UNITED
STATES


SECURITIES
EXCHANGE COMMISSION


Washington,
D.C. 20549







Amendment


To


FORM
10-K







ANNUAL
REPORT PURSUANT TO


THE
SECURITIES EXCHANGE ACT OF 1934




For
the Fiscal Year Ended September 30, 2008




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.
      Employer
                Identification
      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. Yeso  NOx




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yeso  NOx




Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), (2) has been subject to the filing requirements for at
least the past 90 days. Yeso  NOx




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.o




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




(Check
      one):o Large accelerated
      filer
              x Accelerated
      filer
              o Non-accelerated
      filer
              o 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): Yeso  NOx




As of
September 30, 2008, the aggregate market value of the registrant’s common stock
held by nonaffiliates of the registrant was approximately $54,584,383 million
based on the closing price as reported on the OTCBB.




As
of January 30, 2009, there were 189,342,437 shares of the registrant’s
company stock outstanding.





XSUNX,
INC.




TABLE
OF CONTENTS





PagePART
      IItem
      1.    Business
                
                1Item
      1A. Risk Factors
                
                11Item
      1B. Unresolved Staff Comments
                
                17Item
      2.    Properties
                
                17Item
      3.    Legal Proceedings
                
                18Item
      4.    Submission of Matters to a Vote of Security
      Holders
                
                19PART
      IIItem
      6.    Selected Financial Data
                
                27Item
      7.    Management’s Discussion and Analysis or Plan of
      Operations
                
                28Item
      7A. Quantitative and Qualitative Disclosures About Market
    Risk
                
                34Item
      8.    Financial Statements and Supplementary
      Data
                
                34Item
      9.    Changes in and Disagreements on Accounting and
      Financial Disclosure
                
                35Item
      9A. Controls and Procedures
                
                35Item
      9B. Other Information
                
                37PART
      IIIItem
      10.  Directors, Executive Officers, and Corporate
      Governance
                
                37Item
      11.  Executive Compensation
                
                42Item
      12.  Security Ownership of Certain Beneficial Owners and Management
      and Related Stockholder Matters
                
                53Item
      13.  Certain Relationships and Related Transactions, and Director
      Independence
                
                53Item
      14.  Principal Accounting Fees and Services
                
                54PART
      IVItem
      15.  Exhibits, Financial Statement Schedules
                
                55Signatures
                
                58Financial
      Statements
                
                F-1







Explanatory
Statement





We are filing this Amendment to our
Annual report on Form 10 K to enhance our disclosures relating to the Company’s
restatement of its financial statements for the fiscal years ending September
30, 2007 and 2006, to correct the inception to date Cash Flow Statement and to
correct typographical errors in the original filing,




As a
result, of these changes, we are also filing new Certificates has Exhibits 31.1,
31.2, 32.1 and 32.2 hereto.





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.





Business
Overview




XsunX,
Inc. is a thin-film photovoltaic (“TFPV”) company which utilizes amorphous
silicon (“a-Si”), a mature semiconductor technology, as the core solar energy
absorber used to convert sunlight into electricity in the design and manufacture
of its solar modules. We believe that the design of our proprietary
manufacturing system, and solar module, coupled with our choice of assembly
materials may allow us to enjoy production costs of approximately $1.27 per watt
within our first full year of solar module production.


1


We are
currently developing the infrastructure to manufacture high performance TFPV
solar modules to address growth in demand for solar modules within the
electrical power production markets, and to satisfy contractual commitments for
the sale and delivery of our solar modules in 2009 and 2010. To accomplish this
we are executing a plan to build a thin film amorphous silicon solar module
manufacturing facility located in the Portland Oregon, USA area.  We
are working to complete the installation of our base production infrastructure
and develop initial production capacities to 25 MW in 2009, and then scale
through system optimization to approximately 33 MW within the first full year of
manufacturing operations. Subject to available financing we plan to expand
production capacities through replication, growing production capacities to over
100 MW as rapidly as possible.





Upon
completion and operation of our initial manufacturing system we anticipate that
our per watt production costs will decrease over the next several years of
operation as we work to further optimize solar module output per line, validate
and then utilize newer and less costly packaging materials, increase the
sellable watts per solar module, expand production capacities, and leverage
economies of scale to better absorb certain fixed costs. Our goal is to drive
our per watt solar module production costs to or below $1.00 per watt as rapidly
as possible, a price point that may allow us to offer a solar electricity
production solution that can generate electricity on a non-subsidized basis at a
cost equal to the price of retail electricity within certain domestic and
foreign markets conducive to solar power production.





We have
designed a TFPV solar module which we believe will deliver an average of
approximately 127.5 peak watts. To produce solar modules in commercial
quantities, our system design processes multiple 100cm X 160cm glass substrates
simultaneously within a proprietary semiconductor manufacturing system which
employs the design of a high-throughput, automated and continuous process. We
believe that the design of our TFPV module and manufacturing system can deliver
per watt costs significantly less than those of traditional crystalline silicon
solar module manufacturers, and allow us to market TFPV modules that will be
highly competitive with other thin film offerings.





While we
receive interest in the use of our solar module in a broad range of
applications, our business strategy is to deliver thin film solar products that
meet the performance needs of the large solar farm and utility scale
installation market. Our target customers represent a range
of  developers that may own and operate solar power plants or sell
turnkey solar power plants to end-users that include government facilities,
public and private utility companies, operators of commercial warehouse, office
and industrial buildings, and financial investors that are looking to operate
large scale solar power plant projects.





Renewable
Electricity Markets – A Changing Focus On The Cost Of Generating
Electricity





Driving
our solar module manufacturing business is what we believe to be the ability to
capitalize on long term growth in solar spurred by increasing electrical energy
costs, demand, and the rapid adoption of environmentally conscious production
methods. We believe that our target markets being utilities, private power
companies, and large commercial operations have begun to focus on the annualized
cost of energy produced from a photovoltaic system rather than the intermediate
installation cost at the solar module or system level. Regardless of technology
or energy conversion potentials, the market has begun to focus on costs at the
kilowatt-hour level.





The cause
for this change in value perception away from peak factory performance and
straight per watt installation costs is being driven by simple business metrics.
Photovoltaic systems ultimately produce a commodity: electricity. Power
companies sell electricity in units of kilowatt-hours (kWh) and focus on the
production costs per kWh to optimize operations. While the end product of a
photovoltaic system may be a commodity, the integrated technology to deliver the
electricity varies greatly and performs differently in real world conditions. By
focusing on the cost per kWh production calculation under real world operating
conditions, power companies can compare competing technologies and installation
methods utilizing a defined metric that is independent of a technologies factory
operating potential or the intermediate cost at the solar module or system
level.





Thin
Film Amorphous Competitive Advantage





In
designing our ASI-120 amorphous silicon module we evaluated numerous different
designs in an effort to achieve low per watt manufacturing costs while
continuing to deliver our end customer superior per watt performance. Our choice
of amorphous silicon is also supported in its use by other well known system
manufacturers such as Applied Materials and Oerlikon in the turn key solar
module manufacturing systems they market.


2


We
believe that our use of amorphous silicon as the core photovoltaic material
provides us with a marketable advantage to other solar technologies within our
target markets. Amorphous exhibits excellent solar conversion properties and is
a proven scalable technology. While it’s rated per watt performance under
factory test conditions may appear to leave it lagging behind other thin film
and silicon wafer technologies, its actual return per watt in real world use
applications provides that amorphous often out performs all other technologies.
Driving this potential is low per watt solar module manufacturing costs
providing us with the ability to offer a lower per watt average selling price
(ASP) than crystalline-silicon offerings.





In
addition to offering a low ASP, amorphous silicon thin film solar module
installations do not require the use of costly mounting systems called trackers
that follow the sun and optimize the capture of sunlight. Typically, to achieve
optimal performance, utility-scale crystalline-silicon-(cSi)-based solar module
installations and solar concentrating technologies do. Through the use of a
simple fixed array of amorphous solar modules optimally aligned for both azimuth
and incline angle, amorphous can produce more kWh/per kW installed than
crystalline-silicon installations. Crystalline silicon solar modules, when put
on trackers, require additional spacing to prevent shading between modules,
which in turn decreases the installed or active power producing area
calculation. Without the need for the use of trackers amorphous provides a more
efficient use of available space. Additionally, amorphous silicon works better
under low and diffused light conditions and nearer to its full potential across
broader portions of the day, and does not need to be optimally pointed at the
sun on a continuous basis. The performance enhancement from the use of costly
trackers in an amorphous installation would unnecessarily increase the $/kWh
performance of a typical system.





A study
available on our web site (http://www.xsunx.com/pdf/IBIS-XsunX-LCOE-report.pdf)
which was performed by IBIS & Associates in February of 2008 offers more
detail into this phenomenon as it compares various different solar technologies
within a standardized installation.





Products





Solar
Modules




We have
designed a TFPV solar module, the ASI-120, which we believe will deliver an
average of approximately 127.5 peak watts. In designing our solar module, the
XsunX ASI-120 module, we interviewed solar systems integrators and developed a
design that we believe provides a module delivering high power output relative
to other thin films. In doing so, we believe our modules strike a competitive
balance between silicon wafer modules and other thin film modules.





Our
design utilizes two separate (tandem) solar cell layers of amorphous silicon
deposited on to a glass substrate. Two solar cell layers are used to broaden the
visible spectrum of sunlight utilized by the module which in turn can increase
the amount of absorbed and converted solar energy within our modules. After the
tandem cell layers, conductive wiring, and weatherproofing encapsulant are
applied we bond a second tempered sheet of glass to the module
assembly.  Based on previous experimental and limited commercial use
of our thin film deposition recipes, we anticipate the finished solar module to
produce 7.9% frame to frame efficiency delivering approximately 127.5 peak watts
of direct current “DC” power. We believe that we may be able to improve
conversion efficiencies through the use of derivative forms of amorphous and
other proprietary cell structures.





We
anticipate that we can present the superior per-rated-watt-performance of
amorphous in “real world” operating conditions as a competitive strength over
the factory-rated performance of various other solar technologies. We believe
these factors will influence the purchasing decision process of large solar
power farms and utility size installations.


3


Solar
Module Warranty





We will
provide a limited warranty to the end user of our solar modules for one year
following delivery for defects in materials and workmanship under normal use and
service conditions. Our warranties will automatically transfer from the original
end user to a subsequent end user under limited conditions. We will also warrant
to the end user of our solar modules that a solar module installed in accordance
with agreed-upon specifications will produce at least 90% of their power output
rating during the first 10 years following their installation and at least
80% of their power output rating during the subsequent 10 years of
operation. In performance of warranty claims under both the defects and power
output warranties, we have the option of repairing or replacing the warranted
solar module or, under the power output warranty, providing additional solar
modules to remedy the power shortfall. As of the period ended September 30,
2008, our accrued warranty liability was $0.0.





Product
Safety and Reliability Plan




Our
safety and reliability plan includes the use of components already approved by
Underwriters Laboratories, accelerated reliability testing of product
assemblies, technical consultation and product review with UL and knowledgeable
industry and reliability consultants, and testing to achieve Listing by UL-San
Jose, CA.  Upon completion of initial commercial module production
capabilities, we plan to submit modules for participation in laboratory and
field tests with the National Renewable Energy Laboratory, and the Fraunhofer
Institute for Solar Energy.  We plan to achieve and maintain all
certifications required to sell solar modules in the markets we intend to serve,
including UL 1703, IEC 61646, TUV Safety Class II, and CE.





Production
Line, Solar Module, and Materials





Production
Line Features




In an
effort to produce solar modules in commercial quantities and at competitive
prices, our production line is designed to processes multiple 100cm X 160cm
(3.25ft X 5.25ft) glass substrates simultaneously within a proprietary
semiconductor manufacturing system employing an automated, high-throughput
continuous process. This innovative design incorporates material handling, solar
cell creation, laser segmentation, cleaning, and module packaging functions
necessary to convert an inexpensive piece of glass into a complete solar module
in less than three hours. This process is designed to use only a fraction of the
supply-constrained semiconductor material that would be necessary to produce
crystalline silicon solar modules.





The
production line will measure approximately 500 feet in length and will be
comprised of 26 discrete manufacturing components connected via an automated
material handling system. The complete system design is defined by two distinct
manufacturing stages:





1)
            “Solar
      cell creation” comprised of highly-automated systems necessary to deposit
      the photovoltaic materials, cell definition utilizing high speed
      diode-pump lasers, pre-assembly specification testing;
  and





2)
            “Final
      assembly” comprised of application and installation of module assembly
      materials, lamination, and final module test and
      certification.





Solar
Module Assembly and Manufacturing Features





Upon
completion of assembly of our manufacturing system the operation of the “solar
cell creation” portion of the manufacturing line is designed to provide the
following integrated manufacturing techniques; In the initial solar cell
creation stage, robots load glass panels pre-treated with a reflective and
conductive coating (TCO glass) onto the automated production line.  A laser
system segments the TCO and imprints a 2-D Bar Code necessary for data
collection and evaluation on each of the following processes.  The
panels then pass through a cleaning system to remove debris from the glass
substrate in preparation for solar cell creation.  Next a
multi-chamber Plasma Enhanced Chemical Vapor Deposition (PECVD) coating machine
deposits numerous thin film layers of amorphous silicon creating large area
tandem solar cell structures. Transferring the glass to the next two systems
enables the deposition of conducting oxides, and a backside coating to reflect
light energy within the module for better solar absorption.  Between these
coating machines, precisely tuned and focused high-speed lasers segment the
large area solar cell structures into multiple individual solar cells optimized
for electrical performance, while maintaining electrical interconnection between
cells.  Following each laser, a washer cleans the panel of debris. A final
laser deletes a small portion of the perimeter of solar cell material from the
edge of the module to isolate the electrical elements from the application
environment.  Each panel is then tested in-line to ensure it meets
specification, ensuring that only conforming panels advance into final
assembly.  The solar cell creation portion of our assembly line is designed
to provide a high degree of process automation and minimal labor relative to the
final assembly of solar modules which requires the use of more
labor.


4


Upon
completion of assembly of our manufacturing system the operation of the “final
assembly” portion of the manufacturing line is designed to provide the following
integrated manufacturing techniques; In the final assembly stage, conductive
tapes forming an electrical buss are uniformly applied to the perimeter of each
panel. The solar cells on the glass panel are then covered with an encapsulant
material and a second panel of tempered glass.  This stack is then
automatically heated and vacuum laminated to seal the solar cells from the
environment and to provide strength to the module assembly.  Electrical
connections between the buss and electrical cables are then made in an
environmentally sealed junction box permanently adhered to the module back
glass.  The electrical cables terminate in mistake-proofed connectors which
allow solar modules to be safely and permanently connected together in
large-scale field installations. Prior to shipment, each solar module is tested
in an in-line solar simulator for final electrical performance rating, sorting,
and quality assurance. All the data accumulated for each individual module for
each of the processes are aggregated and analyzed within the context of on-going
process controls, refinement, and improvement.  Modules are then
packaged for bulk shipment to integrators of large-scale solar
installations.





Our TFPV
modules and manufacturing system are designed to deliver per-watt costs
significantly lower than those of traditional crystalline silicon solar module
manufacturers, enabling XsunX to market TFPV modules that will be highly
competitive with other thin film offerings.





Solar
Module Raw Materials





Our
manufacturing process will use approximately 8 component groups with a total of
18 underlying raw materials to construct a complete solar module. Of these raw
materials and components, the following thirteen are critical to our
manufacturing process: TCO coated front glass, Argon gas, Diborane gas, Germane
gas, Hydrogen gas, Methane gas, Phosphine gas, and Silane gas will be used in
the fabrication of solar cells, buss lead wire, encapsulant film adhesive,
tempered back glass, junction box with cables, and adhesives. In planning for
the use of these materials and components in our manufacturing process, our
suppliers underwent a qualification process depending on the type of raw
material or component, which has resulted in Product Supply Agreements (PSA)
with various suppliers of these materials.





Phased
Production Build Out and Planned Capacities




At
present, and for the foreseeable future, the majority of our operations
development efforts will focus on establishing and expanding facilities
necessary to manufacture our TFPV solar modules for commercial
sale.





During
the period ended September 30, 2008 we  engaged in simultaneous
efforts to prepare manufacturing facilities to house our module assembly line,
design engineering and the placement of orders for manufacturing line
components, monitor and management of component assembly efforts, material
vendor negotiations and selection, and continued product design
evaluation.





Areas of
specific focus, progress, and capital expenditures have included:





Facilities





In April
2008 we selected and leased a 90,000 sq ft pre-existing commercial building to
house our solar module manufacturing operations. Initial aspects of necessary
modifications to the building were completed in July 2008. Prior to installing
any industrial gas management systems necessary for manufacture of our solar
modules, XsunX was required to modify the building’s occupancy
rating.  Plans incorporating design changes to certain isolated
building sectors necessary to comply with occupancy ratings, electrical, air
management, and fire control have been completed and were submitted to the local
city compliance department for approval in September 2008. As of the date of
this report we have received plan approval and permits and a contractor has been
selected to perform the balance of major work under the modification plans. In
September 2008 we began working to establish a research and product improvement
center within our Oregon manufacturing facility, of which a laser system,
deposition system, and test and measuring equipment have arrived on
site.  Minor modifications of the facilities have been initiated for
the operation of this center.


5


Equipment
Orders





At a
macro level our manufacturing process consists of 6 major operations: glass
cleaning, thin film deposition (sputtering and PECVD), laser patterning,
packaging, testing, and material transport.  At a micro level, these 6
macro level operations are divided into 26 discrete operations connected
together with automated material handling conveyors.  For example
there are 4 laser patterning operations interspersed between 3 deposition
operations and 4 glass cleaning operations.  Additionally there are
three test stations at various stages of product completion.  As of
the period ended September 30, 2008 our thin film deposition (sputtering and
PECVD), laser, glass cleaning, testing, lamination, and material handling system
vendors are all under contract and in various stages of
production.  This comprises 24 of the 26 operations.  We
have vendors identified for the remaining two minor operations of buss lead tape
dispense and shunt busting and are finalizing our statement of work to place the
final two machines under contract.  The information
presented above should be read in conjunction with “Item 7 Management’s
Discussion and Analysis or Plan of Operations – Contractual Obligations” for
additional financial detail associated with equipment orders.





With the
goal of continuing process improvement and improved production efficiencies, 2D
bar coding and reading systems were also ordered. Many vendors who provide
computer automation, including Manufacturing Execution Systems (MES), and other
sophisticated computer-based analytical and quality control tools have been
evaluated, demonstrated, and quoted.  Finalization of selection
process is anticipated in early 2009.





Module
Assembly Material Vendors





A key
advantage of our module design is the limited number of readily available raw
materials that is required to construct a completed final product for commercial
sale.  Our module design consists of a front and back sheet of glass,
a specialty film adhesive to hermetically seal the two pieces of glass together,
an electrical junction box (j-box) with lead wires, and the solar cell device
material that is directly deposited onto the front glass.  The solar
cell layers comprising of conductive oxide, amorphous silicon, zinc oxide, and
aluminum are deposited from a combination of seven industrial gases and
commodity metals (aluminum and zinc).  As of September 2008, we have
all the primary raw goods materials suppliers either identified or under
contract.  This includes front and back glass, junction box adhesive,
the PECVD gases, and the commodity metals (aluminum and zinc).  For
specialty film adhesive and electrical junction box, we have several vendors
identified and are evaluating designs to achieve the best quality and
reliability at the lowest cost.  All of our vendors currently supply
materials for the solar industry and all the materials we have selected have
successfully passed UL testing in the past.





Planned
Completion and Capacity Expansion





Barring
assembly delays and/or any delays in securing necessary working capital, we
anticipate completing the assembly of our initial 25MW manufacturing line and
commencing manufacturing operations in 2009. We plan to scale manufacturing
capacities through system optimization to approximately 33 MW within the first
full year of production. Subject to available financing, we plan to expand
production capacities through replication, growing production capacities to over
100 MW as rapidly as possible.





Production
Line Planned Utilization and Production Costs




We have
estimated our initial module production capacity to be approximately 25
megawatts, “MW” per annum, based on an initial 58% system utilization (the
percentage of system utilization in each 7 day by 24 hour period) and 80% yield
(the percentage of product meeting saleable specifications). We plan to ramp-up
system utilization and yield to industry standards of 80% & 85% respectively
over the course of the first full year of production, thereby increasing total
production capacities of our initial production line to an anticipated
33MW.


6


Upon
completion and operation of our initial manufacturing system we anticipate that
our per watt production costs will decrease over the next several years of
operation as we work to further optimize solar module output per line, validate
and then utilize newer and less costly packaging materials, increase the
sellable watts per solar module, expand production capacities, and leverage
economies of scale to better absorb certain fixed costs. Our goal is to drive
our per watt solar module production costs to or below $1.00 per watt as rapidly
as possible, a price point that may allow us to offer a solar electricity
production solution that can generate electricity on a non-subsidized basis at a
cost equal to the price of retail electricity within certain domestic and
foreign markets conducive to solar power production.





Through
these continuous production efficiency enhancements we believe that we can
continue to improve our cost advantage over traditional crystalline silicon
solar module manufacturers.





Sales
and Marketing





Target
Markets





While we
receive interest in the use of our solar module in a broad range of applications
our business strategy is to deliver thin film solar products that meet the
performance needs of the large solar farm and utility scale installation market.
Our target customers represent a range of  developers that may own and
operate solar power plants or sell turnkey solar power plants to end-users that
include government facilities, public and private utility companies, operators
of commercial warehouse, office and industrial buildings, and financial
investors that are looking to operate large scale solar power plant projects.
Many of these target markets are utilizing government subsidies and growth in
government mandated renewable energy production portfolio standards to develop
projects that can provide a reasonable rate of return on
investments.





Sales
and Pre-Production Reservations





To
develop brand awareness and attract potential customers from within our target
market we have relied on attendance and presentation at industry trade shows and
renewable energy investment forums where we continue to build brand and sales
interest. A pre-sales reservation program launched by us has attracted 145 MW of
reservation commitments for the purchase of our TFPV modules over the 2009,
2010, and 2011 production periods. As of the date of this report we have entered
into sales agreements for a portion of our planned future production capacities.
These agreements represent approximately $37 million dollars in total contract
value with an initial 5 megawatts valued at $13 million slated for delivery in
calendar 2009, and the remaining 10 megawatt balance for delivery in calendar
2010.  As we complete our manufacturing capacity, we anticipate
developing additional customer relationships which will reduce our customer and
geographic concentration and dependence. The information in this paragraph is
designed to summarize our market opportunities, pre-sales reservation program,
and sales. It is not intended to provide guidance about our future operating
results, including revenues or profitability.





Future
Markets





Longer
term we believe that the sale of the electrical power produced by our modules
may provide more revenue development potential.  To develop a better
understanding of these market opportunities we have begun to develop business
relationships directly with utilities working to meet renewable energy mandates,
and developers of power purchase agreements “PPA”. The initial focus of this
effort has been to provide proposals for turn key multi-mega watt installations.
As we navigate this new area of business development we have also begun working
with qualified and experienced electrical and engineering firms capable of
assisting us in the planning and installation of these projects. Should these
efforts continue to develop we may engage in efforts to acquire an operating
solar systems integrator to provide.


7


Economic
Incentives





Per watt
installation and annualized operating costs for a solar power field have
realized reductions over the last several years. The main driver for these
reductions has been advancements in panel assembly, installation techniques, and
operating systems that together have helped to reduce material and labor costs.
Even with improvements to the economies associated with solar power field
installations nearing the cost of production for non-renewable sources
government tax incentives and other support for solar electricity generation
such as renewable portfolio standards, feed-in tariffs, and net metering
programs continue to provide the key to the adoption of solar power systems.
These incentives can provide the following benefits;




In the
USA tax incentive programs exist at both the federal and state level and can
provide investment tax credits, accelerated depreciation and property tax
exemptions for operators. Investors and operators of solar power fields employ
the use of available incentives to assist in accelerated recapitalization of
systems costs and to reduce amortized operating costs over a typical twenty (20)
year life span of a solar power field project. Programs at both the federal and
state levels have also undergone cycles of expanded adoption and expiration of
policies over the years, and;





Government
mandated renewable portfolio standards are typically regionally or state based
and direct regulated power utilities to supply a portion of their total
electricity in the form of renewable electricity sources. Some programs further
specify that a portion of the renewable energy quota must be from solar
electricity, while others provide no specific technology requirement for
renewable electricity generation, and;





Government
mandated feed-in tariffs require that regulated utilities are required to pay
for renewable electricity generated by end-users and delivered into the
electrical power grid. The prices are set above market rates and differ based on
power production or application. Net metering programs allow end-users to simply
sell unused solar electricity to their local utility in exchange for a credit
against their utility bills. The policies governing net metering and feed-in
tariffs vary by region and utility.





Product
and Technology Development





Since our
initial reorganization in October 2003 through the second period ended March
2007, we have focused the majority of our operational budgets towards the
development of technological infrastructure, research and development of solar
cell device types and manufacturing techniques, and the licensure of certain
patented and patent pending technologies related to solar cell devices and
manufacturing techniques. We focused on the solar cell structure and thin film
manufacturing processes for amorphous and microcrystalline materials. The
primary business purpose for these efforts was to establish intellectual
property and “know how” that could be sold and/or licensed to third parties for
use in the development of their respective solar product businesses. Over this
period, we committed approximately $3,965,261 towards the above product and
technical “know how” development.




In March
2007, we re-evaluated our business development and technology plans and launched
efforts to prepare a plan to grow XsunX through the manufacturing and sales of
TFPV solar modules. Our proposed expansion into solar module manufacturing
required that we develop additional technical expertise in the areas of large
area cell integration and packaging techniques necessary to produce commercially
viable solar modules. Between March 2007 and the period ended September 30, 2007
we focused on the development of a TFPV solar module design, an integrated
manufacturing and assembly line, identifying government incentive programs to
offset start-up and initial operations costs of our proposed facilities, and the
qualification of systems and material vendors to supply the manufacturing
equipment and materials necessary to establish and operate our proposed
manufacturing facilities.




In the
period ended September 30, 2008 we focused our efforts on execution of our plan
to establish TFPV solar module manufacturing capabilities. We anticipate that
for the foreseeable future the core of our operations and efforts will continue
to focus on raising necessary capital and on the establishment of these TFPV
solar module manufacturing capabilities.


8


Intellectual
Property





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.





In May
2008 XsunX and MVSystems, Inc. (“MVS”), a vendor previously performing research
and technology development services for XsunX and from which XsunX had licensed
certain patented and patent-pending technologies, entered into
a  Non-Exclusive License and Cross License Agreement providing XsunX a
worldwide, non-exclusive, royalty-free, irrevocable, fully-paid up right and
license, with the right to sublicense the following patents and patent
application and any reissues, re-examinations, divisionals, continuations and
extensions thereof: (a) U.S. Patent No. 6,488,777 B2; (b) U.S. Patent No.
6,258,408 B1; and (c) U.S. Patent App. No. 10/905,545 (Pub. No. US 2005/0150542
A1) (together, the “Patents”). The license limits XsunX to the use of the
Patents for the development by XsunX of commercial-grade (i.e ., web width 30 cms or
more and nominal output exceeding 1 megawatt/year based on 1 shift operation)
semi-transparent (greater than 5% transparency) and opaque solar cells,
photovoltaic technologies, solar cell panels and methods of manufacture. The
agreement further provides that MVS will continue to be the exclusive owner of
the Patents and grants XsunX exclusive ownership of any improvements made by
XsunX to the licensed Patents.




The
Non-Exclusive License and Cross License Agreement provides MVS a worldwide,
non-exclusive, royalty-free, irrevocable, fully-paid up right and license, with
the right to sublicense the derivative works produced by the parties under the
various phased technology development programs between September 17, 2004 and
May 30, 2008. The agreement further provides that XsunX will continue to be the
exclusive owner of the derivative works and grants MVS exclusive ownership of
any improvements made by MVS to the licensed derivative works.





On June
13, 2008, the Company and Sencera, LLC (“Sencera), a company that XsunX had
previously lent $1,500,000 dollars to in exchange for certain license rights to
patent-pending technologies yet to be developed for applicability in thin film
solar cell manufacturing, entered into a Separation Agreement in which XsunX
agreed to release its rights to the yet to be developed technology in exchange
for the accelerated re-payment of $1,673,251.05 in principal and accrued
interest to XsunX by Sencera under a secured, seven year, 10% Promissory Note
and Loan Agreement between the Company and Sencera dated January 1, 2007. Use of
the licensed plasma technology by XsunX in any of its planned or future
processes or products was subject to completion of development by Sencera, LLC,
under a phased development plan, substantiation by XsunX of intended performance
criteria as specified under the agreements and Phase II development objectives,
and determination of commercial application suitability by XsunX. The Company
received letters from Sencera in January and February 2008 providing
inconsistent representations on the part of Sencera as to the successful
development of a licensable process that would be expected to produce silicon
materials at deposition rates expected to produce thin film solar cells at costs
of less than $1 dollar USD per watt. Subsequent further review of the Sencera
project reports by the Company’s scientific staff and an on-site review of the
report data with Sencera concluded, in the opinion of XsunX, that a licensable
process, or the basis for a licensable process, had not been developed that
would be capable of, or that indicated the potential for, producing silicon
materials at deposition rates expected to produce thin film solar cells at costs
of less than $1 dollar USD per watt.





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.


9


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





In August
2008, XsunX was provided a Notice of Intent to Award, Photovoltaic Array Power
Purchase Agreement in Pendleton, Oregon SOLICITATION #089988T001 from the Oregon
Military Department Pendleton Army Aviation Support Facility (AASF).  The
award was for the installation, maintenance, and operation of grid-connected
solar electric systems sized from 20-200 kilowatt (KW) and the sale of solar
electric power to government agencies by means of a power purchase agreement
(PPA). Subsequent to this notification, in September 2008 an on-site meeting was
attended by both AASF and XsunX representatives to commence negotiations related
to establishing PPA operating terms and to make an award upon successful
completion of the negotiations.





In
November 2008, XsunX was notified by the AASF had placed the award “on hold”
until further notice because of the necessity to review and evaluation of the
solicitation #089988T001 within the context of changing budgets. XsunX was not
disqualified nor was another vendor selected to replace
XsunX.





There are
no government contracts at this time.





Competitive
Conditions





Currently,
management is aware of other amorphous silicon and thin film products similar to
those proposed for manufacture by us on the market. Although similar in respect
to the operation and use of amorphous silicon technologies, the Company believes
the design of our large area TFPV solar module delivering 127.5 watts of DC
power provides marketable improvements over other thin film products offering
less total power output per module technologies. We believe our design will
require fewer TFPV solar panels per installation compared to the use of other
thin film systems, thereby reducing the overall costs associated with mounting,
installation, wiring, and interconnection of fewer parts and
pieces.





However,
a number of 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 diselenide 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 our design, and they may also achieve
manufacturing costs per watt lower than our cost per watt to manufacture a TFPV
solar module.





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. The five largest 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.


10


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
used in the manufacture of our solar modules, 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





The
Company is a development stage company and as of September 30, 2008 had 10
salaried employees. This represents an increase of 4 employees over the same
period ended 2007. The Company also engages several consultants to perform
specific functions that otherwise would require an employee. Over the next 12
months the Company plans to complete the assembly and commence operation of its
initial 25MW module manufacturing capacity requiring the addition of
approximately 90 employees necessary to initially manage and operate these ramp
up capacities.




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, 2008 and 2007 was $4,058,952 million
and $1,968,846 million, respectively. Net cash used for operations was
$2,695,476 and $979,218 for the years ended September 30, 2008 and
2007, respectively. From inception through September 30, 2008, we had an
accumulated deficit of $21,075,069.


11


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 will
require significant financing in order to execute our operating plan and
continue as a going concern. We cannot predict whether this additional
financing, if available, will be in the form of equity, debt, or another form.
We may not be able to obtain the necessary additional capital on a timely basis,
on acceptable terms, or at all. In any of these events, we may be unable to
implement our current plans for expansion, repay our debt obligations as they
become due or respond to competitive pressures, any of which circumstances would
have a material adverse effect on our business, prospects, financial condition
and results of operations. The financial statements do not include any
adjustments relating to the recoverability and reclassification of recorded
asset amounts or amounts and reclassification of liabilities that might be
necessary, should we be unable to continue as a going concern.




Should
financing sources fail to materialize, management would seek alternate funding
sources such as the sale of common and/or preferred stock, the issuance of debt,
or the sale of our marketable assets.




In the
event that these financing sources do not materialize, or that we are
unsuccessful in increasing our revenues and profits, we will be forced to
further reduce our costs, may be unable to repay our debt obligations as they
become due, or respond to competitive pressures, any of which circumstances
would have a material adverse effect on our business, prospects, financial
condition and results of operations. Additionally, if these funding sources or
increased revenues and profits do not materialize, and we are unable to secure
additional financing, we could be forced to reduce or cease our business
operations.





We
expect that we will need to obtain significant additional financing to continue
to operate our business, including significant capital expenditures to complete
the installation of our initial 25MW per annum production capacity, 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, including capital expenditures to install our planned production
capacity.  Although the Company entered into a financing arrangement
with Fusion Capital Fund II, LLC pursuant to which the Company has the right
over a 25-month period to receive $80,000 every two business days under such
financing arrangement unless our stock price equals or exceeds $0.30, in which
case we can sell greater amounts to Fusion Capital as the price of our common
stock increases, Fusion Capital 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 $0.20.  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, develop and install or expand our manufacturing
operations and 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 its
business plan, including, without limitation, the installation of our planned
production in Oregon, which would have a material adverse affect 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


12


We may
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 affect on our business.





We
are working to establish our manufacturing capacity for TFPV products in order
to meet anticipated demand, and our revenues and profits may decrease if we are
unable to successfully complete our initial 25MW of manufacturing capacity and
then sell our TFPV products at volumes to match our available production
capacity.





We are
working to establish initial manufacturing capacity of 25MW per annum and plan
to expand manufacturing capacity to 100MW per annum as rapidly as possible. This
plan includes adding a new facility in Oregon. We will be installing and testing
the equipment for this manufacturing facility internally and through third
parties. We may experience delays, additional or unexpected costs and other
adverse events in connection with our projects, including those associated with
the equipment we purchase from third parties. Additionally, there can be no
assurance that market demand will absorb our manufacturing capacity or that our
marketing capabilities will be successful. As a result, we may not be able to
realize revenues and profits based upon the expected capacity, or we may
experience delays or reductions in these revenues and profits, and our business
could be materially adversely affected.





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 which will have a
materially adverse affect 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 commercial-scale
manufacturing has been achieved which could have an adverse affect 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.


13


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 affect 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 products and the
systems and components to our planned 25MW manufacturing system could impede our
ability to complete our product and/or our initial manufacturing system and have
a material adverse affect 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 affect 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.





Higher
raw material costs could negatively impact our cost of goods and our ability to
successfully develop our products and technologies which could have a material
adverse affect on our business





Higher
costs for certain raw materials and commodities, principally glass, resin-based
polymers and industrial gases, as well as higher energy costs, could negatively
impact our cost of operations. While we have developed strategies to mitigate or
partially offset the impact of higher raw material, commodity and energy costs,
there can be no assurances such measures will be successful. In addition, no
assurances can be given that the magnitude and duration of these cost increases
or any future cost increases will not have a larger adverse impact on our
profitability and consolidated financial position than currently anticipated. As
part of our planned research and development activities, we are attempting to
reduce costs through improved automation and substitution strategies. There can
be no assurances that we will succeed in these future cost-reduction efforts,
which may be essential for the continued development of our competitive
presence.


14


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





Rules
adopted by the SEC, pursuant to Section 404 of the Sarbanes-Oxley Act of 2002
require annual assessment of our internal control over financial reporting, and
attestation of our assessment by our independent registered public accountants.
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. In addition, the
attestation process by our independent registered public accountants is new and
we may encounter problems or delays in completing the implementation of any
requested improvements and receiving an attestation of our assessment by our
independent registered public accountants. If we cannot assess our internal
control over financial reporting as effective, or our independent registered
public accountants are unable to provide an unqualified attestation report on
such assessment, 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.




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


15





·
            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 affect 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.


16


Item
1B. Unresolved Staff Comments





On
December 23, 2008, the Company received a letter from the SEC whereby the SEC
requested that the Company disclose in this Annual Report that the PCAOB has
revoked the registration of the Company’s former independent registered public
accounting firm, Jaspers + Hall.  The Company dismissed Jaspers + Hall
effective October 31, 2008 in light of the PCAOB’s revocation and appointed
Stark Winter Schenkein & Co., LLP to serve as the Company’s new registered
public accounting firm.  The Company responded to the SEC in a comment
response letter dated January 9, 2009 filed as correspondence with the SEC that
it shall disclose such material information in this Annual
Report.  The Company has explained such revocation in Item 14 herein
below.  As of the date of the filing of this Annual Report with the
SEC, the Company has not received a response by the SEC to the Company’s
response letter.





Item
2. Properties





As of
September 30, 2008 the Company leased administrative office facilities located
at 65 Enterprise, Aliso Viejo CA 92656 for an average cost of approximately
$3,150 per month on a month to month basis.  Based on specific space
utilization, the lowest cost was $2,650 and the highest cost per month was
$3,854. We plan to reduce our use of office space in Aliso Viejo by
approximately 50% over the first two quarters of the 2009 fiscal
period.





On April
1, 2008, XsunX entered into a sub-lease agreement for approximately ninety
thousand (90,000) square feet of manufacturing facility located at 23365 NE
Halsey Street, Wood Village, Oregon, U.S.A. On July 15, 2008, the sub-lease
commenced and XsunX took possession of the facility. The purpose of the lease
agreement was to establish facilities necessary for the installation and
operation of the Company’s planned thin film solar module manufacturing
operations. The lease agreement requires that XsunX post a security deposit
letter of credit in the amount of $106,000 which has been delivered, and a
second letter of credit in an amount to be determined for 125% of the value for
the removal of any improvements performed to the structure by
XsunX.   Other elements specifically associated with this
facility including property taxes and insurance add an additional $27,967 per
month.  These amounts could be higher or lower based on the Company’s
economic development status, property tax rates and amount of property and
insurance coverage.  The Company also pays approximately $825 monthly
for interior and exterior maintenance on the property.





The term
of the lease agreement with the sub-landlord provides for XsunX occupancy
through July 31, 2011. Thereafter, should XsunX elect to continue to occupy the
premises, XsunX will be required to have established continued lease
arrangements with the master landlord. Specific term and lease payment schedule
is as follows:





Annual Rent Schedule
                
                Rate/sf
                
                
                Annualized
                  Rent
                
                
                Monthly Rent7/15/08 - 7/31/09
                
                $
                7.07
                
                
                $
                636,000
                
                
                $
                53,0008/1/09 - 7/31/10
                
                $
                7.21
                
                
                $
                648,720
                
                
                $
                54,0608/1/010 – 7/31/11
                
                $
                7.35
                
                
                $
                661,694
                
                
                $
                55,141





In April
2006, the Company entered into a three year lease for technical and marketing
operations facilities in Golden, CO. The Company provided a $2,615 security
deposit and expensed $79,867 in costs associated with tenant improvements to the
facilities in preparation for occupancy. The following is a schedule, by years,
of the minimum base payments required under this operating lease for facilities.
An additional $905 monthly is also due as a pro rata share equaling 4.12% of the
operating costs for real estate taxes, assessments, and the expenses of
operating and maintaining common areas within the commercial grounds surrounding
the leased facilities. We plan to vacate the Golden facility at the term of the
lease agreement which currently expires in June 2009.





Annual Rent Schedule
                
                Rate/sf
                
                
                Annualized
                  Rent
                
                
                Monthly Rent7/1/06 - 6/30/07
                
                $
                6.75
                
                
                $
                20,250
                
                
                $
                1,6877/1/07 - 6/30/08
                
                $
                6.95
                
                
                $
                20,850
                
                
                $
                1,7377/1/08 - 6/30/09
                
                $
                7.16
                
                
                $
                21,480
                
                
                $
                1,790





The
Company owns no real property.


17


Item
3. Legal Proceedings





In the
ordinary conduct of our business, we are subject to periodic lawsuits,
investigations and claims, including, but not limited to, routine employment
matters. Although we cannot predict with certainty the ultimate resolution of
lawsuits, investigations and claims asserted against us, we are currently not
aware of nor have any knowledge of any legal proceedings or claims that we
believe will have, individually or in the aggregate, a material adverse affect
on our business, financial condition or operating results except as set forth
below.





On
December 7, 2007, the Company filed an action for breach of contract and
declaratory relief in the Superior Court of Orange County, California, against
Wharton Capital Partners, Ltd, Wharton Capital Markets LLC, and Capitoline
Financial Group LLC. The XsunX Action was brought to seek a court determination
that the Company did not owe any fees to the above defendants by reason of a $21
million dollar financing transaction with Fusion Capital Fund II, LLC
(“Fusion”). In on or about February 2008 the XsunX Action was removed to the
U.S. District Court for the Southern District of New York.




On
January 3, 2008, Wharton Capital Partners, Ltd, and Wharton Capital Markets LLC,
(“Wharton”) filed an action in the U.S. District Court for the Southern District
of New York against the Company pursuant to which Wharton sought fees in an
amount equal to seven percent (7%) of the gross proceeds received by the Company
under a financing agreement between Fusion Capital Fund II, LLC and the
Company.  On May 30, 2008, XsunX and Wharton entered into a Settlement
Agreement pursuant to which XsunX agreed to provide Wharton with 875,000 shares
of its common stock. Subject to the fulfillment of the requirements of Rule 144
of the Securities Act, Wharton agreed not to sell or transfer more than 250,000
shares monthly. The Company also agreed to a $100,000 cash payment to be paid in
four (4) monthly installments of $25,000 each. As of September 30, 2008, all
securities and cash payment required under the Settlement Agreement had been
provided to Wharton.  The parties have filed a joint motion, pursuant
to Federal Rule of Civil Procedure 41(a) (1) (A) (ii), to dismiss both the New
York Action and the California Action with prejudice. Each of the parties have
unconditionally and irrevocably released, waived, and forever discharged each
other from claims related to the XsunX Action and the Wharton
Action.




In
November 2008 XsunX received a notice from MVSystems, Inc. asserting that XsunX
was in material default of the terms of a Separation Agreement between the
parties dated May 30, 2008. XsunX disputes the assertion and as of the date of
this report no related litigation is pending, and MVSystems has not asserted any
related monetary damages. The claim relates to a production prototype machine
built under the terms of an Expanded Use License Agreement dated October 12,
2005 between XsunX and MVSystems, Inc. Under the terms of the Expanded Use
License Agreement the parties had agreed to build the machine to prove
technology for intended resale and split any associated profits from the sale of
the machine 50/50. This production machine was never brought operational due to
the failure to meet contractual requirements of the machine by MVSystems, and
XsunX has never taken possession of the machine. Under the terms of the May 2008
Separations Agreement MVSystems continues to have possession of the machine and
subject to the Separations Agreement has undertaken efforts to sell the machine
for the parties benefit. Under the notice of material default provided to XsunX
MVSystems has claimed that a sale of the machine has occurred to XsunX and that
state sales tax in the amount of approximately $60,000 is due. XsunX disputes
this claim and the parties have each petitioned the State of Colorado for a
final determination on this matter.


18


Item
4. Submission of Matters to a Vote of Security Holders





None
during the period ended September 30, 2008.





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 bid quotations for the
Company’s common stock by fiscal quarter within the last three fiscal years, as
reported by the National Quotation Bureau Incorporated, was as
follows:





Year
      Ended September 30, 2008
                
                High
                
                
                Low
                
                
                CloseFirst
      Quarter ended December 31, 2007
                
                
                0.55
                
                
                
                0.29
                
                
                
                0.55Second
      Quarter ended March 31, 2008
                
                
                0.74
                
                
                
                0.35
                
                
                
                0.40Third
      Quarter ended June 30, 2008
                
                
                0.51
                
                
                
                0.38
                
                
                
                0.39Fourth
      Quarter ended September 30, 2008
                
                
                0.43
                
                
                
                0.26
                
                
                
                0.26Year
      Ended September 30, 2007First
      Quarter ended December 31, 2006
                
                
                0.68
                
                
                
                0.34
                
                
                
                0.38Second
      Quarter ended March 31, 2007
                
                
                0.64
                
                
                
                0.40
                
                
                
                0.49Third
      Quarter ended June 30, 2007
                
                
                0.51
                
                
                
                0.41
                
                
                
                0.42Fourth
      Quarter ended September 30, 2007
                
                
                0.44
                
                
                
                0.30
                
                
                
                0.39Year
      Ended September 30, 2006First
      Quarter ended December 31, 2005
                
                
                0.59
                
                
                
                0.53
                
                
                
                0.58Second
      Quarter ended March 31, 2006
                
                
                2.24
                
                
                
                2.08
                
                
                
                2.13Third
      Quarter ended June 30, 2006
                
                
                1.06
                
                
                
                1.04
                
                
                
                1.05Fourth
      Quarter ended September 30, 2006
                
                
                0.55
                
                
                
                0.52
                
                
                
                0.54


19


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, 2008, there were approximately 1,166 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, 2008, there were approximately
186,292,437 shares of common stock outstanding on record with the Company’s
stock transfer agent, Mountain Share Transfer. On September 30, 2008 the last
reported sales price of our common stock on the OTCBB was $0.26 per
share.





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. 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, 2008, the board of directors authorized the
grant of options to purchase an aggregate of 3,800,000 shares of the Company’s
common stock. The options are exercisable at a price of $0.36 per share, and
expire at various times through November 2012. Of the original 20,000,000 shares
authorized under the plan, 14,250,000 shares remain available.  An
additional 1,950,000 shares issued before the creation of the plan are
considered as issued under the plan for the purposes of defining additional
shares available under the plan.


20


Employment
Incentive Option Grants — In connection with the start of the
Company’s efforts to prepare, install, and operate solar module manufacturing
capabilities, the Company authorized employment incentive option grants to the
following employees on October 23, 2007 at an exercise of $0.36 price per share.
The options have a 5 year exercise terms and vest in conjunction with a
performance milestone based vesting schedule as described below:





Joseph
      Grimes
              500,000
      Option SharesRobert
      G. Wendt
              500,000
      Option SharesDr.
      Guang Lin
              300,000
      Option Shares





The
vesting schedule for Mr. Grimes and Mr. Wendt 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 as
they may relate to the Company’s phased build out plan for a solar module
manufacturing facility:




(a)
                100,000
      shares upon the assembly and commissioning of the base line production
      system.(b)
                100,000
      shares upon the production of a commercial size working sample of the
      Company’s planned tandem junction amorphous silicon solar
      module.




(c)
            300,000
      shares upon the assembly and commissioning of the initial 25 mega watt
      production system as contemplated within the Company’s phased build out
      plan for a solar module manufacturing
facility.




The
vesting schedule for Dr. Guang is as follows:




The
option shall become exercisable in the following amounts upon the delivery
and/or achievement by the optionee of the following performance milestones as
they may relate to the Company’s phased build out plan for a solar module
manufacturing facility:




(a)
                100,000
      shares upon the assembly and commissioning of the base line production
      system.(b)
                150,000
      shares upon the production of a commercial size working sample of the
      Company’s planned tandem junction amorphous silicon solar
      module.





(c)
            50,000
      shares upon the assembly and commissioning of the initial 25 mega watt
      production system as contemplated within the Company’s phased build out
      plan for a solar module manufacturing
facility.




Board of
Directors Incentive Option Grants — In furtherance of the Company’s
policy to compensate current members, and attract new members, to its Board of
Directors the Company authorized incentive option grants to the following
Directors at an exercise price of $0.36 per share. The options have a 5 year
exercise terms and vest as described below:




Thomas
      Anderson
              October
      23, 2007
              1,500,000
      Option Shares (*)Oz
      Fundingsland
              November
      11, 2007
              500,000
      Option SharesDr.
      Michael Russak
              November
      26, 2007
              500,000
      Option Shares





The
vesting schedule for Mr. Anderson is as follows:




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


21





(a)
            The
      Option became exercisable in the amount of 1,000,000 shares upon the
      effective date of the grant for services rendered as a member of the
      Company Board of Directors from the period beginning October 1, 2003
      through September 30, 2008.





(b)
            Beginning
      October 1, 2007 the option shall vest and become exercisable at the rate
      of 62,500 shares upon the anniversary of each calendar quarter of
      continuous service as a Director, or prorated portion thereof, for
      services rendered as a member of the Company’s Board of Directors up to a
      total of 250,000 shares.




(*)
Amendment to Stock Option Grant — On November 12, 2007, the Company
entered into an agreement amending the terms of a stock option grant dated
October 23, 2007 between the Company and Mr. Thomas Anderson, a member of the
XsunX Board of Directors. The amendment provided for an increase of 250,000
options to the pool of options available within the vesting provisions of the
grant. All other provisions of the stock option grant remained the same. Item
(b) to the vesting schedule was amended as follows:




The
vesting schedule for Mr. Fundingsland is as follows:




The
option shall become exercisable in the following amounts upon the delivery
and/or achievement by t4he optionee of the following milestones:




(a)
            Beginning
      November 12, 2007 the option shall vest and become exercisable at the rate
      of 62,500 shares upon the anniversary of each calendar quarter of
      continuous service as a Director, or prorated portion thereof, for
      services rendered as a member of the Company’s Board of Directors up to a
      total of 500,000 shares.




The
vesting schedule for Dr. Russak is as follows





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




(a)
            Beginning
      November 26, 2007 the option shall vest and become exercisable at the rate
      of 62,500 shares upon the anniversary of each calendar quarter of
      continuous service as a Director, or prorated portion thereof, for
      services rendered as a member of the Company’s Board of Directors up to a
      total of 500,000 shares.




(b)
            Beginning
      October 1, 2007 the option became exercisable at the rate of 62,500 shares
      upon the anniversary of each calendar quarter of continuous service as a
      Director, or prorated portion thereof, for services rendered as a member
      of the Company’s Board of Directors up to a total of 500,000
      shares.





Additionally,
on January 24, 2008, the Board of Directors authorized the amendments to prior
option grants issued to the named employees and consultant listed below as
follows:





Grant Number
                      
                      Optionee Name
                      
                      Amendment Terms06-2005
                      
                      Dr.
      John Moore
                      
                      Extension
      of time to exercise the warrant until January 1, 201213-2006
                      
                      Joseph
      Grimes
                      
                      Section
      2.1.1(iii) Vesting Schedule was amended as follows; One Hundred Forty
      Eight Thousand (148,000) Shares shall become exercisable upon the
      performance by the Optionee in the presentation of suitable manufacturing
      facilities and facilities lease terms to the Company and approval of such
      facilities and lease terms by the Company Board of
    Directors.07-018
                      
                      Joseph
      Grimes
                      
                      Section
      3(i) (a) Exercise of Option was amended as follows; Option shall become
      exercisable in the amount of 100,000 shares upon the first sale and
      delivery of an XsunX solar module.07-016
                      
                      Robert
      Wendt
                      
                      Section
      3(i) (a) Exercise of Option was amended as follows; Option shall become
      exercisable in the amount of 100,000 shares upon the first sale and
      delivery of an XsunX solar module.07-015
                      
                      Jeff
      Huitt
                      
                      Section
      3(i) (a) Exercise of Option was amended as follows; Option shall become
      exercisable in the amount of 100,000 shares upon the first sale and
      delivery of an XsunX solar
module.


22


Table
of Equity Compensation




The
following table sets forth summary information, as of September 30, 2008,
concerning securities authorized for issuance under all equity compensation
plans and agreements for the fiscal years ended September 30, 2008, 2007 and
2006 is as follows:




A summary
of warrant activity for the year ended September 30, 2008, 2007 and 2006 is as
follows:




Number of
                  Options /
                  Warrants
                
                
                Weighted-Average
                  Exercise
                  Price
                
                
                Accrued
                  Options /
                  Warrants
                  Vested
                
                
                Weighted-Average
                  Exercise
                  PriceOutstanding,
      September 30, 2005
                
                
                15,125,000
                
                
                $
                0.16
                
                
                
                13,408,334
                
                
                $
                0.16Granted
      2006
                
                
                11,987,000
                
                
                $
                0.36
                
                
                
                5,543,000
                
                
                $
                0.46Exercised
                
                
                (10,850,000
                )
                
                $
                0.48
                
                
                
                (10,850,000
                )
                
                $
                0.33Vested
                
                
                
                
                
                
                
                
                
                
                600,000
                
                
                $
                0.18Outstanding,
      September 30, 2006
                
                
                16,262,000
                
                
                $
                0.42
                
                
                
                8,701,334
                
                
                $
                0.37Granted
      2007
                
                
                1,950,000
                
                
                $
                0.46
                
                
                
                
                
                
                $
                0.46Exercised
                
                
                (900,000
                )
                
                $
                0.15
                
                
                
                (900,000
                )
                
                $
                0.15Vested
                
                
                -
                
                
                
                
                
                
                
                352,500
                
                
                $
                0.42Outstanding,
      September 30, 2007
                
                
                17,312,000
                
                
                $
                0.33
                
                
                
                8,153,834
                
                
                $
                0.38Granted
      2008
                
                
                3,800,000
                
                
                $
                0.36
                
                
                
                5,048,332
                
                
                $
                0.36Exercised/Cancelled
                
                
                (11,166,668
                )
                
                $
                0.19
                
                
                
                (7,829,334
                )
                
                $
                0.19Vested
                
                
                
                
                
                
                
                
                
                
                1,750,000
                
                
                $
                0.46Outstanding,
      September 30, 2008
                
                
                9,945,332
                
                
                $
                0.23
                
                
                
                7,122,832
                
                
                $
                0.27


23


At
September 30, 2007, the range of warrant/option prices for shares under
warrants/options not exercised and the weighted-average remaining contractual
life is as follows:




Options/Warrants Outstanding
                        
                        
                        Options/Warrants
                          ExercisableRange of
                          Option/
                          Warrant Prices
                        
                        Number of
                          Options/
                          Warrants
                        
                        
                        Weighted-
                          Average
                          Exercise
                          Price
                        
                        
                        Weighted-
                          Average
                          Remaining
                          Contractual
                          Life (yr)
                        
                        
                        Number of
                          Options/
                          Warrants
                        
                        
                        Weighted-
                          Average
                          Exercise
                          Price$
                        0.20
                        
                        
                        250,000
                        
                        
                        $
                        0.20
                        
                        
                        
                        4.3
                        
                        
                        
                        250,000
                        
                        
                        $
                        0.20$
                        0.36
                        
                        
                        3,800,000
                        
                        
                        $
                        0.36
                        
                        
                        
                        3.1
                        
                        
                        
                        1,750,000
                        
                        
                        $
                        0.36$
                        0.41
                        
                        
                        100,000
                        
                        
                        $
                        0.41
                        
                        
                        
                        3.9
                        
                        
                        
                        62,500
                        
                        
                        $
                        0.41$
                        0.45
                        
                        
                        100,000
                        
                        
                        $
                        0.45
                        
                        
                        
                        3.6
                        
                        
                        
                        62,500
                        
                        
                        $
                        0.45$
                        0.46
                        
                        
                        1,650,000
                        
                        
                        $
                        0.46
                        
                        
                        
                        3.3
                        
                        
                        
                        977,500
                        
                        
                        $
                        0.46$
                        0.50
                        
                        
                        1,666,666
                        
                        
                        $
                        0.50
                        
                        
                        
                        4.1
                        
                        
                        
                        1,666,666
                        
                        
                        $
                        0.50$
                        0.51
                        
                        
                        500,000
                        
                        
                        $
                        0.51
                        
                        
                        
                        2.8
                        
                        
                        
                        500,000
                        
                        
                        $
                        0.51$
                        0.53
                        
                        
                        100,000
                        
                        
                        $
                        0.53
                        
                        
                        
                        3.4
                        
                        
                        
                        75,000
                        
                        
                        $
                        0.53$
                        0.75
                        
                        
                        1,666,666
                        
                        
                        $
                        0.75
                        
                        
                        
                        4.1
                        
                        
                        
                        1,666,666
                        
                        
                        $
                        0.75$
                        1.69
                        
                        
                        112,000
                        
                        
                        $
                        1.69
                        
                        
                        
                        2.5
                        
                        
                        
                        112,000
                        
                        
                        $
                        1.699,945,332
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        7,122,832





Stock
Price Performance Graph





The
following graph compares the cumulative 60-month total return attained by
shareholders on XsunX’s, Inc.’s common stock relative to the cumulative total
returns of the NASDAQ Market Index and the current composition of peer
companies related to SIC Code 3674 - Semiconductors, Related Device. An
investment of $100 (with reinvestment of all dividends) is assumed to have been
made in our common stock and in each index on September 30, 2003 and its
relative performance is tracked through September 30, 2008. No cash dividends
have been declared on shares of our common stock. This performance graph is not
“soliciting material,” is not deemed filed with the SEC and is not to be
incorporated by reference in any filing by us under the Securities Act of 1933,
as amended (the “Securities Act”), or the Exchange Act, whether made before or
after the date hereof and irrespective of any general incorporation language in
any such filing. The stock price performance shown on the graph represents past
performance and should not be considered an indication of future price
performance.


24








COMPARISON
OF CUMULATIVE TOTAL RETURN OF ONE OR MORE


COMPANIES,
PEER GROUPS, INDUSTRY INDEXES AND/OR BROAD MARKETS




*$100
invested on 9/30/2003 in stock or in index-including reinvestment of
dividends.





Company/Index/Market
                            
                            9/30/2003
                            
                            9/30/2004
                            
                            9/30/2005
                            
                            9/30/2006
                            
                            9/30/2007
                            
                            
                            9/30/2008XsunX,
      Inc.
                            
                            
                            100.00
                            
                            
                            1500.00
                            
                            
                            866.67
                            
                            
                            1783.33
                            
                            
                            1286.67
                            
                            
                            
                            866.67Semiconductors,
      Related Device
                            
                            
                            100.00
                            
                            
                            83.15
                            
                            
                            102.20
                            
                            
                            100.67
                            
                            
                            117.64
                            
                            
                            
                            81.57NASDAQ
      Market Index
                            
                            
                            100.00
                            
                            
                            106.02
                            
                            
                            120.61
                            
                            
                            127.77
                            
                            
                            152.68
                            
                            
                            
                            118.28




The
stock price performance included in this graph is not necessarily indicative of
future stock price performance.




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.




In a
placement of the Company’s common stock pursuant to an S-1 Registration
Statement declared effective by the SEC on April 10, 2008, the Company has sold
to Fusion Capital Fund II, LLC through September 30, 2008, approximately
15,347,581 shares for a total investment of $5,208,723.54 including the initial
$1,000,000 and 3,333,332 shares. These shares were sold at various pricing
between $0.405 and $0.24 per share. Subsequent to September 30, 2008, we have
sold an additional 3,000,000 shares for $600,000 for a total of 18,347,581
shares and $5,808,723.54. These shares were sold at $0.20 per share. Including
3,500,000 shares provided to Fusion as financing commitment shares this leaves
18,152,419 registered shares available for future sales pursuant to the
effective S-1 Registration Statement.




Additionally,
in January 2008, Cumorah Capital purchased 8,650,000 shares of the Company’s
restricted common stock in a private transaction for total proceeds of
$2,500,000. These shares were incorporated within the above referenced S-1
Registration Statement, deemed effective by the SEC on April 10,
2008.


25


The
following represents a detailed analysis of the 2008 Common stock
transactions.




Fusion
Capital Transaction





On
November 1, 2007, XsunX signed a common stock Purchase Agreement with Fusion
Capital Fund II, LLC, an Illinois limited liability Company (“Fusion Capital”)
providing for the sale of up to $21 million of common stock to Fusion. Upon
signing the agreement, XsunX received $1,000,000 from Fusion Capital as an
initial purchase under the $21 million commitment in exchange for 3,333,332
shares of our common stock. The shares were issued in a transaction exempt from
registration pursuant to Section 4(2) of the Securities Act. Concurrently with
entering into the common stock purchase agreement, we entered into a
registration rights agreement with Fusion Capital. On January 18, 2008, XsunX,
Inc. filed a Form S-1 with the Securities and Exchange Commission seeking to
register 48,650,000 shares related to our financing agreements with Fusion
Capital Fund II, LLC and Cumorah Capital. The registration was declared
effective by the Securities and Exchange Commission on April 10,
2008.





The
Company has the right over a 25-month period to receive $80,000 every two
business days under the Purchase Agreement with Fusion Capital unless our stock
price equals or exceeds $0.30, in which case we can sell greater amounts to
Fusion Capital as the price of our common stock increases. Fusion Capital 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
$0.20.




The
purchase price of the shares related to the $20 million balance of future
funding under the Purchase Agreement will be based on the prevailing market
prices of the Company’s shares at the time of sales without any fixed discount,
and the Company will control the timing and amount of any sale of shares to
Fusion Capital. There are no upper limits to the price Fusion Capital may pay to
purchase our common stock. However, Fusion Capital shall not be obligated to
purchase any shares of our common stock on any business day that the price of
our common stock is below $0.20. There are no negative covenants, restrictions
on future funding(s), penalties or liquidated damages in the agreement. The
common stock purchase agreement may be terminated by us at any time at our
discretion without any cost to us.




In
consideration for entering into the $21 million agreement we agreed to issue to
Fusion Capital 3,500,000 shares of our common stock as financing commitment
shares which Fusion Capital has agreed to hold for the term of the common stock
purchase agreement. Additionally, under the stock purchase agreement we granted
Fusion Capital common stock purchase warrants to purchase 1,666,666 shares of
our common stock at $0.50, and 1,666,666 shares of our common stock at $0.75.
The shares underlying the warrant grants do not carry mandatory registration
requirements under the terms of the common stock purchase agreement and
registration rights agreement. The above commitment shares and warrants were
issued in a transaction exempt from registration pursuant to Section 4(2) of the
Securities Act.




Pursuant
to the S-1 Registration Statement declared effective by the SEC on April 10,
2008, the Company has sold to Fusion Capital Fund II, LLC through September 30,
2008, approximately 15,347,581 shares for a total investment of $5,208,723.54
including the initial $1,000,000 and 3,333,332 shares. These shares were sold at
various pricing between $0.405 and $0.24 per share. Subsequent to September 30,
2008, we have sold an additional 3,000,000 shares for $600,000 for a total of
18,347,581 shares and $5,808,723.54. These shares were sold at $0.20 per share.
Including 3,500,000 shares provided to Fusion as financing commitment shares
this leaves 18,152,419 registered shares available for future sales pursuant to
the effective S-1 Registration Statement.




Cumorah
Capital Transaction





On
January 16, 2008, Cumorah Capital purchased 8,650,000 shares of the Company’s
restricted common stock in a private transaction for total proceeds of
$2,500,000. The Company agreed to register the 8,650,000 shares purchased by
Cumorah Capital. Cumorah Capital is a Nevada corporation and an Accredited
Investor, as defined in Rule 501(a) of Regulation D as promulgated by the
SEC.


26


Wharton
Settlement Agreement





On May
30, 2008, XsunX and Wharton entered into a Settlement Agreement pursuant to
which XsunX agreed to provide Wharton with 875,000 shares of its common stock.
Subject to the fulfillment of the requirements of Rule 144 of the Securities
Act, Wharton agreed not to sell or transfer more than 250,000 shares monthly.
The Company also agreed to a $100,000 cash payment to be paid in four (4)
monthly installments of $25,000 each. As of September 30, 2008, all securities
and cash payment required under the Settlement Agreement had been provided to
Wharton.




Use
of Proceeds from Registered Securities




The
proceeds from the above sales of securities were and are being used primarily to
fund efforts by the Company to prepare manufacturing facilities and systems
necessary to build thin film solar modules, 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




The
following table below sets forth certain financial information derived from the
Company’s audited consolidated financial statements for the periods and at the
dates indicated.




In 2003,
the Company completed a Plan of Reorganization and Asset Purchase Agreement and
changed the name of the Company from Sun River Mining, Inc. to XsunX, Inc. Due
to the Company’s change in primary focus in October of 2003 and the developing
nature of the 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. The historical trends reflect this change of primary focus and the
associated research and development period of the development stage company.
This change in primary focus is the largest factor in the comparability of this
information over time.




The
information presented below should be read in conjunction with “Item 7:
Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and our consolidated financial statements and the related
notes.




Years EndedIn Thousands ($000)
                                              
                                              Sept 30,
                                                2008
                                              
                                              
                                              Sept 30,
                                                2007
                                              
                                              
                                              Sept 30,
                                                2006
                                              
                                              
                                              Sept 30,
                                                2005
                                              
                                              
                                              Sept 30,
                                                2004Statement
      of Operations Data:Net
      Sales
                                              
                                              $
                                              —
                                              
                                              
                                              $
                                              7
                                              
                                              
                                              $
                                              8
                                              
                                              
                                              $
                                              —
                                              
                                              
                                              $
                                              —Research
      and Development Expense
                                              
                                              
                                              (41
                                              )
                                              
                                              
                                              420
                                              
                                              
                                              
                                              956
                                              
                                              
                                              
                                              507
                                              
                                              
                                              
                                              129Loan
      Fees
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —
                                              
                                              
                                              
                                              7,002
                                              
                                              
                                              
                                              532
                                              
                                              
                                              
                                              —Warrant
      Expenses
                                              
                                              
                                              673
                                              
                                              
                                              
                                              772
                                              
                                              
                                              
                                              465
                                              
                                              
                                              
                                              180
                                              
                                              
                                              
                                              825Income(Loss)
                                              
                                              
                                              (4,059
                                              )
                                              
                                              
                                              (1,969
                                              )
                                              
                                              
                                              (9,113
                                              )
                                              
                                              
                                              (1,986
                                              )
                                              
                                              
                                              (1,115
                                              )Income(Loss)
      per Common Share
                                              
                                              $
                                              (0.02
                                              )
                                              
                                              
                                              (0.01
                                              )
                                              
                                              $
                                              (0.07
                                              )
                                              
                                              $
                                              (0.02
                                              )
                                              
                                              $
                                              (0.01
                                              )Cash
      Flow Data:Net
      cash provided by (used in) operating activities
                                              
                                              
                                              (2,695
                                              )
                                              
                                              
                                              (979
                                              )
                                              
                                              
                                              (1,966
                                              )
                                              
                                              
                                              (1,049
                                              )
                                              
                                              
                                              (236
                                              )


27





Years EndedSept 30,
                                              2008
                                            
                                            
                                            Sept 30,
                                              2007
                                            
                                            
                                            Sept 30,
                                              2006
                                            
                                            
                                            Sept 30,
                                              2005
                                            
                                            
                                            Sept 30,
                                              2004Net
      cash used in investing activities
                                            
                                            
                                            (4,229
                                            )
                                            
                                            
                                            (1,692
                                            )
                                            
                                            
                                            (2,076
                                            )
                                            
                                            
                                            (191
                                            )
                                            
                                            
                                            (12
                                            )Net
      cash provided by financing activities
                                            
                                            
                                            7,545
                                            
                                            
                                            
                                            135
                                            
                                            
                                            
                                            8,171
                                            
                                            
                                            
                                            1,380
                                            
                                            
                                            
                                            1,483Balance
      Sheet Data:Cash
                                            
                                            
                                            2,389
                                            
                                            
                                            
                                            1,769
                                            
                                            
                                            
                                            4,305
                                            
                                            
                                            
                                            176
                                            
                                            
                                            
                                            37Property
      Plant and Equipment, Net
                                            
                                            
                                            276
                                            
                                            
                                            
                                            290
                                            
                                            
                                            
                                            237
                                            
                                            
                                            
                                            165
                                            
                                            
                                            
                                            2Note
      Receivable
                                            
                                            
                                            —
                                            
                                            
                                            
                                            1,500
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —Marketable
      Prototype & Other Assets
                                            
                                            
                                            5,830
                                            
                                            
                                            
                                            3,484
                                            
                                            
                                            
                                            2,028
                                            
                                            
                                            
                                            20
                                            
                                            
                                            
                                            19Total
      Assets
                                            
                                            
                                            9,925
                                            
                                            
                                            
                                            5,884
                                            
                                            
                                            
                                            6,919
                                            
                                            
                                            
                                            442
                                            
                                            
                                            
                                            80Accounts
      Payable
                                            
                                            
                                            407
                                            
                                            
                                            
                                            547
                                            
                                            
                                            
                                            590
                                            
                                            
                                            
                                            58
                                            
                                            
                                            
                                            14Note
      Payable
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            850
                                            
                                            
                                            
                                            1Total
      Liabilities
                                            
                                            
                                            497
                                            
                                            
                                            
                                            615
                                            
                                            
                                            
                                            589
                                            
                                            
                                            
                                            974
                                            
                                            
                                            
                                            106Total
      Stockholders Equity
                                              (Deficit)
                                            
                                            
                                            9,428
                                            
                                            
                                            
                                            5,269
                                            
                                            
                                            
                                            6,330
                                            
                                            
                                            
                                            (532
                                            )
                                            
                                            
                                            (24
                                            )Long
      Term Obligations
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —Cash
      Dividends Declared per Common Share
                                            
                                            $
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            —
                                            
                                            
                                            $
                                            —





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 by the Company in 2007 and 2006 and Form 10-KSB in 2005 and any Current
Reports on Form 8-K filed by the Company.




Business
Overview




XsunX,
Inc. is a thin-film photovoltaic (“TFPV”) company which utilizes amorphous
silicon (“a-Si”), a mature semiconductor technology, as the core solar energy
absorber used to convert sunlight into electricity in the design and manufacture
of its solar modules. We believe that the design of our proprietary
manufacturing system, and solar module, coupled with our choice of assembly
materials may allow us to enjoy production costs of approximately $1.27 per watt
within our first full year of solar module production.




We are
currently developing the infrastructure to manufacture high performance TFPV
solar modules to address growth in demand for solar modules within the
electrical power production markets, and to satisfy contractual commitments for
the sale and delivery of our solar modules in 2009 and 2010. To accomplish this
we are executing a plan to build a thin film amorphous silicon solar module
manufacturing facility located in the Portland Oregon, USA area. We are working
to complete the installation of our base production infrastructure and develop
initial production capacities to 25 MW in 2009, and then scale through system
optimization to approximately 33 MW within the first full year of manufacturing
operations. Subject to available financing we plan to expand production
capacities through replication, growing production capacities to over 100 MW as
rapidly as possible.


28


Phased
Production Build Out and Planned Capacities




During
the year ended September 30, 2008, and for the foreseeable future, the
majority of our operations development efforts will focus on establishing and
expanding facilities necessary to manufacture our TFPV solar modules for
commercial sale.




During
the year ended September 30, 2008 we engaged in simultaneous efforts to
prepare manufacturing facilities to house our module assembly line, design
engineering and the placement of orders for manufacturing line components,
monitor and management of component assembly efforts, material vendor
negotiations and selection, and continued product design
evaluation.




Areas of
specific focus, progress, and capital expenditures have included:




Facilities





In April
2008 we selected and leased a 90,000 sq ft pre-existing commercial building to
house our solar module manufacturing operations. Initial aspects of necessary
modifications to the building were completed in July 2008. Industrial gas
management systems to be used in the manufacture of our solar modules required
modification to the buildings occupancy rating. The balance of design plans
incorporating occupancy rating to certain isolated building sectors necessary to
complete the required modifications were submitted to the local city compliance
department for approval in September 2008. As of the date of this report we have
received plan approval and permits, and a contractor has been selected to
perform the balance of major work under the modification plans. In September
2008 we began working to establish a research and product improvement center
within our Oregon manufacturing facility.





Equipment
Orders





At a
macro level our manufacturing process consists of 6 major operations: glass
cleaning, thin film deposition (sputtering and PECVD), laser patterning,
packaging, testing, and material transport. At a micro level, these 6 macro
level operations are divided into 26 discrete operations connected together with
automated material handling conveyors. For example there are 4 laser patterning
operations interspersed between 3 deposition operations and 4 glass cleaning
operations. Additionally there are three test stations at various stages of
product completion. As of the year ended September 30, 2008 our thin film
deposition (sputtering and PECVD), laser, glass cleaning, testing, lamination,
and material handling system vendors are all under contract and in various
stages of production. This comprises 24 of the 26 operations. We have vendors
identified for the remaining two minor operations of buss lead tape dispense and
shunt busting and are finalizing our statement of work to place the final two
machines under contract. The information presented above should be read in
conjunction with “Item 7 Management’s Discussion and Analysis or Plan of
Operations – Contractual Obligations” for additional financial detail associated
with equipment orders.





Module
Assembly Material Vendors





A key
advantage of our module design is the limited number of raw materials that is
required to construct a completed final product for commercial sale. Our module
design consists of a front and back sheet of glass, a specialty film adhesive to
hermetically seal the two pieces of glass together, an electrical junction box
(j-box) with lead wires, and the solar cell device material that is directly
deposited onto the front glass. The solar cell layers comprising of conductive
oxide, amorphous silicon, zinc oxide, and aluminum are deposited from a
combination of seven industrial gases and commodity metals (aluminum and zinc).
As of September 2008, we have all the primary raw goods materials suppliers
either identified or under contract. This includes front and back glass,
junction box adhesive, the PECVD gases, and the commodity metals (aluminum and
zinc). For specialty film adhesive and electrical junction box, we have several
vendors identified and are evaluating designs to achieve the best quality and
reliability at the lowest cost. All of our vendors currently supply materials
for the solar industry and all the materials we have selected have successfully
passed UL testing in the past.




Planned
Completion and Capacity Expansion




Barring
assembly delays and/or any delays in securing necessary working capital, we
anticipate completing the assembly of our initial 25MW manufacturing line and
commencing manufacturing operations in 2009. We plan to scale manufacturing
capacities through system optimization to approximately 33 MW within the first
full year of production. Subject to available financing we plan to expand
production capacities through replication, growing production capacities to over
100 MW as rapidly as possible.


29


Plan
of Operations




For the
year ending September 30, 2009 the Company has developed a plan of operations
that commits $9.4MM for cost of goods sold, $4.7MM for general, administrative
and working capital, $2.6MM for continued research and development and $1.1MM
for selling and advertising expenses. We anticipate approximately $40.6MM for
capital expenditures related to manufacturing and R&D equipment during the
fiscal year. The planned expenditures are consistent with our anticipated costs
associated with the placement of equipment order deposits, ongoing progress
payments, facility lease hold improvements for general office facilities and
manufacturing sub-system infrastructure, and operations support for an initial
approximate annual manufacturing capacity of 25MW.




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.




Re-Audit
for the Fiscal Periods Ended September 30, 2007 and 2006




As a
result of the suspension of our prior auditor, Jasper – Hall PC, by the Public
Company Accounting Oversight Board (PCAOB) practice on October 28, 2008, the
Company engaged new auditors and was required to re-audit the financial
statements for the years ended September 30, 2006 and September 30, 2007. The
financial statements for the fiscal periods 2006 and 2007 contained in this
annual report on Form 10-K have been restated to reflect the adjustments to
accounting estimates in those periods. In fiscal year 2007, the total impact of
these changes was to increase net loss by $679,349. $447,012 of this additional
loss was related to a change in estimate for option and warrant expenses and did
not impact cash. There was also an increases to non-cash depreciation
expense of $62,354, and a decrease to accrued interest income of approximately
$77,882 that resulted from adjustments in interest calculations corrected in the
2008 fiscal period. The impact to cash expenses, as a result of the audit
adjustments, was immaterial. There was no impact to earnings per share as it
remained $0.01 loss per share for the period.




In fiscal
year ended September 30, 2006, there were audit adjustments totaling $5,732,901
resulting in minimal impact to cash expenses. The largest adjustment relates to
the amortization of loan fees associated with convertible debentures issued in
the 2005 and 2006 fiscal years. We took a non-cash $6,373,156 additional charge
for the amortization of expenses associated with debenture structuring fees,
debenture commitment fees, and expenses attributable to the beneficial
conversion costs for in the money stock and warrant conversion under the
debentures. Depreciation expense was reduced by $66,265 and warrant and option
expenses were reduced by $486,250 for the period. This resulted in additional
non-cash net income of $552,519 that partially offset the amortization of the
loan fees associated with the convertible debentures. There was an increased
loss per share associated with these restatements of $0.05 per share bringing
the total to $0.07 loss per share.




Results
of Operations for the Three Fiscal Years Ended September 30, 2008 Compared to
Fiscal Years Ended September 30, 2007 and 2006




Revenue,
Cost of Goods Sold:




The
Company generated no revenues in the period ended September 30, 2008. In the
period ended September 30, 2007 the Company generated revenue of $6,880 and for
the corresponding period in 2006 we generated $8,000 in revenue. There were no
associated costs of goods sold in any of the fiscal periods represented
above.


30


Operating
Expenses:




The
Company incurred operating expenses totaling $4,262,192 in the fiscal year ended
September 30, 2008 as compared to $3,184,814 in the corresponding
fiscal year in 2007 and as compared to $2,203,594 in corresponding fiscal
period in 2006.




The
increase of $1,077,378 between the fiscal years 2008 and 2007 was primarily
driven by an increase of $432,343 to consulting service fees, $139,943 to rent,
and $417,304 to public relations efforts associated with the Company’s efforts
to prepare, install, and operate solar module manufacturing operations. For
the fiscal year ended September 30, 2007 operating expenses increased by
$1,069,146 as compared to the corresponding fiscal year in 2006. The
increase was driven by non-cash expenses totaling $307,315 for option and
warrant expenses, increases to salary and payroll of $549,327, increased legal
fees of $178,977 and increased travel costs of $116,291




Excluding
these non-cash items associated with the debentures, and consistent with the
Company’s efforts to prepare, install, and operate solar module manufacturing
operations, there was an increase in normal and customary operating expense of
$979,529 to operating expenses for the period ending September 30, 2007 as
compared to the same period 2006. The primary drivers of this increase are
discussed in detail below.




Salaries
and Wages:




Consistent
with the Company’s planned efforts to prepare, install, and operate solar module
manufacturing operations the Company hired additional staff and modified salary
structures in the course of implementing its commercialization strategy in the
fiscal year ended September 30, 2008. This increase in staffing and salaries
resulted in total salary expenditures for the fiscal year ended September
30, 2008 of $1,173,815 which is an increase of $345,104 compared to the same
period in 2007. Salary expenses for the fiscal year 2007 totaled $828,711
which was an increase of $553,622 compared to the same period in 2006. The
Company expects this trend to continue as the manufacturing facility is built
out and begins operations.




Research
and Development:




The
Company recovered $40,590 previously spent on research and development
activities during the fiscal year ended September 30, 2008 as a result of a
separation agreement with MVSystems, Inc. which resulted in reductions to
pre-paid research, product development, and consulting and R&D fees for
projects previously entered into with MVSystems, Inc. This represented a
decrease of $457,825 in research and development expenses for the
fiscal year ended September 30, 2008 as compared to the same period in
2007. Research and development expenses for the year ended September 30,
2007 were $420,462. This represented a decrease of $530,733 as compared to the
same period in 2006. This decrease between the 2007 and 2006 fiscal periods
reflects the Company’s reduction in research and development expenditures in
2007 and the move towards development of manufacturing facilities.




Professional
Services:




Consulting
services totaled $541,916, representing an increase of $432,343 for the fiscal
year ended September 30, 2008 as compared to the same fiscal period in 2007. The
increase between these periods was primarily driven by increased expenditures
for engineering and professional consulting services associated with efforts to
prepare our planned production facility. For the fiscal year ended
September 30, 2007, total consulting services were $109,573 representing an
increase of $61,723 for the fiscal year ended September 30, 2007 as compared to
$47,850 for the fiscal year ended September 30, 2006. The increase between
these periods was largely driven by the expansion of the Company’s Scientific
Advisory Board and increasing contract engineering expenses related to efforts
by the Company to commercialize products.


31


Legal and
Accounting fees increased marginally by $26,714 to $347,482 for the fiscal year
ended September 30, 2008 as compared to fees totaling $320,768 in the same
period in 2007 which in turn represented an increase of $178,977 to legal and
accounting fees over the same period in 2006. This increase of $181,111 between
the fiscal year ended September 30, 2006 and 2007 was primarily the result
of legal expenses related to our increase in the development of licensing rights
to technologies, the Company’s attempted acquisition of manufacturing assets,
and the attempted enforcement of contract rights under the acquisition. The
increase to legal and accounting expenses of $26,714, and overall continued
increased legal and accounting expenditures in the fiscal year ended
September 30, 2008 compared to the same period in 2007 were driven by legal fees
associated with service and vendor contracts, license rights negotiations, the
defense of claims made for finders fees related to financing, and the negotiated
accelerated re-payment of a loan made by the Company to Sencera,
LLC.




Travel:




Travel
and associated expenses were $220,475 for the fiscal year ended September 30,
2008. This represents an increase of $61,880 as compared to the same fiscal
period in 2007 and an increase of $196,010 over fiscal year 2006. The increase
between the fiscal year ended 2006 and 2007 and the continued increase of
$61,880 into the corresponding period in 2008 represent the Company’s efforts
beginning in fiscal 2007 to prepare, install, and operate solar module
manufacturing operations.




Other
Operating Expenses:




Other
operating expenses changes include, advertising expenses totaling $ 19,894 for
the fiscal year ended September 30, 2008, as compared to $47,573 for the fiscal
year ended September 30, 2007, a decrease of $27,679. In the fiscal year ended
September 30, 2006, advertising expenditures totaled $9,050 which resulted in a
year over year increase of $38,523 between the same fiscal periods in 2007 and
2006. The increased to advertising expenditures in the 2007 fiscal period
relative to the same period in 2006 represented an increased focus on generating
brand awareness, and marketing efforts in the development of a sales channel
while the decrease of $27,679 in the 2008 fiscal period relative to the same
period in 2007 is a result of the Company’s continued use of assets developed
under the fiscal 2007 advertising efforts, and an increased focus on the
preparation of manufacturing facilities resulting less advertising by the
Company.




In
the year ended September 30, 2008 the Company adopted a policy providing
for the payment of a monthly stipend fee to its non-employee members of its
board of directors. This resulted in director fees totaling $35,000 in the
fiscal period 2008. Prior to the fiscal year 2008 the Company did not
provide members of its board with cash payments. There were no associated cost
increases or decreases attributed to director fees for fiscal years prior
to the fiscal year 2008.





Insurance
expenses were $52,651 for the fiscal year ended September 30, 2008 and $66,856
for the fiscal year ended September 30, 2007, a decrease of $14,205. This
decrease represents the selection of more advantageous coverage packages that
provided the same or enhanced coverage at a reduced price. The increase of
$64,151 from 2006 to 2007 represents the addition of a directors and officers
insurance coverage.




License
fees totaled $128,077 in the fiscal year ended September 30, 2008 as
compared to $90 and $20 for the corresponding fiscal periods ended 2007 and 2006
respectively. The increase of $127,987 in the fiscal year 2008 represents
costs associated with the Company’s efforts to plan and prepare for
manufacturing facilities, and the associated cost to these efforts for
compliance with government regulatory compliance for building and
safety.




Other
(Income) and Expense:





Other
(Income)/expense decreased by $1,005,048 between the fiscal periods ended
September 30, 2008 and 2007.  The decrease was primarily driven by
income of $1,100,000 from a legal settlement in 2007 which was a one- time
occurrence.  Other (Income/expense decreased by 8,126,482 between the
fiscal years ended September 30, 2007 and 2006.  This decrease was
driven by non-cash expenses of $7,001,990 associated with debenture structuring
fees, commitment fees and expenses attributable to beneficial conversion costs
for “in the money” stock and warrant conversions under debentures issued in the
fiscal years ended September 30, 2006 and 2005.




For the
fiscal year ended September 30, 2008, the Company’s net loss was $(4,058,952) as
compared to $(1,968,846) for the same year ended September 30, 2007 and
$(9,112,988) for the same year ended September 30, 2006. The increase to
net loss of $2,090,106 between the fiscal year 2008 and 2007 was primarily
driven by the expenses associated with the Company’s on going efforts to
establish solar module manufacturing infrastructure.


32


Our
net loss per share was $(0.02) for the year ended September 30, 2008, net
loss per share of $(0.01) for the year ended September 30, 2007, and a net
loss per share of $(0.07) for the year ended September 30,
2006.




Due to
the Company’s change in primary business focus in October 2003 and the
developing nature of its 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. Since inception in 1997 the Company had an accumulated deficit totaling
($21,075,069) at September 30, 2008.




Liquidity
and Capital Resources




Working
capital at September 30, 2008 was $3,321,294 as compared to $1,495,331 as
of September 30, 2007 and as compared to working capital of $4,065,653 at
September 30, 2006. There were no revenue producing activities in fiscal
year ended September 30, 2008. There were immaterial revenues totaling
$6,880 and $8,000 in the fiscal years ended September 30, 2007 and 2006
respectively.




Cash and
cash equivalents at September 30, 2008 were $2,389,218 as compared to $168,616
for the same period in 2007 and as compared to $4,305,105 at September 30,
2006.




During
the year ended September 30, 2008, the Company used $2,695,476 net cash in
operating activities as compared to $979,218 net cash in operating activities
for the year ended September 30, 2007 and compared to using $1,966,403 net
cash in operating activities for the year ended September 30,
2006.




The
increase of $1,716,258 in the use of cash for operating activities between the
2008 and 2007 fiscal years resulted from increased operating expenses such as an
increase of $432,343 to consulting service fees, $139,943 to rent, and $417,304
to public relations efforts associated with the Company's efforts to prepare,
install, and operate solar module manufacturing
operations.  There was a decrease of $987,185 in the use of
cash for operating activities between the 2007 and 2006.




For the
twelve months ended, September 30, 2008, the Company’s capital needs have
primarily been met from the proceeds of the sale of common stock. Net cash
provided by financing activities for the period ended September 30, 2008
increased to $7,544,700. For the year ended September 30, 2007 total cash
provided by financing activity was $135,000 as compared to $5,000,000 for the
same period ended September 30, 2006.




Contractual
Obligations are shown in the following table:





Contractual Obligations
                
                Payments Due by PeriodTotal
                
                
                Less than
                  1 Year
                
                
                1 - 3
                  Years
                
                
                3 - 5
                  Years
                
                
                More
                  than
                  5 YearsLong
      Term Obligations
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Capital
      Lease
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Operating
      Lease(1)
                
                $
                1,865,007
                
                
                $
                662,713
                
                
                $
                1,202,294
                
                
                
                —
                
                
                
                —Purchase
      Obligations(2)
                
                
                32,814,587
                
                
                
                32,814,587
                
                
                
                —
                
                
                
                —
                
                
                
                —Other
      Long Term Liabilities Reflected on the Registrant’sBalance Sheet Under
      GAAP
                
                
                —To
                
                $
                34,679,594
                
                
                $
                33,477,300
                
                
                $
                1,202,2944
                
                
                
                —
                
                
                
                —


33





(1)
            Operating
      lease obligations consist of the lease on the Company’s Manufacturing
      facility in Wood Village, OR and an Administrative facility in Golden,
      CO.




(2)
            Represents
      the total contractual purchase obligations represented by purchase orders
      for manufacturing equipment. The total obligations under these agreements
      is $38,264,635 of which, $5,450,048 has been paid on the obligations.
      Future scheduled payments are tied to progress made on the delivery of the
      associated equipment. The timing of these payments may vary due to the
      progress actually made by the
vendors.





The
estimated contract cost in item (2) above may be higher or lower based on final
costs. The Company has not booked any contingency for cost
overruns.




During
the fiscal year ended September 30, 2008, we used $4,228,623 for investing
activities as compared to $1,692,271 for the fiscal year ended September 30,
2007 and $2,095,611 for the same period ended September 30, 2006. During the
year ended September 30, 2008 the Company’s cash used in research and
development equipment including the marketable prototype currently for sale was
$5,617,410.  The majority of the decrease between the fiscal years 2006 and
2007 was related to the investment in deposition technologies licensed in
conjunction with the issuance of a $1.5MM note to Sencera, LLC.




We had,
at September 30, 2008, working capital of $3,321,294. The Company is currently
engaged in efforts to establish solar module manufacturing facilities. However
the cash flow requirements associated with the completion of these manufacturing
facilities, and the transition to revenue recognition may exceed cash generated
from operations in the current and future periods. We may seek 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.




Net
Operating Loss




For
federal income tax purposes, we have net operating loss carry forwards of
approximately $20,000,000 as of September 30, 2008. These carry forwards will
begin to expire in 2010. The use of such net operating loss carry forwards to be
offset against future taxable income, if achieved, may be subject to specified
annual limitations. The ability to use these carry forwards depends on future
profitability which is uncertain at this time.





Item
7A. Quantitative and Qualitative Disclosures About Market Risk




The
Company maintains interest bearing deposits in the form of U.S. Treasury Notes
in various amounts and maturity periods that allow us to maintain access to
necessary capital to fund operations. These investments in Treasury Notes earn
varied interest rates and upon maturity are subject to market risks associated
with the increase or decrease for the then available rates comparative to the
expiring rates. These investments in U.S Treasury Notes are underwritten by the
United States Government and are brokered through our association with a U.S.
based and federally insured bank. We do not believe that these investments are
subject to foreign currency risks.




Our
products are 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.




Item
8. Financial Statements and Supplementary Data




Please
refer to pages F-1 through F-22.


34


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




The PCAOB
revoked the registration of our former independent registered public accounting
firm, Jaspers + Hall, PC on or about October 21, 2008.  After receiving
notice of such revocation, the Company’s Board of Directors dismissed Jaspers +
Hall, PC effective October 31, 2008 and engaged Stark Winter Schenkein &
Co., LLP (“ SWSC ”) to serve as the Company’s new independent registered public
accounting firm effective as of November 3, 2008 as set forth in the Company’s
Current Report on Form 8-K as filed with the SEC on November 6, 2008.  On
December 23, 2008, the Company received a Comment Letter from the SEC stating
that the Company may not include the reports of Jaspers + Hall, PC in its
filings and that the Company should have a firm that is registered with the
PCAOB re-audit that year.  In addition to auditing the Company’s financial
statements for the fiscal year ended September 30, 2008 which are attached to
this Annual Report, SWSC is also auditing the Company’s financial statements for
the fiscal years ended September 30, 2007 and 2006.  All audit work
performed on the September 30, 2008, 2007 and 2006, financial statements by SWSC
was performed by SWSC’s full time employees.




Item
9A. Controls and Procedures




Disclosure
Controls and Procedures




Our Chief
Executive Officer and Chief Financial 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 Financial 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, 2008 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, 2008, 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 Financial Officer
concluded that our internal control over financial reporting as of September 30,
2008 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.


35


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.




Report
of Independent Registered Public Accounting Firm




Based on
this assessment, management determined that, as of September 30, 2008, the
Company maintained effective internal control over financial reporting. Stark
Winter Schenkein & Co., LLP, an independent registered public accounting
firm, audited and reported on the consolidated financial statements of the
Company included in the report on the financial statements on page
F-1.





REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Stockholders of XsunX, Inc,





We have
audited XsunX, Inc.’s internal control over financial reporting as of September
30, 2008, 2007 and 2006, based on criteria established inInternal
Control—Integrated Framework  issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The Company’s
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting included in the accompanying Managements'
Report on Internal Controls. Our responsibility is to express an opinion on the
company’s internal control over financial reporting based on our
audits.





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 effective
internal control over financial reporting was maintained in all material
respects. Our audits of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on the assessed
risk. Our audits also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits provide a reasonable
basis for our opinion.





A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. 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.





In our
opinion, XsunX, Inc. maintained, in all material respects, effective internal
control over financial reporting as of September 30, 2008, 2007 and 2006, based
on criteria established inInternal
Control—Integrated Framework  issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).





We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the balance sheets and the related statements
of income, stockholders’ equity and comprehensive income, and cash flows of
XsunX, Inc., and our report dated January 30, 2009 expressed an unqualified
opinion.




/s/ Stark
Winter Schenkein & Co., LLP




Denver,
Colorado


January
30, 2009


36


Item
9B. Other Information




On
November 12, 2007, the Company announced the appointment of Mr. Oz Fundingsland
as Director, effective November 12, 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




On August
1, 2008, Mr. Joseph Grimes was appointed as a Director of the
Company.




In
November 2008, the Company issued 50,000 shares of its common in connection with
a services agreement to provide marketing and financing service to the Company.
These shares are unregistered and restricted.





Employee
Incentive Option Grants. In the fiscal period beginning October 1, 2008, and in
connection with the Company’s policy to incentivized employees whose
contribution is deemed to influence the Company’s efforts to prepare, install,
and operate solar module manufacturing capabilities, the Company authorized
employment incentive option grants to the following employees at an exercise
price per share of $0.36. The options have a 5 year exercise terms and vest in
the amount of 1/3 of the total grant on an annual basis from the date of hire
and subject to continued employment with the Company:




Name
                              
                              Date
      of Grant
                              
                              Amount
                              
                              Type
      of Grant
                              
                              Exercise Price
                              
                              TermVanessa
      Watkins
                              
                              October
      10, 2008
                              
                              
                              115,000
                              
                              Incentive
                              
                              $
                              0.36
                              
                              5
      yr.Tyler
      Anderson
                              
                              October
      10, 2008
                              
                              
                              100,000
                              
                              Incentive
                              
                              $
                              0.36
                              
                              5
      yr.Yang
      Zhuang
                              
                              October
      29, 2008
                              
                              
                              20,000
                              
                              Incentive
                              
                              $
                              0.36
                              
                              5
      yr.




In
November 2008 XsunX received a notice from MVSystems, Inc. asserting that XsunX
was in material default of the terms of a Separation Agreement between the
parties dated May 30, 2008. XsunX disputes the assertion and as of the date of
this report no related litigation is pending, and MVSystems has not asserted any
related monetary damages. The claim relates to a production prototype machine
built under the terms of an Expanded Use License Agreement dated October 12,
2005 between XsunX and MVSystems, Inc. Under the terms of the Expanded Use
License Agreement the parties had agreed to build the machine to prove
technology for intended resale and split any associated profits from the sale of
the machine 50/50. This production machine was never brought operational due to
the failure to meet contractual requirements of the machine by MVSystems, and
XsunX has never taken possession of the machine. Under the terms of the May 2008
Separations Agreement MVSystems continues to have possession of the machine and
subject to the Separations Agreement has undertaken efforts to sell the machine
for the parties benefit. Under the notice of material default provided to XsunX
MVSystems has claimed that a sale of the machine has occurred to XsunX and that
state sales tax in the amount of approximately $60,000 is due. XsunX disputes
this claim and the parties have each petitioned the State of Colorado for a
final determination on this matter.




PART
III




Item
10. Directors, Executive Officers, and Corporate Governance




The
following table lists the executive offices and directors of the Company as of
September 30, 2008:




Name
              
              Age
              
              Position
      Held
              
              TenureTom
      Djokovich
              
              51
              
              President,
      CEO, Director
              
              Since
      October 2003Joseph
      Grimes
              
              51
              
              COO,
      Director
              
              COO
      since April 2006 and as a director Since August 2008Jeff
      Huitt
              
              47
              
              CFO
              
              Since
      January 2007Thomas
      Anderson
              
              43
              
              Director
              
              Since
      August 2001Oz
      Fundingsland
              
              65
              
              Director
              
              Since
      November 2007Michael
      Russak
              
              61
              
              Director
              
              Since
      November 2007




37




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 51, President and Chief Executive Officer as of October 2003,
and Director;




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
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 51, Chief Operating Officer as of April 2006 and as a
Director as of August 2008;





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.
Jeff Huitt, age 47, became Chief Financial Officer in January 2007;




Jeff
Huitt serves as Chief Financial Officer at XsunX. Located in the Golden,
Colorado research facility, his responsibilities include operations management
and coordination of resources. He has over 20 years experience in leadership
positions of both larger organizations and start ups, most recently as President
of Parking Stripes Advertising, a private start-up media company from October
2006 to August 2007. Prior to that, he was COO/CFO of a startup defense
contractor guiding the company through high growth and a recapitalization from
January 2004 to October 2006. His additional experience includes CFO of iSherpa
Capital, from October 2001 to January 2004 and Controller of Qwest Wireless from
1996 to 2000.




Mr. Huitt
is a CPA, currently on inactive status and holds two degrees from the University
of Denver: a Bachelor of Science in Accounting and a Master’s in Business
Administration.


38




Mr.
Thomas Anderson, age 43, 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 Denison University and his M.S. in
EnvironmentalScience and Engineering from Colorado School of Mines.




Mr.
Oz Fundingsland as Director, age 65, 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 61, 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
Intervac, 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 Rutgers University 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.





Scientific
Advisory Board




In
September 2004 the Company established the XsunX Scientific Advisory Board to
attract qualified specialists from the fields of material and device
engineering. During the fiscal year 2008, the membership of the advisory board
was unchanged. Panel members are typically engaged for a period of two years.
The qualifications and biographical information for the members of the panel are
as follows:


39




Dr.
John J. Moore — Chairman Scientific Advisory Board





Dr. John
J. Moore is a Materials Scientist who currently holds the position of Trustees’
Professor and Head of Department of Metallurgical and Materials Engineering at
the Colorado School of Mines. Dr. Moore is also Director of the
interdisciplinary graduate program in Materials Science and Director of the
Advanced Coatings and Surface Engineering Laboratory, ACSEL, at the Colorado
School of Mines in Golden. He has been at the Colorado School of Mines since
1989.





Dr. Moore
was awarded a B.Sc. in Materials Science and Engineering from the University of
Surrey, UK, in 1966, a Ph.D. in Industrial Metallurgy from the University of
Birmingham, UK, in 1969, and a D.Eng. from the School of Materials of the
University of Birmingham, UK, in 1996. Dr. Moore worked as a Student Apprentice
at Stewarts and Lloyds Ltd., UK, from 1962 to 1966, and as Manager of Industrial
Engineering and Production Control at Birmid-Qualcast Industries Ltd., UK, the
largest die casters in Europe at the time, from 1969 to 1974.





Prior to
his appointment at the Colorado School of Mines, Dr. Moore served as
Professor  & Head, Department of Chemical and Materials
Engineering, University of Auckland, New Zealand, from 1986 to 1989; Professor
of Metallurgical Engineering at the University of Minnesota, USA, from 1979 to
1986, and Senior Lecturer of Chemical Metallurgy at Sandwell College, England,
from 1974 to 1979.





Dr. Moore
has published more than 500 papers in materials science and engineering
journals, holds 13 patents, and has been the author or co-auth or editor of 9
books. Dr. Moore is a Fellow of the Institute of Materials (UK), a Fellow ASM
International, a Fellow of the American Ceramic Society, and a Chartered
Engineer, (C.Eng.), in the UK. Dr. Moore is also an Honorary Professor and has
been awarded an Honorary Doctorate from the Moscow State Institute of Steels and
Alloys, Russia.





Dr.
Richard K. Ahrenkiel, Member Scientific Advisory Board




Richard
K. Ahrenkiel is currently a Research Professor of Metallurgical and Materials
Engineering at the Colorado School of Mines in Golden, Colorado. He is also a
Consultant and Research Fellow Emeritus at the National Renewable Energy
Laboratory (NREL), (formerly the Solar Energy Research Institute) Golden,
Colorado, where he worked from 1981 to 2005. He became a Research Fellow at NREL
in 2000. His area of specialization is the measurement and characterization of
photovoltaic cells and materials. He also works in photovoltaic device design
and modeling. He received a B.S. degree in Engineering Physics and the M.S. and
Ph.D degrees in Physics at the University of Illinois, Urbana. He joined the
staff of the Research Laboratories of the Eastman Kodak Company. From 1972-76,
he worked on the newly founded electronic photography project using silicon
charge coupled devices as sensing elements. He joined Laser Division of the Los
Alamos National Laboratory in 1976 (then LASL), and in 1978, he became a Group
Leader in the Electronics Division of LANL. He is a Fellow of the American
Physical Society, the Institute of Electrical and Electronic Engineers (IEEE),
the American Vacuum Society, and the Optical Society of America.





Edward
T. Yu, Member Scientific Advisory Board





Edward T.
Yu is currently Professor of Electrical and Computer Engineering at the
University of California, San Diego (UCSD). He received his A.B. (summa cum
laude) and A.M. degrees in Physics from Harvard University in 1986, and his
Ph.D. degree in Applied Physics from the California Institute of Technology in
1991. From 1986 to 1989 he was a National Science Foundation Doctoral Fellow,
and from 1989 to 1991 he was an AT&T Bell Laboratories Ph.D. Scholar,
holding both appointments at Caltech. From 1991 to 1992 he was a Postdoctoral
Fellow at the IBM Thomas J. Watson Research Center in Yorktown Heights, NY. From
1992 to 1996 he was Assistant Professor of Electrical and Computer Engineering
at UCSD, and from 1996 to 1998 he was Associate Professor. He has held his
current appointment as Professor since 1998. Dr. Yu also serves currently as a
member of the DARPA Defense Sciences Research Council.


40




At UCSD
Professor Yu directs a research laboratory concerned generally with the
characterization, understanding, and application of physical phenomena and of
solid-state material and device properties at nanometer to atomic length scales.
Current research interests in his group include III-V nitride heterostructure
materials and device physics; scanning probe characterization of advanced
electronic materials and devices; solid-state nanoscience and nanotechnology;
and photovoltaics and other technologies for energy generation. The results of
his research have been reported in over 120 reference journal publications and
over 175 conference and seminar presentations.





Dr.
Michael A. Russak, Member Scientific Advisory Board and a Director




Dr.
Michael A. Russak currently holds the position of Executive Vice President of
Business Development with Intervac, 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 Rutgers University 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.





Board
Committees; Audit Committee





As of
September 30, 2008, 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 solely on its review of the
copies of such Section 16 Reports and any amendments thereto received by it, or
written representations received from certain Reporting Persons, the Company has
no knowledge that any Reporting Person failed to file any Section 16 Report on a
timely basis.


41




Code
of Ethics





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





Item
11. Executive Compensation





Compensation
Discussion and Analysis





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 solar
module manufacturing infrastructure.




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 provided to future
executive officers. The named executive officers for fiscal 2008 are Tom M.
Djokovich, our chief executive officer, Joseph Grimes, our chief operating
officer, and Jeff Huitt, our chief financial officer.





Executive
Compensation Policies




Our
long-term success depends on our ability to commercialize our solar product
designs through the strategic goal of establishing manufacturing infrastructure.
To execute these objectives rapidly and efficiently, it is critical that we
attract, motivate and retain highly talented individuals at all levels of the
organization that are committed to the Company’s mission and core
values.




The board
of directors deems the following policies as relevant in determining
compensation standards:





•
                    Compensation
      objectives are based on the level of job responsibility, individual
      performance and Company performance or strategic objective progress
      goals.•
                    Compensation
      within the Company’s efforts to attract qualified personnel should reflect
      the value of similar jobs within the marketplace. To attract and retain a
      highly skilled work force, we must first provide pay that is competitive
      with the pay offered by other employers who compete with us for talent.
      Compensation next is designed to provide incentive based compensation
      through the grant of cash bonus or equity incentive grants tied to Company
      strategic objectives within the scope of influence of the employee or
      management group.•
                    We
      have and plan to continue to provide employees a mix of both annual and
      longer-term incentives tied to metrics including sales/revenue attainment
      minimums, strategic objective attainment including manufacturing
      facilities preparation, production of marketable solar modules, and
      continued commitment to the Company. Employees at higher levels may have
      an increasing proportion of their compensation tied to longer-term
      performance because they are in a position to have greater influence on
      longer-term results.•
                    Attainment
      of strategic objectives is the core to the success of our business
      plan. We believe that the use of performance-based compensation
      should foster a long-term focus required for our success within the solar
      industry. We have elected to structure our programs to deliver
      compensation for individual contribution and group performance necessary
      in achieving our goals. We believe success can best be measured by our
      ability to first complete our strategic goal for the assembly of our
      manufacturing infrastructure and then work to leverage invested capital
      (or net assets) to produce commercially marketable solar modules, and
      finally by focusing on reducing our production costs, thereby enabling us
      to reduce the price that we can charge for our
  products.




42





•
            To
      be effective, performance-based compensation programs should enable
      associates to easily understand how their efforts can affect their pay,
      both directly through individual performance accomplishments and
      indirectly through contributing to the Company’s achievement of its
      strategic and operational goals.




As a
small developing stage Company we have not engaged in a policy of adhering to
rigid compensation formulas and we may reacted to short-term changes in business
performance or objectives in determining the amount and mix of compensation
elements for our named executives. We consider competitive compensation paid by
other companies comparable in size and stage of development, but do not attempt
to maintain a certain target percentile within a peer group or otherwise
exclusively rely on market data to determine executive compensation. We
incorporate flexibility into our compensation decisions and in our assessment
process to respond to and adjust for the evolving business environment in which
we operate.




Components
of Executive Compensation




The
certain primary elements of our executive compensation for the period ended
September 30, 2008 were developed fiscal year 2007 and are discussed below,
including a description of each particular element and how such element fits
into our overall executive compensation package. In the descriptions below, we
highlight particular objectives that specific elements of our executive
compensation program are designed to address. However, it should be noted that
we have designed our compensation program so that each element complements the
other and collectively serve all of our executive compensation objectives
described above and below.





Due to
our evolving nature as a development stage company we have also exercised
discretion towards the adjustment or addition of compensation components during
interim periods to provide for relevant new goals and objectives as they evolve.
Whether or not specifically mentioned, we believe that each element of our
executive compensation program, to a greater or lesser extent, serves each of
our objectives.




During
the fiscal year ended September 30, 2008, the compensation of named executive
officers consisted of base salary, a cash bonus award opportunity, as well as
stock option grants and continued option vesting opportunities for those named
executive officers. The following is a summary of the components of our
compensation:





Component
                
                Objective
                
                FocusBase
      Salary Compensation
                
                To
      provide fair market fixed compensation paid in cash and commensurate with
      peer and industry groups.
                
                To
      reward individual performance, contribution, level of experience, and
      critical nature of position. Increase in base salaries tied to revenue
      attainment minimums.Cash
      Bonus and Incentive Compensation
                
                To
      provide at-risk incentive pay linked to short and midterm Company goals
      paid in cash.
                
                To
      reward specific achievement of operational goals which allow the Company
      to achieve strategic objectives.Lone-Term
      Equity Based Compensation
                
                To
      provide at-risk incentive pay linked to longer term Company goals or
      performance paid in stock options that vest over time or the attainment of
      strategic goals.
                
                To
      reward overall Company
performance.




43




The
following is a discussion of the board considerations in establishing each of
the components for the executive officer compensation for fiscal 2008 (we do not
have a compensation committee and our board currently serves such
functions).




Base
Salary Compensation




Base
salary is the guaranteed element of annual cash compensation. The value of base
salary for each named executive officer reflects the requirements of such
executive’s employment agreement, long-term performance and skill set, including
the market value of that skill set at the time of hire or subject to current
market conditions that may prevail. Base salary adjustment review is subject to
the Company first achieving revenue attainment goals of $5,000,000. Any
resulting base salary increases are subject to the discretion of the board of
directors. For details relating to the employment agreements, see “Executive
Compensation — Employment Agreements and Arrangements”.




Cash
Bonuses and Incentive Compensation




The bonus
opportunity during the fiscal year ended September 30, 2008 to named executive
officers appear in the Summary Compensation Table under the “Non-Equity
Incentive Plan Compensation” column and were determined based on the terms of
the employment agreements with our named executive officers as well as a general
assessment of the Company’s attainment of certain revenue goals. The board of
directors considered certain revenue minimum attainment goals as the primary
driver in the award of primary cash compensation bonus awards.





During
fiscal year 2008, the Company’s bonus program applicable to management and
executives, including certain named executive officers, focused on encouraging
teamwork rewarding of excellent performance with respect to corporate and
organizational objectives under the Company’s strategic business
plan.





Also
during fiscal year 2008 certain additional cash bonuses were made available to
named executive officers to provide special compensation bonus awards for
efforts associated with the establishment of manufacturing facilities in Oregon,
USA.




Equity-Based
Compensation




To
attract and retain qualified and motivated employees, we believe it is important
to provide our employees with the opportunity to share in the success our
Company in a manner commensurate with their ability to influence our success.
Providing an equity interest in the Company to employees allows the employee to
become a stockholder of the Company, along with the other shareholders, and we
believe this will align the interests of the employee to the success of the
Company, and the interests of our shareholders. We also believe that the level
of equity ownership should be commensurate with the employee’s job
responsibilities or ability to influence the objectives of the Company,
recognizing that higher level roles may have a greater influence on the ability
of the Company to meet its objectives and succeed.




For our
named executive officers the board of directors determined that equity-based
compensation, through grants of stock options at fair market value, rather than
providing only cash compensation would provide motivating incentive.
Accordingly, if the Company’s performance improves, the executive will benefit
together with our shareholders. If the Company’s performance deteriorates, the
executive may not benefit from improves stock appreciation and may see their
compensation opportunity reduced. With respect to new employees, for certain
roles, particularly as the role has more influence on the success of our
business, we may provide options grants or cash incentives, as necessary to
attract the candidate to the Company. Any equity-based compensation granted to
employees is granted in accordance with our 2007 Stock Option Plan and any
options are issued at or above fair market value as of the date of
grant.


44





The board
of directors determined and established three primary objectives in the
consideration of an option based compensation grant for the named executive
officers. Any one or all three of the following may be used in the determination
of an option grant by the board. (i) the provision of an initial vesting
allowance of a portion of the executive total award as an incentive ownership
stake, (ii) under limited vesting of portions of the executive total award
through the continued employment by the executive under quarterly and annual
periods and (iii) through the attainment of the strategic business objective of
the Company to establish solar module manufacturing infrastructure and
successfully produce commercial quality solar modules. Subject to the discretion
by the board of directors these objectives may change and are subject to
influence from market and industry conditions.




For
details relating to equity based compensation, see “Grants of Plan Based Awards
Table” and the “Outstanding Equity Awards at Fiscal Year-End”
table.




Broad-based
Benefits Programs and Other Compensation




Our named
executives are entitled to participate in a medical benefit program we offer to
all of our employees. Under our 2008 medical benefit plan, the Company sponsors
up to $300 dollars for non-executive employees and $400 for the named executive
employees for use by the employee towards the payment of either private or
Company offered medical benefit insurance program. Generally, our named
executive officers have vacation entitlements of three weeks as provided in
their employment agreements.





Other
General Compensation Policies





In
determining compensation we did not provide policies for allocating between
long-term and currently paid out compensation. Efforts we also made to attempt
to structure equity based compensation programs that could limit or minimize
costs to the Company, the employee, and the named executive officers. It was
determined that the provisioning of option grants under the Company’s 2007 Stock
Option Plan provided sufficient equity compensation opportunity while maximizing
benefits and reducing anticipated costs to the Company and the
employee.





In the
event that an employee or named executive officer holder of an option grant
willingly terminates employment status, or is terminated for cause by the
Company, other than for death or disability, than the employee shall have the
lesser of 30 days or the remaining term of the option grant to exercise any
remaining vested but unexercised options under a grant.





The
Company has not adopted a policy for retirement benefits. As such we have not
developed any policies related to accounting for prior compensation or benefits
towards any contemplated retirement program.





The
financial impact for equity based compensation provided in the form of stock
option grants under the Company’s 2007 Stock Option Plan are accounted for
utilizing Black Scholes method.





We have
not adopted nor do we maintain policies related to security ownership
requirements or guidelines, and we have not established any policies related to
hedging the economic risk of such ownership.





While we
have attempted to keep informed as to the compensation levels commensurate with
similar positions for our named executive officers we have not engaged in any
specific benchmarking of total compensation.





Change
of Control




The board
of directors generally believes it is in the best interests of the Company to
provide assurance to certain executives that the executives will be fairly
compensated for any lost employment or lost opportunity to realize the value of
their compensation agreement upon a change in control of the Company. We
recognize that, in order to align the interest of the executives with our
shareholders, it is important to encourage the continued attention and
dedication of the executives to their assigned duties and to mitigate the
uncertainty and questions a potential change in control may raise among such
executives. As a result, we have provided certain named executive officers a
special compensation benefit that provide payment in an amount equal to six (6)
months base salary at the rate of base salary then paid to executive at the time
of sale and, any accrued vacation benefits within sixty (60) days of the
consummation of the sale of all or substantially all of the stock or assets of
the Company which results in the termination or relocation of the executive
within one (1) year of such sale, or for termination without good cause. For a
further description of compensation provided in the event of a change of
control, see “Executive Compensation — Potential Payments upon Termination or
Change of Control”.


45




Employment
Agreements




We have
entered into employment agreements with certain of our executives with the goal
of clarifying their terms of employment and eliminating future disagreement
regarding their employment terms. When we have entered into such employment
agreements with our executives, it has been the judgment of the board that such
agreements were appropriate and necessary. The employment agreements generally
provide for base salary, bonus, benefits and eligibility for equity-based
compensation awards, as well as rights to certain payments and benefits upon
certain terminations of employment. For more details on these employment
agreements and the compensation and benefits payable or to be provided in the
event of a termination of employment, see “Executive Compensation —
Employment Agreements and Arrangements” and “Executive Compensation —
Potential Payments upon Termination or Change of Control”.




Executive
Compensation





The
following table sets forth information with respect to compensation earned by
our chief executive officer, our chief financial officer and our chief operating
officer (collectively, our “named executive officers”) for the fiscal years
ended September 30, 2008, and September  30, 2007, and 2006
respectively.




Summary
Compensation Table





Name and Principal Position
                        
                        Year
                        
                        
                        Salary
                          ($)
                        
                        
                        Bonus
                          ($)
                        
                        
                        Stock
                          Awards
                          ($)
                        
                        
                        Option
                          Awards
                          ($)
                        
                        
                        All Other
                          Compensation
                          ($)
                        
                        
                        Total
                          ($)Tom Djokovich,
      CEO(2)
                        
                        
                        2008
                          2007
                          2006
                        
                        
                        
                        220,000
                          150,000
                          150,000
                        
                        
                        
                        0
                          0
                          0
                        
                        
                        
                        0
                          0
                          0
                        
                        
                        
                        0
                          0
                          0
                        
                        
                        
                        4,800
                          4,800
                          4,800
                        
                        
                        
                        224,800
                          154,800
                          154,800Jeff Huitt,
      CFO(2)
                        
                        
                        2008
                          2007
                          2006
                        
                        
                        
                        155,000
                          135,000
                          0
                        
                        
                        
                        0
                          0
                          0
                        
                        
                        
                        0
                          0
                          0
                        
                        
                        
                        44,600
                          22,300
                          0
                        
                        
                        
                        4,800
                          4,800
                          0
                        
                        
                        
                        204,400
                          162,100
                          0Joe Grimes,
      COO(3)
                        
                        
                        2008
                          2007
                          2006
                        
                        
                        
                        210,000
                          150,000
                          75,000
                        
                        
                        
                        30,000
                          0
                          0
                        
                        
                        
                        0
                          0
                          0
                        
                        
                        
                        44,600
                          241,932
                          0
                        
                        
                        
                        4,800
                          4,800
                          2,400
                        
                        
                        
                        289,400
                          396,732
                          77,400




(1)
            In
      the fiscal period ended September 30, 2008, the Company agreed to pay Mr.
      Djokovich an annual salary of $220,000 for services provided as Chief
      Executive Officer up to and until the Company determines executive
      compensation pursuant to an employment agreement as determined by the
      Board. In addition to Mr. Djokovich’s base compensation the Company also
      provides Mr. Djokovich with a $400 monthly health insurance
      allowance.





(2)
            The
      Company has agreed to pay Mr. Grimes an annual salary of $210,000 for
      services provided as Chief Operating Officer under the terms of an amended
      and restated employment agreement effective November 6, 2007. In addition
      to Mr. Grimes base compensation the Company also provides Mr. Grimes with
      a $400 monthly health insurance allowance.  Mr. Grimes amended
      employment agreement with the Company includes a facilities finders and
      relocation bonus of $30,000 which was fully paid in the year ended
      September 30, 2008 upon completion of the
  requirements.




46




(3)
            The
      Company has agreed to pay Mr. Huitt an annual salary of $155,000 for
      services provided as Chief Financial Officer under the terms of an
      employment agreement effective January 1, 2007. In addition to Mr. Huitt’s
      base compensation the Company also provides Mr. Huitt 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 years ended
September 30, 2008, 2007, and 2006 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
                                        
                                        ($)2008
                                      
                                      
                                      0
                                      
                                      
                                      
                                      0
                                      
                                      
                                      
                                      0Tom
      Djokovich, CEO
                                      
                                      2007
                                      
                                      
                                      0
                                      
                                      
                                      
                                      0
                                      
                                      
                                      
                                      02006
                                      
                                      
                                      0
                                      
                                      
                                      
                                      0
                                      
                                      
                                      
                                      02008
                                      
                                      
                                      0
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      44,600Jeff
      Huitt, CFO
                                      
                                      2007
                                      
                                      
                                      500,000
                                      (5)
                                      
                                      
                                      0.46
                                      
                                      
                                      
                                      22,3002006
                                      
                                      
                                      0
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      02008
                                      
                                      
                                      500,000
                                      (4)
                                      
                                      
                                      0.36
                                      
                                      
                                      
                                      44,600Joe
      Grimes, COO
                                      
                                      2007
                                      
                                      
                                      500,000
                                      (3)
                                      
                                      
                                      0.46
                                      
                                      
                                      
                                      241,9322006
                                      
                                      
                                      500,000
                                      (2)
                                      
                                      
                                      1.69
                                      
                                      
                                      
                                      02006
                                      
                                      
                                      112,000
                                      (1)
                                      
                                      
                                      0.51
                                      
                                      
                                      
                                      0




(1)
            Employment
      Incentive Warrants — In connection with the issuance of an
      employment agreement to Joseph Grimes in April 2006, the Company granted
      500,000 warrants at the then market price of $1.69. On July 20, 2006 the
      Company and Mr. Grimes mutually agreed to the cancellation of the
      remaining 388,000 unvested balance of this
  warrant.


47





(2)
            Employment
      Incentive Warrants — In connection with the issuance of an
      employment agreement to Joseph Grimes in April 2006, the Company granted
      500,000 warrants on July 20, 2006 at the then market price of $0.51. The
      warrant vested at the rate of 28,000 shares per month up to and through
      the first nine months of employment, 100,000 shares became exercisable
      upon delivery of a marketing plan by Mr. Grimes to the Board of Directors,
      148,000 shares will become exercisable upon the first sale and deliver of
      an XsunX solar module.




(3)
            Employment
      Incentive Options — In connection with the issuance of an
      employment agreement to Joseph Grimes in January 2007, the Company granted
      500,000 options on January 1, 2007 at the then market price of $0.46. The
      option began vesting at the rate of 50,000 shares per calendar quarter up
      to a total of 400,000 shares. Another 50,000 shall vest and become
      exercisable upon each of the first two sales and delivery of an XsunX
      solar module.




(4)
            Employment
      Incentive Options — In connection with the determination by the
      board of directors in October 2007 to provide for equity compensation
      related to the Company’s efforts to establish solar module manufacturing
      infrastructure, the Company granted 500,000 options effective October 23
      at the then market price of $0.36 to Mr. grimes. The options vest
      according to the following
schedule:




(a)
              100,000
      shares upon the assembly and commissioning of the base line production
      system.(b)
              100,000
      shares upon the production of a commercial size working sample of the
      Company’s planned tandem junction amorphous silicon solar
      module.(c)
              300,000
      shares upon the assembly and commissioning of the initial 25 mega watt
      production system as contemplated within the Company’s phased build out
      plan for a solar module manufacturing
facility.





(5)
            Employment
      Incentive Option — In connection with the issuance of an
      employment agreement to Jeff Huitt in January 2007, the Company granted
      500,000 options effective January 1 at the then market price of $0.46. The
      option began vesting at the rate of 50,000 shares per calendar quarter up
      to a total of 400,000 shares. Another 50,000 shall vest and become
      exercisable upon each of the first two sales and delivery of an XsunX
      solar module.





Outstanding
Equity Awards at Fiscal Year End Table





The
following table sets forth information with respect to outstanding option and
stock awards held by our named executive officers at September 30,
2008.




48





Name
                                  
                                  Number of
                                    Securities
                                    Underlying
                                    Unexercised
                                    Options
                                    (#)
                                    Exercisable
                                  
                                  Number of
                                    Securities
                                    Underlying
                                    Unexercised
                                    Options
                                    (#)
                                    Unexercisable
                                  
                                  
                                  Option
                                    Exercise
                                    Price
                                    ($)
                                  
                                  Option
                                    Expiration
                                    Date
                                    (f)Tom
      Djokovich, CEO
                                  
                                  0
                                  
                                  0Jeff
      Huitt, CFO
                                  
                                  400,000
                                  
                                  100,000
                                  
                                  
                                  $
                                  0.46
                                  
                                  01/26/2012Joe
      Grimes
                                    COO
                                  
                                  0
                                    400,000
                                    112,000
                                    500,000
                                  
                                  500,000
                                    100,000
                                    0
                                    0
                                  
                                  
                                  $
                                  0.36
                                    0.46
                                    1.69
                                    0.51
                                  
                                  10/23/2012
                                    1/26/2002
                                    4/4/2011
                                    7/19/2011


49





Option Exercises and Stock
Vested





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, president, 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 2008 period was $220,000, 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. Grimes is entitled to a minimum annual base
salary of $210,000 (subject to annual review and increase upon the attainment by
the Company of a minimum of $5,000,000 in revenue in any calendar year) and is
eligible to receive additional compensation in the form of a cash payment bonus
upon business development attainment goals as follows; a $5,000 cash bonus upon
the successful identification and lease by the Company of a manufacturing
facility site, a $25,000 cash payment bonus upon the relocation by Mr. Grimes to
the Company’s selected manufacturing facilities site, a $5,000 cash payment
bonus upon the successful implementation of a pilot or base production line, a
$10,000 cash payment bonus upon the successful completion and start up of the
Company’s 25 megawatt base 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.
Mr. Grimes also receives 15 days of paid vacation.  Our
employment agreement with Mr. Grimes provides that, in the event that
Mr. Grimes employment is terminated by us without good cause,
Mr. Grimes will receive a severance payment in the amount equal to
6 months of his annual base salary, payable within 30 days of such
termination.




Pursuant
to his amended and restated employment agreement Mr. Grimes entered into a
separate Stock Option Agreement with the Company under which Mr. Grimes received
options to purchase 500,000 shares of our common stock, exercisable at
$0.36 cents per share. 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.




50




Jeff
Huitt





On
January 1, 2007, we entered into an employment agreement with Mr. Jeff Huitt,
our chief financial officer. Under the terms of his employment agreement,
Mr. Huitt was initially entitled to a minimum annual base salary of
$135,000 which was adjusted to $155,000 in November 2007 after review by the
board. Future increases under the agreement are subject to annual review and
increase upon the attainment by the Company of a minimum of $5,000,000 in
revenue in any calendar year. Mr. Huitt is eligible to receive additional
compensation in the form of a 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. Huitt a $400 monthly
allowance for use in payment for health benefits with the balance of such
benefits paid by Mr. Huitt. Mr. Huitt also receives 15 days of paid
vacation.  Our employment agreement with Mr. Huitt provides a
special compensation benefit that provides payment in an amount equal to six (6)
months base salary at the rate of base salary then paid to Mr. Huitt at the time
of sale and, any accrued vacation benefits within sixty (60) days of the
consummation of the sale of all or substantially all of the stock or assets of
the Company which results in the termination or relocation of the executive
within one (1) year of such sale.




Pursuant
to his employment agreement Mr. Huitt entered into a separate Stock Option
Agreement with the Company under which Mr. Huitt received options to purchase
500,000 shares of our common stock, exercisable at $0.46 cents per share.
Under the employment agreement Mr. Huitt is also subject to confidentiality
and non-solicitation provisions which provide that Mr. Huitt will not
divulge information or solicit employees for 24 months after termination of
his employment.





Potential
Payments Upon Termination or Change-In-Control





Under the
terms of an employment agreement dated January 1, 2007, Mr. Jeff Huitt, our
chief financial officer,  may receive a special compensation benefit
that provides payment in an amount equal to six (6) months base salary at the
rate of base salary then paid to Mr. Huitt at the time of sale and, any accrued
vacation benefits within sixty (60) days of the consummation of the sale of all
or substantially all of the stock or assets of the Company which results in the
termination or relocation of the executive within one (1) year of such sale.
Potential cost to the Company could total at minimum $77,500 for the termination
of Mr. Huitt subject to the termination upon a change of control of the
Company.





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, plus accrued vacation benefits, all
payable within 30 days of such termination. Potential cost to the Company could
total at minimum $105,000 for the termination of Mr. Grimes subject to the
termination without good cause by the Company.





Long
Term Incentive Plans — Awards in Last Fiscal Year





The
following table and notes set forth the incentive awards provided to officers of
the Company in 2008 fiscal period.





Date
                                Issued
                              
                              Number
                                Issued
                              
                              
                              Exercise
                                Price
                              
                              Expiration
                                Date
                              
                              ConsiderationJoseph
                                Grimes (1)
                              
                              23-Oct-07
                              
                              
                              500,000
                              
                              
                              $
                              0.36
                              
                              23-Oct-12
                              
                              As
      part of an employment
                                incentive
      agreement




(1)
            Employment
      Incentive Options — In connection with the determination by the
      board of directors in October 2007 to provide for equity compensation
      related to the Company’s efforts to establish solar module manufacturing
      infrastructure, the Company granted 500,000 options effective October 23
      at the then market price of $0.36 to Mr. grimes. The options vest
      according to the following
schedule:




51





(a)
            100,000
      shares upon the assembly and commissioning of the base line production
      system.




(b)
            100,000
      shares upon the production of a commercial size working sample of the
      Company’s planned tandem junction amorphous silicon solar
      module.




(c)
            300,000
      shares upon the assembly and commissioning of the initial 25 mega watt
      production system as contemplated within the Company’s phased build out
      plan for a solar module manufacturing
facility.





Director
Compensation





In the
fiscal period ended September 30, 2008, Directors received no additional cash or
non cash compensation for their service to the Company as
directors.  Outside Directors received an annual retainer fee of
$18,000 paid monthly plus stock options.  All Directors were
reimbursed for expenses actually incurred in connection with attending meetings
of the Board of Directors.





SUMMARY
COMPENSATION TABLE OF DIRECTORS





Name
                  
                  Fees
                    Earned or
                    Paid in
                    Cash
                    ($)
                  
                  
                  Stock
                    Awards
                    ($)
                  
                  
                  Option
                    Awards
                    ($)
                  
                  
                  All
                    Other
                    Compensation
                    ($)
                  
                  
                  Total
                    ($)Tom
      Djokovich
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  
                  
                  
                  0
                  
                  
                  0Joseph
      Grimes
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  
                  
                  
                  0
                  
                  
                  0Thomas
      Anderson
                  
                  
                  18,000
                  
                  
                  
                  0
                  
                  
                  
                  343,813
                  
                  
                  
                  0
                  
                  
                  
                  361,318Oz
      Fundingsland
                  
                  
                  18,000
                  
                  
                  
                  0
                  
                  
                  
                  68,763
                  
                  
                  
                  0
                  
                  
                  
                  86,763Michael
      Russak
                  
                  
                  18,000
                  
                  
                  
                  0
                  
                  
                  
                  68,763
                  
                  
                  
                  0
                  
                  
                  
                  86,763





Compensation
Committee Interlocks and Insider Participation





From the
period commencing October 1, 2007 through November 12, 2007 the Company’s board
of directors was comprised of two directors, Mr. Tom Djokovich and Mr. Thomas
Anderson. During this period adjustments or additions to new or existing
employment agreements we reviewed and deliberated by Mr. Djokovich who also
serves as the Company’s chief executive officer, and Mr. Anderson. Subsequent to
November 12, 2007 no further discussions or deliberations were engaged by the
board pertaining to executive compensation for the balance of the fiscal year
ended September 30, 2008.





Compensation
Committee Report





The Board
of Directors has reviewed and discussed the Compensation Discussion and Analysis
required by Item 402(b) of Regulation S-K with the Company’s management and
based on such review and discussions, the Board has recommended that the
Compensation Discussion and Analysis be included in this Annual Report on Form
10-K.




52




Tom
      Djokovich
              DirectorJoseph
      Grimes
              DirectorThomas
      Anderson
              DirectorOz
      Fundingsland
              DirectorMichael
      Russak
              Director





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





The
following table sets forth, as of January 15, 2009, 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
as of January 15, 2009. 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, California 92656.





Shareholders/Beneficial Owners
                
                Number of
                  Shares
                
                Ownership
                  Percentage(1)Tom
      Djokovich(2)
                  President
      & Director
                
                
                17,903,000
                
                9.5%Thomas
      Anderson(3)
                  Director
                
                
                1,250,000
                
                <
      1%Oz
      Fundingsland(3)
                  Director
                
                
                323,500
                
                <
      1%Mike
Russak(3)
                  Director
                
                
                323,500
                
                <
      1%Joseph
      Grimes(3)
                  Chief
      Operating Officer
                
                
                1,012,000
                
                <
      1%Jeff Huitt(3)
                  Chief
      Financial Officer
                
                
                400,000
                
                <
      1%




All
directors and executive officers as a group of (6 persons) account for ownership
of 21,212,000 shares representing 11.26% of the issued and outstanding common
stock. Each principal shareholder has sole investment power and sole voting
power over the shares.




(1)
            Applicable
      percentage ownership is based on 189,342,437 shares of common stock issued
      and outstanding as of January 15, 2009. 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 January 15, 2009 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
      16,978,000 shares owned by the Djokovich Limited Partnership. Mr.
      Djokovich shares voting and dispositive power with respect to these shares
      with Mrs. Tamara Djokovich.




(3)
            Includes
      warrants/options that may vest and be exercised within 60 days of the date
      of January 15, 2009.




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




No
officer or director 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 security holdings, contracts, options, or otherwise.




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 would 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.




53




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





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




Item
14. Principal Accounting Fees and Services




The PCAOB
revoked the registration of our former independent registered public accounting
firm, Jaspers + Hall, PC on or about October 21, 2008.  After
receiving notice of such revocation, the Company’s Board of Directors dismissed
Jaspers + Hall, PC effective October 31, 2008 and engaged Stark, Winter,
Schenkein & Co., LLP (“ SWSC ”) to serve as the Company’s new independent
registered public accounting firm effective as of November 3, 2008 as set forth
in the Company’s Current Report on Form 8-K as filed with the SEC on November 6,
2008.  On December 23, 2008, the Company received a Comment Letter
from the SEC stating that the Company may not include the reports of Jaspers +
Hall, PC in its filings and that the Company should have a firm that is
registered with the PCAOB re-audit that year.  In addition to auditing
the Company’s financial statements for the fiscal year ended September 30, 2008
which are attached to this Annual Report, SWSC is also auditing the Company’s
financial statements for the fiscal year ended September 30,
2007.  All audit work performed on the September 30, 2008 financial
statements by SWSC was performed by SWSC’s full time employees.




Audit
Fees 2008




As of the
period ended September 30, 2008 SWSC had billed the Company $16,000 for the
following professional services: $1,000 Retainer for preparation of Income Tax
Returns, $10,000 for retainer for the 2007 and 2008 re-audit and audit of the
Company’ financial statements and a $5,000 progress payment for related audit
work and services on the Form 10K.





Jaspers +
Hall, PC was paid $12,300 for work performed in the fiscal period ended
September 30, 2008 for work on our first through third quarter reports Form 10-Q
and for its work on the Companies Form S-1registration
statement.  They have not been paid any fees relating to the 2008
audit based on their dismissal as auditor.




Audit
Fees 2007




As of the
period ended September 30, 2007 Jaspers + Hall, PC had billed the Company
$14,500 for the following professional services: review of the interim financial
statements included in quarterly reports on Form 10-Q for the periods ended
December 31, 2006 March 30, and June 30, 2007, and for audit fees related to the
Company’s annual report on Form 10-K. No other fees we billed by Jaspers + Hall,
PC in the period ended September 30, 2007.





Audit
Fees 2006




As of the
period ended September 30, 2006 Jaspers + Hall, PC had billed the Company $7,500
for the following professional services: review of the interim financial
statements included in quarterly reports on Form 10-Q for the periods ended
December 31, April 30, and June 30, 2006, and for audit fees related to the
Company’s annual report on Form 10-K.. No other fees we billed by Jaspers +
Hall, PC in the period ended September 30, 2006.




The
Company’s Board acts as the audit committee and had no “pre-approval policies
and procedures” in effect for the auditors’ engagement for audit years 2006,
2007, and 2008.


54




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
                  
                  MVSystems, Inc. Technology
      License Agreement, dated September 2004.(4)10.3
                  
                  MVSystems, Inc. Expanded
      Technology License Agreement, dated October
  2005.(5)10.4
                  
                  Sencera, LLC, Technology
      Development and License Agreement, dated January 1,
      2007.(6)10.5
                  
                  Sencera, LLC, 10% secured
      Promissory Note and Loan Agreement, dated January 1,
      2007.(6)10.6
                  
                  XsunX 2007 Stock Option Plan,
      dated January 5, 2007.(7)10.7
                  
                  Dr. John Moore, Scientific
      Advisory Board Consulting Agreement, dated January 26,
      2007.(8)10.8
                  
                  Dr. John Moore, Stock Option
      Grant, dated January 26, 2007.(8)10.9
                  
                  Jeff Huitt, Employment Agreement,
      dated January 26, 2007.(8)10.10
                  
                  Jeff Huitt, Stock Option Grant,
      dated January 26, 2007.(8)10.11
                  
                  Robert Wendt, Employment
      Agreement, dated January 26, 2007.(8)10.12
                  
                  Robert Wendt, Stock Option Grant,
      dated January 26, 2007.(8)10.13
                  
                  Joseph Grimes, Employment
      Agreement, dated January 26, 2007.(8)10.14
                  
                  Joseph Grimes, Stock Option
      Grant, dated January 26, 2007.(8)10.15
                  
                  Dr. Edward Yu, Scientific
      Advisory Board Consulting Agreement, dated February 22,
      2007.(9)10.16
                  
                  Dr. Edward Yu, Stock Option
      Grant, dated February 22, 2007.(9)10.17
                  
                  Binding Letter of Intent to
      purchase solar module manufacturing assets, dated March 23,
      2007.(10)10.18
                  
                  Details of $1.1 million dollar
      settlement received by XsunX, dated August 27,
      2007.(11)10.19
                  
                  Dr. Richard Ahrenkiel, Scientific
      Advisory Board Consulting Agreement, dated April 23, 2007.
      (12)10.20
                  
                  Dr. Richard Ahrenkiel, Stock
      Option Grant, dated April 23, 2007.(12)10.21
                  
                  Dr. Michael Russak, Scientific
      Advisory Board Consulting Agreement, dated August 28,
      2007.(13)10.22
                  
                  Dr. Michael Russak, Stock Option
      Grant, dated August 28, 2007.(13)10.23
                  
                  Fusion Capital Fund II, LLC,
      Stock Purchase Agreement, dated November 1,
    2007.(14)10.24
                  
                  Fusion Capital Fund II, LLC,
      Registration Rights Agreement, dated November 1,
      2007.(14)10.25
                  
                  Fusion Capital Fund II, LLC, $.50
      Warrant Agreement, dated November 1, 2007.(14)10.26
                  
                  Fusion Capital Fund II, LLC, $.75
      Warrant Agreement, dated November 1, 2007.(14)10.27
                  
                  Oz Fundingsland, Stock Option
      Grant Agreement, dated November 12, 2007.(15)10.28
                  
                  Dr. Michael Russak, Stock Option
      Grant Agreement, dated November 28, 2007.(16)10.29
                  
                  Joseph Grimes, Incentive Stock
      Option Grant, dated October 23, 2007.(17)10.30
                  
                  Robert Wendt, Incentive Stock
      Option Grant, dated October 23, 2007.(17)10.31
                  
                  Dr. Guang Lin, Incentive Stock
      Option Grant, dated October 23, 2007.(17)10.32
                  
                  Thomas Anderson, Stock Option
      Grant, dated October 23, 2007.(18)10.33
                  
                  Thomas
      Anderson, Amendment to Stock Option Grant, dated November 11,
      200710.34
                  
                  Amended
      and Restated Employment Agreement, Joseph Grimes, dated October 19,
      200710.35
                  
                  Cumorah Capital, Stock Purchase
      Agreement, dated January 16, 2008.(19)10.36
                  
                  Merix Sub Lease Agreement, dated
      April 1, 2008.(20)10.37
                  
                  Wharton Capital LLC settlement
      agreement, dated May 30, 2008.(21)10.38
                  
                  MVSystems, Inc. Separation and
      Mutual Release Agreement, dated May 30,
2008.(22)10.39
                  
                  MVSystems, Inc. Non-Exclusive
      License and Cross-License Agreement, dated May 30,
      2008.(22)10.40
                  
                  MVSystems, Inc. Sublease
      Agreement, dated May 30, 2008.(22)10.41
                  
                  Sencera LLC, Separation
      Agreement, dated June 13,
2008.(23)




55




10.42
                
                Amendment to Stock Option
      Agreement #06-2005, Dr. John Moore, dated January 24,
      2008(24)10.43
                
                Amendment to Stock Option
      Agreement #13-2006, Joseph Grimes, dated January 24,
      2008(24)10.44
                
                Amendment to Stock Option
      Agreement #07-018, Joseph Grimes, dated January 24,
      2008(24)10.45
                
                Amendment
      to Stock Option Agreement #07-016, Robert Wendt, dated January 24,
      200810.46
                
                Amendment to Stock Option
      Agreement #07-015, Jeff Huitt, dated January 24,
      2008(24)16.1
                
                Auditor
      Letter(24)31.1
                
                Sarbanes-Oxley
      Certification(24)31.2
                
                Sarbanes-Oxley
      Certification(24)32.1
                
                Sarbanes-Oxley
      Certification(24)32.2
                
                Sarbanes-Oxley
      Certification(24)





(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 prior Report on Form
      10-KSB filed with the Securities and Exchange Commission dated January 18,
      2005.(5)
                  Incorporated
      by reference to exhibits included with the Company’s prior Report on Form
      10-KSB filed with the Securities and Exchange Commission dated January 11,
      2006.(6)
                  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
      3, 2007.(7)
                  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.(8)
                  Incorporated
      by reference to exhibits included with the Company’s Current Report on
      Form 8-K filed with the Securities and Exchange Commission dated February
      13, 2007.(9)
                  Incorporated
      by reference to exhibits included with the Company’s Current Report on
      Form 8-K filed with the Securities and Exchange Commission dated February
      28, 2007.(10)
                  Incorporated
      by reference to exhibits included with the Company’s Current Report on
      Form 8-K filed with the Securities and Exchange Commission dated March 28,
      2007.(11)
                  Incorporated
      by reference to exhibits included with the Company’s Current Report on
      Form 8-K filed with the Securities and Exchange Commission dated August
      28, 2007.(12)
                  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 25,
      2007.(13)
                  Incorporated
      by reference to exhibits included with the Company’s Current Report on
      Form 8-K filed with the Securities and Exchange Commission dated August
      23, 2007.




56




(14)
              Incorporated
      by reference to exhibits included with the Company’s Current Report on
      Form 8-K/A filed with the Securities and Exchange Commission dated
      November 5, 2007.(15)
              Incorporated
      by reference to exhibits included with the Company’s Current Report on
      Form 8-K filed with the Securities and Exchange Commission dated November
      14, 2007.(16)
              Incorporated
      by reference to exhibits included with the Company’s Current Report on
      Form 8-K filed with the Securities and Exchange Commission dated November
      28, 2007.(17)
              Incorporated
      by reference to exhibits included with the Company’s Current Report on
      Form 8-K filed with the Securities and Exchange Commission dated October
      29, 2007.(18)
              Incorporated
      by reference to exhibits included with the Company’s Current Report on
      Form 8-K filed with the Securities and Exchange Commission dated October
      29, 2007.(19)
              Incorporated
      by reference to exhibits included with the Company’s Current Report on
      Form S-1 filed with the Securities and Exchange Commission dated January
      18, 2008.(20)
              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 2,
      2008.(21)
              Incorporated
      by reference to exhibits included with the Company’s Current Report on
      Form 8-K filed with the Securities and Exchange Commission dated June 4,
      2008.(22)
              Incorporated
      by reference to exhibits included with the Company’s Current Report on
      Form 8-K filed with the Securities and Exchange Commission dated June 6,
      2008.(22)
              Incorporated
      by reference to exhibits included with the Company’s Current Report on
      Form 8-K filed with the Securities and Exchange Commission dated June 6,
      2008.(22)
              Incorporated
      by reference to exhibits included with the Company’s Current Report on
      Form 8-K filed with the Securities and Exchange Commission dated June 6,
      2008.(23)
              Incorporated
      by reference to exhibits included with the Company’s Current Report on
      Form 8-K filed with the Securities and Exchange Commission dated June 17,
      2008.(24)
              Provided
      herewith




57




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: May 18,
      2009
            XSUNX,
      INC.By:
            /s/
      Tom DjokovichName:
            Tom
      DjokovichTitle:
            President




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
            
            May
      18, 2009Tom
      Djokovich, Chief Executive Officer,
              Principal
      Executive Officer and Director/s/ Jeff Huitt
            
            May
      18, 2009Jeff
      Huitt, Chief Financial Officer and Principal
              Financial
      and Accounting Officer/s/
      Joseph Grimes
            
            May
      18, 2009Joseph
      Grimes, Chief Operating Officer and Director/s/
      Thomas Anderson
            
            May
      18, 2009Thomas
      Anderson, Director/s/
      Oz Fundingsland
            
            May
      18, 2009Oz
      Fundingsland, Director/s/
      Michael Russak
            
            May
      18, 2009Michael
      Russak, Director




58





REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





Stockholders
and Board of Directors


XsunX,
Inc.





We have
audited the accompanying balance sheets of XsunX, Inc., as of September 30, 2008
and 2007, and the related statements of operations, stockholders’ equity and
cash flows for the years ended September 30, 2008, 2007 and 2006, and the period
from inception (February 25, 1997) through September 30, 2008. 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 audits. The Company’s financial statements for the period from inception
(February 25, 1997) to September 30, 2005, were audited by other auditors whose
report dated December 28, 2005 expresses an unqualified opinion and included a
going concern paragraph on those financial statements. The financial statements
for the period from inception (February 25, 1997) to September 30, 2005, reflect
a net loss of $5,934,283 that is included in the related total for the period
from inception (February 25, 1997) to September 30, 2008. The other auditors
report has been previously furnished to us, and our opinion, insofar as it
relates to the amounts included for such prior period, is based solely on the
report 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 audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit 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 consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of XsunX, Inc., at
September 30, 2008, 2007 and 2006, and the consolidated results of its
operations and its cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of
America.





The
accompanying financial statements have been prepared assuming the Company will
continue as a going concern. As described in Note 3 of the financial statements,
the Company has an accumulated deficit of $21.1 million as of September 30,
2008, and needs to raise additional capital to finance its operations. These
conditions raise substantial doubt about the Company’s ability to continue as a
going concern. Management’s plans as to this matter are further described in
Note 3. The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of this uncertainty.





We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), The Company’s internal control over financial
reporting as of September 30, 2008, 2007 and 2006, based on criteria established
inInternal
Control—Integrated Framework  issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO), and our report dated
January 30, 2009 expressed an unqualified opinion.








Stark
Winter Schenkein & Co. LLP


Denver,
Colorado


January
30, 2009


F-1


XSUNX,
INC.


(A
Development Stage Company)


Balance
Sheets





September
      30,
                              
                              
                              September
      30,2008
                              
                              
                              2007
                                (Restated)ASSETS:Current
      assets:Cash
                              
                              $
                              2,389,218
                              
                              
                              $
                              1,768,616Inventory
      Held for Sale
                              
                              
                              1,417,000
                              
                              
                              
                              -Prepaid
      Expenses
                              
                              
                              11,986
                              
                              
                              
                              341,757Total
      current assets
                              
                              
                              3,818,204
                              
                              
                              
                              2,110,373Fixed
      assets:Office
      Equipment
                              
                              
                              50,010
                              
                              
                              
                              39,437Research
      and Development Equipment
                              
                              
                              435,910
                              
                              
                              
                              335,270Leasehold
      Improvements
                              
                              
                              89,825
                              
                              
                              
                              89,825Total Fixed Assets
                              
                              
                              575,745
                              
                              
                              
                              464,532Less Accumulated Depreciation
                              
                              
                              (299,559
                              )
                              
                              
                              (174,712
                              )Total fixed assets
                              
                              
                              276,186
                              
                              
                              
                              289,820Other
      assets:Other
      Long Term Assets - Manufacturing Equipment and Facilities in
      Progress
                              
                              
                              5,824,630
                              
                              
                              
                              207,219Security
      Deposit
                              
                              
                              5,815
                              
                              
                              
                              5,815Accrued
      Interest Receivable
                              
                              
                              -
                              
                              
                              
                              70,701Note
      Receivable
                              
                              
                              -
                              
                              
                              
                              1,500,000Marketable
      Prototype
                              
                              
                              -
                              
                              
                              
                              1,700,000Total other assets
                              
                              
                              5,830,445
                              
                              
                              
                              3,483,735TOTAL
      ASSETS
                              
                              $
                              9,924,835
                              
                              
                              $
                              5,883,928LIABILITIES
      AND STOCKHOLDERS' EQUITY:Current
      Liabilities:Accounts
      Payable
                              
                              $
                              465,953
                              
                              
                              $
                              547,129Accrued
      Expenses
                              
                              
                              30,957
                              
                              
                              
                              67,909Total
      current liabilities
                              
                              
                              496,910
                              
                              
                              
                              615,038Stockholders'
      Equity:Preferred
      Stock, par value $0.01 per share; 50,000,000 shares authorized; no shares
      issued and outstanding
                              
                              
                              -
                              
                              
                              
                              -Common
      Stock, no par value; 500,000,000 shares authorized; 186,292,437 shares
      issued and outstanding at September 30, 2008 and 157,919,856 shares were
      issued and outstanding at September 30, 2007
                              
                              
                              22,613,369
                              
                              
                              
                              13,425,869Paid
      in Capital - Common Stock Warrants
                              
                              
                              2,641,412
                              
                              
                              
                              2,773,565Additional
      Paid in Capital
                              
                              
                              5,248,213
                              
                              
                              
                              6,085,573(Deficit)
      accumulated during the development stage
                              
                              
                              (21,075,069
                              )
                              
                              
                              (17,016,117
                              )Total
      stockholders' equity
                              
                              
                              9,427,925
                              
                              
                              
                              5,268,890TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                              
                              $
                              9,924,835
                              
                              
                              $
                              5,883,928





The
Accompanying Notes are an Integral Part of These Financial
Statements


F-2


XSUNX,
INC.


(A
Development Stage Company)


Statements
of Operations




February
      25, 1997Years Ended September 30,
                                                        
                                                        
                                                        (Inception)
      toSeptember
      30,2008
                                                        
                                                        
                                                        2007
                                                          (Restated)
                                                        
                                                        
                                                        2006
                                                          (Restated)
                                                        
                                                        
                                                        2008RevenueService
      Income
                                                        
                                                        $
                                                        -
                                                        
                                                        
                                                        $
                                                        6,880
                                                        
                                                        
                                                        $
                                                        8,000
                                                        
                                                        
                                                        $
                                                        14,880Total
      Revenue
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        6,880
                                                        
                                                        
                                                        
                                                        8,000
                                                        
                                                        
                                                        
                                                        14,880Expenses:Selling,
      General and Administrative Expense
                                                        
                                                        
                                                        3,331,683
                                                        
                                                        
                                                        
                                                        2,272,897
                                                        
                                                        
                                                        
                                                        1,721,918
                                                        
                                                        
                                                        
                                                        11,281,100Depreciation
                                                        
                                                        
                                                        257,222
                                                        
                                                        
                                                        
                                                        139,602
                                                        
                                                        
                                                        
                                                        16,676
                                                        
                                                        
                                                        
                                                        435,113Option
      / Warrant Expense
                                                        
                                                        
                                                        673,287
                                                        
                                                        
                                                        
                                                        772,315
                                                        
                                                        
                                                        
                                                        465,000
                                                        
                                                        
                                                        
                                                        2,915,602Total
      Operating Expenses
                                                        
                                                        
                                                        4,262,192
                                                        
                                                        
                                                        
                                                        3,184,814
                                                        
                                                        
                                                        
                                                        2,203,594
                                                        
                                                        
                                                        
                                                        14,631,815Other
      (Income) ExpenseInterest
      Expense
                                                        
                                                        
                                                        1,054
                                                        
                                                        
                                                        
                                                        1,209
                                                        
                                                        
                                                        
                                                        47,216
                                                        
                                                        
                                                        
                                                        91,293Interest
      Income
                                                        
                                                        
                                                        (176,250
                                                        )
                                                        
                                                        
                                                        (175,297
                                                        )
                                                        
                                                        
                                                        (88,480
                                                        )
                                                        
                                                        
                                                        (440,050
                                                        )Legal
      Settlement
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (1,100,000
                                                        )
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (1,100,000
                                                        )Loan
      Fees
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        7,001,990
                                                        
                                                        
                                                        
                                                        7,001,990Impairment
      of Asset
                                                        
                                                        
                                                        215,625
                                                        
                                                        
                                                        
                                                        65,000
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        1,204,459Other
      - Non Operating
                                                        
                                                        
                                                        1,331
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        3,884
                                                        
                                                        
                                                        
                                                        5,215Forgiveness
      of Debt
                                                        
                                                        
                                                        (245,000
                                                        )
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (304,773
                                                        )Total
      Other Income/Expense
                                                        
                                                        
                                                        (203,240
                                                        )
                                                        
                                                        
                                                        (1,209,088
                                                        )
                                                        
                                                        
                                                        6,917,394
                                                        
                                                        
                                                        
                                                        6,458,134Net
      (Loss)
                                                        
                                                        $
                                                        (4,058,952
                                                        )
                                                        
                                                        $
                                                        (1,968,846
                                                        )
                                                        
                                                        $
                                                        (9,112,988)
                                                        
                                                        
                                                        $
                                                        (21,075,069
                                                        )Per
      Share Information:Basic
      and dilutedWeighted
      average number ofcommon
      shares outstanding
                                                        
                                                        
                                                        166,998,772
                                                        
                                                        
                                                        
                                                        138,005,964
                                                        
                                                        
                                                        
                                                        123,854,733Net
      (Loss) per Common Share
                                                        
                                                        $
                                                        (0.02
                                                        )
                                                        
                                                        $
                                                        (0.01
                                                        )
                                                        
                                                        $
                                                        (0.07
                                                        )




The
Accompanying Notes are an Integral Part of These Financial
Statements


F-3


XSUNX,
INC.


(A
Development Stage Company)


Statements
of Stockholders' Equity (Deficit)


For the
period February 25, 1997 (Inception) to


September
30, 2008




Paid in Capital
                  
                  
                  (Deficit)
                    AccumulatedCommon
                  
                  
                  During theTreasury Stock
                  
                  
                  Common Stock
                  
                  
                  Additional
                  
                  
                  Stock
                  
                  
                  Development# of Shares
                  
                  
                  Amount
                  
                  
                  # of Shares
                  
                  
                  Amount
                  
                  
                  Paid in Capital
                  
                  
                  Warrants
                  
                  
                  Stage
                  
                  
                  TotalsInception
      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 Year
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (193,973
                  )
                  
                  
                  (193,973
                  )Balance
      - 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 Year
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (799,451
                  )
                  
                  
                  (799,451
                  )Balance
      - 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 Year
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (1,482,017
                  )
                  
                  
                  (1,482,017
                  )Balance
      - 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 year
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (118,369
                  )
                  
                  
                  (118,369
                  )Balance
      - September 30, 2000
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  768,148
                  
                  
                  
                  1,921,419
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (2,593,810
                  )
                  
                  
                  (672,391
                  )Extinguishment
      of debt
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  337,887
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  337,887Net
      Loss for year
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (32,402
                  )
                  
                  
                  (32,402
                  )Balance
      - September 30, 2001
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  768,148
                  
                  
                  
                  2,259,306
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (2,626,212
                  )
                  
                  
                  (366,906
                  )Net
      Loss for year
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (47,297
                  )
                  
                  
                  (47,297
                  )Balance
      - 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 year
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (145,868
                  )
                  
                  
                  (145,868
                  )Balance
      - September 30, 2003
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  111,298,148
                  
                  
                  
                  2,821,726
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (2,819,377
                  )
                  
                  
                  2,349Issuance
      of stock for cash
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,737,954
                  
                  
                  
                  282,670
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  282,670Issuance
      of Common Stock Warrants
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  825,000
                  
                  
                  
                  375,000
                  
                  
                  
                  1,200,000Net
      Loss for Year
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (1,509,068
                  )
                  
                  
                  (1,509,068
                  )Balance
      - 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
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  360,945Amortization
      ofwarrants/options
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  180,000
                  
                  
                  
                  -
                  
                  
                  
                  180,000Amortization
      of warrants, conversion fee and beneficial conversion
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  400,000
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  400,000Shares
      held as collateral for debentures
                  
                  
                  26,798,418
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Net
      Loss for Year
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (1,980,838
                  )
                  
                  
                  (1,980,838
                  )Balance
      - September 30, 2005 (Restated)
                  
                  
                  26,798,418
                  
                  
                  
                  -
                  
                  
                  
                  123,876,639
                  
                  
                  
                  3,996,735
                  
                  
                  
                  400,000
                  
                  
                  
                  1,005,000
                  
                  
                  
                  (5,934,283
                  )
                  
                  
                  (532,547
                  )Issuance
      of stock for services
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  72,366
                  
                  
                  
                  31,500
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  31,500Issuance
      and amortization of Common Stock Warrants
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  996,250
                  
                  
                  
                  -
                  
                  
                  
                  996,250Amortization
      of warrants, conversion fee and beneficial conversion
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  5,685,573
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  5,685,573Issuance
      of stock for debenture 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 Year
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (9,112,988
                  )
                  
                  
                  (9,112,988
                  )Balance
      September 30, 2006 (Restated)
                  
                  
                  26,798,418
                  
                  
                  
                  -
                  
                  
                  
                  157,169,856
                  
                  
                  
                  13,290,869
                  
                  
                  
                  6,085,573
                  
                  
                  
                  2,001,250
                  
                  
                  
                  (15,047,271
                  )
                  
                  
                  6,330,421Cancellation
      of Stock for Services Returned
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (150,000
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Release
      of Security Collateral
                  
                  
                  (26,798,418
                  )Issuance
      of Stock for Warrants - Jim Bentley
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  900,000
                  
                  
                  
                  135,000
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  135,000Issuance
      and amortization of Options and Warrants
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  772,315
                  
                  
                  
                  -
                  
                  
                  
                  772,315Net
      Loss for Year
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (1,968,846
                  )
                  
                  
                  (1,968,846
                  )Balance
      September 30, 2007 (Restated)
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  157,919,856
                  
                  
                  
                  13,425,869
                  
                  
                  
                  6,085,573
                  
                  
                  
                  2,773,565
                  
                  
                  
                  (17,016,117
                  )
                  
                  
                  5,268,890Fusion
      Equity Stock Purchase
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  15,347,581
                  
                  
                  
                  5,200,000
                  
                  
                  
                  (55,300)
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  5,144,700Commitment
      Fees
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,500,000
                  
                  
                  
                  1,190,000
                  
                  
                  
                  (1,190,000
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Cumorah
      Capital 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
                  )
                  
                  
                  -
                  
                  
                  
                  -Options
      and Warrants Amortization
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  673,287
                  
                  
                  
                  -
                  
                  
                  
                  673,287Net
      Loss for Year
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (4,058,952
                  )
                  
                  
                  (4,058,952
                  )Balance
      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-4




XSUNX,
INC.


(A
Development Stage Company)


Statement
of Cash Flows




February 25,1997Years Ended September 30,
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (Inception) to
                                                                                                                                      September 30,2008
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  2007
                                                                                                                                    (Restated)
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  2006
                                                                                                                                    (Restated)
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  2008Cash
      Flows from Operating Activities:Net
      (Loss)
                                                                                                                                  
                                                                                                                                  $
                                                                                                                                  (4,058,952
                                                                                                                                  )
                                                                                                                                  
                                                                                                                                  $
                                                                                                                                  (1,968,846
                                                                                                                                  )
                                                                                                                                  
                                                                                                                                  $
                                                                                                                                  (9,112,988
                                                                                                                                  )
                                                                                                                                  
                                                                                                                                  $
                                                                                                                                  (21,075,069
                                                                                                                                  )Issuance
      of Common Stock forInterest
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  -
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  -
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  241,383
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  241,383Issuance
      of Common Stock forServices
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  -
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  -
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  31,500
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  1,588,251Amortization
      of Cornell financingwarrants,
      commitment fees andbeneficial
      conversion
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  -
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  -
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  5,685,573
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  5,685,573Option
      / Warrant Expense
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  673,287
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  772,315
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  996,250
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  2,915,602Asset
      Impairment
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  215,625
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  65,000
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  -
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  1,204,459Depreciation
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  257,222
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  139,602
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  16,676
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  435,113Adjustments
      to reconcile net loss to cash (used in) operating
    activities:(Increase)
      in Inventory held for sale
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (1,700,000
                                                                                                                                  )
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  -
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  -
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (1,417,000
                                                                                                                                  )(Increase)
      Decrease in Prepaid Expense
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  329,771
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  7,360
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (269,133
                                                                                                                                  )
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (11,986
                                                                                                                                  )(Increase)
      Decrease in Other Assets
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  1,638,326
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (21,121
                                                                                                                                  )
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (20,000
                                                                                                                                  )
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (5,815
                                                                                                                                  )Increase
      (Decrease) in Accounts Payable
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (13,804
                                                                                                                                  )
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (42,898
                                                                                                                                  )
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  531,654
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  2,072,242Increase
      (Decrease) in Accrued Liabilities
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (36,951
                                                                                                                                  )
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  69,370
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (67,318
                                                                                                                                  )
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  30,957Net
      Cash Flows (Used in) Operating Activities
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (2,695,476
                                                                                                                                  )
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (979,218
                                                                                                                                  )
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (1,966,403
                                                                                                                                  )
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (8,336,290
                                                                                                                                  )Cash
      Flows from Investing Activities:Purchase
      of Fixed Assets
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (111,213
                                                                                                                                  )
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (192,271
                                                                                                                                  )
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (87,996
                                                                                                                                  )
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (575,745
                                                                                                                                  )Purchase
      of Marketable Prototype
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  -
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  -
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (1,780,396
                                                                                                                                  )
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (1,780,396
                                                                                                                                  )Purchase
      of Manufacturing Equipment and Facilities - in process
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (5,617,410
                                                                                                                                  )
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  -
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (207,219
                                                                                                                                  )
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (5,824,629
                                                                                                                                  )Payment
      to Note receivable
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  -
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (1,500,000
                                                                                                                                  )
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  -
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (1,500,000
                                                                                                                                  )Receipts
      on Note receivable
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  1,500,000
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  -
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  -
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  1,500,000Net
      Cash Flows (Used in) Investing Activities
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (4,228,623
                                                                                                                                  )
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (1,692,271
                                                                                                                                  )
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (2,075,611
                                                                                                                                  )
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (8,180,770
                                                                                                                                  )Cash
      Flows from Financing Activities:Proceeds
      from Warrant Conversion
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  -
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  135,000
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  3,171,250
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  3,306,250Proceeds
      from Debentures
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  -
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  -
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  5,000,000
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  5,850,000Issuance
      of Common Stock for cash, net of expenses and Wharton
      Settlement
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  7,544,700
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  -
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  -
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  9,750,028Net
      Cash Flows Provided by Financing Activities
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  7,544,700
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  135,000
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  8,171,250
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  18,906,278Net
      Increase (Decrease) in Cash
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  620,601
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  (2,536,489
                                                                                                                                  )
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  4,129,236
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  2,389,218Cash
      and cash equivalents - Beginning of period
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  1,768,616
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  4,305,105
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  175,869
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  -Cash
      and cash equivalents - End of period
                                                                                                                                  
                                                                                                                                  $
                                                                                                                                  2,389,218
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  $
                                                                                                                                  1,768,616
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  $
                                                                                                                                  4,305,105
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  $
                                                                                                                                  2,389,218Supplemental
      Disclosure of Cash Flow InformationCash
      Paid During the Year for:Interest
                                                                                                                                  
                                                                                                                                  $
                                                                                                                                  47,217
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  $
                                                                                                                                  1,054
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  $
                                                                                                                                  -
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  $
                                                                                                                                  119,617Income
      Taxes
                                                                                                                                  
                                                                                                                                  $
                                                                                                                                  -
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  $
                                                                                                                                  -
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  $
                                                                                                                                  -
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  $
                                                                                                                                  -NON-CASH
      FINANCING AND INVESTING ACTIVITIESConversion
      of debenture for stock
                                                                                                                                  
                                                                                                                                  $
                                                                                                                                  -
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  $
                                                                                                                                  -
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  $
                                                                                                                                  5,850,000
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  $
                                                                                                                                  5,850,000Shares
      issued for Wharton settlement
                                                                                                                                  
                                                                                                                                  $
                                                                                                                                  297,500
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  $
                                                                                                                                  -
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  $
                                                                                                                                  -
                                                                                                                                  
                                                                                                                                  
                                                                                                                                  $
                                                                                                                                  297,500





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, 2008 and 2007





Note
1 — 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”).




Pursuant
to the Plan the Company acquired the following three patents from Xoptix, Inc.,
a California corporation for Seventy Million (70,000,000) shares (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.




XsunX,
Inc. is a thin-film photovoltaic (“TFPV”) company which utilizes amorphous
silicon (“a-Si”), a mature semiconductor technology, as the core solar energy
absorber used to convert sunlight into electricity in the design and manufacture
of its solar modules. We believe that the design of our proprietary
manufacturing system, and solar module, coupled with our choice of assembly
materials may allow us to enjoy production costs of approximately $1.27 per watt
within our first full year of solar module production.





We are
currently developing the infrastructure to manufacture high performance TFPV
solar modules to address growth in demand for solar modules within the
electrical power production markets, and to satisfy contractual commitments for
the sale and delivery of our solar modules in 2009 and 2010. To accomplish this
we are executing a plan to build a thin film amorphous silicon solar module
manufacturing facility located in the Portland Oregon, USA area.  We
are working to complete the installation of our base production infrastructure
and develop initial production capacities to 25 MW in 2009, and then scale
through system optimization to approximately 33 MW within the first full year of
manufacturing operations. Subject to the availability of financing we plan to
expand production capacities through replication, growing production capacities
to over 100 MW as rapidly as possible.




Note
2 – Restatement of Financial Statements for the Fiscal Periods 2007 and
2006:




As a
result of the suspension of our prior auditor, Jasper – Hall PC, by the Public
Company Accounting Oversight Board (PCAOB) on October 28, 2008, the Company
engaged new auditors and was required to re-audit the financial statements for
the years ended September 30, 2006 and September 30, 2007. The financial
statements for the fiscal periods 2006 and 2007 contained in this annual report
on Form 10-K have been restated to reflect the adjustments to accounting
estimates in those periods. In fiscal year 2007, the total impact of these
changes was to increase net loss by $679,349. $447,012 of this additional loss
was related to a change in estimate for option and warrant expenses and did not
impact cash. There was also an increase to non-cash depreciation expense of
$62,354, and a decrease to accrued interest income of approximately $77,882 that
resulted from adjustments in interest calculations corrected in the 2008 fiscal
period. Additionally, there was a $65,000 asset impairment charge and a
$27,111impact to cash expenses as a result of the audit adjustments. There was
no impact to loss per share as it remained $0.01 loss per share for the
period.




In fiscal
year ended September 30, 2006, there were audit adjustments totaling $5,671,048
as reduction to net income resulting in minimal impact to cash expenses. The
largest adjustment relates to the amortization of loan fees associated with
convertible debentures issued in the 2005 and 2006 fiscal years. We took a
$6,373,156 additional charge for the amortization of expenses associated with
debenture structuring fees, debenture commitment fees, and expenses attributable
to the beneficial conversion costs for in the money stock and warrant conversion
under the debentures. Of this total, $47,216 was paid in cash, the remainder in
common stock. Depreciation expense was reduced by $66,265 and warrant and option
expenses were reduced by $486,250 for the period. This resulted in additional
non-cash net income of $552,519 that partially offset the amortization of the
loan fees associated with the convertible debentures. Interest expense was also
reduced by $111,117 and there were %38,472 of other expense adjustments made.
There was an increased loss per share associated with these restatements of
$0.05 per share bringing the total to $0.07 loss per share.


F-6




Note
3 — Summary of Significant Accounting Policies:




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, 2008 and 2007 was $4,058,952 and
$1,968,846, respectively. In addition, the Company has an accumulated deficit of
$21,075,069 since inception.  We do not have sufficient capital to
carry out the current operational plan or sufficient capital to meet fully it’s
obligations to finish the factory.  The Company plans to raise
additional capital to complete its operational plan.




Basis
of Presentation — Development Stage Company




The
Company has not earned any revenues from operations. Accordingly, the Company’s
activities have been accounted for as those of a “Development Stage Enterprise”
as set forth in Financial Accounting Standards Board Statement No. 7 (“SFAS 7”).
Among the disclosures required by SFAS 7 are that the Company’s financial
statements be identified as those of a development stage company, and that the
statements of operations, stockholders’ equity (deficit) and cash flows disclose
activity since the date of the Company’s inception.





The
accompanying financial statements have been prepared on the accrual basis of
accounting in accordance with accounting principles generally accepted in the
United States.





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.





Use
of Estimates




The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates. Significant
estimates made in preparing these financial statements include the estimate for
the useful life of property and equipment, and the fair value of stock
warrants.




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
September 30, 2008 and 2007, 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.





Property
and Equipment




Property
and equipment are stated at cost, and are depreciated or amortized using the
straight-line method over the following estimated useful lives:





Furniture,
      fixtures & equipment
                
                5
      yearsComputer
      equipment
                
                3
      yearsCommerce
      server
                
                3
      yearsComputer
      software
                
                3
      yearsLeasehold
      improvements
                
                Length
      of the lease, currently all our leases are three
  years


F-7




Net
Earnings (Loss) per Share




Basic
loss per share is computed on the basis of the weighted average number of common
shares outstanding. For all periods, all of the Company’s common stock
equivalents were excluded from the calculation of diluted loss per common share
because they were anti-dilutive, due to the Company’s net losses. There were
9,945,332 issued options/warrants outstanding as of September 30, 2008 that are
potentially dilutive of which 7,122,832 are currently vested.





Advertising




Advertising
costs are expensed as incurred. Total advertising costs were $19,894, $47,573
and $9,050 for the years ended September 30, 2008, 2007 and 2006,
respectively.





Research
and Development




Research
and development costs are expensed as incurred. Total research and development
costs were $(40,590), $420,462 and $956,212 for the years ended September 30,
2008, 2007 and 2006, respectively.  The policy of the Company is to
expense research and development costs as incurred as the estimated future
benefit of these research products is not currently predictable.  The
Company, not included in this total, capitalizes physical plant that can be used
for several products, initial production facilities, marketable prototypes that
are held for re-sale or have a long useful life associated with the development
of manufacturing facilities.





Other
Comprehensive Income




The
Company has no components of other comprehensive income (loss) and accordingly,
net loss is equal to comprehensive loss in all periods.





Stock
Based Compensation




The
Company records the fair value of stock-based compensation grants as an expense.
In order to determine the fair value of stock options on the date of grant the
Company applies the Black-Scholes option-pricing model. Inherent in this model
are assumptions related to expected stock-price volatility, option life,
risk-free interest rate and dividend yield. While the risk-free interest rate
and dividend yield are less subjective assumptions, typically based on factual
data derived from public sources, the expected stock-price volatility and option
life assumptions require a greater level of judgment.




The
Company uses an expected stock-price volatility assumption that is based on
historical implied volatilities of the underlying stock which is obtained from
public data sources. With regard to the weighted-average option life
assumption The Company considers the exercise behavior of past grants
and models the pattern of aggregate exercises. Patterns are determined on
specific criteria of the aggregate pool of optionees. Forfeiture rates are based
on the Company’s historical data and future estimates for stock option
forfeitures. There are 9,945,332 options and warrants issued of which 7,122,832
are vested. The exercise price range for the Company’s options and warrants are
$0.20 to $1.69. The weighted average remaining life of the option and warrant
grants range from 2.5 years to 4.3 years. We have based our expected volatility
on the historical performance of our stock over the expected life of the options
and are using 101.162% for the stock options as a whole. The risk free interest
rate used in our calculation was 3.54%. Total net stock-based compensation
expense is attributable to the granting of and the remaining requisite service
periods of stock options previously granted. Compensation expense attributable
to net stock-based compensation in fiscal 2008 was $673,287 increasing basic
loss by less than $0.01 per share.




Deferred
Income Taxes




The
Company accounts for income taxes under SFAS No. 109, which requires the asset
and liability approach to accounting for income taxes. Under this approach,
deferred income taxes are determined based upon differences between the
financial statement and tax bases of the Company’s assets and liabilities and
operating loss carry forwards using enacted tax rates in effect for the year in
which the differences are expected to reverse. The approximate tax effect used
in these calculations is 40%. Deferred tax assets are recognized if it is more
likely than not that the future tax benefit will be realized. The Company is a
Development Stage Company and the likelihood of its ability to utilize the
deferred tax asset that arises from the operating loss carry forwards can’t be
reasonably estimated. The company has created a valuation allowance equal to
100% of the deferred tax asset arising from the operating loss carry forwards as
a result of this inability to estimate whether or not the asset can be utilized
in future periods.





Revenue
Recognition





The
Company recognizes revenue when the services contracted for are provided in
full.  To date, only limited amount of consulting revenue has been
earned.  The Company’s revenue recognition policy will be re-evaluated
in light of the manufacturing of solar panels in the future.


F-8


Warranties





The
Company has no products for sale at the present time and offers no
warranties.  As a result no reserves for warranties have been
recognized on the books of the company.  This policy will be
re-evaluated in light of the manufacturing of solar panels in the
future.





Asset
Impairment





The
Company has a policy to review the current value of its assets quarterly and to
right down the value of the asset should it’s value be impaired in the
period.  We have written down the value of the Marketable Production
Machine $65,000 in the year ended September 30, 2007 and $215,625 in the year
ended September 30, 2008.





Manufacturing
Equipment in Progress





XsunX,
Inc. entered into a number of agreements to begin designing and building
manufacturing equipment for the manufacturing facility in Oregon.  The
Company records cash payments made to our vendors for this equipment as other
long term asset – Manufacturing Equipment in Progress.  Upon delivery,
installation and the use  of this equipment, the Company will re class
these expenditures to plant in service and begin depreciating them.




Concentration
of Credit Risk





Financial
instruments which potentially subject the Company  to concentrations
of credit risk are cash and cash equivalents.  The Company invests
only in high credit quality, short term bank accounts and debt in the form of
money market accounts for its surplus funds.  Additionally, $106,000
of  our cash currently invested in a certificate of deposit is used as
collateral to support a letter of credit associated with our lease in
Oregon.





Patents
and Trademarks and Associated Amortization





The
Company records the value of trademarks and patents at the purchase price of the
asset.  The value of the patent or trademark is amortized over the
useful economic life of the asst.  To date, the Company has only
purchased trademarks which are no longer in use.  As a result, the
Company has no patent or trademark assets and no associated
amortization.


F-9




Note
4 — Federal Income Tax:




The
Company accounts for income taxes under SFAS No. 109, which requires the asset
and liability approach to accounting for income taxes. Under this approach,
deferred income taxes are determined based upon differences between the
financial statement and tax bases of the Company’s assets and liabilities and
operating loss carry forwards using enacted tax rates in effect for the year in
which the differences are expected to reverse. The approximate tax effect used
in these calculations is 40%. Deferred tax assets are recognized if it is more
likely than not that the future tax benefit will be realized. The Company is a
Development Stage Company and the likelihood of its ability to utilize the
deferred tax asset that arises from the operating loss carry forwards can’t be
reasonably estimated. The company has created a valuation allowance equal to
100% of the deferred tax asset arising from the operating loss carry forwards as
a result of this inability to estimate whether or not the asset can be utilized
in future periods.




Significant
components of the Company’s deferred tax liabilities and assets are as follows:
The deferred tax assets are composed of the Company’s net operating loss carry
forwards of approximately $21,000,000 at the approximate tax effect of 40%.
There are no other material deferred tax assets or liabilities of the Company as
of September 30, 2008.





2008
                  
                  
                  2007
                  
                  
                  2006Deferred
      Tax Assets
                  
                  $
                  8,400,000
                  
                  
                  $
                  6,806,448
                  
                  
                  $
                  6,018,909Deferred
      Tax LiabilitiesValuation
      allowance
                  
                  $
                  (8,400,000
                  )
                  
                  $
                  (6,018,909
                  )
                  
                  $
                  (6,018,909
                  )Net
      Deferred tax assets
                  
                  $
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —





At
September 30, 2008, the Company had net operating loss carry forwards of
approximately, $21,000,000 for federal income tax purposes. These carry forwards
if not utilized to offset taxable income will begin to expire in
2010.





Note
5 — Common Stock Transactions:





The
authorized common stock of the Company was established at 500,000,000 shares
with no par value and the authorized preferred stock of the Company is
50,000,000 shares with a par value of $.01.





Fusion
Capital Transaction





On
November 1, 2007, XsunX signed a common stock Purchase Agreement with Fusion
Capital Fund II, LLC, an Illinois limited liability Company (“Fusion Capital”)
providing for the sale of up to $21 million of common stock to Fusion. Upon
signing the agreement, XsunX received $1,000,000 from Fusion Capital as an
initial purchase under the $21 million commitment in exchange for 3,333,332
shares of our common stock. The shares were issued in a transaction exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933.
Concurrently with entering into the common stock purchase agreement, we entered
into a registration rights agreement with Fusion Capital. On January 18, 2008,
XsunX, Inc. filed a Form S-1 with the Securities and Exchange Commission seeking
to register 48,650,000 shares related to our financing agreements with Fusion
Capital Fund II, LLC and Cumorah Capital. The registration was declared
effective by the Securities and Exchange Commission on April 10,
2008.





The
Company has the right over a 25-month period to receive $80,000 every two
business days under the Purchase Agreement with Fusion Capital unless our stock
price equals or exceeds $0.30, in which case we can sell greater amounts to
Fusion Capital as the price of our common stock increases. Fusion Capital 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
$0.20.





The
purchase price of the shares related to the $20 million balance of future
funding under the Purchase Agreement will be based on the prevailing market
prices of the Company’s shares at the time of sales without any fixed discount,
and the Company will control the timing and amount of any sale of shares to
Fusion Capital. There are no upper limits to the price Fusion Capital may pay to
purchase our common stock. However, Fusion Capital shall not be obligated to
purchase any shares of our common stock on any business day that the price of
our common stock is below $0.20. There are no negative covenants, restrictions
on future funding(s), penalties or liquidated damages in the agreement. The
common stock purchase agreement may be terminated by us at any time at our
discretion without any cost to us.


F-10





In
consideration for entering into the $21 million agreement we agreed to issue to
Fusion Capital 3,500,000 shares of our common stock as financing commitment
shares which Fusion Capital has agreed to hold for the term of the common stock
purchase agreement. The Company valued these shares at the date of the agreement
with Fusion Capital at approximately $0.34 per share.  Additionally,
under the stock purchase agreement we granted Fusion Capital common stock
purchase warrants to purchase 1,666,666 shares of our common stock at $0.50, and
1,666,666 shares of our common stock at $0.75. These shares were valued using
black scholes methodology  at $0.36.  The risk free rate of
return was 3.54% over the five year life of the warrants and an expected
volatility of 101.162. The shares underlying the warrant grants do not carry
mandatory registration requirements under the terms of the common stock purchase
agreement and registration rights agreement.




Pursuant
to the S-1 Registration Statement declared effective by the SEC on April 10,
2008, the Company has sold to Fusion Capital Fund II, LLC through September 30,
2008, approximately 15,347,581 shares for a total investment of $5,200,000
including the initial $1,000,000 and 3,333,332 shares.  These shares
were sold at various pricing between $0.405 and $0.24 per
share.  Subsequent to September 30, 2008, we have sold an additional
3,000,000 shares for $600,000 for a total of 18,347,581 shares and
$5,600,000.  These shares were sold at $0.20 per
share.  Including 3,500,000 shares provided to Fusion as financing
commitment shares this leaves 18,152,419 registered shares available for future
sales pursuant to the effective S-1 Registration Statement.




Cumorah
Capital Transaction





On
January 16, 2008, Cumorah Capital purchased 8,650,000 shares of the Company’s
restricted common stock in a private transaction for total proceeds of
$2,500,000. The Company agreed to register the 8,650,000 shares purchased by
Cumorah Capital. Cumorah Capital is a Nevada corporation and an Accredited
Investor, as defined in Rule 501(a) of Regulation D as promulgated by the
SEC.





Wharton
Settlement




On May
30, 2008 XsunX and Wharton entered into a Settlement Agreement. Under the
Settlement Agreement XsunX agreed to provide Wharton with eight hundred and
seventy five thousand (875,000) shares of its common stock. Subject to the
fulfillment of the requirements of Rule 144 of the Securities Act of 1933,
Wharton agreed not to sell or transfer no more than two hundred and fifty
thousand (250,000) shares monthly.  Refer to note 9 for additional
detail.  The 875,000 shares were valued at market price on the day the
Fusion Capital transaction closed, $0.34 per
share.  Additionally, $100.000 in cash payments were made in four
equal monthly installments.





Other





In the
fiscal year ended September 30, 2006, the Company issued a total of 33,293,217
shares of common stock as follows: 21,657,895 was issued for debt conversion for
$5,850,00; 10,850,000 were issued for warrant conversions related to the Cornell
transaction for $3,171,250; 712,956 shares were issued for $241,383 of Cornell
interest expense and 72,366 shares of common stock  issued for
consulting services valued at $31,500.




The
following represents a detailed analysis of the 2007 capital stock
transactions.




Return of
Shares for Services — In December 2006, the Company entered into a
settlement agreement with a service provider in which the service provider
returned to the Company 150,000 of the 300,000 shares of common stock issued to
the service provider in the period ended March 31, 2005. The returned shares
were received and cancelled effective January 2007.




Return of
Security Shares — In conjunction with the sale of convertible
debentures in the amount of $850,000 and $5,000,000 in the fiscal years ended
December 31, 2005 and 2006 respectively, the Company issued and deposited into
escrow 26,798,418 shares of common stock as part of a security structure for the
above referenced obligations. As of September 30, 2006 the principal balance of
the debentures had been reduced to $0.0. Subsequently the holder of the
debentures provided the Company with a notice of release of its security
interests and returned the security shares to the Company for cancellation. On
January 18, 2007 the above shares were cancelled on the Company’s books.




Issuance
of Shares — Warrant Conversion — In September 2007, a
consultant exercised the remaining 900,000 of the 1,000,000 $.15 cent warrants
granted to the consultant in September 2004. The amount of $135,000 was paid to
XsunX by the consultant and 900,000 shares of unregistered common stock were
issued.




Note
6 — Employment and Consulting Agreements:





During
the fiscal year ended September 30, 2008, the Company continued to operate under
employment agreements developed in the fiscal 2007 period with the following
executive officers that remain in effect at September 30, 2008.





Joseph
      Grimes
                      
                      Chief
      Operating Officer
                      
                      $
                      220,000Jeff
      Huitt
                      
                      Chief
      Financial Officer
                      
                      $
                      155,000




The Board
of Directors of the Company authorized salary increases effective in November
2007 for the following individuals:




Tom
      Djokovich
                      Chief
      Executive Office
                      $70,000
      increase to $220,000Joseph
      Grimes
                      Chief
      Operating Officer
                      $60,000
      increase to $210,000Jeff
      Huitt
                      Chief
      Financial Officer
                      $20,000
      increase to
$155,000





During
the fiscal year ended September 30, 2008, the Company adopted a policy for the
payment of a monthly stipend of $1,500 to the independent Directors of the
Company, Mr. Anderson, Mr. Fundingsland and Mr. Russak.  This is in
addition to the option grants discussed in Note 7.


F-11




During
the fiscal year ended September 30, 2008, the Company continued to operate under
consulting agreements with members of its Scientific Advisory Board developed
and entered into in the fiscal period ended September 30, 2007. Under these
agreements the chairmen receives a consulting fee of $1,500 per month, and each
of the three remaining members each receive a fee of $1,000 per
month.





Note
7— Stock Options and Warrants:





On
January 5, 2007, the Board of Directors 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. A total of 20,000,000 shares of common stock are authorized
under the plan. An additional 195,000 shares are considered issued under the
plan for issuances prior to the plans adoption.





Stock
Compensation, Issuance of Stock Purchase Options





During
the fiscal year ended September 30, 2008, the board of directors authorized the
grant of options to purchase an aggregate of 3,800,000 shares of the Company’s
common stock. The options are exercisable at a price of $.36 per share, and
expire at various times through November 2012. Of the original 20,000,000 shares
authorized under the plan, as the period ended September 30, 2008, 14,250,000
shares remain available under the plan.





Employment
Incentive Option Grants — In connection with the start of the
Company’s efforts to prepare, install, and operate solar module manufacturing
capabilities, the Company authorized employment incentive option grants to the
following employees on October 23, 2007 at an exercise price per share of $0.36.
The options have a 5 year exercise terms and vest in conjunction with a
performance milestone based vesting schedule as described below:





Joseph Grimes
                      500,000 Option SharesRobert G. Wendt
                      500,000 Option SharesDr. Guang Lin
                      300,000 Option Shares





The
vesting schedule for Mr. Grimes and Mr. Wendt is:





The
Option shall become exercisable in the following amounts upon the delivery
and/or achievement by Optionee(s) of the following performance milestones as
they may relate to the Company’s phased build out plan for a solar module
manufacturing facility:





(a)
            100,000
      shares upon the assembly and commissioning of the base line production
      system.





(b)
            100,000
      shares upon the production of a commercial size working sample of the
      Company’s planned tandem junction amorphous silicon solar
      module.





(c)
            300,000
      shares upon the assembly and commissioning of the initial 25 mega watt
      production system as contemplated within the Company’s phased build out
      plan for a solar module manufacturing
facility.





The
vesting schedule for Dr. Guang is:





The
Option shall become exercisable in the following amounts upon the delivery
and/or achievement by Optionee of the following performance milestones as they
may relate to the Company’s phased build out plan for a solar module
manufacturing facility:





(a)
            100,000
      shares upon the assembly and commissioning of the base line production
      system.


F-12


(b)
            150,000
      shares upon the production of a commercial size working sample of the
      Company’s planned tandem junction amorphous silicon solar
      module.





(c)
            50,000
      shares upon the assembly and commissioning of the initial 25 mega watt
      production system as contemplated within the Company’s phased build out
      plan for a solar module manufacturing
facility.





Board of
Directors Incentive Option Grants — In furtherance of the Company’s
policy to compensate current members, and attract new members, to its Board of
Directors the Company authorized incentive option grants to the following
Directors at an exercise price per share of $0.36. The options have a 5 year
exercise terms and vest as described below:





Thomas Anderson
                        October 23, 2007
                        1,500,000 Option Shares (*)Oz Fundingsland
                        November 11, 2007
                        500,000 Option SharesDr. Michael Russak
                        November 26, 2007
                        500,000 Option Shares





The vesting
schedule for Mr. Anderson is:





The
Option shall become exercisable in the following amounts upon the delivery
and/or achievement by Optionee of the following milestones:





(a)
            The
      Option became exercisable in the amount of 1,000,000 shares upon the
      effective date of the grant for services rendered as a member of the
      Company Board of Directors from the period beginning October 1, 2003
      through September 30, 2008.





(b)
            Beginning
      October 1, 2007 the Option shall vest and become exercisable at the rate
      of 62,500 shares upon the anniversary of each calendar quarter of
      continuous service as a Director, or prorated portion thereof, for
      services rendered as a member of the Company Board of Directors up to a
      total of 250,000 shares.





(*)
Amendment to Stock Option Grant — On November 12, 2007, the Company
entered into an agreement amending the terms of a stock option grant dated
October 23, 2007 between the Company and Mr. Thomas Anderson, a member of the
XsunX Board of Directors. The amendment provided for an increase of 250,000
options to the pool of options available within the vesting provisions of the
grant. All other provisions of the stock option grant remained the same. Item
(b) to the vesting schedule was amended as follows:





The
vesting schedule for Mr. Fundingsland is:





The
Option shall become exercisable in the following amounts upon the delivery
and/or achievement by Optionee of the following milestones:





(a)
            Beginning
      November 12, 2007 the Option shall vest and become exercisable at the rate
      of 62,500 shares upon the anniversary of each calendar quarter of
      continuous service as a Director, or prorated portion thereof, for
      services rendered as a member of the Company Board of Directors up to a
      total of 500,000 shares.





The
vesting schedule for Dr. Russak is:





The
Option shall become exercisable in the following amounts upon the delivery
and/or achievement by Optionee of the following milestones:





(a)
            Beginning
      November 26, 2007 the Option shall vest and become exercisable at the rate
      of 62,500 shares upon the anniversary of each calendar quarter of
      continuous service as a Director, or prorated portion thereof, for
      services rendered as a member of the Company Board of Directors up to a
      total of 500,000 shares.


F-13




(b)
            Beginning
      October 1, 2007 the Option became exercisable at the rate of 62,500 shares
      upon the anniversary of each calendar quarter of continuous service as a
      Director, or prorated portion thereof, for services rendered as a member
      of the Company Board of Directors up to a total of 500,000
      shares.





Additionally,
on January 24, 2008, the Board of Directors authorized the amendments to prior
option grants for the following named employees and consultant:





Grant Number
                    
                    Optionee Name
                    
                    Amendment
      Terms06-2005
                    
                    Dr.
      John Moore
                    
                    Extension
      of time to exercise the warrant until January 1, 2012.  Black
      Scholes re-calculation of this extension resulted in an additional expense
      of $26,750 for the period ended September 30, 2008.13-2006
                    
                    Joseph
      Grimes07-018
                    
                    Joseph
      Grimes07-016
                    
                    Robert
      Wendt07-015
                    
                    Jeff
      Huitt
                    
                    The
      agreements with Mr. Grimes, Mr. Huitt and  Mr. Wendt were
      modified to replace outdate performance objectives with new performance
      objectives consistent with the plan of operations of the
      Company.  Namely, the shares vest upon the sales of and delivery
      of an XsunX module.  There were no changes to the options that
      had a financial
impact.





During
the year ended September 30, 2007 the board of directors authorized the grant of
options to purchase an aggregate of 2,200,000 shares of the Company’s common
stock of which 250,000 were forfeited due to the resignation of an employee and
1,950,000 remain outstanding. Such options are exercisable at prices ranging
from $.41 to $.53 per share, and expire at various times through August
2012.





The
following represents a detailed analysis of the 2007 stock option
grants.





Consulting
Incentive Options: In connection with entering into a Consulting and Advisory
Agreement effective January 26, 2007 with Dr. John Moore for two years service
as Chairman of the Company’s Scientific Advisory Board, the Company issued to
Dr. Moore 150,000 options under the terms of a Stock Option Agreement, with an
exercise price of $.46 per share. The options have a 5 year exercise term and
vest under the following provisions:




(b)
            The
      Option became exercisable in the amount of 12,500 shares upon the First
      Vesting Date of April 26, 2007. Thereafter, the Option shall vest become
      exercisable at the rate of 18,750 Shares per calendar quarter, or any
      apportioned amount thereof, during the term of engagement of the Optionee
      by XsunX.





Employment
Incentive Options — In connection with entering into an Employment
Agreement effective January 1, 2007 with Jeff Huitt for two years service as
Chief Financial Officer, the Company issued to Mr. Huitt 500,000 options under
the terms of a Stock Option Agreement effective January 26, 2007, with an
exercise price of $.46 per share. The options have a 5 year exercise term and
vest under the following provisions:




(c)
            The
      Option became exercisable in the amount of 50,000 shares upon the First
      Vesting Date of April 1, 2007. Thereafter, the Option shall vest and
      become exercisable at the rate of 50,000 Shares per calendar quarter up to
      a total of 400,000 shares.





(d)
            This
      Option shall also become exercisable in the amount of 50,000 shares for
      each of the first two sales/licensure of an XsunX
  system.





Employment
Incentive Options — In connection with entering into an Employment
Agreement effective January 1, 2007 with Robert Wendt for two years service as
Vice President of Engineering, the Company issued to Mr. Wendt 500,000 options
under the terms of a Stock Option Agreement effective January 26, 2007, with an
exercise price of $.46 per share. The options have a 5 year exercise term and
vest under the following provisions:




(a)
            The
      Option became exercisable in the amount of 50,000 shares upon the First
      Vesting Date of April 1, 2007. Thereafter, the Option shall vest and
      become exercisable at the rate of 50,000 Shares per calendar quarter up to
      a total of 400,000 shares.





(b)
            This
      Option shall also become exercisable in the amount of 50,000 shares for
      each of the first two sales/licensure of an XsunX
  system.


F-14


Employment
Incentive Options — In connection with entering into an Employment
Agreement effective January 1, 2007 with Kurt Laetz for two years service as
Vice President of Sales, the Company issued to Mr. Laetz 250,000 options under
the terms of a Stock Option Agreement effective January 26, 2007, with an
exercise price of $.46 per share. As of September 30, 2007 Mr. Laetz no longer
worked for the Company and the above referenced option grant was terminated and
the available options were returned to the pool of available options under the
XsunX 2007 Stock Option Plan.





Employment
Incentive Options — In connection with entering into an Employment
Agreement effective January 1, 2007 with Joseph Grimes for two years service as
Chief Operating Officer, the Company issued to Mr. Grimes 500,000 options under
the terms of a Stock Option Agreement effective January 26, 2007, with an
exercise price of $.46 per share. The options have a 5 year exercise term and
vest under the following provisions:




(a)
            The
      Option became exercisable in the amount of 50,000 shares upon the First
      Vesting Date of April 1, 2007. Thereafter, the Option shall vest and
      become exercisable at the rate of 50,000 Shares per calendar quarter up to
      a total of 400,000 shares.





(b)
            This
      Option shall also become exercisable in the amount of 50,000 shares for
      each of the first two sales/licensure of an XsunX
  system.





Consulting
Incentive Options: In conjunction with entering into a Consulting and Advisory
Agreement effective February 22, 2007 with Dr. Edward Yu for two years service
as a member of the Company’s Scientific Advisory Board, the Company issued to
Dr. Yu 100,000 options under the terms of a Stock Option Agreement, with an
exercise price of $.53 per share. The options have a 5 year exercise term and
vest under the following provisions:




(a)
            The
      Option became exercisable in the amount of 12,500 shares upon the First
      Vesting Date of May 23, 2007. Thereafter, the Option shall vest become
      exercisable at the rate of 12,500 Shares per calendar quarter, or any
      apportioned amount thereof, during the term of engagement of the Optionee
      by XsunX.





Consulting
Incentive Options: In conjunction with entering into a Consulting and Advisory
Agreement effective April 23, 2007 with Dr. Richard Ahrenkiel for two years
service as a member of the Company’s Scientific Advisory Board, the Company
issued to Dr. Yu 100,000 options under the terms of a Stock Option Agreement,
with an exercise price of $.45 per share. The options have a 5 year exercise
term and vest under the following provisions:




(a)
            The
      Option became exercisable in the amount of 12,500 shares upon the First
      Vesting Date of July 24, 2007. Thereafter, the Option shall vest become
      exercisable at the rate of 12,500 Shares per calendar quarter, or any
      apportioned amount thereof, during the term of engagement of the Optionee
      by XsunX.





Consulting
Incentive Options: In conjunction with entering into a Consulting and Advisory
Agreement effective August 28, 2007 with Dr. Michael Russak for two years
service as a member of the Company’s Scientific Advisory Board, the Company
issued to Dr. Russak 100,000 options under the terms of a Stock Option
Agreement, with an exercise price of $.41 per share. The options have a 5 year
exercise term and vest under the following provisions:




(a)
            The
      Option became exercisable in the amount of 12,500 shares upon the First
      Vesting Date of November 29, 2007. Thereafter, the Option shall vest
      become exercisable at the rate of 12,500 Shares per calendar quarter, or
      any apportioned amount thereof, during the term of engagement of the
      Optionee by XsunX.





The total
charged in expense for the 2007 fiscal year was $772,315 for the issuance of the
above described warrants and stock options.





The
following represents a detailed analysis of the 2006 stock warrant and option
grants.





Expanded
Use License stock warrant MVSystems, Inc. - As consideration for the grant of an
Expanded Use License on October 12, 2005, granting XsunX additional benefits for
use of licensed technologies and patents, XsunX granted MVS a warrant, (the
"Expanded Use License Stock Warrant") for the purchase of up to Seven Million
(7,000,000) shares of common stock of XsunX, the warrant will expire five (5)
years after the date of the grant and is subject to the following vesting
provisions:





(1)
            The
      Expanded Use License Stock Warrant allowed for the vesting of one million
      (1,000,000) warrants on the effective date of the
    agreements.


F-15


(2)
            One
      million (1,000,000) warrants will vest upon the satisfactory completion of
      a Phase 4 development program for the development of certain opaque solar
      technologies.





(3)
            The
      balance of the remaining five million (5,000,000) warrants will vest upon
      the date the technologies licensed within the Expanded Use License are
      licensed to a third party in a bona fide arms-length commercial
      setting.





Debenture
Warrants - In connection with the issuance of a debenture in the principal
amount of $5,000,000 in December, 2005 3,125,000 warrants were granted to
Cornell Capital Partners, LP at $.45 and 1,250,000 warrants were granted at
$.55. During the 2006 fiscal year Cornell exercised all of the available
warrants granted. As of the date of this filing there were no remaining warrants
available for conversion by Cornell.





Employment
Incentive Warrants - In connection with the issuance of an employment agreement
to Joseph Grimes in April 2006, the Company granted 500,000 warrants at the then
market price of $1.69. On July 20, 2006 the Company and Mr. Grimes mutually
agreed to the cancellation of the remaining 388,000 unvested balance of this
warrant and to the grant of a new warrant agreement in the amount of 500,000
warrants at the then market price of $.51. The warrant will expire five (5)
years after the date of the grant and is subject to the following vesting
provisions:





(1)
            The
      Warrant shall become exercisable at the rate of 28,000 shares per month up
      to and through the first nine months of employment of Optionee by
      Company.





(2)
            One
      Hundred Thousand (100,000) shares shall become exercisable upon the
      completion and delivery of a marketing plan by Optionee to the Board of
      Directors.





(3)
            One
      Hundred Forty Eight Thousand (148,000) shares shall become exercisable
      upon the first sale or licensure of an XSUNX, Inc. technology under the
      marketing plan.





The total
charged in expense for the 2006 fiscal year has been $465,000 for the issuance
of the above described Expanded Use License, Debenture warrants, and employment
incentive warrants.





During
the years ended September 30, 2006 the board of directors approved the issuance
of warrants to purchase an aggregate of 11,987,000 shares of the Company's
common stock. Such warrants are exercisable at prices ranging from $.25 to $1.69
per share, vest over periods from between 36 to 60 months, and expire at various
times through July 2011.





. During
the year ended September 30, 2006 warrant holders exercised a total of
10,850,000 warrants in cash to purchase the Company's common
stock.


F-16


Table
of Equity Compensation





The
following table sets forth summary information, as of September 30, 2008,
concerning securities authorized for issuance under all equity compensation
plans and agreements for the fiscal years ended September 30, 2008, 2007 and
2006 is as follows:





A summary
of warrant activity for the year ended September 30, 2008, 2007 and 2006 is as
follows:




Number of
                  Options /
                  Warrants
                
                
                Weighted-
                  Average
                  Exercise
                  Price
                
                
                Accrued
                  Options /
                  Warrants
                  Vested
                
                
                Weighted-
                  Average
                  Exercise
                  PriceOutstanding,
      September 30, 2005
                
                
                15,125,000
                
                
                $
                0.16
                
                
                
                13,408,334
                
                
                $
                0.16Granted
      2006
                
                
                11,987,000
                
                
                $
                0.36
                
                
                
                5,543,000
                
                
                $
                0.46Exercised
                
                
                (10,850,000
                )
                
                $
                0.48
                
                
                
                (10,850,000
                )
                
                $
                0.33Vested
                
                
                -
                
                
                
                
                
                
                
                600,000
                
                
                $
                0.18Outstanding,
      September 30, 2006
                
                
                16,262,000
                
                
                $
                0.42
                
                
                
                8,701,334
                
                
                $
                0.37Granted
      2007
                
                
                1,950,000
                
                
                $
                0.46
                
                
                
                
                
                
                $
                0.46Exercised
                
                
                (900,000
                )
                
                $
                0.15
                
                
                
                (900,000
                )
                
                $
                0.15Vested
                
                
                -
                
                
                
                
                
                
                
                352,500
                
                
                $
                0.42Outstanding,
      September 30, 2007
                
                
                17,312,000
                
                
                $
                0.33
                
                
                
                8,153,834
                
                
                $
                0.38Granted
      2008
                
                
                3,800,000
                
                
                $
                0.36
                
                
                
                5,048,332
                
                
                $
                0.36Exercised/Cancelled
                
                
                (11,166,668
                )
                
                $
                0.19
                
                
                
                (7,829,334
                )
                
                $
                0.19Vested
                
                
                
                
                
                
                
                
                
                
                1,750,000
                
                
                $
                0.46Outstanding,
      September 30, 2008
                
                
                9,945,332
                
                
                $
                0.23
                
                
                
                7,122,832
                
                
                $
                0.27





At
September 30, 2008, the range of warrant/option prices for shares under
warrants/options not exercised and the weighted-average remaining contractual
life is as follows:





Options/Warrants
      Outstanding
                                
                                
                                Options/Warrants
                                  ExercisableRange
      of
                                  Option/
                                  Warrant
      Prices
                                
                                Number
      of
                                  Options/
                                  Warrants
                                
                                
                                Weighted-
                                  Average
                                  Exercise
                                  Price
                                
                                
                                Weighted-
                                  Average
                                  Remaining
                                  Contractual
                                  Life
      (yr)
                                
                                
                                Number
      of
                                  Options/
                                  Warrants
                                
                                
                                Weighted-
                                  Average
                                  Exercise
                                  Price$
                                0.20
                                
                                
                                250,000
                                
                                
                                $
                                0.20
                                
                                
                                
                                4.3
                                
                                
                                
                                250,000
                                
                                
                                $
                                0.20$
                                0.36
                                
                                
                                3,800,000
                                
                                
                                $
                                0.36
                                
                                
                                
                                3.1
                                
                                
                                
                                1,750,000
                                
                                
                                $
                                0.36$
                                0.41
                                
                                
                                100,000
                                
                                
                                $
                                0.41
                                
                                
                                
                                3.9
                                
                                
                                
                                62,500
                                
                                
                                $
                                0.41$
                                0.45
                                
                                
                                100,000
                                
                                
                                $
                                0.45
                                
                                
                                
                                3.6
                                
                                
                                
                                62,500
                                
                                
                                $
                                0.45$
                                0.46
                                
                                
                                1,650,000
                                
                                
                                $
                                0.46
                                
                                
                                
                                3.3
                                
                                
                                
                                977,500
                                
                                
                                $
                                0.46$
                                0.50
                                
                                
                                1,666,666
                                
                                
                                $
                                0.50
                                
                                
                                
                                4.1
                                
                                
                                
                                1,666,666
                                
                                
                                $
                                0.50$
                                0.51
                                
                                
                                500,000
                                
                                
                                $
                                0.51
                                
                                
                                
                                2.8
                                
                                
                                
                                500,000
                                
                                
                                $
                                0.51$
                                0.53
                                
                                
                                100,000
                                
                                
                                $
                                0.53
                                
                                
                                
                                3.4
                                
                                
                                
                                75,000
                                
                                
                                $
                                0.53$
                                0.75
                                
                                
                                1,666,666
                                
                                
                                $
                                0.75
                                
                                
                                
                                4.1
                                
                                
                                
                                1,666,666
                                
                                
                                $
                                0.75$
                                1.69
                                
                                
                                112,000
                                
                                
                                $
                                1.69
                                
                                
                                
                                2.5
                                
                                
                                
                                112,000
                                
                                
                                $
                                1.699,945,332
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                7,122,832


F-17





Note
8 — Inventory - Marketable Production Machine:





The
Company has a single item of inventory, a first run production tool built under
the terms of the Expanded Use License Agreement dated October 12, 2005 between
XsunX and MVSystems, Inc. This production machine is used to proof,
develop and prepare for market certain thin film solar cell manufacturing
technology. The initial cost of the machine was $1,765,000. This production
machine was never brought operational due to the failure to meet contractual
requirements of the machine by the vendor.  During the year ended
September 30, 2007, a $65,000 valuation allowance was taken to reflect the lower
value of the production machine bringing the book value of the asset to
$1,700,000.





This
Marketable Production Machine was built but never operated by the
Company.  Upon the signing of the separations agreement between
MVSystems and the Company calling for MVSystems to sell the Marketable
Production Machine, it was reclassed from other assets to inventory held for
sale and reduced in value to the amount expected to be received by the Company
upon the completion of the sale, $1,417,000.





In the
year ended September 30, 2008, the Company and MVSystems, Inc. entered into a
separations agreement that calls for MVSystems to sell this production
machine.  Upon the successful sale of the Machine, the Company and MVS
have agreed that if the sale proceeds are greater than $1,765,000, exclusive of
sales tax, import duties and packaging and shipping costs, such proceeds will be
allocated and disbursed 50% to XsunX and 50% to MVS from such amount as may be
left after payment, in the following order and to the extent sale proceeds
remain available, of $1,417,000 to XsunX, $353,000 to MVS, MVS’s costs of sale,
and one-half (1/2) of XsunX’s rental payments made for the premises housing the
Machine;  or (b) if the sale proceeds are less than $1,765,000,
exclusive of sales tax, import duties and packaging and shipping costs, such
proceeds will be allocated and disbursed approximately 80% to XsunX and
approximately 20% to MVS. The Company reclassified this asset from Other Long
Term Assets to Inventory Asset as a result of this
agreement.  Further, the valuation allowance of $283,000 was taken
during the year to write down the value of the inventory to $1,417,000 as
detailed in the agreement as the realizable value of the inventory upon the
completion of the sale.  MVSystems has informed us that they continue
to market the production machine under the agreement at agreed to
pricing.





Note 9 — Notes,
Commitments, and Contingencies:





Contractual
Obligations




Contractual Obligations
                
                Payments Due by PeriodTotal
                
                
                Less than
                  1 Year
                
                
                1 - 3
                  Years
                
                
                3 - 5
                  Years
                
                
                More
                  than
                  5 YearsLong
      Term Obligations
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Capital
      Lease
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Operating
      Lease(1)
                
                $
                1,865,007
                
                
                $
                662,713
                
                
                $
                1,202,294
                
                
                
                —
                
                
                
                —Purchase
      Obligations(2)
                
                
                32,814,587
                
                
                
                32,814,587
                
                
                
                —
                
                
                
                —
                
                
                
                —To
                
                $
                34,679,594
                
                
                $
                33,477,300
                
                
                $
                1,202,2944
                
                
                
                —
                
                
                
                —







(1)
            Operating
      Lease Obligations consist of the lease on the Company’s Manufacturing
      facility in Wood Village, OR and an Administrative facility in Golden,
      CO.





(2)
            Represents
      the total contractual purchase obligations represented by purchase orders
      for manufacturing equipment. The total obligations under these agreements
      is $38,264,635 of which, $5,450,048 has been paid on the
      obligations.  Future scheduled payments are tied to progress
      made on the delivery of the associated equipment.  The timing of
      these payments may vary due to the progress actually made by the
      vendors.


F-18





The
estimated contract cost in item (2) above may be higher or lower based on final
costs. The Company has not booked any contingency for cost
overruns.





Operating
Leases





As of
September 30, 2008 the Company leased administrative office facilities located
at 65 Enterprise, Aliso Viejo CA 92656 for an average cost of approximately
$3,150 per month on a month to month basis.  Based on specific space
utilization, the lowest cost was $2,650 and the highest cost per month was
$3,854. We plan to reduce our use of office space in Aliso Viejo by
approximately 50% over the first two quarters of the 2009 fiscal
period.





On April
1, 2008, The Company entered into a sub-lease agreement for approximately ninety
thousand (90,000) square feet of manufacturing facility located at 23365 NE
Halsey Street, Wood Village, OR, U.S.A. On July 15, 2008, the sub-lease
commenced and The Company took possession of the facility. The purpose of the
lease agreement was to establish facilities necessary for the installation and
operation of the Company’s planned thin film solar module manufacturing
operations. The lease agreement requires that The Company post a security
deposit letter of credit in the amount of $106,000 which has been delivered, and
a second letter of credit in an amount to be determined for 125% of the value
for the removal of any improvements performed to the structure by
XsunX.   Other elements specifically associated with this
facility including property taxes and insurance add an additional $27,967 per
month.  These amounts could be higher or lower based on the Company’s
economic development status, property tax rates and amount of property and
insurance coverage.  The Company also pays approximately $825 monthly
for interior and exterior maintenance on the property.





The term
of the lease agreement with the sub-landlord provides for The Company occupancy
through July 31, 2011. Thereafter, should XsunX elect to continue to occupy the
premises, The Company will be required to have established continued lease
arrangements with the master landlord. Specific term and lease payment schedule
is as follows:




Annual
      Rent Schedule
                
                Rate/sf
                
                
                Annualized
                  Rent
                
                
                Monthly Rent7/15/08 - 7/31/09
                
                $
                7.07
                
                
                $
                636,000
                
                
                $
                53,0008/1/09 - 7/31/10
                
                $
                7.21
                
                
                $
                648,720
                
                
                $
                54,0608/1/010 – 7/31/11
                
                $
                7.35
                
                
                $
                661694
                
                
                $
                55,141





In April
2006 the Company entered into a three year lease for operations facilities in
Golden, CO. The Company provided a $2,615 security deposit and
capitalized $79,867 in costs associated with tenant improvements to the
facilities in preparation for occupancy. The following is a schedule, by years,
of the minimum base payments required under this operating lease for facilities.
An additional $905 monthly is also due as a pro rata share equaling 4.12% of the
operating costs for real estate taxes, assessments, and the expenses of
operating and maintaining common areas within the commercial grounds surrounding
the leased facilities. We plan to vacate the facilities upon the completion of
the term of the lease in June 2009.




Rent Schedule
                
                Annual
                  Rate/sf
                
                
                Annualized
                  Rent
                
                
                Monthly Rent7/1/06 – 6/30/07
                
                $
                6.75
                
                
                $
                20,250
                
                
                $
                1,6877/1/07 – 6/30/08
                
                $
                6.95
                
                
                $
                20,850
                
                
                $
                1,7377/1/08 – 6/30/09
                
                $
                7.16
                
                
                $
                21,480
                
                
                $
                1,790





Legal
Proceedings





In the
ordinary conduct of our business, we are subject to periodic lawsuits,
investigations and claims, including, but not limited to, routine employment
matters. Although we cannot predict with certainty the ultimate resolution of
lawsuits, investigations and claims asserted against us, we are currently not
aware of nor have any knowledge of any legal proceedings or claims that we
believe will have, individually or in the aggregate, a material adverse affect
on our business, financial condition or operating results.


F-19





On
December 7, 2007, XsunX, Inc. (the “Company”) filed an action for breach of
contract and declaratory relief in the Superior Court of Orange County,
California, against Wharton Capital Partners, Ltd, Wharton Capital Markets LLC,
and Capitoline Financial Group LLC. The XsunX Action was brought to seek a court
determination that the Company did not owe any fees to the above defendants by
reason of a $21 million dollar financing transaction with Fusion Capital Fund
II, LLC (“Fusion”). In on or about February 2008 the XsunX Action was removed to
the U.S. District Court for the Southern District of New York.





On
January 3, 2008, Wharton Capital Partners, Ltd, and Wharton Capital Markets LLC,
(“Wharton”) filed an action in the U.S. District Court for the Southern District
of New York against the Company pursuant to which Wharton sought fees in an
amount equal to seven percent (7%) of the gross proceeds received by the Company
under a financing agreement between Fusion Capital Fund II, LLC and the
Company.





On May
30, 2008 XsunX and Wharton entered into a Settlement Agreement. Under the
Settlement Agreement XsunX agreed to provide Wharton with eight hundred and
seventy five thousand (875,000) shares of its common stock. Subject to the
fulfillment of the requirements of Rule 144 of the Securities Act of 1933,
Wharton agreed not to sell or transfer no more than two hundred and fifty
thousand (250,000) shares monthly. The Company also agreed to a one hundred
thousand dollar ($100,000) cash payment to be paid in four (4) monthly
installments of $25,000 each. As of the period ended September 30, 2008 all
securities and cash payment required under the Settlement Agreement had been
provided to Wharton.  The parties have filed a joint motion, pursuant
to Federal Rule of Civil Procedure 41(a) (1) (A) (ii), to dismiss both the New
York Action and the California Action with prejudice. Each of the parties has
unconditionally and irrevocably released, waived, and forever discharged each
other from claims related to the XsunX Action and the Wharton
Action.





Note
10 — Planned Expansion of Business Operations:





In March
2007 XsunX launched efforts to expand the scope of business development efforts
to include the planned establishment of a solar energy module manufacturing
facility to be located in Oregon, USA. The Company intends to finance the
associated costs for the build out of new facilities in a series of debt and/or
equity financings.





Note
11 — Note Receivable:





On
January 1, 2007, XSUNX, Inc. issued a secured, seven year, 10% note to Sencera,
LLC in the amount up to $1,500,000. Under the terms, the Company provided
Sencera, LLC with $400,000 at the time of signing and $137,500 per month for up
to eight months. These funds are to be used to develop technology and obtain
licenses in agreement with the Technology Development and License Agreement
between Sencera and XsunX, Inc also signed on January 1, 2007. The note may be
converted into a membership interest in Sencera, LLP and an extension of the
license for a period of three years. The security consists of the license
rights, the ability to exercise the conversion and all other rights and remedies
provided by law.





On
September 7, 2007, XsunX initiated the final funding of disbursements under a
Promissory Note and Loan Agreement dated January 1, 2007, between XsunX and a
private technology development firm. Under the Promissory Note and Loan
Agreement XsunX has funded and extended the principal amount of $1,500,000
dollars to the private firm.





On June
13, 2008, the Company entered into a separations agreement with Sencera, LLC
which resulted in the full repayment of the principal $1,500,000 balance of the
note plus accrued interest of approximately $173,251.


F-20





Note
12 — Subsequent Events:





Financing





Subsequent
to September 30, 2008, we have sold an additional 3,000,000 shares under the
agreement with Fusion Equity for $600,000.  This represents a total of
21,847,581 shares and approximately $5,800,000 received under the
agreement.  These shares were sold at $0.20 per share.  This
leaves 18,152,419 registered shares available for future sales pursuant to the
effective S-1 Registration.





In
November 2008, the Company issued 50,000 shares of its common in connection with
a services agreement to provide marketing and financing service to the
Company.  These shares are unregistered and restricted.





Marketable
Prototype Dispute





In
November 2008 XsunX received a notice from MVSystems, Inc. asserting that XsunX
was in material default of the terms of a Separation Agreement between the
parties dated May 30, 2008. XsunX disputes the assertion and as of the date of
this report no related litigation is pending, and MVSystems has not asserted any
related monetary damages. The claim relates to a production prototype machine
built under the terms of an Expanded Use License Agreement dated October 12,
2005 between XsunX and MVSystems, Inc. Under the terms of the Expanded Use
License Agreement the parties had agreed to build the machine to prove
technology for intended resale and split any associated profits from the sale of
the machine 50/50. This production machine was never brought operational due to
the failure to meet contractual requirements of the machine by MVSystems, and
XsunX has never taken possession of the machine. Under the terms of the May 2008
Separations Agreement MVSystems continues to have possession of the machine and
subject to the Separations Agreement has undertaken efforts to sell the machine
for the parties benefit. Under the notice of material default provided to XsunX
MVSystems has claimed that a sale of the machine has occurred to XsunX and that
state sales tax in the amount of approximately $60,000 is due. XsunX disputes
this claim and the parties have each petitioned the State of Colorado for a
final determination on this matter.





Employee
Incentive Option Grants





In the
fiscal period beginning October 1, 2008, and in connection with the Company’s
policy to incentivized employees whose contribution is deemed to influence the
Company’s efforts to prepare, install, and operate solar module manufacturing
capabilities, the Company authorized employment incentive option grants to the
following employees at an exercise price per share of $0.36. The options have a
5 year exercise terms and vest in the amount of 1/3 of the total grant on an
annual basis from the date of hire and subject to continued employment with the
Company:





Name
                
                Date of Grant
                
                Amount
                
                Type of Grant
                
                Exercise Price
                
                TermVanessa Watkins
                
                October
      10, 2008
                
                
                115,000
                
                Incentive
                
                $
                0.36
                
                5
      yr.Tyler
      Anderson
                
                October
      10, 2008
                
                
                100,000
                
                Incentive
                
                $
                0.36
                
                5
      yr.Yang
      Zhuang
                
                October
      29, 2008
                
                
                20,000
                
                Incentive
                
                $
                0.36
                
                5
      yr.





Note
13 — Financial Accounting Developments:





Recently
issued Accounting Pronouncements





On
February 15, 2007, the Financial Accounting Standards Board (“FASB”) issued
SFAS No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities” (SFAS No. 159). SFAS No. 159 permits entities to choose
to measure many financial instruments and other items at fair value. The
objective is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently, without having to apply complex
hedge accounting procedures. SFAS No. 159 also establishes presentation and
disclosure requirements designed to facilitate comparisons between companies
that choose different measurement attributes for similar types of assets and
liabilities. The Statement is expected to expand the use of fair value
measurements, which is consistent with the Board’s long-term measurement
objectives for accounting for financial instruments. SFAS No. 159 will be
effective for the Company’s 2009 fiscal year and was required to be adopted by
the Company effective October 1, 2008. Management at this time has not
evaluated the impact, if any, of adopting SFAS No. 159 on its financial
statements.





In
December 2007, the FASB issued SFAS No. 160 “Non-controlling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51.” SFAS 160
establishes accounting and reporting standards for the non-controlling interest
in a subsidiary and for the deconsolidation of a subsidiary. The guidance will
become effective as of the beginning of our fiscal year beginning after December
15, 2008. Management believes the adoption of this pronouncement will not have a
material impact on our consolidated financial statements.





In
December 2007, the FASB issued SFAS No. 141R “Business Combinations
(revised 2007).” This statement replaces SFAS 141, Business Combinations. The
statement provides guidance for how the acquirer recognizes and measures the
identifiable assets acquired, liabilities assumed and any non-controlling
interest in the acquiree. SFAS 141R provides for how the acquirer recognizes and
measures the goodwill acquired in the business combination or a gain from a
bargain purchase. The statement determines what information to disclose to
enable users to be able to evaluate the nature and financial effects of the
business combination. The provisions of SFAS 141R will be effective for our
fiscal year beginning October 1, 2009, and do not allow early adoption.
Management is currently evaluating the impact of adopting this
statement.




F-21




In
February 2008, FASB Staff Position (FSP) No. 157-2, “Effective Date of
FASB Statement No. 157” was issued. FSP No. 157-2 defers the effective
date of SFAS No. 157 to fiscal years beginning after December 15,
2008, and interim periods within those fiscal years, or all non-financial assets
and liabilities, except those that are recognized or disclosed at fair value in
the financial statements on a recurring basis (at least annually). Examples of
items within the scope of FSP No. 157-2 are non-financial assets and
non-financial liabilities initially measured at fair value in a business
combination (but not measured at fair value in subsequent periods), and
long-lived assets, such as property, plant and equipment and intangible assets
measured at fair value for an impairment assessment under SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets.” The partial
adoption of SFAS 157 on January 1, 2008, with respect to financial assets
and financial liabilities recognized or disclosed at fair value in the financial
statements on a recurring basis, is not expected to have a material effect on
the Company’s consolidated financial statements. The Company is currently
assessing the impact, if any, of SFAS No. 157 relating to its planned
October 1, 2009, adoption of the remainder of the standard.





In
March 2008, the FASB issued SFAS No. 161, “Disclosures about
Derivative Instruments and Hedging Activities-an Amendment of FASB Statement
No. 133”, which became effective on November 15, 2008. This standard
changed the disclosure requirements for derivative instruments and hedging
activities.  Entities are required to provide enhanced disclosures about
(a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under SFAS 133
and its related interpretations, and (c) how derivative instruments and
related hedging items affect an entity’s financial position, financial
performance, and cash flows. Management is currently evaluating the impact of
the adopting this statement.





In
April 2008, the FASB issued FASB Staff Position (FSP) FSP 142-3,
“Determination of the Useful Life of Intangible Assets.” This FSP amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under FASB
Statement No. 142, “Goodwill and Other Intangible Assets.” The intent of
this FSP if to improve the consistency between the useful life of a recognized
intangible asset under Statement 142 and the period of expected cash flows to
measure the fair value of the asset under FASB Statement No. 141 (Revised
2007), “Business Combinations,” and other U.S. generally accepted accounting
principles (GAAP). This FSP is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. Early adoption is prohibited. The Company does not expect
the adoption of FAS 142-3 to have a material effect on its results of operations
and financial condition.





In
May 2008, the FASB issued FASB Staff Position (FSP) No. APB 14-1
“Accounting for Convertible Debt Instruments That May Be Settled in Cash
upon Conversion (Including Partial Cash Settlement)”. FSP APB 14-1 requires the
issuer of certain convertible debt instruments that may be settled in cash (or
other assets) on conversion to separately account for the liability (debt) and
equity (conversion option) components of the instrument in a manner that
reflects the issuer’s non-convertible debt borrowing rate. FSP APB 14-1 is
effective for fiscal years beginning after December 15, 2008, on a
retroactive basis and will be adopted by the Company in the first quarter of
fiscal 2009. The Company does not expect the adoption of FSP APB 14-1 to have a
material effect on its results of operations and financial
condition.





In
May 2008, the FASB issued SFAB No. 162, “The Hierarchy of Generally
Accepted Accounting Principles,” which becomes effective upon approval by the
SEC. the standard sets forth the sources of accounting principles and provides
entities with a framework for selecting the principles used in the preparation
of financial statements that are presented in conformity with GAAP. It is not
expected to change any of our current accounting principles or practices and
therefore, is not expected to have a material impact on our financial
statements.





F-22