**UNITED
      STATES**


**SECURITIES
      EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**








**Amendment
      #1**


**To**





**FORM
      10-K**







**ANNUAL
      REPORT PURSUANT TO**


**THE
      SECURITIES EXCHANGE ACT OF 1934**




**For
      the Fiscal Year Ended September 30, 2007**




**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: **None**








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




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




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. Yes x NO o




Check
      if
      disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not
      contained in this form, and no disclosure will 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 file, an accelerated
      filer, or a non-accelerated filer.




(Check
                one):oLarge accelerated filer
            
            xAccelerated filer
            
            oNon-accelerated
                filer




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




As
      of
      September 30, 2007, 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 NASDAQ OTCBB Market.




As
      of December 28, 2007, there were 164,752,188 shares of the registrant’s
      Common Stock outstanding.







XSUNX,
      INC.




**TABLE
      OF CONTENTS**





**Page****PART
                I**Item
                1.    Business
            1Item
                1A. Risk Factors
            12Item
                1B. Unresolved Staff Comments
            16Item
                2.    Properties
            16Item
                3.    Legal Proceedings
            17Item
                4.    Submission of Matters to a Vote of Security
                Holders
            17**PART
                II**Item
                6.    Selected Financial Data
            22Item
                7.    Management’s Discussion and Analysis or Plan of
                Operations
            23Item
                7A. Quantitative and Qualitative Disclosures About Market
                Risk
            31Item
                8.    Financial Statements and Supplementary
                Data
            32Item
                9.    Changes in and Disagreements on Accounting and
                Financial Disclosure
            32Item
                9A. Controls and Procedures
            32Item
                9B. Other Information
            35**PART
                III**Item
                10.  Directors, Executive Officers, and Corporate
                Governance
            38Item
                11.  Executive Compensation
            40Item
                12.  Security Ownership of Certain Beneficial Owners and Management
                and Related Stockholder Matters
            42Item
                13.  Certain Relationships and Related Transactions, and Director
                Independence
            43Item
                14.  Principal Accounting Fees and Services
            43**PART
                IV**Item
                15.  Exhibits, Financial Statement Schedules
            44Signatures
            48










**Explanatory
      Statement**





We
      are
      filing this Amendment Number One to our Annual report on Form 10 K to enhance
      our disclosures in the following areas:





·
            Revised
                audit report to make it clear that Since Inception numbers were audited
                and the present auditors are relying on the work of previous auditors.
                This enhancement can be found in Part
                IV.


·
            Enhance
                the deferred tax asset disclosures in note 3 to the financial statements
                entitled Federal Incomes Tax.


·
            Enhance
                the disclosures relating to the Company’s Marketable Prototype in note 7
                to the financial statements entitled Marketable Production Machine
                Acquisition.


·
            Enhance
                the disclosures relating to the Company’s Option and Warrant Expenses in
                note 2, Summary of Significant Accounting Policies and note 6, Stock
                Options and Warrants to the financial
                statements.


·
            Revised
                our discussion of the Company’s Internal Controls to state the internal
                control framework the Company is using. This can be found in Item
                9A -
                Controls and Procedures.





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 and the Securities Act of 1933,
      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
      is
      a thin-film photovoltaic (“TFPV”) company that intends to grow its business by
      manufacturing TFPV amorphous solar modules and selling them into what we believe
      is a high growth solar market opportunity. Our decision to pursue this strategy
      is based on our three years of research in the design and use of technologies
      for the manufacture of TFPV solar cells utilizing amorphous silicon. During
      this
      time we have developed the technical capabilities, qualified core staff, and
      market understanding that we believe will be necessary to establish product
      manufacturing infrastructure and take our product to market.


1





We
      have
      designed a TFPV solar module which we believe will deliver an average of 125
      peak watts. To produce solar modules in commercial quantities we intend to
      processes glass substrates within a proprietary semiconductor manufacturing
      system which employs the design of a high-throughput, automated, 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.





Our
      plan
      for growth is to build and operate a TFPV solar module manufacturing facility
      in
      the state of Oregon. Employing a phased roll-out of manufacturing capacities,
      our baseline production system is scheduled for installation in mid calendar
      year 2008, the installation of our first 25MW line is scheduled near the end
      of
      calendar 2008, and the installation of our 4 th 25MW
      line is scheduled for early 2010. In anticipation of commercial production,
      we
      have begun to market our TFPV solar module under the brand name of the XsunX
      ASI-120. Furthermore, we have successfully developed and implemented a pre-sales
      reservation program for system installers and large users of solar.





***Markets***




We
      believe the solar market represents a high growth opportunity nationally and
      internationally, both currently and into the foreseeable future. The global
      demand for electrical energy has experienced significant growth due to growth
      in
      populations and the economic vitality of emerging economies. This has created
      a
      growing need to diversify and establish new sources of electrical production,
      and we believe has created tremendous opportunities for growth in the solar
      market. Within the markets for solar products we anticipate that growth in
      demand for solar products based on TFPV technologies will out perform the
      balance of the solar market.





Macro
      growth drivers for solar energy production products include political support
      and government subsidies, high energy prices, technical progress having led
      to
      cost reductions in manufacturing techniques, and advantages over other renewable
      energy sources including:





•
            Proven,
                commercialized and widely used solar technologies adapting to a host
                of
                applications





•
            Negligible
                environmental impact





•
            Reliability,
                little or no delivery risk





•
            Maximum
                power generation coincides with peak energy demands





•
            Potential
                for distributed point of use generation




Growth
      drivers that we believe may allow TFPV to outpace the balance of the solar
      market include:




•
            Highly
                scalable and automated manufacturing processes





•
            Lower
                material costs and fewer constraints to sufficient material supplies





•
            Lower
                per watt production costs for solar cells and integrated solar modules





Driving
      our solar module manufacturing plan is what we believe to be the ability to
      capitalize on long term growth in solar spurred by increasing electrical energy
      costs and demand. Large markets are developing for commercial operators of
      private solar farms, utilities meeting green mandates, government subsidized
      installations, and operators of large commercial and industrial properties.
      These projects represent large installations typically approaching 1MW or more.





While
      we
      believe that the market conditions are excellent for all producers of solar
      products, we intend to deliver thin film solar products that provide extra
      value
      in performance and cost.


2





**Products**





***Solar
      Modules***




In
      designing our XsunX ASI-120 module, we interviewed solar systems integrators
      and
      developed a design that we believe provides for a module delivering high power
      output (relative to other thin films), and size and framing that would allow
      for
      the use of many existing mounting systems. In doing so, we believe our modules
      strike a balance between higher rated power silicon wafer modules and lower
      rated power thin film modules. Further, we believe the market will dictate
      retail installed pricing. Systems integrators will look to sell installed watts
      at market dictated prices, and after accounting for certain fixed installation
      costs inherent to each of the different solar technologies, they will drive
      pricing per watt for factory delivered modules to compensate for any added
      installation costs when using certain technologies.





We
      have
      focused on the development of thin film amorphous technologies and products
      due
      to what we perceive as inherent advantages of amorphous silicon over other
      solar
      absorbers in regards to conversion efficiencies. Amorphous silicon produces
      more
      power earlier in the day and later into the evening because it requires less
      incident light than many other technologies. Amorphous silicon also exhibits
      less thermal coefficient degradation effects when operating in hot climates.
      In
      contrast, other thin film and conventional silicon wafer technologies degrade
      at
      significant rates of approximately 10% to 20% conversion loss of peak rated
      performance when operating at normal temperatures of 65 degrees centigrade.





We
      plan
      to deposit two separate solar cell layers of amorphous silicon on to a glass
      substrate. This is to increase the amount of absorbed and converted solar energy
      in our modules. 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 125 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.





***Product
      Competitive Strengths***




Other
      product and manufacturing design strengths that may allow us to become a
      competitive force within the solar energy industry and the broader electric
      power industry include:





***Cost-Per-Watt
      Advantage.*** We
      contend the design of our solar module and our vertical, in-line, continuous
      process production system may allow us to take advantage of economies of scale
      and accelerate development cycles, enabling possible further reductions in
      our
      manufacturing costs per watt. As we introduce planned manufacturing efficiency
      gains, we anticipate our per watt production costs to fall from initially $1.58
      in 2008 to approximately $1.19 per watt by 2011. We believe this pricing will
      continue to be significantly less than the costs of crystalline silicon solar
      modules. As we mature and integrate new cell designs and materials, we believe
      the opportunity exists to drive cell performance above 8% and deliver wholesale
      costs per watt approaching $1 per watt or less.





***Stable
      Material Availability.*** Our
      planned operations are not impacted by the current shortage of polysilicon
      (a
      key raw material for conventional non thin film solar module products) that
      is
      affecting most of our competitors through higher costs and limited availability.
      The key raw materials to be used in our solar module design are low iron
      tempered glass, high purity industrial gases such as argon, nitrogen, hydrogen,
      and silane





and
      germane, and extruded aluminum for module framing with polymer materials
      employed in the encapsulation for weather proofing. We believe we have adequate
      sources for the supply of these key raw materials and components for our
      manufacturing needs and in most instances, have selected multiple source
      suppliers. As we begin to scale manufacturing efforts, we may single out certain
      key suppliers to enhance efficiency, cost and quality. The cost of certain
      raw
      materials may rise over the next several years and we intend to actively manage
      these costs through purchasing strategies, product design, and operating
      improvements.





***Non-Toxic
      Finished Product.*** The
      design of our amorphous solar module transfers no heavy metals or toxic
      compounds in the finished product. Conventional polysilicon solar modules
      contain lead based cell interconnections and thin films such as cadmium
      telluride (CdTe) and copper indium gallium selenide (CIGS) contain toxic
      materials in the finished product.


3





***Large
      Area, High Power Delivery Module Design.*** Our
      intent and execution plan is to work on establishing the most efficient way
      to
      deliver a commercially viable solar module at competitive price points as
      opposed to focusing strictly on how to increase energy conversion efficiencies
      of the solar cell. Our solar module is based on established module designs
      and
      well known manufacturing processes necessary to deliver a large area, TFPV
      module producing what we believe to be nearly twice the rated power delivery
      per
      module of other thin film offerings. We believe this design will require fewer
      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.





***Knowledgeable
      System Component Vendor Base.*** Amorphous
      TFPV benefits from nearly thirty years of process development and research,
      which has produced a knowledgeable and experienced vendor base. These vendors
      provide access to improved semiconductor device technologies resulting in
      improvements to manufacturing processes in related areas such as thin film
      transistors, memory devices, and high performance opto-electric coatings. We
      have engaged a select group of these vendors and established a primary and
      secondary vendor for each major system component.





***Certifications***




We
      have
      selected components for use in our TFPV solar module that have previously been
      tested by Underwriters Laboratories (UL) and approved for use in the manufacture
      of solar modules. We plan to submit these materials, and a full scale working
      sample of our TFPV module, to UL for the purpose of receiving UL certification
      1703 in the 2008 period. Upon completion of initial module production
      capabilities we plan to submit modules for participation in laboratory and
      field
      tests with the National Renewable Energy Laboratory, the Fraunhofer Institute
      for Solar Energy.





We
      plan
      to work to achieve and maintain all certifications required to sell solar
      modules in the markets we plan or expect to serve, including UL 1703, IEC 61646,
      TÜV Safety Class II and CE.





**Planned
      Manufacturing Capacities**





***Production
      Line Features***




The
      core
      feature of our plan revolves around the design of an efficient mass production
      system. The design utilizes an in-line vertical glass coating system processing
      two balanced and independent lines simultaneously. This design incorporates
      material handling, cell deposition, laser segmentation, cleaning, and module
      packaging functions necessary to convert an inexpensive piece of 100cm X 160cm
      sheet glass into a complete solar module in less than three hours. Our process
      uses only a fraction of the semiconductor material that would be necessary
      to
      produce crystalline silicon solar modules.





***Phased
      Production Build Out and Planned Capacities***




In
      the
      2008 calendar year, we anticipate completing the assembly and installation
      of a
      small scale baseline production system and initiating construction of our first
      full scale 25 MW system. We further anticipate that the baseline production
      system will generate limited solar module production in 2008 for use in fueling
      our sales channel and establishing product recognition for larger quantity
      sales
      in 2009. We anticipate completing the assembly of and commissioning our first
      25MW line between December 2008 and January 2009. Near the end of the 2008
      calendar year, we plan to launch the build-out of the first of three additional
      25 MW




systems
      necessary to eventually bring our capacity to 100MW. Barring assembly delays,
      the first of these lines is slated to come on-line in November 2009, the second
      in January 2010, and the final 25MW in March 2010. We intend to use the balance
      of the 2010 year to continue to work to improve system utilization, add shifts,
      and increase module yields to bring our production to peak capacities of 100MW
      or more of annualized solar module production. To complete each new production
      line, we plan to use a systematic replication process that is designed to enable
      us to add production lines rapidly and efficiently, and achieve operating
      metrics that are comparable to the performance of our initial 25MW system.


4





***Production
      Line Planned Utilization and Production Costs***




Each
      system, or line, has an estimated annualized initial module production capacity
      of 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 in 2009, thereby increasing total production capacities per line
      to an anticipated 33MW. Initial per watt production costs during ramp-up of
      operations in the 2009 period are anticipated to be $1.58 per watt. As we
      improve system utilization and production yield in 2009, we anticipate our
      production costs will lower to $1.38 in 2010 and $1.19 in 2011. By continuing
      to
      expand production and improve solar energy conversion efficiencies and
      manufacturing processes, we believe we can further reduce our manufacturing
      costs per watt and improve our cost advantage over traditional crystalline
      silicon solar module manufacturers.





At
      present, the majority of our operations development efforts for the period
      ending September 2008 and the foreseeable future thereafter will focus on
      establishing and expanding facilities necessary to manufacture our TFPV solar
      modules for commercial sale. Areas of specific focus and capital expenditures
      include:





(a)
            Lease
                and preparation of facilities necessary to house and operate, at
                minimum,
                our first of four proposed 25MW manufacturing lines; and





(b)
            Establishment
                of a baseline production system to produce full size (100cm × 160cm)
                sample modules; and





(c)
            The
                placement of orders with select vendors for the core and sub-system
                components necessary to begin assembly leading to the commissioning
                of the
                first of four proposed 25MW manufacturing lines; and





(d)
            Continued
                R&D efforts to establish enhanced solar cell deposition methods and
                reduce manufacturing costs.





The
      purpose of these ongoing investments is to first establish a base TFPV solar
      module manufacturing infrastructure necessary to produce approximately 25MW
      of
      annualized solar module production, and second, to establish a replication
      process designed to enable us to add the balance of our proposed three
      additional production lines as rapidly and efficiently as possible.





The
      following chart summarizes our planned initial production capacity and
      installation timing:





**Manufacturing
                Facility**
            
            **Number of**
              **Production Lines**
            
            **Initial Annualized**
              **Solar Modules***
            
            **Initial Annualized**
              **Watts***
            
            **Anticipated System**
              **Commissioning Date**1st
                line
            
            
            1
            
            
            190,000
            
            
            25MW
            
            
            Dec
                2008Addition
                of 2ndline
            
            
            1
            
            
            190,000
            
            
            25MW
            
            
            Nov
                2009Addition
                of 3rdline
            
            
            1
            
            
            190,000
            
            
            25MW
            
            
            Jan
                2010Addition
                of 4thline
            
            
            1
            
            
            190,000
            
            
            25MW
            
            
            Mar
                2010Total
                Planned
            
            
            4
            
            
            760,000
            
            
            100MW







*
            Annualized
                solar module production rates are based on an initial system utilization
                rate of 58% (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 of each system.




5




We
                  anticipate that due to normal production variables we will produce
                  on
                  average marketable solar modules ranging from between 115 to 130
                  watts
                  each.





**Sales
      and Marketing**





Driving
      our solar module manufacturing plan is what we believe to be the ability to
      capitalize on long term growth in solar spurred by increasing electrical energy
      costs and demand. Large markets are developing for commercial operators of
      private solar farms, utilities meeting green mandates, government subsidized
      installations, and operators of large commercial and industrial properties.
      These projects represent large installations typically approaching 1MW or more.





Solar
      systems installers looking to satisfy the module needs of these large and long
      term projects are looking for opportunities to secure access to modules
      supplies. We believe that the design and performance of our solar module is
      ideally suited for use in these project types, and we further believe that
      our
      module production capacities can be pre-sold well into the future.





***Target
      Markets***





Our
      primary target markets for our TFPV solar modules will be applications for
      On-Grid (facilities tied to conventional power distribution infrastructure)
      application of 1MW in size and above. Typical applications and buyers would
      include:





•
            Solar
                Farms





—
            License
                Holders in Germany, Spain & Canada





—
            US
                installers servicing commercial and utility scale installations





•
            Government
                Agencies (DOD)





—
            Bureau
                of Land Management





—
            Department
                of Defense





•
            Power
                Purchase Agreements





—
            Renewable
                Ventures





•
            Utility
                Companies





—
            Meeting
                Green Mandates





•
            Large
                Commercial Installations





***Pricing***




Our
      analysis made in predicting the anticipated sales per watt for module production
      in the years 2009, 2010, and 2011 was based on several factors. These factors
      included a review of pricing of both crystalline and thin film per watt sales
      trends for the previous several years including 2007 pricing trends. Trends
      were
      primarily derived from pricing surveys conducted by interviews and an industry
      watch firm named SolarBuzz.com. The following pricing of both crystalline and
      thin film for September 2007 was produced by SolarBuzz.com:





*“The
      lowest retail price for a multicrystalline solar module is $4.11 per watt (€3.00
      per watt) from a US retailer. The lowest retail price for a monocrystalline
      module is $4.30 per watt (€3.14 per watt), also from a US retailer.”* **And** *“The
      lowest thin film module price is at $3.49 per watt (€2.55/Wp) per watt from a
      European retailer. As a general rule, it is typical to expect thin film modules
      to be at a price discount to crystalline silicon (for like module powers).
      This
      thin film price is represented by a 60 watt module.”*





The
      pricing in the thin film category represents modules below 100 watts of stated
      peak power. Specifically, modules producing total peak power of only 60 watts
      were priced lowest at $3.49 per watt.


6





XsunX
      determined that a key driver in the lower price point for most thin film in
      relation to crystalline modules was the discount value assigned to the lower
      total power output per module requiring more modules per installation. As an
      example, if a 10kW project were to employ the use of 65 watt cadmium telluride





(CdTe)
      or
      copper indium gallium selenide (CIGS) modules as opposed to 125 watt amorphous
      silicon (a-Si) modules, the required number of modules necessary for
      installation would be approximately 70 more units. Additional units may also
      be
      necessary to compensate for thermal coefficient performance loss of a CdTe
      or
      CIGS solar cell resulting in power production loss from heat at normal operating
      temperatures*. In our estimate, this may bring the total number of additional
      units to an excess of 70 more 65 watt modules for the same project than with
      the
      use of a 125 watt amorphous module. To an installer/integrator, the use of
      more
      modules would increase overall balance of systems (BOS) cost due to increased
      labor, mounting hardware, and interconnection cost. We believe that integrators
      may demand lower per watt price points for certain modules over others as a
      result of these additional system costs.





In
      developing price points for the XsunX ASI-120 module, we determined that the
      rated power output of our device struck a balance between higher energy density
      crystalline modules and the lower power 60 to 75 watt products offered by other
      TFPV manufactures such as First Solar, Sharp, and ECD. The following chart
      reviews our factory per watt pricing assumptions based on integrator interviews,
      industry publications, and our manufacturing cost assumptions.





**Period**
            
            **Crystalline**
            
            **Thin-Film < 100 watt**
            
            **XsunX Thin Film > 120 watt**2009
            
            $
            3.25
            
            $
            2.25
            
            $
            2.602010
            
            $
            3.00
            
            $
            2.00
            
            $
            2.402011
            
            $
            2.90
            
            $
            1.75
            
            $
            2.00





*
      NOTE:
      Solar technologies such as silicon wafer, CdTe, and CIGS exhibit performance
      loss due to heat. While the factory rated “Peak” power is determined at 25
      degrees centigrade, real world operating temperatures average 65 degrees
      centigrade. This potential 40 degree increase can affect different solar
      technologies in varying percentages of approximately 1⁄4 to 1⁄2 percent per degree
      in conversion efficiency. This results in an approximate reduction in efficiency
      at the “Peak” period (noon) of about 10% to 20%. To place this in perspective, a
      100 watt module (silicon wafer, CdTe, CIGS) would deliver approximately 90
      to 80
      watts of power during the peak periods while operating at 65 degrees centigrade.
      Amorphous silicon does not experience the same degree of performance
      degradation, realizing only about 3% or less performance loss.





***Sales
      & Distribution***





In
      anticipation of commercial production, we have developed a pre-sales reservation
      program, based upon the solar module manufacturing industry’s policy of
      pre-selling manufacturing capacity to system installers and large users of
      solar. This is intended to aid in building a sales channel, loading that channel
      with customers interested in purchasing our future module production, and
      developing brand presence and recognition as early as possible. The program
      enables qualified, interested parties to specify the amount of solar module
      capacity they anticipate purchasing at favorable per watt pricing. As of the
      date of this report, we have signed reservation agreements with solar system
      integrators indicating interest in over 100MW of production in calendar 2008,
      2009, 2010. Our agreements provide for the payment of a 5% deposit based on
      the
      2009 calendar year purchase commitment either prior to, or not later than,
      30
      days after the delivery by XsunX to the reserving party of commercial samples
      for evaluation. The information in this paragraph is designed to summarize
      the
      general terms of the pre-sales reservation program and market opportunities.
      It
      is not intended to provide guidance about our future operating results,
      including revenues or profitability.


7




**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 $4,069,981 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, attracting 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.




We
      anticipate that for the foreseeable future the core of our operations and
      efforts will focus on the establishment of TFPV solar module manufacturing
      capabilities. Separately, we continue to explore opportunities with parties
      interested in the licensing and cooperative commercial development and use
      of
      our semi-transparent TFPV technologies.





The
      Company continues to develop additional processes, techniques, and device
      designs. These research and development efforts may provide the Company with
      additional proprietary technology that may lead to the filing of new provisional
      and patent applications.





**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.





XsunX
      licensed the patent and technology portfolio of MVSystems, Inc., a Colorado
      corporation (“MVSystems”) in September 2004 and then later expanded our use
      rights under the license in October 2005. The patents acquired were
      Semiconductor Vacuum Deposition System And Method Having A Reel-To-Reel
      Substrate Cassette: US6, 258,408 B1: July 10th, 2001 (Method of Fabrication);
      and US Provisional Patent Application serial number 60/536,151- three terminal
      and four terminal solar cells, solar cell panels, and method of manufacture
      (Device and Method of Fabrication). The license granted XsunX the royalty free
      exclusive rights for use by XsunX in its pursuit to establish a commercially
      viable process for the manufacture of TFPV solar cells and accordingly, included
      all MVSystems technology, know how, and resources which are part of or related
      to the licensed patents and technology that was then or may become applicable
      or
      beneficial to the furtherance of the business objectives of XsunX in the future.
      The license was exclusive as to technology pertaining to the XsunX field of
      use
      as it pertains to the business of developing, commercializing and licensing
      processes for the manufacture of solar cells or photovoltaic technologies.





Effective
      January 1, 2007 we entered into a cooperative development agreement with
      Sencera, LLC for the licensure and development of a Sencera patent pending
      plasma source for use in the manufacture of deposited thin-film solar cells.
      Under the terms of the agreement, XsunX and Sencera entered into a Technology
      Development and License Agreement, providing for a phased program to further
      develop and proof the Sencera plasma source for use in the manufacture of
      deposited thin-film solar cells. In connection with the agreement, Sencera
      issued XsunX a seven (7) year royalty based license that provides XsunX with
      exclusivity in the area of the XsunX field of use as claimed in U.S. Patent
      No.
      6,180,871; 6,320,117; 6,509,204; 6,488,777; 6,258,408; 6,472,622; and (b) as
      claimed in U.S. Provisional Application No. 60/536,151; and (c) for use in
      semi-transparent photovoltaic devices, multi-terminal photovoltaic devices,
      and
      cassette-based roll-to-roll manufacturing equipment.


8





The
      Company continues to develop additional processes, techniques, and device
      designs. These research and development efforts may provide the Company with
      additional proprietary technology that may lead to the filing of new provisional
      and patent applications.




**Company
      History**





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





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





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





**Government
      Contracts**





There
      are
      no government contracts 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 these technologies, the Company believes the design
      of our large area TFPV solar module delivering 125 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.





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.




9




**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. To date,
      compliance with these regulations by the Company has had no material effect
      on
      the Company’s operations, capital, earnings, 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, 2007 had 6
      salaried employees. This represents an increase of 1 employee over the same
      period ended 2006. The Company also engages several consultants to perform
      specific functions that otherwise would require an employee. The Company
      projects that during the next 12 months the Company’s workforce is likely to
      increase to 22, with 2 of the new employees being in Administrative, 2 in
      Marketing and Sales positions, 5 Scientific and Technical positions, 4 in
      Manufacturing Technicians, and 3 in Administrative Support. In addition to
      the
      anticipated retention of new employees the Company expects to expand its use
      of
      strategic relationships to leverage industry expertise in areas of design,
      systems automation, manufacturing and assembly to augment product
      commercialization time lines and the delivery of technologies. The Company
      may
      find a need to engage additional full-time employees as necessary.





**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 2007, the membership of the advisory board
      was enhanced to reflect the current operational status of the Company. It is
      anticipated that panel members will be engaged for a period of two years. The
      qualifications and biographical information for the members of the panel are
      as
      follows:





***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.


10





***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.





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 refereed journal publications and
      over 175 conference and seminar presentations.





***Dr.
      Michael A. Russak, Member Scientific Advisory Board***





Dr.
      Michael A. Russak 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.




11




**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 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 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 may never achieve profitability.***





We
      are a
      development stage company and, to date, have not generated any significant
      revenues. From inception through September 30, 2007, we had an accumulated
      deficit of $10,197,938. 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, and if it will achieve market acceptance. We may not achieve
      our business objectives and the failure to achieve such goals would have an
      adverse impact on us.





***We
      expect that we will need to obtain significant additional financing to continue
      to operate our business, including significant capital expenditures to install
      our initial 25MW per annum production capacity, and financing may be unavailable
      or available only on disadvantageous terms.***





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.





On
      November 1, 2007, XsunX signed a $21 million common stock purchase agreement
      with Fusion Capital Fund II, LLC, an Illinois limited liability Company (“Fusion
      Capital”). 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. Under the registration
      rights agreement, we agreed to file a registration statement related to the
      transaction with the U.S. Securities & Exchange Commission (“SEC”) covering
      the shares that have been issued or may be issued to Fusion Capital under the
      common stock purchase agreement. After the SEC has declared effective the
      registration statement related to the transaction we have the right over a
      25-month period to sell our shares of common stock to Fusion Capital, from
      time
      to time, in amounts up to $1 million per sale, depending on certain conditions
      as set forth in the agreement, up to the full aggregate commitment of $21
      million. See Item 9B: Other Information, “Sale of Unregistered Securities and
      Financing Agreement”.





There
      can
      be no assurance that such 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.


12





***We
      are working to establish our manufacturing capacity for TFPV products in order
      to meet anticipated demand, and our revenues and profits will depend upon our
      ability to successfully complete our initial 25MW of manufacturing capacity
      and
      then to 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 by 2010. 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.





***Continued
      research and development efforts will be required to improve or maintain
      competitiveness of our products, and there can be no assurance that such efforts
      will be successful.***





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.***





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





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





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.


13





***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
      result in a material adverse effect causing our business to suffer.***





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.***





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.





***Raw
      material costs could impact our cost of goods and our ability to successfully
      develop our products and technologies.***





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.





**Indemnification
      of Officers and Directors.**





The
      Colorado Business Corporation Act provides for the indemnification of its
      directors, officers, employees, and agents, under certain circumstances, against
      attorney’s fees and other expenses incurred by them in any litigation to which
      they become a party arising from their association with or activities on behalf
      of the Company. The Company will also bear the expenses of such litigation
      for
      any of its directors, officers, employees, or agents, upon such person’s promise
      to repay the Company therefore if it is ultimately determined that any such
      person shall not have been entitled to indemnification. This indemnification
      policy could result in substantial expenditures by the Company which it will
      be
      unable to recoup.





**Director’s
      Liability Limited.**





The
      Colorado Business Corporation Act excludes personal liability of its directors
      to the Company and its stockholders for monetary damages for breach of fiduciary
      duty except in certain specified circumstances. Accordingly, the Company will
      have a much more limited right of action against its directors than otherwise
      would be the case. This provision does not affect the liability of any director
      under federal or applicable state securities laws.


14





**Effective
      Internal Controls.**





As
      a
      public company, we are required to document and test our internal control
      procedures in order to satisfy the requirements of Section 404 of the
      Sarbanes-Oxley Act, which will require annual management assessments of the
      effectiveness of our internal control over financial reporting and a report
      by
      our independent registered public accounting firm that both addresses
      management’s assessment of the effectiveness of internal control over financial
      reporting and the effectiveness of internal control over financial reporting.
      During the course of our testing, we may identify deficiencies which we may
      not
      be able to remediate in time to meet our deadline for compliance with Section
      404. Testing and maintaining internal controls can divert our management’s
      attention from other matters that are important to our business. We also expect
      the new regulations to increase our legal and financial compliance cost, make
      it
      more difficult to attract and retain qualified officers and members of our
      board
      of directors (particularly to serve on an audit committee) and make some
      activities more difficult, time consuming and costly. We may not be able to
      conclude on an ongoing basis that we have effective internal control over
      financial reporting in accordance with Section 404. Our independent registered
      public accounting firm may not be able or willing to issue an unqualified report
      on the effectiveness of our internal control over financial reporting. If we
      conclude that our internal control over financial reporting is not effective,
      we
      cannot be certain as to the timing of completion of our evaluation, testing
      and
      remediation actions or their effect on our operations since there is presently
      no precedent available by which to measure compliance adequacy. If we are unable
      to conclude that we have effective internal control over financial reporting
      or
      our independent auditors are unable to provide us with an unqualified report
      as
      required by Section 404, then we may be unable to continue to have our common
      stock traded on the Over the Counter Bulletin Board and investors could lose
      confidence in our reported financial information, which could have a negative
      effect on the trading price of our stock.




**The
      following risks relate principally to our common stock and its market value:**


***Our
      Common Stock is deemed a low-priced “Penny” stock, therefore an investment in
      our Common Stock should be considered high risk and subject to marketability
      restrictions.***





Since
      our
      Common Stock is a penny stock, as defined in Rule 3a51-1 under the Exchange
      Act,
      it will be more difficult for investors to liquidate their investment. Until
      the
      trading price of the Common Stock rises above $5.00 per share, if ever, trading
      in our Common Stock is subject to the penny stock rules of the Exchange Act
      specified in rules 15g-1 through 15g-10. Those rules require broker-dealers,
      before effecting transactions in any penny stock, to:





•
            Deliver
                to the customer, and obtain a written receipt for, a disclosure document;





•
            Disclose
                certain price information about the stock;





•
            Disclose
                the amount of compensation received by the broker-dealer or any associated
                person of the broker-dealer;





•
            Send
                monthly statements to customers with market and price information
                about
                the penny stock; and





•
            In
                some circumstances, approve the purchaser’s account under certain
                standards and deliver written statements to the customer with information
                specified in the rules.





Consequently,
      the penny stock rules may restrict the ability or willingness of broker-dealers
      to sell our Common Stock and may affect the ability of holders to sell their
      Common Stock in the secondary market and the price at which such holders can
      sell any such securities. These additional procedures could also limit our
      ability to raise additional capital in the future.





**No
      Foreseeable Dividends.** We
      have never paid cash dividends on our common stock and do not anticipate paying
      cash dividends in the foreseeable future. The payment of dividends on our common
      stock will depend on earnings, financial condition and other business and
      economic factors affecting it at such time as the board of directors may
      consider relevant. If we do not pay dividends, our common stock may be less
      valuable because a return on your investment will only occur if its stock price
      appreciates.





**Limited
      Public Market** .  There
      is only a limited public market for the Company’s common stock, and no assurance
      can be given that a market will continue or that a shareholder ever will be
      able
      to liquidate his investment without considerable delay, if at all. If a market
      should continue, the price may be highly volatile. Factors such as those
      discussed in this “Risk Factors” section may have a significant impact upon the
      market price of the securities offered hereby. 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.


15





**Stock
      Volatility.** 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
      addition, the securities markets have from time to time experienced significant
      price and volume fluctuations that are unrelated to the operating performance
      of
      particular companies. These market fluctuations may also materially and
      adversely affect the market price of our common stock.




**Item
      1B. Unresolved Staff Comments**





(None)





**Item
      2. Properties**





As
      of
      September 30, 2007 the Company leased administrative office facilities located
      at 65 Enterprise, Aliso Viejo CA 92656 for approximately $3,800 per month.





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.





**Annual
                Rent Schedule**
            
            **Rate/sf**
            
            **Annualized**
              **Rent**
            
            **Monthly Rent**7/1/06 - 6/30/07
            
            $
            6.75
            
            $
            20,250.00
            
            $
            1,687.507/1/07 - 6/30/08
            
            $
            6.95
            
            $
            20,850.00
            
            $
            1,737.507/1/08 - 6/30/09
            
            $
            7.16
            
            $
            21,480.00
            
            $
            1,790.00





The
      Company owns no real property.





To
      support the Company’s plans to prepare TFPV solar module manufacturing
      capabilities, we plan to lease suitable facilities of approximately 60,000
      to
      75,000 square feet in the 2008 fiscal year. We have selected the area
      surrounding the Portland, Oregon area as the location of our facilities and
      we
      are working to complete site selection and lease negotiations.


16





**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.





Effective
      March 23, 2007 XsunX entered into a binding letter of intent (“LOI”) with a
      manufacturer (the “Seller”) of photovoltaic products for the purchase of certain
      net assets of the manufacturer for the amount of five million dollars
      ($5,000,000) USD in a cash transaction. On or about April 27, 2007 the Company
      was notified by the Seller of a change in direction and decision not to complete
      the sale of assets under the LOI agreement. XsunX filed a complaint (“Lawsuit”)
      against the Seller and related entities in the United States District Court
      for
      the District of Massachusetts on May 10th, 2007, alleging breach of contract
      and
      other claims. On August 23, 2007 the Seller and XsunX entered into a settlement
      agreement (“Settlement”). The Settlement became effective upon the transfer by
      the Seller to XsunX of one million one hundred thousand dollars USD ($1,100,000)
      on August 27, 2007. Upon the effectiveness of the Settlement counsel for each
      of
      the parties filed with the United States District Court for the District of
      Massachusetts a Stipulation of Dismissal with Prejudice thereby dismissing
      the
      Lawsuit with prejudice. Each of the parties has unconditionally and irrevocably
      released, waived, and forever discharged each other from claims related to
      the
      LOI and the Lawsuit.





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 shares were originally issued in a transaction exempt
      from registration pursuant to Section 4(2) of the Securities Act of 1933. The
      returned shares were received and cancelled effective January 2007. As a result
      of the return and cancellation of these shares, the Company recorded a credit
      to
      expenses in the amount of $12,000 and a debit to paid in capital of $12,000
      for
      the period ending March 31, 2007. The $12,000 represents one half of the
      monetary value expensed by the Company in the period in which the shares were
      issued.




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





None
      in
      the period ended September 30, 2007.





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





**Year
                Ended September 30, 2007**
            
            **High**
            
            **Low**
            
            **Close**First
                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
            
            
            0.39**Year
                Ended September 30, 2006**First
                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




17





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, 2007, there were approximately 1,456 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, 2007, there were approximately
      157,919,858 shares of common stock outstanding on record with the Company’s
      stock transfer agent, Mountain Share Transfer. On September 30, 2007 the last
      reported sales price of our common stock on the OTCBB was $.39 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, 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 1,950,000 remain authorized. The options are exercisable
      at prices ranging from $.41 to $.53 per share, and expire at various times
      through August 2012.





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 were issued in a transaction
      exempt from registration pursuant to Section 4(2) of the Securities Act of
      1933.
      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 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 were issued in a transaction
      exempt from registration pursuant to Section 4(2) of the Securities Act of
      1933.
      The options have a 5 year exercise term and vest under the following provisions:




18


(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.





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 were issued in a transaction
      exempt from registration pursuant to Section 4(2) of the Securities Act of
      1933.
      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.





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. The options were issued in a transaction
      exempt from registration pursuant to Section 4(2) of the Securities Act of
      1933.
      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 were issued in a transaction
      exempt from registration pursuant to Section 4(2) of the Securities Act of
      1933.
      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 were issued in a transaction
      exempt from registration pursuant to Section 4(2) of the Securities Act of
      1933.
      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 were issued in a
      transaction exempt from registration pursuant to Section 4(2) of the Securities
      Act of 1933. The options have a 5 year exercise term and vest under the
      following provisions:


19





(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 were issued
      in
      a transaction exempt from registration pursuant to Section 4(2) of the
      Securities Act of 1933. 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.





**Table
      of Equity Compensation**





The
      following table sets forth summary information, as of September 30, 2007,
      concerning securities authorized for issuance under all equity compensation
      plans and agreements for the fiscal years ended September 30, 2005, 2006 and
      2007 is as follows:





**Number
                of**
              **Options/**
              **Warrants**
            
            **Weighted-**
              **Average**
              **Exercise**
              **Price**
            
            **Accrued**
              **Options/**
              **Warrants**
              **Exercisable**
            
            **Weighted-**
              **Average**
              **Exercise**
              **Price**Outstanding,
                September 30, 2004
            
            
            8,000,000
            
            $
            0.15
            
            
            5,500,000
            
            $
            0.15Granted
                2005
            
            
            7,125,000
            
            $
            0.17
            
            
            6,708,334
            
            $
            0.17Exercisable
                from 2004 in 2005
            
            
            —
            
            
            
            
            
            1,200,000
            
            
            0.15Outstanding,
                September 30, 2005
            
            
            15,125,000
            
            $
            0.16
            
            
            13,408,334
            
            $
            0.16Granted
                2006
            
            
            11,987,000
            
            $
            0.36
            
            
            5,543,000
            
            $
            0.46Exercised
                2006
            
            
            (4,375,000
            )
            $
            0.48
            
            
            (4,375,000
            )
            $
            0.48Exercised
                from 2004 in 2006
            
            
            (100,000
            )
            $
            0.15
            
            
            (100,000
            )
            $
            0.15Exercised
                from 2005 in 2006
            
            
            (6,375,000
            )
            $
            0.17
            
            
            (6,375,000
            )
            $
            0.17Exercisable
                from 2004 in 2006
            
            
            —
            
            
            
            
            
            300,000
            
            $
            0.15Exercisable
                from 2005 in 2006
            
            
            —
            
            
            
            
            
            300,000
            
            $
            0.20Outstanding,
                September 30, 2006
            
            
            16,262,000
            
            
            
            
            
            8,701,334Granted
                2007
            
            
            1,950,000
            
            $
            0.46
            
            
            554,167
            
            $
            0.46Exercised
                2007
            
            
            —
            
            
            
            
            
            —Exercised
                from 2004 in 2007
            
            
            (900,000
            )
            $
            0.15
            
            
            (900,000
            )
            $
            0.15Exercised
                from 2005 in 2007
            
            
            —
            
            
            
            
            
            —


20





**Number
                of**
              **Options/**
              **Warrants**
            
            **Weighted-**
              **Average**
              **Exercise**
              **Price**
            
            **Accrued**
              **Options/**
              **Warrants**
              **Exercisable**
            
            **Weighted-**
              **Average**
              **Exercise**
              **Price**Exercised
                from 2006 in 2007
            
            
            —
            
            
            
            
            
            —Exercisable
                from 2004 in 2007
            
            
            —
            
            
            
            
            
            —Exercisable
                from 2005 in 2007
            
            
            —
            
            
            
            
            
            116,666
            
            $
            0.20Exercisable
                from 2006 in 2007
            
            
            —
            
            
            
            
            
            296,000
            
            $
            0.51Outstanding,
                September 30, 2007
            
            
            17,312,000
            
            $
            0.33
            
            
            8,768,167
            
            $
            0.22





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
                Exercisable****Range
                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**$
                0.15
            
            
            7,000,000
            
            $
            0.15
            
            
            1.9
            
            
            6,000,000
            
            $
            0.15$
                0.20
            
            
            750,000
            
            $
            0.20
            
            
            0.3
            
            
            750,000
            
            $
            0.20$
                0.25
            
            
            7,000,000
            
            $
            0.25
            
            
            3.0
            
            
            1,000,000
            
            $
            0.25$
                0.41
            
            
            100,000
            
            $
            0.41
            
            
            4.9
            
            
            4,167
            
            $
            0.41$
                0.45
            
            
            100,000
            
            $
            0.45
            
            
            4.6
            
            
            20,833
            
            $
            0.45$
                0.46
            
            
            1,650,000
            
            $
            0.46
            
            
            4.3
            
            
            500,000
            
            $
            0.46$
                0.51
            
            
            500,000
            
            $
            0.51
            
            
            3.8
            
            
            352,000
            
            $
            0.51$
                0.53
            
            
            100,000
            
            $
            0.53
            
            
            4.4
            
            
            29,167
            
            $
            0.53$
                1.69
            
            
            112,000
            
            $
            1.69
            
            
            3.5
            
            
            112,000
            
            $
            1.6917,312,000
            
            
            
            
            
            
            
            
            8,768,167





**Sales
      or Transactions of Securities**





The
      authorized capital stock of the Company was established at 500,000,000 shares
      with no par value.





In
      the
      fiscal year ended September 30, 2005, the Company issued a total of 9,818,631
      shares of common stock as follows: 6,735,137 shares of common stock were issued
      pursuant to Regulation S promulgated under the Securities Act, raising gross
      proceeds of $531,396; 474,231 shares of common stock were issued in transactions
      exempt from registration pursuant to Section 4(2) of the Securities Act of
      1933,
      for consulting services valued at $40,000; and 2,609,263 shares of common stock
      were issued pursuant to an exemption under Section 4(2) of the Act, in
      connection with the sale of an $850,000 secured convertible debenture by the
      Company.





In
      the
      fiscal year ended September 30, 2006, the Company issued a total of 33,293,217
      shares of common stock as follows: 33,120,851 shares of common stock registered
      pursuant to an effective registration statement were issued pursuant to the
      conversion of secured convertible debentures, raising gross proceeds of
      $9,294,133; 72,366 shares of common stock were issued in transactions exempt
      from registration pursuant to Section 4(2) of the Securities Act of 1933, for
      consulting services valued at $31,500; and 100,000 shares of common stock were
      issued pursuant to an exemption under Section 4(2) of the Act, in connection
      with the exercise of 100,000 warrants bearing an exercise price of $.15 each.


21


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





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 shares were originally issued in a transaction exempt
      from registration pursuant to Section 4(2) of the Securities Act of 1933. The
      returned shares were received and cancelled effective January 2007. As a result
      of the return and cancellation of these shares, the Company recorded a credit
      to
      expenses in the amount of $12,000 and a debit to paid in capital of $12,000
      for
      the period ending March 31, 2007. The $12,000 represents one half of the
      monetary value expensed by the Company in the period in which the shares were
      issued.





In
      conjunction with the sale of convertible debentures in the amount of $850,000
      and $5,000,000 in the fiscal periods 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.





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 dollars was paid to XsunX by the
      consultant and 900,000 shares of unregistered common stock were issued. The
      shares were issued in a transaction exempt from registration pursuant to Section
      4(2) of the Securities Act of 1933.





**Use
      of Proceeds from the Sale of Securities**





The
      proceeds from the above sales of securities are used primarily to fund the
      product developments efforts and 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
                Ended******
            
            **Sept
                30,**
              **2007**
            
            **Sept
                30,**
              **2006**
            
            **Sept
                30,**
              **2005**
            
            **Sept
                30,**
              **2004**
            
            **Sept
                30,**
              **2003*****Statement
                of Operations Data:***Net
                Sales
            
            
            6,880
            
            
            8,000
            
            
            —
            
            
            —
            
            
            —Research
                and Development Expense
            
            
            435,534
            
            
            949,472
            
            
            501,423
            
            
            129,493
            
            
            —Loan
                Fees
            
            
            —
            
            
            628,834
            
            
            115,000
            
            
            —
            
            
            —Warrant
                Expenses
            
            
            325,303
            
            
            951,250
            
            
            —
            
            
            1,200,000
            
            
            —Income(Loss)
                from Continuing Operations
            
            
            (1,289,497
            )
            
            (3,441,940
            )
            
            (1,400,839
            )
            
            (1,509,068
            )
            
            (145,868
            )Income(Loss)
                from Continuing Operations per CommonShare
            
            $
            (0.01
            )
            $
            (0.02
            )
            $
            (0.02
            )
            $
            (0.01
            )
            $
            (0.02
            )***Cash
                Flow Data:***Net
                cash provided by (used in) operating activities
            
            
            (843,416
            )
            
            (1,942,278
            )
            
            (1,049,650
            )
            
            (236,630
            )
            
            (27,372
            )


22





**Years
                Ended******
            
            **Sept
                30,**
              **2007**
            
            **Sept
                30,**
              **2006**
            
            **Sept
                30,**
              **2005**
            
            **Sept
                30,**
              **2004**
            
            **Sept
                30,**
              **2003**Net
                cash used in investing activities
            
            
            (1,822,942
            )
            
            (2,099,736
            )
            
            (191,995
            )
            
            (12,267
            )
            
            (3
            )Net
                cash provided by financing activities
            
            
            135,000
            
            
            8,171,250
            
            
            1,380,170
            
            
            1,483,895
            
            
            29,721***Balance
                Sheet Data:***Cash
            
            
            1,773,748
            
            
            4,305,105
            
            
            175,869
            
            
            37,344
            
            
            2,346Property
                Plant and Equipment, Net
            
            
            499,868
            
            
            397,626
            
            
            165,831
            
            
            2,270
            
            
            —Note
                Receivable
            
            
            1,500,000
            
            
            —
            
            
            —
            
            
            —
            
            
            —Marketable
                Prototype
            
            
            1,765,000
            
            
            1,765,000
            
            
            —
            
            
            —
            
            
            —Total
                Assets
            
            
            5,742,260
            
            
            6,859,464
            
            
            441,684
            
            
            72,114
            
            
            2,349Accounts
                Payable
            
            
            259,652
            
            
            582,161
            
            
            78,377
            
            
            89,030
            
            
            —Note
                Payable
            
            
            —
            
            
            —
            
            
            850,000
            
            
            1,225
            
            
            —Total
                Liabilities
            
            
            312,688
            
            
            588,699
            
            
            974,233
            
            
            96,163
            
            
            —Total
                Stockholders Equity
              (Deficit)
            
            
            5,429,572
            
            
            6,270,765
            
            
            (532,549
            )
            
            (24,049
            )
            
            2,349Long
                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 2006 and Form 10-KSB in 2005 and any Current Reports
      on
      Form 8-K filed by the Company.


23


**Business
      Overview**





XsunX
      is
      a thin-film photovoltaic (“TFPV”) company that intends to grow its business by
      manufacturing TFPV amorphous solar modules and selling them into what we believe
      is a high growth solar market opportunity. Our decision to pursue this strategy
      is based on our three years of research in the design and use of technologies
      for the manufacture of TFPV solar cells utilizing amorphous silicon. During
      this
      time we have developed the technical capabilities, qualified core staff, and
      market understanding that we believe will be necessary to establish product
      manufacturing infrastructure and take our product to market.




We
      have
      designed a 125 peak watt TFPV solar module utilizing glass substrates and a
      proprietary semiconductor manufacturing system which employs the design of
      a
      high-throughput, automated, continuous process to produce solar modules in
      commercial quantities. We believe that these key processes 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.




Our
      plan
      for growth is to build and operate a TFPV solar module manufacturing facility
      in
      the state of Oregon. Employing a phased roll-out of manufacturing capacities
      our
      baseline production system is scheduled for installation in mid calendar year
      2008, the installation of our first 25MW line is scheduled near the end of
      calendar 2008, and the installation of our 4 th 25MW
      line is scheduled for early 2010. In anticipation of commercial production,
      we
      have begun to market our TFPV solar module under the brand name of the XsunX
      ASI-120. Furthermore, we have successfully developed and implemented a pre-sales
      reservation program for system installers and large users of solar.




**Markets**





We
      believe the solar market represents a high growth opportunity nationally and
      internationally, both currently and into the foreseeable future. The global
      demand for electrical energy has experienced significant growth due to growth
      in
      populations and the economic vitality of emerging economies. This has created
      a
      growing need to diversify and establish new sources of electrical production,
      and we believe has created tremendous opportunities for growth in the solar
      market. Within the markets for solar products we anticipate that growth in
      demand for solar products based on TFPV technologies will out perform the
      balance of the solar market.





Macro
      growth drivers for solar energy production products include political support
      and government subsidies, high energy prices, technical progress having led
      to
      cost reductions in manufacturing techniques, and advantages over other renewable
      energy sources including:





•
            Proven,
                commercialized and widely used solar technologies adapting to a host
                of
                applications





•
            Negligible
                environmental impact





•
            Reliability,
                little or no delivery risk





•
            Maximum
                power generation coincides with peak energy demands





•
            Potential
                for distributed point of use generation




Growth
      drivers that we believe may allow TFPV to outpace the balance of the solar
      market include:




•
            Highly
                scalable and automated manufacturing processes





•
            Lower
                material costs and fewer constraints to sufficient material supplies





•
            Lower
                per watt production costs for solar cells and integrated solar modules





Driving
      our solar module manufacturing plan is what we believe to be the ability to
      capitalize on long term growth in solar spurred by increasing electrical energy
      costs and demand. Large markets are developing for commercial operators of
      private solar farms, utilities meeting green mandates, government subsidized
      installations, and operators of large commercial and industrial properties.
      These projects represent large installations typically approaching 1MW or more.


24


While
      we
      believe that the market conditions are excellent for all producers of solar
      products, we intend to deliver thin film solar products that provide extra
      value
      in performance and cost.





**Products**





***Solar
      Modules***




In
      designing our ASI-120 watt module, we interviewed solar systems integrators
      and
      developed a design that we believe provides for a module delivering high power
      output (relative to other thin films), and size and framing that would allow
      for
      the use of many existing mounting systems. In doing so, we believe our modules
      strike a balance between higher rated power silicon wafer modules and lower
      rated power thin film modules. Further, we believe the market will dictate
      retail installed pricing. Systems integrators will look to sell installed watts
      at market dictated prices, and after accounting for certain fixed installation
      costs inherent to each of the different solar technologies, they will drive
      pricing per watt for factory delivered modules to compensate for any added
      installation costs when using certain technologies.




We
      have
      focused on the development of thin film amorphous technologies and products
      due
      to what we perceive as inherent advantages of amorphous silicon over other
      solar
      absorbers in regards to conversion efficiencies. Amorphous silicon produces
      more
      power earlier in the day and later into the evening because it requires less
      incident light than many other technologies. Amorphous silicon also exhibits
      less thermal coefficient degradation effects when operating in hot climates.
      In
      contrast, other thin film and conventional silicon wafer technologies degrade
      at
      significant rates of approximately 10% to 20% conversion loss of peak rated
      performance when operating at normal temperatures of 65 degrees centigrade.




We
      plan
      to deposit two separate solar cell layers of amorphous silicon on to a glass
      substrate. This is to increase the amount of absorbed and converted solar energy
      in our modules. 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 125 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.





**Planned
      Manufacturing Capacities**





***Production
      Line Features***





The
      core
      feature of our plan revolves around the design of an efficient mass production
      system. The design utilizes an in-line vertical glass coating system processing
      two balanced and independent lines simultaneously. This design incorporates
      material handling, cell deposition, laser segmentation, cleaning, and module
      packaging functions necessary to convert an inexpensive piece of 100cm X 160cm
      sheet glass into a complete solar module in less than three hours. Our process
      uses only a fraction of the semiconductor material that would be necessary
      to
      produce crystalline silicon solar modules.





***Phased
      Production Build Out and Planned Capacities***





In
      the
      2008 calendar year, we anticipate completing the assembly and installation
      of a
      small scale baseline production system and initiating construction and
      commissioning our first full scale 25MW system. We further anticipate that
      the
      baseline production system will generate limited solar module production in
      2008
      for use in fueling our sales channel and establish product recognition for
      larger quantity sales in 2009. We anticipate completing the assembly of and
      commissioning our first 25MW line between December 2008 and January 2009. Near
      the end of the 2008 calendar year, we plan to launch the build-out of the first
      of three additional 25MW systems necessary to eventually bring our capacity
      to
      100MW. Barring assembly delays, the first of these lines is slated to come
      on-line in November 2009, the second in January 2010, and the final 25MW in
      March 2010. We intend to use the balance of the 2010 year to continue to work
      to
      improve system utilization, add shifts, and increase module yields to bring
      our
      production to peak capacities of 100MW or more of annualized solar module
      production. To complete each new production line, we plan to use a systematic
      replication process that is designed to enable us to add production lines
      rapidly and efficiently, and achieve operating metrics that are comparable
      to
      the performance of our initial 25MW system.


25


***Production
      Line Planned Utilization and Production Costs***





Each
      system, or line, has an estimated annualized initial module production capacity
      of 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 in 2009, thereby increasing total production capacities per line
      to an anticipated 33MW. Initial per watt production costs during ramp-up of
      operations in the 2009 period are anticipated to be $1.58 per watt. As we
      improve system utilization and production yield in 2009, we anticipate our
      production costs will lower to $1.38 in 2010 and $1.19 in 2011. By continuing
      to
      expand production and improve solar energy conversion efficiencies and
      manufacturing processes, we believe we can further reduce our manufacturing
      costs per watt and improve our cost advantage over traditional crystalline
      silicon solar module manufacturers.





**Sales
      and Marketing**





Driving
      our solar module manufacturing plan is what we believe to be the ability to
      capitalize on long term growth in solar spurred by increasing electrical energy
      costs and demand. Large markets are developing for commercial operators of
      private solar farms, utilities meeting green mandates, government subsidized
      installations, and operators of large commercial and industrial properties.
      These projects represent large installations typically approaching 1MW or more.





Solar
      systems installers looking to satisfy the module needs of these large and long
      term projects are looking for opportunities to secure access to modules
      supplies. We believe that the design and performance of our solar module is
      ideally suited for use in these project types, and we further believe that
      our
      module production capacities can be pre-sold well into the future.





***Target
      Market***





Our
      primary target market for our TFPV solar modules will be applications for
      On-Grid (facilities tied to conventional power distribution infrastructure)
      application of 1MW in size and above. Typical applications and buyers would
      include:





•
            Solar
                Farms





—
            License
                Holders in Germany, Spain & Canada





—
            US
                installers servicing commercial and utility scale installations





•
            Government
                Agencies (DOD)





—
            Bureau
                of Land Management





—
            Department
                of Defense





•
            Power
                Purchase Agreements





—
            Renewable
                Ventures





•
            Utility
                Companies





—
            Meeting
                Green Mandates





•
            Large
                Commercial Installations


26


***Sales
      & Distribution***





In
      anticipation of commercial production, we have developed a pre-sales reservation
      program, based upon the solar module manufacturing industry’s policy of
      pre-selling manufacturing capacity to system installers and large users of
      solar. This is intended to aid in building a sales channel, loading that channel
      with customers interested in purchasing our future module production, and
      developing brand presence and recognition as early as possible. The program
      enables qualified, interested parties to specify the amount of solar module
      capacity they anticipate purchasing at favorable per watt pricing. As of the
      date of this report, we have signed reservation agreements with solar system
      integrators indicating interest in over 100MW of production in calendar 2008,
      2009, 2010. Our agreements provide for the payment of a 5% deposit based on
      the
      2009 calendar year purchase commitment either prior to, or not later than,
      30
      days after the delivery by XsunX to the reserving party of commercial samples
      for evaluation. The information in this paragraph is designed to summarize
      the
      general terms of the pre-sales reservation program and market opportunities.
      It
      is not intended to provide guidance about our future operating results,
      including revenues or profitability.





**Plan
      of Operations**





At
      present, we anticipate the majority of our product and operations development
      efforts for the period ending September 2008 and the foreseeable future
      thereafter, will focus on establishing and expanding facilities necessary to
      manufacture our TFPV solar modules for commercial sale. Areas of specific focus
      and capital expenditures include:





(a)
            Establishment
                of a baseline production system to produce full size (100cm × 160cm)
                sample modules; and





(b)
            Lease
                and preparation of facilities necessary to house and operate, at
                minimum,
                our first of four proposed 25MW manufacturing lines; and





(c)
            The
                placement of orders with select vendors for the core and sub-system
                components necessary to begin assembly leading to the commissioning
                of the
                first of four planned 25MW manufacturing lines; and





(d)
            Continued
                R&D efforts to establish enhanced solar cell deposition methods and
                reduce manufacturing costs.





For
      the
      year ending September 30, 2008 the Company has developed a plan of operations
      requiring approximately $20,080,316 that commits 38% of its budget or
      $12,773,974 towards initial Manufacturing Equipment and Sub-systems, another
      11%
      of its budget or $3,578,594 to General and Administrative functions as well
      as
      working capital needs, another 8% of its budget or $2,725,098 to facilities
      including lease payments and manufacturing lease hold improvements and another
      3% of its budget or $1,002,649 to the development of new manufacturing devices,
      techniques and other research and development. 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 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.





The
      Company will need additional capital to fund its budget. To support the
      completion of the our planned initial 25MW of manufacturing capacity, associated
      production start-up costs, establish a replication process designed to enable
      us
      to add the balance of our proposed 75MW of additional production capacity,
      and
      fund operations as we attempt to generate initial sales and revenues, we may
      seek to obtain additional financing of approximately $25,000,000 from equity
      and/or debt placements. To support these and future operational plans, we may
      elect to attempt to secure loans and/or grants offered by the State of Oregon
      where we intend to establish our manufacturing facilities. No representation
      is
      made that any funds will be available when needed or on terms that acceptable
      to
      the Company. In the event funds cannot be raised when needed, the Company may
      not be able to carry out its business plan, may never achieve sales or income,
      and could fail in business as a result of these uncertainties.


27


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





**Results
      of Operations for the Three Fiscal Years Ended September 30, 2007 Compared
      to
      Fiscal Years Ended September 30, 2006 and 2005**





***Revenue,
      Cost of Goods Sold:***





The
      Company generated insignificant revenues in the period ended September 30,
      2007
      of $6,880. The Company generated revenue of $8,000 for the same period in 2006
      and generated no revenue for the same period in 2005. There were no associated
      costs of goods sold.





***Operating
      Expenses:***





The
      Company incurred expenses totaling $2,648,359 in fiscal year 2007 as compared
      to
      $3,380,087 in 2006 and $1,383,406 in 2005. The decrease of $731,728 was
      primarily driven by non-cash warrant expenses of $625,947 and loan fees of
      $628,834 incurred in 2006 that were not incurred in 2007. For the year 2006
      as
      compared to 2005, the increase of $1,996,681 included a onetime non-cash warrant
      issuance expense of $951,250 for warrants issued in association with the
      licensure of technologies and the sale by the Company of convertible debentures,
      and a net increase of $486,833 in loan fee expenses associated with the sale
      by
      the Company of convertible dentures.





Excluding
      these non-cash items, there was an increase in normal and customary operating
      expense of $523,053 for the period ending September 30, 2007 as compared to
      the
      same period 2006. The primary drivers of this increased are discussed in detail
      below.





***Salaries
      and Wages:***





The
      Company hired additional staff to implement its commercialization strategy
      in
      the fiscal year ended September 30, 2007. This increase in staffing resulted
      in
      a total expenditure of $828,711 which is an increase of $553,622 over the same
      period in 2006 and an increase of $119,853 from 2006 to the same period in
      2005.
      The company expects this trend to continue.





***Research
      and Development:***





The
      Company spent $435,534 in research and development activities during the fiscal
      year ended September 30, 2007. This represented a decrease of $513,938 as
      compared to the same period in 2006 and an increase of $448,049 for the year
      2006 versus the same period in 2005. This illustrates the Company’s ramp up of
      research and development expenditures during 2005 and 2006. As the Company
      began
      to focus on commercializing the technology, the related research and development
      expenditures declined in 2007.





***Professional
      Services:***





Consulting
      services were $117,751, an increase of $69,901 for the fiscal year ended
      September 30, 2007 compared to the prior year. This increase was largely driven
      by the expansion of the Company’s Scientific Advisory Board and increased
      contract engineering expenses related to the efforts to commercialization of
      the
      Company’s product. The decrease expenditures for the year ending September 30,
      2006 versus the same period in 2005 was $273,094 which resulted primarily from
      the replacement of outside consultants with employees.





Legal
      and
      Accounting fees increased $162,185 to $302,478 for the fiscal year ended
      September 30, 2007. This increase was primarily the result of legal work
      relating to the Company’s attempted acquisition of manufacturing assets, and
      from enforcing the Company’s contact rights with several vendors. Legal and
      accounting fees were relatively flat for the year ending September 30, 2006
      as
      compared to the same period in 2005, an increase of $33,044.


28


***Travel:***





Travel
      and associated expenses were $158,503 for the fiscal year ended September 30,
      2007. This represents an increase of $116,680 as compared to the same period
      in
      2006 and an increase of $30,589 for fiscal year 2006 as compared to the same
      period in 2005. These increases are due to increased travel directed at sales
      and business development efforts.





***Other
      Operating Expenses:***





Additionally,
      advertising expenses were $47,573 for the fiscal year 2007, an increase of
      $38,523 for the same period in 2006, an increase of $5,071 for the same period
      in 2005. This increase resulted from the Company’s increased efforts to generate
      sales.





Insurance
      expenses were $66,856 for the fiscal year ended September 30, 2007, an increase
      of $64,151 from the prior period. This increase was primarily caused by
      increased coverage and the addition of a directors and officers insurance
      package. The increase of $1,947 between the fiscal years 2006 and 2005 was
      primarily driven by increase coverage levels.





For
      the
      fiscal year ended September 30, 2007, the Company’s consolidated net loss was
      $(1,289,497) as compared to $(3,441,940) for the same period ended September 30,
      2006 and $(1,400,839) for the same period ended September 30, 2005. The
      decreased net loss in 2007 was primarily related to i) $1,100,000 non-operating
      settlement of an asset purchase agreement which resulted in cash inflow and
      a
      non-operating income ii) a decreased operating expenses of $731,728 as discussed
      above, iii) increased interest income of $164,699 resulting for the loan to
      Sencera and iv) decreased interest expense with the conversion of outstanding
      debentures into equity in 2006. This resulted in a net loss per was of $(0.01)
      for the twelve months ended September 30, 2007.





The
      increase of $2,041,101 between the 2006 and 2005 periods resulted from a one
      time non-cash warrant issuance expense of $951,250 for warrant expenses
      accounted for in the period ended September 30, 2006, and a net increase of
      $486,833 in loan fee expenses associated with the sale by the Company of
      convertible dentures. Excluding the one time non-cash warrant expense and net
      loan fee expenses, in the comparative analysis between the periods, results
      in
      an increase of $578,017 in net loss for the period ended September 30, 2006
      as
      compared to the same period 2005. The net loss per share was less than $(0.02)
      for the twelve month period ended September 30, 2006 and $(0.01) for the same
      period in 2005.





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 has an accumulated deficit totaling
      ($10,460,850) at September 30, 2007.





**Liquidity
      and Capital Resources**





Working
      Capital at September 30, 2007 was $1,515,437 as compared to $4,065,524 for
      the
      same period in 2006 and as compared to a working capital (deficit) of $(718,380)
      at September 30, 2005. There were insignificant operating cash flows totaling
      $6,880 during the twelve months ended September 30, 2007 and $8,000 in the
      same
      period in 2006 and zero in the same period in 2005.





Cash
      and
      cash equivalents at September 30, 2007 were $1,828,125 a decrease of
      $(2,826,098) from the same period in 2006. Cash and cash equivalents at
      September 30, 2006 were $4,654,223, an increase of $4,398,370 from September
      30,
      2005.





During
      the year ended, September 30, 2007, the Company used $1,289,497 net cash in
      operating activities as compared to $1,942,278 net cash in operating activities
      for the year ending September 30, 2006 and compared to using $1,049,650 net
      cash
      for the year ended, September 30, 2005.





The
      Company used $843,416 for operating activities during the year ended September
      30, 2007 as compared to $1,942,278 for the same period in 2006. The decrease
      of
      $1,098,862 resulted primarily from a reduced net loss of $2,152,443 offset
      by
      warrant expense and issuance of common stock for interest of $867,330, change
      in
      pre-paid expenses of $563,871 and to accounts payable of $826.293.





The
      increase of $892,628 in use of cash for operating activities between the 2006
      and 2005 periods resulted from one time non-cash expenses for a warrant issuance
      expense of $951,250, an expense of $31,500 for the issuance of stock in lieu
      of
      cash for services, and $241,383 in expenses for the issuance of stock in lieu
      of
      cash for the payment of accrued interest associated with the sale of debentures
      by the Company accounted for in the period ended September 30, 2006. Excluding
      these one time non-cash expenses, in the comparative analysis between the
      periods, results in a decrease of $331,505 in net cash used in operations for
      the period ended September 30, 2006 compared to the same period 2005. This
      decrease of net cash used in operations was primarily due to a decrease in
      consulting expenses of $273,094 in the 2006 period.


29


For
      the
      twelve months ended, September 30, 2007, the Company’s capital needs have
      primarily been met from the proceeds of (i) the issuance of Common Stock for
      Debenture conversion and; (ii) the issuance of Common Stock for warrant
      conversion. Total cash provided by financing activities for the period ended
      September 30, 2007 decreased to $135,000. For the period ended September 30,
      2006 total cash provided by financing activity increased to $8,171,250 from
      $1,380,170 for the same period ended September 30, 2005. The decrease of
      $8,036,250 is a result of financing activity in fiscal year 2006 that was not
      required to execute on the business plan in 20007. Additionally, $135,000 was
      received by the Company for 900,000 warrants that were exercised by a
      consultant. The increase of $6,791,080 between the 2006 and 2005 periods was
      mainly attributable to an increase of $5,000,000 from the conversion of a
      debenture into common stock and $3,171,250 in the conversion of warrants for
      common stock.





On
      November 1, 2007, XsunX signed a $21 million common stock purchase agreement
      with Fusion Capital Fund II, LLC, an Illinois limited liability Company (“Fusion
      Capital”). 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. Under the registration
      rights agreement, we agreed to file a registration statement related to the
      transaction with the U.S. Securities & Exchange Commission (“SEC”) covering
      the shares that have been issued or may be issued to Fusion Capital under the
      common stock purchase agreement. After the SEC has declared effective the
      registration statement related to the transaction we have the right over a
      25-month period to sell our shares of common stock to Fusion Capital, from
      time
      to time, in amounts up to $1 million per sale, depending on certain conditions
      as set forth in the agreement, up to the full aggregate commitment of $21
      million.





The
      purchase price of the shares related to the $20 million balance of future
      funding will be based on the prevailing market prices of the Company’s shares at
      the time of sales without any fixed discount, 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 of 1933.





The
      proceeds received by the Company under the common stock purchase agreement
      are
      expected to be used to build an initial base production system delivering full
      size commercial quality solar modules, and initiate the manufacture of the
      first
      of four (4) planned 25 megawatt systems under the Company’s planned 100 megawatt
      thin film solar module production facility. Proceeds may also be used to lease
      and prepare manufacturing facilities with the necessary support systems for
      the
      manufacturing line, inventory, staff, and general working capital.





Contractual
      Obligations are shown in the following table -


30





**Contractual
                Obligations**
            
            **Payments
                Due by Period******
            
            **Total**
            
            **Less
                than**
              **1
                Year**
            
            **1 - 3**
              **Years**
            
            **3 - 5**
              **Years**
            
            **More
                than**
              **5
                Years**Long
                Term Obligations
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Capital
                Lease
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Operating
                Lease(1)
            
            
            37,118
            
            
            21,008
            
            
            16,110
            
            
            —
            
            
            —Purchase
                Obligations(2),(3)
            
            
            492,345
            
            
            492,345
            
            
            —
            
            
            —
            
            
            —Other
                Long Term Liabilities Reflected on the Registrant’s Balance Sheet Under
                GAAP
            
            
            —Total
            
            
            529,463
            
            
            513,353
            
            
            16,110
            
            
            —
            
            
            —




(1)
            Operating
                Lease Obligations consist of the lease on the Company’s Administrative and
                Sales facility in Golden, CO.





(2)
            Remaining
                accounts payable associated with the production a roll to roll cassette
                cluster tool providing plasma enhanced chemical vapor deposition
                (PECVD)
                and sputtering system of $353,000.





(3)
            Estimated
                remaining amount due a third party research and development provider
                of
                $139,345.





The
      estimated contract cost in item (2) and (3) above may be higher or lower based
      on final costs. The Company has not booked any contingency for cost overruns.





During
      the year ended, September 30, 2007, we used $1,822,942 for investing activities
      as compared to $2,099,736 for the same period ended September 30, 2006. This
      represents a decrease of $276,794 primarily related to the purchase of fewer
      fixed assets in 2007 than in the previous year and the purchase of the
      marketable manufacturing tool in 2006 which reduced 2007 expenditures. This
      difference was offset by the investment of $1,500,000 and associated accrued
      interest income in the Sencera Note. During the year ended, September 30, 2006,
      we used $2,099,736 for investing activities as compared to $191,995, for the
      year ended, September 30, 2005. The increased use of cash for investing
      activities resulted from an increase in the acquisition of assets in the form
      of
      a marketable manufacturing tool and additional equipment.





We
      had,
      at September 30, 2007, working capital of $1,515,437. The Company has announced
      plans to build its manufacturing facility which we anticipate will lead to
      revenue after the close of fiscal year 2008. However the cash flow requirements
      associated with 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 if necessary.





**Net
      Operating Loss**





For
      federal income tax purposes, we have net operating loss carry forwards of
      approximately $10,960,721 as of September 30, 2007. 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.




**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.


31


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.




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





None




**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 Securities Exchange Act of 1934, as amended
      (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. 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.




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.





**Internal
      Control over Financial Reporting**





The
      Securities and Exchange Commission 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. The Company
      has
      an internal control frame work based on COSO Internal Control - Integrated
      Framework that has been modified to more appropriately reflect the current
      limited operational scope of the company as a Development Stage, smaller public
      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 first half of the Company's fiscal year ending September 30, 2008 management
      will continue revising the Company's internal and controls procedure document
      basing this revision upon additional guidance for implementing the model
      framework created by the Committee of Sponsoring Organizations of the Treadway
      Commission (or "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
      Securities and Exchange Commission 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.


32


As
      of
      September 30, 2007, the Company’s board of directors had one outside director
      and did not have an audit committee of the board of directors. Additional
      outside directors were appointed in November of 2007. The newly expanded board
      of directors will appoint committees as necessary, including an audit committee.





**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, 2007, the
      Company maintained effective internal control over financial reporting. Jaspers
      + Hall, PC, an independent registered public accounting firm, who audited and
      reported on the consolidated financial statements of the Company included in
      the
      report on the financial statements on page 47.




33




**XSUNX,
      INC.**


**(A
      Development Stage Company)**


***JASPERS
      + HALL, PC***


*CERTIFIED
      PUBLIC ACCOUNTANTS*





***9175
      E. Kenyon Avenue, Suite 100***


***Denver,
      CO 80237***


***303-796-0099***





**REPORT
      OF REGISTERED INDEPENDENT PUBLIC ACCOUNTING FIRM**





Board
      of
      Directors


XSUNX,
      INC.


Aliso
      Viejo, CA





We
      have
      audited management’s assessment, included in the accompanying Management’s
      Report on Internal Control over Financial Reporting, that Xsunx, Inc. maintained
      effective internal control over financial reporting as of September 30, 2007,
      based on criteria established in Internal Control — Integrated
      Framework issued by the Committee of Sponsoring Organizations of the Treadway
      Commission (the COSO criteria). Xsunx, Inc.’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.
      Our responsibility is to express an opinion on management’s assessment and an
      opinion on the effectiveness of the company’s internal control over financial
      reporting based on our audit.





We
      conducted our audit 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 audit included obtaining an understanding of internal control
      over
      financial reporting, evaluating management’s assessment, testing and evaluating
      the design and operating effectiveness of internal control, and performing
      such
      other procedures as we considered necessary in the circumstances. We believe
      that our audit provides 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, management’s assessment that Xsunx, Inc. maintained effective internal
      control over financial reporting as of September 30, 2007, is fairly stated,
      in
      all material respects, based on the COSO criteria. Also, in our opinion, Xsunx,
      Inc. maintained, in all material respects, effective internal control over
      financial reporting as of September 30, 2007, based on the COSO criteria.





We
      also
      have audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the accompanying consolidated balance sheets
      of
      Xsunx, Inc. as of September 30, 2005, 2006, and 2007, and the related
      consolidated statements of income, stockholders’ equity, and cash flows for the
      years then ended, and our report dated December 28, 2007 expressed an
      unqualified opinion thereon.




December
      28, 2007




34




**Item
      9B. Other Information**





**Sale
      of Unregistered Securities and Financing Agreement**





On
      November 1, 2007, XsunX signed a $21 million common stock purchase agreement
      with Fusion Capital Fund II, LLC, an Illinois limited liability Company (“Fusion
      Capital”). 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. Under the registration
      rights agreement, we agreed to file a registration statement related to the
      transaction with the U.S. Securities & Exchange Commission (“SEC”) covering
      the shares that have been issued or may be issued to Fusion Capital under the
      common stock purchase agreement. After the SEC has declared effective the
      registration statement related to the transaction we have the right over a
      25-month period to sell our shares of common stock to Fusion Capital, from
      time
      to time, in amounts up to $1 million per sale, depending on certain conditions
      as set forth in the agreement, up to the full aggregate commitment of $21
      million.





The
      purchase price of the shares related to the $20 million balance of future
      funding will be based on the prevailing market prices of the Company’s shares at
      the time of sales without any fixed discount, 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 of 1933.





The
      proceeds received by the Company under the common stock purchase agreement
      are
      expected to be used to build an initial base production system delivering full
      size commercial quality solar modules, and initiate the manufacture of the
      first
      of four (4) planned 25 megawatt systems under the Company’s planned 100 megawatt
      thin film solar module production facility. Proceeds may also be used to lease
      and prepare manufacturing facilities with the necessary support systems for
      the
      manufacturing line, inventory, staff, and general working capital.


35


**Changes/Additions
      to the Board of Directors**





***Addition — Mr.
      Oz Fundingsland as Director***




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.




***Addition — Dr.
      Michael A. Russak as Director***





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 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.





**Stock
      Compensation, Grant of Stock Purchase Options**





As
      part
      of a plan for the Company to provide incentives to employees and consultants,
      and attract new employees and members to its Board of Directors the Company
      engages in a policy of providing stock option grants. Between the period
      beginning October 1, 2007 and the date of this report, the board of directors
      authorized the grant of options to purchase an aggregate of 3,800,000 shares
      of
      the Company’s common stock. Such options are exercisable at the price of $.36
      per share, and expire at various times through November 2012.





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 23rd 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:


36





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.





(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, 2007.





(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.





The
      vesting schedule for Mr. Fundingsland is:


37


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.





(*)
      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:





(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.





**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, 2007:





**Name**
            
            **Age**
            
            **Position
                Held**
            
            **Tenure**Tom
                Djokovich
            
            50
            
            President,
                CEO, Director
            
            Since
                October 2003Joseph
                Grimes
            
            50
            
            COO
            
            Since
                April 2006Jeff
                Huitt
            
            46
            
            CFO
            
            Since
                January 2007Thomas
                Anderson
            
            39
            
            Director
            
            Since
                August 2001





The
      directors named above will serve until the next annual meeting of the Company’s
      stockholders. Thereafter, directors will be elected for one-year terms at the
      annual stockholders’ meeting. Officers will hold their positions at the pleasure
      of the board of directors. There is no arrangement or understanding between
      the
      directors and officers of the Company and any other person pursuant to which
      any
      director or officer was or is to be selected as a director or officer.





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.


38


**Biographical
      Information**





***TOM
      DJOKOVICH, age 50, 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.





***JOSEPH
      GRIMES, age 50, Chief Operating Officer as of April 2006;***





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.





***JEFF
      HUITT, age 46, 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 and holds two degrees from the University of Denver: a Bachelor of
      Science in Accounting and a Master’s in Business Administration.





***THOMAS
      ANDERSON, age 42, became a director of the Company in August 2001;***





Mr.
      Anderson presently works as the Managing Director of the Environmental Science
      and Engineering Directorate of Qinetiq North America in Los Alamos, New Mexico.
      He has been with Qinetiq North America, formerly Apogen Technologies, since
      January, 2005. Mr. Anderson has worked for past 18 years in the environmental
      consulting field, providing consulting services in the areas of environmental
      compliance, characterization and remediation services to Department of Energy,
      Department of Defense, and industrial clients. He formerly worked as a Senior
      Environmental Scientist at Concurrent Technologies Corp. from November 2000
      to
      December 2004. He earned his B.S. in Geology from Denison University and his
      M.S. in Environmental Science and Engineering from Colorado School of Mines.





**Board
      Committees**





As
      of
      September 30, 2007, the Company’s board of directors had one outside director
      and did not have any board committees. Additional outside directors were
      appointed in November of 2007. The newly expanded board of directors intends
      to
      appoint committees as necessary.


39


**Compliance
      with Section 16(A) of the Exchange Act**





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 Securities
      and Exchange Commission (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 received by it,
      or
      written representations received from certain Reporting Persons, the following
      persons were required to file forms pursuant to Section 16(a):





**Name**
            
            **Form**
            
            **Filed**Tom
                Djokovich
            
            Form
                3
            
            October
                24, 2003Joseph
                Grimes
            
            Form
                3
            
            December
                21, 2007Jeff
                Huitt
            
            Form
                3
            
            Did
                not fileThomas
                Anderson
            
            Form
                3
            
            Did
                not fileMichael
                Russak
            
            Form
                3
            
            Did
                not fileOs
                Fundingsland
            
            Form
                3
            
            Did
                not file




**Item
      11. Executive Compensation**





**Director
      Compensation**





In
      the
      fiscal period ended September 2007 Directors received no cash compensation
      for
      their service to the Company as directors, but were reimbursed for expenses
      actually incurred in connection with attending meetings of the Board of
      Directors.





**SUMMARY
      COMPENSATION TABLE OF DIRECTORS**





**Name**
            
            **Annual**
              **Retainer**
              **Fees
                ($)**
            
            **Meeting**
              **Fees
                ($)**
            
            **Consulting**
              **Fees/**
              **Other
                Fees ($)**
            
            **Number
                of**
              **Shares
                (#)**
            
            **Number
                of**
              **Securities**
              **Underlying**
              **Options**
              **SARS
                (#)**Director,
                Tom Djokovich
            
            $
            0
            
            $
            0
            
            $
            0
            
            
            0
            
            
            0Director,
                Thomas Anderson
            
            $
            0
            
            $
            0
            
            $
            0
            
            
            0
            
            
            0





**Executive
      Officer Compensation**





The
      annual compensation for the executive officers of the Company for the post
      reorganization operations has not yet been determined, but is expected to be
      established by a resolution of the Company’s Board of Directors in the future.





The
      following table and notes set forth the annual cash compensation paid to
      officers of the Company.


40





**Name
                & Principal Position**
            
            **Fiscal**
              **Year**
            
            **Annual**
              **Salary**
              **($)**
            
            **Annual**
              **Bonus**
              **($)**
            
            **Awards**
              **Other**
              **Annual**
              **Compensation**
              **($)**
            
            **Restricted**
              **Stock**
              **Award(s)**
              **($)**
            
            **Securities**
              **Underlying**
              **Options/SARS**
              **(#)**Tom
                Djokovich, President(1)
            
            
            2007
            
            $
            150,000
            
            
            0
            
            
            0
            
            
            0
            
            
            02006
            
            $
            150,000
            
            
            0
            
            
            0
            
            
            0
            
            
            02005
            
            $
            150,000
            
            
            0
            
            
            0
            
            
            0
            
            
            0Joseph
                Grimes, COO(2)
            
            
            2007
            
            $
            150,000
            
            
            0
            
            
            0
            
            
            0
            
            
            500,0002006
            
            $
            150,000
            
            
            0
            
            
            0
            
            
            0
            
            
            612,0002005
            
            $
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0Jeff
                Huitt, CFO(3)
            
            
            2007
            
            $
            135,000
            
            
            0
            
            
            0
            
            
            0
            
            
            500,0002006
            
            $
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            02005
            
            $
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0




(1)
            In
                the fiscal period ended September 30, 2007, the Company agreed to
                pay Mr.
                Djokovich an annual salary of $150,000 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.
                Effective November 2007 the Company agreed to increase Mr. Djokovich
                annual salary to $220,000. When necessitated by the Company’s adverse
                financial condition Mr. Djokovich has agreed to the deferment of
                his
                monthly salary up to and until such time that the Company can repay
                any
                such deferred amounts.





(2)
            The
                Company has agreed to pay Mr. Grimes an annual salary of $150,000
                for
                services provided as Chief Operating Officer under the terms of an
                employment agreement effective January 1, 2007. In addition to Mr.
                Grimes
                base compensation the Company also provides Mr. Grimes with a $400
                monthly
                health insurance allowance. Effective November 2007, the Company
                agreed to
                increase Mr. Grimes annual salary to $210,000.





(3)
            The
                Company has agreed to pay Mr. Huitt an annual salary of $135,000
                for
                services provided as Chief Financial Officer under the terms of an
                employment agreement effective January 1, 2007. In addition to Mr.
                Huitts
                base compensation the Company also provides Mr. Huitt with a $400
                monthly
                health insurance allowance. Effective November 2007, the Company
                agreed to
                increase Mr. Huitt’s annual salary to $155,000.





**Option/SAR
      Grants Table**





(None)





**Aggregated
      Option/SAR Exercises in Last Fiscal Year an FY-End Option/SAR Value**




(None)




**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 2007 fiscal period.





**Date**
              **Issued**
            
            **Number**
              **Issued**
            
            **Exercise**
              **Price**
            
            **Expiration**
              **Date**
            
            **Consideration**Joseph
                Grimes(1)
            
            5-Apr-06
            
            112,000
            
            $
                1.69
            
            5-Apr-11
            
            As
                part of an employment incentive agreementJoseph
                Grimes(2)
            
            20-Jul-06
            
            500,000
            
            $
                0.51
            
            20-Jul-11
            
            As
                part of an employment incentive agreementJoseph
                Grimes(3)
            
            26-Jan-07
            
            500,000
            
            $
                0.46
            
            26-Jan-12
            
            As
                part of an employment incentive agreementJeff
                Huitt(4)
            
            26-Jan-07
            
            500,000
            
            $
                0.46
            
            26-Jan-12
            
            As
                part of an employment incentive agreement


41




(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.





(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 or licensure
                of
                an XsunX technology under the marketing plan.





(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 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/licensure of an XsunX
                system.





(4)
            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/licensure of an XsunX
                system.





No
      other
      compensation not described above was paid or distributed during the last fiscal
      year to the executive officers of the Company. There are no compensatory plans
      or arrangements, with respect to any executive office of the Company, which
      result or will result from the resignation, retirement or any other termination
      of such individual’s employment with the Company or from a change in control of
      the Company or a change in the individual’s responsibilities following a change
      in control.




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





The
      following table sets forth, as of the date of this Report, 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 December 28, 2007. 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
              
              
              10.87
              %Thomas
                  Anderson(3)
                Director
              
              
              1,161,067
              
              
              0.70
              %Oz
                  Fundingsland(3)
                Director
              
              
              62,500
              
              
              0.03
              %Mike
                  Russak(3)
                Director
              
              
              87,500
              
              
              0.05
              %Joseph
                  Grimes(3)
                Chief
                  Operating Officer
              
              
              664,000
              
              
              0.40
              %Jeff
                  Huitt(3)
                Chief
                  Financial Officer
              
              
              200,000
              
              
              0.12
              %




42






All
      directors and executive officers as a group of (6 persons) account for ownership
      of 20,078,067 shares representing 12.19% 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 164,752,188 shares of common stock
                issued
                and outstanding as of December 28, 2007. Beneficial ownership is
                determined in accordance with the rules of the Securities and Exchange
                Commission and generally includes voting or investment power with
                respect
                to securities. Shares of common stock that are currently exercisable
                or
                exercisable within 60 days of December 28, 2007 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 December 28, 2007.




**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.




**Item
      14. Principal Accounting Fees and Services**




The
      Company’s Board acts as the audit committee and had no “pre-approval policies
      and procedures” in effect for the auditors’ engagement for the audit year 2005,
      2006 and 2007.




All
      audit
      work was performed by the auditors’ full time employees.




Michael
      Johnson & Co., LLC, formerly auditors for the Company, was dismissed as
      auditor on July 18, 2005. Jaspers + Hall, PC were engaged as auditors for
      Company on July 18, 2005.




Jaspers
      +
      Hall, PC, is now the Company’s principal auditing accountant firm. The Company’s
      Board of Directors has considered whether the provision of the audit services
      is
      compatible with maintaining Jaspers + Hall, PC independence.





**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. No other fees we billed by
      Jaspers + Hall, PC in the period ended September 30, 2007.




43




**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-QSB for the periods ended
      December 31, April 30, and June 30, 2006. No other fees we billed by Jaspers
      +
      Hall, PC in the period ended September 30, 2006.





**Audit
      Fees 2005:**




As
      of the
      period ended September 30, 2005 Jaspers + Hall, PC had billed the Company $1,500
      for the following professional services: review of the interim financial
      statements included in quarterly reports on Form 10-QSB for the periods ended
      June 30, 2005 and annual financial statements included in annual reports on
      Form
      10-KSB for the period ended September 30, 2005. No other fees we billed by
      Jaspers + Hall, PC in the period ended September 30, 2006.




The
      Company’s previous auditor, Michael Johnson & Co, LLC, billed the Company
      $7,500 for the following professional services: audit of the annual financial
      statement of the Company for the fiscal year ended September 30, 2004, review
      of
      the interim financial statements included in quarterly reports on Form 10-QSB
      for the periods ended December 31, 2004, March 31, 2005.




The
      Company’s Board acts as the audit committee and had no “pre-approval policies
      and procedures” in effect for the auditors’ engagement for the audit year 2005,
      2006, and 2007.




**PART
      IV**





**Item
      15. Exhibits, Financial Statement Schedules**




1.
      The
      following is a list of Current Reports filed by the Company in the fiscal year
      ended September 30, 2007. These reports are filed as part of this report:




**Reports
                on Form 8-K:**
            
            **Date
                Filed**Report
                on Form 8-K related to the Company entering into a corporative developmentagreement,
                the licensure of certain plasma deposition technologies, and the
                issuance
                of a$1.5
                million dollar line of credit to Sencera, LLC.
            
            1/3/2007Report
                on Form 8-K related to the adoption of the Company’s 2007 Stock Option
                Plan
            
            1/5/2007Report
                on Form 8-K related to the Company entering into four employment
                agreements, a consulting agreement, and the issuance of five incentive
                option agreements.
            
            2/13/2007Report
                on Form 8-K related to the Company entering into a consulting agreement
                and the issuance of an incentive option agreement.
            
            2/28/2007Report
                on Form 8-K related to the Company entering into a binding letter
                of
                intent to
              purchase
                certain solar module manufacturing assets.
            
            3/28/2007Report
                on Form 8-K related to the Company entering into a consulting agreement
                and the issuance of an incentive option agreement.
            
            4/25/2007Report
                on Form 8-K related to the Company’s issuance of a press release providing
                up date information related to the Company’s efforts to develop solar
                module manufacturing
              capabilities.
            
            7/18/2007Report
                on Form 8-K related to the Company’s entering into a settlement agreement
                with the seller of certain solar module manufacturing assets related
                to
                the Company’s claims of an alleged breach by the seller of a binding
                letter of intent between the parties.
            
            8/28/2007Report
                on Form 8-K related to the Company entering into a consulting agreement
                and the issuance of an incentive option agreement.
            
            8/31/2007Report
                on Form 8-K related the Company’s completion of funding a $1.5 million
                dollar secured note under the terms of a promissory note and a technology
                license and development agreement.
            
            9/14/2007Report
                on Form 8-K related to the exercise by a consultant of
                warrants.
            
            9/19/2007




44




The
      following is a list of Current Reports on Form 8-K filed by the Company
      subsequent to the fiscal year ended September 30, 2007. These reports are filed
      as part of this report:




Report
                on Form 8-K related the Company’s issuance of three incentive option
                grants to employees.
            
            10/29/2007Report
                on Form 8-K related to the Company’s issuance of an option grant a
                director.
            
            10/29/2007Report
                on Form 8-K and 8-KA related to the Company entering into a stock
                purchase
                and financing agreement.
            
            11/2/2007Report
                on Form 8-KA related to clarifying and correcting certain specifics
                to
                reports filed in November 2, 2007 related to the Company entering
                into a
                stock purchase and financing
              agreement.
            
            11/5/2007Report
                on Form 8-K related to a press release announcing the Company’s entering
                into a stock purchase and financing agreement.
            
            11/7/2007Report
                on Form 8-K related to the appointment of a new director, the issuance
                of
                an option grant to the director, and an amendment to a previous option
                grant to a director.
            
            11/14/2007Report
                on Form 8-K related to the appointment of a new director and the
                issuance
                of a stock option grant to the director.
            
            11/28/2007


**2.
      Exhibits:**




**Exhibit**
            
            **Description**3.1
            
            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)




45




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)31.1
            
            Sarbanes-Oxley
                Certification31.2
            
            Sarbanes-Oxley
                Certification32.1
            
            Sarbanes-Oxley
                Certification32.2
            
            Sarbanes-Oxley
                Certification





(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.




46


(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.





(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.




47




**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:****March
                28, 2008**
            **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*
            
            March
                28, 2008*Tom
                Djokovich, President, Chief Executive Officer,*
              *Principal
                Executive Officer and Director**/s/
                Jeff Huitt*
            
            March
                28, 2008*Jeff
                Huitt, Chief Financial Officer and Principal*
              *Financial
                and Accounting Officer*





48





**INDEPENDENT
      AUDITOR'S REPORT**





Board
      of
      Directors


XSUNX,
      INC.


Aliso
      Viejo, CA





We
      have
      audited the accompanying balance sheets of XSUNX, Inc., (formerly Sun River
      Mining, Inc.) (A Development Stage Company) as of September 30, 2004 and 2003,
      and the related statements of operations, cash flows, and stockholders' equity
      for the years ended September 30, 2004 and 2003 and for the period from February
      25, 1997 (inception) to September 30, 2004. 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.




We
      conducted our audits “in accordance with the standards of the Public Company
      Accounting Oversight Board (United States)” as outlined in PCAOB Auditing
      Standard No. 1. Those standards require that we plan and perform the audit
      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. An audit
      also includes assessing the accounting principles used and significant estimates
      made by management, as well as evaluating the overall financial statement
      presentation. We believe that our audits provide a reasonable basis for our
      opinion.




In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the financial position of XSUNX, INC., (formerly Sun River
      Mining, Inc.) at September 30, 2004 and 2003 and the results of their operations
      and their cash flows for the years ended September 30, 2004 and 2003 and for
      the
      period from February 25, 1997 (inception) to September 30, 2004 in conformity
      with accounting principles generally accepted in the United States.




The
      accompanying financial statements have been prepared assuming that the Company
      will continue as a going concern. As discussed in Note 3 to the financial
      statements, conditions exist which raise substantial doubt about the Company's
      ability to continue as a going concern unless it is able to generate sufficient
      cash flows to meet its obligations and sustain its operations. Management's
      plans in regard to these matters are also described in Note 3. The financial
      statements do not include any adjustments that might result from the outcome
      of
      this uncertainty.




/s/
      Michael Johnson & Co., LLC


Michael
      Johnson & Co., LLC


Denver,
      Colorado


February
      24, 2005


May
      5,
      2005





49





**XSUNX,
      INC.**


**(A
      Development Stage Company)**


**FINANCIAL
      STATEMENTS**


**September
      30, 2007, 2006 and 2005**





***JASPERS
      + HALL, PC***


*CERTIFIED
      PUBLIC ACCOUNTANTS*





***9175
      E. Kenyon Avenue, Suite 100***


***Denver,
      CO 80237***


***303-796-0099***





**REPORT
      OF REGISTERED INDEPENDENT PUBLIC ACCOUNTING FIRM**





Board
      of
      Directors


XSUNX,
      INC.


Aliso
      Viejo, CA





We
      have
      audited the accompanying balance sheets of XSUNX, Inc., (formerly Sun River
      Mining, Inc). (A Development Stage Company) as of September 30, 2005, 2006,
      and
      2007, and the related statements of operations, cash flows, and stockholders’
equity for the years then ended. These financial statements are the
      responsibility of the Company’s management. Our responsibility is to express an
      opinion on these financial statements based on our audit.




We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes assessing the accounting principles used
      and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audits provide a
      reasonable basis for our opinion.




In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the financial position of XSUNX, INC., (formerly Sun River
      Mining, Inc.) at September 30, 2005, 2006, and 2007 and the results of their
      operations and their cash flows for the years then ended, in conformity with
      accounting principles generally accepted in the United States.




The
      financial statements for the period February 25, 1997 (inception) to September
      30, 2004, were audited by other accountants, whose report dated May 5, 2005
      expressed an unqualified opinion on those statements. They have not performed
      any auditing procedures since that date and our opinion, insofar as it relates
      to those amounts, is based solely on the report of the other auditors.
      .




Denver,
      CO


December
      28, 2007


/s/
      Jaspers + Hall, PC


Jaspers
      +
      Hall, PC


Denver,
      Colorado


December
      28, 2007





50





**XSUNX,
      INC.**


**(A
      Development Stage Company)**


**BALANCE
      SHEETS**




**(Audited)**
              **September 30,**
              **2007**
            
            **(Audited)**
              **September 30,**
              **2006**
            
            **(Audited)**
              **September 30,**
              **2005****ASSETS:**Current
                assets:Cash
            
            $
            1,773,748
            
            $
            4,305,105
            
            $
            175,869Prepaid
                Expenses
            
            
            54,377
            
            
            349,118
            
            
            79,984Total
                current assets
            
            
            1,828,125
            
            
            4,654,223
            
            
            255,853Fixed
                assets:Office
                & Misc. Equipment
            
            
            39,437
            
            
            9,774
            
            
            2,270Research
                and Development Equipment
            
            
            532,795
            
            
            392,301
            
            
            181,995Leasehold
                Improvement
            
            
            89,825
            
            
            80,492Total
                Fixed Assets
            
            
            662,057
            
            
            482,567
            
            
            184,265Less
                Depreciation
            
            
            (162,189
            )
            
            (84,941
            )
            
            (18,434
            )Total
                fixed assets
            
            
            499,868
            
            
            397,626
            
            
            165,831Other
                assets:Patents/Trade
                Marks
            
            
            
            
            
            40,000
            
            
            20,000Security
                Deposit
            
            
            5,815
            
            
            2,615Accrued
                Interest Receivable
            
            
            143,452Note
                Receivable
            
            
            1,500,000Marketable
                Prototype
            
            
            1,765,000
            
            
            1,765,000Total
                other assets
            
            
            3,414,267
            
            
            1,807,615
            
            
            20,000**Total
                Assets**
            
            $
            5,742,260
            
            $
            6,859,464
            
            $
            441,684**LIABILITIES
                AND STOCKHOLDERS’ EQUITY:****Current
                Liabilities:**Accounts
                Payable
            
            $
            259,652
            
            $
            582,161
            
            $
            78,377Accrued
                Expenses
            
            
            53,036
            
            
            6,538
            
            
            45,856Current
                Portion of Note Payable
            
            
            
            
            
            
            
            
            850,000Total
                current liabilities
            
            
            312,688
            
            
            588,699
            
            
            974,233**Stockholders’
                Equity:**Preferred
                Stock, par value $0.01 per share; 50,000,000 shares authorized; no
                shares
                issued and outstandingTreasury
                Stock, no par value; no shares where issued oroutstandingCommon
                Stock, no par value; 500,000,000 shares authorized; 157,919,856 shares
                issued and outstanding at September 30, 2007 and 157,019,856 shares
                were
                issued and outstanding at September 30, 2006
            
            
            13,563,869
            
            
            13,290,869
            
            
            3,996,735Paid
                in Capital — Common Stock Warrants
            
            
            2,326,553
            
            
            2,151,250
            
            
            1,200,000Deficit
                accumulated during the development stage
            
            
            (10,460,850
            )
            
            (9,171,354
            )
            
            (5,729,284
            )Total
                stockholders’ profit (deficit)
            
            
            5,429,572
            
            
            6,270,765
            
            
            (532,549
            )**Total
                Liabilities and Stockholders’ Equity**
            
            $
            5,742,260
            
            $
            6,859,464
            
            $
            441,684






*The
      Accompanying Notes Are an Integral Part of These Financial
      Statements.*





51





**XSUNX,
      INC.**


**(A
      Development Stage Company)**


**STATEMENTS
      OF OPERATIONS**


**(Audited)**


**Years Ended September 30,**
              
              **Feb.
                  25, 1997**
                **(Inception)
                  to**
                **September 30,******
              
              **2007**
              
              **2006**
              
              **2005**
              
              **2007****Revenues:**Service
                  Income
              
              $
              6,880
              
              $
              8,000
              
              
              
              
              $
              14,880Other
                  Income
              
              
              
              
              
              
              
              
              
              
              
              —Total
                  Revenue
              
              
              6,880
              
              
              8,000
              
              
              —
              
              
              14,880**Expenses:**Advertising
              
              
              47,573
              
              
              9,050
              
              
              3,979
              
              
              60,602Bank
                  Charges
              
              
              973
              
              
              294
              
              
              500
              
              
              3,880Conferences
                  & Seminars
              
              
              14,725
              
              
              11,267
              
              
              25,992Consulting
              
              
              117,751
              
              
              47,850
              
              
              320,944
              
              
              1,510,584Depreciation
              
              
              77,248
              
              
              82,941
              
              
              18,435
              
              
              181,802Directors’
                  Fees
              
              
              
              
              
              
              
              
              
              
              
              11,983Due
                  Diligence
              
              
              
              
              
              
              
              
              
              
              
              45,832Equipment
                  Rental
              
              
              
              
              
              
              
              
              
              
              
              1,733Filing
                  Fees
              
              
              2,185
              
              
              4,625
              
              
              1,800
              
              
              8,610Impairment
                  loss
              
              
              923,834Insurance
              
              
              66,856
              
              
              2,705
              
              
              758
              
              
              70,319Legal
                  & Accounting
              
              
              302,478
              
              
              140,293
              
              
              107,249
              
              
              738,380Licenses
                  & Fees
              
              
              90
              
              
              20
              
              
              25
              
              
              6,545Loan
                  Fees
              
              
              
              
              
              628,834
              
              
              115,000
              
              
              741,834Meals
                  & Entertainment
              
              
              
              
              
              
              
              
              
              
              
              4,119Miscellaneous
              
              
              1,691
              
              
              1,882
              
              
              1,675
              
              
              7,378Office
                  Expenses
              
              
              15,086
              
              
              4,581
              
              
              2,634
              
              
              41,500Patent
                  Fees
              
              
              1,181
              
              
              625
              
              
              663
              
              
              2,469Postage
                  & Shipping
              
              
              8,327
              
              
              1,123
              
              
              2,161
              
              
              14,828Printing
              
              
              9,860
              
              
              8,730
              
              
              4,300
              
              
              28,470Public
                  Relations
              
              
              79,831
              
              
              182,151
              
              
              116,413
              
              
              489,361Recruitment
                  Expenses
              
              
              47,064
              
              
              
              
              
              
              
              
              47,064Research
                  & Development
              
              
              435,534
              
              
              949,472
              
              
              501,423
              
              
              2,015,922Rent
              
              
              66,702
              
              
              19,858
              
              
              9,000
              
              
              112,523Salaries
              
              
              828,711
              
              
              275,089
              
              
              155,236
              
              
              1,759,122Subscription
                  Reports
              
              
              6,103
              
              
              2,895
              
              
              860
              
              
              9,858Taxes
              
              
              4,180
              
              
              
              
              
              
              
              
              8,837Telephone
              
              
              22,301
              
              
              12,318
              
              
              5,489
              
              
              74,923Transfer
                  Agent Expense
              
              
              
              
              
              411
              
              
              3,628
              
              
              20,365Travel,
                  Meals & Entertainment
              
              
              158,503
              
              
              41,823
              
              
              11,234
              
              
              274,493Utilities
              
              
              8,103
              
              
              
              
              
              
              
              
              8,103Abandoned
                  Equipment
              
              
              
              
              
              
              
              
              
              
              
              808Option/Warrant
                  Expense
              
              
              325,303
              
              
              951,250
              
              
              
              
              
              2,476,553**Total
                  Operating Expenses**
              
              
              2,648,359
              
              
              3,380,087
              
              
              1,383,406
              
              
              11,728,626




*The
      Accompanying Notes Are an Integral Part of These Financial
      Statements.*




52


**Years Ended September 30,**
                
                **Feb. 25, 1997**
                  **(Inception) to**
                  **September 30,**
                  **2007******
                
                **2007**
                
                **2006**
                
                **2005****Other
                    (Income) Expense**Interest
                    Expense
                
                
                1,197
                
                
                158,333
                
                
                17,433
                
                
                248,560Interest
                    Income
                
                
                (253,179
                )
                
                (88,480
                )
                
                
                
                
                (341,682
                )Legal
                    Settlement
                
                
                (1,100,000
                )
                
                
                
                
                
                
                
                (1,100,000
                )Forgiveness
                    of Debt
                
                
                —
                
                
                —
                
                
                —
                
                
                (59,773
                )**Total
                    Other Income/Expense**
                
                
                (1,351,982
                )
                
                69,853
                
                
                17,433
                
                
                (1,252,895
                )**Net
                    (Loss)**
                
                $
                (1,289,497
                )
                $
                (3,441,940
                )
                $
                (1,400,839
                )
                $
                (10,460,850
                )**Per
                    Share Information:**Basic
                    and DilutedWeighted
                    average number of common shares outstanding
                
                
                156,680,076
                
                
                138,005,964
                
                
                123,854,733**Net
                    Loss per Common Share**
                
                $
                (0.01
                )
                $
                (0.02
                )
                $
                (0.01
                )




*The
      Accompanying Notes Are an Integral Part of These Financial
      Statements.*





53





**XSUNX,
      INC.**


**(A
      Development Stage Comapny)**


**STATEMENT
      OF STOCKHOLDERS’ EQUITY (Deficit)**


**September
      30, 2007**


**(Audited)**


**Treasury Stock**
              
              **Common Stock**
              
              **Paid in**
                **Capital**
                **Common**
                **Stock**
                **Warrants**
              
              **Deficit**
                **Accumulated**
                **During****the**
                **Exploration**
                **Stage**
              
              **Totals******
              
              **# of Shares**
              
              **Amount**
              
              **#
                  of Shares**
              
              **Amount**Inception
                  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
              )
              
              335,834Issuance
                  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
              )
              
              2,350Issuance
                  of stock for cash
              
              
              —
              
              
              —
              
              
              2,737,954
              
              
              282,670
              
              
              —
              
              
              —
              
              
              282,670Issuance
                  of Common Stock Warrants
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              1,200,000
              
              
              —
              
              
              1,200,000




*The
      Accompanying Notes Are an Integral Part of These Financial
      Statements.*




54




**Treasury
                  Stock**
              
              **Common Stock**
              
              **Paid in**
                **Capital**
                **Common**
                **Stock**
                **Warrants**
              
              **Deficit**
                **Accumulated**
                **During
                  the**
                **Exploration**
                **Stage**
              
              **Totals******
              
              **#
                  of Shares**
              
              **Amount**
              
              **# of Shares**
              
              **Amount**Net
                  Loss for Year
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (1,509,068
              )
              
              (1,509,068
              )**Balance — September
                  30, 2004**
              
              
              
              
              
              
              
              
              114,036,102
              
              
              3,104,396
              
              
              1,200,000
              
              
              (4,328,445
              )
              
              (24,049
              )Issuance
                  of stock for cash
              
              
              —
              
              
              —
              
              
              6,747,037
              
              
              531,395
              
              
              —
              
              
              —
              
              
              531,395Issuance
                  of stock for services
              
              
              —
              
              
              —
              
              
              3,093,500
              
              
              360,945
              
              
              —
              
              
              —
              
              
              360,945Issuance
                  of stock for collateral
              
              
              26,798,418
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Net
                  Loss for Year
              
              
              
              
              
              
              
              
              —
              
              
              —
              
              
              —
              
              
              (1,400,839
              )
              
              (1,400,839
              )**Balance — September
                  30, 2005**
              
              
              26,798,418
              
              
              —
              
              
              123,876,639
              
              
              3,996,735
              
              
              1,200,000
              
              
              (5,729,284
              )
              
              (532,549
              )Issuance
                  of stock for services
              
              
              —
              
              
              —
              
              
              72,366
              
              
              31,500
              
              
              —
              
              
              —
              
              
              31,500Issuance
                  of Common Stock Warrants
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              951,250
              
              
              —
              
              
              951,250Issuance
                  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
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (3,441,940
              )
              
              (3,441,940
              )**Balance
                  September 30, 2006**
              
              
              26,798,418
              
              
              —
              
              
              157,169,856
              
              
              13,290,869
              
              
              2,151,250
              
              
              (9,171,354
              )
              
              6,270,765Cancelation
                  of Stock for Services Returned
              
              
              
              
              
              
              
              
              (150,000
              )
              
              (12,000
              )
              
              
              
              
              
              
              
              (12,000
              )Release
                  of Security Collateral
              
              
              (26,798,418
              )Issuance
                  of Stock for Warrants - Jim Bentley
              
              
              
              
              
              
              
              
              900,000
              
              
              285,000
              
              
              (150,000
              )
              
              
              
              
              135,000Stock
                  Option/Warrant Expense
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              325,303
              
              
              
              
              
              325,303Net
                  Loss for Year
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,289,497
              )
              
              (1,289,497
              )**Balance
                  September 30, 2007**
              
              
              —
              
              $
              —
              
              
              157,919,856
              
              $
              13,563,869
              
              $
              2,326,553
              
              $
              (10,460,850
              )
              
              5,429,572




*The
      Accompanying Notes Are an Integral Part of These Financial
      Statements.*




55





**XSUNX,
      INC.**


**(A
      Development Stage Company)**


**STATEMENT
      OF CASH FLOWS**


**(Audited)**




**Years
                  Ended September 30,**
              
              **Feb. 25, 1997**
                **(Inception) to**
                **September 30,**
                **2007******
              
              **2007**
              
              **2006**
              
              **2005****Cash
                  Flows from Operating Activities:**Net
                  Loss
              
              $
              (1,289,497
              )
              $
              (3,441,940
              )
              $
              (1,400,839
              )
              $
              (10,460,850
              )Issuance
                  of Common Stock for Services
              
              
              (12,000
              )
              
              31,500
              
              
              50,827
              
              
              1,336,998Issuance
                  of Common Stock for LoanInducement
              
              
              
              
              
              
              
              
              310,117
              
              
              310,117Option/Warrant
                  Expense
              
              
              325,303
              
              
              951,250
              
              
              
              
              
              2,476,553Issuance
                  of Stock for Interest
              
              
              
              
              
              241,383
              
              
              
              
              
              241,383Depreciation
              
              
              77,248
              
              
              82,941
              
              
              18,435
              
              
              162,189Adjustments
                  to reconcile net loss to cash used in operating activities:
              
              
              
              
              
              
              
              
              
              
              
              —(Increase)
                  in Deferred Financing Costs
              
              
              
              
              
              
              
              
              
              
              
              —(Increase)
                  Accounts Receivable
              
              
              
              
              
              
              
              
              
              
              
              —(Increase)
                  Security Deposit
              
              
              (3,200
              )
              
              (2,615
              )
              
              
              
              
              (5,815
              )(Increase)
                  in Prepaid Expense
              
              
              294,741
              
              
              (269,133
              )
              
              (60,115
              )
              
              (54,377
              )(Decrease)
                  in Accounts Payable
              
              
              (322,509
              )
              
              503,784
              
              
              (10,653
              )
              
              259,652Increase
                  (Decrease) in Accrued Liabilities
              
              
              86,498
              
              
              (39,448
              )
              
              42,578
              
              
              53,036Net
                  Cash Flows Used for Operating Activities
              
              
              (843,416
              )
              
              (1,942,278
              )
              
              (1,049,650
              )
              
              (5,681,114
              )**Cash
                  Flows from Investing Activities:**Purchase
                  of Fixed Assets
              
              
              (179,490
              )
              
              (314,736
              )
              
              (181,995
              )
              
              (662,057
              )Purchase
                  of Marktable Prototype and Patent
              
              
              —
              
              
              (1,785,000
              )
              
              (10,000
              )
              
              (1,765,000
              )Note
                  Receivable
              
              
              (1,500,000
              )
              
              
              
              
              
              
              
              (1,500,000
              )Accrued
                  Interest earned
              
              
              (143,452
              )
              
              
              
              
              
              
              
              (143,452
              )Net
                  Cash Flows Used for Investing Activities
              
              
              (1,822,942
              )
              
              (2,099,736
              )
              
              (191,995
              )
              
              (4,070,509
              )**Cash
                  Flows from Financing Activities:**Proceeds
                  from Notes Payable — Stockholder
              
              
              
              
              
              
              
              
              3,775
              
              
              —Payment
                  for Note Payable — Stockholder
              
              
              
              
              
              
              
              
              (5,000
              )
              
              —Proceeds
                  from Warrant Conversion
              
              
              
              
              
              3,171,250
              
              
              
              
              
              3,171,250Procceds
                  from Debenture Conversion
              
              
              
              
              
              5,000,000
              
              
              
              
              
              5,000,000Proceeds
                  from Convertible Debt
              
              
              
              
              
              
              
              
              850,000
              
              
              —Issuance
                  of Common Stock for Warrants
              
              
              135,000
              
              
              
              
              
              
              
              
              135,000Issuance
                  of Common Stock for cash
              
              
              
              
              
              
              
              
              531,395
              
              
              3,219,121Net
                  Cash Flows Provided by Financing Activities
              
              
              135,000
              
              
              8,171,250
              
              
              1,380,170
              
              
              11,525,371Net
                  Increase (Decrease) in Cash
              
              
              (2,531,358
              )
              
              4,129,236
              
              
              138,525
              
              
              1,773,748Cash
                  and cash equivalents — Beginning of period
              
              
              4,305,105
              
              
              175,869
              
              
              37,344
              
              
              —**Cash
                  and cash equivalents — End of period**
              
              $
              1,773,748
              
              $
              4,305,105
              
              $
              175,869
              
              $
              1,773,748




*The
      Accompanying Notes Are an Integral Part of These Financial
      Statements.*




56


**Years Ended September 30,**
              
              **Feb. 25, 1997**
                **(Inception) to**
                **September 30,**
                **2007******
              
              **2007**
              
              **2006**
              
              **2005****Supplemental Disclosure of Cash
                  Flow Information**Cash
                  Paid During the Year for:Interest
              
              $
              1,197
              
              
              
              
              
              
              
              $
              72,543Income
                  Taxes
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              —**NON-CASH
                  TRANSACTIONS**Common
                  stock issued (returned) in exchange for services
              
              $
              (12,000
              )
              $
              31,500
              
              $
              50,827
              
              $
              1,336,998Conversion
                  of debt for StockCommon
                  Stock Issued for Loan Inducement
              
              
              
              
              
              
              
              $
              310,117
              
              $
              310,117Common
                  Stock Issued for Interest
              
              
              
              
              $
              241,383
              
              
              
              
              $
              241,383




*The
      Accompanying Notes Are an Integral Part of These Financial
      Statements.*





57




**XSUNX,
      INC.**


**(A
      Development Stage Company)**


**Notes
      to Financial Statements**


**September
      30, 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 that has spent the last three
      years in focused research with a photovoltaic material called Amorphous Silicon.
      During this time, the Company has developed the technical capabilities,
      qualified core staff, and market understanding that it believes will be
      necessary to complete the development of its products and establish product
      manufacturing infrastructure. The products that the Company intends to produce
      and market are amorphous silicon solar modules on glass panels.




Utilizing
      this experience and the collective body of intellectual property we have
      developed, or evaluated as suitable or advantageous for use, we have designed
      a
      120 watt thin film amorphous silicon solar module and a proprietary
      semiconductor manufacturing system to produce these modules in commercial
      quantities. We anticipate the manufacture of our solar modules, employing the
      design of our high-throughput production lines in an automated continuous
      process, will provide manufacturing costs significantly less than those of
      traditional crystalline silicon solar module manufacturers, and be highly
      competitive with other thin film offerings.




The
      company has included the audit report of our prior auditor, Michael Johnson
      and
      Co., LLC for the years ending September 30, 2003 and 2004.  This audit
      report was relied upon by our current auditors, Jaspers+Hall to express an
      opinion on the financial statements from inception (February 25, 1997) to
      date.  The going concern opinion in the Michael Johnson audit relate to the
      fiscal year ended September 30, 2004 which was appropriate for that
      period.  The more audit opinions relating to the fiscal year ended
      September 30, 2007 does not include a going concern opinion.




**Note
      2 — Summary of Significant Accounting Policies:**





***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.





58











**XSUNX,
      INC.**


**(A
      Development Stage Company)**


**Notes
      to Financial Statements**


**September
      30, 2007**




**Note
      2 — Summary of Significant Accounting
      Policies:  – (continued)**





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.
      Actual results could differ from those




***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, 2007, 2006 and 2005, 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





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





***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 are
      17,312,000 issued options/warrants outstanding as of September 30, 2007 that
      are
      potentially dilutive of which 8,768,167 are currently vested.




59


**XSUNX,
      INC.**


**(A
      Development Stage Company)**


**Notes
      to Financial Statements**


**September
      30, 2007**





**Note
      2 — Summary of Significant Accounting
      Policies:  – (continued)**





***Advertising***




Advertising
      costs are expensed as incurred. Total advertising costs were $47,573, $9,050
      and
      $3,979 for the years ended September 30, 2007, 2006 and 2005, respectively.





***Research
      and Development***




Research
      and development costs are expensed as incurred. Total research and development
      costs were $435,534, $949,472 and $501,423 for the years ended September 30,
      2007, 2006 and 2005, respectively.





***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***




XsunX
      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. XsunX
      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.




XsunX
      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. XsunX
      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
      17,312,000 options and warrants issued of which 8,768,167 are vested. The
      exercise price range for the Company’s options and warrants are $0.15 to $1.69.
      The weighted average remaining life of the option and warrant grants range
      from
      .3 years to 4.9 years. We have based our expected volatility on the historical
      performance of our stock adjusted for extreme periods of volatility that
      resulted from unusual events. The range of volatility for our options and
      warrants is 53 to 86 based on the specific grant. 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 2007 was $325,303, increasing basic loss
      $.002 per share.




60


**XSUNX,
        INC.**
 **(A
        Development Stage Company)**
 **Notes
        to Financial Statements**
 **September
        30, 2007**
 
 **Note
        3 — 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 carryforwards 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 $10,960,721 at the approximate tax effect of 40%.
        There are no other material deferred tax assets or liabilities of the Company
        as
        of September 30, 2007.
 
 **2007**
              
              **2006**
              
              **2005**Deferred
                  Tax Assets
              
              $
              4,384,288
              
              $
              3,858,490
              
              $
              2,291,714Deferred
                  Tax LiabilitiesValuation
                  allowance
              
              $
              4,384,288
              
              $
              3,858,490
              
              $
              2,291,714Net
                  Deferred tax assets
              
              $
              0
              
              $
              0
              
              $
              0
 
 At
        September 30, 2007, the Company had net operating loss carry forwards of
        approximately, $10,960,721 for federal income tax purposes. These carry forwards
        if not utilized to offset taxable income will begin to expire in 2010.
 
 **Note
        4 — Capital Stock Transactions:**
 
 The
        authorized capital stock of the Company was established at 500,000,000 shares
        with no par value.
 In
        the
        fiscal year ended September 30, 2005, the Company issued a total of 9,818,631
        shares of common stock as follows: 6,735,137 shares of common stock were
        issued,
        raising gross proceeds of $531,396; 474,231 shares of common stock were issued
        in transactions for consulting services valued at $40,000; and 2,609,263
        shares
        of common stock were issued in connection with the sale of an $850,000 secured
        convertible debenture by the Company.
  In
        the
        fiscal year ended September 30, 2006, the Company issued a total of 33,293,217
        shares of common stock as follows: 33,120,851 shares of common stock registered
        pursuant to an effective registration statement were issued pursuant to the
        conversion of secured convertible debentures, raising gross proceeds of
        $9,294,133; 72,366 shares of common stock were issued for consulting services
        valued at $31,500; and 100,000 shares of common stock were issued in connection
        with the exercise of 100,000 warrants bearing an exercise price of $.15 each.
  The
        following represents a detailed analysis of the 2007 capital stock transactions.
  61
  **XSUNX,
        INC.**
 **(A
        Development Stage Company)**
 **Notes
        to Financial Statements**
 **September
        30, 2007**
 
 **Note
        4 — Capital Stock Transactions: - (continued)**
 
 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. As a result of the return
        and cancellation of these shares, the Company recorded a credit to expenses
        in
        the amount of $12,000 and a debit to paid in capital of $12,000 for the period
        ending March 31, 2007. The $12,000 represents one half of the monetary value
        expensed by the Company in the period in which the shares were issued.
  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 periods
        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
        5 — Employment and Consulting Agreements:**
 
 Effective
        January 1, 2007, XsunX, Inc. entered into two year Employment Agreements
        with
        the following individuals:
 
 Joseph
                  Grimes
              
              
              Chief
                  Operating Officer
              
              $
              150,000.00Jeff
                  Huitt
              
              
              Chief
                  Financial Officer
              
              $
              135,000.00Robert
                  Wendt
              
              
              Vice
                  President of Engineering
              
              $
              150,000.00Kurt
                  Laetz
              
              
              Vice
                  President of Global Sales
              
              $
              120,000.00
              (1)
  (1)
              Effective
                  September 2007 Kurt Laetz terminated his employment agreement and
                  employment with the Company.
  Effective
        January 26, 2007, XsunX entered into a two year Consulting and Advisory
        Agreement with Dr. John Moore to become the Chairman of the Company’s Scientific
        Advisory Board. The Company compensates Dr. Moore $1,500 per month for his
        services.
  Effective
        February 22, 2007, XsunX entered into a two year Consulting and Advisory
        Agreement with Dr. Edward Yu to become a member of the Company’s Scientific
        Advisory Board. The Company compensates Dr. Moore $1,000 per month for his
        services.
  62
  **XSUNX,
        INC.**
 **(A
        Development Stage Company)**
 **Notes
        to Financial Statements**
 **September
        30, 2007**
 
 **Note
        5 — Employment and Consulting Agreements: -
        (Continued)**
 
 Effective
        April 23, 2007, XsunX entered into a two year Consulting and Advisory Agreement
        with Dr. Richard Ahrenkiel to become a member of the Company’s Scientific
        Advisory Board. The Company compensates Dr. Moore $1,000 per month for his
        services.
  Effective
        August 28, 2007, XsunX entered into a two year Consulting and Advisory Agreement
        with Dr. Michael Russak to become a member of the Company’s Scientific Advisory
        Board. The Company compensates Dr. Moore $1,000 per month for his services.
 
 **Note
        6 — Stock Options and Warrants:**
 
 ***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-Based
        Compensation***
  Effective
        September 30, 2007, XsunX adopted SFAS No. 123(R), (“Share-Based Payment” (SFAS
        No. 123(R)). This statement replaces SFAS No. 123, “Accounting for Stock-Based
        Compensation” (SFAS No. 123) and supersedes APB No. 25. SFAS No. 123(R) requires
        that all stock-based compensation be recognized as an expense in the financial
        statements and that such cost be measured at the fair value of the grant.
        This
        statement was adopted using the modified prospective method of application,
        which requires us to recognize compensation expense on a prospective basis.
        Therefore, prior period financial statements have not been restated. Under
        this
        method, in addition to reflecting compensation expense for new share-based
        grants, expense is also recognized to reflect the remaining service period
        of
        grants that had been included in pro-forma disclosures in prior periods.
  XsunX
        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,
        XsunX
        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.
  XsunX
        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, XsunX
        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
        17,312,000 options and warrants issued of which 8,768,167 are vested. The
        exercise price range for the Company’s options and warrants are $0.15 to $1.69.
        The weighted average remaining life of the option and warrant grants range
        from
        .3 years to 4.9 years. We have based our expected volatility on the historical
        performance of our stock adjusted for extreme period of volatility that resulted
        from unusual events. The range of volatility for our options and warrants
        is 53
        to 86 based on the specific grant. 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 2007 was $325,303, increasing basic loss
        $.002 per share.
  63
  **XSUNX,
        INC.**
 **(A
        Development Stage Company)**
 **Notes
        to Financial Statements**
 **September
        30, 2007**
 
 **Note
        6 — Stock Options and
        Warrants: – (continued)**
 
 ***Warrant
        Grants***
  There
        were no Warrants issued by the Company in the year ended September 30, 2007.
 
 ***Stock
        Option Plan Grants***
  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 1,950,000 remain authorized. 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.
  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.
  64
  **XSUNX,
        INC.**
 **(A
        Development Stage Company)**
 **Notes
        to Financial Statements**
 **September
        30, 2007**
 
 **Note
        6 — Stock Options and
        Warrants:  – (continued)**
  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 $325,303 for the issuance
        of the
        above described warrants and stock options.
  65
  **XSUNX,
        INC.**
 **(A
        Development Stage Company)**
 **Notes
        to Financial Statements**
 **September
        30, 2007**
  **Note
        6 — Stock Options and
        Warrants:  – (continued)**
 
 A
        summary
        of option and warrant activity for the years ended September 30, 2007, 2006
        and
        2005 is as follows:
  **Number of**
                **Options/**
                **Warrants**
              
              **Weighted-**
                **Average**
                **Exercise**
                **Price**
              
              **Accrued**
                **Options/**
                **Warrants**
                **Exercisable**
              
              **Weighted-**
                **Average**
                **Exercise Price**Outstanding,
                  September 30, 2004
              
              
              8,000,000
              
              $
              0.15
              
              
              5,500,000
              
              $
              0.15Granted
                  2005
              
              
              7,125,000
              
              $
              0.17
              
              
              6,708,334
              
              $
              0.17Exercisable
                  from 2004 in 2005
              
              
              —
              
              
              
              
              
              1,200,000
              
              
              0.15Outstanding,
                  September 30, 2005
              
              
              15,125,000
              
              $
              0.16
              
              
              13,408,334
              
              $
              0.16Granted
                  2006
              
              
              11,987,000
              
              $
              0.36
              
              
              5,543,000
              
              $
              0.46Exercised
                  2006
              
              
              (4,375,000
              )
              $
              0.48
              
              
              (4,375,000
              )
              $
              0.48Exercised
                  from 2004 in 2006
              
              
              (100,000
              )
              $
              0.15
              
              
              (100,000
              )
              $
              0.15Exercised
                  from 2005 in 2006
              
              
              (6,375,000
              )
              $
              0.17
              
              
              (6,375,000
              )
              $
              0.17Exercisable
                  from 2004 in 2006
              
              
              —
              
              
              
              
              
              300,000
              
              $
              0.15Exercisable
                  from 2005 in 2006
              
              
              —
              
              
              
              
              
              300,000
              
              $
              0.20Outstanding,
                  September 30, 2006
              
              
              16,262,000
              
              
              
              
              
              8,701,334Granted
                  2007
              
              
              1,950,000
              
              $
              0.46
              
              
              554,167
              
              $
              0.46Exercised
                  2007
              
              
              —
              
              
              
              
              
              —Exercised
                  from 2004 in 2007
              
              
              (900,000
              )
              $
              0.15
              
              
              (900,000
              )
              $
              0.15Exercised
                  from 2005 in 2007
              
              
              —
              
              
              
              
              
              —Exercised
                  from 2006 in 2007
              
              
              —
              
              
              
              
              
              —Exercisable
                  from 2004 in 2007
              
              
              —
              
              
              
              
              
              —Exercisable
                  from 2005 in 2007
              
              
              —
              
              
              
              
              
              116,666
              
              $
              0.20Exercisable
                  from 2006 in 2007
              
              
              —
              
              
              
              
              
              296,000
              
              $
              0.51Outstanding,
                  September 30, 2007
              
              
              17,312,000
              
              $
              0.33
              
              
              8,768,167
              
              $
              0.22
 
 66
 
 **XSUNX,
        INC.**
 **(A
        Development Stage Company)**
 **Notes
        to Financial Statements**
 **September
        30, 2007**
  **Note
        6 — Stock Options and
        Warrants:  – (continued)**
 
 At
        September 30, 2007, the range of option/warrant prices for shares under
        options/warrants not exercised and the weighted-average remaining contractual
        life is as follows:
 **Options/Warrants Outstanding**
                  
                  **Options/Warrants Exercisable****Range 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**$
                      0.15
                  
                  
                  7,000,000
                  
                  $
                  0.15
                  
                  
                  1.9
                  
                  
                  6,000,000
                  
                  $
                  0.15$
                      0.20
                  
                  
                  750,000
                  
                  $
                  0.20
                  
                  
                  0.3
                  
                  
                  750,000
                  
                  $
                  0.20$
                      0.25
                  
                  
                  7,000,000
                  
                  $
                  0.25
                  
                  
                  3.0
                  
                  
                  1,000,000
                  
                  $
                  0.25$
                      0.41
                  
                  
                  100,000
                  
                  $
                  0.41
                  
                  
                  4.9
                  
                  
                  4,167
                  
                  $
                  0.41$
                      0.45
                  
                  
                  100,000
                  
                  $
                  0.45
                  
                  
                  4.6
                  
                  
                  20,833
                  
                  $
                  0.45$
                      0.46
                  
                  
                  1,650,000
                  
                  $
                  0.46
                  
                  
                  4.3
                  
                  
                  500,000
                  
                  $
                  0.46$
                      0.51
                  
                  
                  500,000
                  
                  $
                  0.51
                  
                  
                  3.8
                  
                  
                  352,000
                  
                  $
                  0.51$
                      0.53
                  
                  
                  100,000
                  
                  $
                  0.53
                  
                  
                  4.4
                  
                  
                  29,167
                  
                  $
                  0.53$
                      1.69
                  
                  
                  112,000
                  
                  $
                  1.69
                  
                  
                  3.5
                  
                  
                  112,000
                  
                  $
                  1.6917,312,000
                  
                  
                  
                  
                  
                  
                  
                  
                  8,768,167
 
 **Note
        7 — Marketable Production Machine Acquisition:**
  Subject
        to the terms of the Expanded Use License Agreement dated October 12, 2005
        between XsunX and MVSystems, Inc. the parties are building a first run
        production machine for the purpose of demonstrating certain thin film solar
        cell
        manufacturing technology for commercial viability. As of September 30, 2007
        the
        machine was substantially assembled and was in the process of validating
        operating software, systems operation, and general testing to ascertain
        functionality, suitability for intended use, and safety. Upon completion
        of
        these operations the machine will undergo an acceptance testing procedure
        prior
        to final certification and the ability to market the machine. During this
        period
        of testing and pre-sale, the production machine is being depreciated over
        five
        years using the straight line method. Depreciation on this production machine
        began in mid September 2007. Upon completion of this phase of the production
        machine usage, the parties intend to sell this first machine and have agreed
        to
        a 50/50 split of the net proceeds of the sale of this machine excluding
        production costs and reasonable marketing expenses. Upon the sale of the
        production machine, the asset will be treated as inventory at the depreciated
        asset value at the time of the sale. The valuation of this asset is based
        on the
        contracted delivery price in the Expanded Use License Agreement dated October
        12, 2005. The valuation is reviewed quarterly using replacement cost and
        estimated potential sales price estimates. It is the policy of the Company
        to
        write down the value of this asset if these estimates are less than the current
        book value.
  67
 
 **XSUNX,
        INC.**
 **(A
        Development Stage Company)**
 **Notes
        to Financial Statements**
 **September
        30, 2007**
 
 **Note
        8 — Notes, Commitments, and Contingencies:**
 
 ***Trademark
        Transfer Agreement***
  In
        November 2007, the Company elected not to complete the trademark transfer
        agreement for “POWER GLASS.” The value of the Trademark is minimal given the
        Company’s expanded focus on manufacturing. As a result, $40,000 previous
        recorded as an asset associated with this Trademark were written off effective
        September 30, 2007 and recorded in research and development expense.
 
 ***Operating
        Leases***
  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 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.
  **Rent Schedule**
              
              **Annual**
                **Rate/sf**
              
              **Annualized**
                **Rent**
              
              **Monthly Rent**7/1/06 – 6/30/07
              
              $
              6.75
              
              $
              20,250.00
              
              $
              1,687.507/1/07 – 6/30/08
              
              $
              6.95
              
              $
              20,850.00
              
              $
              1,737.507/1/08 – 6/30/09
              
              $
              7.16
              
              $
              21,480.00
              
              $
              1,790.00
  ***Agreement
        for the Sale of Equipment***
  The
        Company has entered into agreements for the sale of certain vacuum deposition
        technology equipment valued at $41,800,000, excluding royalty payments based
        on
        per watt annualized production totals. The agreements, consisting of a systems
        sale and a royalty based manufacturing license agreement, provide for thin
        film
        photovoltaic production equipment and two product development tools specializing
        in the fabrication of micro-crystalline and amorphous thin film silicon solar
        cells. Manufacture of the product development tools was scheduled to begin
        in
        June 2007 upon receipt of initial payments from the buyer. The Company extended
        the down payment requirement by three months on July 17, 2007. The down payment
        was not received by the due date. As of the date of this report, the Company
        has
        notified the buyer of the termination of the purchase and license agreement.
 
 ***Legal
        Proceedings***
  None
 
 **Note
        9 — Planned Expansion of Business Operations:**
  In
        March
        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.
  68
  **XSUNX,
        INC.**
 **(A
        Development Stage Company)**
 **Notes
        to Financial Statements**
 **September
        30, 2007**
 
 **Note
        10 — 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.
  Use
        of
        the licensed plasma technology by XsunX in any of its planned or future
        processes or products has and continues to be subject to completion of
        development by Sencera, LLC, substantiation of intended performance criteria
        under the agreements, and determination of commercial application suitability
        by
        XsunX.
  As
        of
        September 30, 2007 the current balance of the note receivable was $1,500,000
        plus accrued interest earned of $143,452.
  **Note
        11 — Other Income — Legal Settlement:**
  Effective
        March 23, 2007 XsunX entered into a binding letter of intent (“LOI”) with a
        manufacturer (the “Seller”) of photovoltaic products for the purchase of certain
        net assets of the manufacturer for the amount of five million dollars
        ($5,000,000) USD in a cash transaction.
  On
        or
        about April 27, 2007 the Company was notified by the Seller of a change in
        direction and decision not to complete the sale of assets under the LOI
        agreement. XsunX filed a complaint (“Lawsuit”) against the Seller and related
        entities in the United States District Court for the District of Massachusetts
        on May 10th, 2007, alleging breach of contract and other claims.
  On
        August
        23, 2007 the Seller and XsunX entered into a settlement agreement
        (“Settlement”). The Settlement became effective upon the transfer by the Seller
        to XsunX of one million one hundred thousand dollars USD ($1,100,000) on
        August
        27, 2007.
  Upon
        the
        effectiveness of the Settlement counsel for each of the parties filed with
        the
        United States District Court for the District of Massachusetts a Stipulation
        of
        Dismissal with Prejudice thereby dismissing the Lawsuit with prejudice. Each
        of
        the parties has unconditionally and irrevocably released, waived, and forever
        discharged each other from claims related to the LOI and the Lawsuit.
  69
  **XSUNX,
        INC.**
 **(A
        Development Stage Company)**
 **Notes
        to Financial Statements**
 **September
        30, 2007**
 
 **Note
        12 — Subsequent Events:**
 
 ***Financing***
  On
        November 1, 2007, XsunX signed a $21 million common stock purchase agreement
        with Fusion Capital Fund II, LLC, an Illinois limited liability Company (“Fusion
        Capital”). 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. Concurrently with entering into the
        common
        stock purchase agreement, we entered into a registration rights agreement
        with
        Fusion Capital. Under the registration rights agreement, we agreed to file
        a
        registration statement related to the transaction with the U.S. Securities
&
Exchange Commission (“SEC”) covering the shares that have been issued or may be
        issued to Fusion Capital under the common stock purchase agreement. After
        the
        SEC has declared effective the registration statement related to the transaction
        we have the right over a 25-month period to sell our shares of common stock
        to
        Fusion Capital, from time to time, in amounts up to $1 million per sale,
        depending on certain conditions as set forth in the agreement, up to the
        full
        aggregate commitment of $21 million.
  The
        purchase price of the shares related to the $20 million balance of future
        funding will be based on the prevailing market prices of the Company’s shares at
        the time of sales without any fixed discount, 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
        proceeds received by the Company under the common stock purchase agreement
        are
        expected to be used to build an initial base production system delivering
        full
        size commercial quality solar modules, and initiate the manufacture of the
        first
        of four (4) planned 25 100 megawatt thin film solar module production facility.
        Proceeds may also be used to lease and prepare manufacturing facilities with
        the
        necessary support systems for the manufacturing line, inventory, staff, and
        general working capital.
  ***Changes/Additions
        to the Board of Directors***
  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.
  70
  **XSUNX,
        INC.**
 **(A
        Development Stage Company)**
 **Notes
        to Financial Statements**
 **September
        30, 2007**
 
 **Note
        12 — Subsequent
        Events:  – (continued)**
  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. 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. Dr. Russak is
        currently Executive Director of IDEMA-US, the trade association for the Hard
        Disk Drive Industry. He has published over 90 technical papers, and holds
        23
        U.S. patents.
  ***Executive
        Compensation***
  The
        Board
        of Directors of the Company Authorized Salary Increases effective November
        6,
        2007 for the following individuals:
  Tom
                  Djokovich
              
              Chief
                  Executive Office
              
              $70,000.00
                  Increase to $220,000.00Joseph
                  Grimes
              
              Chief
                  Operating Officer
              
              $60,000.00
                  Increase to $210,000.00Jeff
                  Huitt
              
              Chief
                  Financial Officer
              
              $20,000.00
                  Increase to $155,000.00
 
 ***Stock
        Option Plan Grants***
  As
        part
        of a plan for the Company to provide stock based incentives to employees
        and
        consultants, and attract new employees and members to its board of directors,
        the Company engages in a policy of providing stock option grants. Between
        the
        period beginning October 1, 2007 and the date of this report, the board of
        directors authorized the grant of options to purchase an aggregate of 3,800,000
        shares of the Company’s common stock. Such options are exercisable at the price
        of $.36 per share, and expire at various times through November 2012.
 
 71
  **XSUNX,
        INC.**
 **(A
        Development Stage Company)**
 **Notes
        to Financial Statements**
 **September
        30, 2007**
 
 **Note
        12 — Subsequent
        Events:  – (continued)**
   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 23rd 2007 at an exercise price per share of
        $0.36. The options were issued in a transaction exempt from registration
        pursuant to Section 4(2) of the Securities Act of 1933. The options have
        a 5
        year exercise term 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.
 
 (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 were issued
        in a
        transaction exempt from registration pursuant to Section 4(2) of the Securities
        Act of 1933.The options carry 5 year exercise terms and vest as described
        below:
  72
  **XSUNX,
        INC.**
 **(A
        Development Stage Company)**
 **Notes
        to Financial Statements**
 **September
        30, 2007**
 
 **Note
        12 — Subsequent
        Events:  – (continued)**
 
 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:
  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, 2007.
  (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.
  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.
  (*)
        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 provision of the stock option grant remained the same. The
        vesting schedule for item (b) was amended as follows:
  (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 500,000 shares.
  73
  **XSUNX,
        INC.**
 **(A
        Development Stage Company)**
 **Notes
        to Financial Statements**
 **September
        30, 2007**
 
 **Note
        13 — Financial Accounting Developments:**
 
 ***Recently
        issued Accounting Pronouncements***
  SFAS
        155 — ‘Accounting for Certain Hybrid Financial
        Instruments — an amendment of FASB Statements No. 133 and 140’ This
        Statement, issued in February 2006, amends FASB Statements No. 133, Accounting
        for Derivative Instruments and Hedging Activities, and No. 140, Accounting
        for
        Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.
        This Statement resolves issues addressed in Statement 133 Implementation
        Issue
        No. D1, “Application of Statement 133 to Beneficial Interests in Securitized
        Financial Assets.” This Statement:
  (a)
              Permits
                  fair value remeasurement for any hybrid financial instrument that
                  contains
                  an embedded derivative that otherwise would require bifurcation
 
 (b)
              Clarifies
                  which interest-only strips and principal-only strips are not subject
                  to
                  the requirements of Statement 133
  (c)
              Establishes
                  a requirement to evaluate interests in securitized financial assets
                  to
                  identify interests that are freestanding derivatives or that are
                  hybrid
                  financial instruments that contain an embedded derivative requiring
                  bifurcation
 
 (d)
              Clarifies
                  that concentrations of credit risk in the form of subordination
                  are not
                  embedded derivatives
 
 (e)
              Amends
                  Statement 140 to eliminate the prohibition on a qualifying special-purpose
                  entity from holding a derivative financial instrument that pertains
                  to a
                  beneficial interest other than another derivative financial instrument.
  This
        Statement is effective for all financial instruments acquired or issued after
        the beginning of our first fiscal year that begins after September 15, 2006.
  The
        fair
        value election provided for in paragraph 4(c) of this Statement may also
        be
        applied upon adoption of this Statement for hybrid financial instruments
        that
        had been bifurcated under paragraph 12 of Statement 133 prior to the adoption
        of
        this Statement. Earlier adoption is permitted as of the beginning of our
        fiscal
        year, provided we have not yet issued financial statements, including financial
        statements for any interim period, for that fiscal year. Provisions of this
        Statement may be applied to instruments that we hold at the date of adoption
        on
        an instrument-by-instrument basis.
  The
        Company is currently reviewing the effects of adoption of this statement
        but it
        is not expected to have a material impact on our financial statements.
 
 74
  **XSUNX,
        INC.**
 **(A
        Development Stage Company)**
 **Notes
        to Financial Statements**
 **September
        30, 2007**
 
 **Note
        13 — Financial Accounting
        Developments:  – (continued)**
 
 SFAS
        156 — ‘Accounting for Servicing of Financial Assets — an
        amendment of FASB Statement No. 140’
  This
        Statement, issued in March 2006, amends FASB Statement No. 140, Accounting
        for
        Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
        with respect to the accounting for separately recognized servicing assets
        and
        servicing liabilities. This Statement:
  (1)
              Requires
                  an entity to recognize a servicing asset or servicing liability
                  each time
                  it undertakes an obligation to service a financial asset by entering
                  into
                  a servicing contract in certain situations.
 
 (2)
              Requires
                  all separately recognized servicing assets and servicing liabilities
                  to be
                  initially measured at fair value, if practicable.
 
 (3)
              Permits
                  an entity to choose either the amortization method or the fair
                  value
                  measurement method for each class of separately recognized servicing
                  assets and servicing liabilities.
 
 (4)
              At
                  its initial adoption, permits a one-time reclassification of
                  available-for-sale securities to trading securities by entities
                  with
                  recognized servicing rights, without calling into question the
                  treatment
                  of other available-for-sale securities under Statement 115, provided
                  that
                  the available-for-sale securitiesare
                  identified in some manner as offsetting the entity’s exposure to changes
                  in fair value of servicing assets or servicing liabilities that
                  a servicer
                  elects to subsequently measure at fair value.
 
 (5)
              Requires
                  separate presentation of servicing assets and servicing liabilities
                  subsequently measured at fair value in the statement of financial
                  position
                  and additional disclosures for all separately recognized servicing
                  assets
                  and servicing liabilities.
  Adoption
        of this Statement is required as of the beginning of the first fiscal year
        that
        begins after September 15, 2006. The adoption of this statement is not expected
        to have a material impact on our financial statements.
 
 75