UNITED
STATES


SECURITIES
EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-K




ANNUAL
REPORT PURSUANT TO


THE
SECURITIES EXCHANGE ACT OF 1934




For
the Fiscal Year Ended September 30, 2009




Commission File Number
000-29621




XSUNX,
INC.


(Exact
Name of Registrant as Specified in Its Charter)





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





65 Enterprise, Aliso Viejo,
CA 92656


(Address
of Principal Executive Offices) (Zip Code)




(949)
330-8060


(Registrant’s
Telephone Number)




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




Name of
Each Exchange on which Registered:N/A




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





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





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yeso NOx




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




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




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




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




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




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.) (Check one): Yeso NOx




As of
September 30, 2009, the aggregate market value of the registrant’s common stock
held by non-affiliates of the registrant was approximately $26,983,741 million
based on the closing price as reported on the OTCBB.




As
of January 12, 2010, there were 200,095,217 shares of the registrant’s
company stock outstanding.







XSUNX,
INC.




TABLE
OF CONTENTS





PagePART
      IItem
      1.    Business
              
              1Item
      1A. Risk Factors
              
              5Item
      1B. Unresolved Staff Comments
              
              9Item
      2.    Properties
              
              9Item
      3.    Legal Proceedings
              
              10Item
      4.    Submission of Matters to a Vote of Security
      Holders
              
              10PART
      IIItem
      5. Market for Registrant’s Common Equity, Related Stockholder Matters and
      Issuer Purchases ofEquity
      Securities
              
              11Item
      6.    Selected Financial Data
              
              15Item
      7.    Management’s Discussion and Analysis or Plan of
      Operations
              
              15Item
      7A. Quantitative and Qualitative Disclosures About Market
    Risk
              
              17Item
      8.    Financial Statements and Supplementary
      Data
              
              17Item
      9.    Changes in and Disagreements on Accounting and
      Financial Disclosure
              
              17Item
      9A. Controls and Procedures
              
              18Item
      9B. Other Information
              
              19PART
      IIIItem
      10.  Directors, Executive Officers, and Corporate
      Governance
              
              19Item
      11.  Executive Compensation
              
              21Item
      12.  Security Ownership of Certain Beneficial Owners and Management
      and Related Stockholder Matters
              
              26Item
      13.  Certain Relationships and Related Transactions, and Director
      Independence
              
              26Item
      14.  Principal Accounting Fees and Services
              
              26PART
      IVItem
      15.  Exhibits, Financial Statement Schedules
              
              27Signatures
              
              28Financial
      Statements
              
              F-1









CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS





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




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




PART
I




Item
1. Business.




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





Organization





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





Business
Overview





In the
fiscal year ended September 30, 2009 XsunX modified its previous plans to
directly establish solar module manufacturing infrastructure. We have re-focused
operations on the development of a cross-industry thin film solar manufacturing
concept that we believe provides an opportunity for XsunX to establish a
competitive advantage within the solar industry. Our current efforts are focused
on the combination of highly developed thin film solar processes with
state-of-the-art mature magnetic media thin film manufacturing technologies
derived from the hard disc drive (HDD) industry to improve manufacturing output,
increase cell efficiency and production yields, and lower the costs for the
production of high efficiency Copper Indium Gallium (di) Selenide (CIGS) thin
film solar cells.





It is our
belief that by leveraging the manufacturing processes from the HDD industry and
adapting them to thin-film CIGS solar technologies, we can reduce the cost per
watt for solar to well below $1 per watt, thereby making solar a viable
alternative in the energy field.  Furthermore, it is our belief that
our expertise, experience and the proprietary technology we are developing in
this area will allow us to seek joint ventures with larger companies thereby
generating revenue streams through licensing fees and manufacturing
royalties.





Re-Focus
Plan of Operations





In late
2008, XsunX began investigating the viability of small area CIGS thin film solar
manufacturing technology that would employ the use of high rate thin film
manufacturing techniques successfully used within the magnetic media industry to
produce hard disc drives (HDD).  For decades, the HDD industry has had
to continually improve manufacturing output, and production yields, to lower the
costs for the production of high efficiency magnetic media. In January 2009,
XsunX began working directly with the HDD industry to validate the possibility
of transitioning this manufacturing technology to the thin film photovoltaic
(TFPV) industry and more specifically for the manufacture of CIGS solar
cells.




1


In
February, 2009, XsunX and Intevac, Inc., a leading provider of magnetic
media deposition equipment to the hard disk drive (HDD) industry, began to
collaborate in the development of techniques and equipment for the production of
commercially marketable processes and equipment for the manufacture of
CIGS thin-film solar cells on small area wafers similar in size to
traditional crystalline silicon wafers of approximately 5”
squares.  Through the successful combination of cross-industry
specialties, XsunX plans to develop a new breed of thin film photovoltaic (TFPV)
manufacturing techniques to produce CIGS based thin-film solar
cells.





CIGS Thin Film Solar
Devices





Copper
Indium Gallium (di) Selenide (CIGS) exceeds all other thin film solar cell
performance to date delivering nearly 20% conversions in laboratory
environments. The Nation Renewable Energy Laboratories (NREL) believes that CIGS
solar module efficiencies could easily match silicon performance while costing
less to produce. It is this high efficiency low cost potential for CIGS, and its
wide array of uses and applications, that provides the basis to drive the cost
of energy production for alternative sources to unprecedented new lows. For this
reason NREL views CIGS as a significant solar technology and supports continuous
development and research efforts related to CIGS thin films. XsunX has found
interest in its CIGS program at NREL and is working with NREL to establish a
Cooperative Research and Development Agreement to assist in the
commercialization process.





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





CIGS: Current Manufacturing
Limitations





Current
techniques for the production of CIGS thin films do not leverage stationary
small area, high rate, production technologies which allow for the precise
control of thin film properties. Development and production of CIGS, and many
other thin films like amorphous silicon (a-Si), have focused on the use of large
area substrates or continuous moving roll-to-roll deposition methods. While CIGS
holds the record for best thin film cell performance at nearly 20% in smaller
area devices, scaling these laboratory results to large area devices have proved
costly and difficult, resulting in much lower product
efficiencies.





A number
of manufacturers of CIGS today use large area or continuously moving roll-to-
roll substrates in an effort to mass produce and then cut these large areas up
into smaller wafer sized pieces for use in solar module assemblies. They
sacrifice quality for quantity and the net results are products that deliver
only fractions of the CIGS potential. Others employ manufacturing techniques
that to date have yet to deliver the potential for low cost and high efficiency
CIGS solar cells. Typically most commercially produced CIGS solar cells provide
between 8% to 10% conversion efficiencies which leaves virtually 100% of the
potential efficiencies untapped.





Rapid Small Area Processing
vs. Large Panel Processing





Traditional
economies-of-scale theory dictates that large panel processing decreases costs.
Large volumes or output are achieved with each batch or panel that comes off a
line.  This is particularly true for amorphous silicon (a-Si) where 10
to 50 panels can be simultaneously processed is a single large batch
system.  However, the goal of single cell processing is to achieve
similar production volumes but through speed.  We believe that the
benefits of rapid single cell processing over large panel processing
include.





·
            Factory Floor
      Print:  Large format panels require floor space and while
      real estate is less expensive than in the past the cost is still
      significant.  In contrast single cell processing can be
      conducted in a facility that is significantly
      smaller.  Additionally much of the cost of a large facility is
      the recurring monthly utility bill which amplifies the
      problem.  The cost of a large facility becomes even larger if
      clean rooms are required.


·
            Product
      Acceptability:  CIGS is deposited in a substrate
      configuration and must have a top glass to achieve UL, IEC, and TUV
      certifications.  Without a top glass the product will not meet
      the 20-30 year lifetime typical for the solar industry.  As a
      result the final product panel weight will be significant.  In
      contrast the single cells that are strung together can use a single
      tempered top glass and a thin moisture barrier back sheet (similar to a
      silicon solar cell panel).  Not only is handling of the back
      sheet easier in production the resulting module can be up to ~1/2 the
      weight.


·
            Scrap: With large format
      processing, if there is a problem during processing the entire panel is
      scrapped leading to significant loss of production potential. As a result
      scraping is a significant problem for large format monolithically
      integrated solar panels. For a single cell with an area of approximately
      twenty five square inches (for the 125mm  pseudo square), a
      processing problem results in scraping only about 1.45 Watts of
      product.


·
            Breakage:  Silicon
      solar cells are very thin and fragile. This leads to losses resulting from
      breakage during manufacture and assembly. Our proposed CIGS cell
      deposition is done on stainless steel wafers.  Stainless does
      not break.


·
            Large
      Defects:  A large defect for large area deposition
      anywhere on the panel will require the entire panel to be scrapped because
      that defect will ‘drag’ the rest of the panel to virtually zero
      output.  For single cell production the cell that encountered
      the defect can simply be removed during cell testing and performance
      sorting.


·
            Small Defects or Composition
      Variation:  For a large area substrate, statistically
      there are more small area defects and compositional variations. These
      defects and compositional variations can cause slightly different
      performance from cell to cell across the large format monolithically
      integrated panel.  The result is the entire panel is ‘drug’ down
      to the lowest current cell.  For single cell processing, each
      cell is tested and binned (or sorted) according to efficiency and current
      prior to assembly thereby resulting in a more efficient use of a factories
      potential production capacities.




2




·
            Process
      Control:  While all of the above are significant factors
      to consider when comparing large area to small area production, large area
      process control quite possibly could be the biggest differentiating
      feature between large monolithically integrated panels.  Control
      of the manufacturing process over a large area, even with well controlled
      process such as sputtering has shown significant
    challenges.




CIGS
Experience





Our staff
experience includes nearly 15 years of thin film and CIGS experience in
successful technology development, equipment design, and production of several
million square feet CIGS products in a commercial production
setting.  Our Chief Technology Officer has worked side by side with
leading researchers at NREL and in fact shares an R&D 100 award with NREL
staff for efforts related to CIGS technology development.





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





CIGS: Strategy and
Differentiation





The XsunX
approach is to capitalize on past commercialization experience of CIGS and to
combine this experience with smaller area deposition within high rate hard disk
drive (HDD) equipment. It is anticipated that the combination of these two
principals will lead to solar conversion efficiency approaching that achieved in
laboratories as well as achieving high yield and high throughput, similar to the
HDD industry.





We
are adapting sophisticated high rate production tools from the disk drive
industry with process knowledge from the CIGS and thin film
industry.  By maintaining a relatively small deposition area, we
believe reduces a significant challenge that has faced the CIGS industry in the
past: maintaining cell performance while scaling production.





We
believe that key advantages to the adaptation of high rate HDD technologies to
CIGS thin film manufacture include:





The
Ability to Leverage Previous Commercialization Experience Developed for CIGS
Thin Films and the HDD Industry


•
            Not
      Starting from “Scratch”


•
            Lower
      Cost Re-Tooling of Existing Systems


•
            Maximizing:


ü
            Pre-existing
      Equipment Designs to Speed
Development


ü
            Proven
      High Rate Hard Disk Drive Mass Material and Process Control
      Techniques


ü
            Small
      Area Process Controls to Improve Thin Film
  Quality


ü
            Reducing
      Time to Market Through the Use of Development Systems Sized to Match
      Commercial Production Systems – No Need to Scale System Architecture to
      Achieve Commercial Production





Applications for Thin Film
CIGS Solar Cells





We
believe that high efficiency flexible CIGS solar cells provide an immense
opportunity for use in multiple market segments. The modular format of single
thin film CIGS solar cells offers an opportunity to become the solar building
blocks for a wide variety of applications including:





§
              Replacing Existing Silicon
      Wafers: A virtual drop in replacement for expensive and
      unpredictable silicon wafer costs. We believe this is a vast market
      opportunity to replace aging
technology.


§
              Utility Scale Solar
      Fields: Due to the modular building block aspect of using wafers
      solar module size and power output can be tailored to deliver the needs of
      any size solar farm or application. The constraints of monolithic thin
      film technology no longer limit panel
size.


§
              BIPV Products: High
      performance thin film flexible CIGS wafers can be designed into an array
      of building products including roofing materials, building facades, and
      glass.


§
              Residential Markets:
      Unlike lower performance thin film solutions, high performance CIGS
      modules deliver the energy density necessary to make residential
      applications economical.


§
              Consumer Products: A
      growing array of consumer products from hand held devices to vehicles and
      gadgets of all types have begun to integrate solar. Thin film CIGS wafers
      can be sized to meet the needs of these rapidly growing market
      segments.


3




Sales and
Marketing





We have
developed and have begun to implement a plan to offer joint venture
manufacturing opportunities for regional well funded, manufacturing partners in
a number of industry sectors. To date we have focused primarily on semiconductor
and solar companies. Although XsunX focuses on the development of solar
technology and products, we are not a systems or a machine manufacturer. Our
plan is to license technology we develop that provides for a complete front end
CIGS solar cell manufacturing process coupled with a back end process to convert
the CIGS solar cells into solar modules. We have and intend to continue to
develop relationships with equipment manufacturers that can build systems to our
specifications thereby allowing us to offer turn-key manufacturing solutions to
enable our joint venture companies to manufacturer CIGS small area cells quickly
and inexpensively.





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





Intellectual
Property





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





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





In May
2008 XsunX licensed certain patented and patent-pending technologies from
MVSystems, Inc. providing XsunX a worldwide, non-exclusive, royalty-free,
irrevocable, fully-paid up right and license, with the right to sublicense the
following patents and patent application and any reissues, re-examinations,
divisionals, continuations and extensions thereof: (a) U.S. Patent No. 6,488,777
B2; (b) U.S. Patent No. 6,258,408 B1; and (c) U.S. Patent App. No. 10/905,545
(Pub. No. US 2005/0150542 A1) (together, the “Patents”). The license limits
XsunX to the use of the Patents for the development by XsunX of commercial-grade
(i.e. ., web width 30
cm or more and nominal output exceeding 1 megawatt/year based on 1 shift
operation) solar cells, photovoltaic technologies, solar cell panels and methods
of manufacture. The license grants XsunX exclusive ownership of any improvements
made by XsunX to the licensed patents. In April 2009 the Company received notice
from MVSystems that U.S. Patent App. No. 10/905,545 (Pub. No. US 2005/0150542
A1) application referenced above had been rejected by the US Patent Office for
various deficiencies. In August 2009 MVSystems notified the Company that it had
amended its application and re-filed the amended patent application with the U.S
Patent Office.




In the
fiscal year ended September 30, 2009 we have begun the development of process
technology and engineering efforts to adapt certain manufacturing technologies
and systems utilized in the production of magnetic media for use to manufacture
discreet (individual) thin film solar cells. As we continue to develop these new
technologies, we may actively seek patent protection for certain aspects related
to methods and apparatus we develop. We can give no assurance that any such
patent(s) will be granted for any process and manufacturing technology that we
may develop individually or in conjunction with third parties.





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





Company
History





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





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





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


4





Government
Contracts





There are
no government contracts at this time.





Competitive
Conditions





A number
of thin film solar cell technologies have and are being developed by other
companies. Such technologies include amorphous silicon, cadmium telluride,
copper-indium-gallium-selenide (CIGS), and copper indium 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 technologies developed that may be
developed by us, and they may also achieve manufacturing costs per watt lower
than cost per watt to manufacture technologies developed by us.





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





A number
of large companies are actively engaged in the development, manufacturing and
marketing of solar electric power products. The seven 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.




Compliance
with Environmental Laws and Regulations





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





Employees
and Consultants





As of the
fiscal year ended September 30, 2009 we had 5 salaried employees. This
represents a decrease of 5 employees over the same period ended 2008. The
Company also engages consultants to perform specific functions that otherwise
would require an employee. We have not experienced any work stoppages and we
consider relations with our employees to be good.




Available
Information





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




Item
1A. Risk Factors





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





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




We are a
development stage company and, to date, have not generated any significant
revenues.  The accompanying consolidated financial statements have
been prepared in conformity with accounting principles generally accepted in the
United States of America, which contemplate our continuation as a going concern.
Net loss for the years ended September 30, 2009 and 2008 was $10,634,133 million
and $4,058,952 million, respectively. Net cash used for operations was
$2,862,327 and $2,695,476 for the years ended September 30, 2009 and
2008, respectively. From inception through September 30, 2009, we had an
accumulated deficit of $31,709,202.


5




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




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





We have
in the past experienced substantial losses and negative cash flow from
operations and have required financing, including equity and debt financing, in
order to pursue the commercialization of products based on our technologies. We
expect that we will continue to need significant financing to operate our
business. Furthermore, there can be no assurance that additional financing will
be available or that the terms of such additional financing, if available, will
be acceptable to us. If additional financing is not available or not available
on terms acceptable to us, our ability to fund our operations, complete the
development of marketable technologies, develop a sales network, maintain our
research and development efforts or otherwise respond to competitive pressures
may be significantly impaired. We could also be forced to curtail our business
operations, reduce our investments, decrease or eliminate capital expenditures
and delay the execution of our business plan, including, without limitation, all
aspects of our operations, which would have a material adverse affect on our
business.





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





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





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





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





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





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





6




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


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





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





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





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





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





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





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





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





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





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





7




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


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





Downturns
in general economic conditions could adversely affect our
profitability.





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




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





This
annual report does not include an attestation report of the company's registered
public accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by the company's registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the company to provide only management's report
in this annual report. The standards that must be met for management to assess
the internal control over financial reporting as effective are new and complex,
and require significant documentation, testing and possible remediation to meet
the detailed standards and will impose significant additional expenses on us. We
may encounter problems or delays in completing activities necessary to make an
assessment of our internal control over financial reporting. In addition, rules
may be adopted by the SEC, pursuant to Section 404 of the Sarbanes-Oxley Act of
2002 that will require annual assessment of our internal control over financial
reporting, and attestation of our assessment by our independent registered
public accountants. The attestation process by our independent registered public
accountants will be new and we may encounter problems or delays in completing
the implementation of any requested improvements and receiving an attestation of
our assessment by our independent registered public accountants. If we cannot
assess our internal control over financial reporting as effective, or our
independent registered public accountants are unable to provide an unqualified
attestation report on such assessment, investor confidence and share value may
be negatively impacted.





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




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




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




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





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





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




8


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




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




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




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





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





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





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





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





•
            additions
      or departures of key personnel;





•
            sales
      of our common stock;





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





•
            our
      ability to execute our business
plan;





•
            operating
      results below expectations;





•
            loss
      of any strategic relationship;





•
            industry
      developments;





•
            economic
      and other external factors; and





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





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





Item
1B. Unresolved Staff Comments





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





Item
2. Properties





California
Corporate Office Lease





Effective
April 1, 2009 the Company reduced its leased facilities at its Aliso Viejo, CA
offices by approximately 50%. This resulted in associated reductions to monthly
lease and facility expenses totaling approximately $2,000 leaving a monthly
lease and facility liability of approximately $1,400. The Company plans to
continue to lease these facilities for the foreseeable future.





9




Oregon
Manufacturing Facility Lease and Lease Termination





In
furtherance of its revised plan of operations focusing on the development of new
manufacturing technology for CIGS thin films, and plans to establish
manufacturing operations through joint venture license agreements for such new
technology, the Company elected to eliminate its Oregon based
facility.  On August 27, 2009, the Company entered into a lease
termination and mutual release of claims with Merix Corporation, an Oregon
corporation. Pursuant to the terms of the Agreement, the Parties agreed to
terminate that certain sublease agreement by and between the Parties, dated
April 1, 2008, related to certain real property described therein which
comprised the Company’s Oregon based facility (the “Premises”). Accordingly, the
Company agreed to vacate the Premises on or before September 1, 2009. In
connection with the termination of the Sublease, the Company also agreed (a) to
sell certain equipment, currently housed on the Premises, to Merix for the
amount of $111,620, (b) to allow Merix to complete a full drawdown of that
certain $106,000 irrevocable letter of credit issued by Wells Fargo Bank, N.A.,
at the request of the Company, in favor of Merix. The combined amounts of the
sale of equipment and draw down to the letter of credit totaling $217,620 were
credited to the accrued lease payment liabilities. The remaining accrued lease
payment liabilities and contractual term lease obligation were reduced to
$456,920.66 and the Company issued an unsecured promissory note in favor of
Merix in the amount of $456,920.66. The note accrues interest at 10% per
annum.The Parties
agreed to unconditionally release each other from the obligations imposed by, or
related to, the Sublease, except for the obligations established by the
Agreement.  The termination of the Sublease eliminates continued
monthly operating costs associated with the facility, which the Company no
longer requires for its plan of operations, while also reducing the Company’s
short-term liabilities associated with the lease to zero and reducing the
Company’s long-term liabilities by approximately sixty-five percent
(65%).





Colorado Facilities Lease





On
September 30, 2009 the Company extended the lease at its Golden, Colorado
facility for an additional six months expiring on March 31, 2010 at the lease
rate of $1,790 per month plus $945.00 in triple net for a total of $2,735 per
month. While the Company does not currently conduct operations of any
significance in the facility a machine built under contract for the Company, and
held in inventory for sale by the Company, is housed in this facility and we are
engaged in efforts to market and sell this machine. Upon the sale of the machine
we do not anticipate continued use of the facility in our
operations.





The
Company owns no real property.





Item 3. Legal
Proceedings





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





On
September 3, 2009, XsunX received notice of an action filed by a vendor in the
State of Oregon, Multnomah County, requesting, a) that the court grant the
re-possession of certain industrial gas management equipment (the “equipment”)
for shipment back to the vendor (XsunX had returned the equipment to the vendor
on August 28, 2009), b) that the court grant the vendor unspecified re-stocking
and re-shipment fees, or c) the sum of $117,207.07 plus interest and collection
fees for payment for the equipment. The vendor allegations stem from XsunX’s
determination that the vendor had modified an order for the equipment previously
placed by XsunX without approval by XsunX through the issuance of an authorizing
purchase order. Attempts by XsunX to return the equipment were met with demands
for re-stocking fees from the vendor. XsunX has refused to pay re-stocking fees
for equipment it believes was modified without approval. The vendor agreed to
the return of the equipment and then subsequently filed its claim. Since the
filing of the claim the vendor has proposed that it provide XsunX with a
re-stocking credit leaving approximately $95,000 in re-stocking fees, interest,
and collection fees. We dispute this amount and have retained counsel to
aggressively defend this matter.




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





None
during the period ended September 30, 2009.


10




PART
II





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





Price
Range of Common Stock





The
Company’s common stock trades on the OTC Bulletin Board under the symbol
“XSNX”.  The range of high, low and close bid 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, 2009
                
                High
                
                
                Low
                
                
                CloseFirst
      Quarter ended December 31, 2008
                
                
                0.30
                
                
                
                0.18
                
                
                
                0.19Second
      Quarter ended March 31, 2009
                
                
                0.20
                
                
                
                0.09
                
                
                
                0.16Third
      Quarter ended June 30, 2009
                
                
                0.17
                
                
                
                0.11
                
                
                
                0.13Fourth
      Quarter ended September 30, 2009
                
                
                0.22
                
                
                
                0.10
                
                
                
                0.15Year
      Ended September 30, 2008First
      Quarter ended December 31, 2007
                
                
                0.55
                
                
                
                0.29
                
                
                
                0.55Second
      Quarter ended March 31, 2008
                
                
                0.74
                
                
                
                0.35
                
                
                
                0.40Third
      Quarter ended June 30, 2008
                
                
                0.51
                
                
                
                0.38
                
                
                
                0.39Fourth
      Quarter ended September 30, 2008
                
                
                0.43
                
                
                
                0.26
                
                
                
                0.26




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




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





Number
of Holders





As of
September 30, 2009, there were approximately 286 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, 2009, there were approximately 196,484,610
shares of common stock outstanding on record with the Company’s stock transfer
agent, Mountain Share Transfer. On September 30, 2009 the last reported sales
price of our common stock on the OTCBB was $0.15 per share.





Transfer
Agent





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





Dividends





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




Stock
Option Plan





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





Stock
Compensation, Issuance of Stock Purchase Options




During
the fiscal year ended September 30, 2009, the board of directors authorized the
grant of options to purchase an aggregate 5,350,000 stock options. The stock
options are exercisable for a period of five years from the date of grant at an
exercise price between $0.16 and $0.36 per share and expire at various times
through March 2014.





Employment
Option Grants — In connection with the Company’s efforts to develop
and commercialize thin film solar manufacturing technology and as part of
reductions to salaries, the Company authorized employment option grants to the
following employees on in the year ended September 30, 2009. The options have a
5 year exercise terms and vest in conjunction with employment and performance
milestones based vesting schedule as described below:


11




Name
                      
                      Date of Grant
                      
                      Amount
                      
                      
                      Exercise Price
                      
                      TermVanessa
      Watkins (1)
                      
                      October
      10, 2008
                      
                      
                      115,000
                      
                      
                      $
                      0.36
                      
                      5
      yr.Tyler
      Anderson
                      
                      October
      10, 2009
                      
                      
                      100,000
                      
                      
                      $
                      0.36
                      
                      5
      yr.Yang
      Zhuang
                      
                      October
      29, 2009
                      
                      
                      20,000
                      
                      
                      $
                      0.36
                      
                      5
      yr.Vanessa
      Watkins (2)
                      
                      March
      31, 2009
                      
                      
                      115,000
                      
                      
                      $
                      0.16
                      
                      5
      yr.Joseph
      Grimes
                      
                      March
      31, 2009
                      
                      
                      2,500,000
                      
                      
                      $
                      0.16
                      
                      5
      yr.Robert
      G. Wendt
                      
                      March
      31, 2009
                      
                      
                      2,500,000
                      
                      
                      $
                      0.16
                      
                      5
      yr.




The
vesting schedule for Vanessa Watkins is as follows:





(a)
            (1)
      The Option became exercisable in the amount of 38,334 shares on April 6,
      2009. Thereafter, the Option shall vest and become exercisable at the rate
      of 38,333 Shares per year of continuous employment.
              
              (2)
      The Option became exercisable in the amount of 38,334 shares on April 1,
      2009. Thereafter, the Option shall vest and become exercisable at the rate
      of 38,333 Shares per year of continuous
  employment.





The
vesting schedule for Tyler Anderson is as follows:





(a)
            The
      Option became exercisable in the amount of 33,334 shares on May 12, 2009.
      Thereafter, the Option shall vest and become exercisable at the rate of
      33,333 Shares per year of continuous employment. As of September 30, 2009
      Mr. Anderson no longer worked for the Company and the total grant of
      100,000 options was terminated and the options were returned to the pool
      of available options under the XsunX 2007 Stock Option
    Plan.





The
vesting schedule for Yang Zhuang is as follows:





(a)
            The
      Option became exercisable in the amount of 6,667 shares on August 18,
      2009. Thereafter, the Option shall vest and become exercisable at the rate
      of 6,666 Shares per year of continuous employment. As of September 30,
      2009 Mr. Zhuang no longer worked for the Company and the total grant of
      20,000 options was terminated and the options were returned to the pool of
      available options under the XsunX 2007 Stock Option
  Plan.





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





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





(a)
            208,333
      shares vested on April 1, 2009 and thereafter 208,333 shall vest per each
      XsunX fiscal calendar quarter of continuous employment from the date of
      grant.





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





(c)
            All
      remaining unvested Options shall vest and become exercisable upon the
      assembly and third party validation of a functioning XsunX manufactured
      solar module producing a 10% frame to frame average DC power conversion
      rating under standard test conditions (STC), and the subsequent sale and
      delivery of a solar module manufactured by XsunX meeting similar
      specifications.




Table
of Equity Compensation




The
following table sets forth summary information, as of September 30, 2009,
concerning securities authorized for issuance under all equity compensation
plans and agreements for the fiscal years ended September 30, 2009, and 2008 is
as follows:




12




2009
            
            2008Risk
      free interest rate
            1.67%
      to 2.77%
            
            3.23%
      to 4.87%Stock
      volatility factor
            90.56%
      to 104.73%
            
            53%
      to 122%Weighted
      average expected option life
            5
      years
            
            5
      yearsExpected
      dividend yield
            None
            
            None




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




2009
                                          
                                          
                                          2008Weighted
                                          
                                          
                                          
                                          
                                          
                                          WeightedNumber
                                          
                                          
                                          average
                                          
                                          
                                          Number
                                          
                                          
                                          averageof
                                          
                                          
                                          exercise
                                          
                                          
                                          of
                                          
                                          
                                          exerciseOptions
                                          
                                          
                                          price
                                          
                                          
                                          Options
                                          
                                          
                                          priceOutstanding,
      beginning of year
                                          
                                          
                                          5,750,000
                                          
                                          
                                          $
                                          0.39
                                          
                                          
                                          
                                          1,950,000
                                          
                                          
                                          $
                                          0.46Granted
                                          
                                          
                                          5,350,000
                                          
                                          
                                          $
                                          0.17
                                          
                                          
                                          
                                          3,800,000
                                          
                                          
                                          $
                                          0.36Exercised
                                          
                                          
                                          -
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          $
                                          -Expired
                                          
                                          
                                          (920,000
                                          )
                                          
                                          $
                                          0.41
                                          
                                          
                                          
                                          -
                                          
                                          
                                          $
                                          -Outstanding,
      end of year
                                          
                                          
                                          10,180,000
                                          
                                          
                                          $
                                          0.27
                                          
                                          
                                          
                                          5,750,000
                                          
                                          
                                          $
                                          0.39Exercisable
      at the end of year
                                          
                                          
                                          4,927,500
                                          
                                          
                                          $
                                          0.33
                                          
                                          
                                          
                                          2,927,500
                                          
                                          
                                          $
                                          0.40Weighted
      average fair value ofoptions
      granted during the year
                                          
                                          
                                          $
                                          0.11
                                          
                                          
                                          
                                          
                                          
                                          
                                          $
                                          0.28





The
weighted average remaining contractual life of options outstanding issued under
the plan as of September 30, 2009 was as follows:


WeightedAverageStock
                                    
                                    
                                    Stock
                                    
                                    RemainingExercisable
                                    
                                    
                                    Options
                                    
                                    
                                    Options
                                    
                                    ContractualPrices
                                    
                                    
                                    Outstanding
                                    
                                    
                                    Exercisable
                                    
                                    Life
      (years)$
                                    0.46
                                    
                                    
                                    
                                    1,150,000
                                    
                                    
                                    
                                    950,000
                                    
                                    2.32
      years$
                                    0.53
                                    
                                    
                                    
                                    100,000
                                    
                                    
                                    
                                    100,000
                                    
                                    2.40
      years$
                                    0.45
                                    
                                    
                                    
                                    100,000
                                    
                                    
                                    
                                    100,000
                                    
                                    2.56
      years$
                                    0.41
                                    
                                    
                                    
                                    100,000
                                    
                                    
                                    
                                    100,000
                                    
                                    2.91
      years$
                                    0.36
                                    
                                    
                                    
                                    2,500,000
                                    
                                    
                                    
                                    1,437,500
                                    
                                    3.07
      years$
                                    0.36
                                    
                                    
                                    
                                    500,000
                                    
                                    
                                    
                                    437,500
                                    
                                    3.12
      years$
                                    0.36
                                    
                                    
                                    
                                    500,000
                                    
                                    
                                    
                                    437,500
                                    
                                    3.16
      years$
                                    0.36
                                    
                                    
                                    
                                    115,000
                                    
                                    
                                    
                                    57,501
                                    
                                    4.03
      years$
                                    0.16
                                    
                                    
                                    
                                    5,115,000
                                    
                                    
                                    
                                    1,307,499
                                    
                                    4.50
      years10,180,000
                                    
                                    
                                    
                                    4,927,500




Stock-based
compensation expense recognized during the period is based on the value of the
portion of stock-based payment awards that is ultimately expected to vest.
Stock-based compensation expense recognized in the financial statements of
operations during the year ended September 30, 2009, included compensation
expense for the stock-based payment awards granted prior to, but not yet vested,
as of September 30, 2009 based on the grant date fair value estimated, and
compensation expense for the stock-based payment awards granted subsequent to
September 30, 2009, based on the grant date fair value estimated. We account for
forfeitures as they occur. The stock-based compensation expense recognized in
the statement of operations during the fiscal years ended September 30, 2009 and
2008 was $534,518 and $673,287, respectively.





Warrants





During
the fiscal year ended September 30, 2009, the Company issued no warrants. At
September 30, 2009, the Company had a total of 4,195,332 warrants to purchase
4,047,332 shares of common stock outstanding.





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




13




2009
                                                
                                                
                                                2008Weighted
                                                
                                                
                                                
                                                
                                                
                                                WeightedNumber
                                                
                                                
                                                average
                                                
                                                
                                                Number
                                                
                                                
                                                averageof
                                                
                                                
                                                exercise
                                                
                                                
                                                of
                                                
                                                
                                                exerciseOptions
                                                
                                                
                                                price
                                                
                                                
                                                Options
                                                
                                                
                                                priceOutstanding,
      beginning of year
                                                
                                                
                                                4,195,332
                                                
                                                
                                                $
                                                0.61
                                                
                                                
                                                
                                                15,362,000
                                                
                                                
                                                $
                                                0.22Granted
                                                
                                                
                                                -
                                                
                                                
                                                $
                                                -
                                                
                                                
                                                
                                                3,333,332
                                                
                                                
                                                $
                                                0.63Exercised
                                                
                                                
                                                -
                                                
                                                
                                                $
                                                -
                                                
                                                
                                                
                                                
                                                
                                                
                                                $
                                                -Expired
                                                
                                                
                                                -
                                                
                                                
                                                $
                                                -
                                                
                                                
                                                
                                                (14,500,000
                                                )
                                                
                                                $
                                                0.20Outstanding,
      end of year
                                                
                                                
                                                4,195,332
                                                
                                                
                                                $
                                                0.61
                                                
                                                
                                                
                                                4,195,332
                                                
                                                
                                                $
                                                0.61Exercisable
      at the end of year
                                                
                                                
                                                4,047,332
                                                
                                                
                                                $
                                                0.62
                                                
                                                
                                                
                                                4,047,332
                                                
                                                
                                                $
                                                0.61Weighted
      average fair value ofwarrants
      granted during the year
                                                
                                                
                                                $
                                                -
                                                
                                                
                                                
                                                
                                                
                                                
                                                $
                                                0.63




At
September 30, 2009, the weighted average remaining contractual life of options
outstanding:




WeightedAverageRemainingExercisable
                              
                              
                              Warrants
                              
                              
                              Warrants
                              
                              ContractualPrices
                              
                              
                              Outstanding
                              
                              
                              Exercisable
                              
                              Life
      (years)$
                              1.69
                              
                              
                              
                              112,000
                              
                              
                              
                              112,000
                              
                              1.51
      years$
                              0.51
                              
                              
                              
                              500,000
                              
                              
                              
                              352,000
                              
                              1.80
      years$
                              0.20
                              
                              
                              
                              250,000
                              
                              
                              
                              250,000
                              
                              2.25
      years$
                              0.50
                              
                              
                              
                              1,666,666
                              
                              
                              
                              1,666,666
                              
                              3.09
      years$
                              0.75
                              
                              
                              
                              1,666,666
                              
                              
                              
                              1,666,666
                              
                              3.09
      years4,195,332
                              
                              
                              
                              4,047,332




Recent
Sales of Securities (Registered and Unregistered)





The
authorized Common stock of the Company was established at 500,000,000
shares with no par value. The Company is also authorized to issue 50,000,000
shares of preferred stock with a par value of $0.01 per share.  The
rights, preferences and privileges of the holders of the preferred stock will be
determined by the Board of Directors prior to issuance of such shares. The
following represents a detailed analysis of the 2009 Common stock
transactions.




In
the fiscal period ended September 30, 2009, there was a placement of the
Company’s common stock pursuant to an S-1 Registration declared effective by the
U.S. Securities and Exchange Commission on April 10, 2008. Pursuant to the S-1
Registration, the Company sold 3,000,000 shares of common stock at a price of
$0.20 each, for total proceeds of $600,000 to Fusion Capital Fund II, LLC.
Pursuant to the S-1 Registration Statement declared effective by the SEC on
April 10, 2008, the Company has sold to Fusion Capital Fund II, LLC through
September 30, 2009, a total of approximately 18,347,581 shares for a total
investment of $5,808,723.  These shares were sold at various pricing
between $0.405 and $0.20 per share.  The registration statement is
currently not available for use for sales to Fusion.





Through
private placements, on September 8th and 23rd, 2009, which were made in
reliance upon an exemption from registration under rule 506 of Regulation D
promulgated under Section 4(2) of the Securities Act of 1933, we issued
1,129,483  and then 5,000,000  restricted shares of common
stock respectively to an Accredited Investor, as defined in Rule 501(a) of
Regulation D as promulgated by the SEC, for gross cash proceeds of $70,000
on September 8, 2009, and gross cash proceeds of $350,000 on September 23,
2009.





Issuance
of Shares for Services





For the
fiscal period ended September 30, 2009, the Company issued a total of 1,062,690
shares of its restricted common stock in connection with service agreements to
provide various marketing, and consulting services to the Company as
follows:





In
November 2008, the Company issued 50,000 shares of its restricted common stock
in connection with a service agreement to provide marketing and financing
service to the Company.  The shares were valued at $0.22 per share,
the share price on the date the agreement was reached.  The service
agreement ended on December 31, 2008.





In August
2009, the Company issued 76,976 shares of its restricted common stock as payment
for $10,500 in accrued service fees in connection with a service agreement to
provide marketing and public relations services to the Company.  The
shares were valued at $0.1364 per share, the average share price between the
period May 1, 2009 and August 30, 2009 in which the fees were accrued and
services were rendered.





14




In August
2009, the Company issued 900,000 shares of its restricted common stock in
connection with a service agreement to provide marketing and public relations
services to the Company.  The shares were valued at $0.12 per share,
the share price on the date the agreement was reached.  The service
provider has agreed not to sell or transfer the shares prior to September
2010.





In
September 2009, the Company issued 35,714 shares of its restricted common stock
in connection with a service agreement to provide marketing and financing
service to the Company.  Subject to the service agreement the shares
were valued at $5,000.





Use
of Proceeds from the Sale of Securities




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




Item
6. Selected Financial Data





N/A





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




Cautionary
and Forward-Looking Statements




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





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




Business
Overview




In the
fiscal year ended September 30, 2009 XsunX modified its previous plans to
directly establish solar module manufacturing infrastructure. We have re-focused
operations on the development of a cross-industry thin film solar manufacturing
concept that we believe provides an opportunity for XsunX to establish a
competitive advantage within the industry. Our current efforts are focused on
the combination of highly developed thin film solar processes with
state-of-the-art mature magnetic media thin film manufacturing technologies
derived from the hard disc drive (HDD) industry to improve manufacturing output,
increase cell efficiency and production yields, and lower the costs for the
production of high efficiency Copper Indium Gallium (di) Selenide (CIGS) thin
film solar cells.





It is our
belief that by leveraging the manufacturing processes from the HDD industry and
adapting them to thin-film solar technologies, we can reduce the cost per watt
for solar to well below $1 per watt, thereby making solar a viable alternative
in the energy field.  Furthermore, it is our belief that our
expertise, experience and proprietary technology in this area will allow us to
seek joint ventures with larger companies thereby generating revenue streams
through licensing fees and manufacturing royalties.




Plan
of Operations




For the
fiscal year ending September 30, 2010, the Company has developed a plan of
operations based upon three significant management implementations which began
in the 2009 fiscal year.  The first is cost-cutting measures,
including the closure of the Oregon solar module manufacturing facility which
was under assembly, layoff of staff employed under efforts to establish the
Oregon facility, and an across the board reduction of salaries, with the
intended goal of reducing operating expenses not directly related to the
development of new technologies under the Company’s revised plans. The second
was a modified sales strategy.  Rather than operate under a direct
manufacturing business model, XsunX plans to develop joint-ventures with
pre-existing semi-conductor companies that management believes may be capable
and prepared to invest in the green energy market.  Lastly, we have
re-focused operations on the development of a cross-industry thin film solar
manufacturing concept that we believe provides an opportunity for XsunX to
establish a competitive advantage within the industry. In furtherance of these
efforts the Company has begun the development of a hybrid manufacturing system
combining certain technologies derived from the magnetic media manufacturing
industry with manufacturing techniques for thin film solar to produce high
efficiency Copper Indium Gallium (di) Selenide (CIGS) thin film solar
cells.





15




Our
current Plan of Operations, based upon the aforementioned activities, commits
$1.65 million for general, administrative and working capital under a phase one
plan necessary to prove and prepare the commercial viability of the new thin
film CIGS manufacturing systems we are developing. Once we have completed our
initial development efforts and proven the commercial viability of these new
manufacturing technologies we plan to launch a phase two plan to establish a
pilot production system for marketing and sales efforts, continued process
improvement, and general business development efforts related to the
commercialization of our proposed new CIGS manufacturing
technology.





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




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




Results
of Operations for the Fiscal Year Ended September 30, 2009 Compared to Fiscal
Year Ended September 30, 2008




Revenue
and Cost of Sales:




The
Company generated no revenues in the fiscal years ended September 30, 2009, and
2008. There were no associated costs of goods sold in any of the fiscal periods
represented above. The Company to date has had minimal revenue and cost of
sales, and is still in the development stage.





Selling
and Marketing Expenses:





Selling
and Marketing (S&M) expenses decreased by ($224,498) during the fiscal
year ended September 30, 2009 to $212,700 as compared to  $437,198 for
the fiscal year ended September 30, 2008. The decreases in S&M expenses were
primarily due to a decrease in branding efforts and investor relations expenses
associated with the Company’s efforts to modify its plan of
operations.





General
and Administrative Expenses:




General
and Administrative (G&A) expenses increased by $55,494 during
the fiscal year ended September 30, 2009 to $2,745,269 as compared to
$2,689,775 for the fiscal year ended September 30, 2008. The increase in G&A
expenses were primarily due to the increase in rent and operating expense for
the Oregon facilities related to the Company’s prior efforts to establish
amorphous silicon solar module manufacturing operations, and accounting expenses
related to the Company’s re-audit of the fiscal years ended September 30, 2007,
and 2006.





Research
and Development:





Research
and development expenses increased by $399,474 during the fiscal year ended
September 30, 2009 to $358,884 as compared to ($40,590) for the fiscal year
ended September 30, 2008. The increase in R&D was due primarily to an
increase in contract engineering expenses and laboratory materials related to
the Company’s efforts to develop new manufacturing technology for the production
of thin film CIGS solar technologies, and because the Company had recovered
previous R&D expenses in the fiscal year ended September 30,
2008.





Net
Loss:





For the
fiscal year ended September 30, 2009, our net loss was ($10,634,133) as compared
to a net loss of ($4,058,952) for the fiscal year ended September 30,
2008.   This increase in Net Loss of $6,575,180 compared to the
fiscal year ended September 30, 2008 was primarily driven by the Company’s
impairment of certain assets related to the Company’s prior efforts to establish
amorphous silicon solar module manufacturing infrastructure. This impairment
resulted in an expense of $5,826,990. This represents a total write down to zero
for the portion of the Company’s Manufacturing Equipment in Process account that
the Company does not anticipate using under its new plan of
operations.  The valuation adjustment was the result of an analysis of
certain significant unobservable events and the inputs used in determining the
amount of the valuation adjustment include the decision to move to new
manufacturing technology under efforts to establish a competitive
advantage.




Liquidity
and Capital Resources





We had
working capital at September 30, 2009 of $517,387, as compared to working
capital of $3,321,294 as of September 30, 2008. The decrease in working capital
of $2,803,907 was the result of an increase in operating expenses, and no
revenue producing activities for the fiscal year ended September 30,
2009.





16




Cash flow
used by operating activities was ($2,862,327) for the fiscal year ended
September 30, 2009, as compared to cash flow used by operating activities of
($2,695,476) for the fiscal year ended September 30, 2008. The increase in cash
flow used of $166,851 by operating activities was primarily due to the increase
of $(6,575,181) in operating net loss due to the Company refocusing its
operations from solar module manufacturing to focus on development of new thin
film solar technology. The majority of the net change in net loss consisted of
an increase in asset impairment of $5,611,365, and an increase in write down of
inventory asset of $1,117,000.





Cash
flow used in investing activities was $(16,174) for the fiscal year ended
September 30, 2009, as compared to cash flow used in investing activities of
($4,228,623) during the fiscal year ended September 30, 2008. The decrease in
investing activities of $4,212,449, primarily due to the Company’s change in
business development focus, whereby, there were no investments in manufacturing
equipment and facilities in process, and the purchase of fixed assets decreased
by $95,039 Also, the Company had a no notes receivable for the fiscal year ended
September 30, 2009.





Cash flow
provided by financing activities was $1,020,000 for the fiscal year ended
September 30, 2009, as compared to cash provided by financing activities of
$7,544,700 during the fiscal year ended September 30, 2008. The decrease in cash
flow provided by financing activities of $6,524,700 was the result of a
reduction to cash provided through equity financing.





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




Off-Balance Sheet
Arrangements





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





Item
7A. Quantitative and Qualitative Disclosures About Market Risk





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




Item
8. Financial Statements and Supplementary Data




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





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




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





Effective
as of July 17, 2009 (the “Effective Date”), Stark Winter Schenkein & Co.,
LLP (“SWS”) was dismissed by the board of directors of XsunX as the Company’s
principal independent registered public accounting firm. None of SWS’s reports
included in the Company’s financial statements for the past two (2) fiscal
years, as well as the subsequent interim periods through the Effective Date,
contained an adverse opinion or a disclaimer of opinion, or was qualified or
modified as to uncertainty, audit scope, or accounting principles. SWS’s report
did contain a paragraph relating to the Company’s ability to continue as a going
concern. During the Company’s two (2) most recent fiscal years, as well as
the subsequent interim period through the Effective Date, there were no
disagreements between the Company and SWS on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedures,
which disagreements if not resolved to their satisfaction would have caused them
to make reference to the subject matter of the disagreement in connection with
SWS’s report. During the Company’s most recent two (2) fiscal years, as well as
the subsequent interim period through the Effective Date, SWS did not advise the
Company of any of the matters identified in Item 304(a)(v)(A) - (D) of
Regulation S-K.





17




Effective
as of July 17, 2009, the board of directors of the Company approved the
engagement of HJ Associates & Consultants, LLP (“HJ”) as its principal
independent registered public accounting firm to audit the Company’s financial
statements. The Company did not consult HJ on any matters described in Item
304(a) (2) of Regulation S-K during the Registrant’s two (2) most recent fiscal
years or any subsequent interim period prior to engaging HJ.




Item
9A. Controls and Procedures




Disclosure
Controls and Procedures




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




Internal
Control over Financial Reporting




Management
is responsible for establishing and maintaining adequate internal control
structure and procedures over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f)) under the Exchange Act. The SEC rule making
for the Sarbanes-Oxley Act of 2002 Section 404 requires that a company's
internal controls over financial reporting be based upon a recognized internal
control framework. Our management conducted an assessment of the effectiveness
of our internal control over financial reporting as of September 30, 2009 based
on the framework set forth in Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”) that has been modified to more appropriately reflect the current
limited operational scope of the Company as a Development Stage company. The
Company used the COSO guide - The Internal Control over Financial Reporting -
Guidance for Smaller Public Companies to implement the Company’s internal
control framework. Additionally, the limited scope of operations of the Company
means that traditional separation of duties controls are not used by the Company
as a result of the limited staffing within the Company. The Company relies on
alternative procedures to overcome this non-material control
weakness.




During
the Company's fiscal year ended September 30, 2009, management continued
revising the Company's internal and controls procedure document basing this
revision upon additional guidance for implementing the model framework created
by COSO as is appropriate to our operations and operations of smaller public
entities. This framework is entitled Internal Control-Integrated Framework. The
COSO Framework, which is the common shortened title, was published in 1992 and
has been updated, and we believe will satisfy the SEC requirements of Section
404 of the Sarbanes-Oxley Act of 2002. As the Company expands operations,
additional staff will be added to implement separation of duties controls as
well.





Based on that evaluation, our
Chief Executive Officer and our Chief Operating Officer concluded that our
internal control over financial reporting as of September 30, 2009 was
effective.    Internal control over financial reporting
cannot provide absolute assurance of achieving financial reporting objectives
because of its inherent limitations. Internal control over financial reporting
is a process that involves human diligence and compliance and is subject to
lapses in judgment and breakdowns resulting from human failures. Because of such
limitations, there is a risk that material misstatements may not be prevented or
detected on a timely basis by internal control over financial reporting. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.





Changes
in Internal Control over Financial Reporting




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




Auditors
Report on Internal Control over Financial Reporting





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




18




Item
9B. Other Information




Under
the Company’s previous efforts to establish a thin film solar module
manufacturing facility the Company had placed an order for certain thin film
deposition equipment with a vendor. In June the vendor and XsunX proposed terms
for the cancellation of the order without further obligation to either party. On
December 21, 2009 the parties agreed to the termination of the
order.





On
October 16, 2009 the Company accepted an offer for the sale of 2,556,818 shares
of its restricted common stock in a private placement for cash proceeds of
$225,000.





On
November 16, 2009 the Company issued 53,789 shares of its common restricted
stock for services related to marketing and public relations valued at $10,000
dollars.





On
December 31, 2009 the Company accepted an offer for the sale of 1,000,000 shares
of its restricted common stock in a private placement for cash proceeds of
$88,000.





In the
fiscal year ended September 30, 2009 XsunX modified its previous plans to
directly establish amorphous silicon product manufacturing infrastructure. We
have re-focused operations on the development of a cross-industry thin film
solar manufacturing concept that we believe provides an opportunity for XsunX to
establish a competitive advantage within the industry. In furtherance of these
efforts the Company has begun the development of a hybrid manufacturing system
combining certain technologies derived from the magnetic media manufacturing
industry with manufacturing techniques for thin film solar. The Company has
agreed to an estimate of $1,150,000 from a vendor for the cost of this prototype
system, and in October 2009 paid an initial $115,000 deposit towards the
manufacture of this system. The vendor and the Company are now engaged in
efforts to complete the testing and engineering designs necessary to build the
system.





In March
2009 XsunX received notice from the State of Colorado offering determination
that sales tax and penalties were due for what the state perceived as a purchase
of a machine for use by XsunX rather than as an inventory item that was
developed for re-sale.  On April 10, 2009 the Company filed a protest
and hearing request disputing the findings of the tax auditor requesting that
the total tax liability determination be reversed. On November 17, 2009 the
Colorado Department of Revenue withdrew and cancelled its assessment of tax
liability in total.




PART
III




Item
10. Directors, Executive Officers, and Corporate Governance





The
following table lists the executive offices and directors of the Company during
the fiscal year ended September 30, 2009:




Name
                
                Age
                
                Position
      Held
                TenureTom
      Djokovich
                
                
                52
                
                CEO,
      Director, Secretary, and acting Principal Accounting
    Officer
                CEO
      and Director since October 2003, Secretary and PAO since September
      2009Joseph
      Grimes
                
                
                52
                
                President,
      COO, Director
                President
      since March 2009, COO since April 2006, and as a director Since August
      2008Jeff
      Huitt (1)
                
                
                48
                
                CFO
                Since
      January 2007Robert
      Wendt
                
                
                47
                
                CTO
                Since
      March 2009Thomas
      Anderson
                
                
                44
                
                Director
                Since
      August 2001Oz
      Fundingsland
                
                
                66
                
                Director
                Since
      November 2007Michael
      Russak
                
                
                62
                
                Director
                Since
      November 2007





(1)
            In
      March, 2009, as part of our efforts to modify the Company’s plan of
      operations, the Company and Mr. Huitt agreed to the termination of Mr.
      Huitt’s employment agreement and status as an employee of the Company. In
      March the Company and Mr. Huitt’s consulting firm, Orion Business
      Services, LLC, entered into a professional service consulting agreement
      under which Mr. Huitt would provide financial consulting services to the
      Company as a consulting chief financial officer. Effective September 9,
      2009 Mr. Huitt and the Company agreed to the termination of services in
      the capacity of CFO.




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





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




19




Biographical
Information




Mr.
Tom Djokovich, age 52, Chief Executive Officer and a Director as of October
2003, acting Principal Accounting Officer as of September 2009;




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




Mr.
Joseph Grimes, age 52, Chief Operating Officer as of April 2006, a Director as
of August 2008, and President as of March 2009;





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





Mr.
Robert Wendt, age 47, Chief Technology Officer as of March 2009;


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


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


Independent
Directors





Mr.
Thomas Anderson, age 44, became a director of the Company in August
2001;




Mr.
Anderson presently works as the Director of Southwest Business Operations for
American Capital Energy, a commercial and utility scale solar integrator. He has
been with American Capital Energy since October, 2008.  He recently served
as Managing Director of the Environmental Science and Engineering Directorate of
Qinetiq North America in Los Alamos, New Mexico. He was with Qinetiq North
America, formerly Apogen Technologies, from January, 2005, through September,
2008. Mr. Anderson worked for 19 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.




Mr.
Oz Fundingsland as Director, age 66, became a director of the Company in
November 2007;




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




20




Dr.
Michael A. Russak as Director, age 62, became a director of the Company in
November 2007;




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





Involvement
in Certain Legal Proceedings




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





Board
Committees; Audit Committee




As of
September 30, 2009, the Company’s board was comprised of five directors, three
of which are considered independent directors and the Company did not have an
audit committee. Further, none of the members of the board of directors is
qualified as a financial expert. We are a development stage company with limited
resources and we are actively seeking a qualified financial expert for addition
to the board. The board of directors will appoint committees as necessary,
including an audit committee as resources permit.  In the meantime,
the Board serves as the Company’s audit committee utilizing business judgment
rules and good faith efforts.





Section
16(A) Beneficial Ownership Reporting Compliance





Section
16(a) of the Exchange Act requires the Company’s officers and directors, and
certain persons who own more than 10% of a registered class of the Company’s
equity securities (collectively, “Reporting Persons”), to file reports of
ownership and changes in ownership (“Section 16 Reports”) with the SEC.
Reporting Persons are required by the SEC to furnish the Company with copies of
all Section 16 Reports they file.  Based on its review of the copies
of such forms received by it, or written representations from certain reporting
persons, the Company believes that, during the fiscal year ended September 30,
2009, all filing requirements applicable to its officers, directors, and greater
than ten-percent beneficial owners were complied with the exception
that one report, covering an aggregate of three gift and donation
transactions were not timely filed by the chief executive officer
with the SEC via Form 4 or via year-end report on Form 5.





Code
of Ethics





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





Item
11. Executive Compensation





Overview




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




21




In this
Compensation Discussion and Analysis, the individuals in the Summary
Compensation Table set forth below are referred to as the “named executive
officers”. Generally, the types of compensation and benefits provided to the
named executive officers may be similar to what we intend to provided to future
executive officers. The named executive officers for fiscal 2009 are Tom M.
Djokovich, our chief executive officer, Joseph Grimes, our chief operating
officer, Jeff Huitt our chief financial officer for portions of the 2009 fiscal
year, and Robert Wendt, our chief technical officer.





Executive
Compensation





The
following table sets forth information with respect to compensation earned by
our chief executive officer, our former chief financial officer, our chief
operating officer, and our chief technical officer (collectively, our “named
executive officers”) for the fiscal years ended September 30, 2009, and 2008
respectively.




Summary
Compensation Table





Name and Principal Position
                                  
                                  Year
                                  
                                  Salary
                                    ($)
                                  
                                  
                                  Bonus
                                    ($)
                                  
                                  
                                  Stock
                                    Awards
                                    ($)
                                  
                                  
                                  Option
                                    Awards
                                    ($)
                                  
                                  
                                  All Other
                                    Compensation
                                    ($)
                                  
                                  
                                  Total
                                    ($)Tom Djokovich,
      CEO(1)
                                  
                                  2009
                                  
                                  
                                  165,000
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  4,800
                                  
                                  
                                  
                                  169,8002008
                                  
                                  
                                  220,000
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  4,800
                                  
                                  
                                  
                                  224,800Joe Grimes,
      COO(2)
                                  
                                  2009
                                  
                                  
                                  157,500
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  107,750
                                  
                                  
                                  
                                  4,800
                                  
                                  
                                  
                                  270,0502008
                                  
                                  
                                  210,000
                                  
                                  
                                  
                                  30,000
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  44,600
                                  
                                  
                                  
                                  4,800
                                  
                                  
                                  
                                  289,400Jeff Huitt,
      CFO(3)
                                  
                                  2009
                                  
                                  
                                  155,000
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  39,000
                                  
                                  
                                  
                                  4,800
                                  
                                  
                                  
                                  198,8002008
                                  
                                  
                                  155,000
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  44,600
                                  
                                  
                                  
                                  4,800
                                  
                                  
                                  
                                  204,400Robert Wendt,
      CTO(4)
                                  
                                  2009
                                  
                                  
                                  150,000
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  107,750
                                  
                                  
                                  
                                  4,800
                                  
                                  
                                  
                                  262,5502008
                                  
                                  
                                  200,000
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  44,600
                                  
                                  
                                  
                                  3,600
                                  
                                  
                                  
                                  203,600




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





(2)
            In
      March 2009 Mr. Grimes and the Company agreed to the reduction of annual
      salary from $210,000 to $157,500 as part of cost cutting measures approved
      by the Board of Directors in association with the Company’s efforts to
      modify its plan of operations. In addition to Mr. Grimes base compensation
      the Company also provides Mr. Grimes with a $400 monthly health insurance
      allowance.  Mr. Grimes employment agreement with the Company
      included a facilities finders and relocation bonus of $30,000 which was
      fully paid in the year ended September 30, 2008 upon completion of the
      requirements.




(3)
            In
      March, 2009, as part of our efforts to modify the Company’s plan of
      operations, the Company and Mr. Huitt agreed to the termination of Mr.
      Huitt’s employment status as an employee of the Company and annual salary
      of $155,000 and a $400 monthly health insurance allowance. In March the
      Company and Mr. Huitt’s consulting firm, Orion Business Services, LLC,
      entered into a professional service consulting agreement under which Mr.
      Huitt would provide financial consulting services to the Company as a
      consulting chief financial officer. The Company paid $65,625 for these
      professional consulting services in the fiscal year ended September 30,
      2009. Effective September 9, 2009 Orion Business Services, LLC and the
      Company agreed to the termination of Mr. Huitt’s services in the capacity
      as chief financial officer for the
Company.





(4)
            Prior
      to March 2009 Mr. Wendt held the position of Vice President of Engineering
      and Product Development and was not an executive officer to the Company.
      In March 2009 Mr. Wendt was elected to the position of chief technical
      officer for XsunX. In March 2009 Mr. Wendt and the Company also agreed to
      the reduction of annual salary from $200,000 to $150,000 as part of cost
      cutting measures approved by the Board of Directors in association with
      the Company’s efforts to modify its plan of operations. In addition to Mr.
      Wendt’s base compensation the Company also agreed to provide Mr. Wendt
      with a $400 monthly health insurance
allowance.




22




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





Grants
of Plan-Based Awards Table





The
following table sets forth summary information regarding all grants of
plan-based awards made to our named executive officers during the two years
ended September 30, 2009, and 2008 respectively.




Name
                                
                                Grant
                                  Date
                                
                                All Other
                                  Option
                                  Awards:
                                  Number of
                                  Securities
                                  Underlying
                                  Options
                                  (#)
                                
                                
                                Exercise or
                                  Base Price
                                  of Option
                                  Awards
                                  ($/Sh)
                                
                                
                                Grant Date
                                  Fair Value of
                                  Stock and
                                  Option Awards
                                  ($)Tom
      Djokovich, CEO
                                
                                2009
                                
                                
                                0
                                
                                
                                
                                0
                                
                                
                                
                                02008
                                
                                
                                0
                                
                                
                                
                                0
                                
                                
                                
                                0Jeff
      Huitt, CFO
                                
                                2009
                                
                                
                                0
                                
                                
                                
                                0
                                
                                
                                
                                02008
                                
                                
                                0
                                
                                
                                
                                0.46
                                
                                
                                
                                44,600Joe
      Grimes, COO
                                
                                2009
                                
                                
                                2,500,000
                                
                                
                                
                                0.16
                                
                                
                                
                                68,7502008
                                
                                
                                500,000
                                
                                
                                
                                0.36
                                
                                
                                
                                44,600Robert
      Wendt, CTO
                                
                                2009
                                
                                
                                2,500,000
                                
                                
                                
                                0.16
                                
                                
                                
                                68,7502008
                                
                                
                                500,000
                                
                                
                                
                                0.36
                                
                                
                                
                                44,600





Outstanding
Equity Awards at Fiscal Year End Table





The
following table sets forth the outstanding equity awards with respect our named
executive officers for the fiscal year ended September 30, 2009





OPTION
      AWARDS
                                  
                                  
                                  STOCK
      AWARDSEquity
                                  
                                  
                                  EquityEquity
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  Incentive
      Plan
                                  
                                  
                                  Incentive
      PlanIncentive
      Plan
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  Awards:
                                  
                                  
                                  Awards:Number
      of
                                  
                                  
                                  Awards:
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  Market
                                  
                                  
                                  Number
      of
                                  
                                  
                                  Market
      orNumber
      of
                                  
                                  
                                  Securities
                                  
                                  
                                  Number
      of
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  Number
      of
                                  
                                  
                                  Value
      of
                                  
                                  
                                  Unearned
                                  
                                  
                                  Payout
      Value ofSecurities
                                  
                                  
                                  Underlying
                                  
                                  
                                  Securities
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  Shares
      or
                                  
                                  
                                  Shares
      or
                                  
                                  
                                  Shares,
      Units
                                  
                                  
                                  UnearnedUnderlying
                                  
                                  
                                  Unexercised
                                  
                                  
                                  Underlying
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  Units
      of
                                  
                                  
                                  Units
      of
                                  
                                  
                                  or
      Other
                                  
                                  
                                  Shares,
      Units orUnexercised
                                  
                                  
                                  Unearned
                                  
                                  
                                  Unexercisable
                                  
                                  
                                  Option
                                  
                                  
                                  Option
                                  
                                  
                                  Stock
      That
                                  
                                  
                                  Stock
      that
                                  
                                  
                                  Rights
      That
                                  
                                  
                                  Other
      RightsOptions
      (#)
                                  
                                  
                                  Options
      (#)
                                  
                                  
                                  Unearned
                                  
                                  
                                  Exercise
                                  
                                  
                                  Expiration
                                  
                                  
                                  Have
      Not
                                  
                                  
                                  Have
      Not
                                  
                                  
                                  Have
      Not
                                  
                                  
                                  That
      HaveName
                                  
                                  Exercisable
                                  
                                  
                                  Unexercisable
                                  
                                  
                                  Options
      (#)
                                  
                                  
                                  Price
      ($)
                                  
                                  
                                  Date
                                  
                                  
                                  Vested
      (#)
                                  
                                  
                                  Vested
      ($)
                                  
                                  
                                  Vested
      (#)
                                  
                                  
                                  Not
      Vested (#)Tom
      Djokovich, CEO
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —Jeff
      Huitt, CFO
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —Joe
      Grimes, COO
                                  
                                  
                                  624,999
                                  
                                  
                                  
                                  1,875,001
                                  
                                  
                                  
                                  0
                                  
                                  
                                  $
                                  0.16
                                  
                                  
                                  
                                  4/1/2014
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —0
                                  
                                  
                                  
                                  500,000
                                  
                                  
                                  
                                  0
                                  
                                  
                                  $
                                  0.36
                                  
                                  
                                  
                                  10/23/2012
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —400,000
                                  
                                  
                                  
                                  100,000
                                  
                                  
                                  
                                  0
                                  
                                  
                                  $
                                  0.46
                                  
                                  
                                  
                                  1/26/2012
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —352,000
                                  
                                  
                                  
                                  148,000
                                  
                                  
                                  
                                  0
                                  
                                  
                                  $
                                  0.51
                                  
                                  
                                  
                                  7/19/2011
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —112,000
                                  
                                  
                                  
                                  0
                                  
                                  
                                  
                                  0
                                  
                                  
                                  $
                                  1.69
                                  
                                  
                                  
                                  4/4/2011
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —Robert
      Wendt
                                  
                                  
                                  624,999
                                  
                                  
                                  
                                  1,875,001
                                  
                                  
                                  
                                  0
                                  
                                  
                                  $
                                  0.16
                                  
                                  
                                  
                                  4/1/2014
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —
                                  
                                  
                                  
                                  —0
                                  
                                  
                                  
                                  500,000
                                  
                                  
                                  
                                  0
                                  
                                  
                                  $
                                  0.36
                                  
                                  
                                  
                                  10/23/2012
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -400,000
                                  
                                  
                                  
                                  100,000
                                  
                                  
                                  
                                  0
                                  
                                  
                                  $
                                  0.46
                                  
                                  
                                  
                                  1/26/2012
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -




Option Exercises





None





Pension Benefits





None




Nonqualified
Defined Contribution and Other Nonqualified Deferred Compensation
Plans





None





23




Employment
Agreements and Arrangements




Tom
M. Djokovich




Mr.
Djokovich serves as our chief executive officer, acting principal accounting
officer, and a director. We do not have an employment agreement with Mr.
Djokovich. He currently works at the discretion of the board of directors as he
has since October 2003. His annual base salary compensation for the 2009 period
was initially $220,000, and he was provided a $400 per month allowance for use
in the payment of medical benefits. In March 2009 Mr. Djokovich and the Company
agreed to the reduction of annual salary from $220,000 to $165,000 as part of
cost cutting measures approved by the Board of Directors in association with the
Company’s efforts to modify its plan of operations. His medical allowance
payment was unchanged. His total compensation is based solely on the annual base
cash salary and we do not have any equity based, cash bonus, or special
compensation agreements or understanding in place with Mr.
Djokovich.





Joseph
Grimes





On
November 6, 2007, we entered into an amended and restated employment agreement
with Mr. Joseph Grimes, our chief operating officer. Under the terms of his
employment agreement, Mr. Grimes is entitled to a minimum annual base
salary of $210,000 (subject to annual review and increase upon the attainment by
the Company of a minimum of $5,000,000 in revenue in any calendar year) and is
eligible to receive additional compensation in the form of a cash payment bonus
upon certain remaining business development attainment goals as follows; a
$5,000 cash payment bonus upon the successful implementation of a pilot
production line,. Mr. Grimes is also eligible for cash payment bonus subject to
attainment by the Company of certain minimum revenues in the course of a
calendar year as follows; a $5,000 cash payment bonus upon the attainment by the
Company of $5,000,000 in revenue, a $10,000 cash payment bonus upon the
attainment by the Company of $10,000,000 in revenue, a $15,000 cash payment
bonus upon the attainment by the Company of $15,000,000 in revenue. We also
provide Mr. Grimes a $400 monthly allowance for use in payment for health
benefits with the balance of such benefits paid by Mr. Grimes. Our employment
agreement with Mr. Grimes provides that, in the event that Mr. Grimes
employment is terminated by us without good cause, Mr. Grimes will receive
a severance payment in the amount equal to 6 months of his annual base
salary, payable within 30 days of such termination. Under the employment
agreement Mr. Grimes is also subject to confidentiality and
non-solicitation provisions which provide that Mr. Grimes will not divulge
information or solicit employees for 24 months after termination of his
employment.




In March
2009 Mr. Grimes and the Company agreed to the reduction of annual base salary
from $210,000 to $157,500 as part of cost cutting measures approved by the Board
of Directors in association with the Company’s efforts to modify its plan of
operations. In conjunction with agreeing to the reduction in base salary
the Company provided Mr. Grimes with a stock option grant to purchase
2,500,000 shares of our common stock, exercisable at $0.16 cents per
share.




Jeff
Huitt





On
January 1, 2007, we entered into an employment agreement with Mr. Jeff Huitt,
our former chief financial officer. Under the terms of his employment agreement,
Mr. Huitt was initially entitled to a minimum annual base salary of
$135,000 which was adjusted to $155,000 in November 2007 after review by the
board. We also provide Mr. Huitt a $400 monthly allowance for use in payment for
health benefits with the balance of such benefits paid by Mr.
Huitt.




In March,
2009, as part of our efforts to modify the Company’s plan of operations, the
Company and Mr. Huitt agreed to the termination of Mr. Huitt’s employment status
as an employee of the Company and annual salary of $155,000 and a $400 monthly
health insurance allowance. In March the Company and Mr. Huitt’s consulting
firm, Orion Business Services, LLC, entered into a professional service
consulting agreement under which Mr. Huitt would provide financial consulting
services to the Company as a consulting chief financial officer. The Company
paid $65,625 for these professional consulting services in the fiscal year ended
September 30, 2009. Effective September 9, 2009 Orion Business Services, LLC and
the Company agreed to the termination of Mr. Huitt’s services in the capacity as
chief financial officer for the Company.





Robert
Wendt





On
January 1, 2007, we entered into an employment agreement with Mr. Robert Wendt,
our chief technical officer. Under the terms of his employment agreement,
Mr. Wendt was initially entitled to a minimum annual base salary of
$150,000 which was adjusted to $200,000 in November 2007 after review by the
board. We also provide Mr. Wendt a $300 monthly allowance for use in payment for
health benefits with the balance of such benefits paid by Mr.
Wendt.





In March
2009 Mr. Wendt and the Company agreed to the reduction of annual salary from
$200,000 to $150,000 as part of cost cutting measures approved by the Board of
Directors in association with the Company’s efforts to modify its plan of
operations. In conjunction with agreeing to the reduction in base salary
the Company provided Mr. Wendt with a stock option grant to purchase
2,500,000 shares of our common stock, exercisable at $0.16 cents per
share.


24





Potential
Payments Upon Termination or Change-In-Control





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





Terms of
a two year Key Employee Retention Agreement dated September 1, 2009, with Mr.
Robert Wendt, our chief technical officer, provide that in the event that Mr.
Wendt’s employment is terminated by the Company without good cause, Mr. Wendt
may receive twelve months salary at the then salary rate at time of termination,
twelve months Company paid costs for actual costs incurred by Mr. Wendt for
medical benefits related to COBRA coverage, and a relocation payment up to
$2,500. Potential cost to the Company could total at minimum $164,500 for the
termination of Mr. Wendt subject to the termination without good cause by the
Company.





Long
Term Incentive Plans — Awards in Last Fiscal Year





The
following table and notes set forth the incentive awards provided to named
officers of the Company in 2009 fiscal year.





Date
                            Issued
                          
                          Number
                            Issued
                          
                          
                          Exercise
                            Price
                          
                          Expiration
                            Date
                          
                          ConsiderationJoseph
                            Grimes (1)
                          31-March-09
                          
                          
                          2,500,000
                          
                          
                          $
                          0.16
                          
                          1-April-14
                          
                          As
      part of an employment incentive agreement related to salary
      reductionsRobert Wendt (1)
                          31-March-09
                          
                          
                          2,500,000
                          
                          
                          $
                          0.16
                          
                          1-April-14
                          
                          As
      part of an employment incentive agreement  related to salary
      reductions





(1)
              The
      vesting schedule for Mr. Grimes and Mr. Wendt is as
    follows:





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





(a)
            208,333
      shares vested on April 1, 2009 and thereafter 208,333 shall vest per each
      XsunX fiscal calendar quarter of continuous employment from the date of
      grant.





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





(c)
            All
      remaining unvested Options shall vest and become exercisable upon the
      assembly and third party validation of a functioning XsunX manufactured
      solar module producing a 10% frame to frame average DC power conversion
      rating under standard test conditions (STC), and the subsequent sale and
      delivery of a solar module manufactured by XsunX meeting similar
      specifications.





Director Compensation





In the
fiscal year ended September 30, 2009, Directors received no additional cash or
non cash compensation for their service to the Company as
directors.  Outside Directors received an annual retainer fee of
$9,000. All Directors were reimbursed for expenses actually incurred in
connection with attending meetings of the Board of Directors.





SUMMARY
COMPENSATION TABLE OF DIRECTORS





Name
                  
                  Fees
                    Earnedor
                    Paidin
                    Cash
                    ($)
                  
                  
                  Stock
                    Awards
                    ($)
                  
                  
                  Option
                    Awards
                    ($)
                  
                  
                  All
                    Other
                    Compensation
                    ($)
                  
                  
                  Total
                    ($)Tom
      Djokovich
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  0Joseph
      Grimes
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  0Thomas
      Anderson
                  
                  $
                  9,000
                  
                  
                  
                  0
                  
                  
                  
                  63,011
                  
                  
                  
                  0
                  
                  
                  $
                  72,011Oz
      Fundingsland
                  
                  $
                  9,000
                  
                  
                  
                  0
                  
                  
                  
                  59,063
                  
                  
                  
                  0
                  
                  
                  $
                  68,063Dr.
      Michael Russak
                  
                  $
                  9,000
                  
                  
                  
                  0
                  
                  
                  
                  53,150
                  
                  
                  
                  0
                  
                  
                  $
                  62,150





Compensation
Committee Interlocks and Insider Participation





For the
fiscal year ended September 30, 2009 adjustments or additions to new or existing
employment agreements were reviewed and deliberated by the five members of the
Company’s Board of Directors.


25





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





The
following table sets forth, as of January 8, 2010, the number of shares of
common stock owned of record and beneficially by executive officers, directors
and persons who hold 5.0% or more of the outstanding common stock of the
Company. Also included are the shares held by all executive officers and
directors as a group. Unless otherwise indicated, the address of each beneficial
owner listed below is c/o XsunX, Inc., 65 Enterprise, Aliso Viejo, California
92656.





Shareholders/BeneficialOwners
                  
                  Numberof
                    Shares
                  
                  
                  Ownership
                    Percentage(1)Tom
      Djokovich(2)
                    President
      & Director
                  
                  
                  16,293,000
                  
                  
                  
                  8.1
                  %Thomas
      Anderson
                    Director
                  
                  
                  1,500,000
                  
                  
                  <
      1
                  %Oz
      Fundingsland
                    Director
                  
                  
                  500,000
                  
                  
                  <
      1
                  %Mike
      Russak
                    Director
                  
                  
                  500,000
                  
                  
                  <
      1
                  %Joseph
      Grimes(3)
                    Chief
      Operating Officer
                  
                  
                  1,697,332
                  
                  
                  <
      1
                  %Robert
      Wendt(3)
                    Chief
      Technical Officer
                  
                  
                  1,048,332
                  
                  
                  <
      1
                  %




All
directors and executive officers as a group of (6 persons) account for ownership
of 21,538,664 shares representing 10.76% 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 200,095,217 shares of common stock issued
      and outstanding as of January 8, 2010. Beneficial ownership is determined
      in accordance with the rules of the Securities and Exchange Commission and
      generally includes voting or investment power with respect to securities.
      Shares of common stock that are currently exercisable or exercisable
      within 60 days of January 8, 2010 are deemed to be beneficially owned by
      the person holding such securities for the purpose of computing the
      percentage of ownership of such person, but are not treated as outstanding
      for the purpose of computing the percentage ownership of any other
      person.





(2)
            Includes
      15,368,000 shares owned by the Djokovich Limited Partnership. Mr.
      Djokovich shares voting and dispositive power with respect to these shares
      with Mrs. Djokovich.





(3)
            Includes
      500,161 warrants/options that may vest and be exercised within 60 days of
      the date of January 7, 2010.




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




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




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




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





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




Item
14. Principal Accounting Fees and Services




Audit
Fees 2009




As of the
fiscal year ended September 30, 2009 HJ Associates & Consultants, LLP had
billed the Company $17,359 for the following professional services: review of
the interim financial statements included in quarterly reports on Form 10-Q for
the periods ended June 30, 2009, and for audit fees related to the Company’s
annual report on Form 10-K. No other fees were billed by HJ Associates &
Consultants, LLP in the fiscal year ended September 30, 2009.


26





During
the fiscal year ended September 30, 2009 Stark Winter Schenkein & Co., LLP
(“ SWSC ”)  had billed the Company $95,550 for the following
professional services: $10,000 for preparation of Income Tax Returns for the tax
years 2006, 2007, and 2008, $62,500 for related audit work and services on the
Form 10K for the fiscal year 2008, and the re-audit of the 2007, and 2006
periods, $23,050 for review of the interim financial statements included in
quarterly reports on Form 10-Q for the periods ended December 31, 2008 and March
31, 2009.  They were not paid any fees relating to the 2009 audit based on
their dismissal as auditor.





Audit
Fees 2008




As of
September 30, 2008 Stark Winter Schenkein & Co., LLP had not yet been
engaged by the Company. Billings and payments related to the audit work and
services on the Form 10K for the fiscal period 2008 were made in the fiscal year
ended September 30, 2009 as described above in the review of the audit fees for
2009.





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




The
Company’s Board acts as the audit committee and had no “pre-approval policies
and procedures” in effect for the auditors’ engagement for audit years 2008, and
2009.





PART
IV





Item
15. Exhibits, Financial Statement Schedules




Exhibits:





Exhibit
            
            Description3.1
            
            Articles of
      Incorporation(1)3.2
            
            Bylaws(2)10.1
            
            XsunX Plan of Reorganization and
      Asset Purchase Agreement, dated September 23,
    2003.(3)10.2
            
            XsunX 2007 Stock Option Plan,
      dated January 5, 2007.(4)10.3
            
            MVSystems, Inc. Non-Exclusive
      License and Cross-License Agreement, dated May 30,
      2008.(5)10.4
            
            Form of Employment Retention
      agreement between the Company and Robert Wendt, dated September 1, 2009(6)10.5
            
            Form of Stock Sale Agreement used
      in connection with the sale of equity to accredited investors totaling
      6,000,000 shares of common stock(6)10.6
            
            Form of Stock Option Agreement
      used in connection with the issuance of Options to employees in the fiscal
      year ended September 30, 2009. (6)10.7
            
            Lease Termination and Mutual
      Release of Claims, dated August 27, 2009 between the Company and Merix
      Corporation(6)10.8
            
            Promissory Note in the amount of
      $456,920.66, dated August 27, 2009 between the Company and Merix
      Corporation(6)10.9
            
            Form
      of Professional Services Agreement between Orion and the Company, dated
      March 9, 2009(6)10.10
            
            Sencera
      LLC, Separation Agreement, dated June 13, 2008.(7)16.1
            
            Auditor
      Letter(6)31.1
            
            Sarbanes-Oxley
      Certification(6)31.2
            
            Sarbanes-Oxley
      Certification(6)32.1
            
            Sarbanes-Oxley
      Certification(6)32.2
            
            Sarbanes-Oxley
      Certification(6)





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





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





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





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





(5)
            Incorporated
      by reference to exhibits included with the Company’s Current Report on
      Form 8-K filed with the Securities and Exchange Commission dated June 6,
      2008.





(6)
            Provided
      herewith(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 June 17,
      2008.


27




SIGNATURES




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




Date: January 12,
      2010
            XSUNX,
      INC.By:
            /s/ Tom
      DjokovichName:
            Tom
      DjokovichTitle:
            CEO
      and Principal Accounting Officer




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




/s/ Tom Djokovich
            
            January
      12 , 2010Tom
      Djokovich,  Chief Executive Officer,
              Principal
      Executive Officer,  Principal
              Financial
      and Accounting Officer, and Director/s/ Joseph Grimes
            
            January  12,
      2010Joseph
      Grimes, President, Chief Operating Officer and Director/s/ Thomas Anderson
            
            January  12,
      2010Thomas
      Anderson, Director/s/ Oz Fundingsland
            
            January  12,
      2010Oz
      Fundingsland, Director/s/ Michael Russak
            
            January
      12, 2010Michael
      Russak, Director


28





REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Shareholders


XsunX,
Inc. (A Development Stage Company)


Alisa
Viejo, California





We have
audited the accompanying balance sheet of XsunX, Inc. (a development stage
company) as of September 30, 2009, and the related statements of operations,
stockholders' equity (deficit), and cash flows for the year then ended and the
period from February 25, 1997 (inception) to September 30,
2009.  These financial statements are the responsibility of the
Company's management.  Our responsibility is to express an opinion on
these financial statements based on our audits.  The financial
statements for the period from February 25, 1997 (inception) to September 30,
2008 were audited by other auditors and our opinion, insofar as it relates to
cumulative amounts included for such prior periods, is based solely on the
reports of such other auditors.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  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. as of September 30,
2009, and the results of its operations and its cash flows for each of the year
ended September 30, 2009 and the period from February 25, 1997 (inception) to
September 30, 2009, in conformity with U.S. generally accepted accounting
principles.





We were
not engaged to examine management's assessment of the effectiveness of XsunX,
Inc.'s internal control over financial reporting as of September 30, 2009,
included in the accompanying managements’ report and, accordingly, we do not
express an opinion thereon.





The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern.  As discussed in Note 1
to the financial statements, the Company does not generate significant revenue
and has negative cash flows from operations which raise substantial doubt about
its ability to continue as a going concern.  Management’s plans in
regard to these matters are also described in Note 1.  The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.





HJ
Associates & Consultants, LLP


Salt Lake
City, Utah


January
11, 2010


F-1










REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




Stockholders
and Board of Directors
 XsunX,
Inc.
 
 We have
audited the accompanying balance sheet of XsunX, Inc., as of September 30, 2008
and the related statements of operations, stockholders’ equity and cash flows
for the year 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 audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides 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., at September 30, 2008,
and the results of its operations and its cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States of
America.
 
 The
accompanying financial statements have been prepared assuming the Company will
continue as a going concern. As described in Note 1 of the financial statements,
the Company has an accumulated deficit as of September 30, 2008, and needs to
raise additional capital to finance its operations. These conditions raise
substantial doubt about the Company’s ability to continue as a going concern.
Management’s plans as to this matter are further described in Note 1. The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of this
uncertainty.
 
  
 Stark
Winter Schenkein & Co. LLP
 Denver,
Colorado
 January
30, 2009









F-2





XSUNX,
INC.


(A
Development Stage Company)


Balance
Sheets


September 30, 2009
                              
                              
                              September 30, 2008ASSETSCURRENT
      ASSETSCash
      & cash equivalents
                              
                              $
                              530,717
                              
                              
                              $
                              2,389,218Inventory
      asset
                              
                              
                              300,000
                              
                              
                              
                              1,417,000Prepaid
      expenses
                              
                              
                              118,332
                              
                              
                              
                              11,986Total
      Current Assets
                              
                              
                              949,049
                              
                              
                              
                              3,818,204PROPERTY
      & EQUIPMENTOffice
      & miscellaneous equipment
                              
                              
                              51,708
                              
                              
                              
                              50,010Machinery
      & equipment
                              
                              
                              450,386
                              
                              
                              
                              435,910Leasehold
      improvements
                              
                              
                              89,825
                              
                              
                              
                              89,825591,919
                              
                              
                              
                              575,745Less
      accumulated depreciation
                              
                              
                              (378,353
                              )
                              
                              
                              (299,559
                              )Net
      Property & Equipment
                              
                              
                              213,566
                              
                              
                              
                              276,186OTHER
      ASSETSManufacturing
      equipment in progress
                              
                              
                              207,219
                              
                              
                              
                              5,824,630Security
      deposit
                              
                              
                              5,815
                              
                              
                              
                              5,815Total
      Other Assets
                              
                              
                              213,034
                              
                              
                              
                              5,830,445TOTAL
      ASSETS
                              
                              $
                              1,375,649
                              
                              
                              $
                              9,924,835LIABILITIES
      AND SHAREHOLDERS' EQUITYCURRENT
      LIABILITIESAccounts
      payable
                              
                              $
                              389,293
                              
                              
                              $
                              425,548Accrued
      expenses
                              
                              
                              24,451
                              
                              
                              
                              30,957Credit
      card payable
                              
                              
                              17,918
                              
                              
                              
                              40,405Total
      Current Liabilities
                              
                              
                              431,662
                              
                              
                              
                              496,910LONG
      TERM LIABILITIESAccrued
      interest on note payable
                              
                              
                              4,256
                              
                              
                              
                              -Note
      payable, vendor
                              
                              
                              456,921
                              
                              
                              
                              -Total
      Long Term Liabilities
                              
                              
                              461,177
                              
                              
                              
                              -TOTAL
      LIABILITIES
                              
                              
                              892,839
                              
                              
                              
                              496,910SHAREHOLDERS'
      EQUITYPreferred
      stock, $0.01 par value;50,000,000
      authorized preferred shares
                              
                              
                              -
                              
                              
                              
                              -Common
      stock, no par value;500,000,000
      authorized common shares196,484,610
      and 186,292,437 shares issued and outstanding,
respectively
                              
                              
                              23,767,869
                              
                              
                              
                              22,613,369Paid
      in capital, common stock warrants
                              
                              
                              3,175,930
                              
                              
                              
                              2,641,412Additional
      paid in capital
                              
                              
                              5,248,213
                              
                              
                              
                              5,248,213Deficit
      accumulated during the development stage
                              
                              
                              (31,709,202
                              )
                              
                              
                              (21,075,069
                              )TOTAL
      SHAREHOLDERS' EQUITY
                              
                              
                              482,810
                              
                              
                              
                              9,427,925TOTAL
      LIABILITIES AND SHAREHOLDERS'  EQUITY
                              
                              $
                              1,375,649
                              
                              
                              $
                              9,924,835




The
Accompanying Notes are an Integral Part of These Financial
Statements


F-3





XSUNX,
INC.


(A
Development Stage Company)


Statements
of Operations





From InceptionFebruary 25, 1997Years Ended
                    
                    
                    toSeptember 30, 2009
                    
                    
                    September 30, 2008
                    
                    
                    September 30, 2009REVENUE
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    14,880OPERATING
      EXPENSESSelling,
      general and administrative, and research and development
      expense
                    
                    
                    3,316,853
                    
                    
                    
                    3,331,683
                    
                    
                    
                    14,597,953Stock
      option and warrant expense
                    
                    
                    534,518
                    
                    
                    
                    673,287
                    
                    
                    
                    3,450,120Depreciation
      and amortization expense
                    
                    
                    127,293
                    
                    
                    
                    257,222
                    
                    
                    
                    562,406TOTAL
      OPERATING EXPENSES
                    
                    
                    3,978,664
                    
                    
                    
                    4,262,192
                    
                    
                    
                    18,610,479LOSS
      FROM OPERATIONS BEFORE  OTHER INCOME/(EXPENSE)
                    
                    
                    (3,978,664
                    )
                    
                    
                    (4,262,192
                    )
                    
                    
                    (18,595,599
                    )OTHER
      INCOME/(EXPENSES)Interest
      income
                    
                    
                    5,443
                    
                    
                    
                    176,250
                    
                    
                    
                    445,493Impairment
      of assets
                    
                    
                    (5,826,990
                    )
                    
                    
                    (215,625
                    )
                    
                    
                    (7,031,449
                    )Legal
      settlement
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,100,000Loan
      fees
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (7,001,990
                    )Write
      down of inventory asset
                    
                    
                    (1,117,000
                    )
                    
                    
                    -
                    
                    
                    
                    (1,117,000
                    )Forgiveness
      of debt
                    
                    
                    287,381
                    
                    
                    
                    245,000
                    
                    
                    
                    592,154Other,
      non-operating
                    
                    
                    -
                    
                    
                    
                    (1,331
                    )
                    
                    
                    (5,215
                    )Interest
      expense
                    
                    
                    (4,303
                    )
                    
                    
                    (1,054
                    )
                    
                    
                    (95,596
                    )TOTAL
      OTHER INCOME/(EXPENSES)
                    
                    
                    (6,655,469
                    )
                    
                    
                    203,240
                    
                    
                    
                    (13,113,603
                    )NET
      LOSS
                    
                    $
                    (10,634,133
                    )
                    
                    $
                    (4,058,952
                    )
                    
                    $
                    (31,709,202
                    )BASIC
      AND DILUTED LOSS PER SHARE
                    
                    $
                    (0.06
                    )
                    
                    $
                    (0.02
                    )WEIGHTED-AVERAGE
      COMMON SHARES OUTSTANDING BASIC AND DILUTED
                    
                    
                    189,455,449
                    
                    
                    
                    166,998,772




The
Accompanying Notes are an Integral Part of These Financial
Statements


F-4





XSUNX,
INC.


(A
Development Stage Company)


Statements
of Stockholders' Equity


From
Inception February 25, 1997 to September 30, 2009




DeficitAccumulatedAdditional
                        
                        
                        Stock Options/
                        
                        
                        
                        
                        
                        during theCommon Stock
                        
                        
                        Paid-in
                        
                        
                        Warrants
                        
                        
                        Treasury Stock
                        
                        
                        DevelopmentShares
                        
                        
                        Amount
                        
                        
                        Capital
                        
                        
                        Paid-in-Capital
                        
                        
                        Shares
                        
                        
                        Stage
                        
                        
                        TotalBalance
      at February 25, 1997
                        
                        
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -Issuance
      of stock for cash
                        
                        
                        15,880
                        
                        
                        
                        217,700
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        217,700Issuance
      of stock to Founders
                        
                        
                        14,110
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Issuance
      of stock for consolidation
                        
                        
                        445,000
                        
                        
                        
                        312,106
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        312,106Net
      Loss for the year ended September 30, 1997
                        
                        
                        
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (193,973
                        )
                        
                        
                        (193,973
                        )Balance
      at September 30, 1997
                        
                        
                        474,990
                        
                        
                        
                        529,806
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (193,973
                        )
                        
                        
                        335,833Issuance
      of stock for services
                        
                        
                        1,500
                        
                        
                        
                        30,000
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        30,000Issuance
      of stock for cash
                        
                        
                        50,200
                        
                        
                        
                        204,000
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        204,000Consolidation
      stock cancelled
                        
                        
                        (60,000
                        )
                        
                        
                        (50,000
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (50,000
                        )Net
      Loss for the year ended September 30, 1998
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (799,451
                        )
                        
                        
                        (799,451
                        )Balance
      at September 30, 1998
                        
                        
                        466,690
                        
                        
                        
                        713,806
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (993,424
                        )
                        
                        
                        (279,618
                        )Issuance
      of stock for cash
                        
                        
                        151,458
                        
                        
                        
                        717,113
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        717,113Issuance
      of stock for services
                        
                        
                        135,000
                        
                        
                        
                        463,500
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        463,500Net
      Loss for the year ended September 30, 1999
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (1,482,017
                        )
                        
                        
                        (1,482,017
                        )Balance
      at September 30, 1999
                        
                        
                        753,148
                        
                        
                        
                        1,894,419
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (2,475,441
                        )
                        
                        
                        (581,022
                        )Issuance
      of stock for cash
                        
                        
                        15,000
                        
                        
                        
                        27,000
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        27,000Net
      Loss for the year ended September 30, 2000
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (118,369
                        )
                        
                        
                        (118,369
                        )Balance
      at September 30, 2000
                        
                        
                        768,148
                        
                        
                        
                        1,921,419
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (2,593,810
                        )
                        
                        
                        (672,391
                        )Extinguishment
      of debt
                        
                        
                        -
                        
                        
                        
                        337,887
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        337,887Net
      Loss for the year ended September 30, 2001
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (32,402
                        )
                        
                        
                        (32,402
                        )Balance
      at September 30, 2001
                        
                        
                        768,148
                        
                        
                        
                        2,259,306
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (2,626,212
                        )
                        
                        
                        (366,906
                        )Net
      Loss for the year ended September 30, 2002
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (47,297
                        )
                        
                        
                        (47,297
                        )Balance
      at September 30, 2002
                        
                        
                        768,148
                        
                        
                        
                        2,259,306
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (2,673,509
                        )
                        
                        
                        (414,203
                        )Issuance
      of stock for assets
                        
                        
                        70,000,000
                        
                        
                        
                        3
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        3Issuance
      of stock for cash
                        
                        
                        9,000,000
                        
                        
                        
                        225,450
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        225,450Issuance
      of stock for debt
                        
                        
                        115,000
                        
                        
                        
                        121,828
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        121,828Issuance
      of stock for expenses
                        
                        
                        115,000
                        
                        
                        
                        89,939
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        89,939Issuance
      of stock for services
                        
                        
                        31,300,000
                        
                        
                        
                        125,200
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        125,200Net
      Loss for the year ended September 30, 2003
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (145,868
                        )
                        
                        
                        (145,868
                        )Balance
      at September 30, 2003
                        
                        
                        111,298,148
                        
                        
                        
                        2,821,726
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (2,819,377
                        )
                        
                        
                        2,349Issuance
      of stock for cash
                        
                        
                        2,737,954
                        
                        
                        
                        282,670
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        282,670Warrant
      expense
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        825,000
                        
                        
                        
                        -
                        
                        
                        
                        375,000
                        
                        
                        
                        1,200,000Net
      Loss for the year ended September 30, 2004
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (1,509,068
                        )
                        
                        
                        (1,509,068
                        )Balance
      at September 30, 2004
                        
                        
                        114,036,102
                        
                        
                        
                        3,104,396
                        
                        
                        
                        -
                        
                        
                        
                        825,000
                        
                        
                        
                        -
                        
                        
                        
                        (3,953,445
                        )
                        
                        
                        (24,049
                        )Issuance
      of stock for cash
                        
                        
                        6,747,037
                        
                        
                        
                        531,395
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        531,395Issuance
      of stock for services
                        
                        
                        3,093,500
                        
                        
                        
                        360,945
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        360,945Warrant
      expense
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        180,000
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        180,000Beneficial
      conversion
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        400,000
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        400,000Shares
      held as collateral for debentures
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        26,798,418
                        
                        
                        
                        -
                        
                        
                        
                        -Net
      Loss for the year ended September 30, 2005
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (1,980,838
                        )
                        
                        
                        (1,980,838
                        )Balance
      at September 30, 2005
                        
                        
                        123,876,639
                        
                        
                        
                        3,996,736
                        
                        
                        
                        400,000
                        
                        
                        
                        1,005,000
                        
                        
                        
                        26,798,418
                        
                        
                        
                        (5,934,283
                        )
                        
                        
                        (532,547
                        )Issuance
      of stock for services
                        
                        
                        72,366
                        
                        
                        
                        31,500
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        31,500Warrant
      expense
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        996,250
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        996,250Beneficial
      conversion
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        5,685,573
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        5,685,573Debenture
      conversion
                        
                        
                        21,657,895
                        
                        
                        
                        5,850,000
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        5,850,000Issuance
      of stock for interest expense
                        
                        
                        712,956
                        
                        
                        
                        241,383
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        241,383Issuance
      of stock for warrant conversion
                        
                        
                        10,850,000
                        
                        
                        
                        3,171,250
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        3,171,250Net
      Loss for the year ended September 30, 2006
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (9,112,988
                        )
                        
                        
                        (9,112,988
                        )Balance
      at September 30, 2006 (restated)
                        
                        
                        157,169,856
                        
                        
                        
                        13,290,869
                        
                        
                        
                        6,085,573
                        
                        
                        
                        2,001,250
                        
                        
                        
                        26,798,418
                        
                        
                        
                        (15,047,271
                        )
                        
                        
                        6,330,421




The
Accompanying Notes are an Integral Part of These Financial
Statements


F-5




XSUNX,
INC.


(A
Development Stage Company)


Statements
of Stockholders' Equity


From
Inception February 25, 1997 to September 30, 2009





DeficitAccumulatedAdditional
                              
                              
                              Stock Options/
                              
                              
                              
                              
                              
                              during theCommon Stock
                              
                              
                              Paid-in
                              
                              
                              Warrants
                              
                              
                              Treasury Stock
                              
                              
                              DevelopmentShares
                              
                              
                              Amount
                              
                              
                              Capital
                              
                              
                              Paid-in-Capital
                              
                              
                              Shares
                              
                              
                              Stage
                              
                              
                              TotalCancellation
      of stock for serivces returned
                              
                              
                              (150,000
                              )
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Release
      of security collateral
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (26,798,418
                              )
                              
                              
                              -
                              
                              
                              
                              -Issuance
      of stock for warrants
                              
                              
                              900,000
                              
                              
                              
                              135,000
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              135,000Stock
      option and warrant expense
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              772,315
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              772,315Net
      Loss for the year ended September 30, 2007
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (1,968,846
                              )
                              
                              
                              (1,968,846
                              )Balance
      at September 30, 2007 (restated)
                              
                              
                              157,919,856
                              
                              
                              
                              13,425,869
                              
                              
                              
                              6,085,573
                              
                              
                              
                              2,773,565
                              
                              
                              
                              -
                              
                              
                              
                              (17,016,117
                              )
                              
                              
                              5,268,890Fusion
      Equity common stock purchase
                              
                              
                              15,347,581
                              
                              
                              
                              5,200,000
                              
                              
                              
                              (55,300
                              )
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              5,144,700Commiment
      fees
                              
                              
                              3,500,000
                              
                              
                              
                              1,190,000
                              
                              
                              
                              (1,190,000
                              )
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Cumorah
      common stock purchase
                              
                              
                              8,650,000
                              
                              
                              
                              2,500,000
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              2,500,000Wharton
      settlement
                              
                              
                              875,000
                              
                              
                              
                              297,500
                              
                              
                              
                              (397,500
                              )
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (100,000
                              )MVS
      warrant cancellation
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              805,440
                              
                              
                              
                              (805,440
                              )
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Stock
      options and warrant expense
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              673,287
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              673,287Net
      Loss for the year ended September 30, 2008
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (4,058,952
                              )
                              
                              
                              (4,058,952
                              )Balance
      at September 30, 2008
                              
                              
                              186,292,437
                              
                              
                              
                              22,613,369
                              
                              
                              
                              5,248,213
                              
                              
                              
                              2,641,412
                              
                              
                              
                              -
                              
                              
                              
                              (21,075,069
                              )
                              
                              
                              9,427,925Issuance
      of stock for cash
                              
                              
                              2,000,000
                              
                              
                              
                              400,000
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              400,000Issuance
      of stock for cash
                              
                              
                              1,000,000
                              
                              
                              
                              200,000
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              200,000Issuance
      of stock for services
                              
                              
                              50,000
                              
                              
                              
                              11,000
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              11,000Issuance
      of stock for cash
                              
                              
                              1,129,483
                              
                              
                              
                              70,000
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              70,000Issuance
      of stock for services
                              
                              
                              900,000
                              
                              
                              
                              108,000
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              108,000Issuance
      of stock for services
                              
                              
                              76,976
                              
                              
                              
                              10,500
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              10,500Issuance
      of stock for services
                              
                              
                              35,714
                              
                              
                              
                              5,000
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              5,000Issuance
      of stock for cash
                              
                              
                              5,000,000
                              
                              
                              
                              350,000
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              350,000Stock
      compensation expense
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              534,518
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              534,518Net
      Loss for the year ended September 30, 2009
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (10,634,133
                              )
                              
                              
                              (10,634,133
                              )Balance
      at September 30, 2009
                              
                              
                              196,484,610
                              
                              
                              $
                              23,767,869
                              
                              
                              $
                              5,248,213
                              
                              
                              $
                              3,175,930
                              
                              
                              $
                              -
                              
                              
                              $
                              (31,709,202
                              )
                              
                              $
                              482,810





The
Accompanying Notes are an Integral Part of These Financial
Statements


F-6





XSUNX,
INC.


(A
Development Stage Company)


Statements
of Cash Flows





From InceptionFebruary 25,1997Years Ended
                    
                    
                    toSeptember 30, 2009
                    
                    
                    September 30, 2008
                    
                    
                    September 30, 2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                    
                    $
                    (10,634,133
                    )
                    
                    $
                    (4,058,952
                    )
                    
                    $
                    (31,709,202
                    )Adjustment
      to reconcile net loss to net cash used in operating
    activitiesDepreciation
      & amortization
                    
                    
                    127,293
                    
                    
                    
                    257,222
                    
                    
                    
                    562,406Common
      stock issued for services and interest
                    
                    
                    134,500
                    
                    
                    
                    -
                    
                    
                    
                    1,964,134Stock
      option and warrant expense
                    
                    
                    534,518
                    
                    
                    
                    673,287
                    
                    
                    
                    3,450,120Beneficial
      conversion and commitment fees
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    5,685,573Asset
      impairment
                    
                    
                    5,826,990
                    
                    
                    
                    215,625
                    
                    
                    
                    7,031,449Write
      down of inventory asset
                    
                    
                    1,117,000
                    
                    
                    
                    -
                    
                    
                    
                    1,117,000Gain
      on settlement of debt
                    
                    
                    (287,381
                    )
                    
                    
                    -
                    
                    
                    
                    (287,381
                    )Settlement
      of lease
                    
                    
                    59,784
                    
                    
                    
                    -
                    
                    
                    
                    59,784Change
      in Assets and Liabilites(Increase)
      Decrease in:Prepaid
      expenses
                    
                    
                    (106,346
                    )
                    
                    
                    329,771
                    
                    
                    
                    (118,332
                    )Inventory
      asset
                    
                    
                    -
                    
                    
                    
                    (1,700,000
                    )
                    
                    
                    (1,417,000
                    )Other
      assets
                    
                    
                    -
                    
                    
                    
                    1,638,326
                    
                    
                    
                    (5,815
                    )Increase
      (Decrease) in:Accounts
      payable
                    
                    
                    345,211
                    
                    
                    
                    16,729
                    
                    
                    
                    2,439,940Accrued
      expenses
                    
                    
                    (2,250
                    )
                    
                    
                    (36,951
                    )
                    
                    
                    28,707Credit
      cards payable
                    
                    
                    22,487
                    
                    
                    
                    (30,533
                    )
                    
                    
                    17,918NET
      CASH USED IN OPERATING ACTIVITIES
                    
                    
                    (2,862,327
                    )
                    
                    
                    (2,695,476
                    )
                    
                    
                    (11,198,617
                    )CASH
      FLOWS USED IN INVESTING ACTIVITIES:Purchase
      of manufacturing equipment and facilities in process
                    
                    
                    -
                    
                    
                    
                    (5,617,410
                    )
                    
                    
                    (5,824,629
                    )Payments
      on note receivable
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (1,500,000
                    )Receipts
      on note receivable
                    
                    
                    -
                    
                    
                    
                    1,500,000
                    
                    
                    
                    1,500,000Purchase
      of marketable prototype
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (1,780,396
                    )Purchase
      of fixed assets
                    
                    
                    (16,174
                    )
                    
                    
                    (111,213
                    )
                    
                    
                    (591,919
                    )NET
      CASH USED IN INVESTING ACTIVITIES
                    
                    
                    (16,174
                    )
                    
                    
                    (4,228,623
                    )
                    
                    
                    (8,196,944
                    )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from warrant conversion
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    3,306,250Proceeds
      from debentures
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    5,850,000Proceeds
      for issuance of common stock, net
                    
                    
                    1,020,000
                    
                    
                    
                    7,544,700
                    
                    
                    
                    10,770,028NET
      CASH PROVIDED BY FINANCING ACTIVITIES
                    
                    
                    1,020,000
                    
                    
                    
                    7,544,700
                    
                    
                    
                    19,926,278NET
      INCREASE (DECREASE) IN CASH
                    
                    
                    (1,858,501
                    )
                    
                    
                    620,601
                    
                    
                    
                    530,717CASH
      & CASH EQUIVALENTS, BEGINNING OF YEAR
                    
                    
                    2,389,218
                    
                    
                    
                    1,768,616
                    
                    
                    
                    -CASH
      & CASH EQUIVALENTS, END OF YEAR
                    
                    $
                    530,717
                    
                    
                    $
                    2,389,218
                    
                    
                    $
                    530,717SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATIONInterest
      paid
                    
                    $
                    46
                    
                    
                    $
                    47,217
                    
                    
                    $
                    119,663Taxes
      paid
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -


SUPPLEMENTAL
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
 During
the fiscal year ended September 30, 2009, the Company agreed upon a settlement
of its remaining lease obligation on the Oregon facility, and issued a
promissory note in the amount of $456,921. During the year ended September 30,
2008, the Company issued 875,000 shares of common stock for settlement of debt
at a fair value of $297,500.




The
Accompanying Notes are an Integral Part of These Financial
Statements


F-7





XSUNX,
INC.


(A
Development Stage Company)


Notes
to Financial Statements


September
30, 2009 and 2008





1.
            ORGANIZATION
      AND LINE OF BUSINESS





Organization


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





Line of
Business


In the
fiscal year ended September 30, 2009 XsunX modified its previous plans to
directly establish product manufacturing infrastructure. We have re-focused
operations on the development of a cross-industry thin film solar manufacturing
concept that we believe provides an opportunity for XsunX to establish a
competitive advantage within the industry. Our current efforts are focused on
the combination of proven thin film solar processes with state-of-the-art mature
magnetic media thin film manufacturing technologies derived from the hard disc
drive (HDD) industry to improve manufacturing output, increase cell efficiency
and production yields, and lower the costs for the production of high efficiency
Copper Indium Gallium (di) Selenide (CIGS) thin film solar
cells.





It is our
belief that by leveraging the manufacturing processes from the HDD industry and
adapting them to thin-film solar technologies, we can reduce the cost per watt
for solar to well below $1 per watt, thereby making solar a viable alternative
in the energy field.  Furthermore, it is our belief that our
expertise, experience and proprietary technology in this area will allow us to
seek joint ventures with larger companies thereby generating revenue streams
through licensing fees and manufacturing royalties.





Going
Concern


The
accompanying financial statements have been prepared on a going concern basis of
accounting, which contemplates continuity of operations, realization of assets,
liabilities and commitments in the normal course of business.  The
accompanying financial statements do not reflect any adjustments that might
result if the Company is unable to continue as a going concern.  The
Company does not generate revenue, and has negative cash flows from operations,
which raise substantial doubt about the Company’s ability to continue as a going
concern.  The ability of the Company to continue as a going concern
and appropriateness of using the going concern basis is dependent upon, among
other things, additional cash infusion.  The Company has obtained
funds from its shareholders since its inception through September 30, 2009.
Management believes the existing shareholders and the prospective new investors
will provide the additional cash needed to meet the Company’s obligations as
they become due, and will allow the development of its core of
business.





2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES





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





Development Stage Activities
and Operations


The
Company has been in its initial stages of formation and for the fiscal years
ended September 30, 2009, and 2008, had no revenues. A development stage
activity as one in which all efforts are devoted substantially to establishing a
new business and even if planned principal operations have commenced, revenues
are insignificant.





Use of
Estimates


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





Cash and Cash
Equivalents


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





Fair Value of Financial
Instruments


The
Company’s financial instruments, including cash and cash equivalents, accounts
payable and accrued liabilities are carried at cost, which approximates their
fair value, due to the relatively short maturity of these instruments. As of
September 30, 2009, and 2008, 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.





Revenue
Recognition


The
Company recognizes revenue when services are performed, and at the time of
shipment of products, provided that evidence of an arrangement exists, title and
risk of loss have passed to the customer, fees are fixed or determinable, and
collection of the related receivable is reasonably assured.  To date,
only a limited amount of consulting revenue has been earned and the Company is
still in the development stage.  The Company’s revenue recognition
policy will be re-evaluated in light of the licensing of solar manufacturing
technologies in the future.


F-8





XSUNX,
INC.


(A
Development Stage Company)


Notes
to Financial Statements


September
30, 2009 and 2008





2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)





Property and
Equipment


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





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





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





Loss per
Share


Loss per
Share is the calculation of basic earnings per share and diluted earnings per
share. Basic earnings per share are computed by dividing income available to
common shareholders by the weighted-average number of common shares available.
Diluted earnings per share is computed similar to basic earnings per share
except that the denominator is increased to include the number of additional
common shares that would have been outstanding if the potential common shares
had been issued and if the additional common shares were dilutive. The Company’s
diluted loss per share is the same as the basic loss per share for the fiscal
years ended September 30, 2009, and 2008, as the inclusion of any potential
shares would have had an anti-dilutive effect due to the Company generating a
loss.





Advertising


Advertising
costs are expensed as incurred. Total advertising costs were $11,340, and
$19,894 for the fiscal years ended September 30, 2009, and 2008,
respectively.





Research and
Development


Research
and development costs are expensed as incurred. Total research and development
costs were $358,884, and $(40,590) for the fiscal years ended September 30,
2009, and 2008, respectively. In the fiscal year ended September 30, 2008 the
Company recovered previous R&D expenses.





Inventory


Inventories
are stated at the lower of cost or market, and consist of a marketable
production prototype. As of September 30, 2009 and 2008, the value of the
inventory was $300,000 and $1,417,000, respectively.





Stock-Based
Compensation


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




Income
Taxes


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




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





Recent Accounting
Pronouncements


In June
2009, the FASB issued guidance under Accounting Standards Codification (“ASC”)
Topic 105, “Generally Accepted Accounting Principles” (SFAS No. 168, The FASB
Accounting Standards Codification TM and the Hierarchy of Generally Accepted
Accounting Principles). This guidance establishes the FASB ASC as the single
source of authoritative U.S. GAAP recognized by the FASB to be applied by
nongovernmental entities. Rules and interpretive releases of the SEC under
authority of federal securities laws are also sources of authoritative U.S. GAAP
for SEC registrants. SFAS 168 and the ASC are effective for financial statements
issued for interim and annual periods ending after September 15, 2009. The ASC
supersedes all existing non-SEC accounting and reporting standards. All other
non-grandfathered, non-SEC accounting literature not included in the ASC has
become non-authoritative. Following SFAS 168, the FASB will no longer
issue new standards in the form of Statements, FSPs, or EITF Abstracts. Instead,
the FASB will issue Accounting Standards Updates, which will serve only to
update the ASC, provide background information about the guidance, and provide
the bases for conclusions on the change(s) in the ASC. We adopted ASC 105
effective for our financial statements issued as of September 30, 2009. The adoption
of this guidance did not have an impact on our financial statements but will
alter the references to accounting literature within the consolidated financial
statements.


F-9


XSUNX,
INC.


(A
Development Stage Company)


Notes
to Financial Statements


September
30, 2009 and 2008





2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)





In August
2009, the FASB issued guidance under Accounting Standards Update (“ASU”) No.
2009-05, “Measuring Liabilities at Fair Value”. This guidance clarifies how the
fair value a liability should be determined. This guidance is effective for the
first reporting period after issuance. We will adopt this guidance for our
fiscal year ended September 30, 2009. The adoption of this guidance has no
material impact on our financial statements





Reclassification


Certain
expenses for the fiscal year ended September 30, 2008 were reclassified to
conform with the expenses for the fiscal year ended September 30,
2009.





3.
            CAPITAL
      STOCK





At
September 30, 2009, the Company’s authorized stock consisted of 500,000,000
shares of common stock, with no par value.  The Company is also
authorized to issue 50,000,000 shares of preferred stock with a par value of
$0.01 per share.  The rights, preferences and privileges of the
holders of the preferred stock will be determined by the Board of Directors
prior to issuance of such shares. During the year ended September 30, 2009, the
Company issued 3,000,000 shares of common stock issued through a private
placement at a price of $0.20 per share for cash of $600,000; 5,000,000 shares
of common stock issued at a price of $0.07 per share for cash of $350,000;
1,129,483 shares of common stock issued at a price of $0.062 per share for cash
of $70,000; 1,062,690 shares of common stock issued at prices between $0.12 and
$0.22 per share for services. During the year ended September 30, 2008, the
Company issued 8,650,000 shares of common stock at a price of $0.2890 per share
for cash of $2,500,000; 15,347,581 shares of common stock issued at an average
price of $0.3388 per share for gross cash proceeds of $5,200,000; 3,500,000
shares of common stock issued at a price of $0.34 per share as part of
a  financing commitment fee of $1,190,000; 875,000 shares of common
stock issued at a price of $0.34 per share for settlement of a
debt.





4.
            STOCK
      OPTIONS AND WARRANTS





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





2009
                      
                      2008Risk
      free interest rate
                      1.67%
      to 2.77%
                      
                      3.23% to 4.87%Stock
      volatility factor
                      90.56% to 104.73%
                      
                      53%
      to 122%Weighted
      average expected option life
                      5
      years
                      
                      5
      yearsExpected
      dividend yield
                      None
                      
                      None


F-10





XSUNX,
INC.


(A
Development Stage Company)


Notes
to Financial Statements


September
30, 2009 and 2008





4.
            STOCK
      OPTIONS AND WARRANTS (Continued)




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




2009
                  
                  
                  2008Weighted
                  
                  
                  
                  
                  
                  WeightedNumber
                  
                  
                  average
                  
                  
                  Number
                  
                  
                  averageof
                  
                  
                  exercise
                  
                  
                  of
                  
                  
                  exerciseOptions
                  
                  
                  price
                  
                  
                  Options
                  
                  
                  priceOutstanding,
      beginning of year
                  
                  
                  5,750,000
                  
                  
                  $
                  0.39
                  
                  
                  
                  1,950,000
                  
                  
                  $
                  0.46Granted
                  
                  
                  5,350,000
                  
                  
                  $
                  0.17
                  
                  
                  
                  3,800,000
                  
                  
                  $
                  0.36Exercised
                  
                  
                  -
                  
                  
                  $
                  -
                  
                  
                  
                  -
                  
                  
                  $
                  -Expired
                  
                  
                  (920,000
                  )
                  
                  $
                  0.41
                  
                  
                  
                  -
                  
                  
                  $
                  -Outstanding,
      end of year
                  
                  
                  10,180,000
                  
                  
                  $
                  0.27
                  
                  
                  
                  5,750,000
                  
                  
                  $
                  0.39Exercisable
      at the end of year
                  
                  
                  4,927,500
                  
                  
                  $
                  0.33
                  
                  
                  
                  2,927,500
                  
                  
                  $
                  0.40Weighted
      average fair value of options granted during the year
                  
                  
                  
                  
                  
                  $
                  0.11
                  
                  
                  
                  
                  
                  
                  $
                  0.28





The
weighted average remaining contractual life of options outstanding issued under
the plan as of September 30, 2009 was as follows:





WeightedAverageStock
                                    
                                    
                                    Stock
                                    
                                    RemainingExercisable
                                    
                                    Options
                                    
                                    
                                    Options
                                    
                                    ContractualPrices
                                    
                                    Outstanding
                                    
                                    
                                    Exercisable
                                    
                                    Life (years)$
                                    0.46
                                    
                                    
                                    1,150,000
                                    
                                    
                                    
                                    950,000
                                    
                                    2.32
      years$
                                    0.53
                                    
                                    
                                    100,000
                                    
                                    
                                    
                                    100,000
                                    
                                    2.40
      years$
                                    0.45
                                    
                                    
                                    100,000
                                    
                                    
                                    
                                    100,000
                                    
                                    2.56
      years$
                                    0.41
                                    
                                    
                                    100,000
                                    
                                    
                                    
                                    100,000
                                    
                                    2.91
      years$
                                    0.36
                                    
                                    
                                    2,500,000
                                    
                                    
                                    
                                    1,437,500
                                    
                                    3.07
      years$
                                    0.36
                                    
                                    
                                    500,000
                                    
                                    
                                    
                                    437,500
                                    
                                    3.12
      years$
                                    0.36
                                    
                                    
                                    500,000
                                    
                                    
                                    
                                    437,500
                                    
                                    3.16
      years$
                                    0.36
                                    
                                    
                                    115,000
                                    
                                    
                                    
                                    57,501
                                    
                                    4.03
      years$
                                    0.16
                                    
                                    
                                    5,115,000
                                    
                                    
                                    
                                    1,307,499
                                    
                                    4.50
      years10,180,000
                                    
                                    
                                    
                                    4,927,500





Stock-based
compensation expense recognized during the period is based on the value of the
portion of stock-based payment awards that is ultimately expected to vest.
Stock-based compensation expense recognized in the financial statements of
operations during the fiscal year ended September 30, 2009, included
compensation expense for the stock-based payment awards granted prior to, but
not yet vested, as of September 30, 2009 based on the grant date fair value
estimated, and compensation expense for the stock-based payment awards granted
subsequent to September 30, 2009, based on the grant date fair value estimated.
We account for forfeitures as they occur. The stock-based compensation expense
recognized in the statement of operations during the fiscal years ended
September 30, 2009 and 2008 was $534,518 and $673,287,
respectively.


F-11





XSUNX,
INC.


(A
Development Stage Company)


Notes
to Financial Statements


September
30, 2009 and 2008





4.
            STOCK
      OPTIONS AND WARRANTS (Continued)





Warrants


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









2009
                    
                    
                    2008Weighted
                    
                    
                    
                    
                    
                    WeightedNumber
                    
                    
                    average
                    
                    
                    Number
                    
                    
                    averageof
                    
                    
                    exercise
                    
                    
                    of
                    
                    
                    exerciseOptions
                    
                    
                    price
                    
                    
                    Options
                    
                    
                    priceOutstanding,
      beginning of year
                    
                    
                    4,195,332
                    
                    
                    $
                    0.61
                    
                    
                    
                    15,362,000
                    
                    
                    $
                    0.22Granted
                    
                    
                    -
                    
                    
                    $
                    -
                    
                    
                    
                    3,333,332
                    
                    
                    $
                    0.63Exercised
                    
                    
                    -
                    
                    
                    $
                    -
                    
                    
                    
                    
                    
                    
                    $
                    -Expired
                    
                    
                    -
                    
                    
                    $
                    -
                    
                    
                    
                    (14,500,000
                    )
                    
                    $
                    0.20Outstanding,
      end of year
                    
                    
                    4,195,332
                    
                    
                    $
                    0.61
                    
                    
                    
                    4,195,332
                    
                    
                    $
                    0.61Exercisable
      at the end of year
                    
                    
                    4,047,332
                    
                    
                    $
                    0.62
                    
                    
                    
                    4,047,332
                    
                    
                    $
                    0.61Weighted
      average fair value ofwarrants
      granted during the year
                    
                    
                    
                    
                    
                    $
                    -
                    
                    
                    
                    
                    
                    
                    $
                    0.63







At
September 30, 2009, the weighted average remaining contractual life of options
outstanding:




WeightedAverageRemainingExercisable
                            
                            Warrants
                            
                            
                            Warrants
                            
                            ContractualPrices
                            
                            Outstanding
                            
                            
                            Exercisable
                            
                            Life (years)$
                            1.69
                            
                            
                            112,000
                            
                            
                            
                            112,000
                            
                            1.51
      years$
                            0.51
                            
                            
                            500,000
                            
                            
                            
                            352,000
                            
                            1.80
      years$
                            0.20
                            
                            
                            250,000
                            
                            
                            
                            250,000
                            
                            2.25
      years$
                            0.50
                            
                            
                            1,666,666
                            
                            
                            
                            1,666,666
                            
                            3.09
      years$
                            0.75
                            
                            
                            1,666,666
                            
                            
                            
                            1,666,666
                            
                            3.09
      years4,195,332
                            
                            
                            
                            4,047,332




5.
            INCOME
      TAXES




The
Company files income tax returns in the U.S. Federal jurisdiction, and the state
of California. With few exceptions, the Company is no longer subject to U.S.
federal, state and local, or non-U.S. income tax examinations by tax authorities
for years before 2006.





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





The
Company's policy is to recognize interest accrued related to unrecognized tax
benefits in interest expense and penalties in operating expenses. During the
fiscal year ended September 30, 2009, the Company did not recognize interest and
penalties.





6.
            DEFERRED
      TAX BENEFIT





At
September 30, 2009, the Company had net operating loss carry-forwards of
approximately $16,648,000 that may be offset against future taxable income from
the year 2010 through 2030. No tax benefit has been reported in the September
30, 2009 financial statements since the potential tax benefit is offset by a
valuation allowance of the same amount.





Due to
the change in ownership provisions of the Tax Reform Act of 1986, net operating
loss carry-forwards for Federal income tax reporting purposes are subject to
annual limitations. Should a change in ownership occur, net operating loss
carry-forwards may be limited as to use in future years.


F-12





XSUNX,
INC.


(A
Development Stage Company)


Notes
to Financial Statements


September
30, 2009 and 2008





6.
            DEFERRED
      TAX BENEFIT (Continued)





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





2009Book
      Income
                      
                      $
                      (4,253,653
                      )State
      Income Taxes
                      
                      
                      -Nondeductible
      Stock Compensation
                      
                      
                      213,807Other
                      
                      
                      1,784NOL
      Carryover
                      
                      
                      -Valuation
      Allowance
                      
                      
                      4,038,062Income
      Tax Expense
                      
                      $
                      -





At
September 30, 2008, the Company had net operating loss carry forwards of
approximately, $6,576,177 for federal income tax purposes. The deferred tax
assets of $2,630,471 are composed of the Company’s net operating loss carry
forwards of approximately $6,576,177 at the approximate tax effect of 40%. There
are no other material deferred tax assets or liabilities of the Company as of
September 30, 2008.





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





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





2009Deferred
      Tax Assets:NOL
      Carryforward
                  
                  $
                  6,659,187Depreciation
                  
                  
                  38,990Contribution
      Carryforward
                  
                  
                  40Section
      179 Expense Carry-Forward
                  
                  
                  90,686Deferred
      Tax Liabilities:
                  
                  
                  -Valuation
      Allowance
                  
                  
                  (6,788,903
                  )Net
      Deferred Tax Asset
                  
                  $
                  -





7.
            IMPAIRMENT
      OF ASSETS





Manufacturing Equipment in
Process


In
response to changes within the financial markets and solar industry the Company
modified its business development efforts. The change to operation and business
development plans required the review and valuation assessment of each of the
assets that make up the total under the Company’s Manufacturing Equipment in
Process account. The review has resulted in a write down of certain assets
related to the Company’s efforts to establish amorphous silicon solar module
manufacturing infrastructure that the Company does not anticipate utilizing
under its new plan. This impairment resulted in an expense of $5,826,990. This
represents a total write down to zero for the portion of the Company’s
Manufacturing Equipment in Process account that the Company does not anticipate
using under its new plan of operations.  The valuation adjustment was
the result of an analysis of certain significant unobservable events and the
inputs used in determining the amount of the valuation adjustment include the
decision to move to new manufacturing technology under efforts to establish a
competitive advantage.  As these assets were not in service, there was
no impact to depreciation expense or accumulated depreciation. The non-cash
expense for the period ended September 30, 2009 is $209,580. However, there was
an impact to the impairment expense recorded for the period.





Inventory Asset for
Sale


The
Company has engaged in efforts to market and sell a production prototype machine
held in inventory for sale. We have engaged in efforts to solicit buyers, but we
cannot be assured that a sale of the machine will be finalized in the near term.
In an effort to develop alternate methods for the sale of the system the Company
is engaged in discussions with interested parties for an arms-length trade of
the system for services related to the Company’s efforts to develop new thin
film manufacturing techniques for CIGS thin films. As a result of these
negotiations utilizing the system as a trade for services, the company
reasonably believes that the book value of the marketable prototype should be
adjusted to reflect a current fair market valuation of $300,000 representing an
average of the trade discussions under way at September 30, 2009. Management
also believes that the write down of $1,117,000 to a book value of $300,000
represents the reasonable salvage value for the marketable prototype
machine.


F-13





XSUNX, INC.


(A
Development Stage Company)


Notes
to Financial Statements


September
30, 2009 and 2008





8.
            PROMISSORY
      NOTE





During
the fiscal year ended September 30, 2009, the Company converted an accounts
payable for accrued facility lease payments to a promissory note in the amount
of $456,921 The note accrues interest at 10% per annum. The note, including all
principal and interest are due September 1, 2011. The interest expense for the
fiscal year ended September 30, 2009 is $4,256. Also, as part of the lease
payments the Company returned equipment to the lease holder and recognized
a non-cash loss of $59,784.





9.
            SETTLEMENT
      OF DEBT





During
the fiscal year ended September 30, 2009, the Company was forgiven an accounts
payable liability for equipment and services in the amount of
$287,381.





10.
            CONCENTRATION
      OF CREDIT RISK





The
Company has a concentration of credit risk for cash by maintaining deposits with
banks, which may at a time exceed insured amounts.  The accounts are
insured by the Federal Deposit Insurance Corporation up to $250,000 per
financial institution. At September 30, 2009, the Company’s uninsured cash
deposits were $280,717.





11.
            COMMITMENTS
      AND CONTINGENCIES





California Corporate Office
Lease


Effective
April 1, 2009 the Company reduced its leased facilities at its Aliso Viejo, CA
offices by approximately 50%. This resulted in associated reductions to monthly
lease and facility expenses totaling approximately $2,000 leaving a monthly
lease and facility liability of approximately $1,400. The Company plans to
continue to lease these facilities for the foreseeable future.





Oregon Manufacturing
Facility Lease


In
furtherance of its revised plan of operations focusing on the development of new
manufacturing technology for CIGS thin films and plans to establish
manufacturing operations through joint venture license agreements for such new
technology the Company elected to eliminate its Oregon based
facility.  On August 27, 2009, the Company entered into a lease
termination and mutual release of claims with Merix Corporation, an Oregon
corporation. Pursuant to the terms of the Agreement, the Parties agreed to
terminate that certain sublease agreement by and between the Parties, dated
April 1, 2008, related to certain real property described therein which
comprised the Company’s Oregon based facility (the “Premises”). Accordingly, the
Company agreed to vacate the Premises on or before September 1, 2009. In
connection with the termination of the Sublease, the Company also agreed (a) to
sell certain equipment, currently housed on the Premises, to Merix for the
amount of $111,620, (b) to allow Merix to complete a full drawdown of that
certain $106,000 irrevocable letter of credit issued by Wells Fargo Bank, N.A.,
at the request of the Company, in favor of Merix. The combined amounts of the
sale of equipment and draw down to the letter of credit totaling $217,620 were
credited to the accrued lease payment liabilities. The remaining accrued lease
payment liabilities and contractual term lease obligation were reduced to
$456,920.66 and the Company issued an unsecured promissory note in favor of
Merix in the amount of $456,920.66. The note accrues interest at 10% per annum.
The Parties agreed to unconditionally release each other from the obligations
imposed by, or related to, the Sublease, except for the obligations established
by the Agreement.  The termination of the Sublease eliminates
continued monthly operating costs associated with the facility, which the
Company no longer requires for its plan of operations, while also reducing the
Company’s short-term liabilities associated with the lease to zero and reducing
the Company’s long-term liabilities by approximately sixty-five percent
(65%).





Colorado Facilities
Lease


On
September 30, 2009 the Company extended the lease at its Golden, Colorado
facility for an additional six months expiring on March 31, 2010 at the lease
rate of $1,790 per month plus $945.00 in triple net for a total of $2,735 per
month. While the Company does not currently conduct operations of any
significance in the facility a machine built under contract for the Company, and
held in inventory for sale by the Company, is housed in this facility and we are
engaged in efforts to market and sell this machine. Upon the sale of the machine
we do not anticipate continued use of the facility in our
operations.





Marketable Production
Prototype Machine





An
inspection on April 30, 2009 of a production prototype machine built for the
Company to prove technology for intended resale by the Company resulted in the
determination that the machine continues to fail to meet contractual
requirements and on May 4, 2009 XsunX provided the vendor, MVSystems Inc., a
notice asserting that MVSystems is in material default of the terms of the
agreement for the machine between the parties. No resolution to this notice of
default has been agreed to by the parties.





Marketable Production
Prototype Sales Tax Dispute


In March
2009 XsunX received notice from the State of Colorado offering determination
that sales tax and penalties were due for what the state perceived as a purchase
of a machine for use by XsunX rather than as an inventory item that was
developed for re-sale.  On April 10, 2009 the Company filed a protest
and hearing request disputing the findings of the tax auditor requesting that
the total tax liability determination be reversed. As of September 30, 2009 we
had not yet received a final determination from the Colorado Department of
Revenue and we had a potential contingent liability in the amount of $72,800 for
tax on the machine. On November 17, 2009 the Colorado Department of Revenue
withdrew and cancelled its assessment of tax liability in
total.


F-14


XSUNX,
INC.


(A
Development Stage Company)


Notes
to Financial Statements


September
30, 2009 and 2008





11.
            COMMITMENTS
      AND CONTINGENCIES(Continued)





Manufacturing Facility
Production Equipment Dispute


Under the
Company’s previous efforts to establish a thin film solar module manufacturing
facility the Company had placed an order for certain thin film deposition
equipment with a vendor. While the Company worked with the vendor to verify and
approve the contractual compliance of certain deliverables associated with
$2,500,000 in invoicing received by the Company from the vendor the Company
reported this invoice as a liability in its quarterly report for the period
ended December 31, 2008 on Form 10Q. We completed our review of the deliverables
and the vendor’s compliance with contractual requirements and determined that
the deliverables under the invoice did not meet the required contractual
specifications. For the period ended March 31, 2009 the Company reversed the
$2,500,000 accounts payable liability until such time that the contractual
requirements had been met by the vendor. In June the vendor and XsunX proposed
terms for the cancellation of the order without further obligation to either
party. As of the year ended September 30, 2009 the parties had agreed to terms
but had not executed a signed release. The terms did not include or create any
current or continuing liabilities for XsunX or the vendor. On December 21, 2009
the parties agreed to the termination of the order and all liabilities
associated with the order further providing that neither party would be require
to provide continuing services or payment.





Under the
Company’s previous efforts to establish a thin film solar module manufacturing
facility the Company had placed an order for glass washing systems totaling
$523,950 with a vendor. Deposits totaling $130,987.50 were paid to the vendor
prior to the cancellation of the order by the Company, and no systems have been
delivered. The vendor is claiming that a balance is due prior to shipment in the
amount of $408,963 which includes certain accrued interest payments. The Company
has cancelled this order and disputes this amount and has instructed the vendor
to apply the deposit payment of $130,987.50 towards re-stocking fees as full and
final settlement to the account. Invoicing for this item totaling $209,580
remains on the Company’s account payables until such time that a final
adjustment can be determined between the parties. In the judgment of management
this remaining accounts payable amount of $209,580, if necessary, fairly
represents an allowance sufficient to account for adjustments to re-stocking
credits.





On
September 3, 2009, XsunX received notice of an action filed by a vendor in the
State of Oregon, Multnomah County, requesting, a) that the court grant the
re-possession of certain industrial gas management equipment (the “equipment”)
for shipment back to the vendor (XsunX had returned the equipment to the vendor
on August 28, 2009), b) that the court grant the vendor unspecified re-stocking
and re-shipment fees, or c) the sum of $117,207.07 plus interest and collection
fees for payment for the equipment. The vendor allegations stem from XsunX’s
determination that the vendor had modified an order for the equipment previously
placed by XsunX without approval by XsunX through the issuance of an authorizing
purchase order. Attempts by XsunX to return the equipment were met with demands
for re-stocking fees from the vendor. XsunX has refused to pay re-stocking fees
for equipment it believes was modified without approval. The vendor agreed to
the return of the equipment and then subsequently filed its claim. Since the
filing of the claim the vendor has proposed that it provide XsunX with a
re-stocking credit leaving approximately $95,000 in re-stocking fees, interest,
and collection fees. We dispute this amount and have retained counsel to
aggressively defend this matter. At this time the Company is unable to estimate
a loss related to this action.





Employment
Agreements


On
November 6, 2007, we entered into an amended and restated employment agreement
with Mr. Joseph Grimes, our chief operating officer. Under the terms of his
employment agreement, Mr. Grimes is entitled to a minimum annual base
salary of $210,000. In March 2009 Mr. Grimes and the Company agreed to the
reduction of annual base salary from $210,000 to $157,500 as part of cost
cutting measures approved by the Board of Directors in association with the
Company’s efforts to modify its plan of operations. In conjunction with agreeing
to the reduction in base salary the Company also provided Mr. Grimes with a
stock option grant to purchase 2,500,000 shares of our common stock,
exercisable at $0.16 cents per share. In the event that Mr. Grimes
employment is terminated by us without good cause, Mr. Grimes may receive a
severance payment in the amount equal to 6 months of his annual base salary
then paid to Mr. Grimes, all payable within 30 days of such termination.
Potential cost to the Company could total at minimum $100,000 for the
termination of Mr. Grimes subject to the termination without good cause by the
Company.





On
January 1, 2007, we entered into an employment agreement with Mr. Robert Wendt,
our chief technical officer. Under the terms of his employment agreement,
Mr. Wendt was initially entitled to a minimum annual base salary of
$150,000 which was adjusted to $200,000 in November 2007 after review by the
board. In March 2009 Mr. Wendt and the Company agreed to the reduction of annual
salary from $200,000 to $150,000 as part of cost cutting measures approved by
the Board of Directors in association with the Company’s efforts to modify its
plan of operations. In conjunction with agreeing to the reduction in base salary
the Company also provided Mr. Wendt with a stock option grant to purchase
2,500,000 shares of our common stock, exercisable at $0.16 cents per share.
In September 2009 the Company agreed to the terms of a two year Key Employee
Retention Agreement with Mr. Robert Wendt providing that in the event that Mr.
Wendt’s employment is terminated by the Company without good cause, Mr. Wendt
may receive twelve months salary at the then salary rate at time of termination,
twelve months Company paid costs for actual costs incurred by Mr. Wendt for
medical benefits related to COBRA coverage, and a relocation payment up to
$2,500. Potential cost to the Company could total at minimum $164,500 for the
termination of Mr. Wendt subject to the termination without good cause by the
Company.




12.
              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 were to be used to develop technology and obtain
licenses in agreement with the Technology Development and License Agreement
between Sencera and XsunX, Inc also signed on January 1, 2007. The note may be
converted into a membership interest in Sencera, LLP and an extension of the
license for a period of three years. The security consists of the license
rights, the ability to exercise the conversion and all other rights and remedies
provided by law. On September 7, 2007, XsunX initiated the final funding of
disbursements under a Promissory Note and Loan Agreement dated January 1, 2007,
between XsunX and a private technology development firm. Under the Promissory
Note and Loan Agreement XsunX has funded and extended the principal amount of
$1,500,000 dollars to the private firm. On June 13, 2008, the Company entered
into a separations agreement with Sencera, LLC which resulted in the full
repayment of the principal $1,500,000 balance of the note plus accrued interest
of approximately $173,251.


F-15


XSUNX,
INC.


(A
Development Stage Company)


Notes
to Financial Statements


September
30, 2009 and 2008


13.
              SUBSEQUENT
      EVENTS
 
 The
following are items management has evaluated as subsequent events as of January
11, 2010, the date the financial statements were issued.




Under the
Company’s previous efforts to establish a thin film solar module manufacturing
facility the Company had placed an order for certain thin film deposition
equipment with a vendor. In June the vendor and XsunX proposed terms for the
cancellation of the order without further obligation to either party. On
December 21, 2009 the parties agreed to the termination of the orderand all liabilities
associated with the order further providing that neither party would be require
to provide continuing services or payment.





On
October 16, 2009, the Company accepted an offer for the sale of 2,556,818 shares
of its restricted common stock in a private placement for cash proceeds of
$225,000.





On
November 16, 2009 the Company issued 53,789 shares of its common restricted
stock for services related to marketing and public relations valued at $10,000
dollars.





On
December 31, 2009 the Company accepted an offer for the sale of 1,000,000 shares
of its restricted common stock in a private placement for cash proceeds of
$88,000.





In the
fiscal year ended September 30, 2009 XsunX modified its previous plans to
directly establish amorphous silicon product manufacturing infrastructure. We
have re-focused operations on the development of a cross-industry thin film
solar manufacturing concept that we believe provides an opportunity for XsunX to
establish a competitive advantage within the industry. In furtherance of these
efforts the Company has begun the development of a hybrid manufacturing system
combining certain technologies derived from the magnetic media manufacturing
industry with manufacturing techniques for thin film solar. The Company has
agreed to an estimate of $1,150,000 from a vendor for the cost of this prototype
system, and in October 2009 paid an initial $115,000 deposit towards the
manufacture of this system. The vendor and the Company are now engaged in
efforts to complete the testing and engineering designs necessary to build the
system.





In March
2009 XsunX received notice from the State of Colorado offering determination
that sales tax and penalties were due for what the state perceived as a purchase
of a machine for use by XsunX rather than as an inventory item that was
developed for re-sale.  On April 10, 2009 the Company filed a protest
and hearing request disputing the findings of the tax auditor requesting that
the total tax liability determination be reversed. On November 17, 2009 the
Colorado Department of Revenue withdrew and cancelled its assessment of tax
liability in total.


F-16