FORM 10-K


                         SECURITIES EXCHANGE COMMISSION
                             Washington, D.C. 20549

                Annual Report Pursuant to Section 13 or 15(d) of
                       the Securities Exchange Act of 1934

                  For the fiscal year ended September 30, 2006

                        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)
               ---------------------------------------------------
                  Registrant's telephone number: (949) 330-8060

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

    Title of each class: None Name of each exchange on which registered: N/A

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

                            Title of each class: None

Indicate by check mark if the  registrant is a well-known  seasoned  issuer,  as
defined in Rule 405 of the Securities Act.  [_] Yes  [X] No

Indicate  by  check  mark if the  registrant  is not  required  to file  reports
pursuant to Section 13 or Section 15(d) of the Act.  [_] Yes  [X] No

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

Check if disclosure of delinquent  filers pursuant to Item 405 of Regulation S-B
is not contained in this form, and no disclosure will be contained,  to the best
of  Registrant's  knowledge,  in  definitive  proxy  or  information  statements
incorporated  by reference  in Part III of this Form 10-KSB or any  amendment to
this Form 10-KSB. [_]

Indicate by check mark whether the  registrant is a large  accelerated  file, an
accelerated  filer, or a  non-accelerated  filer. see definition of "accelerated
filer and large  accelerated  filer" in Rule 12b-2 of the Exchange  Act.  (Check
one):

[_] Large accelerated filer  [X] Accelerated filer  [_] Non-accelerated filer

<PAGE>

State issuer's revenues for its most recent fiscal year. $8,0000

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act.  Yes [_]    No [X]

Aggregate market value of the authorized  voting stock held by non-affiliates of
the  registrant  as of September  30, 2006:  $75,156,137  based on the last sale
price at year end of $.54 as reported by OTCBB.

Number of authorized  outstanding shares of the registrant's no par value common
stock, as of December 14, 2006: 157,137,931

                                       2

<PAGE>


                                TABLE OF CONTENTS

PART I                                                                      PAGE

  Item 1.   Business                                                           5
  Item 1A.  Risk Factors                                                      13
  Item 1B.  Unresolved Staff Comments                                         13
  Item 2.   Properties                                                        16
  Item 3.   Legal Proceedings                                                 16
  Item 4.   Submission of Matters to a Vote of Security Holders               16


PART II
  Item 5.   Market for Common Equity and Related Stockholder Matters
            and Issuer Purchases of Equity Shares                             16
  Item 6.   Selected Financial Data                                           21
  Item 7.   Management's Discussion and Analysis of Financial Condition
            and Results of Operations                                         21
  Item 7A.  Quantitative and Qualitative Disclosres About Market Risk         26
  Item 8.   Financial Statements and Supplementary Data                       26
  Item 9.   Changes in and Disagreements With Accountants on Accounting
            and Financial Disclosure                                          26
  Item 9A.  Controls and Procedures                                           26
  Item 9B.  Other Information                                                 27

PART III
  Item 10.  Directors, Executive Officers, Promoters and Corporate Governance 27
  Item 11.  Executive Compensation                                            29
  Item 12.  Security Ownership of Certain Beneficial Owners and Management
            and Related Stockholder Matters                                   33
  Item 13.  Certain Relationships and Related Transactions, and Director
            Independence                                                      33
  Item 14.  Principal Accounting Fees and Services                            34

PART IV
  Item 15.  Exhibits, Financial Schedules                                     35

SIGNATURES

CERTIFICATES


                                       3
<PAGE>

                       DOCUMENTS INCORPORATED BY REFERENCE

List hereunder the following documents if incorporated by reference and the Part
of the Form 10-K  (e.g.,  Part I, Part II,  etc.)  into  which the  document  is
incorporated:  (1) Any  annual  report  to  security  holders;  (2) Any proxy or
information  statement;  and (3) Any prospectus filed pursuant to Rule 424(b) or
(c) under the  Securities Act of 1933.  The listed  documents  should be clearly
described for identification  purposes (e.g.,  annual report to security holders
for fiscal year ended December 24, 1980).

              CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report contains  forward-looking  statements  within the meaning of Section
21E of the  Securities  Exchange Act of 1934,  and Section 27A of the Securities
Act of 1933 that  reflect its  current  expectations  about its future  results,
performance,  prospects and opportunities.  These forward-looking statements are
subject to significant risks, uncertainties,  and other factors, including those
identified in Risk Factors (see Item 1 "Description of Business - Risk Factors")
below,  which may cause actual results to differ materially from those expressed
in,  or  implied  by,  any  forward-looking   statements.   The  forward-looking
statements  within this Form 10-K may be identified by words such as "believes,"
"anticipates,"  "expects,"  "intends,"  "may," "would," "will" and other similar
expressions.  However,  these words are not the exclusive  means of  identifying
these  statements.  In  addition,  any  statements  that refer to  expectations,
projections or other  characterizations  of future events or  circumstances  are
forward-looking  statements.   Except  as  expressly  required  by  the  federal
securities  laws,  the Company  undertakes no  obligation to publicly  update or
revise  any  forward-looking  statements  to  reflect  events  or  circumstances
occurring  subsequent  to the  filing  of this Form 10-K with the SEC or for any
other reason.  You should carefully review and consider the various  disclosures
the Company  make in this report and its other  reports  filed with the SEC that
attempt  to advise  interested  parties of the  risks,  uncertainties  and other
factors that may affect its business.

For further information about these and other risks,  uncertainties and factors,
please review the  disclosure  included in this report under Item 1 "Description
of Business - Risk Factors and Item 7  "Management's  Discussion and Analysis or
Plan of Operation - Cautionary and Forward Looking Statements."


                                       4
<PAGE>


                                     PART I

ITEM 1. BUSINESS

COMPANY HISTORY

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

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

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

GENERAL OVERVIEW

XsunX  develops and markets  proprietary  solar cell designs and core solar cell
manufacturing  systems,  enabling  licensees to  manufacture  advanced thin film
solar devices on various substrates. We function as a strategic solar technology
partner,  supplying the advanced thin film solar cell manufacturing know-how and
capabilities  that will  enable our  original  equipment  manufacturers  ("OEM")
customers to address the expanding market for thin film solar products.

The process for producing  electricity from sunlight is known as  Photovoltaics.
Thin  film  photovoltaics  (TFPV)  are  comprised  of thin  film of PV  material
deposited on various  rigid or flexible  substrate.  Photovoltaic  ("PV") is the
science of capturing and converting sun light into electricity.

The  product of the  Company's  development  efforts is  intended to deliver two
aspects  of  deliverable  technologies  in the  form of an  integrated  solution
providing,   a)  commercially  scalable  manufactured  processes  and  equipment
designed  for  the  specific  manufacture  of  the  Company's  thin  film  solar
technologies,  and, b) proprietary thin film solar cell designs that address new
application   opportunities   in  the  growing  field  of  Building   Integrated
Photovoltaics.


                                       5
<PAGE>

BUSINESS STRATEGY

XsunX, as a technology partner to our customers, develops and delivers thin film
solar cell designs and core  manufacturing  systems,  customized to the needs of
our customers. Licensees of our technology can manufacture thin film solar cells
that are  lightweight,  flexible,  and provide OEM's the  opportunity  for rapid
returns on investment (ROI). The key aspects to XsunX's business strategy are:

XsunX is  positioning  itself as a leading  provider of TFPV device  designs and
core  manufacturing  products to an  expanding  global group of existing and new
entrant  solar  product  manufacturers.  The company is working to  establish an
environment in which XsunX products and technologies are viewed as advanced core
support  infrastructure  to  manufacturers  increasing their  opportunities  for
economic success in servicing their regional solar markets.  XsunX does not sell
thin film solar materials directly to the consumer market.

Preliminary  marketing based on an analysis of 3,120 direct product inquires for
the last 12 months  illustrates a wide breadth of interest and diversity ranging
from  local  home  owners  enquiring  about  solar  glazing  for  their  home to
international automakers enquiring about solar glazing for their automobiles.

The preliminary  results of the marketing queries provide insights into end-user
support and interest from potential  customers.  The percentage breakdown of the
queries is as follows:

o        70% End-users: such as Architects, Building Managers, and Residential
o        16% Distributors, Integrators, and Fabricators
o        12% New Entrant OEMs and Manufacturers
o        2% Existing Solar or Building Material Manufacturers
o        And of the queries, 23% were international in nature and were comprised
         of India, China, Japan,  Mexico,  Australia,  France,  Italy,  Germany,
         Spain, Portugal, Belgium, Eastern Europe, Costa Rica, and Chile.

Based upon these  initial  results and the high degree of new entrant  interest,
XsunX believes that there is a market for fully integrated turnkey manufacturing
lines and their end product TFPV panels.  Therefore,  the targeted manufacturing
partners will include (but not be limited to):

o        Existing and new entrant Photovoltaic materials manufacturers
o        Construction materials manufacturers (BIPV)
o        Solar energy systems integrators
o        Global Joint Ventures

PRODUCTS

The XsunX  approach  integrates  technologies  for the  production  of thin film
variants  of silicon  (Si)  solar  cells  using  various  processes  to form the
necessary top and bottom transparent conducting oxides (TCO) as contacts, Plasma
Enhanced  Chemical  Vapor  Deposition  (PECVD) to form the  photovoltaic  cores,
patterning  techniques to generate either  serially  connected or discrete solar
cells, and a cassette based patented  reel-to-reel material handling system that
allows for the use of metallic or plastic based flexible substrates.


                                       6
<PAGE>

XsunX systems offer the efficiency  attributes of in-line roll-to-roll thin film
processing techniques, process automation, reliability and low maintenance while
improving cell  efficiencies  due to reductions in cross chamber  contamination.
Modular in design the systems offer  upgradeability  for production  capacities,
process  technology,  and can be  designed  for  delivery  in either  cluster or
in-line system  architectures.  Production  capacities for multi-chamber cluster
tool production  configurations  are offered in capacities ranging from 1MW/y to
5MW/y, and in-line  multi-chamber  production  configurations  can be offered in
capacities ranging from 5MW/y to in excess of 50MW/y.

Systems can be designed for integration  into existing or new front and back end
production  lines and  configured for annual  production  capacities to meet the
needs of customers. Innovative production technologies include:

         o Multi-Chamber vacuum deposition
         o Advanced Sputtering Techniques
         o RF &VHF Plasma Enhanced Chemical Vapor Deposition  (PECVD)
         o Cassette based reel-to-reel material handling
         o The use of flexible and/or rigid substrates
         o Automated robotic control systems
         o Web widths starting at 30 cm

The Company's solar cell designs,  development efforts, and marketing objectives
are focused on the  commercialization  of the  following  two primary solar cell
device types for production:

          Power Glass(R) for  semi-transparent  and opaque  applications on both
          flexible  and rigid  substrates  - a patented  Amorphous  Silicon cell
          structure  offering the  advantages of cost  effective  monolithically
          integrated  solutions  for  use  in  architectural   glass,   building
          materials,  and  consumer  products.  These cells are  single-junction
          amorphous  silicon  based  (a-Si)  solar cells that  depending  on the
          degree of light transmission,  or transmisivity,  can operate at up to
          4% efficiencies.  That is approximately 40 watts of direct current can
          be produced per square meter of Power Glass film. A projected  cost on
          the  order  of  $2.16/W  is  expected  for   relatively   conservative
          deposition  rates  and a  3.8MW/y  factory.  Costs  are  comprised  by
          materials,  equipment (cluster tool and non-cluster  tool),  personnel
          (fringes  included) and a U.S. based G and A rate of 40%.  Throughputs
          and  production  costs were  calculated  assuming  4%  efficiency  for
          different deposition rates for a-Si and ITO.

          Hybrid  4-Terminal  for high  performance  and high  stability  opaque
          applications  rivaling  silicon wafer  efficiencies - a patent-pending
          cell  structure  combining  nano  crystalline  (nc-Si)  and  amorphous
          silicon (a-Si) layers  exceeding the  performance  characteristics  of
          tandem and  multi-junction  Si solar cell designs without the limiting
          aspects of current matching,  stability,  and performance degradation.
          The initial operating  efficiencies for this cell type are anticipated
          to  produce  10%  conversion   efficiencies   and  through   continued
          refinement   of  the  device   properties   the  Company   anticipates
          improvements  to  produce  conversion  efficiencies  of 12% to 14%.  A
          projected  cost on the order of $1.65/W  is  expected  for  relatively
          conservative deposition rates and a 4MW/y factory. Costs are comprised
          by materials, equipment (cluster tool and non-cluster tool), personnel
          (fringes  included) and a U.S. based G and A rate of 40%.  Throughputs
          and  production  costs were  calculated  assuming 10%  efficiency  for
          different deposition rates for a-Si, nc-Si and ZnO.

                                       7
<PAGE>

COMPANY SPONSORED RESEARCH AND DEVELOPMENT

Management  has  established a plan under which the Company has and continues to
work to  commercializing  its technologies and develop new technologies  through
the contracting for research,  development and commercialization  processes with
certain  qualified  facilities  that  specialize in the Company's  target market
segments.  Management believes this product development process has provided the
Company  with the fastest  path to  marketable  products,  the  maximization  of
corporate  resources,  and,  the  broadest  access to  cutting  edge  device and
material engineering facilities, and technical expertise.

In  June  2004  XsunX  established,  and  continues  to  maintain,  a  strategic
relationship  with Colorado  based  MVSystems,  Inc. that designs,  builds,  and
delivers state-of-the-art manufacturing tools designed specifically for the thin
film semiconductor market.  MVSystems,  Inc. ("MVSystems") is equipped with both
the   technical   staff   and   tools   necessary   for  the   development   and
commercialization  of XsunX technologies.  The terms of the working relationship
provide XsunX with complete R&D facilities without mark-up for profit on the use
of staff and equipment.  In return MVSystems  received warrants for the purchase
of common stock in XsunX.

In September 2004 XsunX increased its patent and technology  assets by acquiring
an  exclusive  royalty  free  license  from  MVSystems to a suite of patents and
technologies  specific  to the design and  manufacture  of its  semi-transparent
solar electric glazing  initiative,  Power Glass. In October of 2005 the Company
further  expanded its licensing  rights with MVSystems to include the design and
manufacture  of opaque solar cell designs  thereby also  expanding the Company's
intended  product  base to include  both  semi-transparent  and opaque thin film
solar cell designs, and manufacturing methods, (see Item 8B "Subsequent Events -
Expanded  License  and  Warrants").  The  Company  believes  that  the  licensed
technologies  provide  enhanced  commercial  viability  for  its  products,  and
improved market opportunities.

For the year ended September 30, 2006, the Company  committed 39% or $949,472 of
its cash operational expenditures towards product development,  another $220,000
was committed for use in the addition of development  equipment,  and $1,765,000
was committed for the  production of a marketable  production  system  prototype
that is  currently  in the final  stages of  assembly.  The  Company  intends to
continue to focus on the development  and refinement of  commercially  appealing
solar cell designs,  proprietary  manufacturing processes, and facilities design
that could be provided to our future licensees as turnkey solutions for the core
requirements  necessary  for the mass  production  of the  Company's  thin  film
designs.  A large part of the  Company's  capital  is used for on going  product
development efforts.

At present the Company  continues to develop and optimize its solar cell designs
and manufacturing process for commercial applications. Areas of on going process
development include:

         (a)  Device   development  on  thin-film  sheet  and  rolled  polymers,
         plastics,  and  metals  (b)  Deposition  processes  to  enhance  device
         properties  and reduce  manufacturing  costs (c) Enhanced  reel-to-reel
         processing  designs;  and  (d)  Development  of new  cell  segmentation
         process for integration into manufacturing process

The  Company  has  and  continues  to make  investments  in the  development  of
intellectual  property  assets as part of its business plan. For the year ending
September  30,  2007 the Company has  developed a plan of  operations  requiring
$5,750,000  that commits 21% of its budget or  $1,200,000  to the  completion of
development of a patent-pending 4-Terminal solar cell device, another 26% of its
budget or $1,500,000 to the  development  of new  technologies  licensed  and/or
acquired  during the 2007  period,  and another 16% of its budget or $900,000 to

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<PAGE>

the  completion  of its first  production  line system for  eventual  re-sale to
future  licensee's  and for  engineering  and  adaptation  of new  manufacturing
devices and techniques.  The purpose of these on going investments is to develop
and market  patented  and  proprietary  solar  electric  thin film  designs  and
manufacturing  processes  for sale  and  licensure  to our  target  markets.  No
research was done by the Company prior to September 30, 2003.

TRADEMARK, PROPRIETARY TECHNOLOGY AND PATENTS

The Company  entered into an agreement  for the purchase of the U.S.  registered
trademark "Power Glass(TM)" and Internet domain name  PowerGlass.com in May 2004
from Western Gas and Electric Company, a California corporation. The Company has
not been issued  registered  trademarks  for its "XsunX" trade name. The Company
may file trademark and trade name  applications with the United States Office of
Patents and Trademarks for its proposed trade names and trademarks.

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 addition,  XsunX licensed the patent and  technology  portfolio of MVSystems,
Inc.,  a Colorado  corporation  ("MVSystems")  in  September  2004.  The license
granted XsunX the royalty free exclusive  rights for use by XsunX in its pursuit
to   establish  a   commercially   viable   process  for  the   manufacture   of
semi-transparent   solar  cells  and  solar  electric  glazing   processes  and,
accordingly,  included all MVSystems  technology,  know how, and resources which
are part of or related to the licensed  patents and technology  that was then or
may  become  applicable  or  beneficial  to  the  furtherance  of  the  business
objectives  of XsunX in the future.  The license was  exclusive as to technology
pertaining  to XsunX field of use as it pertains to the business of  developing,
commercializing  and licensing processes for the manufacture of semi-transparent
(greater than 5% transparency) solar cells or photovoltaic glazing technologies.

In October of 2005 the  Company  further  expanded  its  licensing  rights  with
MVSystems  to include the design and  manufacture  of opaque  solar cell designs
thereby  also  expanding  the  Company's  intended  product base to include both
semi-transparent   and  non-transparent   thin  film  solar  cell  designs,  and
manufacturing  methods,  (see Item 8B "Subsequent  Events - Expanded License and
Warrants").  The Company  believes that the licensed  technologies  provide them
with key aspects to successful  completion of its product  development  efforts,
the commercial  viability of future  products,  and the ability to deliver those
products.

The  following  are  two of the  patents  licensed  from  MVSystems  that  XsunX
management   believes  to  be   beneficial  to  the   development   of  scalable
manufacturing  processes  for its thin  film  technology.  Semiconductor  Vacuum
Deposition  System And Method Having A  Reel-To-Reel  Substrate  Cassette:  US6,
258,408 B1: July 10th, 2001. (Method of Fabrication);  and US Provisional Patent
Application  serial number  60/536,151-  three  terminal and four terminal solar
cells,  solar cell  panels,  and method of  manufacture.  (Device  and Method of
Fabrication)

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<PAGE>

As part of the October 2005 license  expansion  with  MVSystems the Company also
received the benefit of equipment manufacturing services from MVSystems under an
at cost, without mark up for profit,  plus ten percent pricing  structure.  This
provided the Company with access to equipment  manufacturing  facilities and the
ability  to market  and  deliver  integrated  manufacturing  systems  capable of
producing  its thin films  solar cell  designs.  During  its  operating  history
MVSystems has designed, constructed, installed, and provided support for over 70
systems  ranging from small research and development  systems to  multi-megawatt
production systems.

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

GROWTH, REVENUE AND DISTRIBUTION PLAN

The Company  intends to market its integrated  manufacturing  systems as turnkey
solutions for the  manufacture  of its current and future PV thin films designs.
The TFPV  manufacturing  systems  will be licensed to  manufacturers  as modular
systems and licensed for use in the manufacture the Company's thin film designs.
The  manufacturers  would  in turn  agree  to  manufacture  and  distribute  the
Company's PV thin films,  or incorporate  the thin film PV technology into their
product manufacturing process as an "original equipment  manufacturer" (OEM) and
sell the finished product to their consumers.  Although the Company is currently
providing  proposals to interested OEM's no licenses or contracts now exist with
any manufacturer.

We intend to target customers who are developing their own technology  platforms
in which the  manufacture  of or the  integration  of our thin film solar  cells
could play an important role. The Company will offer non-exclusive manufacturing
licenses  and expects to earn a royalty on thin films  manufactured.  In selling
the  manufacturing  equipment and licensing the technology to OEM's, the Company
reduces operating  expenses and saves capital in plant,  property and equipment.
As a result,  should the Company  realize  earnings  it intends to reinvest  its
retained  earnings  in R&D in an  effort to  continuously  develop  related  new
technologies that will help achieve sustainable  competitive  advantages for the
Company.

BACKLOG OF ORDERS

There are currently no orders for sales.

GOVERNMENT CONTRACTS

There are no government contracts at this time.

COMPETITIVE CONDITIONS

Currently,  management  is aware of other  technologies  similar to those of the
company on the market. These include vacuum chamber manufacturing  technologies,
plasma enhanced vapor deposition  technologies,  and variants of available solar
cells that capture and convert solar energy into usable power.  Although similar
in respect to the operation and use of these  technologies  the Company believes
that  its  patented  solar  cell  designs  and  manufacturing   methods  provide
marketable  improvements over current other  technologies.  However, a number of
new 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

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<PAGE>

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 achieve manufacturing costs
per watt lower than the cost per watt to manufacture our thin film solar cells.

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

A  number  of  large  companies  are  actively   engaged  in  the   development,
manufacturing  and marketing of solar electric power products.  The five largest
PV cell  suppliers are Q-Cells Shell Solar,  Sharp  Corporation,  BP Solar,  and
Kyocera  Corporation,  which  together  supply  the  significant  portion of the
current PV cell 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  and  the  design  of  efficient   and  scalable
manufacturing processes.

COMPLIANCE WITH ENVIROMENTAL LAWS AND REGULATIONS

The  operations of the Company are subject to local,  state and federal laws and
regulations  governing  environmental  quality and pollution  control.  To date,
compliance  with these  regulations by the Company has had no material effect on
the Company's operations,  capital,  earnings, or competitive position,  and the
cost of such  compliance has not been material.  The Company is unable to assess
or predict at this time what effect additional  regulations or legislation could
have on its activities.

ADMINISTRATIVE AND MARKETING OFFICES

As of September 30, 2006 the Company  leased  administrative  office  facilities
located at 65  Enterprise,  Aliso  Viejo CA 92656 for  approximately  $2,000 per
month  pursuant to a six month lease  agreement  renewable in 6 month or greater
increments  thereafter.  Management  anticipates  that  there  may be a need  to
increase  administrative  office facilities in the 2007 period.  There can be no
assurances  that  the  Company  will be able to find  the  necessary  additional
facilities on terms similar or more advantages to the current facility terms.

In April 2006 the  Company  entered  into a three year lease for  technical  and
marketing  operations  facilities in Golden,  CO. The Company  provided a $2,615
security   deposit  and  expensed   $79,867  in  costs  associated  with  tenant
improvements to the facilities in preparation for occupancy.  The following is a
schedule,  by years, of the minimum base payments  required under this operating
lease for facilities. An additional $825 monthly is also due as a pro rata share
equaling 4.12% of the operating  costs for real estate taxes,  assessments,  and
the expenses of operating  and  maintaining  common areas within the  commercial
grounds surrounding the leased facilities.

       Annual                                 Annualized           Monthly
Rent Schedule           Rate/sf               Rent                 Rent
-------------           -------               ----                 ----
 7/1/06-6/30/07             $6.75             $20,250.00           $1,687.50
 7/1/07-6/30/08             $6.95             $20,850.00           $1,737.50
 7/1/08-6/30/09             $7.16             $21,480.00           $1,790.00

                                       11
<PAGE>

EMPLOYEES AND CONSULTANTS

The Company is a  development  stage  company and as of September 30, 2006 had 5
salaried  employees.  This  represents an increase of 4 employees  over the same
period ended 2005. Through various other consultancy  agreements and a strategic
technology  sharing and facilities use relationship with MVSystems,  Inc. we use
the services of approximately 15 additional  technologists  and support staff to
assist in the development of our products.  The Company projects that during the
next 12 months the  Company's  workforce  is likely to increase to 13, with 2 of
the new employees being in Administrative, 2 in Marketing and Sales positions, 3
Scientific and Technical positions, and 1 in Administrative Support. In addition
to the  anticipated  addition of new employees the Company expects to expand its
use of  strategic  relationships  to  leverage  industry  expertise  in areas of
design,  systems  automation,  manufacturing  and  assembly  to augment  product
commercialization  time lines and the delivery of technologies.  The Company may
find a need to engage additional full-time employees as necessary.

ADVISORY BOARD

In September 2004 the Company established the XsunX Scientific Advisory Board to
attract   qualified   specialists   from  the  fields  of  material  and  device
engineering,  and, industry specialists representing expertise in manufacturing,
design,  certification  and  applications  associated  with glass,  plastics and
building  materials.  It is anticipated that panel members will be engaged for a
period of two years.  The advisory board retained a chairman,  Dr. Arun Madan to
lead  the  panel,  advise  the  development  process  and  recommend  additional
candidates  for  inclusion  on the panel.  In 2005 the Company  added a total of
three  additional   members  to  the  Scientific   Advisory  Board  representing
specialists  in the  fields of  material  sciences  specific  to our thin  films
development  efforts.  The qualifications  and biographical  information for the
members of the panel are as follows:

Dr. Arun Madan, Chairman Scientific Advisory Board
     Dr. Madan is a Research  Professor in the Department of  Metallurgical  and
     Materials  Engineering  at The  Colorado  School  of  Mines,  President  of
     MVSystems  Inc.  and an adjunct  professor at The  University  of Waterloo,
     Canada. He became one of the originators of Amorphous Silicon  technologies
     in 1970 and fabricated the first TFT (thin film  transistor) as part of his
     Ph.D thesis. With over 30 years of leading edge scientific  accomplishments
     he has  published  well over one  hundred  scientific  papers,  published a
     textbook now in use at several  universities  and holds fourteen patents on
     thin film semiconductor technology as well as advanced vacuum semiconductor
     deposition systems. In addition to his recognized  leadership in the fields
     of thin film  semiconductors  and solar  cells,  he is the  founder  of two
     firms, Glasstech Solar Inc. in 1985 and MVSystems, Inc. in 1989. As founder
     of these firms he has gained over twenty years of  international  business,
     marketing and management experience  successfully  establishing  technology
     sales exceeding $150 million dollars.  Leveraging his extensive scientific,
     business   and    leadership    capabilities    he   has   led   teams   of
     scientists/engineers  in  multi-disciplinary  programs  providing  contract
     research and development work for a multitude of domestic and international
     agencies and firms  including  the  National  Renewable  Energy  Laboratory
     (USA),  BP-Solar (USA),  Shell (The  Netherlands),  Kovio (USA),  Zettacore
     (USA),  QinetiQ (UK),  ENEA (Italy) and Pacific Solar  (Australia)  etc. Dr
     Madan received his Ph.D. - Physics from the University of Dundee, Scotland.

 Dr. John Moore, Member Scientific Advisory Board
     Dr.  John J.  Moore is a  Materials  Scientist  who holds the  position  of
     Trustees'  Professor and Head of Department of Metallurgical  and Materials
     Engineering at the Colorado School of Mines.  Dr. Moore is also Director of
     the interdisciplinary graduate program in Materials Science and Director of
     the Advanced  Coatings and Surface  Engineering  Laboratory,  ACSEL, at the
     Colorado  School of Mines in Golden.  Dr.  Moore  established  the Advanced
     Coatings and Surface Engineering  Laboratory (ACSEL) at the Colorado School
     of Mines in 1994.  The main  objective  of ACSEL is to perform  fundamental
     research in advanced PVD and CVD systems that will aid the U.S. thin films,
     coatings  and  surface  engineering  industry.  ACSEL  is  a  national  and
     international leader in research on advanced coatings,  surface engineering
     and thin film  processing.  Dr.  Moore was  awarded  a B.Sc.  in  Materials
     Science and Engineering from the University of Surrey, UK, in 1966, a Ph.D.
     in Industrial  Metallurgy  from the University of Birmingham,  UK, in 1969,
     and a D.Eng.  from the School of Materials of the University of Birmingham,
     UK, in 1996.

                                       12
<PAGE>

  Dr. Arokia Nathan, Member Scientific Advisory Board
     Arokia Nathan (SM) is a Professor in Electrical  and Computer  Engineering,
     University of Waterloo,  and holds the Canada  Research  Chair in Nanoscale
     Elastic  Circuits.  He is  also  the  chief  technology  officer  of  Ignis
     Innovation  Inc.,  Waterloo,  Canada, a company he founded to commercialize
     technology  on thin film  silicon  backplanes  and driving  algorithms  for
     active  matrix  organic  light  emitting  diode  displays.  Dr.  Nathan has
     extensive  experience  in  device  physics  and  modeling,   and  materials
     processing and  integration.  He has published  extensively in the field of
     sensor  technology and CAD, and thin film transistor  electronics,  and has
     over  15  patents   filed/awarded.   He  is  a  co-author   of  two  books,
     Microtransducer  CAD and CCD Image  Sensors  in  Deep-Ultraviolet.  He is a
     Senior  Member of the IEEE and a member of the American  Physical  Society,
     Electrochemical   Society,   Materials   Research   Society,   Society  for
     Information Displays,  International  Society for Optical Engineering,  and
     the Institute of Electrical  Engineers (UK). He chairs the 2005 IEEE Lasers
     and Electro-Optics Society Technical Committee on Displays and the Displays
     Sub-Committee in both 2004 and 2005. He serves as co-chair of the Fall 2005
     Materials  Research Society Symposium M: Flexible and Printed  Electronics,
     Photonics, and Biomaterials,  and is currently a Guest Editor for a Special
     Issue on Flexible Electronics  Technology in IEEE Proceedings.  He received
     his PhD in Electrical Engineering from the University of Alberta, Edmonton,
     Alberta, Canada, in 1988.

Dr. Richard Rocheleau, Member Scientific Advisory Board
     Dr. Rocheleau is the director of the Hawaii Natural Energy Institute (HNEI)
     of the University of Hawaii  designated as a US Department of Energy Center
     of Excellence.  At HNEI Dr.  Rocheleau has  established the HNEI Thin Films
     Laboratory  and  developed  a  research   program   focused  on  thin  film
     photovoltaics   and  renewable   hydrogen   production   having   near-term
     applications  in both the commercial and military  sectors.  Dr.  Rocheleau
     also serves as the PI of several  programs  including the Hawaii Energy and
     Environmental Technology Initiative; and the Hawaii Hydrogen Center for the
     Development and Deployment of Distributed Energy Systems.  He is the author
     of over 30  publications  in peer reviewed  journals and over 20 conference
     proceedings in the areas of photovoltaics,  photo electrochemical  hydrogen
     production,  and thin-film electronic  materials.  Dr. Rocheleau also holds
     six  patents  and  three  patent  disclosures.   Leveraging  his  extensive
     scientific   and   leadership    capabilities   he   has   led   teams   of
     scientists/engineers  in  multi-disciplinary  programs  providing  contract
     research and development of PV and  semiconductor  manufacturing  processes
     for a  number  of  domestic  and  international  firms  including,  Chronar
     Corporation,  Solarex, First Solar, Trex Enterprises, and Global Solar Inc.
     Dr. Rocheleau received his BChE and PhD (1980) in Chemical Engineering from
     the University of Delaware and a M.S. in Ocean Engineering  (1977) from the
     University of Hawaii.


ITEM 1A. RISK FACTORS

Need For Additional Financing. The Company has limited funds, and such funds may
not be adequate to develop the Company's  current  business  plan.  The ultimate
success of the Company may depend upon its ability to raise additional  capital.
If  additional  capital  is  needed,  there is no  assurance  that funds will be
available  from any source or, if available,  that they can be obtained on terms
acceptable to the Company.  If not available,  the Company's  operations will be
limited to those that can be financed with its modest capital.

Regulation  of Penny  Stocks.  The  Company's  securities,  when  available  for
trading,  will be subject to a  Securities  and  Exchange  Commission  rule that
imposes special sales practice  requirements upon  broker-dealers  who sell such
securities to persons other than established  customers or accredited investors.
For purposes of the rule, the phrase  "accredited  investors"  means, in general
terms, institutions with assets in excess of $5,000,000, or individuals having a

                                       13
<PAGE>

net worth in excess of  $1,000,000  or  having  an annual  income  that  exceeds
$200,000 (or that, when combined with a spouse's income, exceeds $300,000).  For
transactions  covered  by the  rule,  the  broker-dealer  must  make  a  special
suitability  determination for the purchaser and receive the purchaser's written
agreement  to the  transaction  prior to the  sale.  Consequently,  the rule may
affect the ability of broker-dealers  to sell the Company's  securities and also
may affect the ability of purchasers  in this offering to sell their  securities
in any market that might develop therefore.

In addition,  the  Securities  and Exchange  Commission  has adopted a number of
rules to regulate "penny stocks." Such rules include Rules 3a51-1, 15g-1, 15g-2,
15g-3,  15g-4,  15g-5, 15g-6, 15g-7, and 15g-9 under the Securities Exchange Act
of 1934, as amended. Because the securities of the Company may constitute "penny
stocks"  within the  meaning of the rules,  the rules would apply to the Company
and to its  securities.  The rules may  further  affect the ability of owners of
Shares to sell the  securities  of the Company in any market that might  develop
for them.

Shareholders  should  be  aware  that,  according  to  Securities  and  Exchange
Commission,  the  market  for penny  stocks has  suffered  in recent  years from
patterns of fraud and abuse. Such patterns include (i) control of the market for
the  security  by one or a few  broker-dealers  that are  often  related  to the
promoter or issuer; (ii) manipulation of prices through prearranged  matching of
purchases and sales and false and misleading press releases; (iii) "boiler room"
practices   involving   high-pressure   sales  tactics  and  unrealistic   price
projections  by  inexperienced  sales persons;  (iv)  excessive and  undisclosed
bid-ask  differentials  and  markups  by  selling  broker-dealers;  and  (v) the
wholesale dumping of the same securities by promoters and  broker-dealers  after
prices  have been  manipulated  to a desired  level,  along  with the  resulting
inevitable  collapse of those prices and with consequent  investor  losses.  The
Company's  management is aware of the abuses that have occurred  historically in
the penny stock market. Although the Company does not expect to be in a position
to dictate the behavior of the market or of  broker-dealers  who  participate in
the market,  management will strive within the confines of practical limitations
to prevent the  described  patterns from being  established  with respect to the
Company's securities.

Lack of  Operating  History.  The  Company  was  formed  in 1997  and has had an
unprofitable  operating  history.  The  re-organization  of the  Company and the
acquisition of solar electric glazing  technology have provided the Company with
a new opportunity for business development which carries continued special risks
inherent in a new business opportunity. The Company must be regarded as a new or
start-up  venture with all of the  unforeseen  costs,  expenses,  problems,  and
difficulties to which such ventures are subject.


                                       14
<PAGE>

No Assurance of Success or Profitability. There is no assurance that the Company
will successfully commercialize its proprietary technology.  Even if the Company
should  successfully  commercialize  its  proprietary  technology,  there  is no
assurance  that it will generate  significant  revenues or profits,  or that the
market price of the Company's common stock will be increased thereby.

Lack of  Diversification.  Because of the limited  financial  resources that the
Company  has, it is  unlikely  that the Company  will be able to  diversify  its
operations.  The Company's  probable  inability to diversify its activities into
more than one area will  subject the Company to economic  fluctuations  within a
particular business or industry and therefore increase the risks associated with
the Company's operations.

Dependence upon Management.  The Company  currently has only two (2) individuals
who are serving as its  officers and two (2) persons as  directors.  The Company
will be heavily dependent upon their skills, talents, and abilities to implement
its business plan.

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

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

Dependence upon Outside Advisors.  To supplement the business  experience of its
officers and directors,  the Company employ's  accountants,  technical  experts,
appraisers,  attorneys,  or other consultants or advisors.  The selection of any
such  advisors will be made by the  Company's  President  without any input from
stockholders. Furthermore, it is anticipated that such persons may be engaged on
an "as needed" basis without a continuing  fiduciary or other  obligation to the
Company.  In the event the  President  of the Company  considers it necessary to
hire outside advisors, he may elect to hire persons who are affiliates,  if they
are able to provide the required services.

Competition.  The Company  expects to be at a  disadvantage  when competing with
many firms that have  substantially  greater financial and management  resources
and capabilities than the Company.

No Foreseeable Dividends. The Company has not paid dividends on its common stock
and does not anticipate paying such dividends in the foreseeable future.

Limited Public  Market.  There is only a limited public market for the Company's
common stock,  and no assurance can be given that a market will continue or that
a shareholder ever will be able to liquidate his investment without considerable
delay, if at all. If a market should continue, the price may be highly volatile.
Factors  such as those  discussed  in this  "Risk  Factors"  section  may have a
significant  impact upon the market price of the securities  offered hereby. Due
to the low price of the  securities,  many brokerage firms may not be willing to
effect  transactions  in the  securities.  Even if a  purchaser  finds a  broker
willing  to  effect  a  transaction  in these  securities,  the  combination  of
brokerage commissions, state transfer taxes, if any, and any other selling costs
may exceed the selling price. Further, many lending institutions will not permit
the use of such securities as collateral for any loans.


ITEM 1B. UNRESOLVED STAFF COMMENTS

None


                                       15
<PAGE>

ITEM 2. PROPERTIES

As of September 30, 2006 the Company  leased  administrative  office  facilities
located at 65  Enterprise,  Aliso  Viejo CA 92656 for  approximately  $2,000 per
month pursuant to a three month lease agreement.

In April 2006 the  Company  entered  into a three year lease for  technical  and
marketing  operations  facilities in Golden,  CO. The Company  provided a $2,615
security   deposit  and  expensed   $79,867  in  costs  associated  with  tenant
improvements to the facilities in preparation for occupancy.  The following is a
schedule,  by years, of the minimum base payments  required under this operating
lease for facilities. An additional $825 monthly is also due as a pro rata share
equaling 4.12% of the operating  costs for real estate taxes,  assessments,  and
the expenses of operating  and  maintaining  common areas within the  commercial
grounds surrounding the leased facilities.

         Annual                                    Annualized          Monthly
Rent Schedule              Rate/sf                 Rent                Rent
-------------              -------                 ----                ----
 7/1/06-6/30/07                $6.75               $20,250.00          $1,687.50
 7/1/07-6/30/08                $6.95               $20,850.00          $1,737.50
 7/1/08-6/30/09                $7.16               $21,480.00          $1,790.00

The Company owns no real property.


ITEM 3. LEGAL PROCEEDINGS

On March 6,  2006 Ron  Sentchuck  filed an action  against  the  Company  in the
Superior  Court of  California  for the County of Los  Angeles.  The Company was
dismissed  from this  action on August 3, 2006.  No  contingency  expenses  were
accrued by the Company for this complaint.

On April 19th 2006, a service  provider  Office Radio Network filed a lawsuit in
the District Court in Colorado  alleging that it has been damaged due to refusal
to allow it to sell its  shares  under  Rule 144.  The  parties  entered  into a
settlement  in December 2006  providing for the return of 150,000  shares of the
300,000 shares issued to Office Radio Network,  and the  provisioning  by Office
Radio Network of an additional six months of service to the Company.

The Company is not  currently a party to any pending legal  proceedings,  nor is
its property subject to such proceedings, at December 13, 2006.


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None in the period ended September 30, 2006.


                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES

The  Company's  common stock  trades on the OTC Bulletin  Board under the symbol
"XSNX." The range of high,  low and close  trade  quotations  for the  Company's
common stock by fiscal quarter  within the last three fiscal years,  as reported
by the National Quotation Bureau Incorporated, was as follows:

Year Ended September 30, 2006             HIGH         LOW             CLOSE
-----------------------------

First Quarter ended December 31, 2005     $ .59        $0.53           $ .58
Second Quarter ended March 31, 2006       $2.24        $2.08           $2.13
Third Quarter ended June 30, 2006         $1.06        $1.04           $1.05
Fourth Quarter ended September 30, 2006   $ .55        $ .52           $ .54

Year Ended September 30, 2005             HIGH         LOW             CLOSE
-----------------------------

First Quarter ended December 31, 2004     $.51         $.33            $.33
Second Quarter ended March 31, 2005       $.40         $.08            $.11
Third Quarter ended June 30, 2005         $.19         $.08            $.15
Fourth Quarter ended September 30, 2005   $.30         $.13            $.36

                                       16
<PAGE>

Year Ended September 30, 2005             HIGH         LOW             CLOSE
-----------------------------

First Quarter ended December 31, 2003     $2.50        $.025           $.51
Second Quarter ended March 31, 2004       $1.00        $.25            $.47
Third Quarter ended June 30, 2004         $ .95        $.40            $.60
Fourth Quarter ended September 30, 2004   $ .65        $.30            $.45

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, 2006,  there were  approximately  304 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, 2006,  there were  approximately
157,137,931  shares of common  stock  outstanding  on record with the  Company's
stock transfer agent,  Mountain Share  Transfer.  On September 30, 2006 the last
reported sales price of its common stock on the OTCBB was $.54 per share.

DIVIDENDS

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


                         SALE OF UNREGISTERED SECURITIES

Warrant Grants

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

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

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

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

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

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

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

                                       17
<PAGE>

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

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

The total  charged in expense for the 2006 fiscal year has been $951,250 for the
issuance of the above described Expanded Use License,  Debenture  Warrants,  and
Employment Incentive Warrants.

During the years ended  September  30, 2005 and  September 30, 2006 the board of
directors  approved  the  issuance  of warrants  to  purchase  an  aggregate  of
19,112,000  shares of the Company's common stock.  Such warrants are exercisable
at prices  ranging from $.15 to $1.69 per share,  vest over periods from between
36 to 60 months, and expire at various times through July 2011.

During the years ended September 30, 2005 no warrant holder's exercised warrants
to purchase the Company's common stock. During the year ended September 30, 2006
warrant holders exercised a total of 10,850,000 warrants in cash to purchase the
Company's common stock.

A summary of warrant  activity for the year ended September 30, 2005 and 2006 is
as follows:

<TABLE>
<CAPTION>
                                                            Weighted-                           Weighted-
                                         Number of          Average                             Average
                                         Warrants           Exercise         Accrued            Exercise
                                                                             --------------
                                                            Price            Warrants           Price
                                                                             --------
                                                                             Exercisable
                                         --------------     -------------    ---------------    --------------
<S>                                      <C>                <C>              <C>                <C>
Outstanding, September 30, 2004          8,000,000          $0.15            5,525,000          $0.15
    Granted 2005                         7,125,000          $0.1649          7,884,167          $0.1659
    Exercised 2005                       0                  $0.0
                                         --------------     -------------    ---------------    --------------
Outstanding, September 30, 2005          15,125,000         $0.1595          13,409,167         $0.1593

    Granted 2006                         11,987,000         $0.3419          6,143,000          $0.4340
    Exercised 2006                       (10,850,000)       $0.2923          (10,850,000)
                                         --------------     -------------    ---------------    --------------
Outstanding, September 30, 2006          16,262,000         $0.2170          8,702,167          $0.1873
                                         ==============
</TABLE>


                                       18
<PAGE>

At September 30, 2006, the range of warrant prices for shares under warrants not
exercised and the weighted-average remaining contractual life is as follows:

<TABLE>
<CAPTION>

                            Warrants Outstanding                                  Warrants Exercisable
                   --------------------------------------------------    ---------------------------------
                                                     Weighted-
                                   Weighted-         Average                                 Weighted-
Range of           Number of       Average           Remaining           Number              Average
Warrant            Warrants        Exercise          Contractual         Of                  Exercise
Exercise Price                     Price             Life(yr)            Warrants            Price
---------------    ------------    --------------    ----------------    ----------------    -------------
<S>                <C>             <C>               <C>                 <C>                 <C>
$.15                 7,900,000     $ .15               2.7                 6,900,000         $ .15
                   ------------                                          ----------------
 .20                   750,000       .20               1.5                   634,167           .20
                   ------------                                          ----------------
 .25                 7,000,000       .25               4.0                 1,000,000           .25
                   ------------                                          ----------------
 .51                   500,000       .51               4.8                    56,000           .51
                   ------------                                          ----------------
1.69                   112,000      1.69               4.5                    112,000         1.69
                   ============                                          ================
</TABLE>


SALES OF SHARES AND DEBENTURE

The authorized  capital stock of the Company was established at 500,000,000 with
no par value. On September 29, 2003 the Board of Directors  authorized a reverse
split of 1 for 20 shares of stock.  The  stocks  issued in 2003,  as part of the
reorganization,  were for accrued director fees and salaries and to pay off past
debt to investors.  Included in the  reorganization  were  70,000,000  shares of
stock issued to obtain  certain  patent rights from Xoptix,  Inc. Also shares of
stock were issued in 2003 for consulting  fees in arranging the formation of the
reorganized Corporation.  In 2004 2,737,954 shares of stock were issued for cash
and consulting fees to fund  operations.  9,840,537  shares of common stock were
issued in 2005 for cash and consulting  fees to fund  operations.  In July 2005,
26,798,418  shares of common stock were placed in XSUNX, Inc. Treasury Stocks as
collateral for the long-term note with Cornell Capital  Partners.  On August 18,
2006 the note  underlying  the  collateral  shares was paid and  requirement  of
collateral was discharged. In 2006 33,188,926 shares of common stock were issued
for cash and 72,366 were issued for services to fund operations.

The  following  represents  a  detailed  analysis  of  the  2006  capital  stock
transactions.

Debenture  Conversion  - On  February  8, 2006  Cornell  Capital  Partners,  LLP
converted  $350,000 of the  principal  balance of $850,000  debenture  issued to
Cornell in July 2005. On March 1, 2006 Cornell converted the remaining principal
and accrued interest the debenture balance totaling $510,550. Upon conversion of
the  notes  XsunX  issued  8,605,500  shares  of common  stock to  Cornell.  The
conversion  price for all of the above  issued  shares was $.10.  The  remaining
value of the debenture is $0.

Warrant  Conversion - In February  2006, a consultant  exercised  100,000 of the
1,000,000  available $.15 cent warrants.  The amount of $15,000 dollars was paid
to XsunX by the consultant and 100,000 shares were issued.

Warrant  Conversion  - In March 2006 Cornell  Capital  Partners,  LLP  exercised
3,125,000  of  the  available  3,125,000  $.45  warrants  and  1,250,000  of the
available  1,250,000  $.55 cent  warrants.  The  aggregate  amount of $2,093,750
dollars was paid to XsunX by Cornell.  The Company  issued  4,375,000  shares of
common stock in association with the exercise of these warrants.

Warrant  Conversion  - In April 2006 Cornell  Capital  Partners,  LLP  exercised
4,250,000  of  the  available  4,250,000  $.15  warrants  and  2,125,000  of the
available  2,125,000  $.20 cent  warrants.  The  aggregate  amount of $1,062,500
dollars was paid to XsunX by Cornell.  The Company  issued  6,375,000  shares of
common stock in association with the exercise of these warrants.

                                       19
<PAGE>

Debenture Conversions - On May 10, 2006 Cornell Capital Partners,  LLP converted
$2,000,000 of the principal balance of a $5,000,000  debenture issued to Cornell
in December  2005 and the Company  issued  5,263,158  shares of common  stock to
Cornell for the conversion.  On June 12 Cornell converted another  $1,000,000 of
the principal  balance of the debenture and the Company issued  2,631,579 shares
of common stock to Cornell. On July 17, 2006 another $1,000,000 of the principal
balance was converted by Cornell for which the Company issued  2,631,579  shares
of common stock to Cornell.  On August 23, 2006 Cornell  converted the remaining
$1,000,000  principal balance and $230,833 of the total accrued interest charges
of the debenture for which the Company issued  3,239,035  shares of common stock
to Cornell.  The  conversion  price for all of the above issued  shares was $.38
each.  The  remaining  balance of the Debenture as of the date of this filing is
$0.0.

Issuance  of Shares for Service - In December  2005 the  Company  issued  40,441
unregistered  common  shares to a service  provider  for  accrued  service  fees
totaling  $7,500  dollars for services  provided over the fourth  quarter period
ended  September 30, 2005. In September  2006 XsunX issued an additional  31,925
unregistered common shares to the same service provider for accrued service fees
totaling  $24,000  dollars for the one year period ended September 30, 2006. The
shares  were  earned  on a  quarterly  basis  by the  service  provider  and the
conversion  price for the stock issued was  calculated  using the average  daily
closing price of the Company's common stock over each quarter period of service.

USES OF PROCEEDS FROM SALES OF UNREGISTERED SECURITIES

The proceeds from the above sales of unregistered securities were used primarily
to fund the research and development  efforts and day-to-day  operations of the
Company and to pay the accrued liabilities associated with these operations.

REGISTRATION OF MARKETABLE SECURITIES

On December 12, 2005, XsunX, Inc.  consummated a Securities  Purchase  Agreement
dated  December 12, 2005 with Cornell  Capital  Partners L.P.  providing for the
sale by the  Company to Cornell of 10%  secured  convertible  debentures  in the
aggregate  principal amount of $5,000,000 (the "Debentures") of which $2,000,000
was advanced  immediately.  The second  installment  of $2,000,000  was advanced
prior to the filing by the Company with the Securities  and Exchange  Commission
of a Registration  Statement in January 2006. The last installment of $1,000,000
was advanced in February 2006 upon the  Registration  Statement  being  declared
effective  by the  Commission.  Between May 2006 and August 2006 the  Debentures
principal  balance of  $5,000,000  dollars and  accrued  interest  charges  were
converted  into  13,765351  shares of Common Stock at the option of Cornell at a
conversion  price  per  share  equal to  $0.38.  The  remaining  balance  of the
debenture is $0.0.

In connection with the above Cornell L.P.  Securities  Purchase  Agreement,  the
Company also entered into a registration  rights  agreement  (the  "Registration
Rights  Agreement")  providing for the filing of a  registration  statement (the
"Registration   Statement")   with  the  Securities   and  Exchange   Commission
registering  the Common Stock issuable upon conversion of the Debentures and the
exercise of Warrants issued to Cornell in association  with Debenture.  Prior to
executing  the  Securities  Purchase  Agreement,  the  Company  had  withdrawn a
previously  filed  registration  statement that included  Common Stock issued to
Cornell and Common Stock to be issued upon the  conversion of debentures and the
exercise of warrants  previously  sold to Cornell  (collectively,  the  "Initial
Securities")  pursuant to a securities  purchase  agreement executed on July 14,
2005 (the "Prior  Agreement")  as well as Common Stock to be issued  pursuant to
the  Standby  Equity  Distribution  Agreement  dated July 14,  2005  between the
Company and Cornell (the "Distribution Agreement").  All Initial Securities were
included in the Registration  Statement.  The Company and Cornell also agreed to
terminate  the July 14,  2005  Distribution  Agreement.  On January 11, 2006 the
Company filed to register up to 72,879,263  shares in association with the above
securities  registration  requirements.  The  Registration  statement  was  made
effective on or about February 9, 2006. Upon the final  conversion by Cornell of
the Initial  Securities,  the  Securities  Purchase  Agreement,  the  underlying
Warrants  therein,  and accrued  interest  associated with the Debentures  XsunX
issued the aggregate amount of 35,245,851  registered  shares of common stock in
the 2006 period.

                                       20
<PAGE>

The Company's  obligations under the Prior Agreement and the Securities Purchase
Agreement were secured by substantially  all of the Company's assets. As further
security for its obligations  thereunder,  the Company had deposited into escrow
26,798,418  shares of Common Stock.  In addition,  Tom Djokovich,  the Company's
Chief Executive  Officer,  had granted a security  interest in 925,000 shares of
Common Stock that he owns to secure the  Company's  obligations  under the Prior
Agreement  only.  As of the date of this filing XsunX had  received  notice from
Cornell of the release of the security  interest in above listed security shares
and assets.


ITEM 6. SELECTED FINANCIAL DATA

Table of Selected Financial Data

<TABLE>
<CAPTION>


                                              2006                 2005              2004              2003            2002
--------------------------------------------------------------------------------------------------------------------------------
<S>                                           <C>               <C>               <C>              <C>                <C>
Net Sales                                            8,000                  -                 -                -              -
Income(Loss) from Continuing Operations         (3,441,940)        (1,400,839)       (1,509,068)        (145,868)       (47,297)
Income(Loss) from Continuing Operations
   per Common Share                                $ (0.02)           $ (0.02)          $ (0.01)     $     (0.02)            *
Cash                                             4,305,105            175,869            37,344            2,346              -
Total Assets                                     6,859,463            441,684            72,114            2,349              -
Long Term Obligations                                    -                  -                 -                -              -
Cash Dividends Declared per Common Share               $ -                $ -               $ -              $ -            $ -
</TABLE>

 *  Less than $0.01

In 2003,  the Company  completed  a Plan of  Reorganization  and Asset  Purchase
Agreement  and changed the name of the Company  from Sun River  Mining,  Inc. to
XsunX,  Inc. Due to the Company's change in primary focus in October of 2003 and
the developing nature of the business  opportunities,  these historical  results
may not  necessarily  be  indicative  of results to be  expected  for any future
period.  As such,  future results of the Company may differ  significantly  from
previous periods. The historical trends reflect this change of primary focus and
the associated research and development period of the development stage company.
This change in primary focus is the largest factor in the  comparability of this
information over time.


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

CAUTIONARY AND FORWARD LOOKING STATEMENTS

In  addition  to  statements  of  historical   fact,  this  Form  10-K  contains
forward-looking  statements.  The presentation of future aspects of XsunX,  Inc.
("XsunX," the "Company" or "issuer")  found in these  statements is subject to a
number of risks and  uncertainties  that could  cause  actual  results to differ
materially from those reflected in such statements. Readers are cautioned not to
place  undue  reliance  on  these  forward-looking  statements,   which  reflect
management's  analysis  only  as  of  the  date  hereof.  Without  limiting  the
generality of the foregoing,  words such as "may," "will," "expect,"  "believe,"
"anticipate,"  "intend,"  or  "could"  or the  negative  variations  thereof  or
comparable terminology are intended to identify forward-looking statements.

These forward-looking statements are subject to numerous assumptions,  risks and
uncertainties  that may cause XsunX's actual results to be materially  different
from any future  results  expressed  or  implied  by XsunX in those  statements.
Important  facts  that  could  prevent  XsunX from  achieving  any stated  goals
include, but are not limited to, the following:

                                       21

<PAGE>

Some of these risks might include, but are not limited to, the following:

(a) volatility or decline of the Company's stock price;

(b) potential fluctuation in quarterly results;

(c) failure of the Company to earn revenues or profits;

(d) inadequate capital to continue or expand its business, inability to raise
    additional capital or financing to implement its business plans;

(e) failure to commercialize its technology or to make sales;

(f) rapid and significant changes in markets;

(g) litigation with or legal claims and allegations by outside parties;

(h) insufficient revenues to cover operating costs.

There is no assurance that the Company will be  profitable,  the Company may not
be able to successfully develop, manage or market its products and services, the
Company may not be able to attract or retain qualified executives and technology
personnel,  the Company's products and services may become obsolete,  government
regulation may hinder the Company's business, additional dilution in outstanding
stock ownership may be incurred due to the issuance of more shares, warrants and
stock options,  or the exercise of warrants and stock  options,  and other risks
inherent in the Company's businesses.

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

For the year ended September 30, 2006, the Company had and continues to focus on
the  development  and refinement of  commercially  appealing solar cell designs,
proprietary manufacturing processes and facilities design that could be provided
to OEM licensees as turn-key  solutions for the mass production of thin films. A
large part of the Company's capital was used for product  development.  However,
marketing  and business  development  efforts were launched in the later part of
2006 requiring an increase to budget requirements to fund these efforts.

GROWTH, REVENUE AND DISTRIBUTION PLAN

The  Company  is  marketing  its  integrated  manufacturing  systems  as turnkey
solutions for the manufacture it's current and future PV thin films designs. The
manufacturing  systems will be licensed to  manufacturers as modular systems and
licensed  for use in the  manufacture  the  Company's  thin  film  designs.  The
manufacturers would in turn agree to manufacture and distribute the Company's PV
thin  films,  or  incorporate  the thin film PV  technology  into their  product
manufacturing process as an "original equipment manufacturer" (OEM) and sell the
finished product to their consumers. Although the Company is currently providing
proposals  to  interested  OEM's no  licenses  or  contracts  now exist with any
manufacturer.

We intend to target customers who are developing their own technology  platforms
in which the  manufacture  of or the  integration  of our thin film solar  cells
could play an important role. The Company will offer non-exclusive manufacturing
licenses  and expects to earn a royalty on thin films  manufactured.  In selling
the  manufacturing  equipment and licensing the technology to OEM's, the Company
reduces operating  expenses and saves capital in plant,  property and equipment.

                                       22

<PAGE>

As a result,  should the Company  realize  earnings  it intends to reinvest  its
retained  earnings  in R&D in an  effort to  continuously  develop  related  new
technologies that will help achieve sustainable  competitive  advantages for the
Company.

PLAN OF OPERATIONS

XsunX anticipates the 12-month capital  operational  requirements of the company
to be $5,750,000 dollars.  Capital will be applied to operations as follows: (i)
approximately  $1,200,000  will  be  used  to  pay  costs  associated  with  the
completion of development of a 4-Terminal nano-crystalline solar cell patent for
commercialization  purposes, (ii)  approximately$1,500,000  will be used for the
development of new technologies licensed and/or acquired during the 2007 period,
(iii)  approximately  $400,000  will be used to complete  the  manufacture  of a
marketable  prototype  manufacturing  system  that began in January  2006,  (iv)
approximately  $500,000  will be used  for the  engineering  and  adaptation  of
certain  manufacturing  devices and techniques to provide product  manufacturing
demonstration and development  capabilities,  (v) approximately $160,000 will be
used to pay for third party engineering,  testing, and consulting services, (vi)
approximately  $835,000 will be used to pay salaries and general  administrative
costs, and for intellectual  property protection,  (vii) approximately  $625,000
will be used  to pay for  sales  and  market  development,  general  competitive
research and publicity costs, and (viii) approximately $500,000 will be used for
general working capital.

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

The Company will need additional  capital to support its budget. The Company has
insignificant revenues to date. No representation is made that any funds will be
available  when needed.  In the event funds  cannot be raised when  needed,  the
Company may not be able to carry out its business  plan, may never achieve sales
or  royalty   income,   and  could  fail  in  business  as  a  result  of  these
uncertainties.

The Company may need to seek  additional  financing for this budget.  (See "Risk
Factors" at p. 13).

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


RESULTS OF  OPERATIONS  FOR THE THREE  FISCAL  YEARS ENDED  SEPTEMBER  30, 2006,
COMPARED TO FISCAL YEARS ENDED SEPTEMBER 30, 2005 AND SEPTEMBER 30, 2004

The Company generated  insignificant  revenues in the period ended September 30,
2006 of $8,000. The Company generated no revenues for the same period in 2005 as
well as for the same period in 2004.

The Company incurred expenses totaling $3,380,087 in 2006 compared to $1,383,406
in 2005 and  $1,528,193 in 2004.  The increase of $1,996,681  included a onetime
non-cash warrant issuance expense of $951,250 for Warrants issued in association
the  licensure  of  technologies  and the  sale by the  Company  of  convertible
debentures,  and a net increase of $511,834 in loan fee expenses associated with
the sale by the Company of convertible dentures. Excluding this non-cash warrant
expense  and the cash  based  debenture  expenses  in the  comparative  analysis
between the period's  results in an increase of $508,596 in normal and customary
operational expenses for the period ending September 30, 2006 as compared to the
same period 2005.

Primary sources for the increase to operating  expense of $533,597  include:  an
increase of $448,049 in Research and Development activities totaling $949,472 as
compared to $501,423  incurred for the same period in 2005 and $129,493 in 2004,
an  increase  of $65,738  in Public  Relations  activity  totaling  $182,151  as
compared to activity totaling $116,413 for the same period in 2005 and $6,640 in
2004,  an increase of  $119,853  in  Salaries  totaling  $275,089 as compared to
Salaries totaling $155,236 for the same period in 2005 and $119,336 for the same
period 2004, an increase of $33,044 in Legal and  Accounting  expenses  totaling
$140,293 as  compared to Legal and  Accounting  totaling  $107,249  for the same
period in 2005 and $27,203 for the same period 2004,  an increase of $123,707 in

                                       23

<PAGE>

General  and   Administrative   expenses  related  to  an  increase  in  travel,
advertising,   depreciation,   business   development   and  other  General  and
Administrative  expenses. These increases were partially offset by a decrease in
Consulting  expenses  of  $(273,094)  totaling  47,850 as  compared  to activity
totaling $320,944 for the same period in 2005 and $19,900 for the same period in
2004. The $3,355,086 in operating  expenses includes non-cash charges of $24,000
for the issuance of common shares in lieu of cash payment for services.

For the twelve months ended September 30, 2006, the Company's  consolidated  net
loss was $(3,441,940) as compared to a consolidated net loss of $(1,400,839) for
the same period ended  September 30, 2005 and  $(1,509,068)  for the same period
ended  September 30, 2004.  The increase of $2,041,101  resulted from a one time
non-cash warrant issuance expense of $951,250 for Warrant Expenses accounted for
in the period ended  September 30, 2006,  and a net increase of $511,834 in loan
fee expenses  associated with the sale by the Company of convertible  dentures..
Excluding the one time non-cash  warrant  expense and net loan fee expenses,  in
the  comparative  analysis  between  the  period's,  results in an  increase  of
$578,017 in net loss for the period ended  September 30, 2006 as compared to the
same period  2005.  The net loss per share was less than  $(0.02) for the twelve
month period ended September 30, 2006.

Due to the Company's  change in primary  business  focus in October 2003 and the
developing nature of its business opportunities these historical results may not
necessarily  be indicative of results to be expected for any future  period.  As
such,  future  results of the Company  may differ  significantly  from  previous
periods. Since inception in 1997 the Company has an accumulated deficit totaling
($9,171,354) to September 30, 2006.

LIQUIDITY AND CAPITAL RESOURCES

Working  capital at September  30, 2006 was  $4,065,523 as compared to a working
capital (deficit) of $(718,380) at September 30, 2005 and ($38,819) at September
2004. There were insignificant cash flows totaling $8,000 provided by operations
during the twelve months ended September 30, 2006.

Cash and cash equivalents at September 30, 2006 were $4,654,222,  an increase of
$4,398,369 from September 30, 2005.  During the year ended,  September 30, 2006,
the Company  used  $1,942,278  net cash in operating  activities  as compared to
using  $1,049,650  net cash for the year ended,  September 30, 2005 and $236,630
for the year ended September 30, 2004. The increase of $892,628 between the 2006
and 2005 periods resulted from onetime non-cash  expenses for a warrant issuance
expense of $951,250,  an expense of $31,500 for the issuance of stock in lieu of
cash for services, and $241,383 in expenses for the issuance of stock in lieu of
cash for the payment of accrued interest  associated with the sale of debentures
by the Company  accounted for in the period ended September 30, 2006.  Excluding
these one time  non-cash  expenses,  in the  comparative  analysis  between  the
period's,  results in a decrease of $331,505 in net cash used in operations  for
the period  ended  September  30, 2006  compared  to the same  period  2005.This
decrease  of net cash used in  operations  was  primarily  due to a decrease  in
consulting expenses of $273,094 in the 2006 period.

For the twelve months ended,  September  30, 2006,  the Company's  capital needs
have  primarily  been met from the  proceeds of (i) the issuance of Common Stock
for  Debenture  conversion  and;  (ii) the  issuance of Common Stock for warrant
conversion.  Total cash  provided by financing  activities  for the period ended
September 30, 2006 increased to $8,171,250  from  $1,380,170 for the same period
ended  September 30, 2005 and $283,895 for the period ended  September 30, 2004.
The  increase  of  $6,791,080  between  the  2006 and 2005  periods  was  mainly
attributable  to an increase of  $5,000,000  from the  conversion of a debenture
into common stock and $3,171,250 in the conversion of warrants for common stock.

                                       24

<PAGE>

Contractual Obligations are shown in the following table -

<TABLE>
<CAPTION>

------------------------ ------------------------------------------------------------
Contractual Obligations                    Payments Due by Period
------------------------ ------------------------------------------------------------
                                                                           More
                                       Less than                           than 5
                            Total       1 Year     1-3 Years   3-5 Years     Years
------------------------ ------------ ------------ ----------- ----------- ----------
<S>                      <C>          <C>          <C>         <C>         <C>
Long Term Obligations    -            -            -           -           -
------------------------ ------------ ------------ ----------- ----------- ----------
Capital Lease            -            -            -           -           -
------------------------ ------------ ------------ ----------- ----------- ----------
Operating Lease          57,518       20,550       36,968      -           -
------------------------ ------------ ------------ ----------- ----------- ----------
Purchase Obligations     1,183,680    1,183,680    -           -           -
------------------------ ------------ ------------ ----------- ----------- ----------
Other Long Term
Liabilities Reflected
on the Registrant's
Balance Sheet Under
GAAP                     -            -            -           -           -
------------------------ ------------ ------------ ----------- ----------- ----------

Total                    1,241,198    1,204,230    36,968      -           -
------------------------ ------------ ------------ ----------- ----------- ----------
</TABLE>

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

(2) Remaining accounts payable associated with the production  prototype machine
of $353,000

(3)  Remaining  amount  due to  MVSystems  from the Phase IV,  4T  research  and
development contract signed in the period ending September 30, 2006 of $830,680

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

During the year ended,  September  30, 2006,  we used  $2,099,736  for investing
activities as compared to $191,995,  for the year ended,  September 30, 2005 and
$12,267 for the year ended  September  30, 2004.  The  increased use of cash for
investing  activities  resulted from an increase in the acquisition of assets in
the form of a marketable prototype manufacturing tool and additional equipment.

We had, at September  30, 2006,  working  capital of  $4,065,523.  We have begun
marketing efforts and anticipate the sale of licenses in the 2007 period however
the cash flow requirements associated with the transition to revenue recognition
may exceed cash generated from operations in the current and future periods.  We
may seek to obtain additional  financing from equity and/or debt placements.  We
have been able to raise capital in a series of equity and debt  offerings in the
past.  While  there can be no  assurances  that we will be able to  obtain  such
additional financing, on terms acceptable to us and at the times required, or at
all, we believe that sufficient  capital can be raised in the foreseeable future
if necessary.

NET OPERATING LOSS

For federal  income tax purposes,  we have net operating  loss carry forwards of
approximately  $9,646,224  as of September 30, 2006.  These carry  forwards will
begin to expire in 2010. The use of such net operating loss carry forwards to be
offset against future taxable income,  if achieved,  may be subject to specified
annual limitations.

                                       25
<PAGE>

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Please refer to pages F-1 through F-19.


ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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

The Change of  Accountants  was  approved  by the Board of  Directors.  No audit
committee exists other than the members of the Board of Directors.

In connection  with audit of the two most recent  fiscal years,  and through the
date of termination of the accountants,  no disagreements  exist with any former
accountant  on any  matter of  accounting  principles  or  practices,  financial
statement disclosure, or auditing scope of procedure, which disagreements if not
resolved to the satisfaction of the former  accountant would have caused them to
make   reference  in   connection   with  his  report  to  the  subject  of  the
disagreement(s).

The audit report by Michael  Johnson & Co., LLC. for the period ended  September
30,  2004   contained  an  opinion   which   included  a  paragraph   discussing
uncertainties  related to  continuation  of the  Registrant as a going  concern.
Otherwise,  the  audit  report by  Michael  Johnson  & Co.,  LLC for the  period
September 30, 2004 did not contain an adverse  opinion or disclaimer of opinion,
nor was  qualified or modified as to  uncertainty,  audit scope,  or  accounting
principles.


ITEM 9A. CONTROLS AND PROCEEDURES

Disclosure Controls and Procedures

Our Chief  Executive  Officer and Chief  Financial  Officer,  have evaluated the
effectiveness of our disclosure controls and procedures (as such term is defined
in Rules 13a-15(e) and 15d-15(e)  under the Securities  Exchange Act of 1934, as
amended  (the  "Exchange  Act"))  as of the end of the  period  covered  by this
report. The evaluation included certain control areas in which we have made, and
are continuing to make,  changes to improve and enhance controls.  Based on such
evaluation,  our Chief  Executive  Officer  and  Chief  Financial  Officer  have
concluded  that,  as of the end of such  period,  our  disclosure  controls  and
procedures were effective, and we have discovered no material weakness.

A material  weakness is a condition  in which the design or  operation of one or
more of the internal  control  components  does not reduce to a  relatively  low
level the risk that misstatements caused by error or fraud in amounts that would
be material in relation to the financial  statements being audited may occur and
not be detected  within a timely  period by  employees  in the normal  course of
performing their assigned functions.

                                       26
<PAGE>

Internal Control Over Financial Reporting

The Securities and Exchange Commission rule making for the Sarbanes-Oxley Act of
2002 Section 404 requires  that a company's  internal  controls  over  financial
reporting  be based upon a  recognized  internal  control  framework.  While the
Company has an internal  control and  procedures  manual in place and management
believes the controls and  procedures are effective the manual is not based upon
a recognized internal control framework, because we have not found one that fits
the limited scope of operations of our Company.

During the first half of the  Company's  fiscal year ending  September  30, 2007
management  will be revising  the  Company's  internal  and  controls  procedure
document basing this revision upon a model framework created by the Committee of
Sponsoring   Organizations  of  the  Treadway   Commission  (or  "COSO")  as  is
appropriate   to  our   operations.   This   framework   is  entitled   Internal
Control-Integrated  Framework. The COSO Framework, which is the common shortened
title,  was published in 1992 and has been updated,  and we believe will satisfy
the  Securities  and  Exchange  Commission  requirements  of Section  404 of the
Sarbanes-Oxley Act of 2002.

Management  is committed to  re-writing  its  internal  controls and  procedures
manual  based  upon the  Treadway  Commission  report as is  appropriate  to our
operations during the first half of fiscal year ending September 30, 2007.

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.


ITEM 9B. OTHER INFORMATION

On April 19th 2006, a service  provider  Office Radio Network filed a lawsuit in
the District Court in Colorado  alleging that it has been damaged due to refusal
to allow it to sell its  shares  under  Rule 144.  The  parties  entered  into a
settlement  in December 2006  providing for the return of 150,000  shares of the
300,000 shares issued to Office Radio Network,  and the  provisioning  by Office
Radio Network of an additional six months of service to the Company.


                                    PART III

ITEM  10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

The following table lists the executive  offices and directors of the Company as
of September 30, 2006:



     NAME           Age          POSITION HELD                TENURE

Brian Altounian     43     Secretary, Director              Since September 2003
(resigned 6/30)
Tom Djokovich       49     President, CEO, CFO, Director    Since September 2003
Thomas Anderson     41     Director                         Since August 2001
Joseph Grimes       49     COO                              Since April 2006

The  directors  named  above will  serve  until the next  annual  meeting of the
Company's stockholders. Thereafter, directors will be elected for one-year terms
at the annual stockholders'  meeting.  Officers will hold their positions at the
pleasure of the board of directors,  absent any employment  agreement,  of which
none  currently  exists  or  is   contemplated.   There  is  no  arrangement  or
understanding  between the  directors  and officers of the Company and any other
person  pursuant to which any  director or officer was or is to be selected as a
director or officer.

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

                                       27
<PAGE>

BIOGRAPHICAL INFORMATION

TOM DJOKOVICH, age 49, President and Chief Executive Officer as of September 30,
2003, and Director;

Mr.  Djokovich  was the  founder  and  served  from  1995  to 2002 as the  Chief
Executive Officer of Accesspoint  Corporation,  a vertically integrated provider
of electronic  transaction  processing and  e-business  solutions for merchants.
Under   Mr.   Djokovich's   guidance,   Accesspoint   became  a  member  of  the
Visa/MasterCard  association,  the national check processing  association NACHA,
and  developed one of the payment  industry's  most diverse set of network based
transaction  processing,  business  management and CRM systems for both Internet
and conventional points of sale. Prior to Accesspoint, Mr. Djokovich founded TMD
Construction   and   Development   in  1979.   TMD   provided   management   for
multimillion-dollar  projects  incorporating  at times  hundreds  of  employees,
subcontractors   and   international   material   acquisitions  for  commercial,
industrial and custom residential  construction  services as a licensed building
firm in  California.  In 1995 Mr.  Djokovich  developed an early  Internet based
business-to-business   ordering  system  for  the  construction   industry.  Mr.
Djokovich  also  currently  serves  as a  Director  and  Chairman  of the  Audit
Committee  for  Roaming  Messenger,  Inc.,  a publicly  reporting  company  that
provides a breakthrough  software solution for delivering  real-time  actionable
information for Homeland Security,  emergency response,  military and enterprise
applications.

JOSEPH GRIMES, age 49, Chief Operating Officer as of April 2006;

Mr. Grimes brings to XsunX more than eight years direct  experience in thin-film
technology  and  manufacturing.  He was most  recently Vice  President,  Defense
Solutions,  for Envisage Technology  Company,  where he directed and managed the
defense group business  development process,  acquisition  strategies and vision
for next generation  applications.  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.  His direct
experience in thin-film  technology came with Applied  Magnetics  Corporation 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.

THOMAS ANDERSON, age 41, became a director of the Company in August 2001;

Mr. Anderson presently works as a Senior Environmental  Scientist for the Energy
and Environmental Engineering Division of Apogen Technologies in Los Alamos, New
Mexico.  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.
Anderson  has worked for past 16 years in the  environmental  consulting  field,
providing 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. From March 2000 to November 2000 he was employed
as a hydrologist  at Stone & Webster  Engineering,  Inc. From July 1998 to March
2000  he  was  employed  by  advanced  Integrated   Management  Services  as  an
Environmental  Scientist/Engineer.  From 1997 to 1998 he was a graduate research
assistant  at  Colorado  School  of  Mines  in  the  Environmental  Science  and
Engineering Program.


COMPLIANCE WITH SECTION 16(A) OF EXCHANGE ACT

Section 16(a) of the Exchange Act requires the Company's officers and directors,
and certain persons who own more than 10% of a registered class of the Company's
equity  securities  (collectively,  "Reporting  Persons"),  to file  reports  of
ownership and changes in ownership  ("Section 16 Reports")  with the  Securities
and Exchange  Commission (the "SEC").  Reporting Persons are required by the SEC
to furnish the Company with copies of all Section 16 Reports they file.

Based solely on its review of the copies of such Section 16 Reports  received by
it, or written  representations  received from certain  Reporting  Persons,  the
following persons were required to file forms pursuant to Section 16(a):

                                       28
<PAGE>

Name                             Form                      Filed
----------------------------------------------------------------------------
Tom Djokovich                    Form 3                    October 24, 2003
Brian Altounian                  Form 4                    June 22, 2006
Xoptix, Inc.                     Form 3*                   Did not file

* NOTE: Xoptix, Inc. was being liquidated pursuant to a Plan of Liquidation, and
the shares  were  distributed  in  December,  2003 pro rata to  shareholders  of
Xoptix,  Inc.  in a  liquidating  distribution  of  assets in kind.  Xoptix  has
represented that no shareholder of Xoptix, Inc. receiving shares holds more than
10% of the issued and outstanding shares of Registrant.


ITEM 11. EXECUTIVE COMPENSATION

DIRECTOR COMPENSATION

Directors  received  no cash  compensation  for their  service to the Company as
directors,  but can be reimbursed for expenses  actually  incurred in connection
with attending meetings of the Board of Directors.

<TABLE>
<CAPTION>

                             SUMMARY COMPENSATION TABLE OF DIRECTORS
                             (excludes compensation for executives)
------------------------------------ -------------- -------------- ----------------- ---------------- -------------------
Name                                 Annual         Meeting Fees   Consulting        Number of        Number of
                                     Retainer       ($)            Fees/Other Fees   Shares (#)       Securities
                                     Fees ($)                      ($)                                Underlying
                                                                                                      Options SARS (#)
------------------------------------ -------------- -------------- ----------------- ---------------- -------------------
<S>                                  <C>            <C>            <C>               <C>              <C>
Director, Tom Djokovich                   $0             $0               $0                0                 0
------------------------------------ -------------- -------------- ----------------- ---------------- -------------------
Director, Brian Altounian                 $0             $0               $0                0                 0
(resigned June 30, 2006)
------------------------------------ -------------- -------------- ----------------- ---------------- -------------------
Director, Thomas Anderson                 $0             $0               $0                0                 0
------------------------------------ -------------- -------------- ----------------- ---------------- -------------------
</TABLE>


EXCUTIVE OFFICER COMPENSATION

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

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

<TABLE>
<CAPTION>

                    SUMMARY COMPENSATION TABLE OF EXECUTIVES

--------------------------- --------- ------------ --------------- -------------------- ---------------- ----------------
Name & Principal Position   Fiscal    Annual       Annual Bonus    Awards Other         Restricted       Securities
                            Year      Salary ($)   ($)             Annual               Stock Award(s)   Underlying
                                                                   Compensation ($)     ($)              Options/ SARS
                                                                                                         (#)
--------------------------- --------- ------------ --------------- -------------------- ---------------- ----------------
<S>                         <C>       <C>          <C>             <C>                  <C>              <C>
Tom Djokovich, President(1)   2006     $150,000          0                  0                  0                0
                              2005     $150,000          0                  0                  0                0
                              2004     $130,000          0                  0                  0                0
--------------------------- --------- ------------ --------------- -------------------- ---------------- ----------------
Joseph Grimes, COO (2)        2006        $0             0                  0                  0          612,000
                              2005        $0             0                  0                  0                0
                              2004        $0             0                  0                  0                0
--------------------------- --------- ------------ --------------- -------------------- ---------------- ----------------
Brian Altounian, Secretary(3) 2006        $0             0                  0                  0                0
                              2005        $0             0                  0                  0                0
                              2004        $0             0                  0                  0                0
--------------------------- --------- ------------ --------------- -------------------- ---------------- ----------------
Thomas Anderson, Director     2006        $0             0                  0                  0                0
                              2005        $0             0                  0                  0                0
                              2004        $0             0                  0                  0                0
--------------------------- --------- ------------ --------------- -------------------- ---------------- ----------------
</TABLE>

                                       29
<PAGE>

(1) The Company  has agreed to pay Mr.  Djokovich  $2,884 per week for  services
provided  as Chief  Executive  Officer  up to and until the  Company  determines
executive  compensation pursuant to an employment agreement as determined by the
Board.  When  necessitated  by the  Company's  adverse  financial  condition Mr.
Djokovich has agreed to the deferment of his monthly salary up to and until such
time that the Company can repay any such deferred  amounts.  In the period ended
September 30, 2004 Mr.  Djokovich  agreed to the deferment of $65,000 dollars of
his salary until such time that the Company  could begin to repay him. As of the
period  ended  September  30,  2006 the  remaining  balance  of Mr.  Djokovich's
deferred salary was $6,538.

(2) The  Company  has  agreed to pay Mr.  Grimes  $2,884  per week for  services
provided as Chief Operating  Officer under the terms of an employment  agreement
effective April 5, 2006. In addition to Mr. Grimes base compensation the Company
also  provides Mr. Grimes with a $400 monthly  health  insurance  allowance.  In
connection  with the  issuance  of an  employment  agreement  to Mr.  Grimes the
Company granted 500,000  warrants at the then market price of $1.69. On July 20,
2006 the Company  and Mr.  Grimes  mutually  agreed to the  cancellation  of the
remaining  388,000 unvested balance of this warrant and then granted 500,000 new
warrants  on July 20, 2006 at the then  market  price of $0.51.  The new warrant
will vest at the rate of 28,000  shares  per month up to and  through  the first
nine months of employment,  100,000 shares will become exercisable upon delivery
of a marketing plan by Mr. Grimes to the Board of Directors, 148,000 shares will
become exercisable upon the first sale or licensure of an XsunX technology under
the marketing plan.

(3) Resigned as Chairman and Secretary effective June 30, 2006

Option/SAR Grants Table (None)

Aggregated Option/SAR Exercises in Last Fiscal Year an FY-End Option/SAR value
(None)

Long Term Incentive Plans - Awards in Last Fiscal Year

<TABLE>
<CAPTION>

                          Long Term Incentive Plan Options/Warrants

----------------------- ---------------------- ----------------- --------- --------------------- ---------------------
Name                    Date Issued            Number Issued     Exercise   Expiration Date       Consideration
                                                                 Price
----------------------- ---------------------- ----------------- --------- --------------------- ---------------------
<S>                     <C>                    <C>               <C>       <C>                   <C>
Joseph Grimes(1)         April 5, 2006            112,000        $1.69       April 5, 2011       As part of an employment
                                                                                                 incentive agreement
----------------------- ---------------------- ----------------- --------- --------------------- ---------------------
Joseph Grimes(2)         July 20, 2006            500,000        $0.51       July 20, 2011       As part of an employment
                                                                                                 incentive agreement
----------------------- ---------------------- ----------------- --------- --------------------- ---------------------
</TABLE>

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

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

                                       30
<PAGE>

2006 WARRANT ISSUANCE AND SUMMARYS

The following table sets forth  information with respect to warrants to purchase
common stock of the Company granted during fiscal year ended September 30, 2006.

<TABLE>
<CAPTION>
                                         Options/Warrants

----------------------- ---------------------- ----------------- --------- --------------------- ----------------
Name                    Date Issued            Number Issued     Exercise   Expiration Date       Consideration
                                                                 Price
----------------------- ---------------------- ----------------- --------- --------------------- ----------------
<S>                     <C>                    <C>               <C>       <C>                   <C>
MVSystems, Inc.(1)       October 12, 2005       7,000,000          $0.25      October 12, 2010   Expanded Use
                                                                                                 License Agreement
----------------------- ---------------------- ----------------- --------- --------------------- ----------------
Cornell Capital, LP(2)   December 12, 2005      3,125,000          $0.45      December 12, 2010  As part of a
                                                                                                 financing agreement
----------------------- ---------------------- ----------------- --------- --------------------- ----------------
Cornell Capital, LP (3)  December 12, 2005      1,250,000          $0.55      December 12, 2010  As part of a financing
                                                                                                 agreement
----------------------- ---------------------- ----------------- --------- --------------------- ----------------
Joseph Grimes(4)         April 5, 2006            112,000          $1.69      April 5, 2011      As part of an employment
                                                                                                 incentive agreement
----------------------- ---------------------- ----------------- --------- --------------------- ----------------
Joseph Grimes(5)         July 20, 2006            500,000          $0.51      July 20, 2011      As part of an employment
                                                                                                 incentive agreement
----------------------- ---------------------- ----------------- --------- --------------------- ----------------
</TABLE>

(1) The Warrant granted to MVSystems,  Inc. will vest in the amount of 1,000,000
shares upon the effective date of the Expanded Use License  Agreement  which was
October 12,  2005.  Thereafter,  the Warrant  will vest at the rate of 1,000,000
shares upon the satisfactory completion of a Phase 4 development program for the
development of certain opaque solar technologies that began in January 2006, and
the  balance  of  5,000,000  shares  will  vest  upon the date the  technologies
licensed  under the Expanded Use License are licensed to a third party in a bona
fide arms-length commercial setting.

(2), (3) Warrant to Purchase  Common Stock  Cornell - On December 12, 2005,  the
Company  consummated a Securities  Purchase Agreement with Cornell providing for
the sale by the Company to Cornell of its 10% secured convertible  debentures in
the aggregate principal amount of $5,000,000.  Under the Purchase Agreement, the
Company  also issued to Cornell  five-year  warrants to purchase  3,125,000  and
1,250,000 shares of Common Stock at $0.45 and $0.55, respectively (collectively,
the  "Warrants").  As of the date of this filing all of the Cornell warrants had
been exercised.

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

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

                                       31
<PAGE>

become exercisable upon the first sale or licensure of an XsunX technology under
the marketing plan.

During the years ended September 30, 2005 no warrant holders exercised  warrants
to purchase the Company's common stock. During the year ended September 30, 2006
warrant holders exercised a total of 10,850,000 warrants in cash to purchase the
Company's common stock.

A summary of warrant  activity for the year ended September 30, 2005 and 2006 is
as follows:

<TABLE>
<CAPTION>
                                                            Weighted-                           Weighted-
                                         Number of          Average                             Average
                                         Warrants           Exercise         Accrued            Exercise
                                                                             --------------
                                                            Price            Warrants           Price
                                                                             --------
                                                                             Exercisable
                                         --------------     -------------    ---------------    --------------
<S>                                      <C>                <C>              <C>                <C>
Outstanding, September 30, 2004          8,000,000          $0.15            5,525,000          $0.15
    Granted 2005                         7,125,000          $0.1649          7,884,167          $0.1659
    Exercised 2005                       0                  $0.0
                                         --------------     -------------    ---------------    --------------
Outstanding, September 30, 2005          15,125,000         $0.1595          13,409,167         $0.1593

    Granted 2006                         11,987,000         $0.3419          6,143,000          $0.4340
    Exercised 2006                       (10,850,000)       $0.2923          (10,850,000)
                                         --------------     -------------    ---------------    --------------
Outstanding, September 30, 2006          16,262,000         $0.2170          8,702,167          $0.1873
                                         ==============
</TABLE>

At September 30, 2006, the range of warrant prices for shares under warrants not
exercised and the weighted-average remaining contractual life is as follows:

<TABLE>
<CAPTION>

                            Warrants Outstanding                                  Warrants Exercisable
                   --------------------------------------------------    ---------------------------------
                                                     Weighted-
                                   Weighted-         Average                                 Weighted-
Range of           Number of       Average           Remaining           Number              Average
Warrant            Warrants        Exercise          Contractual         Of                  Exercise
Exercise Price                     Price             Life(yr)            Warrants            Price
---------------    ------------    --------------    ----------------    ----------------    -------------
<S>                <C>             <C>               <C>                 <C>                 <C>
$.15                 7,900,000     $ .15               2.7                 6,900,000         $ .15
                   ------------                                          ----------------
 .20                   750,000       .20               1.5                   634,167           .20
                   ------------                                          ----------------
 .25                 7,000,000       .25               4.0                 1,000,000           .25
                   ------------                                          ----------------
 .51                   500,000       .51               4.8                    56,000           .51
                   ------------                                          ----------------
1.69                   112,000      1.69               4.5                    112,000         1.69
                   ============                                          ================
</TABLE>

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

                                       32
<PAGE>


ITEM 12.  SECURITY  OWNERSHIP OF CERTAIN  BENEFICIAL  OWNERS AND  MANAGEMENT AND
RELEATED STOCKHOLDER MATTERS

The  following  table sets forth,  as of the date of this Report,  the number of
shares of common stock owned of record and  beneficially by executive  officers,
directors and persons who hold 5.0% or more of the  outstanding  common stock of
the  Company as of December 7, 2006.  Also  included  are the shares held by all
executive officers and directors as a group.



SHAREHOLDERS/                    NUMBER OF SHARES              OWNERSHIP
BENEFICIAL OWNERS                                              PERCENTAGE(1)
---------------------------------------------------------------------------
Tom Djokovich (2)                     17,903,000                  11.39%
President & Director
65 Enterprise
Aliso Viejo, CA  92656

Thomas Anderson                          56,900                   >.01%
65 Enterprise
Aliso Viejo, CA  92656

Joseph Grimes (3)                       224,000                   >.01%
Chief Operating Officer
65 Enterprise
Aliso Viejo, CA  92656

(1) Applicable  percentage  ownership is based on  157,137,931  shares of common
stock outstanding as of December 13, 2006. Beneficial ownership is determined in
accordance  with  the  rules  of the  Securities  and  Exchange  Commission  and
generally includes voting or investment power with respect to securities. Shares
of common stock that are currently  exercisable or exercisable within 60 days of
December 13, 2006 are deemed to be beneficially owned by the person holding such
securities  for the purpose of  computing  the  percentage  of ownership of such
person,  but are not treated as  outstanding  for the purpose of  computing  the
percentage ownership of any other person.

(2) Includes 16,978,000 shares owned by the Djokovich Limited  Partnership.  Mr.
Djokovich shares voting and dispositive  power with respect to these shares with
Mrs. Tamara Djokovich.

(3) Includes vested warrants that may be exercised within 60 days of the date of
this filing.


ITEM  13.  CERTAIN  RELATIONSHIPS,  RELATED  PARTY  TRANSACTIONS,  AND  DIRECTOR
INDEPENDENCE

No officer or  director  of the  Company  has or  proposes to have any direct or
indirect  material  interest in any asset proposed to be acquired by the Company
through security holdings, contracts, options, or otherwise.

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

                                       33
<PAGE>

Grant of Options/Warrants to Executive Officer

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

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

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

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

Expanded License and Warrants

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

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

    (2)   Another  one  million   (1,000,000)   warrants   will  vest  upon  the
          satisfactory  completion  of a Phase  4  development  program  for the
          development of technologies licensed under the Expanded Use License.

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


ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The  Company's  Board  acts as the  audit  committee  and  had no  "pre-approval
policies and  procedures"  in effect for the auditors'  engagement for the audit
year 2005 and 2006.

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

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

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

AUDIT FEES 2006:

As of the period ended  September 30, 2006 Jaspers + Hall had billed the Company
$1,500 for the following professional services:  review of the interim financial
statements  included in quarterly  reports on Form 10-QSB for the periods  ended
December 31,  April 30, and June 30, 2006.  No other fees we billed by Jaspers +
Hall in the period ended September 30, 2006.

AUDIT FEES 2005:

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

                                       34
<PAGE>

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

The  Company's  Board  acts as the  audit  committee  and  had no  "pre-approval
policies and  procedures"  in effect for the auditors'  engagement for the audit
year 2005 and 2006.


                                     PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

The following documents are filed as part of this report:

1. Reports on Form 8-K:

8-K filed 1-11-06
8-K/A filed 1-11-06
8-K filed 1-12-06
8-K filed 7-6-06
8-K filed 7-27-06

2. Exhibits:


10.1 EXPANDED USE LICENSE AGREEMENT*
10.2 EXPANDED USE LICENSE STOCK WARRANT TO PURCHASE COMMON STOCK OF XSUNX, INC.*
10.3 SUBSCRIPTION FORM AND NOTICE OF EXERCISE*
10.4 CONSULTANCY AND ADVISORY WARRANT TO PURCHASE COMMON STOCK OF XSUNX, INC.*
10.5 CONSULTANCY AND ADVISORY WARRANT TO PURCHASE COMMON STOCK OF XSUNX, INC.*
10.6 CONSULTING AND ADVISORY AGREEMENT*
10.7 CONSULTING AND ADVISORY AGREEMENT*
10.8 CONSULTING AND ADVISORY AGREEMENT*

31 Sarbanes-Oxley Certification
32 Sarbanes-Oxley Certification

* Previously filed



                                       35
<PAGE>

                                      INDEX



                                                      Form 10-K
Regulation                                            Consecutive
S-K Number                 Exhibit                    Page Number

3.1             Articles of Incorporation             Incorporated by reference
                to Registration Statement
                Form 10SB12G #000-29621


3.2             Bylaws                                Incorporated by Reference
                to Registration Statement
                Form 10SB12G #000-29621



                                       36
<PAGE>

                                   XSUNX, INC.

                          (A DEVELOPMENT STAGE COMPANY)
                              FINANCIAL STATEMENTS

                           September 30, 2006 and 2005

JASPERS + HALL, PC
CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------------------------------------
9175 E. Kenyon Avenue, Suite 100
Denver, CO 80237
303-796-0099

             REPORT OF REGISTERED INDEPENDENT PUBLIC ACCOUNTING FIRM

Board of Directors
XSUNX, INC.
Aliso Viejo, CA


We have audited the accompanying  balance sheets of XSUNX,  Inc.,  (formerly Sun
River Mining,  Inc). (A Development Stage Company) as of September 30, 2006, and
the related statements of operations,  cash flows, and stockholders'  equity 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 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  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.,  (formerly Sun
River Mining,  Inc.) at September  30, 2006 and the results of their  operations
and their cash flows for the year ended  September  30,  2006 and for the period
February  25,  1997  to  September  30,  2006,  in  conformity  with  accounting
principles generally accepted in the United States.

The  financial  statements  for the years ended  September 30, 2004 and 2003 and
from the period  February  25, 1997  (inception)  to September  30,  2004,  were
audited  by other  accountants,  whose  report  dated May 5, 2005  expressed  an
unqualified  opinion on those  statements.  They have not performed any auditing
procedures since that date.


Denver, CO
December 14, 2006

/s/ Jaspers + Hall, PC
Jaspers + Hall, PC
Denver, Colorado
December 14, 2006


                                      F-1

<PAGE>


<TABLE>
<CAPTION>

                                                  XSUNX, INC.
                                         (A Development Stage Company)
                                                 Balance Sheets


                                                                                                   Audited
                                                                                                September 30,
                                                                                   ----------------------------------------
                                                                                        2006                    2005
                                                                                   ----------------        ----------------
<S>                                                                                <C>                     <C>
ASSETS:
Current assets:
   Cash                                                                                 $4,305,105               $ 175,869
   Prepaid Research and Development Expense                                                  3,200                       -
   Prepaid Professional Expense                                                            330,917                  79,984
   Prepaid Legal Expenses                                                                   15,000                       -
                                                                                   ----------------        ----------------

      Total current assets                                                               4,654,222                 255,853
                                                                                   ----------------        ----------------

Fixed Assets:
   Office Equipment                                                                          9,774                   2,270
   Research and Development Equipment                                                      392,301                 181,995
   Leasehold Improvement                                                                    80,492                       -
                                                                                   ----------------        ----------------
   Total Fixed Assets                                                                      482,567                 184,265
     Less Depreciation and Amortization                                                    (84,941)                (18,434)
                                                                                   ----------------        ----------------

      Net Fixed Assets                                                                     397,626                 165,831
                                                                                   ----------------        ----------------

Other Assets:
   Patents                                                                                  40,000                  20,000
   Security Deposit                                                                          2,615                       -
   Deferred Financing Costs                                                                 25,001                       -
   Marketable Prototype                                                                  1,765,000                       -
                                                                                   ----------------        ----------------

      Total other assets                                                                 1,832,616                  20,000
                                                                                   ----------------        ----------------

TOTAL ASSETS                                                                            $6,884,464               $ 441,684
                                                                                   ================        ================


LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
Current liabilities:
   Accounts Payable                                                                      $ 582,161                $ 78,377
   Accrued Expenses                                                                          6,538                  45,856
   Note Payable                                                                                  -                 850,000
                                                                                   ----------------        ----------------

      Total current liabilities                                                            588,699                 974,233
                                                                                   ----------------        ----------------

Stockholders' equity (deficit):

Preferred Stock, par value $0.01 per share; 50,000,000
shares authorized; no shares issued and outstanding                                              -                       -
Treasury Stock, no par value; 26,798,418 issued and outstanding                                  -                       -
Common Stock, no par value; 500,000,000 shares authorized;
   157,169,856 shares issued and outstanding September 30, 2006                         13,290,868               3,996,735
   123,876,633 shares issued and outstanding September 30, 2005.
Common Stock Warrants                                                                    2,151,250               1,200,000
Deficit accumulated during the development stage                                        (9,146,353)             (5,729,284)
                                                                                   ----------------        ----------------

       Total stockholders' deficit                                                       6,295,765                (532,549)
                                                                                   ----------------        ----------------

TOTAL LIABILITIES AND
   STOCKHOLDERS' EQUITY (DEFICIT)                                                       $6,884,464               $ 441,684
                                                                                   ================        ================

</TABLE>


      The accompanying notes are an integral part of these financial statements.

                                          F-2

<PAGE>

<TABLE>
<CAPTION>

                                             XSUNX, INC.
                                    (A Development Stage Company)
                                       Statements of Operations

                                                                                          February 25, 1997
                                                      Years Ended                           (Inception) to
                                                     September 30,                           September 30,
                                                     -------------
                                       2006               2005               2004               2006
                                   --------------     -------------      -------------    ------------------
<S>                                <C>                <C>                <C>              <C>
Revenue                                  $ 8,000               $ -                $ -               $ 8,000
                                   --------------     -------------      -------------    ------------------

Expenses:
   Abandoned Equipment                         -                 -                  -                   808
   Advertising                             9,050             3,979                  -                13,029
   Bank Charges                              294               500                401                 2,907
   Conferences and Seminars               11,267                 -                  -                11,267
   Consulting                             47,850           320,944             19,900             1,392,833
   Depreciation and Amortization          82,941            18,435                  -               104,554
   Directors' Fees                                               -                  -                11,983
   Due Dilgence                                                  -                  -                45,832
   Equipment Rental                                              -                  -                 1,733
   Filing Fees                             4,625             1,800                  -                 6,425
   Impairment loss                                               -                  -               923,834
   Insurance                               2,705               758                  -                 3,463
   Legal and Accounting                  140,293           107,249             27,203               435,902
   Licenses and Fees                          20                25                190                 6,455
   Loan Fees                             628,834           115,000                  -               741,834
   Meals and Entertainment                     -                 -                  -                 4,119
   Miscellaneous Expenses                  3,882             1,675                  -                 5,687
   Office Expenses                         4,581             2,634              5,218                26,414
   Patent Fees                               625               663                  -                 1,288
   Salaries                              275,089           155,236            119,336               930,411
   Postage                                 1,123             2,161                  -                 6,501
   Printing                                8,730             4,300                  -                18,610
   Public Relations                      182,151           116,413              6,640               409,530
   Rent                                   19,858             9,000              8,905                45,821
   Research & Development                949,472           501,423            129,493             1,580,388
   Subscription Reports                    2,895               860                  -                 3,755
   Taxes                                       -                 -                  -                 4,657
   Telephone                              12,318             5,489              4,270                52,622
   Transfer Agent Expense                    411             3,628              2,997                20,365
   Travel                                 41,823            11,234              3,640               115,990
   Warrant Option Expense                951,250                 -          1,200,000             2,151,250
                                   --------------     -------------      -------------    ------------------

Total Expenses                         3,380,087         1,383,406          1,528,193             9,080,267
                                   --------------     -------------      -------------    ------------------

Other Income and Expense
   Interest Expense                      158,333            17,433                251               247,363
   Interest Income                       (88,480)                -                  -               (88,503)
   Forgiveness of Debt                         -                 -            (19,376)              (59,773)
                                   --------------     -------------      -------------    ------------------

Net Loss                            $ (3,441,940)     $ (1,400,839)      $ (1,509,068)         $ (9,171,354)
                                   ==============     =============      =============    ==================

Per Share Information:
   Weighted average number of
     common shares outstanding       138,005,964       123,854,733        114,036,102
                                   --------------     -------------      -------------

Net Loss per Common Share             $ (0.02)          $ (0.02)           $ (0.01)
                                   ===========          ========           ========


* Less than $.01
</TABLE>


      The accompanying notes are an integral part of these financial statements.

                                         F-3


<PAGE>

<TABLE>
<CAPTION>

                                          XSUNX, INC.                                   Continued...
                                 (A Development Stage Company)
                          Statement of Stockholders' Equity (Deficit)
                                       September 30, 2006
                                                                                                   Deficit
                                                                                                  Accumulated
                                                                                        Common     During
                                         Treasury Stock           Common Stock          Stock    Development
                                      ----------------------  ----------------------
                                      # of Shares   Amount    # of Shares  Amount      Warrants     Stage       Totals
                                      -----------  --------- ------------  ---------  ----------  ----------   ---------
<S>                                   <C>          <C>       <C>           <C>        <C>         <C>          <C>
Inception February 25, 1997                   -    $     -            -     $     -     $      -   $      -    $      -

Issuance of stock for cash                    -          -       10,590     111,900            -          -     111,900
Issuance of stock to Founders                 -          -       14,110           -            -          -           -
Issuance of stock for consolidation           -          -      445,000     312,106            -          -     312,106
Issuance of stock for cash                    -          -        5,290     105,800            -          -     105,800
Net Loss for Year                             -          -            -           -            -   (193,973)   (193,973)
                                      ----------   ---------  ----------  ----------  ----------  ----------   ---------

Balance - September 30, 1997                  -          -      474,990     529,806            -   (193,973)    335,833
                                      ----------   ---------  ----------  ----------  ----------  ----------   ---------

Issuance of stock for services                -          -        1,500      30,000            -          -      30,000
Issuance of stock for cash                    -          -       50,200     204,000            -          -     204,000
Consolidation stock cancelled                 -          -      (60,000)    (50,000)           -          -     (50,000)
Net Loss for Year                             -          -            -           -            -   (799,451)   (799,451)
                                      ----------   ---------  ----------  ----------  ----------  ----------   ---------

Balance - September 30, 1998                  -          -      466,690     713,806            -   (993,424)   (279,618)
                                      ----------   ---------  ----------  ----------  ----------  ----------   ---------

Issuance of stock for cash                    -          -       21,233     159,367           -           -     159,367
Issuance of stock for services                -          -       65,000     316,500           -           -     316,500
Issuance of stock for cash                    -          -       90,225     488,546           -           -     488,546
Issuance of stock for services                -          -       70,000     147,000           -           -     147,000
Issuance of stock for cash                    -          -       40,000      69,200           -           -      69,200
Net Loss for Year                             -          -            -           -           -  (1,482,017) (1,482,017)
                                      ----------   ---------  ----------  ----------  ----------  ----------   ---------

Balance - September 30, 1999                  -          -      753,148   1,894,419           -  (2,475,441)   (581,022)
                                      ----------   ---------  ----------  ----------  ----------  ----------   ---------

Issuance of stock for cash                    -           -      15,000      27,000           -           -      27,000
Net Loss for year                             -           -           -           -           -    (118,369)   (118,369)
                                      ----------   ---------  ----------  ----------  ----------  ----------   ---------

Balance - September 30, 2000                  -           -     768,148   1,921,419           -   (2,593,810)  (672,391)
                                      ----------   ---------  ----------  ----------  ----------  ----------   ---------

Extinquishment of debt                        -           -           -     337,887           -           -     337,887
Net Loss for year                             -           -           -           -           -     (32,402)    (32,402)
                                      ----------   ---------  ----------  ----------  ----------  ----------   ---------

Balance - September 30, 2001                  -           -     768,148   2,259,306           -   (2,626,212)  (366,906)
                                      ----------   ---------  ----------  ----------  ----------  ----------   ---------

Net Loss for year                             -           -           -           -           -     (47,297)    (47,297)
                                      ----------   ---------  ----------  ----------  ----------  ----------   ---------

Balance - September 30, 2002                  -           -     768,148   2,259,306           -   (2,673,509)  (414,203)
                                      ----------   ---------  ----------  ----------  ----------  ----------   ---------

Issuance of stock for Assets                  -           -  70,000,000           3           -           -           3
Issuance of stock for Cash                    -           -   9,000,000     225,450           -           -     225,450
Issuance of stock for Debt                    -           -     115,000     121,828           -           -     121,828
Issuance of stock for Expenses                -           -     115,000      89,939           -           -      89,939
Issuance of stock for Services                -           -  31,300,000     125,200           -           -     125,200
Net Loss for year                             -           -           -           -           -    (145,868)   (145,868)
                                      ----------   ---------  ----------  ----------  ----------  ----------   ---------

                                              F-4

<PAGE>

                                          XSUNX, INC.                                   ...Continued
                                 (A Development Stage Company)
                          Statement of Stockholders' Equity (Deficit)
                                       September 30, 2006
                                                                                                   Deficit
                                                                                                  Accumulated
                                                                                        Common     During
                                         Treasury Stock           Common Stock          Stock    Development
                                      ----------------------  ----------------------
                                      # of Shares   Amount    # of Shares  Amount      Warrants     Stage       Totals
                                      -----------  --------- ------------  ---------  ----------  ----------   ---------

Balance - September 30, 2003                  -           - 111,298,148   2,821,726           -  (2,819,377)      2,349
                                      ----------   ---------  ----------  ----------  ----------  ----------   ---------

Issuance of stock for Cash                    -           -   2,737,954     282,670           -           -     282,670
Issuance of Common Stock Warrants             -           -           -           -   1,200,000           -   1,200,000
Net Loss for year                             -           -           -           -           -  (1,509,068) (1,509,068)
                                      ----------   ---------  ----------  ----------  ----------  ----------   ---------

Balance - September 30, 2004                  -           - 114,036,102   3,104,396   1,200,000  (4,328,445)    (24,049)
                                      ----------   ---------  ----------  ----------  ----------  ----------   ---------

Issuance of stock for cash                    -           -   6,220,037     491,135           -           -     491,135
Issuance of stock for services                -           -      10,000       3,000           -           -       3,000
Issuance of stock for services                -           -     300,000      24,000           -           -      24,000
Issuance of stock for cash                    -           -     527,000      40,260           -           -      40,260
Issuance of stock for services                -           -     239,469      23,827           -           -      23,827
Issuance of stock for Collateral     26,798,418           -           -           -           -           -           -
Issuance of stock for services                -           -   2,544,031     310,117           -           -     310,117
Net Loss for year                             -           -           -           -           -  (1,400,969) (1,400,969)
                                      ----------   ---------  ----------  ----------  ----------  ----------   ---------

Balance - September 30, 2005         26,798,418           - 123,876,639   3,996,735   1,200,000  (5,729,414)   (532,679)
                                      ----------   ---------  ----------  ----------  ----------  ----------   ---------

Issuance of stock for services                -           -      40,441       7,500           -           -       7,500
Issuance of common stock warrants             -           -           -           -     951,250           -     951,250
Issuance of stock for debenture conversion    -           -   8,500,000     850,000           -           -     850,000
Issuance of stock for interest on debenture   -           -     105,500      10,550           -           -      10,550
Issuance of stock for warrant conversion      -           -   10,850,000  3,171,250           -               3,171,250
Issuance of stock for debenture conversion    -           -   7,894,737   3,000,000           -           -   3,000,000
Issuance of stock for debenture conversion    -           -   5,263,158   2,000,000           -           -   2,000,000
Issuance of stock for interest on debenture   -           -     607,456     230,833           -           -     230,833
Issuance of stock for services                -           -      31,925      24,000           -           -      24,000
Net Loss for year                             -           -           -           -           -  (3,441,940) (3,416,939)
                                      ----------   ---------  ----------  ----------  ----------  ----------   ---------

Balance - September 30, 2006          26,798,418        $ - 157,169,856 $13,290,868 $ 2,151,250 $(8,171,354) $6,295,765
                                      ==========   =========  ==========  ==========  ==========  ==========   =========
</TABLE>


      The accompanying notes are an integral part of these financial statements.

                                         F-5
<PAGE>

<TABLE>
<CAPTION>

                                          XSUNX, INC.
                                 (A Development Stage Company)
                                    Statements of Cash Flows

                                       (Indirect Method)

                                                                                                         February 25, 1997
                                                               Years Ended                                (Inception) to
                                                               September 30,                               September 30,
                                                               -------------
                                                           2006            2005             2004               2006
                                                       --------------  --------------   -------------    ------------------
<S>                                                    <C>             <C>              <C>              <C>
Cash Flows from Operating Activities:

Net Loss                                                $ (3,441,940)   $ (1,400,969)   $ (1,509,068)         $ (9,171,354)

   Issuance of Common Stock for Services                      31,500          50,827               -             1,348,997
   Issuance of Common Stock for Loan Inducement                    -         310,117               -               310,117
   Warrant Expense                                           951,250               -       1,200,000             2,151,250
   Issuance of Common Stock for Interest                     241,383               -               -               241,383
   Depreciation Expense                                       82,941          18,435               -               101,376
Adjustments to reconcile net loss to
    net cash used in operations.
   Decrease in Deposits                                       (2,615)              -         (22,500)               (2,615)
   (Increase) in Deferred Financing Costs                    (25,001)                              -               (25,001)
   (Increase) in Prepaid Expenses                           (269,133)        (59,985)              -              (349,117)
   Increase (Decrease) in Accounts Payable                   503,784         (10,653)         89,030               582,161
   Increase (Decrease) in Accrued Liabilities                (39,448)         42,578           5,908                 6,538
                                                       --------------  --------------   -------------    ------------------

Net Cash Flows Used by Operations                         (1,942,278)     (1,049,650)       (236,630)           (4,781,264)
                                                       --------------  --------------   -------------    ------------------

Cash Flows from Investing Activities:
   Purchase of Fixed Assets                                 (314,736)       (181,995)         (2,270)             (499,002)
   Purchase of Marketable Prototype and Patent            (1,785,000)        (10,000)         (9,997)           (1,805,000)
                                                       --------------  --------------   -------------    ------------------

   Net cash used by investing activities                  (2,099,736)       (191,995)        (12,267)           (2,304,002)
                                                       --------------  --------------   -------------    ------------------

Cash Flows from Financing Activities:
   Proceeds from Notes payable - Stockholder                       -           3,775           1,225                     -
   Payment for Notes payable - Stockholder                         -          (5,000)              -                     -
   Proceeds fom Warrant Conversion                         3,171,250               -               -             3,171,250
   Proceeds from Debenture Conversion                      5,000,000                               -             5,000,000
   Proceeds from Convertible Debt                                  -         850,000               -                     -
   Issuance of Common Stock for cash                               -         531,395         282,670             3,219,121
                                                       --------------  --------------   -------------    ------------------

Net Cash Flows Provided by Financing Activities            8,171,250       1,380,170         283,895            11,390,371
                                                       --------------  --------------   -------------    ------------------

Increase in Cash                                           4,129,236         138,525          34,998             4,305,105
                                                       --------------  --------------   -------------    ------------------

Cash at Beginning of Period                                  175,869          37,344           2,346                     -

Cash at End of Period                                     $4,305,105       $ 175,869        $ 37,344           $ 4,305,105
                                                       ==============  ==============   =============    ==================

Supplemental Disclosure of Cash Flow Information
   Cash paid for Interest                                        $ -             $ -             $ -              $ 71,346
                                                       ==============  ==============   =============    ==================
   Cash paid for income taxes                                    $ -             $ -             $ -                   $ -
                                                       ==============  ==============   =============    ==================

NON-CASH TRANSACTIONS
   Stock issued for services                                $ 31,500        $ 50,827             $ -           $ 1,288,384
                                                       ==============  ==============   =============    ==================
   Stock issued for Loan Inducement                              $ -       $ 310,117             $ -               310,117
                                                       ==============  ==============   =============    ==================
   Stock Issued for Interest                             $   241,383       $       -       $       -          $    241,383
                                                       ==============  ==============   =============    ==================
</TABLE>

      The accompanying notes are an integral part of these financial statements.

                                         F-6

<PAGE>

                                   XSUNX, INC.
                          (A Development Stage Company)
                          Notes to Financial Statements
                               September 30, 2006










                                      F-7


<PAGE>

                                   XSUNX, INC.
                          (A Development Stage Company)
                          Notes to Financial Statements
                               September 30, 2006

Note 1 - Organization:

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

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

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

XsunX, Inc. is developing solar cell designs and manufacturing  process with the
intent to provide  commercially  viable  solar  cell  design  applications  that
convert sun light into electrical energy. The process for producing  electricity
from sun light is known as Photovoltaics.  Photovoltaic ("PV") is the science of
capturing and converting solar energy into electricity.

The  product of the  Company's  development  efforts is  intended to deliver two
aspects  of  deliverable  technologies  in the  form of an  integrated  solution
providing,   a)  commercially  scalable  manufactured  processes  and  equipment
designed  for  the  specific  manufacture  of  the  Company's  thin  film  solar
technologies,  and b) proprietary  thin film solar cell designs that address new
application opportunities.

Note 2 - Summary of Significant Accounting Policies:

Basis of Presentation - Development Stage Company:
-------------------------------------------------

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

Basis of Accounting:
-------------------

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

                                      F-8

<PAGE>

                                   XSUNX, INC.
                          (A Development Stage Company)
                          Notes to Financial Statements
                               September 30, 2006

Note 2 - Summary of Significant Accounting Policies (Cont.):

Cash and Cash Equivalents:
-------------------------

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

Use of Estimates:
----------------

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

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,  2006 and 2005,  the  Company's  notes  payable  have  stated
borrowing  rates that are  consistent  with  those  currently  available  to the
Company and, accordingly,  the Company believes the carrying value of these debt
instruments approximates their fair value.

Property and Equipment
----------------------

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

        Furniture, fixtures & equipment                 7 years
        Computer equipment                              5 years
        Commerce server                                 5 years
        Computer software                           3 - 5 years
        Leasehold improvements              Length of the lease

Net earning (loss) per share:
----------------------------

Basic loss per share is computed on the basis of the weighted  average number of
common shares  outstanding.  For all periods,  all of the Company's common stock
equivalents  were excluded from the calculation of diluted loss per common share
because they were none dilutive, due to the Company's net losses.

Advertising:
-----------

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

Research and Development:
------------------------

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

                                      F-9

<PAGE>

                                   XSUNX, INC.
                          (A Development Stage Company)
                          Notes to Financial Statements
                               September 30, 2006

Other Comprehensive Income:
--------------------------

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

Note 3 - Federal Income Tax:

The Company  accounts  for income taxes under SFAS No. 109,  which  requires the
asset and  liability  approach  to  accounting  for  income  taxes.  Under  this
approach,  deferred income taxes are determined based upon  differences  between
the financial  statement and tax bases of the Company's  assets and  liabilities
and operating loss carry forwards using enacted tax rates in effect for the year
in which the  differences  are  expected  to  reverse.  Deferred  tax assets are
recognized  if it is more likely  than not that the future tax  benefit  will be
realized.

Significant  components of the Company's deferred tax liabilities and assets are
as follows:

<TABLE>
<CAPTION>

                                                             2006            2005
                                                         --------      ------------
<S>                                                    <C>             <C>
   Deferred Tax Liability                              $  9,646,224     $ 5,729,284
   Deferred Tax Assets
            Net Operating Loss Carry forwards
            Book/Tax Differences in Bases of Assets               0               0
                                                       -------------   -------------
   Valuation allowance                                 $  9,646,224     $ 5,729,284
                                                       -------------   -------------

   Net Deferred tax assets                             $          0     $         0
                                                       =============   =============
</TABLE>

Note 3 - Federal Income Tax (Cont.):

At September  30, 2006,  the Company had net  operating  loss carry  forwards of
approximately,  $9,146,353 for federal income tax purposes. These carry forwards
if not utilized to offset taxable income will begin to expire in 2010.

Note 4 - Capital Stock Transactions:

The authorized  capital stock of the Company was established at 500,000,000 with
no par value. On September 29, 2003 the Board of Directors  authorized a reverse
split of 1 for 20 shares  of  stock.  The  stocks  issued in 2003,  as part of a
reorganization,  were for accrued director fees and salaries and to pay off past
debt to investors.  Included in the  reorganization  were  70,000,000  shares of
stock issued to obtain  certain  patent rights from Xoptix,  Inc. Also shares of
stock were issued in 2003 for consulting  fees in arranging the formation of the
reorganized Corporation.  In 2004 2,737,954 shares of stock were issued for cash
and consulting fees to fund  operations.  9,840,537  shares of common stock were
issued in 2005 for cash and consulting  fees to fund  operations.  In July 2005,
26,798,418  shares of common stock were placed in XSUNX, Inc. Treasury Stocks as
collateral for the long-term note with Cornell Capital  Partners.  On August 18,
2006 the note  underlying  the  collateral  shares was paid and  requirement  of
collateral was discharged. In 2006 33,188,926 shares of common stock were issued
for cash and 72,366 were issued for services to fund operations.

The  following  represents  a  detailed  analysis  of  the  2006  capital  stock
transactions.

                                      F-10

<PAGE>

                                   XSUNX, INC.
                          (A Development Stage Company)
                          Notes to Financial Statements
                               September 30, 2006

Issuance of Shares
------------------

Debenture  Conversion  - On  February  8, 2006  Cornell  Capital  Partners,  LLP
converted  $350,000 of the  principal  balance of $850,000  debenture  issued to
Cornell in July 2005. On March 1, 2006 Cornell converted the remaining principal
and accrued interest the debenture balance totaling $510,550. Upon conversion of
the  notes  XsunX  issued  8,605,500  shares  of common  stock to  Cornell.  The
conversion  price for all of the above  issued  shares was $.10.  The  remaining
value of the debenture is $0.

Warrant  Conversion - In February  2006, a consultant  exercised  100,000 of the
1,000,000  available $.15 cent warrants.  The amount of $15,000 dollars was paid
to XsunX by the consultant and 100,000 shares were issued.

Warrant  Conversion  - In March 2006 Cornell  Capital  Partners,  LLP  exercised
3,125,000  of  the  available  3,125,000  $.45  warrants  and  1,250,000  of the
available  1,250,000  $.55 cent  warrants.  The  aggregate  amount of $2,093,750
dollars was paid to XsunX by Cornell.  The Company  issued  4,375,000  shares of
common stock in association with the exercise of these warrants.

Warrant  Conversion  - In April 2006 Cornell  Capital  Partners,  LLP  exercised
4,250,000  of  the  available  4,250,000  $.15  warrants  and  2,125,000  of the
available  2,125,000  $.20 cent  warrants.  The  aggregate  amount of $1,062,500
dollars was paid to XsunX by Cornell.  The Company  issued  6,375,000  shares of
common stock in association with the exercise of these warrants.

Debenture Conversions - On May 10, 2006 Cornell Capital Partners,  LLP converted
$2,000,000 of the principal balance of a $5,000,000  debenture issued to Cornell
in December  2005 and the Company  issued  5,263,158  shares of common  stock to
Cornell for the conversion.  On June 12 Cornell converted another  $1,000,000 of
the principal  balance of the debenture and the Company issued  2,631,579 shares
of common stock to Cornell. On July 17, 2006 another $1,000,000 of the principal
balance was converted by Cornell for which the Company issued  2,631,579  shares
of common stock to Cornell.  On August 23, 2006 Cornell  converted the remaining
$1,000,000  principal balance and $230,833 of the total accrued interest charges
of the debenture for which the Company issued  3,239,035  shares of common stock
to Cornell.  The  conversion  price for all of the above issued  shares was $.38
each.  The  remaining  balance of the Debenture as of the date of this filing is
$0.0.

Issuance of Shares for Service
------------------------------

In December  2005 the Company  issued  40,441  unregistered  common  shares to a
service  provider for accrued  service fees totaling $7,500 dollars for services
provided over the fourth quarter  period ended  September 30, 2005. In September
2006 XsunX issued an additional  31,925  unregistered  common shares to the same
service  provider for accrued service fees totaling  $24,000 dollars for the one
year period  ended  September  30,  2006.  The shares were earned on a quarterly
basis by the service  provider and the conversion price for the stock issued was
calculated  using the average daily closing price of the Company's  common stock
over each quarter period of service.

Note 5 - Stock Options and Warrants:

Stock Option Plan:
-----------------

On July 15, 2004, the Board of Directors of XsunX resolved to establish the 2004
Stock  Option  Plan.  The plan was  adopted  to  provide  equity  incentives  to
employees,  consultants  and suppliers of the Company.  The adoption of the Plan
was subject to ratification by a majority of the Company's  stockholders,  which

                                      F-11

<PAGE>

                                   XSUNX, INC.
                          (A Development Stage Company)
                          Notes to Financial Statements
                               September 30, 2006

approval was to be obtained  within 12 months from the date the Plan was adopted
by the Board.  The Plan was cancelled by the Board due to non-approval in August
2005. No stocks were issued at September 30, 2006.

Warrant/Option Expense
----------------------

Warrant/Option  Expense for the Company was computed by multiplying the value of
the  difference  between the  warrant  exercise  price,  if less than the market
price, and the market price of the stock at date of grant.  This method resulted
in a $951,250  charge to  expenses  for the  warrants  granted in the year ended
September 30, 2006, as follows:

<TABLE>
<CAPTION>

                                     2006 WARRANT/OPTION EXPENSE CHART

------------------------ -------------- --------------- ----------------- ----------------- -----------------
                                                           Underlying       In the Money
                         # of Warrants  Exercise Price   Share Value at    Spread at Date   Warrant Expense
        Holder                                           Date of Grant        of Grant
------------------------ -------------- --------------- ----------------- ----------------- -----------------
<S>                      <C>            <C>             <C>               <C>               <C>
MVSystems, Inc.            7,000,000         $.25             $.31              $.06            $420,000
------------------------ -------------- --------------- ----------------- ----------------- -----------------
Cornell Capital, LP        3,125,000         $.45             $.60              $.15            $468,750
------------------------ -------------- --------------- ----------------- ----------------- -----------------
Cornell Capital, LP        1,250,000         $.55             $.60              $.05            $62,500
------------------------ -------------- --------------- ----------------- ----------------- -----------------
Joseph Grimes               112,000         $1.69            $1.69              $0.0              $0.0
------------------------ -------------- --------------- ----------------- ----------------- -----------------
Joseph Grimes               500,000          $.51             $.51              $.0               $.0
------------------------ -------------- --------------- ----------------- ----------------- -----------------
        Totals                                                                                  $951,250
------------------------ -------------- --------------- ----------------- ----------------- -----------------
</TABLE>




                                      F-12

<PAGE>

                                   XSUNX, INC.
                          (A Development Stage Company)
                          Notes to Financial Statements
                               September 30, 2006

Note 5 - Stock Options and Warrants (cont.):

Warrant Grants
--------------

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

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

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

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

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

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

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

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

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

The total  charged in expense for the 2006 fiscal year has been $951,250 for the
issuance of the above described Expanded Use License,  Debenture  warrants,  and
employment incentive warrants.

During the years ended  September  30, 2005 and  September 30, 2006 the board of
directors  approved  the  issuance  of warrants  to  purchase  an  aggregate  of
19,112,000  shares of the Company's common stock.  Such warrants are exercisable
at prices  ranging from $.15 to $1.69 per share,  vest over periods from between
36 to 60 months, and expire at various times through July 2011.

During the years ended September 30, 2005 no warrant holders exercised  warrants
to purchase the Company's common stock. During the year ended September 30, 2006
warrant holders exercised a total of 10,850,000 warrants in cash to purchase the
Company's common stock.

                                      F-13

<PAGE>

                                   XSUNX, INC.
                          (A Development Stage Company)
                          Notes to Financial Statements
                               September 30, 2006

Note 5 - Stock Options and Warrants (cont.):

A summary of warrant  activity for the year ended September 30, 2005 and 2006 is
as follows:

<TABLE>
<CAPTION>
                                                            Weighted-                           Weighted-
                                         Number of          Average                             Average
                                         Warrants           Exercise         Accrued            Exercise
                                                                             --------------
                                                            Price            Warrants           Price
                                                                             --------
                                                                             Exercisable
                                         --------------     -------------    ---------------    --------------
<S>                                      <C>                <C>              <C>                <C>
Outstanding, September 30, 2004          8,000,000          $0.15            5,525,000          $0.15
    Granted 2005                         7,125,000          $0.1649          7,884,167          $0.1659
    Exercised 2005                       0                  $0.0
                                         --------------     -------------    ---------------    --------------
Outstanding, September 30, 2005          15,125,000         $0.1595          13,409,167         $0.1593

    Granted 2006                         11,987,000         $0.3419          6,143,000          $0.4340
    Exercised 2006                       (10,850,000)       $0.2923          (10,850,000)
                                         --------------     -------------    ---------------    --------------
Outstanding, September 30, 2006          16,262,000         $0.2170          8,702,167          $0.1873
                                         ==============
</TABLE>

At September 30, 2006, the range of warrant prices for shares under warrants not
exercised and the weighted-average remaining contractual life is as follows:

<TABLE>
<CAPTION>

                            Warrants Outstanding                                  Warrants Exercisable
                   --------------------------------------------------    ---------------------------------
                                                     Weighted-
                                   Weighted-         Average                                 Weighted-
Range of           Number of       Average           Remaining           Number              Average
Warrant            Warrants        Exercise          Contractual         Of                  Exercise
Exercise Price                     Price             Life(yr)            Warrants            Price
---------------    ------------    --------------    ----------------    ----------------    -------------
<S>                <C>             <C>               <C>                 <C>                 <C>
$.15                 7,900,000     $ .15               2.7                 6,900,000         $ .15
                   ------------                                          ----------------
 .20                   750,000       .20               1.5                   634,167           .20
                   ------------                                          ----------------
 .25                 7,000,000       .25               4.0                 1,000,000           .25
                   ------------                                          ----------------
 .51                   500,000       .51               4.8                    56,000           .51
                   ------------                                          ----------------
1.69                   112,000      1.69               4.5                    112,000         1.69
                   ============                                          ================
</TABLE>

Note 6 - Marketable Prototype Acquisition:

Subject to the terms of the Expanded  Use License  Agreement  dated  October 12,
2005  between  XsunX and  MVSystems,  Inc.  the parties are building a first run
production Machine for the purpose of proofing and demonstrating thin film solar
cell manufacturing technology. The parties intend to sell this first Machine and
have  agreed to a 50/50 split of the net  proceeds  of the sale of this  Machine
excluding production Costs and reasonable marketing expenses.

Note 7 - Notes, Commitments, and Contingencies

Note Payable (Paid)
-------------------

On July 14,  2005,  XSUNX,  Inc.  entered into a Secured  Convertible  Debenture
agreement  with Cornell  Capital  Partners,  LP in the amount of  $400,000.  The
interest accrued on the outstanding  principal balance thereof at an annual rate
equal to twelve  percent  (12%).  The Debenture was  convertible  into shares of
Common Stock at the option of the Holder,  with a conversion  price in effect on
any Conversion Date was be equal to ten cents ($.10). On August 16, 2005, XSUNX,

                                      F-14

<PAGE>

                                   XSUNX, INC.
                          (A Development Stage Company)
                          Notes to Financial Statements
                               September 30, 2006

Inc. received an additional $450,000 from Cornell Capital Partners,  LP with the
same  interest  and  conversion  rights.  During the period ended March 31, 2006
Cornell  converted  the entire  $850,000  principal  balance  and $10,550 of the
remaining  accrued interest charges into 8,605,500 shares of common shares.  The
shares were issued subject to a registration  statement effective as of February
2006. The remaining balance of the debenture is $0.0.

On December 12, 2005, XsunX, Inc.  consummated a Securities  Purchase  Agreement
dated  December 12, 2005 with Cornell  Capital  Partners L.P.  providing for the
sale by the  Company to Cornell of 10%  secured  convertible  debentures  in the
aggregate  principal amount of $5,000,000 (the "Debentures") of which $2,000,000
was advanced  immediately.  The second  installment  of $2,000,000  was advanced
prior to the filing by the Company with the Securities  and Exchange  Commission
of a Registration  Statement in January 2006. The last installment of $1,000,000
was advanced in February 2006 upon the  Registration  Statement  being  declared
effective  by the  Commission.  Between May 2006 and August 2006 the  Debentures
principal  balance of  $5,000,000  dollars and  accrued  interest  charges  were
converted  into  13,765351  shares of Common Stock at the option of Cornell at a
conversion  price  per  share  equal to  $0.38.  The  remaining  balance  of the
debenture is $0.0.

In connection with the above Cornell L.P.  Securities  Purchase  Agreement,  the
Company also entered into a registration  rights  agreement  (the  "Registration
Rights  Agreement")  providing for the filing of a  registration  statement (the
"Registration   Statement")   with  the  Securities   and  Exchange   Commission
registering  the Common Stock issuable upon conversion of the Debentures and the
exercise of Warrants issued to Cornell in association  with Debenture.  Prior to
executing  the  Securities  Purchase  Agreement,  the  Company  had  withdrawn a
previously  filed  registration  statement that included  Common Stock issued to
Cornell and Common Stock to be issued upon the  conversion of debentures and the
exercise of warrants  previously  sold to Cornell  (collectively,  the  "Initial
Securities")  pursuant to a securities  purchase  agreement executed on July 14,
2005 (the "Prior  Agreement")  as well as Common Stock to be issued  pursuant to
the  Standby  Equity  Distribution  Agreement  dated July 14,  2005  between the
Company and Cornell (the "Distribution Agreement").  All Initial Securities were
included in the Registration  Statement.  The Company and Cornell also agreed to
terminate  the July 14,  2005  Distribution  Agreement.  On January 11, 2006 the
Company filed to register up to 72,879,263  shares in association with the above
securities  registration  requirements.  The  Registration  statement  was  made
effective on or about February 9, 2006. Upon the final  conversion by Cornell of
the Initial  Securities,  the  Securities  Purchase  Agreement,  the  underlying
Warrants  therein,  and accrued  interest  associated with the Debentures  XsunX
issued the aggregate amount of 35,245,851  registered  shares of common stock in
the 2006 period.

The Company's  obligations under the Prior Agreement and the Securities Purchase
Agreement were secured by substantially  all of the Company's assets. As further
security for its obligations  thereunder,  the Company had deposited into escrow
26,798,418  shares of Common Stock.  In addition,  Tom Djokovich,  the Company's
Chief Executive  Officer,  had granted a security  interest in 925,000 shares of
Common Stock that he owns to secure the  Company's  obligations  under the Prior
Agreement  only.  As of the date of this filing XsunX had  received  notice from
Cornell of the release of the security  interest in above listed security shares
and assets.

Trademark Transfer Agreement:
----------------------------

On May 6, 2004 a Trademark  transfer  agreement  was signed with Western Gas and
Electric  Company of California.  Western solely owns all rights and interest in
and to the  registered  trademark  consisting  of printed words styled as "POWER
GLASS' as more fully set forth  herein  ("Trademark")  and desires to assign and
transfer,  subject to the terms and conditions set forth herein,  all rights and
interest in the Trademark to XsunX in exchange for the payment set forth in this
Agreement. The purchase price for the Trademark shall be: (1) the sum of $10,000
if paid within one (1) year from the effective  date;  (2) the sum of $20,000 if
paid after the conclusion of the first (1st) year but prior to the conclusion of
the second (2nd) year after the effective date of this Agreement; (3) the sum of
$35,000 if paid after the  conclusion  of the second (2nd) year but prior to the
conclusion of the third (3rd) year after the effective  date of this  Agreement;

                                      F-15

<PAGE>

                                   XSUNX, INC.
                          (A Development Stage Company)
                          Notes to Financial Statements
                               September 30, 2006

or (4) the sum of $50,000 if paid after the  conclusion  of the third (3rd) year
but prior to the  conclusion  of three (3)  years and six (6)  months  after the
effective date of this Agreement. If payment is not made prior to the conclusion
of  three  (3)  years  and six  (6)  months  after  the  effective  date of this
Agreement,  XsunX shall  re-assign  the  Trademark  back to Western as set forth
herein. At September 2006 the accrued balance of $35,000 is included in Accounts
Payable.

Operating Leases

In April  2006 the  Company  entered  into a three  year  lease  for  operations
facilities in Golden,  CO. The Company  provided a $2,615  security  deposit and
expensed $79,867 in costs associated with tenant  improvements to the facilities
in preparation  for  occupancy.  The following is a schedule,  by years,  of the
minimum base payments  required under this operating  lease for  facilities.  An
additional  $825 monthly is also due as a pro rata share  equaling  4.12% of the
operating  costs  for  real  estate  taxes,  assessments,  and the  expenses  of
operating and maintaining common areas within the commercial grounds surrounding
the leased facilities.

                                       Annual Annualized Monthly
Rent Schedule            Rate/sf               Rent                   Rent
-------------            -------               ----                   ----
 7/1/06-6/30/07              $6.75             $20,250.00             $1,687.50
 7/1/07-6/30/08              $6.95             $20,850.00             $1,737.50
 7/1/08-6/30/09              $7.16             $21,480.00             $1,790.00

Legal Proceedings
-----------------

On March 6,  2006 Ron  Sentchuck  filed an action  against  the  Company  in the
Superior  Court of  California  for the County of Los  Angeles.  The Company was
dismissed  from this  action on August 3, 2006.  No  contingency  expenses  were
accrued by the Company for this complaint.

Note 8 - Subsequent Events
On April 19th 2006,  Office Radio Network filed a lawsuit in the District  Court
in Colorado alleging that it has been damaged due to refusal to allow it to sell
its shares  under Rule 144. The parties  entered  into a settlement  in December
2006  providing for the return of 150,000 shares of the 300,000 shares issued to
Office  Radio  network,  and the  provisioning  by Office  Radio  Network  of an
additional six months of service.

Note 9 - Financial Accounting Developments:

Recently issued Accounting Pronouncements
-----------------------------------------

In February 2003, the Financial  Accounting Standards Board ("FASB") issued SFAS
No. 150,  "Accounting for Certain Financial  Instruments with Characteristics of
Both  Liabilities  and Equity".  The  provisions  of SFAS 150 are  effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
are effective at the beginning of the first interim period  beginning after June
15, 2003,  except for mandatory  redeemable  financial  instruments of nonpublic
entities.  The  Company  has not  issued  any  financial  instruments  with such
characteristics.

In December 2003, the FASB issued FASB  Interpretation  No. 46 (revised December
2003),  "Consolidation  of Variable  Interest  Entities"  (FIN No.  46R),  which
addresses  how  a  business  enterprise  should  evaluate  ,  whether  it  has a
controlling  financial  interest  in an entity  through  means other than voting
rights and accordingly  should consolidate the entity. FIN No. 46R replaces FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities",  which was
issued in January  2003.  Companies  are  required  to apply FIN 46R to variable
interests in variable interest entities ("VIE") created after December 31, 2003.
For variable interest in VIEs created before January 1, 2004 the  interpretation
is applied  beginning  January 1, 2005.  For any VIEs that must be  consolidated
under FIN No.  46R that  were  created  before  January  1,  2004,  the  assets,
liabilities and  non-controlling  interests of the VIE initially are measured at

                                      F-16

<PAGE>

                                   XSUNX, INC.
                          (A Development Stage Company)
                          Notes to Financial Statements
                               September 30, 2006

their carrying  amounts with any difference  between the net amount added to the
balance sheet and any previously  recognized  interest  being  recognized as the
cumulative effect of an accounting  change. If determining the carrying value is
not  practicable,  fair value at the date FIN No. 46R first  applies may be used
measure the assets,  liabilities  and  non-controlling  interest of the VIE. The
Company does not have any interest in VIEs.

In December  2004,  the FASB issued SFAS No. 123R  (revised  2004)  "Share-Based
Payment"  which amends FASB  Statement  No. 123 and will be effective for public
companies  for  interim  or annual  periods  beginning  June 15,  2005.  The new
statement  will require  entities to expense  employee  stock  options and other
share-based payments. The new standard may be adopted in one of three ways - the
modified  prospective  transition method, a variation of the modified transition
method or the  modified  retrospective  transition  method.  The  Company  is to
evaluate how it will adopt the standard and the  evaluation  the effect that the
adoption  of SFAS  123R will  have on the  financial  position  and  results  of
operations.

In November 2004, the FASB issued SFAS No. 151,  "Inventory  Costs, an amendment
of ARB No. 43,  Chapter  4." The  statement  amends the  guidance in ARB No. 43,
Chapter 4, Inventory Pricing,  to clarify the accounting for abnormal amounts of
idle facility expense,  freight,  handling costs and wasted material (spoilage).
Paragraph  5 of ARB No.  43,  Chapter  4  previously  stated  that  "under  some
circumstances,  items such as idle facility expense,  excessive spoilage, double
freight  and  rehandling  costs may be so abnormal  as to require  treatment  as
current period charges". SFAS No. 151 requires that those items be recognized as
current-period  charges  regardless  of whether  they meet the  criterion of "so
abnormal".  In  addition,  this  statement  requires  that  allocation  of fixed
production overhead to the costs of conversion be based on the prospectively and
are effective for inventory  costs incurred  during fiscal years beginning after
June 15, 2005, with earlier  application  permitted for inventory costs incurred
during  fiscal years  beginning  after the date this  Statement  is issued.  The
adoption  of SFAS No.  151 does not have an  impact on the  Company's  financial
position and results of operations.

In December 2004, the FASB issued SFAS No. 153, Exchange of Non-monetary Assets,
an  amendment  of APB  Opinion  No.  29. The  guidance  in APB  opinion  No. 29,
Accounting  for  Non-monetary  Transactions,  is  based  on the  principle  that
exchange  of  non-monetary  assets  should be  measured on the fair value of the
assets  exchanges.  The  guidance in that  Opinion,  however,  included  certain
exceptions to that principle.  This Statement amends Opinion 29 to eliminate the
exception for non-monetary  exchanges of similar  productive  assets that do not
have commercial substance. A non-monetary has commercial substance if the future
cash flows of the entity are expected to change significantly as a result of the
exchange.  SFAS No. 153 is effective  for  non-monetary  exchanges  occurring in
fiscal  periods  beginning  June 15,  2005.  The adoption of SFAS No. 153 is not
expected to have an impact on the  Company's  financial  position and results of
operations.

In March 2005,  the FASB  issued FASB  Interpretation  No. 47,  "Accounting  for
Conditional Asset Retirement  Obligations"  ("FIN 47"). FIN 47 provides guidance
relating to the identification of and financial  reporting for legal obligations
to perform an asset retirement activity. The Interpretation requires recognition
of a liability for the fair value of a conditional  asset retirement  obligation
when incurred if the liability's fair value can be reasonably estimated.  FIN 47
also defines  when an entity would have  sufficient  information  to  reasonably
estimate  the fair value of an asset  retirement  obligation.  The  provision is
effective no later than the end of fiscal years ending after  December 15, 2005.
The Company  will adopt FIN 47 beginning  the first  quarter of fiscal year 2006
and  does  not  believe  the  adoption  will  have  a  material  impact  on  its
consolidated financial position or results of operations or cash flows.

In May  2005,  the FASB  issued  SFAS No.  154,  "Accounting  Changes  and Error
Corrections"  ("SFAS 154") which replaces  Accounting  Principles Board Opinions
No. 20 "Accounting  Changes" and SFAS No. 3,  "Reporting  Accounting  Changes in
Interim  Financial  Statements-An  Amendment  of APB  Opinion  No. 28." SFAS 154
provides guidance on the accounting for and reporting of accounting  changes and
error  corrections.  It  establishes  retrospective  application,  or the latest
practicable  date,  as the required  method for reporting a change in accounting

                                      F-17

<PAGE>

                                   XSUNX, INC.
                          (A Development Stage Company)
                          Notes to Financial Statements
                               September 30, 2006

principle and the  reporting of a correction of an error.  SFAS 154 is effective
for accounting changes and a correction of errors made in fiscal years beginning
after  December  15,  2005 and is  required  to be adopted by the Company in the
first quarter of 2006.  The Company is currently  evaluating the effect that the
adoption  of SFAS 154 will  have on its  results  of  operations  and  financial
condition but does not expect it to have a material impact.

In June 2005, the Emerging  Issues Task Force,  or EITF,  reached a consensus on
Issue 05-6,  Determining  the  Amortization  Period for Leasehold  Improvements,
which requires that leasehold  improvements  acquired in a business  combination
purchased subsequent to the inception of a lease be amortized over the lesser of
the  useful  life of the  assets  or a term  that  includes  renewals  that  are
reasonably  assured at the date of the business  combination  or purchase.  EITF
05-6 is effective for periods beginning after July 1, 2005. We do not expect the
provisions  of  this  consensus  to  have a  material  impact  on the  financial
position, results of operations or cash flows.

In  February  2006  the  amendment  to FASB  Statement  No 133,  Accounting  for
Derivative  Instruments  and Hedging  Activities,  and No. 140,  Accounting  for
Transfers and Servicing of Financial  Assets and  Extinguishment  of Liabilities
was issued as SFAS 155, Accounting for Certain Hybrid Financial Instruments.

This  Statement  permits  fair  value  remeasurement  for any  hybrid  financial
instrument  that contains an embedded  derivative  that otherwise  would require
bifurcation.  Clarifies which interest-only strips and principal-only strips are
not subject to the  requirements of Statement 133,  establishes a requirement to
evaluate interest in securitized financial assets to identify interests that are
freestanding  derivatives or that are hybrid financial  instruments that contain
an embedded derivative requiring  bifurcation.  Clarifies that concentrations of
credit risk in the form of subordination are not embedded derivatives and amends
Statement  140 to eliminate  the  prohibition  on a  qualifying  special-purpose
entity  from  holding a  derivative  financial  instrument  that  pertains  to a
beneficial interest other than another derivative financial instrument.

This  Statement is effective  for all financial  instruments  acquired or issued
after the  beginning of our first fiscal year that begins  after  September  15,
2006.

The fair value  election  provided for in paragraph  4(c) of this  Statement may
also be applied upon adoption of this Statement for hybrid financial instruments
that had been  bifurcated  under  paragraph  12 of  Statement  133  prior to the
adoption of this Statement. Earlier adoption is permitted as of the beginning of
our fiscal year, provided we have not yet issued financial statements, including
financial statements for any interim period, for that fiscal year. Provisions of
this  Statement  may be  applied  to  instruments  that we  hold at the  date of
adoption  on  an  instrument-by-instrument   basis.  The  Company  is  currently
reviewing  the effects of adoption of this  Statement  but it is not expected to
have a material impact on our financial statements.

In March 2006 the amendment to FASB Statement No. 140,  Accounting for Transfers
and  Servicing of  Financial  Assets and  Extinguishment  of  Liabilities,  with
respect  to the  accounting  for  separately  recognized  servicing  assets  and
servicing  liabilities  was  issued as SFAS 156,  Accounting  for  Servicing  of
Financial Assets.

This  Statement  requires an entity to recognize a servicing  asset or servicing
liability each time it undertakes an obligation to service a financial  asset by
entering  into  a  servicing  contract  in  certain  situations,   requires  all
separately recognized servicing assets and servicing liabilities to be initially
measured at fair value,  if practicable  and permits and entity to choose either
the amortization  method or the fair value measurement  method for each class of
separately recognized servicing assets and servicing liabilities. At its initial
adoption,  permits a one-time reclassification of available-for-sale  securities
to trading  securities by entities with  recognized  servicing  rights,  without
calling into question the treatment of other available-for-sale securities under
Statement 115, provided that the available-for-sale securities are identified in

                                      F-18

<PAGE>

                                   XSUNX, INC.
                          (A Development Stage Company)
                          Notes to Financial Statements
                               September 30, 2006

some  manner as  offsetting  the  entity's  exposure to changes in fair value of
servicing assets or servicing liabilities that a servicer elects to subsequently
measure at fair value.  Requires  separate  presentation of servicing assets and
servicing  liabilities  subsequently  measured at fair value in the statement of
financial  position and additional  disclosures  for all  separately  recognized
servicing  assets and  servicing  liabilities.  Adoption  of this  Statement  is
required  as of the  beginning  of the  first  fiscal  year  that  begins  after
September  15, 2006.  The  adoption of this  statement is not expected to have a
material impact on our financial statement.












                                      F-19

<PAGE>

                                   SIGNATURES

Pursuant to the  requirements  of Section 12 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.

Dated: December 14, 2006

                                   XsunX, INC.





/s/ Tom Djokovich
---------------------------------
   Tom Djokovich
   President



                                   DIRECTORS:



/s/ Tom Djokovich
--------------------------------


/s/ Thomas Anderson
--------------------------------