Document:

SECURITY
        AGREEMENT

       

      THIS
        SECURITY AGREEMENT
        (the
“Agreement”), is
        entered into and made effective as of July ___, 2005, by and between
XSUNX,
        INC., a
        Colorado corporation with its principal place of business located at 65
        Enterprise, Aliso Viejo, CA 92656 (the “Company”),
        and
        the BUYER(S)
        listed
        on Schedule I attached to the Securities Purchase Agreement dated the date
        hereof (the
        “Secured
        Party”).

       

      WHEREAS,
        the
        Company shall issue and sell to the Secured Party, as provided in the Securities
        Purchase Agreement of even date herewith between the Company and the Secured
        Party (the “Securities
        Purchase Agreement”),
        and
        the Secured Party shall purchase up to Eight Hundred Fifty Thousand Dollars
        ($850,000) of secured convertible debentures (the “Convertible
        Debentures”),
        which
        shall be convertible into shares of the Company’s common stock, no par value
        (the “Common
        Stock”)
        (as
        converted, the “Conversion
        Shares”)
        in the
        respective amounts set forth opposite each Buyer(s) name on Schedule I
        attached to the Securities Purchase Agreement;

       

      WHEREAS,
        to
        induce
        the Secured Party to enter into the transaction contemplated by the Securities
        Purchase Agreement, the Convertible Debentures, the Investor Registration
        Rights
        Agreement of even date herewith between the Company and the Secured Party
        (the
“Investor
        Registration Rights Agreement”),
        the
        Pledge and Escrow Agreement of even date herewith among the Company, the
        Secured
        Party and David Gonzalez, Esq. (the “Pledge
        Agreement”),
        the
        Escrow Agreement of even date herewith among the Company, the Secured Party,
        and
        David Gonzalez, Esq. (the “Escrow
        Agreement”),
        and
        the Irrevocable Transfer Agent Instructions among the Company, the Secured
        Party, Mountain Share Transfer, and David Gonzalez, Esq. (the “Transfer
        Agent Instructions”)
        (collectively referred to as the “Transaction
        Documents”),
        the
        Company hereby grants to the Secured Party a security interest in and to
        the
        pledged property identified on Exhibit
        A
        hereto
        (collectively referred to as the “Pledged
        Property”)
        until
        the satisfaction of the Obligations, as defined herein below.

       

      NOW,
        THEREFORE, in
        consideration of the promises and the mutual covenants herein contained,
        and for
        other good and valuable consideration, the adequacy and receipt of which
        are
        hereby acknowledged, the parties hereto hereby agree as follows:

       

      ARTICLE
        1.

       

      DEFINITIONS
        AND INTERPRETATIONS

       

      Section
        1.1. Recitals.
        

       

      The
        above
        recitals are true and correct and are incorporated herein, in their entirety,
        by
        this reference.

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

       

      Section
        1.2. Interpretations.
        

       

      Nothing
        herein expressed or implied is intended or shall be construed to confer upon
        any
        person other than the Secured Party any right, remedy or claim under or by
        reason hereof.

       

      Section
        1.3. Obligations
        Secured.

       

      The
        obligations secured hereby are any and all obligations of the Company now
        existing or hereinafter incurred to the Secured Party, whether oral or written
        and whether arising before, on or after the date hereof to the extent that
        those
        obligations of the Company to the Secured Party arise under this Agreement,
        the
        Transaction Documents, and any other amounts now or hereafter owed to the
        Secured Party by the Company thereunder or hereunder (collectively, the
“Obligations”).

       

      ARTICLE
        2.

       

      PLEDGED
        COLLATERAL, ADMINISTRATION OF COLLATERAL 

      AND
        TERMINATION OF SECURITY INTEREST

       

      Section
        2.1. Pledged
        Property.

       

      (a) Company
        hereby pledges to the Secured Party, and creates in the Secured Party for
        its
        benefit, a security interest for such time until the Obligations are paid
        in
        full, in and to all of the property of the Company as set forth in Exhibit “A”
        attached
        hereto (collectively, the “Pledged
        Property”):

       

      The
        Pledged Property, as set forth in Exhibit “A”
        attached
        hereto, and the products thereof and the proceeds of all such items are
        hereinafter collectively referred to as the “Pledged
        Collateral.”

       

      (b) Simultaneously
        with the execution and delivery of this Agreement, the Company shall make,
        execute, acknowledge, file, record and deliver to the Secured Party any
        documents reasonably requested by the Secured Party to perfect its security
        interest in the Pledged Property. Simultaneously with the execution and delivery
        of this Agreement, the Company shall make, execute, acknowledge and deliver
        to
        the Secured Party such documents and instruments, including, without limitation,
        financing statements, certificates, affidavits and forms as may, in the Secured
        Party’s reasonable judgment, be necessary to effectuate, complete or perfect, or
        to continue and preserve, the security interest of the Secured Party in the
        Pledged Property, and the Secured Party shall hold such documents and
        instruments as secured party, subject to the terms and conditions contained
        herein.

       

      Section
        2.2. Rights;
        Interests; Etc.

       

      (a) So
        long
        as no Event of Default (as hereinafter defined) shall have occurred
        and be
        continuing:

       

      
        
           

        

        
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      (i) the
        Company shall be entitled to exercise any and all rights pertaining to the
        Pledged Property or any part thereof for any purpose not inconsistent with
        the
        terms hereof; and

       

      (ii) the
        Company shall be entitled to receive and retain any and all payments paid
        or
        made in respect of the Pledged Property.

       

      (b) Upon
        the
        occurrence and during the continuance of an Event of Default:

       

      (i) All
        rights of the Company to exercise the rights which it would otherwise be
        entitled to exercise pursuant to Section 2.2(a)(i) hereof and
        to
        receive payments which it would otherwise be authorized to receive and retain
        pursuant to Section 2.2(a)(ii) hereof shall be suspended, and
        all such
        rights shall thereupon become vested in the Secured Party who shall thereupon
        have the sole right to exercise such rights and to receive and hold as Pledged
        Collateral such payments; provided,
        however,
        that if
        the Secured Party shall become entitled and shall elect to exercise its right
        to
        realize on the Pledged Collateral pursuant to Article 5 hereof, then
        all
        cash sums received by the Secured Party, or held by Company for the benefit
        of
        the Secured Party and paid over pursuant to Section 2.2(b)(ii) hereof,
        shall be applied against any outstanding Obligations; and

       

      (ii) All
        interest, dividends, income and other payments and distributions which are
        received by the Company contrary to the provisions of
        Section 2.2(b)(i) hereof shall be received in trust for the
        benefit of
        the Secured Party, shall be segregated from other property of the Company
        and
        shall be forthwith paid over to the Secured Party; or 

       

      (iii) The
        Secured Party in its sole discretion shall be authorized to sell
        any
        or all of the Pledged Property at public or private sale in order to recoup
        all
        of the outstanding principal plus accrued interest owed pursuant to the
        Convertible Debenture as described herein

       

      (c) An
        “Event
        of Default”
        shall
        be deemed to have occurred under this Agreement upon an Event of Default
        under
        the Convertible Debentures.

       

      

       

      ARTICLE
        3.

       

      ATTORNEY-IN-FACT;
        PERFORMANCE

       

      Section
        3.1. Secured
        Party Appointed Attorney-In-Fact.

       

      Upon
        the
        occurrence of an Event of Default, the Company hereby appoints the Secured
        Party
        as its attorney-in-fact, with full authority in the place and stead of the
        Company and in the name of the Company or otherwise, from time to time in
        the
        Secured Party’s discretion to take any action and to execute any instrument
        which the Secured Party may reasonably deem necessary to accomplish the purposes
        of this Agreement, including, without limitation, to receive and collect
        all
        instruments made payable to the Company representing any payments in respect
        of
        the Pledged Collateral or any part thereof and to give full discharge for
        the
        same. The Secured Party may demand, collect, receipt for, settle, compromise,
        adjust, sue for, foreclose, or realize on the Pledged Property as and when
        the
        Secured Party may determine. To facilitate collection, the Secured Party
        may
        notify account debtors and obligors on any Pledged Property or Pledged
        Collateral to make payments directly to the Secured Party.

       

      
        
           

        

        
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      Section
        3.2. Secured
        Party May Perform.

       

      If
        the
        Company fails to perform any agreement contained herein, the Secured Party,
        at
        its option, may itself perform, or cause performance of, such agreement,
        and the
        expenses of the Secured Party incurred in connection therewith shall be included
        in the Obligations secured hereby and payable by the Company under
        Section 8.3.

       

      ARTICLE
        4.

       

      REPRESENTATIONS
        AND WARRANTIES

       

      Section
        4.1. Authorization;
        Enforceability.

       

      Each
        of
        the parties hereto represents and warrants that it has taken all action
        necessary to authorize the execution, delivery and performance of this Agreement
        and the transactions contemplated hereby; and upon execution and delivery,
        this
        Agreement shall constitute a valid and binding obligation of the respective
        party, subject to applicable bankruptcy, insolvency, reorganization, moratorium
        and similar laws affecting creditors’ rights or by the principles governing the
        availability of equitable remedies.

       

      Section
        4.2. Ownership
        of Pledged Property.

       

      The
        Company warrants and represents that it is the legal and beneficial owner
        of the
        Pledged Property free and clear of any lien, security interest, option or
        other
        charge or encumbrance except for the security interest created by this
        Agreement.

       

      ARTICLE
        5.

       

      DEFAULT;
        REMEDIES; SUBSTITUTE COLLATERAL

       

      Section
        5.1. Default
        and Remedies.

       

      (a) If
        an
        Event of Default occurs and continues for a period of ten (10) days after
        notice
        of such Event of Default has been delivered to the Company from the Secured
        Party, then in each such case the Secured Party may declare the Obligations
        to
        be due and payable immediately, by a notice in writing to the Company, and
        upon
        any such declaration, the Obligations shall become immediately due and
        payable.

       

      (b) Upon
        the
        occurrence of an Event of Default, the Secured Party shall: (i) be
        entitled
        to receive all distributions with respect to the Pledged Collateral,
        (ii) to cause the Pledged Property to be transferred into the name
        of the
        Secured Party or its nominee, (iii) to dispose of the Pledged Property,
        and
        (iv) to realize upon any and all rights in the Pledged Property then
        held
        by the Secured Party.

       

      
        
           

        

        
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      Section
        5.2. Method
        of Realizing Upon the Pledged Property: Other Remedies.

       

      Upon
        the
        occurrence of an Event of Default, in addition to any rights and remedies
        available at law or in equity, the following provisions shall govern the
        Secured
        Party’s right to realize upon the Pledged Property:

       

      (a) Any
        item
        of the Pledged Property may be sold for cash or other value in any number
        of
        lots at brokers board, public auction or private sale and may be sold without
        demand, advertisement or notice (except that the Secured Party shall give
        the
        Company ten (10) days’ prior written notice of the time and place or
        of the time after which a private sale may be made (the “Sale
        Notice”)),
        which notice period is hereby agreed to be commercially reasonable. At any
        sale
        or sales of the Pledged Property, the Company may bid for and purchase the
        whole
        or any part of the Pledged Property and, upon compliance with the terms of
        such
        sale, may hold, exploit and dispose of the same without further accountability
        to the Secured Party. The Company will execute and deliver, or cause to be
        executed and delivered, such instruments, documents, assignments, waivers,
        certificates, and affidavits and supply or cause to be supplied such further
        information and take such further action as the Secured Party reasonably
        shall
        require in connection with any such sale.

       

      (b) Any
        cash
        being held by the Secured Party as Pledged Collateral and all cash proceeds
        received by the Secured Party in respect of, sale of, collection from, or
        other
        realization upon all or any part of the Pledged Collateral shall be applied
        as
        follows:

       

      (i) to
        the
        payment of all amounts due the Secured Party for the expenses reimbursable
        to it
        hereunder or owed to it pursuant to Section 8.3 hereof;

       

      (ii) to
        the
        payment of the Obligations then due and unpaid.

       

      (iii) the
        balance, if any, to the person or persons entitled thereto, including, without
        limitation, the Company.

       

      (c) In
        addition to all of the rights and remedies which the Secured Party may have
        pursuant to this Agreement, the Secured Party shall have all of the rights
        and
        remedies provided by law, including, without limitation, those under the
        Uniform
        Commercial Code.

       

      (i) If
        the
        Company fails to pay such amounts due upon the occurrence of an Event of
        Default
        which is continuing, then the Secured Party may institute a judicial proceeding
        for the collection of the sums so due and unpaid, may prosecute such proceeding
        to judgment or final decree and may enforce the same against the Company
        and
        collect the monies adjudged or decreed to be payable in the manner provided
        by
        law out of the property of Company, wherever situated.

       

      (ii) The
        Company agrees that it shall be liable for any reasonable fees, expenses
        and
        costs incurred by the Secured Party in connection with enforcement, collection
        and preservation of the Transaction Documents, including, without limitation,
        reasonable legal fees and expenses, and such amounts shall be deemed included
        as
        Obligations secured hereby and payable as set forth in Section 8.3
        hereof.

       

      
        
           

        

        
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      Section
        5.3. Proofs
        of Claim.

       

      In
        case
        of the pendency of any receivership, insolvency, liquidation, bankruptcy,
        reorganization, arrangement, adjustment, composition or other judicial
        proceeding relating to the Company or the property of the Company or of such
        other obligor or its creditors, the Secured Party (irrespective of whether
        the
        Obligations shall then be due and payable as therein expressed or by declaration
        or otherwise and irrespective of whether the Secured Party shall have made
        any
        demand on the Company for the payment of the Obligations), subject to the
        rights
        of Previous Security Holders, shall be entitled and empowered, by intervention
        in such proceeding or otherwise:

       

      (i) to
        file
        and prove a claim for the whole amount of the Obligations and to file such
        other
        papers or documents as may be necessary or advisable in order to have the
        claims
        of the Secured Party (including any claim for the reasonable legal fees and
        expenses and other expenses paid or incurred by the Secured Party permitted
        hereunder and of the Secured Party allowed in such judicial proceeding),
        and

       

      (ii) to
        collect and receive any monies or other property payable or deliverable on
        any
        such claims and to distribute the same; and any custodian, receiver, assignee,
        trustee, liquidator, sequestrator or other similar official in any such judicial
        proceeding is hereby authorized by the Secured Party to make such payments
        to
        the Secured Party and, in the event that the Secured Party shall consent
        to the
        making of such payments directed to the Secured Party, to pay to the Secured
        Party any amounts for expenses due it hereunder.

       

      Section
        5.4. Duties
        Regarding Pledged Collateral.

       

      The
        Secured Party shall have no duty as to the collection or protection of the
        Pledged Property or any income thereon or as to the preservation of any rights
        pertaining thereto, beyond the safe custody and reasonable care of any of
        the
        Pledged Property actually in the Secured Party’s possession.

       

      ARTICLE
        6.

       

      AFFIRMATIVE
        COVENANTS

       

      The
        Company covenants and agrees that, from the date hereof and until the
        Obligations have been fully paid and satisfied, unless the Secured Party
        shall
        consent otherwise in writing (as provided in Section 8.4
        hereof):

       

      Section
        6.1. Existence,
        Properties, Etc.

       

      (a) The
        Company shall do, or cause to be done, all things, or proceed with due diligence
        with any actions or courses of action, that may be reasonably necessary
        (i) to maintain Company’s due organization, valid existence and good
        standing under the laws of its state of incorporation, and (ii) to
        preserve
        and keep in full force and effect all qualifications, licenses and registrations
        in those jurisdictions in which the failure to do so could have a Material
        Adverse Effect (as defined below); and (b) the Company shall not do,
        or
        cause to be done, any act impairing the Company’s corporate power or authority
        (i) to carry on the Company’s business as now conducted, and (ii) to
        execute or deliver this Agreement or any other document delivered in connection
        herewith, including, without limitation, any UCC-1 Financing Statements required
        by the Secured Party to which it is or will be a party, or perform
        any of
        its obligations hereunder or thereunder. For purpose of this Agreement, the
        term
“Material
        Adverse Effect”
        shall
        mean any material and adverse affect as determined by Secured Party in its
        sole
        discretion, whether individually or in the aggregate, upon (a) the
        Company’s assets, business, operations, properties or condition, financial or
        otherwise; (b) the Company’s to make payment as and when due of all or any
        part of the Obligations; or (c) the Pledged Property.

       

      
        
           

        

        
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      Section
        6.2. Financial
        Statements and Reports.

       

      The
        Company shall furnish to the Secured Party within a reasonable time such
        financial data as the Secured Party may reasonably request, including, without
        limitation, the following:

       

      (a) The
        balance sheet of the Company as of the close of each fiscal year, the statement
        of earnings and retained earnings of the Company as of the close of such
        fiscal
        year, and statement of cash flows for the Company for such fiscal year, all
        in
        reasonable detail, prepared in accordance with generally accepted accounting
        principles consistently applied, certified by the chief executive and chief
        financial officers of the Company as being true and correct and accompanied
        by a
        certificate of the chief executive and chief financial officers of the Company,
        stating that the Company has kept, observed, performed and fulfilled each
        covenant, term and condition of this Agreement during such fiscal year and
        that
        no Event of Default hereunder has occurred and is continuing, or if an Event
        of
        Default has occurred and is continuing, specifying the nature of same, the
        period of existence of same and the action the Company proposes to take in
        connection therewith;

       

      (b) A
        balance
        sheet of the Company as of the close of each month, and statement of earnings
        and retained earnings of the Company as of the close of such month, all in
        reasonable detail, and prepared substantially in accordance with generally
        accepted accounting principles consistently applied, certified by the chief
        executive and chief financial officers of the Company as being true and correct;
        and

       

      (c) Copies
        of
        all accountants' reports and accompanying financial reports submitted to
        the
        Company by independent accountants in connection with each annual examination
        of
        the Company.

       

      In
        connection with furnishing the Financial Records, the Secured Party hereby
        agrees to hold in strict confidence and to not make any disclosure or use
        of any
        Financial Records which the Company in good faith determine to be confidential
        and notifies the Secured Party of such determination prior to the furnishing
        of
        such Financial Records to the Secured Party. 

       

      Section
        6.3. Accounts
        and Reports.

       

      The
        Company shall maintain a standard system of accounting in accordance with
        generally accepted accounting principles consistently applied and provide,
        at
        its sole expense, to the Secured Party the following:

       

      
        
           

        

        
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      (a) as
        soon
        as available, a copy of any notice or other communication alleging any
        nonpayment or other material breach or default, or any foreclosure or other
        action respecting any material portion of its assets and properties, received
        respecting any of the indebtedness of the Company in excess of $15,000 (other
        than the Obligations), or any demand or other request for payment under any
        guaranty, assumption, purchase agreement or similar agreement or arrangement
        respecting the indebtedness or obligations of others in excess of $15,000,
        including any received from any person acting on behalf of the Secured Party
        or
        beneficiary thereof; and

       

      (b) within
        fifteen (15) days after the making of each submission or filing, a
        copy of
        any report, financial statement, notice or other document, whether periodic
        or
        otherwise, submitted to the shareholders of the Company, or submitted to
        or
        filed by the Company with any governmental authority involving or affecting
        (i)
        the Company that could have a Material Adverse Effect; (ii) the
        Obligations; (iii) any part of the Pledged Collateral; or (iv) any
        of
        the transactions contemplated in this Agreement or the Loan
        Instruments.

       

      Section
        6.4. Maintenance
        of Books and Records; Inspection.

       

      The
        Company shall maintain its books, accounts and records in accordance with
        generally accepted accounting principles consistently applied, and permit
        the
        Secured Party, its officers and employees and any professionals designated
        by
        the Secured Party in writing, at any time to visit and inspect any of its
        properties (including but not limited to the collateral security described
        in
        the Transaction Documents and/or the Loan Instruments), corporate books and
        financial records, and to discuss its accounts, affairs and finances with
        any
        employee, officer or director thereof.

       

      Section
        6.5. Maintenance
        and Insurance.

       

      (a) The
        Company shall maintain or cause to be maintained, at its own expense, all
        of its
        assets and properties in good working order and condition, making all necessary
        repairs thereto and renewals and replacements thereof.

       

      (b) The
        Company shall maintain or cause to be maintained, at its own expense, insurance
        in form, substance and amounts (including deductibles), which the Company
        deems
        reasonably necessary to the Company’s business, (i) adequate to insure all
        assets and properties of the Company, which assets and properties are of
        a
        character usually insured by persons engaged in the same or similar business
        against loss or damage resulting from fire or other risks included in an
        extended coverage policy; (ii) against public liability and other
        tort
        claims that may be incurred by the Company; (iii) as may be required
        by the
        Transaction Documents and/or applicable law and (iv) as may be reasonably
        requested by Secured Party, all with adequate, financially sound and reputable
        insurers.

       

      Section
        6.6. Contracts
        and Other Collateral.

       

      The
        Company shall perform all of its obligations under or with respect to each
        instrument, receivable, contract and other intangible included in the Pledged
        Property to which the Company is now or hereafter will be party on a timely
        basis and in the manner therein required, including, without limitation,
        this
        Agreement.

       

      
        
           

        

        
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      Section
        6.7. Defense
        of Collateral, Etc.

       

      The
        Company shall defend and enforce its right, title and interest in and to
        any
        part of: (a) the Pledged Property; and (b) if not included
        within the
        Pledged Property, those assets and properties whose loss could have a Material
        Adverse Effect, the Company shall defend the Secured Party’s right, title and
        interest in and to each and every part of the Pledged Property, each against
        all
        manner of claims and demands on a timely basis to the full extent permitted
        by
        applicable law.

       

      Section
        6.8. Payment
        of Debts, Taxes, Etc.

       

      The
        Company shall pay, or cause to be paid, all of its indebtedness and other
        liabilities and perform, or cause to be performed, all of its obligations
        in
        accordance with the respective terms thereof, and pay and discharge, or cause
        to
        be paid or discharged, all taxes, assessments and other governmental charges
        and
        levies imposed upon it, upon any of its assets and properties on or before
        the
        last day on which the same may be paid without penalty, as well as pay all
        other
        lawful claims (whether for services, labor, materials, supplies or
        otherwise) as and when due

       

      Section
        6.9. Taxes
        and Assessments; Tax Indemnity.

       

      The
        Company shall (a) file all tax returns and appropriate schedules thereto
        that are required to be filed under applicable law, prior to the date of
        delinquency, (b) pay and discharge all taxes, assessments and governmental
        charges or levies imposed upon the Company, upon its income and profits or
        upon
        any properties belonging to it, prior to the date on which penalties attach
        thereto, and (c) pay all taxes, assessments and governmental charges
        or
        levies that, if unpaid, might become a lien or charge upon any of its
        properties; provided,
        however,
        that
        the Company in good faith may contest any such tax, assessment, governmental
        charge or levy described in the foregoing clauses (b) and (c) so long as
        appropriate reserves are maintained with respect thereto. 

       

      Section
        6.10. Compliance
        with Law and Other Agreements.
        

       

      The
        Company shall maintain its business operations and property owned or used
        in
        connection therewith in compliance with (a) all applicable federal,
        state
        and local laws, regulations and ordinances governing such business operations
        and the use and ownership of such property, and (b) all agreements,
        licenses, franchises, indentures and mortgages to which the Company is a
        party
        or by which the Company or any of its properties is bound. Without limiting
        the
        foregoing, the Company shall pay all of its indebtedness promptly in accordance
        with the terms thereof.

       

      Section
        6.11. Notice
        of Default.
        

       

      The
        Company shall give written notice to the Secured Party of the occurrence
        of any
        default or Event of Default under this Agreement, the Transaction Documents
        or
        any other Loan Instrument or any other agreement of Company for the payment
        of
        money, promptly upon the occurrence thereof.

       

      
        
           

        

        
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      Section
        6.12. Notice
        of Litigation.

       

      The
        Company shall give notice, in writing, to the Secured Party of (a) any
        actions, suits or proceedings wherein the amount at issue is in excess of
        $50,000, instituted by any persons against the Company, or affecting any
        of the
        assets of the Company, and (b) any dispute, not resolved within fifteen
        (15) days of the commencement thereof, between the Company on the one hand
        and
        any governmental or regulatory body on the other hand, which might reasonably
        be
        expected to have a Material Adverse Effect on the business operations or
        financial condition of the Company.

       

      ARTICLE
        7.

       

      NEGATIVE
        COVENANTS

       

      The
        Company covenants and agrees that, from the date hereof until the Obligations
        have been fully paid and satisfied, the Company shall not, unless the Secured
        Party shall consent otherwise in writing:

       

      Section
        7.1. Indebtedness.

       

      The
        Company shall not directly or indirectly permit, create, incur, assume, permit
        to exist, increase, renew or extend on or after the date hereof any indebtedness
        on its part, including commitments, contingencies and credit availabilities,
        or
        apply for or offer or agree to do any of the foregoing.

       

      Section
        7.2. Liens
        and Encumbrances.

       

      The
        Company shall not directly or indirectly make, create, incur, assume or permit
        to exist any assignment, transfer, pledge, mortgage, security interest or
        other
        lien or encumbrance of any nature in, to or against any part of the Pledged
        Property or of the Company’s capital stock, or offer or agree to do so, or own
        or acquire or agree to acquire any asset or property of any character subject
        to
        any of the foregoing encumbrances (including any conditional sale contract
        or
        other title retention agreement), or assign, pledge or in any way transfer
        or
        encumber its right to receive any income or other distribution or proceeds
        from
        any part of the Pledged Property or the Company’s capital stock; or enter into
        any sale-leaseback financing respecting any part of the Pledged Property
        as
        lessee, or cause or assist the inception or continuation of any of the
        foregoing.

       

      Section
        7.3. Certificate
        of Incorporation, By-Laws, Mergers, Consolidations, Acquisitions and
        Sales.

       

      Without
        the prior express written consent of the Secured Party, which consent shall
        not
        be unreasonably withheld, the Company shall not: (a) Amend its Certificate
        of Incorporation or By-Laws; (b) issue or sell its stock, stock options,
        bonds,
        notes or other corporate securities or obligations, except as expressly
        permitted under the Transaction Documents; (c) be a party to any merger,
        consolidation or corporate reorganization, (d) purchase or otherwise
        acquire all or substantially all of the assets or stock of, or any partnership
        or joint venture interest in, any other person, firm or entity, (e) sell,
        transfer, convey, grant a security interest in or lease all or any substantial
        part of its assets, nor (f)  nor convey any of its assets to any
        subsidiary.

       

      
        
           

        

        
          10

          
            

          

        

        
           

        

      

       

      Section
        7.4. Management,
        Ownership.

       

      The
        Company shall not materially change its ownership, executive staff or management
        without the prior written consent of the Secured Party, which consent shall
        not
        be unreasonably withheld. The ownership, executive staff and management of
        the
        Company are material factors in the Secured Party's willingness to institute
        and
        maintain a lending relationship with the Company.

       

      Section
        7.5. Dividends,
        Etc.

       

      The
        Company shall not declare or pay any dividend of any kind, in cash or in
        property, on any class of its capital stock, nor purchase, redeem, retire
        or
        otherwise acquire for value any shares of such stock, nor make any distribution
        of any kind in respect thereof, nor make any return of capital to shareholders,
        nor make any payments in respect of any pension, profit sharing, retirement,
        stock option, stock bonus, incentive compensation or similar plan (except
        as
        required or permitted hereunder), without the prior written consent of the
        Secured Party.

       

      Section
        7.6. Guaranties;
        Loans.

       

      The
        Company shall not guarantee nor be liable in any manner, whether directly
        or
        indirectly, or become contingently liable after the date of this Agreement
        in
        connection with the obligations or indebtedness of any person or persons,
        except
        for (i) the indebtedness currently secured by the liens identified on the
        Pledged Property identified on Exhibit A hereto and (ii) the endorsement
        of
        negotiable instruments payable to the Company for deposit or collection in
        the
        ordinary course of business. The Company shall not make any loan, advance
        or
        extension of credit to any person other than in the normal course of its
        business.

       

      Section
        7.7. Debt.

       

      The
        Company shall not create, incur, assume or suffer to exist any additional
        indebtedness of any description whatsoever in an aggregate amount in excess
        of
        $25,000 (excluding any indebtedness of the Company to the Secured Party,
        trade
        accounts payable and accrued expenses incurred in the ordinary course of
        business and the endorsement of negotiable instruments payable to the Company,
        respectively for deposit or collection in the ordinary course of
        business).

       

      Section
        7.8. Conduct
        of Business.

       

      The
        Company will continue to engage, in an efficient and economical manner, in
        a
        business of the same general type as conducted by it on the date of this
        Agreement.

       

      Section
        7.9. Places
        of Business.

       

      The
        location of the Company’s chief place of business is 65 Enterprise, Aliso Viejo,
        CA 92656. The Company shall not change the location of its chief place of
        business, chief executive office or any place of business disclosed to the
        Secured Party or move any of the Pledged Property from its current location
        without thirty (30) days' prior written notice to the Secured Party in each
        instance. 

       

      
        
           

        

        
          11

          
            

          

        

        
           

        

      

       

      ARTICLE
        8.

       

      MISCELLANEOUS

       

      Section
        8.1. Notices.

       

      All
        notices or other communications required or permitted to be given pursuant
        to
        this Agreement shall be in writing and shall be considered as duly given
        on:
        (a) the date of delivery, if delivered in person, by nationally recognized
        overnight delivery service or (b) five (5) days after
        mailing if
        mailed from within the continental United States by certified mail, return
        receipt requested to the party entitled to receive the same:

       

      
        	
                If
                  to the Secured Party:

              	
                Cornell
                  Capital Partners, LP

              
	 	
                101
                  Hudson Street-Suite 3700 

              
	 	
                Jersey
                  City, New Jersey 07302 

              
	 	
                Attention: Mark
                  Angelo

              
	 	
                Portfolio
                  Manager

              
	 	
                Telephone: (201)
                  986-8300

              
	 	
                Facsimile: (201)
                  985-8266

              
	 	 
	
                With
                  a copy to:

              	
                Troy
                  Rillo, Esq.

              
	 	
                101
                  Hudson Street, Suite 3700

              
	 	
                Jersey
                  City, NJ 07302

              
	 	
                Telephone: (201)
                  985-8300

              
	 	
                Facsimile: (201)
                  985-8266

              
	 	 
	
                And
                  if to the Company:

              	
                XsunX,
                  Inc.

              
	 	
                65
                  Enterprise 

              
	 	
                Aliso
                  Viejo, CA 92656

              
	 	
                Attention: Tom
                  Djokovich

              
	 	
                Telephone: (949)
                  330-8060

              
	 	
                Facsimile: (949)
                  266-5823

              
	 	 
	
                With
                  a copy to:

              	
                Sichenzia
                  Ross Friedman Ference LLP

              
	 	
                1065
                  Avenue of the Americas

              
	 	
                New
                  York, NY 10018

              
	 	
                Attention: 

              
	 	
                Telephone: (212)
                  930-9700

              
	 	
                Facsimile: (212)
                  930-9725

              

      

      

      Any
        party
        may change its address by giving notice to the other party stating its new
        address. Commencing on the tenth (10th) day
        after the giving of such notice, such newly designated address shall be such
        party’s address for the purpose of all notices or other communications required
        or permitted to be given pursuant to this Agreement.

       

      
        
           

        

        
          12

          
            

          

        

        
           

        

      

       

      Section
        8.2. Severability.

       

      If
        any
        provision of this Agreement shall be held invalid or unenforceable, such
        invalidity or unenforceability shall attach only to such provision and shall
        not
        in any manner affect or render invalid or unenforceable any other severable
        provision of this Agreement, and this Agreement shall be carried out as if
        any
        such invalid or unenforceable provision were not contained herein.

       

      Section
        8.3. Expenses.

       

      In
        the
        event of an Event of Default, the Company will pay to the Secured Party the
        amount of any and all reasonable expenses, including the reasonable fees
        and
        expenses of its counsel, which the Secured Party may incur in connection
        with:
        (i) the custody or preservation of, or the sale, collection from,
        or other
        realization upon, any of the Pledged Property; (ii) the exercise or
        enforcement of any of the rights of the Secured Party hereunder or
        (iii) the failure by the Company to perform or observe any of the
        provisions hereof.

       

      Section
        8.4. Waivers,
        Amendments, Etc.

       

      The
        Secured Party’s delay or failure at any time or times hereafter to require
        strict performance by Company of any undertakings, agreements or covenants
        shall
        not waiver, affect, or diminish any right of the Secured Party under this
        Agreement to demand strict compliance and performance herewith. Any waiver
        by
        the Secured Party of any Event of Default shall not waive or affect any other
        Event of Default, whether such Event of Default is prior or subsequent thereto
        and whether of the same or a different type. None of the undertakings,
        agreements and covenants of the Company contained in this Agreement, and
        no
        Event of Default, shall be deemed to have been waived by the Secured Party,
        nor
        may this Agreement be amended, changed or modified, unless such waiver,
        amendment, change or modification is evidenced by an instrument in writing
        specifying such waiver, amendment, change or modification and signed by the
        Secured Party.

       

      Section
        8.5. Continuing
        Security Interest.

       

      This
        Agreement shall create a continuing security interest in the Pledged Property
        and shall: (i) remain in full force and effect until payment in full
        of the
        Obligations; and (ii) be binding upon the Company and its successors
        and
        heirs and (iii) inure to the benefit of the Secured Party and its
        successors and assigns. Upon the payment or satisfaction in full of the
        Obligations, the Company shall be entitled to the return, at its expense,
        of
        such of the Pledged Property as shall not have been sold in accordance with
        Section 5.2 hereof or otherwise applied pursuant to the terms
        hereof.

       

      Section
        8.6. Independent
        Representation.

       

      Each
        party hereto acknowledges and agrees that it has received or has had the
        opportunity to receive independent legal counsel of its own choice and that
        it
        has been sufficiently apprised of its rights and responsibilities with regard
        to
        the substance of this Agreement.

       

      
        
           

        

        
          13

          
            

          

        

        
           

        

      

       

      Section
        8.7. Applicable
        Law: Jurisdiction.

       

      This
        Agreement shall be governed by and interpreted in accordance with the laws
        of
        the State of New Jersey without regard to the principles of conflict of laws.
        The parties further agree that any action between them shall be heard in
        Hudson
        County, New Jersey, and expressly consent to the jurisdiction and venue of
        the
        Superior Court of New Jersey, sitting in Hudson County and the United States
        District Court for the District of New Jersey sitting in Newark, New Jersey
        for
        the adjudication of any civil action asserted pursuant to this
        Paragraph.

       

      Section
        8.8. Waiver
        of Jury Trial.

       

      AS
        A
        FURTHER INDUCEMENT FOR THE SECURED PARTY TO ENTER INTO THIS AGREEMENT AND
        TO
        MAKE THE FINANCIAL ACCOMMODATIONS TO THE COMPANY, THE COMPANY HEREBY WAIVES
        ANY
        RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING RELATED IN ANY WAY TO THIS
        AGREEMENT AND/OR ANY AND ALL OTHER DOCUMENTS RELATED TO THIS TRANSACTION.
        

       

      Section
        8.9. Entire
        Agreement.

       

      This
        Agreement constitutes the entire agreement among the parties and supersedes
        any
        prior agreement or understanding among them with respect to the subject matter
        hereof.

       

      [REMAINDER
        OF PAGE INTENTIONALLY LEFT BLANK]

       

      
        
           

        

        
          14

          
            

          

        

        
           

        

      

      

      IN
        WITNESS WHEREOF, the
        parties hereto have executed this Security Agreement as of the date first
        above
        written.

       

      

      
        	 	
                COMPANY:

              
	 	
                XSUNX,
                  INC.

              
	 	 
	 	
                By:
                  ____________________________________________

              
	 	
                Name: Tom
                  Djokovich

              
	 	
                Title: Chief
                  Executive Officer

              
	 	 
	 	 
	 	
                SECURED
                  PARTY:

              
	 	
                CORNELL
                  CAPITAL PARTNERS, LP

              
	 	 
	 	
                By: Yorkville
                  Advisors, LLC

              
	 	
                Its: General
                  Partner

              
	 	 
	 	
                By:
                  ____________________________________________

              
	 	
                Name: Mark
                  Angelo

              
	 	
                Title: Portfolio
                  Manager

              
	 	 

      

      

      
        
           

        

        
          15

          
            

          

        

        
           

        

      

       

      EXHIBIT
        A

      DEFINITION
        OF PLEDGED PROPERTY

       

       

      For
        the
        purpose of securing prompt and complete payment and performance by the Company
        of all of the Obligations, the Company unconditionally and irrevocably hereby
        grants to the Secured Party a continuing security interest in and to, and
        lien
        upon, the following Pledged Property of the Company:

       

      (a) all
        goods
        of the Company, including, without limitation, machinery, equipment, furniture,
        furnishings, fixtures, signs, lights, tools, parts, supplies and motor vehicles
        of every kind and description, now or hereafter owned by the Company or in
        which
        the Company may have or may hereafter acquire any interest, and all
        replacements, additions, accessions, substitutions and proceeds thereof,
        arising
        from the sale or disposition thereof, and where applicable, the proceeds
        of
        insurance and of any tort claims involving any of the foregoing;

       

      (b) all
        inventory of the Company, including, but not limited to, all goods, wares,
        merchandise, parts, supplies, finished products, other tangible personal
        property, including such inventory as is temporarily out of Company’s custody or
        possession and including any returns upon any accounts or other proceeds,
        including insurance proceeds, resulting from the sale or disposition of any
        of
        the foregoing;

       

      (c) all
        contract rights and general intangibles of the Company, including, without
        limitation, goodwill, trademarks, trade styles, trade names, leasehold
        interests, partnership or joint venture interests, patents and patent
        applications, copyrights, deposit accounts whether now owned or hereafter
        created;

       

      (d) all
        documents, warehouse receipts, instruments and chattel paper of the Company
        whether now owned or hereafter created;

       

      (e) all
        accounts and other receivables, instruments or other forms of obligations
        and
        rights to payment of the Company (herein collectively referred to as
“Accounts”),
        together with the proceeds thereof, all goods represented by such Accounts
        and
        all such goods that may be returned by the Company’s customers, and all proceeds
        of any insurance thereon, and all guarantees, securities and liens which
        the
        Company may hold for the payment of any such Accounts including, without
        limitation, all rights of stoppage in transit, replevin and reclamation and
        as
        an unpaid vendor and/or lienor, all of which the Company represents and warrants
        will be bona fide and existing obligations of its respective customers, arising
        out of the sale of goods by the Company in the ordinary course of
        business;

       

      (f) to
        the
        extent assignable, all of the Company’s rights under all present and future
        authorizations, permits, licenses and franchises issued or granted in connection
        with the operations of any of its facilities;

       

      (g) all
        products and proceeds (including, without limitation, insurance proceeds)
        from
        the above-described Pledged Property.

       

      
        
           

        

          A-1DISTRIBUTION AGREEMENT

         This Agreement is entered into this day of the 15th day of October
2004, and between W.L. Gore & ASSOCIATES (KOREA) LTD, with an address of 12F,
Chongkeundang Building, 36B, Chungjungra-3ka, Seodaemun-ku, Seoul, 120-756,
Korea (Gore") and Samsung industry Co. Ltd, with a place of business at SF,
Deasung Building, 17-16. Yeoido-dong, Yeongdungpo-ku. Seoul, Korea
(Distributor").

1)     Appointment- Gore hereby appoints Distributor as distributor of
       GORE-TEX(R) Industrial Sealant and GFO(R) Fiber Packing products, as
       listed in the attached Exhibit A ("Products"). Distributor shall conduct
       its business in the purchase and resale of the Products as a principal
       for its own account and as its own expense and risk and expressly agrees
       that no partnership, agency, or other relationship between Distributor
       and Gore is intended or may be inferred from this Agreement.

2)     Obligations of Distributor- Distributor shall use its best efforts to
       sell and promote the sale of the Products in a businesslike manner by,
       among other things, maintaining an adequate inventory of the Products,
       promptly and courteously serving all customer accounts, distributing
       promotional literature concerning the Products, and maintaining an
       adequately-trained sales force of an appropriate size. All Products sold
       by Distributor shall be in a clean and attractive condition.

3)     Obligations of Gore- While this Agreement is in effect, Gore agrees (i)
       not to enter into agreement with another person or entity to distribute
       the Products, and (ii) provide Distributor with adequate supply of
       Product information and literature, to assist Distributor in training
       Distributor's sales representatives, and refer inquiries about the
       Products to the Distributor.

4)     Payment Terms/Security Interest- Gore's most favorable credit terms are
       not 30 days. Credit shall be extended to Distributor on an individual
       basis based upon credit references and experience with Gore. Until and
       unless Gore receives a payment in full for Products shipped to
       Distributor, Gore shall have a security interest in all such Products in
       Distributor's possession or their proceeds.

5)     Price Changes- Gore agrees to give Distributor written notice of any
       change in prices for any of the Products. Gore will accept and honor
       purchase orders placed by Distributor for Products at the old price
       levels prior to the effective date of the price change only if a) such
       purchase orders are actually received by Gore prior to the effective date
       of the price change, b) the orders are for immediate shipment, and c) the
       orders are for reasonable quantities. Gore reserves the right to reject
       or limit any order received after a price change has been announced in
       its sole and absolute discretion.

6)     Trademark Usage- Distributor agrees that it will sell and deliver all
       Products in a fashion which clearly display's Gore's trademarks and trade
       names, and that it will not sell or deliver any Products using any other
       trademark or trade name. Gore mark or logo without Gore's prior written
       consent and that such consent shall only be given for advertising or
       promotional literature and only after Gore has approved the literature
       and the manner in which a Gore name, mark or logo is used in the
       literature.
<PAGE>

7)     Quantities/Shipments- Gore may from time to time establish initial
       stocking order requirements, minimum order quantities, and surcharges for
       drop shipments of the Products requested by Distributor.

8)     Intended Use/Marking- Distributor shall not knowingly sell Products
       covered by this Agreement for any use which is not within Gore's intended
       use of the Product. All Products said by Distributor under this Agreement
       shall bear same marking clearly indicating and identifying Gore as the
       manufacturer of the product. If a Product does not bear such designation,
       Gore will supply Distributor with labels which shall be affixed to the
       packaging of the Product before delivery to the Distributor's customers.

9)     Warranties- Gore warrants that all Products sold to Distributor will be
       free from defects in workmanship or material for a period (30) days from
       the date of their shipment by Gore. Distributor's sole remedies for any
       breach of the warranty set forth above shall be, at Gore's sale and
       exclusive option, replacement of any defective Product or a refund of the
       price paid for the price paid for the Product. EXCPECT AS EXRESSLY SET
       FORTH ABOVE, THERE ARE NO WARRANTIES, EXPRSS OR IMPLIED. MADE CONCERNING
       THE PRODUCTS AND ALL IMPLIED WARRANTIES. INCLUDING BUT NOT LIMITED TO,
       ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE ARE
       HEREBY EXPRESSLY DISCLIMED.

10)    Competitive Products- While this Agreement is in effect, Distributor
       shall not compete against Gore or sell goods from other sources that
       perform same or similar functions as the Products. If any question exists
       as to whether a sale of goods from another source would violate
       Distributor's obligations under the preceding sentence, Gore in its sole
       discretion, shall make a reasonable determination, and Distributor shall
       comply with Gore's determination.

11)    Term/Renewal- Unless terminated under Section 12 below, this Agreement
       shall be effective for one year, commencing on the date the Agreement is
       signed by both parties. If Distributor purchases US$500,000 worth of
       Products during the one-year term, the Agreement will be extended for
       another year and the purchase volume shall be increased to US$1,000,000
       for the second year. If the second year volume requirement is met, this
       Agreement will be extended for a third year.

12)    Termination- Either party may terminate this Agreement at any time, with
       or without cause; by giving written notice by ordinary mall to the other
       party. Any such termination shall take effect thirty (30) days after
       notice is mailed by the party giving notice. In the event of any such
       termination, Gore agrees to fill all purchase orders received by it prior
       to the date such notice was given, and Distributor agrees to pay for all
       Products ordered by it prior to the date such notice was given.

13)    Entire Agreement- This Agreement, including Exhibit A, represents the
       entire agreement between Gore and Distributor concerning its subject
       matter. Any and all prior agreements, correspondence, understandings, or
       discussions between the parties shall have no further force or effect
       once this Agreement has been signed. This Agreement may be amended or
       modified only by a written instrument signed by both parties. This
       agreement is written in English and translated to Korean. In the event of
       any Inconsistency between the English and Korean versions, the English
       version shall control.
<PAGE>

                                                     Samsung Industry Co., Ltd

                                                     By:/s/ CHUL JIN LIM
                                                        -------------------

                                                     Name: Mr. Chul Jin Lim

                                                     Date: October 15, 2004

                                                     W.L. GORE & ASSOCIATES
                                                     (KOREA) LTD.

                                                     By:/s/ IN KYU KIM
                                                        -------------------

                                                     Name: Mr. In Kyu Kim

                                                     Date: October 15, 2004

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