CAUTIONARY AND FORWARD LOOKING STATEMENTS

In addition to statements of historical fact, this Form 10-Q 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:

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-Q and Annual Reports on Form 10-K filed by the Company and any Current Reports on Form 8-K filed by the Company.

CURRENT OVERVIEW

Management believes the summary data 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 in October 2003 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.

Business Overview

XsunX is a development stage company with no significant sources of revenue to date. We are a thin-film photovoltaic ("TFPV") company that intends to grow its business by manufacturing TFPV amorphous solar modules and selling them into what we believe is a high growth solar market opportunity. Our decision to pursue this strategy is based on our three years of research in the design and use of technologies for the manufacture of TFPV solar cells utilizing amorphous silicon. During this time we have developed the technical capabilities, qualified core staff, and market understanding that we believe will be necessary to establish product manufacturing infrastructure and take our product to market.

We have designed a 125 peak watt TFPV solar module utilizing glass substrates and a proprietary semiconductor manufacturing system which employs the design of a high-throughput, automated, continuous process to produce solar modules in commercial quantities. We believe that these key processes can deliver per watt costs significantly less than those of traditional crystalline silicon solar module manufacturers and allow us to market TFPV modules that will be highly competitive with other thin film offerings.

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

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

Products

Solar Modules

In designing our ASI-120 watt module, we interviewed solar systems integrators and developed a design that we believe provides for a module delivering high power output (relative to other thin films), and size and framing that would allow for the use of many existing mounting systems.

We plan to deposit two separate solar cell layers of amorphous silicon on to a one meter by one point six meter size (1m x 1.6m) glass substrate. This is to increase the amount of absorbed and converted solar energy in our modules. Based on previous experimental and limited commercial use of our thin film deposition recipes, we anticipate the finished solar module to produce 7.9% frame to frame efficiency delivering approximately 125 peak watts of direct current "DC" power. We believe that we may be able to improve conversion efficiencies through the use of derivative forms of amorphous and other proprietary cell structures.

Planned Manufacturing Capacities

In the 2008 calendar year, we anticipate completing the assembly and installation of a small production research and development system and initiating construction of our first full scale 25 MW system. Barring assembly delays, we anticipate completing the assembly of our first 25MW line in March 2009. Near the end of the 2008 calendar year, we plan to launch the build-out of the first of three additional 25 MW systems necessary to eventually bring our capacity to 100 MW. Barring assembly delays and/or any delays in securing the necessary expansion capital, we anticipate completing the assembly of the first of these additional lines in November 2009, the second in January 2010, and the final 25 MW in March 2010. We intend to use the balance of the 2010 year to continue to work to improve system utilization, add shifts, and increase module yields to bring our production to peak capacities of 100 MW or more of annualized solar module production. To complete each new production line, we plan to use a systematic replication process that is designed to enable us to add production lines rapidly and efficiently, and achieve operating metrics that are comparable to the performance of our initial 25 MW system.

Sales and Marketing

Target Market

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

· Solar Farms

· Government Agencies (DOD)

o Bureau of Land Management
o Department of Defense

· Power Purchase Agreements

o Renewable Ventures

· Utility Companies

o Meeting Green Mandates

· Large Commercial Installations

Sales & Distribution

In anticipation of commercial production, we have developed a pre-sales reservation program, based upon the solar module manufacturing industry's policy of pre-selling manufacturing capacity to system installers and large users of solar. This is intended to aid in building a sales channel, loading that channel with customers interested in purchasing our future module production, and developing brand presence and recognition as early as possible. The program enables qualified, interested parties to specify the amount of solar module capacity they anticipate purchasing at favorable per watt pricing. As of the date of this report, we have signed reservation agreements with five (5) solar system integrators indicating interest in over 145 MW of production in calendar 2009, 2010 and 2011. Our agreements provide for the payment of a 5% deposit based on the 2009 calendar year purchase commitment either prior to, or not later than, 30 days after the delivery by XsunX to the reserving party of commercial samples for evaluation. The information in this paragraph is designed to summarize the general terms of the pre-sales reservation program and market opportunities. It is not intended to provide guidance about our future operating results, including revenues or profitability.

RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIOD ENDED JUNE 30, 2008 COMPARED TO THE SAME PERIOD IN 2007

Revenue:

The Company generated no revenues in the period ended June 30, 2008 as compared to zero during the same period in 2007. Additionally, there was no associated cost of sales.

Operating Expenses:

Operating Expenses for the three month period ended June 30, 2008 totaled $738,887. This represents an increase of $172,083 as compared to the same period in 2007 which totaled $566,804. The increase in operating expenses between the periods is primarily attributable to increased consulting expenses relating to the planning and preparation for our manufacturing facility, increased legal fees associated with the conclusion of several contract negotiations, an economic enterprise zone application payment, higher public relations expenditures and higher wages and salaries cost. These increased costs were partially offset by reductions in R&D expense associated with a settlement with a research services provider MVSystems, Inc.. A comparative analysis of the period to period performance is provided below.

Option and Warrant Expenses:

Option and Warrant expense for the three month period ending June 30, 2008 were $0 and were the same as compared to the same period in 2007.

Salaries and Wages:

Salaries and wages for the three month period ended June 30, 2008 were $316,813 as compared to $220,736 during the same period in 2007. The increase of $96,077 was driven by an increase to salaries related to retention of key employees and the addition of new employee's necessary for the launch of our plans to build and establish thin film solar module manufacturing infrastructure.

Research and Development:

Research and Development expense for the three month period ended June 30, 2008 were $(234,242) a reduction of $249,555 resulting from accrued R&D expenses that were no longer payable due to the terms of an agreement with MVSystems, Inc. in which the balance of accounts payable to MVSystems, Inc. under R&D expenses was reduced to zero. This total compared to $15,313 for the same period in 2007.

Professional Services:

Public relations and marketing expense for the three month period ended June 30, 2008 totaled $107,798 as compared to $24,660 during this same period in 2007. The increase of $83,138 represents an increased utilization of public relations services to work towards establishing brand awareness during the period.

Consulting expenses for the three month period ended June 30, 2008 totaled $127,274 as compared to $59,462 during the same period in 2007, an increase of $67,812. This increase is largely due to higher utilization of consulting services associated with the planning and preparation for our manufacturing facility.

Legal and accounting fees for the three month period ended June 30, 2008 totaled $168,939 as compared to $84,501 during the same period in 2007. This represents an increase of $84,438 largely driven by increased expenditures for legal services related to equipment and materials contract review and the efforts to defend claims by a third party for payment of fees for claimed services.

Travel and Entertainment:

Expenses for travel and entertainment were $74,361 for the three month period ended June 30, 2008. This compared to $52,718 for the same period in 2007. This increase of $21,643 was driven by increased business development trips to monitor progress on the Oregon manufacturing facility an at vendor facilities.

The net loss for the three months ended June 30, 2008 was $(687,143) as compared to a net loss of ($495,635) for the same period 2007. The increased net loss of $191,508 includes (i) The operating expense changes discussed above, (ii) and a decrease in interest income of $19,814 resulting from the investment of cash balances in interest bearing accounts.

Non-cash expenses included in the above is depreciation of $23,893.

The Company incurred a net loss of $(687,143) and net loss of ($495,635) in the three-month period ended June 30, 2008 and 2007 respectively. The associated net loss per share was $(0.004) for the three month period ended June 30, 2008 and $(0.003) for the same period in 2007. The Company anticipates the trend of losses to continue in future quarters until the Company can recognize sales of significance of which there is no assurance.

RESULTS OF OPERATIONS FOR THE NINE-MONTH PERIOD ENDED JUNE 30, 2008 COMPARED TO THE SAME PERIOD IN 2007

Revenue:

The Company generated no revenues in the period ended June 30, 2008 as compared to $6,880 revenue in the same period in 2007. Additionally, there was no associated cost of sales.

Operating Expenses:

Operating Expenses for the nine month period ended June 30, 2008 totaled $3,367,473. This represents an increase of $1,678,139 as compared to the same period in 2007 which totaled $1,689,334. The increase was primarily due to none cash warrant and option expenses of $1,308,865 and an increase to operational expenses primarily attributable to the Company's efforts to establish manufacturing facilities and to commercialize its technologies. A comparative analysis of the period to period performance is provided below.

Option and Warrant Expenses:

Option and Warrant expense for the nine month period ending June 30, 2008 were $1,308,865 and were higher by $1,308,501 from the same period in 2007 which were $364. This increase is due to additional options and warrants issued by the company under its 2007 Stock Option Plan and the implementation of SFAS No.
123(R), ("Share-Based Payment" (SFAS No. 123(R)). This statement replaces SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123).

Salaries and Wages:

Salaries and wages for the nine month period ended June 30, 2008 were $835,999 as compared to $578,616 during the same period in 2007. The increase of $257,383 was driven by an increase to salaries related to retention of key employees and the addition of employees necessary for the launch of our plans to build and establish thin film solar module manufacturing infrastructure.

Research and Development:

Research and Development expense for the nine month period ended June 30, 2008 totaled $(69,994) a reduction to expense of $(396,544) as compared to $326,550 for the same period in 2007, resulting from accrued R&D expenses that were no longer payable due to the terms of an agreement with MVSystems, Inc. in which the balance of accounts payable to MVSystems, Inc. under R&D expenses was reduced to zero.

Professional Services:

Public relations and marketing expense for the nine month period ended June 30, 2008 totaled $311,459 as compared to $51,960 during this same period in 2007. The increase of $259,499 represents an increased utilization of public relations services to work towards establishing brand awareness during the period.

Consulting expenses for the nine month period ended June 30, 2008 totaled $263,502 as compared to $102,044 during the same period in 2007, an increase of $161,498. This increase is largely due to higher utilization of consulting services associated with the planning and preparation for our manufacturing facility.

Legal and accounting fees for the nine month period ended June 30, 2008 totaled $241,399 as compared to $194,078 during the same period in 2007. This represents an increase of $47,321 largely driven by separation agreement and settlement legal work.

Travel and Entertainment:

Expenses for travel and entertainment were $143,560 for the nine month period ended June 30, 2008. This compared to $128,299 for the same period in 2007. The increase of $15,261 was driven by increased business development trips to monitor progress on the Oregon manufacturing facility an at vendor facilities.

The net loss for the nine months ended June 30, 2008 was ($3,284,334) as compared to a net loss of ($1,369,276) for the same period 2007. The increased net loss of $1,915,558 includes (i) The operating expense changes discussed above including non-cash expenses associated with the issuance of Options and Warrants of $1,308,501, (ii) and a decrease in interest income of $72,896 resulting from the investment of cash balances in interest bearing accounts.

The Company incurred net losses of ($3,284,334) and ($1,369,276) in the nine-month period ended June 30, 2008 and 2007 respectively. The associated net loss per share was $(0.02) for the nine month period ended June 30, 2008 and $(0.009) for the same period in 2007. The Company anticipates the trend of losses to continue in future quarters until the Company can recognize sales of significance of which there is no assurance.

LIQUIDITY AND CAPITAL RESOURCES

The Company had cash at June 30, 2008 of $4,577,784, and inventory of $1,632,625and no pre-paid expenses as compared to cash of $1,773,748, restated inventory from production prototype machine net of depreciation of $1,720,875 and prepaid expenses in the amount of $54,377 as of September 30, 2007. The Company had a net working capital of $6,061,927 as compared to a net working capital of $3,236,312 at September 30, 2007. Cash flow used in operating activities during the six-month period ended, June 30, 2008, was ($1,896,206) as compared to a use of cash of ($1,504,259) for the same period 2007. The increase in cash used in operations of $391,947 included (i) increased non-cash expense relating to option and warrant expenses of $1,308,865, (ii) the operation changes discussed above and (iii)offset by the reduced accounts payable resulting from an agreement for the reduction of liabilities with a research services provider MVSystems, Inc. The current period ended June 30, 2008 also included a non-cash depreciation expense of $101,342 compared to $60,587 in the same period in 2007.

Contractual Obligations are shown in the following table -

Contractual Obligations                                     Payments Due by Period
                                                                                                 More
                                                     Less than       1 - 3        3 - 5          than
                                        Total         1 Year        Years         Years        5 Years
Long Term Obligations                           -              -           -             -              -
Capital Lease                                   -              -           -             -              -
Operating Lease(1)                        185,419         70,015     115,404             -              -
Purchase Obligations(2)                31,616,603     31,616,603           -             -              -
Other Long Term Liabilities
Reflected on the Registrant's
Balance Sheet Under GAAP                        -
To                                     31,802,022     31,686,618     115,404             -              -

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

(2) Represents the total contractual purchase obligations represented by purchase orders for manufacturing equipment. The total obligations under these agreements is $33,948,800 of which, $2,332,197 has been paid on the obligations. Future scheduled payments are tied to progress made on the delivery of the associated equipment. The timing of these payments may vary due to the progress actually made by the vendors.

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

For the nine-months ended June 30, 2008, the Company's capital needs have been met from the use of working capital provided by the proceeds of (i) the issuance of common stock for cash raising gross proceeds of $5,700,000 which occurred in the nine-months ended June 30, 2008, $285,000 from the issuance of stock warrants and $1,673,251 from the early repayment of principal and associated interest from the Sencera Note and other historical financings which occurred in the fiscal year ended September 30, 2007.

At June 30, 2008, we had cash and cash equivalents of $4,577,784 and net working capital of $6,061,927.

DEVELOPMENT STAGE COMPANY

The Company is currently working to transition from the development stage to the implementation phase and as of the period ended June 30, 2008, did not have any significant revenues. 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. As such, the Company's ability to secure additional financing on a timely basis is critical to its ability to stay in business and to pursue planned operational activities.

On November 1, 2007, XsunX signed a $21 million common stock purchase agreement with Fusion Capital Fund II, LLC, an Illinois limited liability Company ("Fusion Capital"). Upon signing the agreement, XsunX received $1,000,000 from Fusion Capital as an initial purchase under the $21 million commitment in exchange for 3,333,332 shares of our common stock. The shares were issued in a transaction exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. Concurrently with entering into the common stock purchase agreement, we entered into a registration rights agreement with Fusion Capital. Under the registration rights agreement, we agreed to file a registration statement related to the transaction with the U.S. Securities & Exchange Commission ("SEC") covering the shares that have been issued or may be issued to Fusion Capital under the common stock purchase agreement. After the SEC declared effective the registration statement related to the transaction, which occurred on April 10, 2008, we have the right over a 25-month period to sell our shares of common stock to Fusion Capital, from time to time, in amounts up to $1 million per sale, depending on certain conditions as set forth in the agreement, up to the full aggregate commitment of $21 million.

The Company has the right over a 25-month period to receive $80,000 every two business days under the Purchase Agreement with Fusion Capital unless our stock price equals or exceeds $0.30, in which case we can sell greater amounts to Fusion Capital as the price of our common stock increases. Fusion Capital shall not have the right or the obligation to purchase any shares of our common stock on any business day that the market price of our common stock is less than $0.20.

While we have been able to raise capital in a series of equity and debt offerings in the past 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.

Irrespective of whether the Company's cash assets prove to be inadequate to meet the Company's operational needs, the Company might seek to compensate providers of services by issuances of stock in lieu of cash.