Item 2. MANAGEMENT'S DISCUSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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:

(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

XsunX develops and markets proprietary Thin Film Photovoltaic (TFPV) solar cell designs and core solar cell manufacturing systems, enabling licensees to manufacture TFPV 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 original equipment manufacturers ("OEM") customers to address the expanding market for thin film solar products.

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.

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 success in servicing their regional solar markets. XsunX does not sell thin film solar materials directly to the consumer market.

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.

Results of Operations for the Three-Month Period Ended December 31, 2006 Compared to the Same Period in 2005

The Company generated no revenues in the period ended December 31, 2006 as compared to $8,000 for the same period in 2005.

The Company incurred operating expenses totaling $616,523 for the three months ending December 31, 2006 compared to $1,566,356 for the same period in 2005. Primary sources for the decrease to operating expense of $949,833 include: Warrant Option Expenses decreased by $951,250 to zero as compared to $951,250 in the same period in 2005. Loan Fees decreased by $213,000 to zero from $213,000 during the same period in 2005. Research and Development expenses decreased by $64,658 to $209,945 as compared to $274,603 for the same period in 2005, Legal and Accounting increased $43,668 to $77,418 as compared to $33,750 for the same period in 2005. Salaries increased by $96,386 to 140,615 from $44,229 in the same period in 2005 as a result of the addition by the Company of three management level employees. The decrease in overall expenses was primarily attributable to the absence of a one-time expense of $951,250 associated with the grant of in-the-money warrants from the sale by the Company of secured convertible debentures in the period ended December 31, 2005 not present in the three month period ending December 31, 2006. The $616,523 operating expenses includes non-cash charges of $27,047 for depreciation.

The net loss for the three months ending December 31, 2006 was ($583,680) as compared to a net loss of ($1,595,533) for the same period 2005. The decrease of $1,011,853 includes (i) prior period one-time expenditures of $951,250 associated with Warrant Option Expenses, (ii) a prior period one-time expenditure of $213,000 associated with loan fees, partially offset by (iii) Salaries increased by $96,386 and Legal and Accounting increased by 43,668

The Company incurred net loses of ($583,680) and ($1,595,533) in the three-month period ended December 31, 2006 and 2005 respectively. The associated net loss per share was nominal in the three-month period ended December 31, 2006 and 2005. 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 December 31, 2006 of $3,692,139 and prepaid expenses in the amount of $349,117 as compared to cash of $4,305,105 and prepaid expenses in the amount of $394,117 as of September 30, 2006. The Company had a net working capital of $3,478,830 as compared to a working capital of $4,065,523 at September 30, 2006. Cash flow used in operating activities during the three-month period ended, December 31, 2006, was ($584,606) as compared to using ($1,848,956) for the same period 2005. The decrease of cash used in operations of $1,264,350 included (i) the decrease in net loss resulting primarily from prior period one-time expenditures of $951,250 associated with Warrant Option Expenses not incurred in the current period, (ii) a prior period one-time expenditure of $213,000 associated with loan fees not incurred in the current period. This decrease in Net Loss was partially offset by (i) Salary increases of $96,386 and Legal and Accounting increases of 43,668. The current period ending December 31, 2006 also included a non-cash deprecation expense of $27,047 while there was no deprecation expense in the period ending December 31, 2005.

For the three-months ended December 31, 2006, 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 Debenture conversion and; (ii) the issuance of Common Stock for warrant conversion which both occurred in the fiscal year ended September 30, 2006.

We had, at December 31, 2006, cash and cash equivalents of $4,041,256 and net working capital of $3,478,830.

DEVELOPMENT STAGE COMPANY

The Company is in the development stage and as of the period ending December 31, 2006, did not have any significant revenues. 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. 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.

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.