Item 2. MANAGEMENT'S DISCUSION AND ANALYSIS 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:

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

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 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.

In March XsunX launched efforts to expand the scope of business development efforts to include the planned establishment of a solar energy module manufacturing facility to be located in the United States. The Company intends to employ the use of certain of its technologies, and those under license, for use in the manufacture and sale of finished solar energy products. The Company is planning the manufacturing line around a 5 megawatt modular design allowing operations to scale from 5 to 20 to 50 megawatts of production capacity in 2008, 2009, and 2010 respectively.

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 MARCH 31, 2007 COMPARED TO THE SAME PERIOD IN 2006

The Company generated minimal revenues of$6,880 from a licensing agreement in the period ended March 31, 2007 as compared to zero revenue in the same period in 2006.

The Company incurred operating expenses totaling $500,935 for the three months ending March 31, 2007 compared to $392,195 for the same period in 2006. Primary sources for the increase to operating expense of $108,740 include:
Salaries increased by $175,435 to 216,105 from $40,670 in the same period in 2006 as a result of the continued growth of the company workforce., Insurance expense increase $31,049 to $31.049 as compared to $0 in the same period in 2006, Travel expenses increased $31,214 to $38,376 from $7,162 as compared to the same period in 2006. These were offset by a decrease in Research and Development expenses of $129,173 to $109,236 as compared to $238,409 for the same period in 2006.The $1,356,484 operating expenses includes non-cash charges of $16,714 for depreciation.

The net loss for the three months ending March 31, 2007 was ($442,904) as compared to a net loss of ($551,471) for the same period 2006. The decreased net loss of $108,567 includes (i) The operating expense changes discussed above, (ii) a decrease in interest expense of $160,136 related to the conversion of a debenture in the prior period to common stock, and (iii) an increase in interest income of $50,291 resulting from the investment of cash balances in interest bearing accounts and the Sencera note.

The Company incurred net losses of ($442,904) and ($551,471) in the three-month period ended March 31, 2007 and 2006 respectively. The associated net loss per share was $(0.01) for the three month period ended March 31, 2007

and $(0.01) for the same period in 2006. 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 SIX-MONTH PERIOD ENDED MARCH 31, 2007 COMPARED TO THE SAME PERIOD IN 2006

The Company generated minimal revenues of $6,880 from a licensing agreement in the period ended March 31, 2007 as compared to $8,000 in the same period in 2006.

The Company incurred operating expenses totaling $1,122,530 for the six months ending March 31, 2007 compared to $1,648,550 for the same period in 2006. Primary sources for the decrease to operating expense of $526,020 include:
A decrease of $950,886 in Warrant Option Expenses and a decrease in Research and Development expenses of $82,681 to $320,331 for the six months ending March 31, 2007 as compared to $403.012 for the same period in 2006. These decreases to operating expenses were partially offset by an increase to Salaries of $272,981 to $357,880 from $84,899 in the same period in 2006 as a result of the continued growth of the company workforce, Insurance expense increase $34,585 to $34,585 as compared to $0 in the same period in 2006, Travel expenses increased $63,559 to $75,581 from $12,022 as compared to the same period in 2006, Advertising increased $43,031 to $43,470 as compared to 439 in the same period in 2006, Legal and Accounting fees increased by $40,968 to $109,577 as compared to $68,609 in the same period in 2006 and Consulting increased $42,542 to $42,542 as compared to zero in 2006. The $1,122,530 operating expenses includes non-cash charges of $34,667 for depreciation.

The net loss for the six months ending March 31, 2007 was ($1,031,245) as compared to a net loss of ($1,799,826) for the same period 2006. The decreased net loss of $768,581 includes (i) The operating expense changes discussed above, (ii) a decrease in interest expense of $160,136 related to the conversion of a debenture in the prior period to common stock, and (iii) an increase in interest income of $83,545 resulting from the investment of cash balances in interest bearing accounts and the Sencera note.

The Company incurred net losses of ($1,031,245) and ($1,799,826) in the six-month period ended March 31, 2007 and 2006 respectively. The associated net loss per share was $(0.01) for the three month period ended March 31, 2007 and $(0.01) for the same period in 2006. 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 March 31, 2007 of $2,401,422 and prepaid expenses in the amount of $311,896 as compared to cash of $4,305,105 and prepaid expenses in the amount of $349,117 as of September 30, 2006. The Company had a net working capital of $2,210,609 as compared to a working capital of $4,065,523 at September 30, 2006. Cash flow used in operating activities during the six-month period ended, March 31, 2007, was ($1,042,194) as compared to a use of cash of ($792,161) for the same period 2006. The increase of cash used in operations of $250,033 included (i) the decrease in net loss resulting primarily from decreased interest expense of $160,136 relating to the conversion of a debenture in prior periods to common stock, (ii) increased cash flow on interest income of $50,291 of which $19,288 was a non-cash accrual of interest relating to the Sencera note, and (iii) the operation changes discussed above. The current period ending March 31, 2007 also included a non-cash depreciation expense of $43,761 compared to $27,647 in the same period in 2006. Additionally, a non-cash reduction to expense of $12,000 was realized in the period associated with the return of common shares for services that were not performed.

For the six-months ended March 31, 2007, 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 March 31, 2007, cash and cash equivalents of $2,713,318 and net working capital of $2,210,609.

DEVELOPMENT STAGE COMPANY

The Company is in the development stage and as of the period ending March 31, 2007, 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.