CAUTIONARY AND FORWARD LOOKING STATEMENTS

In addition to statements of historical fact, this Form 10-KSB 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-QSB and Annual Report on Form 10-KSB filed by the Company in 2004 and any Current Reports on Form 8-K filed by the Company.

CURRENT OVERVIEW

XsunX, Inc. is developing Power Glass(TM) - an innovative solar technology that allows glass windows to produce electricity from the power of the sun. This process for producing electricity is known as Photovoltaics. Photovoltaic ("PV") is the science of capturing and converting solar energy into electricity.

Using patented solar cell design and manufacturing processes, the Company is focused on the development of very thin semi-transparent coatings on thin-film flexible plastics that create large area monolithic solar cell structures that you can see through. This semi-transparency makes Power Glass(TM) glazing desirable for placing over glass, plastics, and other see-through structures.

The Company's strategy is to complete the development and commercialization of its Power Glass(TM) process and enter into licensing

agreements with channel partners who will manufacture and distribute products made with the XsunX solar electric glass technology. In this manner, it is anticipated that glass manufactures will incorporate the Power Glass(TM) technology into their manufacturing process as an "original equipment manufacturer" (OEM) and sell the finished product to their consumers.

For the year ended September 30, 2004, the Company had and continues to focus on the development and refinement commercially appealing solar cell designs, proprietary manufacturing processes and facilities design that could be provided to our future licensees as turn-key solutions for the mass production of Power Glass(TM) films. A large part of the Company's investment capital was used for product development. However, this may begin to shift towards marketing, sales, and business development in this new fiscal year ending September 30, 2005.

The Company intends to continue to make investments in the commercial development of its patents and evolving technologies through the course of the next year. To finance these development efforts we are currently engaged in on going capital formation efforts to fund the Company's projected deficits for development costs in the current year.

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

RESULTS OF OPERATIONS FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2004, COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30, 2003

The Company incurred expenses totaling $1,528,193 in 2004 compared to $145,890 in 2003. The increase of $1,382,303 resulted from an increase of $482,303 in normal and customary operational expenses and $900,000 in non-reoccurring one time expenses as follows; research and product development expenses increased by $129,493 as compared to $0 expenses incurred for the same period in 2003. Technical consulting expenses increase by $194,700 during the twelve months ended September 30, 2004 to $319,900 from $125,200. This included $300,000 in non-cash expenses associated with the grant of in-the-money warrants as consideration for technical and scientific consulting services for which we may make similar arrangements for in future periods (see "Item 12. Certain Relationships and Related Party Transactions"). And, there was a one-time expense of $900,000 associated with the grant of in-the-money warrants as consideration for a technology sharing and license agreement granting a royalty free license to the Company (see "Item 12. Certain Relationships and Related Party Transactions"). General and administrative expenses increased by $138,734 in the twelve months ended September 30, 2004 to $178,800 from $20,690 in 2003. The increase of $158,110 in general and administrative expenses was primarily the result of an increase to operational expenses associated with the development of the Company's business. The Company had no revenues in 2002 or 2003.

For the twelve months ended September 30, 2004, the Company's consolidated net loss was $(1,509,068) as compared to a consolidated net loss of $(145,868) for the same period ended September 30, 2003. $900,000 of this consolidated net loss was attributable to a one-time expense associated with the

grant of in-the-money warrants as consideration for a technology sharing and license agreement granting a royalty free license to the Company (see "Item 12. Certain Relationships and Related Party Transactions"). The net loss per share was less than $(0.01) for the twelve month period ended September 30, 2004.

Due to the Company's change in primary business focus and new business opportunities these historical results may not necessarily be indicative of results to be expected for any future period. As such, future results of the Company may differ significantly from previous periods. Since inception in 1997 the Company has accumulated deficits totaling ($4,328,445) to September 30, 2004.

LIQUIDITY AND CAPITAL RESOURCES

Working capital (deficit) at September 30, 2004 was $(38,819) as compared to $2,346 at September 30, 2003. There were no cash flows provided by operations during the twelve months ended September 30, 2004.

Cash and cash equivalents at September 30, 2004 were $57,344, an increase of $54,998 from September 30, 2003. During the year ended, September 30, 2004, the Company used $1,436,630 net cash in operating activities as compared to using $27,372 net cash for the year ended, September 30, 2003. This increase of net cash used in operations of $1,409,258 was primarily a result of an increase in operational costs associated with the development of the Company's business plan and a one-time expense of $900,000 associated with the grant of in-the-money warrants as consideration for a technology sharing and license agreement granting a royalty free license to the Company (see "Item 12. Certain Relationships and Related Party Transactions").

For the twelve months ended, June 30, 2004, the Company's capital needs have primarily been met from the proceeds of (i) private placements of unregistered common stock pursuant to Rule 506 of Regulation D of the Securities Act of 1933, as amended (the "Act"), to accredited investors at $0.15 per share which raised gross proceeds of $4,500; (ii) private placements of common stock made by the Company pursuant to Regulation S of the Act, at a variable price ranging from 25% to 30% of the closing bid price on the date of the purchase of the stock, which raised gross proceeds of $278,170; and (iii) loans to the Company with a remaining balance $1,225. Total cash provided by financing activities during the year ended September 30, 2004 decreased to $283,895 from $562,420 during the period ended September 30, 2003. The decrease of $278,525 was mainly attributable to a decrease of $336,970 in the use of stock for the payment of services in non-cash transactions.

During the year ended, September 30, 2004, we used $12,267 for investing activities as compared to $3, for the year ended, September 30, 2003. The increased use of cash for investing activities resulted from an increase in the acquisition of assets in the form of equipment and trademark rights.

We had, at September 30, 2003, working capital of $57,344. We anticipate that there will not be sufficient cash generated from operations in the current year necessary to fund our current and anticipated cash requirements. We plan to obtain additional financing from equity and debt placements. We have been able to raise capital in a series of equity and debt offerings in the past. While there can be no assurances that we will be able to obtain such additional financing, on terms acceptable to us and at the times required, or at all, we believe that sufficient capital can be raised in the foreseeable future.

NET OPERATING LOSS

For federal income tax purposes, we have net operating loss carry forwards of approximately $4,328,445 as of September 30, 2004. These carry forwards will begin to expire in 2010. The use of such net operating loss carry forwards to be offset against future taxable income, if achieved, may be subject to specified annual limitations.