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<p style="margin: 0pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="margin: 0pt"><font style="font: 10pt Times New Roman, Times, Serif"></font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><b>NOTE 1 — SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES</b></p>
<p style="margin: 0pt"><font style="font: 10pt Times New Roman, Times, Serif"></font></p>
<p style="margin: 0pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"><b>Description
of Business</b></font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">ZBB
Energy Corporation (“ZBB” or the “Company”) develops and manufactures distributed energy storage solutions
based upon the Company’s proprietary zinc bromide rechargeable electrical energy storage technology and proprietary power
electronics systems.  A developer and manufacturer of modular, scalable and environmentally friendly power systems (“ZBB
Enersystem™”), ZBB Energy was founded in 1998 and is headquartered in Wisconsin, USA with offices also located in
Perth, Western Australia. As described in Note 2 in January 2011 the Company acquired substantially all of the net assets of Tier
Electronics LLC and as described in Note 3 in December 2011 the Company contributed assets to ZBB Powersav Holdings Limited which
contributed assets to a joint venture in China.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">The
Company provides advanced electrical power management platforms targeted at the growing global need for distributed renewable
energy, energy efficiency, power quality, and grid modernization.  The Company and its power electronics subsidiary,
Tier Electronics LLC, have developed a portfolio of intelligent power management platforms that directly integrate multiple renewable
and conventional onsite generation sources with rechargeable zinc bromide flow batteries and other storage technology. The Company
also offers advanced systems to directly connect wind and solar equipment to the grid and systems that can form various levels
of micro-grids.  Tier Electronics participates in the energy efficiency markets through its hybrid vehicle control systems,
and power quality markets with its line of regulation solutions. Together, these platforms solve a wide range of electrical system
challenges in global markets for utility, governmental, commercial, industrial and residential end customers.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">The
consolidated financial statements include the accounts of the Company and those of its wholly-owned subsidiaries, ZBB Technologies,
Inc. and Tier Electronics LLC which operate manufacturing facilities in Menomonee Falls, Wisconsin, and ZBB Technologies, Ltd.
which has its advanced engineering and development facility in Perth, Australia and its sixty percent owned subsidiary ZBB Powersav
Holdings Limited located in Hong Kong which was formed in connection with the Company’s investment in the China Joint Venture.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"><b>Interim
Financial Data</b></font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for
complete financial statements. In the opinion of management, all adjustments (consisting only of adjustments of a normal and recurring
nature) considered necessary for fair presentation of the results of operations have been included. Operating results for the
six month period ended December 31, 2011 are not necessarily indicative of the results that might be expected for the year ending
June 30, 2012.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">The
condensed consolidated balance sheet at June 30, 2011 has been derived from audited financial statements at that date, but does
not include all of the information and disclosures required by GAAP. For a more complete discussion of accounting policies and
certain other information, refer to the Company’s annual report filed on Form 10-K for the fiscal year ended June 30, 2011.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"><b>Basis
of Presentation</b></font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">The
accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries and have
been prepared in accordance with GAAP. All significant intercompany accounts and transactions have been eliminated upon consolidation.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"><b>Cash
and Cash Equivalents</b></font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">The
Company considers all highly liquid investments with maturities of three months or less to be cash equivalents.  The
Company maintains its cash deposits at financial institutions predominately in the United States and Australia.  At
times such balances may exceed insurable limits.  The Company has not experienced any losses in such accounts.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"><b>Accounts
Receivable</b></font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">The
Company records allowances for doubtful accounts based on customer-specific analysis and general matters such as current assessments
of past due balances and economic conditions.  The Company writes off accounts receivable against the allowance when
they become uncollectible.  Accounts receivable are stated net of an allowance for doubtful accounts of $80,000, as
of December 31, 2011 and June 30, 2011.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">  </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"><b>Inventories</b></font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">Inventories
are stated at the lower of cost (first-in, first-out method) or market and consist of raw materials, work in progress and finished
goods held for resale.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">Costs
incurred in bringing each product to its present location and conditions are accounted for as follows:</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<table cellspacing="0" cellpadding="0" style="width: 100%">
<tr style="vertical-align: top">
<td style="width: 48px; font: 10pt/115% Calibri, Halvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">●  </font></td>
<td style="font: 10pt/115% Times New Roman, Times, Serif"><font style="font: 10pt Times New Roman, Times, Serif">Raw materials
– purchased cost of direct material</font></td></tr>
<tr style="vertical-align: top">
<td style="font: 10pt/115% Calibri, Halvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">●  </font></td>
<td style="font: 10pt/115% Times New Roman, Times, Serif"><font style="font: 10pt Times New Roman, Times, Serif">Finished
goods and work-in-progress – purchased cost of direct material plus direct labor plus a proportion of manufacturing
overheads.</font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">The
Company evaluates the recoverability of its slow moving or obsolete inventories at least quarterly. The Company estimates the
recoverable cost of such inventory by product type while considering factors such as its age, historic and current demand trends,
the physical condition of the inventory as well as assumptions regarding future demand. The Company’s ability to recover
its cost for slow moving or obsolete inventory can be affected by such factors as general market conditions, future customer demand
and relationships with suppliers.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"><b>Property,
Plant and Equipment</b></font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">Land,
building, equipment, computers and furniture and fixtures are recorded at cost.  Maintenance, repairs and betterments
are charged to expense. Depreciation is provided for all plant and equipment on a straight line basis over the estimated useful
lives of the assets.  The estimated useful lives used for each class of depreciable asset is:</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom">
<td style="width: 56%; line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="width: 23%; line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="width: 21%; border-bottom: black 1.5pt solid; line-height: 115%; text-align: center"><font style="font: 10pt Times New Roman, Times, Serif">Estimated
Useful Lives</font></td></tr>
<tr style="vertical-align: bottom">
<td colspan="2" style="line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif">Manufacturing equipment</font></td>
<td style="line-height: 115%; text-align: center"><font style="font: 10pt Times New Roman, Times, Serif">  3 - 7
years</font></td></tr>
<tr style="vertical-align: bottom">
<td colspan="2" style="line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif">Office equipment</font></td>
<td style="line-height: 115%; text-align: center"><font style="font: 10pt Times New Roman, Times, Serif">  3 - 7
years</font></td></tr>
<tr style="vertical-align: bottom">
<td colspan="2" style="line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif">Building and improvements</font></td>
<td style="line-height: 115%; text-align: center"><font style="font: 10pt Times New Roman, Times, Serif">  7 - 40
years</font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"><b>Investment
in Investee Company</b></font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">Investee
companies that are not consolidated, but over which the Company exercises significant influence, are accounted for under the equity
method of accounting. Whether or not the Company exercises significant influence with respect to an Investee depends on an evaluation
of several factors including, among others, representation on the Investee company’s board of directors and ownership level,
which is generally a 20% to 50% interest in the voting securities of the Investee company. Under the equity method of accounting,
an Investee company’s accounts are not reflected within the Company’s Consolidated Balance Sheets and Statements of
Operations; however, the Company’s share of the earnings or losses of the Investee company is reflected in the caption ‘‘Equity
in loss of investee company” in the Consolidated Statements of Operations. The Company’s carrying value in an equity
method Investee company is reflected in the caption ‘‘Investment in investee company’’ in the Company’s
Consolidated Balance Sheets.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">When
the Company’s carrying value in an equity method Investee company is reduced to zero, no further losses are recorded in
the Company’s consolidated financial statements unless the Company guaranteed obligations of the Investee company or has
committed additional funding. When the Investee company subsequently reports income, the Company will not record its share of
such income until it equals the amount of its share of losses not previously recognized.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"><b>Intangible
Assets</b></font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">Intangible
assets generally result from business acquisitions.  The Company accounted for the January 21, 2011 acquisition of Tier
Electronics LLC by assigning the purchase price to identifiable tangible and intangible assets and liabilities.  Assets
acquired and liabilities assumed were recorded at their estimated fair values.  Intangible assets consist of a non-compete
agreement, license agreement, and trade secrets.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">Amortization
is recorded for intangible assets with determinable lives. Intangible assets are amortized using the straight line method over
the three year estimated useful lives of the respective assets.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"><b>Goodwill</b></font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">Goodwill
is recognized as the excess cost of an acquired entity over the net amount assigned to assets acquired and liabilities assumed.
Goodwill is not amortized but reviewed for impairment annually as of June 30 each year or more frequently if events or changes
in circumstances indicate that its carrying value may be impaired.  These conditions could include a significant change
in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant
portion of a reporting unit.  The Company has determined that it has two reporting units – ZBB Energy Storage
and Power Electronics Systems, and Tier Electronics Power Conversion Systems.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">Testing
for the impairment of goodwill involves a two-step process. The first step of the impairment test requires the comparing of a
reporting units fair value to its carrying value. If the carrying value is less than the fair value, no impairment exists and
the second step is not performed. If the carrying value is higher than the fair value, there is an indication that impairment
may exist and the second step must be performed to compute the amount of the impairment. In the second step, the impairment is
computed by estimating the fair values of all recognized and unrecognized assets and liabilities of the reporting unit and comparing
the implied fair value of reporting unit goodwill with the carrying amount of that unit’s goodwill.  Based on
this method, the Company determined fair value as evidenced by market capitalization, and concluded that there was no need for
an impairment charge as of December 31, 2011 and June 30, 2011.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"><b>Impairment
of Long-Lived Assets</b></font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">In
accordance with FASB ASC topic 360, "Impairment or Disposal of Long-Lived Assets," the Company assesses potential impairments
to its long-lived assets including property, plant and equipment and intangible assets when there is evidence that events or changes
in circumstances indicate that the carrying value may not be recoverable.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">If
such an indication exists, the recoverable amount of the asset is compared to the asset’s carrying value. Any excess of
the asset’s carrying value over its recoverable amount is expensed in the statement of operations. In assessing value in
use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate.  Management
has determined that there were $0 and $219,213 long-lived assets impaired as of December 31, 2011 and June 30, 2011, respectively
(see Note 6).</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"><b>Warranty
Obligations</b></font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">The
Company typically warrants its products for twelve months after installation or eighteen months after date of shipment, whichever
first occurs. Warranty obligations are evaluated quarterly to determine a reasonable estimate for the replacement of potentially
defective materials of all energy storage systems that have been shipped to customers.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">While
the Company actively engages in monitoring and improving its evolving battery and production technologies, there is only a limited
product history and relatively short time frame available to test and evaluate the rate of product failure.  Should
actual product failure rates differ from the Company’s estimates, revisions are made to the estimated rate of product failures
and resulting changes to the liability for warranty obligations.  In addition, from time to time, specific warranty
accruals may be made if unforeseen technical problems arise.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">During
the year ended June 30, 2010, battery stack manufacturing issues were discovered as a result of an internal test failure.  As
a result, the Company has implemented several manufacturing process changes to eliminate the potential for future failures and
has adjusted its warranty obligations accordingly.  We will adjust our warranty rates in future periods as these processes
are implemented and tested.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">As
of December 31, 2011 and June 30, 2011, included in the Company’s accrued expenses were $122,803 and $413,203, respectively,
related to warranty obligations.  Such amounts are included in accrued expenses in the accompanying consolidated balance
sheets.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">The
following is a summary of accrued warranty activity:</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<table cellpadding="0" cellspacing="0" style="width: 100%; font: 10pt Times New Roman, Times, Serif">
<tr style="vertical-align: bottom">
<td style="text-align: center"> </td><td style="padding-bottom: 1pt"> </td>
<td colspan="7" style="text-align: center; border-bottom: Black 1pt solid">Six Months and Year Ended</td></tr>
<tr style="vertical-align: bottom">
<td style="text-align: center"> </td><td style="padding-bottom: 1pt"> </td>
<td colspan="3" style="text-align: center; border-bottom: Black 1pt solid">December 31, 2011</td><td style="padding-bottom: 1pt"> </td>
<td colspan="3" style="text-align: center; border-bottom: Black 1pt solid">June 30, 2011</td></tr>
<tr style="vertical-align: bottom">
<td style="text-align: center"> </td><td> </td>
<td colspan="3" style="text-align: center"> </td><td> </td>
<td colspan="3" style="text-align: center"> </td></tr>
<tr style="vertical-align: bottom">
<td style="width: 56%">Beginning balance</td><td style="width: 8%"> </td>
<td style="width: 1%; text-align: left">$</td><td style="width: 12%; text-align: right">413,203</td><td style="width: 4%; text-align: left"> </td><td style="width: 5%"> </td>
<td style="width: 1%; text-align: left">$</td><td style="width: 12%; text-align: right">520,000</td><td style="width: 1%; text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td>Accruals for warranties during the period</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">—  </td><td style="text-align: left"> </td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">176,662</td><td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td>Settlements during the perioid</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">(50,400</td><td style="text-align: left">)</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">(283,459</td><td style="text-align: left">)</td></tr>
<tr style="vertical-align: bottom">
<td style="padding-bottom: 1pt">Adjustments relating to preexisting warranties</td><td style="padding-bottom: 1pt"> </td>
<td style="border-bottom: Black 1pt solid; text-align: left"> </td><td style="border-bottom: Black 1pt solid; text-align: right">(240,000</td><td style="padding-bottom: 1pt; text-align: left">)</td><td style="padding-bottom: 1pt"> </td>
<td style="border-bottom: Black 1pt solid; text-align: left"> </td><td style="border-bottom: Black 1pt solid; text-align: right">—  </td><td style="padding-bottom: 1pt; text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td style="padding-bottom: 2.5pt">Ending balance</td><td style="padding-bottom: 2.5pt"> </td>
<td style="border-bottom: Black 2.5pt double; text-align: left">$</td><td style="border-bottom: Black 2.5pt double; text-align: right">122,803</td><td style="padding-bottom: 2.5pt; text-align: left"> </td><td style="padding-bottom: 2.5pt"> </td>
<td style="border-bottom: Black 2.5pt double; text-align: left">$</td><td style="border-bottom: Black 2.5pt double; text-align: right">413,203</td><td style="padding-bottom: 2.5pt; text-align: left"> </td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">  </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"><b>Revenue
Recognition</b></font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">Revenues
are recognized when persuasive evidence of a contractual arrangement exits, delivery has occurred or services have been rendered,
the seller’s price to buyer is fixed and determinable, and collectability is reasonably assured. The portion of revenue
related to installation and final acceptance, is deferred until such installation and final customer acceptance are completed.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">For
sales arrangements containing multiple elements (products or services), revenue relating to undelivered elements is deferred at
the estimated fair value until delivery of the deferred elements. To be considered a separate element, the product or service
in question must represent a separate unit under SEC Staff Accounting Bulletin 104, and fulfill the following criteria: the delivered
item(s) has value to the customer on a standalone basis; there is objective and reliable evidence of the fair value of the undelivered
item(s); and, if the arrangement includes a general right of return relative to the delivered item(s), delivery or performance
of the undelivered item(s) is considered probable and substantially in our control. If the arrangement does not meet all criteria
above, the entire amount of the transaction is deferred until all elements are delivered. Revenue from time and materials based
service arrangements is recognized as the service is performed.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">The
portion of revenue related to engineering and development is recognized ratably upon delivery of the goods or services pertaining
to the underlying contractual arrangement or revenue is recognized as certain activities are performed by the Company over the
estimated performance period.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">The
Company charges shipping and handling fees when products are shipped or delivered to a customer, and includes such amounts in
net revenues. The Company reports its revenues net of estimated returns and allowances.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">Revenues
from government funded research and development contracts are recognized proportionally as costs are incurred and compared to
the estimated total research and development costs for each contract. In many cases, the Company is reimbursed only a portion
of the costs incurred or to be incurred on the contract. Government funded research and development contracts are generally multi-year,
cost-reimbursement and/or cost-share type contracts. The Company is reimbursed for reasonable and allocable costs up to the reimbursement
limits set by the contract.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">Total
revenues of $440,921 and $2,078,778 were recognized for the three and six months ended December 31, 2011, respectively, and were
comprised of one significant customer (81% of total revenues).    Total revenues of $234,681 were recognized
for both the three and six months ended December 31, 2010, and were comprised of two significant customers (100% of total revenues).
The Company had one significant customer with an outstanding accounts receivable balance of $226,702 (82% of accounts receivable)
and $171,622 (100% of accounts receivable) at December 31, 2011 and June 30, 2011, respectively.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"><b>Engineering
and Development Revenues</b></font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">On
April 8, 2011, the Company entered into a Collaboration Agreement (the “Collaboration Agreement”) with Honam Petrochemical
Corporation (“Honam”), a division of LOTTE Petrochemical, pursuant to which the Company agreed with Honam to collaborate
on the further technical development of the Company’s third generation Zinc Bromide flow battery module (the “Version
3 Battery Module”).  Pursuant to the Collaboration Agreement, Honam is required to pay us a total of $3,000,000
dollars as follows:  (1) $1,000,000 within 10 days following the execution of the Collaboration Agreement (subsequently
received on April 9, 2011); (2) $500,000 by June 30, 2011 (subsequently received on June 30, 2011); (3) $1,200,000 by October
10, 2011 (subsequently received on October 10, 2011) and (4) $300,000 within 10 days after a single V3 Battery Module test station  is
set up at Honam’s research and development center.  The Company has recognized $2,300,000 as revenue as of December
31, 2011 based on performance milestones achieved and deferred the balance of $400,000 of the $1,000,000 upfront payment which
is being recognized as certain activities are performed by the Company over the estimated 15 month performance period.  The
unamortized balance of deferred revenue will be recognized over the estimated remaining performance period (6 months).  Pursuant
to the Collaboration Agreement, the parties are required to negotiate a license agreement under which upon the completion of the
collaboration project and the receipt by the Company of all payments due under the Collaboration Agreement, the Company shall
grant to Honam: (1) a fully paid-up, exclusive and royalty-free license to sell and manufacture the Version 3 Battery Module in
Korea and (2) non-exclusive rights to sell the Version 3 Battery Module in Japan, Thailand, Taiwan, Malaysia, Vietnam and Singapore.  In
connection with such non-exclusive rights, Honam will be required to pay a royalty to the Company.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">Included
in engineering and development revenues were $200,000 and $1,600,000 respectively, for the three and six months ended December
31, 2011 related to the Collaboration Agreement.  Engineering and development costs related to the collaboration agreement
totaled $0 and $481,107 for the three and six months ended December 31, 2011.  The financial statements for the three
and six months ended December 31, 2010 did not include engineering and development revenue and costs related to the Collaboration
Agreement.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">On
June 29, 2007, ZBB Technologies Ltd (“ZBB Technologies”), an Australian subsidiary of the Company, and the Commonwealth
of Australia (the “Commonwealth”) represented by and acting through the Department of Environment and Water Resources
(the “Department”), entered into an agreement for project funding under the Advanced Electricity Storage Technologies
(“AEST”) program (the “AEST agreement”) whereby the Department agreed to provide funding to ZBB Technologies
for the development of an energy storage system to be used to demonstrate the storage and supply of renewable energy generated
from photovoltaic solar panels and wind turbines already operational at the Commonwealth Scientific and Industrial Research Organization’s
(“CSIRO”) Newcastle Energy Centre in New South Wales, Australia.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">  </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">The
AEST agreement provided for a three year term under which the Commonwealth provided $2.6 million in project funding over several
periods, totaling $1.35 million in year one, $1.01 million in year two and $0.24 million in year three, as certain development
progress “milestones” were met by ZBB Technologies to the satisfaction of the Commonwealth.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">The
Company owns any assets, including battery storage systems, acquired with the funding from the contract.  The Company
granted the government of Australia a free, non-exclusive license to intellectual property created in the project for their own
internal use.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">The
Company fulfilled its obligations under the AEST agreement and received a final payment of $184,939 in December 2010 which was
recognized as engineering and development revenues during the three months ended December 31, 2010.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">As
of December 31, 2011 and June 30, 2011, the Company had no unbilled amounts from engineering and development contracts. The Company
received $437,408 and $971,949 in customer payments from engineering and development contract revenue,  representing
deposits in advance of performance of the allowable work, as of December 31, 2011 and June 30, 2011, respectively.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"><b>Advanced
Engineering and Development Expenses</b></font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">The
Company expenses advanced engineering and development costs as incurred. These costs consist primarily of labor, overhead, and
materials to build prototype units, materials for testing, develop manufacturing processes and include consulting fees and other
costs.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">To
the extent these costs are separately identifiable, incurred and funded by advanced engineering and development type agreements
with outside parties; they are shown separately on the consolidated statements of operations as a “cost of engineering and
development revenues.”</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"><b>Stock-Based
Compensation</b></font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">The
Company measures all “Share-Based Payments", including grants of stock options, restricted shares and restricted stock
units, to be recognized in its consolidated statement of operations based on their fair values on the grant date, consistent with
FASB ASC topic 718, “Stock Compensation,” guidelines.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">Accordingly,
the Company measures share-based compensation cost for all share-based awards at the fair value on the grant date and recognition
of share-based compensation over the service period for awards that are expected to vest. The fair value of stock options is determined
based on the number of shares granted and the price of the shares at grant, and calculated based on the Black-Scholes valuation
model.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">The
Company compensates its outside directors primarily with restricted stock units (“RSUs”) rather than cash.  The
RSUs were classified as liability awards as of June 30, 2010 because the RSUs were to be paid in cash upon vesting. On November
10, 2010, the June 30, 2010 RSUs were converted to stock based RSUs and were credited to additional paid-in capital. The grant
date fair value of the restricted stock unit awards was determined using the closing stock price of the Company’s common
stock on the day prior to the date of the grant, with the compensation expense amortized over the vesting period of restricted
stock unit awards, net of estimated forfeitures.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">The
Company only recognizes expense to its statements of operations for those options or shares that are expected ultimately to vest,
using two attribution methods to record expense, the straight-line method for grants with only service-based vesting or the graded-vesting
method, which considers each performance period, for all other awards. See Note 10.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"><b>Income
Taxes</b></font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">The
Company records deferred income taxes in accordance with Financial Accounting Standards Board (“FASB”) Accounting
Standard Codification (“ASC”) Topic 740, “Accounting for Income Taxes.” This ASC requires recognition
of deferred income tax assets and liabilities for temporary differences between the tax basis of assets and liabilities and the
amounts at which they are carried in the financial statements, based upon the enacted tax rates in effect for the year in which
the differences are expected to reverse. The Company establishes a valuation allowance when necessary to reduce deferred income
tax assets to the amount expected to be realized.  There were no net deferred income tax assets recorded as of December
31, 2011 and June 30, 2011.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">  </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">The
Company applies a more-likely-than-not recognition threshold for all tax uncertainties as required under ASC Topic 740, which
only allows the recognition of those tax benefits that have a greater than fifty percent likelihood of being sustained upon examination
by the taxing authorities.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">The
Company’s U.S. Federal income tax returns for the years ended June 30, 2008 through June 30, 2011 and the Company’s
Wisconsin and Australian income tax returns for the years ended June 30, 2007 through June 30, 2011 are subject to examination
by taxing authorities.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"><b>Foreign
Currency</b></font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">The
Company uses the United States dollar as its functional and reporting currency, while the Australian dollar and Hong Kong dollar
are the functional currencies of its foreign subsidiaries. Assets and liabilities of the Company’s foreign subsidiaries
are translated into United States dollars at exchange rates that are in effect at the balance sheet date while equity accounts
are translated at historical exchange rates. Income and expense items are translated at average exchange rates which were applicable
during the reporting period. Translation adjustments are accumulated in Accumulated Other Comprehensive Loss as a separate component
of Equity in the consolidated balance sheets. No gain or loss on translation is included in the net loss.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"><b>Loss
per Share</b></font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">The
Company follows the FASB ASC topic 260, “Earnings per Share,” provisions which require the reporting of both basic
and diluted earnings (loss) per share.  Basic earnings (loss) per share is computed by dividing net income (loss) available
to common stockholders by the weighted average number of common shares  outstanding for the period.  Diluted
earnings (net loss) per share reflect the potential dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock. In accordance with the FASB ASC topic 260, any anti-dilutive effects on net
income (loss) per share are excluded.  For the six months ended December 31, 2011 and December 31, 2010 there were 7,711,897
and 5,547,719 of underlying options, restricted stock units and warrants that are excluded, respectively.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"><b>Concentrations
of Credit Risk and Fair Value</b></font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">Financial
instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">The
Company maintains significant cash deposits primarily with three financial institutions, which at times may exceed insured limits.
The Company has not previously experienced any losses on such deposits. Additionally, the Company performs periodic evaluations
of the relative credit rating of these institutions as part of its investment strategy.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">Concentrations
of credit risk with respect to accounts receivable are limited due to accelerated payment terms in current customer contracts
and creditworthiness of the current customer base.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">The
carrying amounts of cash and cash equivalents, accounts receivable, other current assets, accounts payable and accrued expenses
approximate fair value due to the short-term nature of these instruments. The carrying value of bank loans and notes payable approximate
fair value based on their terms which reflect market conditions existing as of December 31, 2011 and June 30, 2011.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"><b>Comprehensive
income (loss)</b></font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">The
Company reports its comprehensive income (loss) in accordance with the FASB ASC<b> </b>topic 220 “Comprehensive Income”,
which requires presentation of the components of comprehensive earnings. Comprehensive income (loss) consists of net income (loss)
for the period plus or minus any net currency translation adjustments applicable for three and six months ended December 31, 2011
and December 31, 2010 is presented as follows:</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom">
<td style="line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td colspan="6" style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center"><font style="font: 10pt Times New Roman, Times, Serif">Three
months ended December 31,</font></td>
<td nowrap="nowrap" style="line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td colspan="6" style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center"><font style="font: 10pt Times New Roman, Times, Serif">Six
months ended December 31,</font></td>
<td nowrap="nowrap" style="line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom">
<td style="line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center"><font style="font: 10pt Times New Roman, Times, Serif">2011</font></td>
<td nowrap="nowrap" style="line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center"><font style="font: 10pt Times New Roman, Times, Serif">2010</font></td>
<td nowrap="nowrap" style="line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center"><font style="font: 10pt Times New Roman, Times, Serif">2011</font></td>
<td nowrap="nowrap" style="line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center"><font style="font: 10pt Times New Roman, Times, Serif">2010</font></td>
<td nowrap="nowrap" style="line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td></tr>
<tr style="vertical-align: bottom">
<td style="width: 52%; line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif">Net loss</font></td>
<td style="width: 1%; line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="width: 1%; line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="width: 9%; line-height: 115%; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">(2,767,540</font></td>
<td nowrap="nowrap" style="width: 1%; line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif">)</font></td>
<td style="width: 1%; line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="width: 1%; line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="width: 9%; line-height: 115%; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">(1,838,274</font></td>
<td nowrap="nowrap" style="width: 1%; line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif">)</font></td>
<td style="width: 1%; line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="width: 1%; line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="width: 9%; line-height: 115%; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">(4,442,988</font></td>
<td nowrap="nowrap" style="width: 1%; line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif">)</font></td>
<td style="width: 1%; line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="width: 1%; line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="width: 9%; line-height: 115%; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">(3,872,575</font></td>
<td nowrap="nowrap" style="width: 1%; line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif">)</font></td></tr>
<tr style="vertical-align: bottom">
<td style="line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif">Net translation adjustment</font></td>
<td style="line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">10,297</font></td>
<td nowrap="nowrap" style="line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">(4,229</font></td>
<td nowrap="nowrap" style="line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif">)</font></td>
<td style="line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">(12,209</font></td>
<td nowrap="nowrap" style="line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif">)</font></td>
<td style="line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">(23,668</font></td>
<td nowrap="nowrap" style="line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif">)</font></td></tr>
<tr style="vertical-align: bottom">
<td style="line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif">Comprehensive loss</font></td>
<td style="line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="border-bottom: black 2.25pt double; line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">(2,757,243</font></td>
<td nowrap="nowrap" style="line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif">)</font></td>
<td style="line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="border-bottom: black 2.25pt double; line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">(1,842,503</font></td>
<td nowrap="nowrap" style="line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif">)</font></td>
<td style="line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="border-bottom: black 2.25pt double; line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">(4,455,197</font></td>
<td nowrap="nowrap" style="line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif">)</font></td>
<td style="line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif"> </font></td>
<td style="border-bottom: black 2.25pt double; line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif">$</font></td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">(3,896,243</font></td>
<td nowrap="nowrap" style="line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif">)</font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"><b>Use
of Estimates</b></font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">The
preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions. These
estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. It is reasonably
possible that the estimates we have made may change in the near future. Significant estimates underlying the accompanying consolidated
financial statements include those related to:</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">  </font></p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: top">
<td style="width: 48px; line-height: 115%; font-family: Calibri, Halvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">●  </font></td>
<td style="line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif">the timing of revenue recognition;</font></td></tr>
<tr style="vertical-align: top">
<td style="line-height: 115%; font-family: Calibri, Halvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">●  </font></td>
<td style="line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif">the allowance for doubtful accounts;</font></td></tr>
</table>
<p style="font: 11pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: top">
<td style="width: 48px; line-height: 115%; font-family: Calibri, Halvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">●  </font></td>
<td style="line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif">provisions for excess and obsolete inventory;</font></td></tr>
<tr style="vertical-align: top">
<td style="line-height: 115%; font-family: Calibri, Halvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">●  </font></td>
<td style="line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif">the lives and recoverability of property,
plant and equipment and other long-lived assets, including goodwill and other intangible assets;</font></td></tr>
</table>
<p style="font: 11pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: top">
<td style="width: 48px; line-height: 115%; font-family: Calibri, Halvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">●  </font></td>
<td style="line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif">contract costs and reserves;</font></td></tr>
<tr style="vertical-align: top">
<td style="line-height: 115%; font-family: Calibri, Halvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">●  </font></td>
<td style="line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif">warranty obligations;</font></td></tr>
</table>
<p style="font: 11pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: top">
<td style="width: 48px; line-height: 115%; font-family: Calibri, Halvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">●  </font></td>
<td style="line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif">income tax valuation allowances;</font></td></tr>
<tr style="vertical-align: top">
<td style="line-height: 115%; font-family: Calibri, Halvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">●  </font></td>
<td style="line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif">stock-based compensation; and</font></td></tr>
</table>
<p style="font: 11pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: top">
<td style="width: 48px; line-height: 115%; font-family: Calibri, Halvetica, Sans-Serif; text-align: right"><font style="font: 10pt Times New Roman, Times, Serif">●  </font></td>
<td style="line-height: 115%"><font style="font: 10pt Times New Roman, Times, Serif">fair values of assets acquired and liabilities
assumed in a business combination.</font></td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"><b>Reclassifications</b></font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">Certain
amounts previously reported have been reclassified to conform to the current presentation.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"><b>Recent
Accounting Pronouncements</b></font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">In
September 2011, the FASB issued an update to ASC 350, <i>Intangibles — Goodwill and Other.</i> This ASU amends
the guidance in ASC 350-20 on testing for goodwill impairment. The revised guidance allows entities testing for goodwill impairment
to have the option of performing a qualitative assessment before calculating the fair value of the reporting unit. The ASU does
not change how goodwill is calculated or assigned to reporting units, nor does it revise the requirement to test annually for
impairment. The ASU is limited to goodwill and does not amend the annual requirement for testing other indefinite-lived intangible
assets for impairment. The ASU is effective for annual and interim goodwill impairment tests performed for fiscal years beginning
after December 15, 2011. We will adopt this ASU for our 2012 goodwill impairment testing. We do not expect this ASU to have
a material impact, if any, on our consolidated condensed financial statements.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">In
June 2011, the Financial Accounting Standards Board (FASB) issued new accounting guidance related to the presentation
of comprehensive income that eliminates the current option to report other comprehensive income and its components in the statement
of changes in equity. Under this guidance, an entity can elect to present items of net income and other comprehensive income in
one continuous statement or two consecutive statements. This guidance is effective for us beginning July 1, 2012. We do not believe
the adoption of this guidance will have a material effect on our consolidated financial statements and related disclosures.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">In
May 2011, the FASB issued updated accounting guidance related to fair value measurements and disclosures that result in common
fair value measurements and disclosures between U.S. GAAP and International Financial Reporting Standards. This guidance includes
amendments that clarify the application of existing fair value measurements and disclosures, in addition to other amendments that
change principles or requirements for fair value measurements or disclosures. This guidance is effective for us beginning January 1,
2012. We do not believe the adoption of this guidance will have a material effect on our consolidated financial statements and
related disclosures.</font></p>
<p style="margin: 0pt"></p>
<p style="margin: 0pt"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><b>NOTE 2 – BUSINESS ACQUISITION</b></p>
<p style="margin: 0pt"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">On January 21, 2011 (“Closing Date”),
the Company entered into an Asset Purchase Agreement under which the Company acquired substantially all of the net assets of Tier
Electronics LLC (“Seller”) used in connection with the Seller’s business of developing, manufacturing, marketing
and selling power electronics products for and to original equipment manufacturers in various industries.  The purchase
price was comprised of (1) a $1.35 million promissory note issued by the Company, (2) 800,000 shares of the Company’s common
stock, and (3) payment of approximately $245,000 of the Seller’s obligations.  The promissory note is in the principal
amount of $1,350,000 and bears interest at eight percent.  The principal balance of the note is payable in three equal
installments of $450,000 on the first, second and third anniversaries of the Closing Date.  Accrued interest is payable
monthly.  If the federal capital gains tax rate exceeds 15% and or the State of Wisconsin capital gains tax rate exceeds
5.425% at any time prior to the payment in full of the unpaid principal balance and accrued interest on the promissory note, then
the principal amount of the promissory note (retroactive to January 21, 2011) shall be increased by an amount equal to the product
of (a) the aggregate amount of federal and state capital gain realized by the Seller or Seller’s sole member, as applicable,
in connection with the acquisition, multiplied by (b) the difference between (i) the combined federal and State of Wisconsin capital
gains tax rate as of the date of calculation, minus (ii) the combined federal and State of Wisconsin capital gains tax rate of
20.425% as of January 21, 2011.  Any adjustment to the principal amount of the promissory note shall be effected by increasing
the amount of the last payment due under the promissory note without affecting the next regularly scheduled payment(s) under the
promissory note.  The following table reconciles the purchase price to the cash consideration paid:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">  </p>
<table cellpadding="0" cellspacing="0" style="width: 100%; font: 10pt Times New Roman, Times, Serif">
<tr style="vertical-align: bottom">
<td style="width: 70%">Total purchase price</td><td style="width: 10%"> </td>
<td style="width: 1%; text-align: left">$</td><td style="width: 18%; text-align: right">2,515,071</td><td style="width: 1%; text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td>  Less debt and equity issued to Seller:</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right"> </td><td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td>        Note payable</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">(1,350,000</td><td style="text-align: left">)</td></tr>
<tr style="vertical-align: bottom">
<td style="padding-bottom: 1pt">        Common stock</td><td style="padding-bottom: 1pt"> </td>
<td style="border-bottom: Black 1pt solid; text-align: left"> </td><td style="border-bottom: Black 1pt solid; text-align: right">(920,000</td><td style="padding-bottom: 1pt; text-align: left">)</td></tr>
<tr style="vertical-align: bottom">
<td style="padding-bottom: 1pt">           Total debt and equity issued to Seller</td><td style="padding-bottom: 1pt"> </td>
<td style="border-bottom: Black 1pt solid; text-align: left"> </td><td style="border-bottom: Black 1pt solid; text-align: right">(2,270,000</td><td style="padding-bottom: 1pt; text-align: left">)</td></tr>
<tr style="vertical-align: bottom">
<td>Total cash paid</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">245,071</td><td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td style="padding-bottom: 1pt">  Less cash acquired</td><td style="padding-bottom: 1pt"> </td>
<td style="border-bottom: Black 1pt solid; text-align: left"> </td><td style="border-bottom: Black 1pt solid; text-align: right">(19,149</td><td style="padding-bottom: 1pt; text-align: left">)</td></tr>
<tr style="vertical-align: bottom">
<td style="padding-bottom: 1pt">Acquisition of business, net of cash acquired</td><td style="padding-bottom: 1pt"> </td>
<td style="border-bottom: Black 1pt solid; text-align: left">$</td><td style="border-bottom: Black 1pt solid; text-align: right">225,922</td><td style="padding-bottom: 1pt; text-align: left"> </td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">The primary reason for the acquisition
was to add a base of business so that the Company now offers a full range of energy storage, utilization, and management solutions
that range from wind and solar converters to power quality, micro-grid systems, and hybrid electric drives for vehicles.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">The Company accounted for the acquisition
using the purchase method under U.S. GAAP.  The purchase method requires that assets acquired and liabilities assumed
in a business combination be recognized at fair value.  The Company finalized the purchase price allocation during the
three month period ended December 31, 2011.  A summary of the allocation of the assets acquired and the liabilities assumed
in connection with the acquisition based on their estimated fair values is as follows:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<table cellpadding="0" cellspacing="0" style="width: 100%; font: 10pt Times New Roman, Times, Serif">
<tr style="vertical-align: bottom">
<td style="width: 70%">Cash and cash equivalents</td><td style="width: 10%"> </td>
<td style="width: 1%; text-align: left">$</td><td style="width: 18%; text-align: right">19,149</td><td style="width: 1%; text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td>Accounts receivable</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">225,081</td><td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td>Inventories</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">772,932</td><td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td>Property and equipment</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">4,500</td><td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td>Other intangible assets</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">2,198,097</td><td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td>Accounts payable</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">(141,003</td><td style="text-align: left">)</td></tr>
<tr style="vertical-align: bottom">
<td>Accrued expenses</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">(203,823</td><td style="text-align: left">)</td></tr>
<tr style="vertical-align: bottom">
<td style="padding-bottom: 1pt">Deferred revenue</td><td style="padding-bottom: 1pt"> </td>
<td style="border-bottom: Black 1pt solid; text-align: left"> </td><td style="border-bottom: Black 1pt solid; text-align: right">(359,862</td><td style="padding-bottom: 1pt; text-align: left">)</td></tr>
<tr style="vertical-align: bottom">
<td style="padding-bottom: 1pt">Net assets acquired</td><td style="padding-bottom: 1pt"> </td>
<td style="border-bottom: Black 1pt solid; text-align: left">$</td><td style="border-bottom: Black 1pt solid; text-align: right">2,515,071</td><td style="padding-bottom: 1pt; text-align: left"> </td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">Fair value is defined as the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. The fair value of the assets and liabilities has been determined by management, with the assistance of an independent
valuation firm, and are based on significant inputs that are generally not observable in the market (level 3 measurements).  Key
assumptions that were used by management are as follows:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">Financial Assets and Liabilities</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">Accounts receivable, accounts payable and
accrued expenses, were valued at stated value, which approximates fair value.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">Inventories were valued at fair value based
on estimated net realizable value less costs to complete and sales costs.  Deferred revenues were valued at fair value
based on the amounts that will be applied as customer credits to future shipments.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">Property and Equipment</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">Property and equipment were valued based
on the estimated market value of similar equipment.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">Other Intangible Assets</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">The Company acquired certain identifiable
intangible assets as part of the transaction which included:  $310,888 in a non-compete agreement, $288,087 in a license
agreement, and $1,599,122 in a trade secrets agreement.  The fair values of these intangibles were estimated based upon
an income approach methodology. Critical inputs into the valuation model for these intangibles include estimations of expected
revenue and attrition rates, expected operating margins and capital requirements.  The other intangible assets were assigned
an estimated useful life of three years.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">Acquisition Related Expenses</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">Included in the consolidated statement
of operations for the period from January 21, 2011 (date of acquisition) to June 30, 2011 were transaction expenses aggregating
approximately $150,000 for advisory and legal costs incurred in connection with the business acquisition.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">Tier Electronics LLC operates as a wholly
owned subsidiary of the Company.  Tier Electronics LLC leases its facility from the former owner of the Seller under
a lease agreement expiring December 31, 2014.  The first year rental is $84,000 per annum and is subject to an annual
CPI adjustment.  The Company is required to pay real estate taxes and other occupancy costs related to the facility.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">In connection with this acquisition the
Company awarded inducement options to purchase a total of 750,000 shares of the Company’s common stock at an exercise price
of $1.15 to certain members of management of Tier Electronics, LLC.  The options vest as follows: (1) 420,000 will vest
in three equal annual installments beginning on December 31, 2011 based on achievement of certain revenue targets and (2) 330,000
vest in three equal annual installments beginning on January 21, 2012.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">Unaudited Pro Forma Information</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">The following unaudited pro forma financial
information summarizes the results of operations for the period indicated as if the acquisition had been completed as of July 1,
2010.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">These pro forma amounts do not purport
to be indicative of the results that would have actually been obtained if the acquisition occurred as of July 1, 2010 or that may
be obtained in the future.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<table cellpadding="0" cellspacing="0" style="width: 100%; font: 10pt Times New Roman, Times, Serif">
<tr style="vertical-align: bottom">
<td style="text-align: center"> </td><td style="font-style: italic"> </td>
<td colspan="7" style="font-style: italic; text-align: center">Unaudited</td><td style="font-style: italic"> </td>
<td colspan="7" style="font-style: italic; text-align: center">Unaudited</td></tr>
<tr style="vertical-align: bottom">
<td style="text-align: center"> </td><td style="font-style: italic; padding-bottom: 1pt"> </td>
<td colspan="7" style="font-style: italic; text-align: center; border-bottom: Black 1pt solid">Three months ended December 31,</td><td style="font-style: italic; padding-bottom: 1pt"> </td>
<td colspan="7" style="font-style: italic; text-align: center; border-bottom: Black 1pt solid">Six Months Ended December 31,</td></tr>
<tr style="vertical-align: bottom">
<td style="text-align: center"> </td><td style="padding-bottom: 1pt"> </td>
<td colspan="3" style="text-align: center; border-bottom: Black 1pt solid">2011</td><td style="padding-bottom: 1pt"> </td>
<td colspan="3" style="text-align: center; border-bottom: Black 1pt solid">2010</td><td style="padding-bottom: 1pt"> </td>
<td colspan="3" style="text-align: center; border-bottom: Black 1pt solid">2011</td><td style="padding-bottom: 1pt"> </td>
<td colspan="3" style="text-align: center; border-bottom: Black 1pt solid">2010</td></tr>
<tr style="vertical-align: bottom">
<td style="width: 40%">Revenues</td><td style="width: 3%"> </td>
<td style="width: 1%; text-align: left">$</td><td style="width: 10%; text-align: right">440,921</td><td style="width: 1%; text-align: left"> </td><td style="width: 3%"> </td>
<td style="width: 1%; text-align: left">$</td><td style="width: 10%; text-align: right">234,681</td><td style="width: 1%; text-align: left"> </td><td style="width: 3%"> </td>
<td style="width: 1%; text-align: left">$</td><td style="width: 10%; text-align: right">2,078,778</td><td style="width: 1%; text-align: left"> </td><td style="width: 3%"> </td>
<td style="width: 1%; text-align: left">$</td><td style="width: 10%; text-align: right">794,576</td><td style="width: 1%; text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td>Loss from Operations</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">(2,765,336</td><td style="text-align: left">)</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">(1,871,595</td><td style="text-align: left">)</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">(4,461,818</td><td style="text-align: left">)</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">(4,011,697</td><td style="text-align: left">)</td></tr>
<tr style="vertical-align: bottom">
<td>Net loss</td><td> </td>
<td style="text-align: left">$</td><td style="text-align: right">(2,730,310</td><td style="text-align: left">)</td><td> </td>
<td style="text-align: left">$</td><td style="text-align: right">(1,945,464</td><td style="text-align: left">)</td><td> </td>
<td style="text-align: left">$</td><td style="text-align: right">(4,405,758</td><td style="text-align: left">)</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">(4,144,573</td><td style="text-align: left">)</td></tr>
<tr style="vertical-align: bottom">
<td> </td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right"> </td><td style="text-align: left"> </td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right"> </td><td style="text-align: left"> </td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right"> </td><td style="text-align: left"> </td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right"> </td><td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td>Net Loss per share-</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right"> </td><td style="text-align: left"> </td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right"> </td><td style="text-align: left"> </td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right"> </td><td style="text-align: left"> </td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right"> </td><td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td style="padding-left: 18.75pt">Basic and diluted</td><td> </td>
<td style="text-align: left">$</td><td style="text-align: right">(0.08</td><td style="text-align: left">)</td><td> </td>
<td style="text-align: left">$</td><td style="text-align: right">(0.09</td><td style="text-align: left">)</td><td> </td>
<td style="text-align: left">$</td><td style="text-align: right">(0.14</td><td style="text-align: left">)</td><td> </td>
<td style="text-align: left">$</td><td style="text-align: right">(0.22</td><td style="text-align: left">)</td></tr>
<tr style="vertical-align: bottom">
<td> </td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right"> </td><td style="text-align: left"> </td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right"> </td><td style="text-align: left"> </td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right"> </td><td style="text-align: left"> </td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right"> </td><td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td>Weighted average shares-basic and diluted:</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right"> </td><td style="text-align: left"> </td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right"> </td><td style="text-align: left"> </td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right"> </td><td style="text-align: left"> </td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right"> </td><td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td style="padding-left: 18.75pt">Basic</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">33,681,776</td><td style="text-align: left"> </td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">20,996,322</td><td style="text-align: left"> </td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">32,089,356</td><td style="text-align: left"> </td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">18,603,353</td><td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td style="padding-left: 18.75pt">Diluted</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">33,681,776</td><td style="text-align: left"> </td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">20,996,322</td><td style="text-align: left"> </td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">32,089,356</td><td style="text-align: left"> </td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">18,603,353</td><td style="text-align: left"> </td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">Pro forma information primarily reflects
adjustments relating to interest on the promissory note and the amortization of the intangible assets acquired in the acquisition.</p>
<p style="margin: 0pt"></p>
<p style="margin: 0pt"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><b>NOTE 3 – CHINA JOINT VENTURE</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">On August 30, 2011, the Company entered
into agreements providing for establishment of a joint venture to develop, produce, sell, distribute and service advanced storage
batteries and power electronics in China (the “Joint Venture”).  Joint venture partners include PowerSav,
Inc. (“Powersav”), AnHui Xinlong Electrical Co. and Wuhu Huarui Power Transmission & Transformation Engineering
Co.  The Joint Venture was established upon receipt of certain governmental approvals from China which were received
in November 2011.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">The Joint Venture operates through a jointly-owned
Chinese company located in Wuhu City, Anhui Province named Anhui Meineng Store Energy Co., Ltd. (“AHMN”).  AHMN
intends to initially assemble and ultimately manufacture the Company’s products for sale in the power management industry
on an exclusive basis in mainland China and on a non-exclusive basis in Hong Kong and Taiwan.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">In connection with the Joint Venture, on
August 30, 2011 the Company and certain of its subsidiaries entered into the following agreements:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">● Joint Venture Agreement of
Anhui Meineng Store Energy Co., Ltd. (the “China JV Agreement”) by and between ZBB PowerSav Holdings Limited, a Hong
Kong limited liability company (“ Holdco”), and Anhui Xinrui Investment Co., Ltd, a Chinese limited liability company;
and</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">● Limited Liability Company
Agreement of ZBB PowerSav Holdings Limited by and between ZBB Cayman Corporation and PowerSav, Inc. (the “Holdco Agreement”).</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">  </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">In connection with the Joint Venture, upon
establishment of AHMN, the Company and certain of its subsidiaries entered into the following agreements:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">● Management Services Agreement
by and between AHMN and Holdco (the “Management Services Agreement”);</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">● License Agreement by and between
Holdco and AHMN (the “License Agreement”); and</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">● Research and Development Agreement
by and between the Company and AHMN (the “Research and Development Agreement”).</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">Pursuant to the China JV Agreement, it
is anticipated that AHMN  will be capitalized with approximately $13.6 million of equity capital.  The Company’s
only capital contributions to the Joint Venture will be a contribution of technology to AHMN via the License Agreement and $200,000
in cash.  The Company’s indirect interest in AHMN equals approximately 33%.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">The Company’s investment in AHMN
will be made through Holdco, a holding company formed with PowerSav.  Pursuant to the Holdco Agreement, the Company agreed
to contribute to Holdco technology via a license agreement with an agreed upon value of approximately $4.4 million and $200,000
in cash in exchange for a 60% equity interest and PowerSav agreed to contribute to Holdco $3.3 million in cash in exchange for
a 40% equity interest.  The initial capital contributions (consisting of the Company’s technology contribution
and one half of required cash contributions) were made in December 2011. For financial reporting purposes, Holdco’s assets
and liabilities are consolidated with those of the Company and Powersav’s 40% interest in Holdco is included in the Company’s
consolidated financial statements as a noncontrolling interest.  AHMN had a net loss from continuing operations and a
net loss of $171,949 of which $58,710 is attributable to the investee on the Company’s condensed consolidated statements
of operations (unaudited).</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">The Company has the right to appoint a
majority of the members of the Board of Directors of Hong Kong Holdco and Hong Kong Holdco has the right to appoint a majority
of the members of the Board of Directors of AHMN.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">Pursuant to the Management Services Agreement
Holdco will provide certain management services to the AHMN in exchange for a management services fee equal to five percent of
AHMN’s net sales for the first five years and three percent of AHMN’s net sales for the subsequent three years.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">Pursuant to the License Agreement, Holdco
granted to AHMN (1) an exclusive royalty-free license to manufacture and distribute the Company’s ZBB Enerstore™, Zinc
Bromide flow battery, version three (v3) battery (50KW) and ZBB Enersection™, POWR PECC (up to 250KW) (the “Products”)
in mainland China in the power supply management industry and (2) a non-exclusive royalty-free license to manufacture and distribute
the Products in Hong Kong and Taiwan in the power supply management industry.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">Pursuant to the Research and Development
Agreement, AHMN may request the Company to provide research and development services upon commercially reasonable terms and conditions.  AHMN
would pay the Company’s fully-loaded costs and expense incurred in providing such services.</p>
<p style="margin: 0pt"></p>
<p style="margin: 0pt"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><b>NOTE 4 - GOING CONCERN</b></p>
<p style="margin: 0pt"></p>
<p style="margin: 0pt"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">The consolidated financial statements as
of December 31, 2011 and for the six months then ended have been prepared on the basis of a going concern which contemplates that
the Company will be able to realize assets and discharge liabilities in the normal course of business. Accordingly, they do not
give effect to adjustments that would be necessary should the Company be required to liquidate its assets. The Company incurred
a net loss of $4,405,758 for the six months ended December 31, 2011 and as of December 31, 2011 has an accumulated deficit of $59,749,441
and total ZBB Energy Corporation equity of $4,290,887.  The ability of the Company to meet its total liabilities of $8,859,719
and to continue as a going concern is dependent upon the availability of future funding and achieving profitability.  The
accompanying financial statements do not include any adjustments that might result from the outcome of these uncertainties.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">The Company believes, with the financing
sources in place and with other potential financing sources, that it will be able to raise the capital necessary to fund operations
through at least June 30, 2012.  The Company’s sources of additional capital in the year ending June 30, 2012 include
the raising of additional capital pursuant to an agreement with Socius CG II, Ltd. (“Socius”), as described in Note
12. As of December 31, 2011, there was approximately $4.2 million of availability under this facility.  However, this
facility places certain restrictions on our ability to draw on it.  For example, our ability to submit a tranche notice
under the Socius Agreement is subject to certain conditions including that: (1) a registration statement covering our sale of shares
of common stock to Socius in connection with the tranche is effective and (2) the issuance of such shares would not result in Socius
and its affiliates beneficially owning more than 9.99% of our common stock.  These limitations have been carefully considered
by the Company and notwithstanding such limitations management has successfully utilized this facility and believes it will continue
to be able to do so.  As described in Note 12, during the three months ended December 31, 2011, the Company delivered
a tranche notice to Socius pursuant to which Socius purchased $750,000 of Series A preferred stock.  However, there can
be no assurances that unforeseen circumstances will not jeopardize the Company’s ability to draw on this and other potential
financing sources.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">Accordingly, the Company is currently exploring
various alternatives including debt and equity financing vehicles, strategic partnerships, and/or government programs that may
be available to the Company, as well as trying to generate additional sales and increase margins.  As described in Note
1, in April 2011, the Company entered into a Collaboration Agreement with Honam Petrochemical Corporation (“Honam”),
a division of LOTTE Petrochemical, pursuant to which during the nine months ended December 31, 2011 Honam paid the Company a total
of $2.7 million.  Pursuant to the Collaboration Agreement Honam is required to pay an additional $300,000 within 10 days
after a V3 single stack test station is set up at Honam’s research and development center.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">As described in Note 12, in the six months
ended December 31, 2011 the Company raised approximately $1.8 million through the sale of shares of Company common stock to certain
investors. As described in Note 17, the Company raised approximately $2,895,000 through the sale of shares of Company stock to
certain investors in February 2012.  However, the Company has no commitments to obtain any additional funds, and there
can be no assurance such funds will be available on acceptable terms or at all.  If the Company is unable to obtain additional
funding and improve its operations, the Company’s financial condition and results of operations may be materially adversely
affected and the Company may not be able to continue operations.</p>
<p style="margin: 0pt"></p>
<p style="margin: 0pt"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><b>NOTE 5 - INVENTORIES</b></p>
<p style="margin: 0pt"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">Inventories are comprised of the following
as of December 31, 2011 and June 30, 2011:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<table cellpadding="0" cellspacing="0" style="width: 100%; font: 10pt Times New Roman, Times, Serif">
<tr style="vertical-align: bottom">
<td style="text-align: center"> </td><td style="padding-bottom: 1pt"> </td>
<td colspan="3" style="text-align: center; border-bottom: Black 1pt solid">December 31, 2011</td><td style="padding-bottom: 1pt"> </td>
<td colspan="3" style="text-align: center; border-bottom: Black 1pt solid">June 30, 2011</td></tr>
<tr style="vertical-align: bottom">
<td style="width: 56%">Raw materials</td><td style="width: 8%"> </td>
<td style="width: 1%; text-align: left">$</td><td style="width: 12%; text-align: right">1,737,214</td><td style="width: 4%; text-align: left"> </td><td style="width: 5%"> </td>
<td style="width: 1%; text-align: left">$</td><td style="width: 12%; text-align: right">1,146,720</td><td style="width: 1%; text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td style="padding-bottom: 1pt">Work in progress</td><td style="padding-bottom: 1pt"> </td>
<td style="border-bottom: Black 1pt solid; text-align: left"> </td><td style="border-bottom: Black 1pt solid; text-align: right">1,000,269</td><td style="padding-bottom: 1pt; text-align: left"> </td><td style="padding-bottom: 1pt"> </td>
<td style="border-bottom: Black 1pt solid; text-align: left"> </td><td style="border-bottom: Black 1pt solid; text-align: right">439,130</td><td style="padding-bottom: 1pt; text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td style="padding-bottom: 2.5pt">Total</td><td style="padding-bottom: 2.5pt"> </td>
<td style="border-bottom: Black 2.5pt double; text-align: left">$</td><td style="border-bottom: Black 2.5pt double; text-align: right">2,737,483</td><td style="padding-bottom: 2.5pt; text-align: left"> </td><td style="padding-bottom: 2.5pt"> </td>
<td style="border-bottom: Black 2.5pt double; text-align: left">$</td><td style="border-bottom: Black 2.5pt double; text-align: right">1,585,850</td><td style="padding-bottom: 2.5pt; text-align: left"> </td></tr>
</table>
<p style="margin: 0pt"></p>
<p style="margin: 0pt"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><b>NOTE 6– PROPERTY, PLANT &
EQUIPMENT</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">Property, plant, and equipment are comprised
of the following as of December 31, 2011 and June 30, 2011:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<table cellpadding="0" cellspacing="0" style="width: 100%; font: 10pt Times New Roman, Times, Serif">
<tr style="vertical-align: bottom">
<td style="text-align: center"> </td><td style="padding-bottom: 1pt"> </td>
<td colspan="3" style="text-align: center; border-bottom: Black 1pt solid">December 31, 2011</td><td style="padding-bottom: 1pt"> </td>
<td colspan="3" style="text-align: center; border-bottom: Black 1pt solid">June 30, 2011</td></tr>
<tr style="vertical-align: bottom">
<td style="width: 56%">Land</td><td style="width: 8%"> </td>
<td style="width: 1%; text-align: left">$</td><td style="width: 12%; text-align: right">217,000</td><td style="width: 3%; text-align: left"> </td><td style="width: 6%"> </td>
<td style="width: 1%; text-align: left">$</td><td style="width: 12%; text-align: right">217,000</td><td style="width: 1%; text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td>Building and improvements</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">3,334,131</td><td style="text-align: left"> </td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">2,559,266</td><td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td>Manufacturing equipment</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">4,336,065</td><td style="text-align: left"> </td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">2,901,912</td><td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td>Office equipment</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">302,499</td><td style="text-align: left"> </td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">217,074</td><td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td style="padding-bottom: 1pt">Construction in process</td><td style="padding-bottom: 1pt"> </td>
<td style="border-bottom: Black 1pt solid; text-align: left"> </td><td style="border-bottom: Black 1pt solid; text-align: right">150,623</td><td style="padding-bottom: 1pt; text-align: left"> </td><td style="padding-bottom: 1pt"> </td>
<td style="border-bottom: Black 1pt solid; text-align: left"> </td><td style="border-bottom: Black 1pt solid; text-align: right">1,215,400</td><td style="padding-bottom: 1pt; text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td style="text-indent: 0.25in">Total, at cost</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">8,340,318</td><td style="text-align: left"> </td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">7,110,652</td><td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td style="padding-bottom: 1pt">Less, accumulated depreciation</td><td style="padding-bottom: 1pt"> </td>
<td style="border-bottom: Black 1pt solid; text-align: left"> </td><td style="border-bottom: Black 1pt solid; text-align: right">(2,614,907</td><td style="padding-bottom: 1pt; text-align: left">)</td><td style="padding-bottom: 1pt"> </td>
<td style="border-bottom: Black 1pt solid; text-align: left"> </td><td style="border-bottom: Black 1pt solid; text-align: right">(2,343,781</td><td style="padding-bottom: 1pt; text-align: left">)</td></tr>
<tr style="vertical-align: bottom">
<td style="padding-bottom: 2.5pt">Property, Plant & Equipment, Net</td><td style="padding-bottom: 2.5pt"> </td>
<td style="border-bottom: Black 2.5pt double; text-align: left">$</td><td style="border-bottom: Black 2.5pt double; text-align: right">5,725,411</td><td style="padding-bottom: 2.5pt; text-align: left"> </td><td style="padding-bottom: 2.5pt"> </td>
<td style="border-bottom: Black 2.5pt double; text-align: left">$</td><td style="border-bottom: Black 2.5pt double; text-align: right">4,766,871</td><td style="padding-bottom: 2.5pt; text-align: left"> </td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">During the year ended June 30, 2011, manufacturing
equipment previously used in production and development activities were identified as impaired or had reached the end of their
respective useful lives due to changing product and manufacturing technologies.  Upon write-down the manufacturing equipment
and accumulated depreciation accounts were adjusted accordingly and $219,213 was charged to operations during the years ended June
30, 2011.  The adjustments were reported as impairment and other equipment charges.  For the three and six
months ended December 31, 2011 the Company has not identified any equipment as impaired or having reached the end of its respective
life.</p>
<p style="margin: 0pt"></p>
<p style="margin: 0pt"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><b>NOTE 7– INTANGIBLE ASSETS</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">Intangible assets are comprised of the
following as of December 31, 2011 and June 30, 2011:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">  </p>
<table cellpadding="0" cellspacing="0" style="width: 100%; font: 10pt Times New Roman, Times, Serif">
<tr style="vertical-align: bottom">
<td style="text-align: center"> </td><td style="padding-bottom: 1pt"> </td>
<td colspan="3" style="text-align: center; border-bottom: Black 1pt solid">December 31, 2011</td><td style="padding-bottom: 1pt"> </td>
<td colspan="3" style="text-align: center; border-bottom: Black 1pt solid">June 30, 2011</td></tr>
<tr style="vertical-align: bottom">
<td style="width: 56%">Non-compete agreement</td><td style="width: 8%"> </td>
<td style="width: 1%; text-align: left">$</td><td style="width: 12%; text-align: right">310,888</td><td style="width: 3%; text-align: left"> </td><td style="width: 6%"> </td>
<td style="width: 1%; text-align: left">$</td><td style="width: 12%; text-align: right">300,000</td><td style="width: 1%; text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td>License agreement</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">288,087</td><td style="text-align: left"> </td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">278,000</td><td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td style="padding-bottom: 1pt">Trade secrets</td><td style="padding-bottom: 1pt"> </td>
<td style="border-bottom: Black 1pt solid; text-align: left"> </td><td style="border-bottom: Black 1pt solid; text-align: right">1,599,122</td><td style="padding-bottom: 1pt; text-align: left"> </td><td style="padding-bottom: 1pt"> </td>
<td style="border-bottom: Black 1pt solid; text-align: left"> </td><td style="border-bottom: Black 1pt solid; text-align: right">1,543,922</td><td style="padding-bottom: 1pt; text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td style="text-indent: 0.25in">Total, at cost</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">2,198,097</td><td style="text-align: left"> </td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">2,121,922</td><td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td style="padding-bottom: 1pt">Less, accumulated amortization</td><td style="padding-bottom: 1pt"> </td>
<td style="border-bottom: Black 1pt solid; text-align: left"> </td><td style="border-bottom: Black 1pt solid; text-align: right">(689,978</td><td style="padding-bottom: 1pt; text-align: left">)</td><td style="padding-bottom: 1pt"> </td>
<td style="border-bottom: Black 1pt solid; text-align: left"> </td><td style="border-bottom: Black 1pt solid; text-align: right">(310,415</td><td style="padding-bottom: 1pt; text-align: left">)</td></tr>
<tr style="vertical-align: bottom">
<td style="padding-bottom: 2.5pt">Intangible Assets, Net</td><td style="padding-bottom: 2.5pt"> </td>
<td style="border-bottom: Black 2.5pt double; text-align: left">$</td><td style="border-bottom: Black 2.5pt double; text-align: right">1,508,119</td><td style="padding-bottom: 2.5pt; text-align: left"> </td><td style="padding-bottom: 2.5pt"> </td>
<td style="border-bottom: Black 2.5pt double; text-align: left">$</td><td style="border-bottom: Black 2.5pt double; text-align: right">1,811,507</td><td style="padding-bottom: 2.5pt; text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td> </td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right"> </td><td style="text-align: left"> </td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right"> </td><td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td>Estimated amortization expense for fiscal periods subsequent to December 31, 2011 are as follows:</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right"> </td><td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td> </td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right"> </td><td style="text-align: left"> </td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right"> </td><td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td>2012</td><td> </td>
<td style="text-align: left">$</td><td style="text-align: right">363,475</td><td style="text-align: left"> </td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right"> </td><td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td>2013</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">732,699</td><td style="text-align: left"> </td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right"> </td><td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td style="padding-bottom: 1pt">2014</td><td style="padding-bottom: 1pt"> </td>
<td style="border-bottom: Black 1pt solid; text-align: left"> </td><td style="border-bottom: Black 1pt solid; text-align: right">411,945</td><td style="padding-bottom: 1pt; text-align: left"> </td><td style="padding-bottom: 1pt"> </td>
<td style="border-bottom: Black 1pt solid; text-align: left"> </td><td style="border-bottom: Black 1pt solid; text-align: right"> </td><td style="padding-bottom: 1pt; text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td style="padding-bottom: 2.5pt"> </td><td style="padding-bottom: 2.5pt"> </td>
<td style="border-bottom: Black 2.5pt double; text-align: left">$</td><td style="border-bottom: Black 2.5pt double; text-align: right">1,508,119</td><td style="padding-bottom: 2.5pt; text-align: left"> </td><td style="padding-bottom: 2.5pt"> </td>
<td style="border-bottom: Black 2.5pt double; text-align: left"> </td><td style="border-bottom: Black 2.5pt double; text-align: right"> </td><td style="padding-bottom: 2.5pt; text-align: left"> </td></tr>
</table>
<p style="margin: 0pt"></p>
<p style="margin: 0pt"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"><b>NOTE
8 – GOODWILL</b></font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">The
Company acquired ZBB Technologies, Inc., a wholly-owned subsidiary, through a series of transactions in March 1996.  The
goodwill amount of $1.134 million, the difference between the price paid for ZBB Technologies, Inc. and the net assets of the
acquisition, amortized through fiscal 2002, resulted in the net goodwill amount of $803,079 as of December 31, 2011 and June 30,
2011.</font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif"> </font></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><font style="font: 10pt Times New Roman, Times, Serif">The
Company accounts for goodwill in accordance with FASB ASC topic 350-20, “Intangibles - Goodwill and Other - Goodwill”
under which goodwill and other intangible assets deemed to have indefinite lives are not amortized but are subject to annual impairment
tests. The implied fair value of goodwill is the amount determined by deducting the estimated fair value of all tangible and identifiable
intangible net assets of the reporting unit to which goodwill has been allocated from the estimated fair value of the reporting
unit. If the recorded value of goodwill exceeds its implied value, an impairment charge is recorded for the excess.</font></p>
<p style="margin: 0pt"></p>
<p style="margin: 0pt"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><b>NOTE 9 – BANK LOANS AND NOTES
PAYABLE</b></p>
<p style="margin: 0pt"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">The Company's debt consisted of the following
as of December 31, 2011 and June 30, 2011:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<table cellpadding="0" cellspacing="0" style="width: 100%; font: 10pt Times New Roman, Times, Serif">
<tr style="vertical-align: bottom">
<td style="text-align: center"> </td><td style="padding-bottom: 1pt"> </td>
<td colspan="3" style="text-align: center; border-bottom: Black 1pt solid">December 31, 2011</td><td style="padding-bottom: 1pt"> </td>
<td colspan="3" style="text-align: center; border-bottom: Black 1pt solid">June 30, 2011</td></tr>
<tr style="vertical-align: bottom">
<td style="width: 56%">Bank loans and notes payable-current</td><td style="width: 8%"> </td>
<td style="width: 1%; text-align: left">$</td><td style="width: 12%; text-align: right">909,560</td><td style="width: 2%; text-align: left"> </td><td style="width: 7%"> </td>
<td style="width: 1%; text-align: left">$</td><td style="width: 12%; text-align: right">779,088</td><td style="width: 1%; text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td style="padding-bottom: 1pt">Bank loans and notes payable-long term</td><td style="padding-bottom: 1pt"> </td>
<td style="border-bottom: Black 1pt solid; text-align: left"> </td><td style="border-bottom: Black 1pt solid; text-align: right">3,654,717</td><td style="padding-bottom: 1pt; text-align: left"> </td><td style="padding-bottom: 1pt"> </td>
<td style="border-bottom: Black 1pt solid; text-align: left"> </td><td style="border-bottom: Black 1pt solid; text-align: right">3,937,056</td><td style="padding-bottom: 1pt; text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td style="padding-bottom: 2.5pt">Total</td><td style="padding-bottom: 2.5pt"> </td>
<td style="border-bottom: Black 2.5pt double; text-align: left">$</td><td style="border-bottom: Black 2.5pt double; text-align: right">4,564,277</td><td style="padding-bottom: 2.5pt; text-align: left"> </td><td style="padding-bottom: 2.5pt"> </td>
<td style="border-bottom: Black 2.5pt double; text-align: left">$</td><td style="border-bottom: Black 2.5pt double; text-align: right">4,716,144</td><td style="padding-bottom: 2.5pt; text-align: left"> </td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">On January 21, 2011 the Company entered
into a promissory note for $1,350,000 with TE Holdings Group, LLC in connection with the acquisition of the net assets of Tier
Electronics LLC.  The promissory note is in the principal amount of $1,350,000 and bears interest at eight percent.  The
principal balance of the note is payable in three equal installments of $450,000 on the first, second and third anniversaries of
the promissory note.  Accrued interest is payable monthly. If the federal capital gains tax rate exceeds 15% and or the
State of Wisconsin capital gains tax rate exceeds 5.425% at any time prior to the payment in full of the unpaid principal balance
and accrued interest on the promissory note, then the principal amount of the promissory note (retroactive to January 21, 2011)
shall be increased by an amount equal to the product of (a) the aggregate amount of federal and state capital gain realized by
the Seller or Seller’s sole member, as applicable, in connection with the acquisition, multiplied by (b) the difference between
(i) the combined federal and State of Wisconsin capital gains tax rate as of the date of calculation, minus (ii) the combined federal
and State of Wisconsin capital gains tax rate of 20.425% as of January 21, 2011.  Any adjustment to the principal amount
of the promissory note shall be effected by increasing the amount of the last payment due under the promissory note without affecting
the next regularly scheduled payment(s) under the promissory note.  The loan was amended in January 2012.  The
initial payment of $450,000 to be made on January 21, 2012 will be made in three equal installments of $150,000 on February 21,
March 21 and April 7, 2012.  Interest will accrue and be paid monthly on the unpaid balance in accordance with the original
agreement.  The outstanding principal balance was $1,350,000 at December 31, 2011 and June 30, 2011.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">On April 7, 2010 the Company entered into
a loan agreement for $1,300,000 with the Wisconsin Department of Commerce.  Payments of principal and interest under
this loan are deferred until May 31, 2012.  The interest rate is 2%.  Payments of $22,800 per month are required
starting June 1, 2012 with a final payment due on May 1, 2017.  Borrowings were not received until July 2010.  The
loan is collateralized by the equipment purchased with the loan proceeds and substantially all assets of the Company not otherwise
collateralized.  The Company is required to maintain and increase a specified number of employees, and the interest rate
is increased in certain cases for failure to meet this requirement.  The outstanding principal balance was $1,300,000
at December 31, 2011 and June 30, 2011 respectively.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">On July 1, 2009 the Company entered into
a loan agreement to finance new production equipment.  The $156,000 bank note was collateralized by specific equipment,
interest at 5.99%.  The note with a balance of $107,155 as of June 30, 2010 was paid off during June 2011.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">On May 14, 2008 the Company entered into
two loan agreements to refinance its building and land in Menomonee Falls, Wisconsin:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">The first loan requires a fixed monthly
payment of principal and interest at a rate of .25% below the prime rate, subject to a floor of 5% as of June 30, 2011 and 2010
with any principal balance due at maturity on June 1, 2018 and collateralized by the building and land.  The outstanding
principal balance was $741,816 and $763,338 at December 31, 2011 and June 30, 2011, respectively.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">The second loan is a secured promissory
note guaranteed by the U.S. Small Business Administration, requiring monthly payments of principal and interest at a rate of 5.5%
until May 1, 2028.   The outstanding principal balance was $779,729 and $794,074 at December 31, 2011 and June 30,
2011, respectively.  The loan is collateralized by a mortgage on the building and land.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">On November 28, 2008 the Company entered
into a loan agreement with a bank.  The note is collateralized by specific equipment, requiring monthly payments of $21,000
of principal and interest; rate equal to the prime rate subject to a floor of 4.25%; maturity date of July 1, 2012. The outstanding
principal balance was $392,731 and $508,733 at December 31, 2011 and June 30, 2011, respectively.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">An equipment loan with a balance of $48,900
as of June 30, 2010 was paid in full in November 2010.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">Maximum aggregate annual principal payments
for fiscal periods subsequent to December 31, 2011 are as follows:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<table cellpadding="0" cellspacing="0" style="width: 100%; font: 10pt Times New Roman, Times, Serif">
<tr style="vertical-align: bottom">
<td style="width: 70%">2012</td><td style="width: 10%"> </td>
<td style="width: 1%; text-align: left">$</td><td style="width: 18%; text-align: right">626,570</td><td style="width: 1%; text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td>2013</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">1,021,838</td><td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td>2014</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">815,883</td><td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td>2015</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">346,466</td><td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td>2016</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">356,327</td><td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td style="padding-bottom: 1pt">2017 and thereafter</td><td style="padding-bottom: 1pt"> </td>
<td style="border-bottom: Black 1pt solid; text-align: left"> </td><td style="border-bottom: Black 1pt solid; text-align: right">1,397,193</td><td style="padding-bottom: 1pt; text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td style="padding-bottom: 2.5pt"> </td><td style="padding-bottom: 2.5pt"> </td>
<td style="border-bottom: Black 2.5pt double; text-align: left">$</td><td style="border-bottom: Black 2.5pt double; text-align: right">4,564,277</td><td style="padding-bottom: 2.5pt; text-align: left"> </td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">The loan agreements with the bank require
the Company to meet certain operating ratios.  The Company was not in compliance with such covenants as of December 31,
2011, for which a waiver was obtained from the bank on June 27, 2011 which waived the covenants through June 29, 2012.</p>
<p style="margin: 0pt"></p>
<p style="margin: 0pt"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><b>NOTE 10 – EMPLOYEE/DIRECTOR EQUITY
INCENTIVE PLANS</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">During the six months ended December 31,
2011 and 2010, the Company’s results of operations include compensation expense for stock options granted and restricted
shares vested under its equity incentive plans. The amount recognized in the financial statements related to stock-based compensation
was $644,640 and $310,788, based on the amortized grant date fair value of options during the six months ended December 31, 2011
and 2010, respectively.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">At the annual meeting of shareholders held
on November 10, 2010, the Company’s shareholders approved the Company’s 2010 Omnibus Long-Term Incentive Plan (the
“Omnibus Plan”). The Omnibus Plan authorizes the board of directors or a committee thereof, to grant the following
types of equity awards under the Omnibus Plan:  Incentive Stock Options (“ISOs”), Non-qualified Stock Options
(“NSOs”), Stock Appreciation Rights (“SARs”), Restricted Stock, Restricted Stock Units (“RSUs”),
cash- or stock-based Performance awards (as defined in the Omnibus Plan) and other stock-based awards. Four million shares of common
stock are reserved for issuance under the Omnibus Plan.  In connection with the adoption of the Omnibus Plan the Company’s
Board of Directors froze the Company’s other stock option plans and no further grants may be made under those plans.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">On November 10, 2010, (1) a total of 511,143
RSUs were granted to the Company’s directors in payment of directors fees through November 2011 pursuant to the Company’s
Director Compensation Policy, (2) a total of 574,242 RSUs previously issued to the Company’s directors pursuant to this policy
and which provided for cash settlement were converted to stock settled RSUs, and (3) 315,000 RSUs were granted in total to a consultant
and to the Company’s President and CEO.  On November 9, 2011, an additional 548,051 RSUs were granted to the Company’s
directors in payment of directors fees through November 2012.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">During the six months ended December
31, 2011 options to purchase 654,500 shares were granted to employees exercisable at prices from $0.59 to $1.16 and exercisable
at various dates through December 2019.  As of December 31, 2011, an additional 991,064 shares are available to be issued
under the Omnibus Plan.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">On January 21, 2011, the Compensation Committee
of the Company’s Board of Directors awarded inducement options to purchase a total of 750,000 shares of the Company’s
common stock at an exercise price of $1.15 to certain members of management of Tier Electronics LLC.  The options vest
as follows: (1) 420,000 will vest in three equal annual installments beginning on December 31, 2011 based on achievement of certain
revenue targets, (2) 330,000 vest in three equal annual installments beginning on the one-year anniversary of the grant date.  At
December 31, 2011, 140,000 of the 420,000 shares vested and 110,000 of the 330,000 shares vested on January 21, 2012.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">During March 2011, the expiration date
of 75,000 options held by a former director of the Company was extended from March 31, 2011 to April 30, 2011, and the expiration
date of 125,000 options was extended from March 31, 2011 to December 31, 2011.  The Company recorded an expense of $45,676
in connection with these extensions.  At December 31, 2011, the remaining 125,000 options expired.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">During 2007 the Company established the
2007 Equity Incentive Plan (the “2007 Plan”) that authorized the Board of Directors or a committee thereof to grant
options to purchase up to a maximum of 1,500,000 shares to employees and directors of the Company.  No options were issued
under the 2007 Plan during the six months ended December 31, 2011.  During the year ended June 30, 2011, 74,500 options
were granted to employees at exercise prices from $0.46 to $0.64 and expiration dates from August 2018 to October 2018 and 150,189
options were forfeited.  As of December 31, 2011, there were no options available to be issued under the 2007 Plan.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">During 2005, the Company established an
Employee Stock Option Scheme (the “2005 Plan”) that authorized the board of directors or a committee thereof to grant
options to employees and directors of the Company. The maximum number of options available to be granted in aggregate at any time
under the 2005 Plan was the number equivalent to 5% of the total number of issued shares of the Company including all shares in
underlying options under the Company’s stock option and incentive plans. No options were issued under the 2005 Plan during
the six months ended December 31, 2011 and 2010.  At December 31, 2011, options to purchase 50,000 shares with an exercise
price of $3.82 and an expiration date of June 20, 2012 were outstanding.  As of December 31, 2011, there were no options
available to be issued under the 2005 Plan.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">In 2002 the Company established the 2002
Stock Option Plan (the “SOP”) whereby a stock option committee was given the discretion to grant up to 579,107 options
to purchase shares to key employees of the Company.  No options were issued under the 2002 Plan during the six months
ended December 31, 2011 and 2010.  During the year ended June 30, 2011 there were 100,000 options forfeited.   At
December 31, 2011 there were 375,000 options outstanding with exercise prices from $0.49 to $3.59 and exercise dates up to June
2018.  As of December 31, 2011, there were no options available to be issued under the SOP.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">The Compensation Committee of the Company’s
Board of Directors awarded two inducement option grants covering a total of 500,000 shares to the Company’s new President
and CEO in January 2010.  The first grant is an option to purchase 400,000 shares of common stock with the following
vesting terms: one third of the shares vested on January 7, 2011 and the balance vest in 24 monthly installments beginning on January
31, 2011 and ending on December 31, 2012.  The second grant is an option to purchase 100,000 shares of common stock which  vested
in two equal installments on June 30, 2010 and December 31, 2010, respectively, based on the satisfaction of certain performance
targets for the six-month periods then ended.  Both options have an exercise price of $1.33 per share which was equal
to the closing price of the Company’s common stock on January 7, 2010 and are not exercisable as to any portion of the option
after the fifth anniversary of the date on which that portion vests.  The options are subject to other terms and conditions
specified in the related option agreements.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">The Compensation Committee of the Company’s
Board of Directors awarded two inducement option grants covering a total of 500,000 shares to the Company’s new Executive
Vice President – Operations in November 2011, with an exercise price of $0.79 per share, which was the closing price of the
Company’s common stock on the NYSE Amex on the date of his appointment.  100,000 of these options will vest based on
the achievement of certain performance targets.  The remaining 400,000 of these options will vest over three years with the
first one-third vesting on November 9, 2012 and the remaining two-thirds vesting in 24 equal monthly installments beginning in
December 2012.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">In aggregate for all plans, at December
31, 2011, the Company has a total of 4,144,303 options outstanding, 1,948,436 RSUs outstanding, and 991,064 shares available for
future grant under the Omnibus Plan.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">  </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">Information with respect to stock option
activity under the employee and director plans is as follows:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<table cellpadding="0" cellspacing="0" style="width: 100%; font: 10pt Times New Roman, Times, Serif">
<tr style="vertical-align: bottom">
<td style="text-align: center"> </td><td style="padding-bottom: 1pt"> </td>
<td colspan="3" style="text-align: center; border-bottom: Black 1pt solid">Number of Options</td><td style="padding-bottom: 1pt"> </td>
<td colspan="3" style="text-align: center; border-bottom: Black 1pt solid">Weighted-Average Exercise Price Per Share</td></tr>
<tr style="vertical-align: bottom">
<td style="width: 56%">Balance at July 1, 2010</td><td style="width: 8%"> </td>
<td style="width: 1%; text-align: left"> </td><td style="width: 12%; text-align: right">2,316,992</td><td style="width: 1%; text-align: left"> </td><td style="width: 8%"> </td>
<td style="width: 1%; text-align: left">$</td><td style="width: 12%; text-align: right">1.92</td><td style="width: 1%; text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td>Options granted</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">1,230,500</td><td style="text-align: left"> </td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">1.02</td><td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td>Options forfeited</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">(150,189</td><td style="text-align: left">)</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">2.51</td><td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td style="padding-bottom: 1pt">Options exercised</td><td style="padding-bottom: 1pt"> </td>
<td style="border-bottom: Black 1pt solid; text-align: left"> </td><td style="border-bottom: Black 1pt solid; text-align: right">(75,000</td><td style="padding-bottom: 1pt; text-align: left">)</td><td style="padding-bottom: 1pt"> </td>
<td style="border-bottom: Black 1pt solid; text-align: left"> </td><td style="border-bottom: Black 1pt solid; text-align: right">1.09</td><td style="padding-bottom: 1pt; text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td>Balance at June 30, 2011</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">3,322,303</td><td style="text-align: left"> </td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">1.55</td><td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td>Options granted</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">1,154,500</td><td style="text-align: left"> </td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">0.84</td><td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td style="padding-bottom: 1pt">Options forfeited</td><td style="padding-bottom: 1pt"> </td>
<td style="border-bottom: Black 1pt solid; text-align: left"> </td><td style="border-bottom: Black 1pt solid; text-align: right">(332,500</td><td style="padding-bottom: 1pt; text-align: left">)</td><td style="padding-bottom: 1pt"> </td>
<td style="border-bottom: Black 1pt solid; text-align: left"> </td><td style="border-bottom: Black 1pt solid; text-align: right">1.08</td><td style="padding-bottom: 1pt; text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td style="padding-bottom: 2.5pt">Balance at December 31, 2011</td><td style="padding-bottom: 2.5pt"> </td>
<td style="border-bottom: Black 2.5pt double; text-align: left"> </td><td style="border-bottom: Black 2.5pt double; text-align: right">4,144,303</td><td style="padding-bottom: 2.5pt; text-align: left"> </td><td style="padding-bottom: 2.5pt"> </td>
<td style="border-bottom: Black 2.5pt double; text-align: left">$</td><td style="border-bottom: Black 2.5pt double; text-align: right">1.39</td><td style="padding-bottom: 2.5pt; text-align: left"> </td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">The following table summarizes information
relating to the stock options outstanding at December 31, 2011:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom">
<td style="line-height: 115%"> </td>
<td colspan="3" style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">Outstanding</td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">Exercisable</td></tr>
<tr style="vertical-align: bottom">
<td style="width: 33%; border-bottom: black 1.5pt solid; line-height: 115%">Range of Exercise Prices</td>
<td style="width: 13%; border-bottom: black 1.5pt solid">
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center">Number of</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center">Options</p></td>
<td style="width: 12%; border-bottom: black 1.5pt solid">
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center"> Average</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center">Remaining</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center">Contractual Life</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center">(in years)</p></td>
<td style="width: 16%; border-bottom: black 1.5pt solid">
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center">Weighted Average</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center">Exercise Price</p></td>
<td style="width: 2%; line-height: 115%"> </td>
<td style="width: 12%; border-bottom: black 1.5pt solid">
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center">Number of</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center">Options</p></td>
<td style="width: 12%; border-bottom: black 1.5pt solid">
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center">Weighted Average</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; text-align: center">Exercise Price</p></td></tr>
<tr style="vertical-align: bottom">
<td style="line-height: 115%">$0.46 to $1.69</td>
<td style="line-height: 115%; text-align: center">3,619,303</td>
<td style="line-height: 115%; text-align: center">6.8</td>
<td style="line-height: 115%"> $                           1.06</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: center">1,131,748</td>
<td style="line-height: 115%"> $                 1.22</td></tr>
<tr style="vertical-align: bottom">
<td style="line-height: 115%">$3.59 to $3.82</td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">525,000</td>
<td style="line-height: 115%; text-align: center">3.1</td>
<td style="line-height: 115%"> $                           3.61</td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">525,000</td>
<td style="line-height: 115%"> $                 3.61</td></tr>
<tr style="vertical-align: bottom">
<td style="line-height: 115%">Balance at December 31, 2011</td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: center">4,144,303</td>
<td style="line-height: 115%; text-align: center">6.4</td>
<td style="line-height: 115%"> $                           1.39</td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: center">1,656,748</td>
<td style="line-height: 115%"> $                 1.98</td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">During the six months ended December 31,
2011 options to purchase 654,500 shares were granted to employees  exercisable at prices from $0.59 to $1.16 per share
based on various service and performance based vesting terms from July 2011 through December 2014 and exercisable at various dates
through December 2019. During the six months ended December 31, 2010 options to purchase 294,500 shares were granted to employees
exercisable at prices from $0.46 to $0.64 per share based on various service and performance based vesting terms from August 2010
through November 2013 and exercisable at various dates through December 2018.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">The fair value of each option granted is
estimated on the date of grant using the Black-Scholes option-pricing method. The Company uses historical data to estimate the
expected price volatility, the expected option life and the expected forfeiture rate. The Company has not made any dividend payments
nor does it have plans to pay dividends in the foreseeable future. The following assumptions were used to estimate the fair value
of options granted during the six months ended December 31, using the Black-Scholes option-pricing model:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<table cellpadding="0" cellspacing="0" style="width: 100%; font: 10pt Times New Roman, Times, Serif">
<tr style="vertical-align: bottom">
<td style="text-align: center"> </td><td style="padding-bottom: 1pt"> </td>
<td colspan="3" style="text-align: center; border-bottom: Black 1pt solid">2012</td><td style="padding-bottom: 1pt"> </td>
<td colspan="3" style="text-align: center; border-bottom: Black 1pt solid">2011</td></tr>
<tr style="vertical-align: bottom">
<td style="width: 56%">Expected life of option (years)</td><td style="width: 8%"> </td>
<td style="width: 1%; text-align: left"> </td><td style="width: 12%; text-align: right">2.5</td><td style="width: 1%; text-align: left"> </td><td style="width: 8%"> </td>
<td style="width: 1%; text-align: left"> </td><td style="width: 12%; text-align: right">2.5</td><td style="width: 1%; text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td>Risk-free interest rate</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">.24 - .55%</td><td style="text-align: left"> </td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">.52-.685%</td><td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td>Assumed volatility</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">104 - 107%</td><td style="text-align: left"> </td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">62-114%</td><td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td>Expected dividend rate</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">0</td><td style="text-align: left"> </td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">0</td><td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td>Expected forfeiture rate</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">5.3 - 6.8%</td><td style="text-align: left"> </td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">0</td><td style="text-align: left"> </td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">Time-vested and performance-based stock
awards, including stock options, restricted stock and restricted stock units, are accounted for at fair value at date of grant.  Compensation
expense is recognized over the requisite service and performance periods.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">A summary of the status of unvested employee
stock options as of December 31, 2011 and June 30, 2011 and changes during the six months and year ended, is presented below:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<table cellpadding="0" cellspacing="0" style="width: 100%; font: 10pt Times New Roman, Times, Serif">
<tr style="vertical-align: bottom">
<td style="text-align: center"> </td><td style="padding-bottom: 1pt"> </td>
<td colspan="3" style="text-align: center; border-bottom: Black 1pt solid">Number of  <br />Options</td><td style="padding-bottom: 1pt"> </td>
<td colspan="3" style="text-align: center; border-bottom: Black 1pt solid">Weighted-Average Grant Date Fair Value Per <br />Share</td></tr>
<tr style="vertical-align: bottom">
<td style="width: 56%">Balance at July 1, 2010</td><td style="width: 8%"> </td>
<td style="width: 1%; text-align: left"> </td><td style="width: 12%; text-align: right">987,500</td><td style="width: 1%; text-align: left"> </td><td style="width: 8%"> </td>
<td style="width: 1%; text-align: left">$</td><td style="width: 12%; text-align: right">0.77</td><td style="width: 1%; text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td>Granted</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">1,230,500</td><td style="text-align: left"> </td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">0.58</td><td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td>Vested</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">(476,526</td><td style="text-align: left">)</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">0.49</td><td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td style="padding-bottom: 1pt">Forfeited</td><td style="padding-bottom: 1pt"> </td>
<td style="border-bottom: Black 1pt solid; text-align: left"> </td><td style="border-bottom: Black 1pt solid; text-align: right">(6,250</td><td style="padding-bottom: 1pt; text-align: left">)</td><td style="padding-bottom: 1pt"> </td>
<td style="border-bottom: Black 1pt solid; text-align: left"> </td><td style="border-bottom: Black 1pt solid; text-align: right">0.29</td><td style="padding-bottom: 1pt; text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td>Balance at June 30, 2011</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">1,735,224</td><td style="text-align: left"> </td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">0.62</td><td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td>Granted</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">1,154,500</td><td style="text-align: left"> </td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">0.84</td><td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td>Vested</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">(194,669</td><td style="text-align: left">)</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">1.06</td><td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td style="padding-bottom: 1pt">Forfeited</td><td style="padding-bottom: 1pt"> </td>
<td style="border-bottom: Black 1pt solid; text-align: left"> </td><td style="border-bottom: Black 1pt solid; text-align: right">(332,500</td><td style="padding-bottom: 1pt; text-align: left">)</td><td style="padding-bottom: 1pt"> </td>
<td style="border-bottom: Black 1pt solid; text-align: left"> </td><td style="border-bottom: Black 1pt solid; text-align: right">1.08</td><td style="padding-bottom: 1pt; text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td style="padding-bottom: 2.5pt">Balance at December 31, 2011</td><td style="padding-bottom: 2.5pt"> </td>
<td style="border-bottom: Black 2.5pt double; text-align: left"> </td><td style="border-bottom: Black 2.5pt double; text-align: right">2,362,555</td><td style="padding-bottom: 2.5pt; text-align: left"> </td><td style="padding-bottom: 2.5pt"> </td>
<td style="border-bottom: Black 2.5pt double; text-align: left">$</td><td style="border-bottom: Black 2.5pt double; text-align: right">0.99</td><td style="padding-bottom: 2.5pt; text-align: left"> </td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">Total fair value of options granted in
the six months ended December 31, 2011 and 2010 was $576,618 and $107,689, respectively.  At December 31, 2011 there
was $725,691 in unrecognized compensation cost related to unvested stock options, which is expected to be recognized over the next
3 years.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">During the fourth quarter of fiscal 2010
the Company agreed to compensate its directors with restricted stock units (“RSUs”) rather than cash.  As
a result included in accrued compensation and benefits at June 30, 2010 was $182,500 related to these awards. The RSUs were classified
as liability awards because the RSUs were expected to be paid in cash upon vesting. These RSUs were converted to 574,242 stock
settled RSUs in November 2010 and $182,500 was transferred from accrued compensation and benefits to additional paid-in capital.  The
cash settled RSUs that were converted to stock settled RSUs were 100% vested upon conversion.  There were also $212,450
in directors’ fees expense and $7,000 in consulting fees expense settled with RSUs for the six months ended December 31,
2011.   As of December 31, 2011 there were 661,037 unvested RSUs outstanding which will vest through May 6, 2014.  At
December 31, 2011 there was $577,498 in unrecognized compensation cost related to unvested RSUs, which is expected to be recognized
through May 6, 2014.  Vested RSUs are payable six months after the holder’s separation from service with the Company.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">The table below summarizes the status of
restricted stock unit balances:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<table cellpadding="0" cellspacing="0" style="width: 100%; font: 10pt Times New Roman, Times, Serif">
<tr style="vertical-align: bottom">
<td style="text-align: center"> </td><td style="padding-bottom: 1pt"> </td>
<td colspan="3" style="text-align: center; border-bottom: Black 1pt solid">Number of Restricted Stock Units</td><td style="padding-bottom: 1pt"> </td>
<td colspan="3" style="text-align: center; border-bottom: Black 1pt solid">Weighted-Average Valuation Price Per Unit</td></tr>
<tr style="vertical-align: bottom">
<td style="width: 56%">Conversion of cash settled RSUs</td><td style="width: 8%"> </td>
<td style="width: 1%; text-align: left"> </td><td style="width: 12%; text-align: right">574,242</td><td style="width: 1%; text-align: left"> </td><td style="width: 8%"> </td>
<td style="width: 1%; text-align: left">$</td><td style="width: 12%; text-align: right">0.55</td><td style="width: 1%; text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td>RSUs granted</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">826,143</td><td style="text-align: left"> </td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">0.80</td><td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td style="padding-bottom: 1pt">RSUs forfeited</td><td style="padding-bottom: 1pt"> </td>
<td style="border-bottom: Black 1pt solid; text-align: left"> </td><td style="border-bottom: Black 1pt solid; text-align: right">—  </td><td style="padding-bottom: 1pt; text-align: left"> </td><td style="padding-bottom: 1pt"> </td>
<td style="border-bottom: Black 1pt solid; text-align: left"> </td><td style="border-bottom: Black 1pt solid; text-align: right">—  </td><td style="padding-bottom: 1pt; text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td>Balance at June 30, 2011</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">1,400,385</td><td style="text-align: left"> </td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">0.70</td><td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td>RSUs granted</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">548,051</td><td style="text-align: left"> </td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">0.77</td><td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td style="padding-bottom: 1pt">RSUs forfeited</td><td style="padding-bottom: 1pt"> </td>
<td style="border-bottom: Black 1pt solid; text-align: left"> </td><td style="border-bottom: Black 1pt solid; text-align: right">—  </td><td style="padding-bottom: 1pt; text-align: left"> </td><td style="padding-bottom: 1pt"> </td>
<td style="border-bottom: Black 1pt solid; text-align: left"> </td><td style="border-bottom: Black 1pt solid; text-align: right">—  </td><td style="padding-bottom: 1pt; text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td style="padding-bottom: 2.5pt">Balance at December 31, 2011</td><td style="padding-bottom: 2.5pt"> </td>
<td style="border-bottom: Black 2.5pt double; text-align: left"> </td><td style="border-bottom: Black 2.5pt double; text-align: right">1,948,436</td><td style="padding-bottom: 2.5pt; text-align: left"> </td><td style="padding-bottom: 2.5pt"> </td>
<td style="border-bottom: Black 2.5pt double; text-align: left">$</td><td style="border-bottom: Black 2.5pt double; text-align: right">0.72</td><td style="padding-bottom: 2.5pt; text-align: left"> </td></tr>
</table>
<p style="margin: 0pt"></p>
<p style="margin: 0pt"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><b>NOTE 11 - NON RELATED PARTY WARRANTS</b></p>
<p style="margin: 0pt"> </p>
<p style="margin: 0pt"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">At December 31, 2011 there were outstanding
warrants to purchase 40,000 common shares issued by the Company to an equipment supplier in January 2011 exercisable at $0.56 per
share and which expire in January 2014.  The fair value of the warrants was $11,834 and is included in the cost of the
equipment.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">At December 31, 2011 there were outstanding
warrants to purchase 1,121,875 common shares acquired by certain purchasers of Company shares in March 2010 exercisable at $1.04
per share and which expire in September 2015.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">At December 31, 2011 there were outstanding
warrants to purchase 358,333 common shares acquired by certain purchasers of Company shares in August 2009 exercisable at $1.33
per share and which expire in August 2015.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">At December 31, 2011 there were outstanding
warrants to purchase 50,000 shares acquired by Empire Financial Group, Ltd. as part of the underwriting compensation in connection
with our United States public offering which are exercisable at $7.20 per share and which expire in June 2012.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">At December 31, 2011 there are warrants
to purchase 48,950 shares issued and outstanding to Strategic Growth International in connection with capital raising activities
in 2007, with an expiration date of June 2012 and with an exercise price of $7.20.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">Warrants to purchase 120,023 common shares
acquired by Empire Financial Group, Ltd. in 2006 exercisable at $3.23 per share expired during September 2011.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">The table below summarizes non-related
party warrant balances:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<table cellpadding="0" cellspacing="0" style="width: 100%; font: 10pt Times New Roman, Times, Serif">
<tr style="vertical-align: bottom">
<td style="text-align: center"> </td><td style="padding-bottom: 1pt"> </td>
<td colspan="3" style="text-align: center; border-bottom: Black 1pt solid">Number of Warrants</td><td style="padding-bottom: 1pt"> </td>
<td colspan="3" style="text-align: center; border-bottom: Black 1pt solid">Weighted-Average Exercise Price Per Share</td></tr>
<tr style="vertical-align: bottom">
<td style="width: 56%">Balance at July 1, 2010</td><td style="width: 8%"> </td>
<td style="width: 1%; text-align: left"> </td><td style="width: 12%; text-align: right">1,846,031</td><td style="width: 1%; text-align: left"> </td><td style="width: 8%"> </td>
<td style="width: 1%; text-align: left">$</td><td style="width: 12%; text-align: right">1.76</td><td style="width: 1%; text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td style="text-indent: 0.25in">Warrants granted</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">3,067,797</td><td style="text-align: left"> </td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">1.24</td><td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td style="text-indent: 0.25in">Warrants expired</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">—  </td><td style="text-align: left"> </td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">—  </td><td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td style="padding-bottom: 1pt; text-indent: 0.25in">Warrants exercised</td><td style="padding-bottom: 1pt"> </td>
<td style="border-bottom: Black 1pt solid; text-align: left"> </td><td style="border-bottom: Black 1pt solid; text-align: right">(3,027,797</td><td style="padding-bottom: 1pt; text-align: left">)</td><td style="padding-bottom: 1pt"> </td>
<td style="border-bottom: Black 1pt solid; text-align: left"> </td><td style="border-bottom: Black 1pt solid; text-align: right">(1.25</td><td style="padding-bottom: 1pt; text-align: left">)</td></tr>
<tr style="vertical-align: bottom">
<td>Balance at June 30, 2011</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">1,886,031</td><td style="text-align: left"> </td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">1.73</td><td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td style="text-indent: 0.25in">Warrants granted (See Note 12)</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">4,132,553</td><td style="text-align: left"> </td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">0.53</td><td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td style="text-indent: 0.25in">Warrants expired</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">(266,873</td><td style="text-align: left">)</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">(3.56</td><td style="text-align: left">)</td></tr>
<tr style="vertical-align: bottom">
<td style="padding-bottom: 1pt; text-indent: 0.25in">Warrants exercised (See Note 12)</td><td style="padding-bottom: 1pt"> </td>
<td style="border-bottom: Black 1pt solid; text-align: left"> </td><td style="border-bottom: Black 1pt solid; text-align: right">(4,132,553</td><td style="padding-bottom: 1pt; text-align: left">)</td><td style="padding-bottom: 1pt"> </td>
<td style="border-bottom: Black 1pt solid; text-align: left"> </td><td style="border-bottom: Black 1pt solid; text-align: right">(0.55</td><td style="padding-bottom: 1pt; text-align: left">)</td></tr>
<tr style="vertical-align: bottom">
<td style="padding-bottom: 2.5pt">Balance at December 31, 2011</td><td style="padding-bottom: 2.5pt"> </td>
<td style="border-bottom: Black 2.5pt double; text-align: left"> </td><td style="border-bottom: Black 2.5pt double; text-align: right">1,619,158</td><td style="padding-bottom: 2.5pt; text-align: left"> </td><td style="padding-bottom: 2.5pt"> </td>
<td style="border-bottom: Black 2.5pt double; text-align: left">$</td><td style="border-bottom: Black 2.5pt double; text-align: right">1.47</td><td style="padding-bottom: 2.5pt; text-align: left"> </td></tr>
</table>
<p style="margin: 0pt"></p>
<p style="margin: 0pt"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><b>NOTE 12 – EQUITY</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">On August 30, 2010, the Company entered
into an amended and restated securities purchase agreement (“Socius Agreement”) with Socius CG II, Ltd. (“Socius”).
Pursuant to the Socius Agreement the Company has the right over a term of two years, subject to certain conditions, to require
Socius to purchase up to $10 million of redeemable subordinated debentures and/or shares of redeemable Series A preferred stock
in one or more tranches.  The debentures bear interest at an annual rate of 10% and the shares of Series A preferred
stock accumulate dividends at the same rate.  Both the debentures and the shares of Series A preferred stock are redeemable
at the Company’s election at any time after the one year anniversary of issuance.  Neither the debentures nor the
Series A preferred shares are convertible into common stock.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">On November 10, 2010, the Company’s
Board of Directors approved a certificate of designation of preferences, rights and limitations to authorize shares of Series A
preferred stock in accordance with the terms of the Socius Agreement.  Upon the authorization of Series A preferred stock
and in accordance with the terms of the Socius Agreement, the $517,168 of outstanding debentures issued by the Company to Socius
CG II, Ltd. on September 2, 2010, and $7,510 of accrued interest were exchanged into 52.468 shares of Series A preferred stock.  In
addition, in accordance with the Socius Agreement, any future tranches under the Socius Agreement will involve shares of Series
A preferred stock instead of debentures.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">Under the Socius Agreement, in connection
with each tranche Socius is obligated to purchase that number of shares of our common stock equal in value to 135% of the amount
of the tranche at a per share price equal to the closing bid price of the common stock on the trading day preceding our delivery
of the tranche notice.  Socius may pay for the shares it purchases at its option, in cash or a collateralized promissory
note.  Any such promissory note will bear interest at 2.0% per year and is collateralized by securities owned by Socius
with a fair market value equal to the principal amount of the promissory note. The entire principal balance and interest on the
promissory note is due and payable on the later of the fourth anniversary of the date of the promissory note or when we have redeemed
all the Series A preferred stock issued by us to Socius under the Socius Agreement, and may be applied by us toward the redemption
of the shares of Series A preferred stock held by Socius.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">  </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">Our ability to submit a tranche notice
is subject to certain conditions including that: (1) a registration statement covering our sale of shares of common stock to Socius
in connection with the tranche is effective and (2) the issuance of such shares would not result in Socius and its affiliates beneficially
owning more than 9.99% of our common stock.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">Under the terms of the Socius Agreement,
the Company was obligated to pay Socius a commitment fee in the form of shares of common stock or cash, at the option of the Company,
in the amount of $500,000 if it is paid in cash and $588,235 if it is paid in shares of common stock. Payment of the commitment
fee occurred 50% at the closing of the first tranche and 50% at the closing of the second tranche.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">On September 2, 2010 the Company delivered
the first tranche notice under the Socius Agreement pursuant to which on September 20, 2010 Socius purchased $517,168 of debentures.  In
connection with this tranche, (1) Socius purchased 1,163,629 shares of common stock for a total purchase price of $698,177 and
at a per share purchase price of $0.60 and (2) the Company issued to Socius 490,196 shares of common stock in payment of the commitment
fee payable in connection with the tranche. As consideration for the common stock it purchased, Socius issued a collateralized
promissory note maturing, the later of September 2, 2014 or when the Series A preferred shares are redeemed by the Company.  Management
expects to redeem the Series A preferred stock on September 20, 2014.  The promissory note was recorded at a discount
of $183,922 determined by discounting the promissory note at a rate of 10%.  The promissory note is included in the stockholders
equity section of the Company’s condensed consolidated balance sheets because the promissory note was received in exchange
for the issuance of common stock.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">On November 12, 2010 the Company delivered
the second tranche notice under the Socius Agreement pursuant to which on November 29, 2010 Socius purchased $490,000 of Series
A preferred stock.  In connection with this tranche, (1) Socius purchased 906,165 shares of common stock for a total
purchase price of $661,500 and at a per share purchase price of $0.73 and (2) the Company issued to Socius 402,901 shares of common
stock in payment of the commitment fee payable in connection with the tranche. As consideration for the common stock it purchased,
Socius issued a collateralized promissory note maturing, the later of November 12, 2014 or when the Series A preferred shares are
redeemed by the Company.  Management expects to redeem the Preferred Shares on November 29, 2014.  The promissory
note was recorded at a discount of $173,872 determined by discounting the promissory note at a rate of 10%.  The promissory
note is included in the stockholders equity section of the Company’s condensed consolidated balance sheets because the promissory
note was received in exchange for the issuance of common stock.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">On January 12, 2011 the Company delivered
the third tranche notice under the Socius Agreement pursuant to which on January 27, 2011 Socius purchased from the Company $2,020,000
of Series A preferred stock.  In connection with the tranche, (1) Socius purchased 1,934,042 shares of common stock for
a total purchase price of $2,727,000 and at a per share purchase price of $1.41. As consideration for the Common Stock Socius purchased,
Socius issued a collateralized promissory note maturing, the later of January 12, 2015 or when the Series A preferred shares are
redeemed by the Company.  Management expects to redeem the Preferred Shares on January 17, 2015. The promissory note
was recorded at a discount of $716,777 determined by discounting the promissory note at a rate of 10%.  The promissory
note is included in the stockholders equity section of the Company’s condensed consolidated balance sheets because the promissory
note was received in exchange for the issuance of common stock.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">On March 16, 2011 the Company delivered
the fourth tranche notice under the Socius Agreement pursuant to which on March 31, 2011 Socius purchased from the Company $520,000
of Series A preferred stock.  In connection with the tranche, (1) Socius purchased 557,142 shares of common stock for
a total purchase price of $702,000 and at a per share purchase price of $1.26. As consideration for the Common Stock Socius purchased,
Socius issued a collateralized promissory note maturing, the later of March 16, 2015 or when the Series A preferred shares are
redeemed by the Company.  Management expects to redeem the Preferred Shares on March 31, 2015. The promissory note was
recorded at a discount of $184,461determined by discounting the promissory note at a rate of 10%.  The promissory note
is included in the stockholders equity section of the Company’s condensed consolidated balance sheets because the promissory
note was received in exchange for the issuance of common stock.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">On September 8, 2011 the Company delivered
the fifth and sixth tranche notices under the Socius Agreement pursuant to which on September  30, 2011 Socius purchased
from the Company $1,447,240 of Series A preferred stock.  In connection with the tranches, Socius purchased 2,621,359
shares of common stock for a total purchase price of $1,953,775 and at an average per share purchase price of $0.75. As consideration
for the Common Stock Socius purchased, Socius issued a collateralized promissory notes maturing, the later of September 8, 2015
or when the Series A preferred shares are redeemed by the Company.  Management expects to redeem the Preferred Shares
on September 30, 2015. The promissory notes were recorded at a discount of $512,815 determined by discounting the promissory notes
at a rate of 10%.  The promissory notes are included in the stockholders equity section of the Company’s condensed
consolidated balance sheets because the promissory notes were received in exchange for the issuance of common stock.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">On November 16, 2011 the Company delivered
the seventh tranche notice under the Socius Agreement pursuant to which on December 2, 2011 Socius purchased from the Company $750,000
of Series A preferred stock.  In connection with the tranche, (1) Socius purchased 1,511,194 shares of common stock for
a total purchase price of $1,012,500 and at a per share purchase price of $0.67. As consideration for the Common Stock Socius purchased,
Socius issued a collateralized promissory note maturing, the later of November 16, 2015 or when the Series A preferred shares are
redeemed by the Company.  Management expects to redeem the Preferred Shares on November 30, 2015. The promissory note
was recorded at a discount of $266,130 determined by discounting the promissory note at a rate of 10%.  The promissory
note is included in the stockholders equity section of the Company’s condensed consolidated balance sheets because the promissory
note was received in exchange for the issuance of common stock.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">The Company’s accounting for the
2% notes receivable – common stock is to accrue interest on the discounted notes receivable at 10% as a credit to additional
paid in capital.  The Company’s accounting for the Series A preferred stock is to accrete dividends at 10% as a
charge to additional paid in capital.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">In the event of liquidation, dissolution
or winding up (whether voluntary or involuntary) of the Company, the holders of shares of Series A preferred stock shall be entitled
to be paid the full amount payable on such shares upon the liquidation, dissolution or winding up of the corporation fixed by the
Board of Directors with respect to such shares, if any, before any amount shall be paid to the holders of the Common Stock.  The
liquidation preference of the outstanding Series A preferred stock was $6,133,947 and $3,715,470 as of December 31, 2011 and June
30, 2011, respectively.  Redemption or liquidation may be paid by application of the Socius notes receivable.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">On October 12, 2010, the Company entered
into Stock Purchase Agreements with certain investors providing for the sale of a total of 3,329,467 shares of the Company’s
common stock for an aggregate purchase price of $1,435,000 at a price per share of $0.431.  The closing took place on
October 15, 2010.  The net proceeds to the Company after deducting $60,000 of offering costs, were $1,375,000.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">On December 29, 2010 and January 3, 2011
the Company entered into Stock Purchase Agreements with certain investors providing for the issuance of a total of 2,103,532 shares
of the Company’s common stock for an aggregate purchase price of $2,000,000 at a weighted average price per share of $0.95.  The
closing took place on January 12, 2011.  The net proceeds to the Company, after deducting $57,000 of offering costs,
were $1,943,000.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">On June 14 and 15, 2011 we entered into
Stock Purchase Agreements with certain investors providing for the issuance of a total of 3,049,463 shares of the Company’s
common stock for an aggregate purchase price of $2,527,000 at a weighted average price per share of $0.83.  The closing
took place on June 17, 2011.  The net proceeds to the Company, after deducting $153,000 of offering costs, were $2,374,000.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">On December 13, 2011, the Company entered
into Stock Purchase Agreements with a strategic investor previously known to the Company and certain Company officers and directors
providing for the sale of a total of 1,167,340 shares of common stock for an aggregate purchase price of $875,505 at a price per
share equal to $0.75 which was the closing price of the Company’s common stock on December 12, 2011.  On December
14, 2011, the Company entered into Stock Purchase Agreements with certain investors providing for the sale of a total of 1,425,000
shares of the Company’s common stock for an aggregate purchase price of $1,011,893 at a price per share of $0.7101 which
was the closing price of the Company’s common stock on December 13, 2011.  The closing for both transactions took
place on December 16, 2011.  The net proceeds to the Company after deducting $65,978 of offering costs were $1,821,420.</p>
<p style="margin: 0pt"></p>
<p style="margin: 0pt"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><b>NOTE 13 – COMMITMENTS</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><b>Leasing Activities</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">The Company leases its Australian research
and development facility from a non-related Australian company under the terms of a lease that expired October 31, 2011.  The
rental rate was $75,596 per annum (A$72,431) and was subject to an annual CPI adjustment. Rent expense was $23,017 and $43,210
for the three months and six months ended December 31, 2011, respectively, and $18,763 and $39,355 for the three and six months
ended December 31, 2010, respectively.  The Company renewed the lease on its Australian research and development facility
through October 31, 2016 at rental rate of $95,855 per annum (A$95,000) subject to an annual CPI adjustment.  The Company
also leases a building from an officer of its subsidiary, Tier Electronics LLC, who is also a shareholder and director, under a
lease agreement expiring December 31, 2014.  The first year rental is $84,000 per annum and is subject to an annual CPI
adjustment.  The rent expense for the three  and six months ended December 31, 2011 was $21,000 and $42,000,
respectively.  The Company is required to pay real estate taxes and other occupancy costs related to the facility.  The
future payments required under the terms of the leases for fiscal periods subsequent to December 31, 2011are as follows:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<table cellpadding="0" cellspacing="0" style="width: 100%; font: 10pt Times New Roman, Times, Serif">
<tr style="vertical-align: bottom">
<td style="width: 70%; text-indent: 0.25in">2012</td><td style="width: 10%"> </td>
<td style="width: 1%; text-align: left">$</td><td style="width: 18%; text-align: right">91,642</td><td style="width: 1%; text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td style="text-indent: 0.25in">2013</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">183,285</td><td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td style="text-indent: 0.25in">2014</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">141,285</td><td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td style="padding-bottom: 1pt; text-indent: 0.25in">2015</td><td style="padding-bottom: 1pt"> </td>
<td style="border-bottom: Black 1pt solid; text-align: left"> </td><td style="border-bottom: Black 1pt solid; text-align: right">99,285</td><td style="padding-bottom: 1pt; text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td style="padding-bottom: 2.5pt"> </td><td style="padding-bottom: 2.5pt"> </td>
<td style="border-bottom: Black 2.5pt double; text-align: left">$</td><td style="border-bottom: Black 2.5pt double; text-align: right">515,497</td><td style="padding-bottom: 2.5pt; text-align: left"> </td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">  </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><b>Employment Contracts</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">The Company has entered into employment
contracts with executives and management personnel. The contracts provide for salaries, bonuses and stock option grants, along
with other employee benefits. The employment contracts generally have no set term and can be terminated by either party. There
is a provision for payments of nine months to eighteen months of annual salary as severance if we terminate a contract without
cause, along with the acceleration of certain unvested stock option grants.</p>
<p style="margin: 0pt"></p>
<p style="margin: 0pt"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><b>NOTE 14 - RETIREMENT PLANS</b></p>
<p style="margin: 0pt"></p>
<p style="margin: 0pt"></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">All Australian based employees are entitled
to varying degrees of benefits on retirement, disability, or death.  The Company contributes to an accumulation fund
on behalf of the employees under an award which is legally enforceable.  For U.S. employees, the Company has a 401(k)
plan.  All active participants are 100% vested immediately.  Expenses under these plans were $27,324 and $42,780
for the three and six months ended December 31, 2011, respectively.  Expenses under these plans were $12,548 and $22,404
for the three and six months ended December 31, 2010, respectively.</p>
<p style="margin: 0pt"></p>
<p style="margin: 0pt"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><b>NOTE 15— INCOME TAXES</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">The provision (benefit) for income taxes
consists of the following:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<table cellpadding="0" cellspacing="0" style="width: 100%; font: 10pt Times New Roman, Times, Serif">
<tr style="vertical-align: bottom">
<td style="text-align: center"> </td><td style="padding-bottom: 1pt"> </td>
<td colspan="7" style="text-align: center; border-bottom: Black 1pt solid">Six months ended December 31,</td></tr>
<tr style="vertical-align: bottom">
<td style="text-align: center"> </td><td style="padding-bottom: 1pt"> </td>
<td colspan="3" style="text-align: center; border-bottom: Black 1pt solid">2011</td><td style="padding-bottom: 1pt"> </td>
<td colspan="3" style="text-align: center; border-bottom: Black 1pt solid">2010</td></tr>
<tr style="vertical-align: bottom">
<td style="width: 56%">Current</td><td style="width: 8%"> </td>
<td style="width: 1%; text-align: left">$</td><td style="width: 12%; text-align: right">(181,800</td><td style="width: 1%; text-align: left">)</td><td style="width: 8%"> </td>
<td style="width: 1%; text-align: left">$</td><td style="width: 12%; text-align: right">—  </td><td style="width: 1%; text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td style="padding-bottom: 1pt">Deferred</td><td style="padding-bottom: 1pt"> </td>
<td style="border-bottom: Black 1pt solid; text-align: left"> </td><td style="border-bottom: Black 1pt solid; text-align: right">—  </td><td style="padding-bottom: 1pt; text-align: left"> </td><td style="padding-bottom: 1pt"> </td>
<td style="border-bottom: Black 1pt solid; text-align: left"> </td><td style="border-bottom: Black 1pt solid; text-align: right">—  </td><td style="padding-bottom: 1pt; text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td style="padding-bottom: 2.5pt">Provision (benefit) for income taxes</td><td style="padding-bottom: 2.5pt"> </td>
<td style="border-bottom: Black 2.5pt double; text-align: left">$</td><td style="border-bottom: Black 2.5pt double; text-align: right">(181,800</td><td style="padding-bottom: 2.5pt; text-align: left">)</td><td style="padding-bottom: 2.5pt"> </td>
<td style="border-bottom: Black 2.5pt double; text-align: left">$</td><td style="border-bottom: Black 2.5pt double; text-align: right">—  </td><td style="padding-bottom: 2.5pt; text-align: left"> </td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">The Company accounts for income taxes using
an asset and liability approach which generally requires the recognition of deferred income tax assets and liabilities based on
the expected future income tax consequences of events that have previously been recognized in the Company’s financial statements
or tax returns. In addition, a valuation allowance is recognized if it is more likely than not that some or all of the deferred
income tax assets will not be realized in the foreseeable future. Deferred income tax assets are reviewed for recoverability based
on historical taxable income, the expected reversals of existing temporary differences, tax-planning strategies and projections
of future taxable income. As a result of this analysis, the Company has provided for a valuation allowance against its net deferred
income tax assets as of December 31, 2011 and 2010.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">During the three and six months ended December
31, 2011, the Company recorded a $181,800 credit (benefit) for income taxes which represents a pro rata portion of an
estimate of a refundable research and development tax credit we expect to receive from the government of Australia for the fiscal
year ending June 30, 2012 based on the qualified expenditures the Company incurred during the three and six months ended December
31, 2011.<b> </b>The Company recorded an estimated income tax refund receivable of $164,640 for the year ended June 30, 2011
for the estimated refund related to qualified expenditures during the year ended June 30, 2011, related to a refundable Australian
research and development tax credit for the year ended June 30, 2011.  The Company recognized a refund of $415,315 for
expenditures incurred during the year ended June 30, 2010 for a refund claim filed in March 2011.  The Company became
aware of the refund opportunity in March 2011and as a result had not provided for a benefit during the six month period ended December
31, 2010.  The Company has provided a valuation allowance against all deferred income tax assets as it is more likely
than not that its deferred income tax assets are not currently realizable due to the net operating losses incurred by the Company
since its inception.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">The Company’s combined effective
income tax rate differed from the U.S. federal statutory income rate as follows:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<table cellpadding="0" cellspacing="0" style="width: 100%; font: 10pt Times New Roman, Times, Serif">
<tr style="vertical-align: bottom">
<td style="text-align: center"> </td><td style="padding-bottom: 1pt"> </td>
<td colspan="7" style="text-align: center; border-bottom: Black 1pt solid">Six months ended December 31,</td></tr>
<tr style="vertical-align: bottom">
<td style="text-align: center"> </td><td style="padding-bottom: 1pt"> </td>
<td colspan="3" style="text-align: center; border-bottom: Black 1pt solid">2011</td><td style="padding-bottom: 1pt"> </td>
<td colspan="3" style="text-align: center; border-bottom: Black 1pt solid">2010</td></tr>
<tr style="vertical-align: bottom">
<td style="width: 56%">Income tax benefit computed at the U.S. federal statutory rate</td><td style="width: 8%"> </td>
<td style="width: 1%; text-align: left"> </td><td style="width: 12%; text-align: right">-34</td><td style="width: 1%; text-align: left">%</td><td style="width: 8%"> </td>
<td style="width: 1%; text-align: left"> </td><td style="width: 12%; text-align: right">-34</td><td style="width: 1%; text-align: left">%</td></tr>
<tr style="vertical-align: bottom">
<td>Australia research and development credit</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">-4</td><td style="text-align: left"> </td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">0</td><td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td style="padding-bottom: 1pt">Change in valuation allowance</td><td style="padding-bottom: 1pt"> </td>
<td style="border-bottom: Black 1pt solid; text-align: left"> </td><td style="border-bottom: Black 1pt solid; text-align: right">34</td><td style="padding-bottom: 1pt; text-align: left"> </td><td style="padding-bottom: 1pt"> </td>
<td style="border-bottom: Black 1pt solid; text-align: left"> </td><td style="border-bottom: Black 1pt solid; text-align: right">34</td><td style="padding-bottom: 1pt; text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td style="padding-bottom: 1pt">Total</td><td style="padding-bottom: 1pt"> </td>
<td style="border-bottom: Black 1pt solid; text-align: left"> </td><td style="border-bottom: Black 1pt solid; text-align: right">-4</td><td style="padding-bottom: 1pt; text-align: left">%</td><td style="padding-bottom: 1pt"> </td>
<td style="border-bottom: Black 1pt solid; text-align: left"> </td><td style="border-bottom: Black 1pt solid; text-align: right">0</td><td style="padding-bottom: 1pt; text-align: left">%</td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><br />
Significant components of the Company’s net deferred income tax assets as of December 31, 2011 and June 30, 2011 were as
follows:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<table cellpadding="0" cellspacing="0" style="width: 100%; font: 10pt Times New Roman, Times, Serif">
<tr style="vertical-align: bottom">
<td style="text-align: center"> </td><td style="padding-bottom: 1pt"> </td>
<td colspan="3" style="text-align: center; border-bottom: Black 1pt solid"> December 31, 2011</td><td style="padding-bottom: 1pt"> </td>
<td colspan="3" style="text-align: center; border-bottom: Black 1pt solid"> June 30, 2011</td></tr>
<tr style="vertical-align: bottom">
<td style="width: 56%">Federal net operating loss carryforwards</td><td style="width: 8%"> </td>
<td style="width: 1%; text-align: left"> </td><td style="width: 12%; text-align: right">14,920,208</td><td style="width: 3%; text-align: left"> </td><td style="width: 6%"> </td>
<td style="width: 1%; text-align: left">$</td><td style="width: 12%; text-align: right">13,481,428</td><td style="width: 1%; text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td>Federal - other</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">3,128</td><td style="text-align: left"> </td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">221,795</td><td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td>Wisconsin net operating loss carryforwards</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">1,762,387</td><td style="text-align: left"> </td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">1,544,877</td><td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td>Australia net operating loss carryforwards</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">1,485,393</td><td style="text-align: left"> </td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">1,560,010</td><td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td style="padding-bottom: 1pt">Deferred income tax asset valuation allowance</td><td style="padding-bottom: 1pt"> </td>
<td style="border-bottom: Black 1pt solid; text-align: left"> </td><td style="border-bottom: Black 1pt solid; text-align: right">(17,989,775</td><td style="padding-bottom: 1pt; text-align: left">)</td><td style="padding-bottom: 1pt"> </td>
<td style="border-bottom: Black 1pt solid; text-align: left"> </td><td style="border-bottom: Black 1pt solid; text-align: right">(16,808,110</td><td style="padding-bottom: 1pt; text-align: left">)</td></tr>
<tr style="vertical-align: bottom">
<td style="padding-bottom: 2.5pt">Total deferred income tax assets</td><td style="padding-bottom: 2.5pt"> </td>
<td style="border-bottom: Black 2.5pt double; text-align: left">$</td><td style="border-bottom: Black 2.5pt double; text-align: right">—  </td><td style="padding-bottom: 2.5pt; text-align: left"> </td><td style="padding-bottom: 2.5pt"> </td>
<td style="border-bottom: Black 2.5pt double; text-align: left">$</td><td style="border-bottom: Black 2.5pt double; text-align: right">—  </td><td style="padding-bottom: 2.5pt; text-align: left"> </td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><br />
The Company has U.S. federal net operating loss carryforwards of approximately $44 million as of December 31, 2011, that expire
at various dates between June 30, 2015 and 2032.  The Company also has $600,000 in other federal deferred tax assets
comprised of charitable contributions carryforwards and intangible amortization.  The Company has U.S. federal research
and development tax credit carryforwards of approximately $48,000 as of December 31, 2011 that expire at various dates through
June 30, 2030.  As of December 31, 2011, the Company has approximately $34 million of Wisconsin net operating loss carryforwards
that expire at various dates between June 30, 2013 and 2027.  As of December 31, 2011, the Company also has approximately
$4 million of Australian net operating loss carryforwards available to reduce future taxable income of its Australian subsidiaries
with an indefinite carryforward period.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">A reconciliation of the beginning and ending
balance of unrecognized income tax benefits is as follows:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<table cellpadding="0" cellspacing="0" style="width: 100%; font: 10pt Times New Roman, Times, Serif">
<tr style="vertical-align: bottom">
<td style="text-align: center"> </td><td style="padding-bottom: 1pt"> </td>
<td colspan="3" style="text-align: center; border-bottom: Black 1pt solid">Six Months Ended December 31, 2011</td><td style="padding-bottom: 1pt"> </td>
<td colspan="3" style="text-align: center; border-bottom: Black 1pt solid">Year Ended June 30, 2011</td></tr>
<tr style="vertical-align: bottom">
<td style="width: 56%"> Beginning balance</td><td style="width: 8%"> </td>
<td style="width: 1%; text-align: left">$</td><td style="width: 12%; text-align: right">219,500</td><td style="width: 4%; text-align: left"> </td><td style="width: 5%"> </td>
<td style="width: 1%; text-align: left">$</td><td style="width: 12%; text-align: right">—  </td><td style="width: 1%; text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td> Additions based on tax positions related to the current period</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">—  </td><td style="text-align: left"> </td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">219,500</td><td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td> Additions for tax positions of prior years</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">—  </td><td style="text-align: left"> </td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">—  </td><td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td> Reductions for tax positions of prior years</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">—  </td><td style="text-align: left"> </td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">—  </td><td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td> Settlements</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">—  </td><td style="text-align: left"> </td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">—  </td><td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td> Lapses of statutes of limitations</td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">—  </td><td style="text-align: left"> </td><td> </td>
<td style="text-align: left"> </td><td style="text-align: right">—  </td><td style="text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td style="padding-bottom: 1pt"> Effect of foreign currency translation</td><td style="padding-bottom: 1pt"> </td>
<td style="border-bottom: Black 1pt solid; text-align: left"> </td><td style="border-bottom: Black 1pt solid; text-align: right">(10,480</td><td style="padding-bottom: 1pt; text-align: left">)</td><td style="padding-bottom: 1pt"> </td>
<td style="border-bottom: Black 1pt solid; text-align: left"> </td><td style="border-bottom: Black 1pt solid; text-align: right"> </td><td style="padding-bottom: 1pt; text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td style="padding-bottom: 2.5pt"> Ending balance</td><td style="padding-bottom: 2.5pt"> </td>
<td style="border-bottom: Black 2.5pt double; text-align: left">$</td><td style="border-bottom: Black 2.5pt double; text-align: right">209,020</td><td style="padding-bottom: 2.5pt; text-align: left"> </td><td style="padding-bottom: 2.5pt"> </td>
<td style="border-bottom: Black 2.5pt double; text-align: left">$</td><td style="border-bottom: Black 2.5pt double; text-align: right">219,500</td><td style="padding-bottom: 2.5pt; text-align: left"> </td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">The unrecognized income tax benefits relate
to the credit the Company claimed during fiscal 2011 related to a refundable Australian research and development tax credit for
qualified expenditures incurred during fiscal year 2010.  If recognized, it would favorably affect the effective income
tax rate.  The amount is included in accrued expenses in the accompanying condensed consolidated balance sheets.</p>
<p style="margin: 0pt"></p>
13123929
21268046
<p style="margin: 0pt"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><b>NOTE 16 – BUSINESS SEGMENT INFORMATION</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">The Company reports its financial results
in two reportable business segments: ZBB Energy Storage and Power Electronic Systems and Tier Electronics Power Conversion Systems.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">The ZBB Energy Storage and Power Electronics
Systems business segment designs and manufactures advanced electrical power management platforms enabling the growing global need
for distributed renewable energy, energy storage, energy efficiency, power quality, and grid modernization. The Company’s
intelligent power management platforms integrate multiple renewable and conventional onsite generation sources with rechargeable
zinc bromide flow batteries and other storage technologies to ensure optimal energy availability for on grid and off grid applications,
while maximizing the use of renewable energy sources.  The Company solves a wide range of global electrical system challenges
for diverse applications in commercial building, telecommunications, defense, utility and industrial markets.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">The Tier Electronics Power Conversion Systems
business segment designs and manufactures state of the art digital power converters for power quality, alternative energy, and
military markets.  These power converters are designed to be fully programmable and feature DSP controls with very high
levels of integration that reduce costs while increasing performance.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">  </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">The operating results for the two business
segments are as follows:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<table cellspacing="0" cellpadding="0" style="font: 10pt Times New Roman, Times, Serif; width: 100%">
<tr style="vertical-align: bottom">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; font-style: italic"> </td>
<td colspan="6" style="border-bottom: black 1.5pt solid; line-height: 115%; font-style: italic; text-align: center">Three months ended December 31,</td>
<td nowrap="nowrap" style="line-height: 115%; font-style: italic"> </td>
<td style="line-height: 115%; font-style: italic"> </td>
<td colspan="6" style="border-bottom: black 1.5pt solid; line-height: 115%; font-style: italic; text-align: center">Six months ended December 31,</td>
<td nowrap="nowrap" style="line-height: 115%; font-style: italic"> </td></tr>
<tr style="vertical-align: bottom">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">2011</td>
<td nowrap="nowrap" style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">2010</td>
<td nowrap="nowrap" style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">2011</td>
<td nowrap="nowrap" style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">2010</td>
<td nowrap="nowrap" style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom">
<td style="line-height: 115%; text-decoration: underline">Revenues:</td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="line-height: 115%"> </td>
<td nowrap="nowrap" style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="line-height: 115%"> </td>
<td nowrap="nowrap" style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="line-height: 115%"> </td>
<td nowrap="nowrap" style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td colspan="2" style="line-height: 115%"> </td>
<td nowrap="nowrap" style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom">
<td style="width: 52%; line-height: 115%">ZBB Energy Storage and Power Electronics Systems</td>
<td style="width: 1%; line-height: 115%; text-align: right"> </td>
<td style="width: 1%; line-height: 115%">$</td>
<td style="width: 9%; line-height: 115%; text-align: right">277,618</td>
<td nowrap="nowrap" style="width: 1%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%; text-align: right"> </td>
<td style="width: 1%; line-height: 115%">$</td>
<td style="width: 9%; line-height: 115%; text-align: right">234,681</td>
<td nowrap="nowrap" style="width: 1%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%">$</td>
<td style="width: 9%; line-height: 115%; text-align: right">1,689,368</td>
<td nowrap="nowrap" style="width: 1%; line-height: 115%"> </td>
<td style="width: 1%; line-height: 115%; text-align: right"> </td>
<td style="width: 1%; line-height: 115%">$</td>
<td style="width: 9%; line-height: 115%; text-align: right">234,681</td>
<td nowrap="nowrap" style="width: 1%; line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom">
<td style="line-height: 115%">Tier Electronics Power Conversion Systems</td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">163,303</td>
<td nowrap="nowrap" style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">-</td>
<td nowrap="nowrap" style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">389,410</td>
<td nowrap="nowrap" style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">-</td>
<td nowrap="nowrap" style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom">
<td style="line-height: 115%">Total</td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 115%">$</td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: right">440,921</td>
<td nowrap="nowrap" style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 115%">$</td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: right">234,681</td>
<td nowrap="nowrap" style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 115%">$</td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: right">2,078,778</td>
<td nowrap="nowrap" style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 115%">$</td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: right">234,681</td>
<td nowrap="nowrap" style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td nowrap="nowrap" style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td nowrap="nowrap" style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td nowrap="nowrap" style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td nowrap="nowrap" style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; font-style: italic"> </td>
<td colspan="6" style="border-bottom: black 1.5pt solid; line-height: 115%; font-style: italic; text-align: center">Three months ended December 31,</td>
<td nowrap="nowrap" style="line-height: 115%; font-style: italic"> </td>
<td style="line-height: 115%; font-style: italic"> </td>
<td colspan="6" style="border-bottom: black 1.5pt solid; line-height: 115%; font-style: italic; text-align: center">Six months ended December 31,</td>
<td nowrap="nowrap" style="line-height: 115%; font-style: italic"> </td></tr>
<tr style="vertical-align: bottom">
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">2011</td>
<td nowrap="nowrap" style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">2010</td>
<td nowrap="nowrap" style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">2011</td>
<td nowrap="nowrap" style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: center">2010</td>
<td nowrap="nowrap" style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom">
<td style="line-height: 115%; text-decoration: underline">Loss from Operations:</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td nowrap="nowrap" style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td nowrap="nowrap" style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td nowrap="nowrap" style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%; text-align: right"> </td>
<td nowrap="nowrap" style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom">
<td style="line-height: 115%">ZBB Energy Storage and Power Electronics Systems</td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%">$</td>
<td style="line-height: 115%; text-align: right">(2,281,768</td>
<td nowrap="nowrap" style="line-height: 115%">)</td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%">$</td>
<td style="line-height: 115%; text-align: right">(1,794,398</td>
<td nowrap="nowrap" style="line-height: 115%">)</td>
<td style="line-height: 115%"> </td>
<td style="line-height: 115%">$</td>
<td style="line-height: 115%; text-align: right">(3,558,222</td>
<td nowrap="nowrap" style="line-height: 115%">)</td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%">$</td>
<td style="line-height: 115%; text-align: right">(3,798,482</td>
<td nowrap="nowrap" style="line-height: 115%">)</td></tr>
<tr style="vertical-align: bottom">
<td style="line-height: 115%">Tier Electronics Power Conversion Systems</td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">(483,568</td>
<td nowrap="nowrap" style="line-height: 115%">)</td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">-</td>
<td nowrap="nowrap" style="line-height: 115%"> </td>
<td style="line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%">$</td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">(903,596</td>
<td nowrap="nowrap" style="line-height: 115%">)</td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%"> </td>
<td style="border-bottom: black 1.5pt solid; line-height: 115%; text-align: right">-</td>
<td nowrap="nowrap" style="line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom">
<td style="line-height: 115%">Total</td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 115%">$</td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: right">(2,765,336</td>
<td nowrap="nowrap" style="line-height: 115%">)</td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 115%">$</td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: right">(1,794,398</td>
<td nowrap="nowrap" style="line-height: 115%">)</td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 115%">$</td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: right">(4,461,818</td>
<td nowrap="nowrap" style="line-height: 115%">)</td>
<td style="line-height: 115%; text-align: right"> </td>
<td style="border-bottom: black 2.25pt double; line-height: 115%">$</td>
<td style="border-bottom: black 2.25pt double; line-height: 115%; text-align: right">(3,798,482</td>
<td nowrap="nowrap" style="line-height: 115%">)</td></tr>
</table>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">The accounting policies of the business
segments are the same as those for the consolidated Company.</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">Total assets for the two business segments
are as follows:</p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<table cellpadding="0" cellspacing="0" style="width: 100%; font: 10pt Times New Roman, Times, Serif">
<tr style="vertical-align: bottom">
<td style="text-align: center"> </td><td style="padding-bottom: 1pt"> </td>
<td colspan="3" style="text-align: center; border-bottom: Black 1pt solid">December 31, 2011</td><td style="padding-bottom: 1pt"> </td>
<td colspan="3" style="text-align: center; border-bottom: Black 1pt solid">June 30, 2011</td></tr>
<tr style="vertical-align: bottom">
<td style="width: 56%">ZBB Energy Storage and Power Electronics Systems</td><td style="width: 8%"> </td>
<td style="width: 1%; text-align: left">$</td><td style="width: 12%; text-align: right">11,510,497</td><td style="width: 2%; text-align: left"> </td><td style="width: 7%"> </td>
<td style="width: 1%; text-align: left">$</td><td style="width: 12%; text-align: right">10,161,151</td><td style="width: 1%; text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td style="padding-bottom: 1pt">Tier Electronics Power Conversion Systems</td><td style="padding-bottom: 1pt"> </td>
<td style="border-bottom: Black 1pt solid; text-align: left"> </td><td style="border-bottom: Black 1pt solid; text-align: right">3,148,941</td><td style="padding-bottom: 1pt; text-align: left"> </td><td style="padding-bottom: 1pt"> </td>
<td style="border-bottom: Black 1pt solid; text-align: left"> </td><td style="border-bottom: Black 1pt solid; text-align: right">2,186,475</td><td style="padding-bottom: 1pt; text-align: left"> </td></tr>
<tr style="vertical-align: bottom">
<td style="padding-bottom: 2.5pt">Total</td><td style="padding-bottom: 2.5pt"> </td>
<td style="border-bottom: Black 2.5pt double; text-align: left">$</td><td style="border-bottom: Black 2.5pt double; text-align: right">14,659,438</td><td style="padding-bottom: 2.5pt; text-align: left"> </td><td style="padding-bottom: 2.5pt"> </td>
<td style="border-bottom: Black 2.5pt double; text-align: left">$</td><td style="border-bottom: Black 2.5pt double; text-align: right">12,347,626</td><td style="padding-bottom: 2.5pt; text-align: left"> </td></tr>
</table>
<p style="margin: 0pt"></p>
<p style="margin: 0pt"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"><b>NOTE 17 — SUBSEQUENT
EVENTS</b></p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white"> </p>
<p style="font: 10pt Times New Roman, Times, Serif; margin: 0; background-color: white">On January 31, 2012 and February 1, 2012
we entered into Stock Purchase Agreements with certain investors including certain members of the Company’s Board of Directors
and management providing for the issuance of a total of 4,431,603 shares of the Company’s common stock for an aggregate purchase
price of $3,165,000 at a weighted average price per share of $0.71.  The closing took place on February 7, 2012.  The
net proceeds to the Company, after deducting approximately $270,000 of offering costs, were $2,895,000.</p>
<p style="margin: 0pt"></p>
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41055079
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