NOTE 2

BASIS OF PREPARATION

Pursuant to the rules and regulations of the Securities and Exchange Commission for Form 10-Q, the condensed consolidated financial statements, footnote disclosures and other information normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The condensed consolidated financial statements contained in this report are unaudited but, in the opinion of management, reflect all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the condensed consolidated financial statements. All significant inter-company accounts and transactions have been eliminated on consolidation. The results of operations for any interim period are not necessarily indicative of results for the full year. The condensed consolidated balance sheet at June 30, 2011 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Form 10-K for the year ended June 30, 2011.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management reviews these estimates and assumptions on an ongoing basis using currently available information. Actual results could differ from those estimates.

Inventories, which consist primarily of goods held for resale, are stated at the lower of cost (weighted-average method) or market and are comprised as follows:

	September 30, 2011			June 30, 2011
Finished goods	$	1,230,333		$	1,207,345
Components		221,083			221,101
		1,451,416			1,428,446
Less: Provision for obsolescence		(871,284	)		(891,730	)
	$	580,132		$	536,716

Included in revenues on the condensed consolidated statement of operations for the three months ended September 30, 2011 is the recovery of out of pocket expenses paid on behalf of Zeroloft Corp. and Zeroloft sales of $102,658 (September 30, 2010 - $267,220). Cost of sales includes $16,814 of expenditures related to Zeroloft activities (September 30, 2010 - $93,363) and general and administrative expenses includes $85,844 of expenditures related to Zeroloft activities (September 30, 2010 - $173,881) and amortization of intangible asset of $0 (September 30, 2010 - $196,043).