INFRAX SYSTEMS, INC. – 10-K/A – Management’s discussion and analysis of financial condition and results of operations

Our significant accounting policies are more fully described in Note 1 to the financial statements. However, certain accounting policies are particularly important to the portrayal of our financial position and results of operations and require the application of significant judgment by our management; as a result they are subject to an inherent degree of uncertainty. In applying these policies, our management uses their judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Those estimates are based on knowledge of our industry, historical operations, terms of existing contracts, and our observance of trends in the industry, information provided by our customers and information available from other outside sources, as appropriate.

    PLAN OF OPERATIONS    

As more fully described in "LIQUIDITY AND CAPITAL RESOURCES", we had approximately $25,000 in cash at June 30, 2011, and extended in excess of the line of credit from Mr. Talari with which to satisfy our future cash requirements. Mr. Talari has extended his support and is in the process to extend his support to a total of $1 million. Our management believes our cash and majority shareholder commitment will support only limited activities for the next twelve months. We are attempting to secure other sources of financing to develop our business plan, and to implement our sales and marketing plan. We believe full implementation of our plan of operations, completion of development of the smart grid related hardware and software, completion of pending acquisitions and the integration of the Lockwood will cost approximately $5 million. We have no assurance we will be able to obtain additional funding to sustain even limited operations beyond twelve months based on the available cash and balance of our line of credit with Mr. Talari. If we do not obtain additional funding, we may need to cease operations until we do so and, in that event, may consider a sale of our technology. Our plan of operations set forth below depends entirely upon obtaining additional funding.

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We are currently in ongoing discussions, arrangements, understandings, commitments or agreements for additional funding with two firms. In this endeavor, we will consider equity funding, either or both of a private sale or a registered public offering of our common stock; however, it seems unlikely that we can obtain an underwriter. We will consider a joint venture in which the joint venture partner provides funding to the enterprise. We will consider debt financing, both unsecured and secured by a pledge of our technology. As noted previously, we our intermediary funding is provided through our line of credit arrangement with Mr. Talari.

   Our Marketing Plan   

The first phase in our plan of operations, subject to adequate funding, will be implementation of our sales and marketing plan. We plan to initially select several resource constrained small to mid-sized utilities to function as beta test sites for our Secure Intelligent Energy Platform. We are currently working with one mid-sized utility during the design phase of product development. We will also be targeting utilities for the immediate deployment of our "Smart Grid Ready" wireless products in preparation of the completion and launch of our SIEP.

Infrax Systems has entered into a Technical Information License Agreement (TIL) with Itron, the leading manufacturer of smart meters. The license agreement allows Infrax to design its Secure Network Interface Card (SNIC) and communications module for inclusion in Itron Centron I & Centron II meters. We have been working closely with Itron during this process to ensure that we are fully compliant and the results to date have all met Itron's criteria. When the qualification testing process is finished, Infrax can license the communications module to Itron and sell the product directly as Itron-compliant.

While we have also been in discussions with several other global meter manufacturers regarding the inclusion of the SNIC and GridMesh into their AMI meters, we believe that Itron's dominant market position and the strength of our relationship will drive the results required to meet our business objectives.

Additionally, during this stage we will continue to design and implement wireless networks in developing countries in continuation of the former Trimax Wireless strategy. In parallel with this activity we plan to continue to target wireless ISP's and carriers, offering our current wireless voice and data communications products.

We may explore the opportunities to locate local and regionally based companies in emerging markets with existing relationships with the key decision makers in Africa, and Middle East, that would be willing establish strategic relationships in those markets and establishing their own Network Operating Centers to increase our visibility and support our customers in those markets. We are considering the establishment of this concept as our business model for countries in these emerging markets.

Product Research and Development

Our Smart Grid products are in the late stages of development and we anticipate delivering prototype solutions to our targeted beta customers by the end of the 1 st quarter of 2012. We have budgeted $1.8M for the completion of our hardware and software products. We do not have financial or other resources to undertake this development. Without additional funding sufficient to cover this budgeted amount, we will not have the resources to conduct this development.

We anticipate that as funding is received, of which there is no assurance, and we will begin hiring the appropriate technical staff that will be able to handle support requirements for this market segment. We anticipate a need for up to forty-four employees by the end of the first year of full operation after funding. The number of employees we hire during the next twelve months will depend upon the level of funding and sales achieved.

                                            - 21 -           Funding   

To support our activities and provide the initial sales and support for entry into the Utility marketplace, as noted above, we will require an initial investment of approximately $5 million. We expect this level of funding to carry us into the Smart Grid and Utility marketplaces and provide the capital necessary to complete the development of our SIEP and SNIC products .

   RESULTS OF OPERATIONS   

Comparison year ended June 30, 2011 to June 30, 2010

For the year ended June 30, 2011 and 2010, we incurred net losses of $3,884,305 and $986,710, respectively. Losses consisted of $500,900 and $510,267 of stock based compensation for the years ended June 30, 2011 and 2010, respectively. Losses also include depreciation and amortization, non-cash expenses, in the amount of $1,347,819 and $2,398 for the years ended June 30, 2011 and 2010, respectively. The increase was primarily due to the amortization charges for intangible and tangible assets acquired from Trimax. Additionally, there were impairments and write downs of certain assets, due to valuation assessments by management, incurring charges of approximately $892,000 in year 2011. Compensation and consulting expenses increased approximately $653,000 for the comparative periods, due to the increase in full-time equivalents and the full year operations of the Trimax acquisition, as well as a full year increase in employment agreement, both in number of individuals under contract and annual amount. General and administrative increased approximately $327,000, while professional fees decreased approximately $67,000.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2011, we had approximately $25,000 in cash. We have exceeded the line of credit from Mr. Talari for which to pay normal operating expenses. Mr. Talari has continued funding our operations. Mr. Talari has expressed commitment to $1 million dollars of funding, the Company is currently in process of formalizing the agreement. We believe this support will allow our continuation while we attempt to secure other sources of financing to develop our business plan, and increase efforts of our marketing plan. Cash used in operations was $592,774, which was primarily provided from advances from our majority shareholder.

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On September 6, 2005, we obtained a loan commitment from Mr. Talari, one of our director and controlling person in the aggregate amount of $350,000, which was amended to $500,000, under a revolving master promissory note, due on demand, with interest at the rate of five percent per annum. We have been receiving advances on this note on an as needed basis and through June 30, 2011, we have received a total of $494,253 for the year ended June 30, 2011 and $574,957, net, since the inception of the commitment. During the course of this agreement Mr. Talari has made a number of conversions, reducing the note and accrued interest in exchange for our common stock.

On June 29, 2010 the Company entered into an agreement with the shareholders of Trimax Wireless, Inc. ("Trimax") for the purchase of their business assets and technology. As part of the agreement a promissory note, in the amount of $712,500 was entered. The note is interest bearing at 6% per annum until fully paid with a start period of 90 (September 29, 2010) days for the first payment. The Company shall make interest-only payments on the first day of each month from the date of this Note until the earlier of (a) receipt of Investment Funding as defined; or (b) 180 days from the date hereof ("Maturity Date") (December 29, 2010). Principal plus all accrued and unpaid interest on such principal shall be due and payable on the Maturity Date We have not made our required payments on this note.

On June 17, 2010 the Company entered into a Bridge Loan Agreement with Blue Diamond Consulting, LLC ("Lender"). The Company may be advanced up to $500,000, secured by the Company's common stock. Advances may be requested in increments of $25,000 and bear interest of 8% per annum. Advances have repayment terms of six months from the date of the requested advance. The Lender has the right, at their option, to convert any amounts due, plus interest, into the Company's common stock at a conversion rate, as defined, at 50% of the closing bid price at the date of conversion request. As of June 30, 2011, there have been no requested advances and no amount is due to Lender.

We anticipate that, depending on market conditions and our plan of operations, we may incur operating losses in the future. We base this expectation, in part, on the fact that we may not be able to generate enough gross profit from our sales and services to cover our operating expenses and increased sales and marketing efforts. Consequently, there remains doubt about the Company's future and sustained profitability.

Recent Accounting Pronouncements

We have reviewed accounting pronouncements and interpretations thereof that have effectiveness dates during the periods reported and in future periods. The Company has carefully considered the new pronouncements that alter previous generally accepted accounting principles and does not believe that any new or modified principles will have a material impact on the corporation's reported financial position or operations in the near term. The applicability of any standard is subject to the formal review of our financial management and certain standards are under consideration. Those standards have been addressed in the notes to the audited financial statement and in our Annual Report, filed on this Form 10-K.

                                          - 23 -               Critical Accounting Policies    

The Company's significant accounting policies are presented in the Company's notes to financial statements for the period ended June 30, 2011 and 2010, which are contained in this filing, the Company's 2011 Annual Report on Form 10-K. The significant accounting policies that are most critical and aid in fully understanding and evaluating the reported financial results include the following:

The Company prepares its financial statements in conformity with generally accepted accounting principles in the United States of America. These principals require management to make estimates and assumptions that 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 amounts of revenues and expenses during the reporting period. Management believes that these estimates are reasonable and have been discussed with the Board of Directors; however, actual results could differ from those estimates.

The Company issues restricted stock to employees and consultants for various services. Cost for these transactions are measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is measurable more reliably measurable. The value of the common stock is measured at the earlier of (i) the date at which a firm commitment for performance by the counterparty to earn the equity instruments is reached or (ii) the date at which the counterparty's performance is complete.

Long-lived assets such as property, equipment and identifiable intangibles are reviewed for impairment whenever facts and circumstances indicate that the carrying value may not be recoverable. When required impairment losses on assets to be held and used are recognized based on the fair value of the asset. The fair value is determined based on estimates of future cash flows, market value of similar assets, if available, or independent appraisals, if required. If the carrying amount of the long-lived asset is not recoverable from its undiscounted cash flows, an impairment loss is recognized for the difference between the carrying amount and fair value of the asset. When fair values are not available, the Company estimates fair value using the expected future cash flows discounted at a rate commensurate with the risk associated with the recovery of the assets. We did not recognize any impairment losses for any periods presented.

Off-Balance Sheet Arrangements

We do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as special purpose entities or variable interest entities, which have been established for the purpose of facilitating off-balance sheet arrangements or other limited purposes.

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Management Consideration of Alternative Business Strategies

In order to continue to protect and increase shareholder value management believes that it may, from time to time, consider alternative management strategies to create value for the company or additional revenues. Strategies to be reviewed may include acquisitions; roll-ups; strategic alliances; joint ventures on large projects; and/or mergers.

The Company is currently in merger or acquisition negotiations with entities which management believes to be key components of the Smart Grid solutions we envision. Management believes that acquisitions will be a catalyst for advancing the Company's existing technology to attain greater market share. We are currently in valuation negotiations with the targeted companies; acquisitions will be primarily share exchanges. Additionally, we are seeking capital financing for the purposes of furthering our plan of operations. These negotiations have not advanced, at this point, to an issuance of a letter of intent; however management believes this ongoing strategy will best serve existing shareholders.

The Company has been approached as a potential target for acquisition. Preliminary discussions were brought to the attention of the Board of Directors. Although negotiations have not advanced, we believe that those discussions were validation of our technology. Management and the Board of Directors are aware of our position and potential of our technology and will consider any offer that increases shareholder value.

Management will only consider these options where it believes the result would be to increase shareholder value while continuing the viability of the company.