UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549










FORM 10-K



(Mark One)





|x | ANNUAL REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------







For the fiscal year ended June 30,
2012



or





|o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------





For the transition period from               to



Commission File Number 001-10647



PRECISION OPTICS CORPORATION, INC.

(Exact name of registrant as specified in
its charter)



|Massachusetts                     |  | 04-2795294         
|--------------------------------- |  | -------------------
|(State or other jurisdiction      |  | (I.R.S. Employer   
|of incorporation or organization) |  | Identification No.)



22 East Broadway

Gardner, Massachusetts 01440

(Address of principal executive offices)
(Zip Code)



(978) 630-1800

(Registrant’s telephone number,
including area code)



Securities registered pursuant to Section 12(b) of
the Act: None



Securities registered pursuant to Section 12(g) of
the Act: Common Stock, $0.01 par value



Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes x No



Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or 15(d) of the Act. o Yes x No



Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. x Yes o No













Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Website, if any, every Interactive Data file required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). x Yes o No



Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated
by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x



Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of
“large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2
of the Exchange Act.



|Large accelerated filer o                     |  | Accelerated filer o        
|--------------------------------------------- |  | ---------------------------
|                                              |  |                            
|Non-accelerated filer o                       |  | Smaller reporting company x
|(Do not check if a smaller reporting company) |  |                            



Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Act). o Yes x No



The aggregate market value of the voting and
non-voting common stock held by non-affiliates of the registrant on December 30, 2011 was approximately $410,820 based on
a total of 293,443 shares of the registrant’s common stock held by non-affiliates on December 31, 2011, at the closing
price of $1.40 per share as reported on the OTCQB market.



The number of shares of outstanding common
stock of the registrant as of October 15, 2012 was 4,029,134.



DOCUMENTS INCORPORATED BY REFERENCE:  None.
















PRECISION OPTICS CORPORATION, INC.

FORM 10-K



TABLE OF CONTENTS



|         |          |                                                                                                              | PAGE
|-------- | -------- | ------------------------------------------------------------------------------------------------------------ | ----
|PART I   |          |                                                                                                              |     
|         | Item 1.  | Business                                                                                                     | 2   
|         | Item 1A. | Risk Factors                                                                                                 | 6   
|         | Item 2.  | Properties                                                                                                   | 10  
|         | Item 3.  | Legal Proceedings                                                                                            | 11  
|         | Item 4.  | Mine Safety Disclosures (Not applicable.)                                                                    | 11  
|         |          |                                                                                                              |     
|PART II  |          |                                                                                                              |     
|         | Item 5.  | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 11  
|         | Item 6.  | Selected Financial Data                                                                                      | 12  
|         | Item 7.  | Management’s Discussion and Analysis of Financial Condition and Results of Operations                        | 12  
|         | Item 7A. | Quantitative and Qualitative Disclosures About Market Risk                                                   | 16  
|         | Item 8.  | Financial Statements and Supplementary Data                                                                  | 17  
|         | Item 9.  | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure                         | 34  
|         | Item 9A. | Controls and Procedures                                                                                      | 34  
|         | Item 9B. | Other Information                                                                                            | 36  
|         |          |                                                                                                              |     
|PART III |          |                                                                                                              |     
|         | Item 10. | Directors, Executive Officers and Corporate Governance                                                       | 36  
|         | Item 11. | Executive Compensation                                                                                       | 39  
|         | Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               | 43  
|         | Item 13. | Certain Relationships and Related Transactions, and Director Independence                                    | 47  
|         | Item 14. | Principal Accounting Fees and Services                                                                       | 47  
|         | Item 15. | Exhibits, Financial Statement Schedules                                                                      | 48  







1





PART I



This Annual Report contains forward-looking
statements as defined under the federal securities laws. All statements other than statements of historical facts included in this
Annual Report on Form 10-K regarding our financial performance, business strategy and plans and objectives of management for
future operations and any other future events are forward-looking statements and based on our beliefs and assumptions. Words such
as “may,” “will,” “expect,” “might,” “believe,” “anticipate,”
“intend,” “could,” “estimate,” “project,” “plan,” and other similar
words are one way to identify such forward-looking statements. Actual results could vary materially from these forward-looking
statements. Such statements reflect our current view with respect to future events and are subject to certain risks, uncertainties,
and assumptions including, without limitation, those risks and uncertainties contained in the Risk Factors section of this Annual
Report on Form 10-K and our other filings made with the SEC. Although we believe that our expectations are reasonable, we
can give no assurance that such expectations will prove to be correct. Based upon changing conditions, any one or more of these
events described herein as anticipated, believed, estimated, expected or intended may not occur. All prior and subsequent written
and oral forward- looking statements attributable to our Company or persons acting on our behalf are expressly qualified in their
entirety by this cautionary statement. We do not intend to update any of the forward-looking statements after the date of this
Annual Report to conform these statements to actual results or to changes in our expectations, except as required by law.



ITEM 1.  BUSINESS.



OVERVIEW



We have been developing and manufacturing
advanced optical instruments since 1982. Today, the vast majority of our business is the design and manufacture of high-quality
medical devices and approximately 10% of our business is design and manufacture of military and industrial products. Our medical
instrumentation line includes traditional endoscopes and endocouplers as well as other custom imaging and illumination products
for use in minimally invasive surgical procedures. Much of our recent development efforts have been targeted at the development
of next generation endoscopes. For the last ten years, we have funded internal research and development programs to develop next
generation capabilities for designing and manufacturing 3D endoscopes and very small MicroprecisionTM lenses, anticipating
future requirements as the surgical community continues to demand smaller and more enhanced imaging systems for minimally invasive
surgery. Our unique proprietary technology in these areas, combined with recent developments in the areas of 3D displays and millimeter
sized image sensors, has allowed us to begin commercialization of these technologies. We believe that new products based on these
technologies provide enhanced imaging for existing surgical procedures and can enable development of many new procedures. While
we have continued to provide custom optics solutions to our medical device company customers, we simultaneously focused significant
development efforts on further advancement of proprietary technology for 3D endoscopy and MicroprecisionTM optical components
and micro medical camera assemblies.



We incorporated in Massachusetts in December 1982
and have been publicly-owned since November 1990. References to our Company contained herein include our two wholly-owned
subsidiaries, Precise Medical, Inc. and Wood’s Precision Optics Corporation, Limited, except where the context otherwise
requires. Our website is www.poci.com. Information contained on our website does not constitute part of this report.



Principal Products and Services



Our Current Core Business:
 Since 1982, we have manufactured medical products such as endoscopes and endocouplers. We have developed and sold
endoscopes incorporating various optical technologies including our proprietary LenslockTM technology, for use in a
variety of minimally invasive surgical and diagnostic procedures. Today, we produce endoscopes for various applications,
which are CE marked and therefore certified for sale throughout the European Economic Area. Since 1985, we have developed,
manufactured and sold a proprietary product line of endocouplers. We also design and manufacture custom optical medical
devices to satisfy our customers’ specific requirements. In addition to medical devices, we also manufacture and sell
components and assemblies specially designed for industrial and military use.



2





MicroprecisionTM Lenses and Micro
Medical Cameras: While the size of endoscopes has gradually decreased over time, the widespread use of very small endoscopes,
with diameters of one millimeter or smaller, has been limited in part, we believe, by the inability of traditional lens fabrication
methods to support these smaller sizes with good image quality and acceptable manufacturing costs. We believe our MicroprecisionTM
optics technology provides a solution to this problem. Combined with recent advances by other companies in complementary metal-oxide-semiconductor
(CMOS) image sensor fabrication techniques, our MicroprecisionTM lenses and proprietary manufacturing techniques enable the
manufacture of micro medical cameras at low prices and with sizes on the order of one millimeter or less, characteristics that
make them well suited to medical applications. While we have manufactured MicroprecisionTM components for the last few years,
we only recently received production orders for endoscopes and camera assemblies that use MicroprecisionTM technology.



3D Endoscopes: Our 3D endoscopes
provide next generation optical imaging for minimally invasive surgical procedures that utilize hand-held rigid endoscopes by using
the brain’s natural ability to perceive depth (the third dimension) by viewing one’s environment through two eyes.
Utilizing our proprietary technology to provide independent images to right and left eyes enables surgeons to view the operative
field with 3D perception. We are currently demonstrating prototype versions of our hand-held 3D endoscopes to potential customers.



Competition and Markets



We sell our products in a highly competitive
market and we compete for business with both foreign and domestic manufacturers. Many of our current competitors are larger than
us and have substantially greater resources than we do. In addition, there is an ongoing risk that other domestic or foreign companies
who do not currently service or manufacture products for our target markets, some with greater experience in the optics industry
and greater financial resources than we have, may seek to produce products or services that compete directly with ours.



We believe that, while our resources are
substantially more limited than those of some of our competitors, we can compete successfully in this market on the bases of product
quality, price, delivery and innovation. Our success will depend in part on our ability to maintain a technological advantage over
our competitors. To this end, we intend to continue to aggressively support and augment our internal engineering, research and
development resources and to aggressively pursue patent protection for existing and new technology. We believe that our unique
technical capabilities in the areas of MicroprecisionTM optics and micro medical cameras, as well as 3D endoscopes currently
represent competitive advantages for us in the minimally invasive surgical device market.



Market Opportunities



MicroprecisionTM lenses and Micro
Medical Cameras: While other approaches exist for the manufacture of camera lenses, we believe that none on the market today
has the combination of low cost, small size, range of optical specifications and high image quality required for many medical applications.
By enabling the production of millimeter sized and smaller cameras with low manufacturing costs, we believe this technology opens
the possibility to replace existing re-sterilizable endoscopes with a single-use alternative. Also, the small size of our MicroprecisionTM
lenses and micro medical cameras can provide visualization for existing procedures that are currently performed blind or with sub-optimal
imaging, and we believe can facilitate the development of new surgical procedures that are currently impractical without sub-mm
visualization instrumentation.



3D Endoscopes: 3D endoscopes have
been used for many years as part of robotic surgery systems partly because the market price of robotic surgery systems is high
enough to support the cost of a high quality custom 3D display. However, we believe the use of 3D endoscopes in hand-held (non-robotic)
systems has been limited in the past by the high cost of good quality 3D display systems. Recently, the cost of high quality 3D
display systems has dropped dramatically, driven by demand in the consumer market. Now, low cost, high quality 3D display systems
(i.e. 3D televisions) are newly available in the market, which we believe enables the development of 3D hand-held endoscopy and
creates a new market opportunity for our 3D endoscopes. To take advantage of this developing market, we have designed and built
a high definition 3D endoscope for use in hand-held 3D endoscopy systems. We are now demonstrating this prototype to potential
customers.



3





Sales and Marketing



We market our 3D endoscopes, MicroprecisionTM
optical components and micro medical cameras by leveraging our existing relationships with major medical device companies –
many of which are current customers. We intend to make our existing and future technologies available to our customers for use
in their current and newly developed minimally invasive surgical products and to eventually develop and market our own proprietary
products, which incorporate these new technologies. In addition to direct sales channels through our existing customer relationships,
we also develop new sales opportunities through our website, email mailings, and attendance at market specific tradeshows.



International Business



We have had negligible direct export sales
to date. However, our medical products have received the CE Mark Certification, which permits sales into the European Economic
Area. We may establish or use production facilities overseas to produce key components for our business, such as lenses. Since
the 1990s, we have maintained a Hong Kong subsidiary to support business and quality control activities as required throughout Asia.
We believe that the cost savings from such production may be essential to our ability to compete on a price basis in the medical
products area particularly and to our profitability generally.



Research and Development



We believe that our future success depends
to a large degree on our ability to continue to conceive and develop new optical products and technologies to enhance the performance
characteristics and methods of manufacture of existing and new products. Research and development expenses are incurred on our
own proprietary products and technology such as MicroprecisionTM optics, micro medical cameras and 3D endoscopes, as well
as on custom projects on behalf of customers. Accordingly, we expect to continue to seek to obtain product-related design and
development contracts with customers and to invest our own funds on research and development. For the years ended June 30, 2012
and 2011, research and development expenses, net amounted to $664,696 and $825,033, respectively.





Raw Materials and Principal Suppliers



A key raw material component for our products
is precision grade optical glass, which we obtain from a few suppliers, principally SCHOTT North America, Inc. and Ohara Corporation.
For optical thin film coatings, the basic raw materials we utilize are metals and dielectric compounds, which we obtain from a
variety of chemical suppliers. Certain of the thin film coatings utilized in our products are currently procured from an outside
supplier, but most thin film coatings are produced in-house. We believe that our demand for these raw materials and thin film coating
services is small relative to the total supply, and that the materials and services required for the production of our products
are currently available in sufficient production quantities and will remain available for fiscal year 2013.



Patents and Trademarks



We rely, in part, upon patents, trade secrets
and proprietary knowledge as well as personnel policies and employee confidentiality agreements concerning inventions and other
creative efforts to develop and to maintain our competitive position. We plan to file for patents, copyrights and trademarks in
the United States and in other appropriate countries to protect our intellectual property rights to the extent practicable. We
currently hold rights to fourteen United States patents, and have five patent applications pending, including applications for
our new generation of micro medical cameras and 3D endoscopes. Our current patent portfolio includes patents, rights to patents
and patent applications that cover various aspects of our technology in the following areas:



| | — | Medical Devices: 8 issued, 1 pending
| | - | ------------------------------------

| | — | 3-D endoscopes: 3 issued, 2 pending
| | - | -----------------------------------

| | — | MicroprecisionTM lenses and micro medical cameras: 2 issued, 2 pending
| | - | ---------------------------------------------------------------------

| | — | Military Products: 1 issued
| | - | ---------------------------



The patents contained in our current patent
portfolio have expiration dates ranging from November 2011 to August 2026. We are not aware of any infringements of these
patents. While we believe that our pending applications relate to patentable devices or concepts, these patents may not ultimately
be issued and we may not be able to successfully defend these patents or effectively limit the development of competitive products
and services.



4





In July 2011, we entered into an asset
purchase agreement with Intuitive Surgical Operations, Inc., in which we received $2.5 million in connection with the sale
of certain intellectual property. Pursuant to the agreement, we agreed to assign to Intuitive Surgical all of our currently issued
and non-expired patents and pending patent applications, and in return, Intuitive Surgical agreed to grant to us a royalty-free,
worldwide license to these patents in fields outside of medical robotics.



We intend to continue to innovate and extend
our technological capabilities in the areas of 3-D endoscopy MicroprecisionTM optics and micro medical cameras and to aggressively
pursue patent protection for such developments.



Employees



As of June 30, 2012, we had 28 employees, 25 of which
were full-time employees. There were 14 employees in manufacturing, 5 in engineering/research and development, 1 in sales and
marketing and 8 in finance and administration. We are not a party to any collective bargaining agreements. We believe our
relations with our employees are good.



Customers



Revenues from our largest customers, as a percentage of total
revenues, for fiscal years 2012 and 2011 were as follows:



|           |  | 2012 |     |   | 2011 | 
|---------- |  | ---- | --- | - | ---- | 
|Customer A |  |      | 34  | % |      | 
|Customer B |  |      | 22  |   |      | 
|Customer C |  |      | 3   |   |      | 
|All others |  |      | 41  |   |      | 
|           |  |      | 100 | % |      | 



No other customer accounted for more than 10% of our revenues
in fiscal years 2012 and 2011. At June 30, 2012, receivables from our two largest customers were 31% and 27%, respectively,
of total accounts receivable.



Environmental Matters



Our operations are subject to a variety of federal, state and
local laws and regulations relating to the discharge of materials into the environment or otherwise relative to the protection
of the environment. From time to time, we use a small amount of hazardous materials in our operations. We believe that we comply
with all applicable environmental laws and regulations.



Government Regulations



Domestic Regulation. We currently develop, manufacture
and sell several medical products, the marketing of which is subject to governmental regulation in the United States. Medical devices
are regulated in the United States by the Food and Drug Administration, or FDA, and, in some cases, by certain state agencies.
The FDA regulates the research, testing, manufacture, safety, effectiveness, labeling, promotion and distribution of medical devices
in the United States. Generally, medical devices require clearance or approval prior to commercial distribution. Additionally,
certain material changes to, and changes in intended use of, medical devices also are subject to FDA review and clearance or approval.
Non-compliance with applicable requirements can result in failure of the FDA to grant pre-market clearance or approval, withdrawal
or suspension of approval, suspension of production, or the imposition of various other penalties.



We previously notified the FDA of our intent to market our endoscopes,
image couplers, beamsplitters, adapters and video ophthalmoscopes, and the FDA has determined that we may market such devices,
subject to the general control provisions of the Food, Drug and Cosmetic Act. We obtained this FDA permission without the need
to undergo a lengthy and expensive approval process due to the FDA’s determination that such devices met the regulatory standard
of being substantially equivalent to existing FDA-approved devices.



5





In the future, we plan to market additional medical devices
that may require the FDA’s permission to market such products. We may also develop additional products or seek to sell some
of our current or future medical products in a manner that requires us to obtain the permission of the FDA to market such products,
as well as the regulatory approval or license of other federal, state and local agencies or similar agencies in other countries.
The FDA has authority to conduct detailed inspections of manufacturing plants in order to assure that “good manufacturing
practices” are being followed in the manufacture of medical devices, to require periodic reporting of product defects to
the FDA and to prohibit the sale of devices which do not comply with law.



Foreign Requirements. Sales of medical device products
outside the United States are subject to foreign regulatory requirements that may vary from country to country. Our failure to
comply with foreign regulatory requirements would jeopardize our ability to market and sell our products in foreign jurisdictions.
The regulatory environment in the European Union member countries of the European Economic Area for medical device products differs
from that in the United States. Medical devices sold in the European Economic Area must bear the CE mark. Devices are classified
by manufacturers according to the risks they represent, with a classification of Class III representing the highest risk devices
and Class I representing the lowest risk devices. Once a device has been classified, the manufacturer can follow one of a
series of conformity assessment routes, typically through a registered quality system, and demonstrate compliance to a “European
Notified Body.” The CE mark may then be applied to the device. Maintenance of the system is ensured through annual on-site
audits by the notified body and a post-market surveillance system requiring the manufacturer to submit serious complaints to the
appropriate governmental authority. All of our medical products are CE mark certified.



ITEM 1A.  RISK FACTORS.



RISKS RELATED TO OUR BUSINESS



An investment in our common stock involves a high degree of
risk. Before making an investment decision, you should give careful consideration to the following risk factors, in addition to
the other information included in this Annual Report. If any of the following risks actually occur, our business, financial condition
or results of operations could be materially and adversely affected and you may lose some or all of your investment.



The current worldwide economic downturn could have a negative
impact on our business, operating results and financial condition.



If the economic downturn continues, our customers may delay,
reduce or cancel their purchases of our products, particularly if they or their customers have difficulty obtaining credit, which
could then reduce our revenues. The economic downturn could increase competition which could have the effect of reducing our prices.
We could incur losses if a customer’s business fails and they are unable to pay us, or pay us on a timely basis. Likewise,
if our suppliers have difficulty in obtaining credit or in operating their businesses, they may not be able to provide us with
the materials we use to manufacture our products. These actions could result in reduced revenues and higher operating costs, and
have an adverse effect on our results of operations and financial condition.



We rely on a small number of customers who may not consistently
purchase our products in the future and if we lose any one of these customers, our revenues may decline.



In the fiscal year ended June 30, 2012, our two largest
customers represented approximately 34% and 22%, respectively, of our total revenues. In the fiscal year ended June 30, 2011,
our three largest customers represented approximately 24%, 22% and 17%, respectively, of our total revenues. No other customer
accounted for more than 10% of our revenues during those periods. At June 30, 2012, receivables from our two largest customers
were 31% and 27%, respectively, of the total accounts receivable.



In the future, a small number of customers may continue to represent
a significant portion of our total revenues in any given period. These customers may not consistently purchase our products at
a particular rate over any subsequent period. A loss of any of these customers could adversely affect our revenues.



6





Negative economic conditions increase the risk that we
could suffer unrecoverable losses on our customers’ accounts receivable which would adversely affect our financial results.



At June 30, 2012, receivables from our two largest customers
were 31% and 27%, respectively, of the total accounts receivable. While we believe we have a varied customer base and have experienced
strong collections in the past, if current economic conditions fail to improve we may experience changes in our customer base,
including reductions in purchasing commitments, which could also have a material adverse effect on our revenues and liquidity.
We have not purchased insurance on our accounts receivable balances.



We rely heavily upon the talents of our Chief Executive
Officer, the loss of whom could severely damage our business.



Our performance depends to a large extent on a small number
of key scientific, technical, managerial and marketing personnel. In particular, we believe our success is highly dependent upon
the services and reputation of our Chief Executive Officer, Dr. Joseph N. Forkey. The loss of Dr. Forkey’s services
could severely damage our business. Dr. Forkey provides highly valuable contributions to our capabilities in optical instrument
development, in management of new technology and in potentially significant longer-term initiatives in biophysics and biomedical
instrumentation.



We must continue to be able to attract employees with
the scientific and technical skills that our business requires and if we are unable to attract and retain such individuals, our
business could be severely damaged.



Our ability to attract employees with a high degree of scientific
and technical talent is crucial to the success of our business. There is intense competition for the services of such persons,
and we cannot guarantee that we will be able to attract and retain individuals possessing the necessary qualifications. If we cannot
attract such individuals, we may not be able to produce our products and our business could be damaged.



We are subject to a high degree of regulatory oversight
and, if we do not continue to receive the necessary regulatory approvals, our revenues may decline.



The FDA allows us to market the medical products we currently
sell in the United States. However, prior FDA approval may be required before we can market additional medical products that we
may develop in the future. We may also seek to sell current or future medical products in a manner that requires us to obtain FDA
permission to market such products. We may also require the regulatory approval or license of other federal, state or local agencies
or comparable agencies in other countries.



We may lose the FDA’s permission to market our current
products or may not obtain the necessary regulatory permission, approvals or licenses for the marketing of any of our future products.
Also, we cannot predict the impact on our business of FDA regulations or determinations arising from future legislation or administrative
action. If we lose the FDA’s permission to market our current products or we do not obtain regulatory permission to market
our future products, our revenues may decline and our business may be harmed.



We face risks inherent in product development and production
under fixed price purchase orders and these purchase orders may not be profitable over time.



A portion of our business has been devoted to research, development
and production under fixed price purchase orders. For our purposes, a fixed price purchase order is any purchase order under which
we will provide products or services for a fixed price over an extended period of time, usually six months or longer. Fixed price
purchase orders represented approximately 25% to 50% of our total revenues during the last several years. We expect that revenues
from fixed price purchase orders will continue to represent a significant portion of our total revenues in future fiscal years.



Because they involve performance over time, we cannot predict
with certainty the expenses involved in meeting our obligations under fixed price purchase orders. Therefore, we can never be sure
at the time we enter into any single fixed price purchase order that such purchase order will be profitable for us.



7





Third parties may infringe on our intellectual property
and, as a result, we could incur significant expense in protecting our patents or not have sufficient resources to protect them.



We utilize a number of licensed patents that are important to
our business. In July 2011, we entered into an asset purchase agreement with Intuitive Surgical Operations, Inc., in
which we received $2.5 million in connection with the sale of certain intellectual property. Pursuant to the agreement, we agreed
to assign to Intuitive Surgical all of our currently issued and non-expired patents and pending patent applications and, in return, Intuitive
Surgical agreed to grant to us a royalty-free, worldwide license to these patents in fields outside of medical robotics.



Although we are not currently aware of any past or present infringements
of our patents, we plan, jointly with Intuitive Surgical, to protect these patents from infringement and obtain additional patents
whenever feasible. To this end, we have obtained confidentiality agreements from our employees and consultants and others who have
access to the design of our products and other proprietary information. Protecting and obtaining patents, however, is both time
consuming and expensive. We therefore may not have the resources necessary to assert all potential patent infringement claims or
pursue all patents that might be available to us. If our competitors or other third parties infringe on our patents, our business
may be harmed.



Third parties may claim that we have infringed on their
patents and, as a result, we could be prohibited from using all or part of any technology used in our products.



Should third parties claim a proprietary right to all or part
of any technology that we use in our products, such a claim, regardless of its merit, could involve us in costly litigation. If
successful, such a claim could also result in us being unable to freely use the technology that was the subject of the claim, or
sell products embodying such technology. If we engage in litigation, our expenses may increase and our business may be harmed.
If we are prohibited from using a particular technology in our products, our revenues may decline and our business may be harmed.



We depend on the availability of certain key supplies
and services that are available from only a few sources and if we experience difficulty with a supplier, we may have difficulty
finding alternative sources of these supplies or services.



We require certain key supplies to develop and manufacture our
products, in particular precision grade optical glass, which is available from only a few sources, each of which is located outside
the United States. Additionally, we rely on outside vendors to grind and polish certain of our lenses and other optical components,
such as prisms and windows. Based upon our ordering experience to date, we believe the materials and services required for the
production of our products are currently available in sufficient quantities. Our requirements are small relative to the total supply,
and we are not currently encountering problems with availability. However, this does not mean that we will continue to have timely
access to adequate supplies of essential materials and services in the future or that supplies of these materials and services
will be available on satisfactory terms when the need arises. Our business could be severely damaged if we become unable to procure
these essential materials and services in adequate quantities and at acceptable prices.



From time to time, subcontractors may produce certain of our
products for us, and our business is subject to the risk that these subcontractors fail to make timely delivery. Our products and
services are also from time to time used as components of the products and services of other manufacturers. We are therefore subject
to the risk that manufacturers that integrate our products or services into their own products or services are unable to acquire
essential supplies and services from third parties in a timely fashion. If this occurs, we may not be able to deliver our products
on a timely basis and our revenues may decline.



Our customers may claim that the products we sold them
were defective and if our insurance is not sufficient to cover a claim, we would be liable for the excess.



Like any manufacturer, we are and always have been exposed to
liability claims resulting from the use of our products. We maintain product liability insurance to cover us in the event of liability
claims, and as of October 5, 2012, no such claims have been asserted or threatened against us. However, our insurance may not be
sufficient to cover all possible future product liabilities.



8





We would be liable if our business operations harmed the
environment and a failure to maintain compliance with environmental laws could severely damage our business.



Our operations are subject to a variety of federal, state and
local laws and regulations relating to the protection of the environment. From time to time, we use hazardous materials in our
operations. Although we believe that we are in compliance with all applicable environmental laws and regulations, our business
could be severely damaged by any failure to maintain such compliance.



Our quarterly financial results vary quarter to quarter
and depend on many factors. As a result, we cannot predict with a high degree of certainty our operating results in any particular
fiscal quarter.



Our quarterly operating results may vary significantly depending
upon factors such as:



| | — | the timing of completion of significant customer orders;
| | - | --------------------------------------------------------



| | — | the timing and amount of our research and development expenditures;
| | - | -------------------------------------------------------------------



| | — | the costs of initial product production in connection with new products;
| | - | ------------------------------------------------------------------------



| | — | the timing of new product introductions—both by us and by our competitors;
| | - | --------------------------------------------------------------------------



| | — | the timing and level of market acceptance of new products or enhanced versions of our existing products;
| | - | --------------------------------------------------------------------------------------------------------



| | — | our ability to retain existing customers and customers’ continued demand for our products and services;
| | - | -------------------------------------------------------------------------------------------------------



| | — | our customers’ inventory levels, and levels of demand for our customers’ products and services; and
| | - | ---------------------------------------------------------------------------------------------------



| | — | competitive pricing pressures.
| | - | ------------------------------



We may not be able to grow or sustain revenues or achieve or
maintain profitability on a quarterly or annual basis and levels of revenue and/or profitability may vary from one such period
to another.



Some of our competitors are large, well-financed companies
who have research and marketing capabilities that are superior to ours.



The industries in which we operate are highly competitive. Many
of our existing and potential competitors have greater financial resources and manufacturing capabilities, more established and
larger marketing and sales organizations and larger technical staffs than we have. Other companies, some with greater experience
in the optics, semiconductor or medical products industries, are seeking to produce products and services that compete with our
products and services.



RISKS RELATED TO OUR STOCK



Trading in our common stock is limited and the price of
our common stock may be subject to substantial volatility.



Our common stock was delisted from the NASDAQ Capital Market
at the opening of business on December 27, 2005. Our common stock (OTCQB: PEYE) trades on OTCQB, the OTC market tier
for companies that report to the SEC. We expect our common stock to continue to trade on the OTCQB for the foreseeable future.
Broker-dealers may decline to trade in OTCQB stocks given the market for such securities is often limited, the stocks are more
volatile and the risk to investors is greater. These factors may reduce the potential market for our common stock by reducing the
number of potential investors. This may make it more difficult for investors in our common stock to sell shares to third parties
or to otherwise dispose of their shares. This could cause our stock price to decline.



9





Additionally, the price of our common stock may be volatile
as a result of a number of factors, including, but not limited to, the following:



| | — | our ability to successfully conceive and to develop new products and services to enhance the performance characteristics and
methods of manufacture of existing products;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | — | our ability to retain existing customers and customers’ continued demand for our products and services;
| | - | -------------------------------------------------------------------------------------------------------



| | — | the timing of our research and development expenditures and of new product introductions;
| | - | -----------------------------------------------------------------------------------------



| | — | the timing and level of acceptance of new products or enhanced versions of our existing products; and
| | - | -----------------------------------------------------------------------------------------------------



| | — | price and volume fluctuations in the stock market at large which do not relate to our operating performance.
| | - | ------------------------------------------------------------------------------------------------------------



“Penny stock” rules may make buying or
selling our securities difficult which may make our stock less liquid and make it harder for investors to buy and sell our securities.



Trading in our securities is subject to the SEC’s “penny
stock” rules and it is anticipated that trading in our securities will continue to be subject to the penny stock rules for
the foreseeable future. The SEC has adopted regulations that generally define a penny stock to be any equity security that has
a market price of less than $5.00 per share, subject to certain exceptions. These rules require that any broker-dealer who
recommends our securities to persons other than prior customers and accredited investors must, prior to the sale, make a special
written suitability determination for the purchaser and receive the purchaser’s written agreement to execute the transaction.
Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a
disclosure schedule explaining the penny stock market and the risks associated with trading in the penny stock market. In addition,
broker-dealers must disclose commissions payable to both the broker-dealer and the registered representative and current quotations
for the securities they offer. The additional burdens imposed upon broker-dealers by these requirements may discourage broker-dealers
from recommending transactions in our securities, which could severely limit the liquidity of our securities and consequently adversely
affect the market price for our securities.



We are contractually obligated to issue shares in the
future, diluting your interest in us.



As of June 30, 2012, there were 392,587 shares of our common
stock issuable upon exercise of stock options outstanding, at a weighted average exercise price of $4.56 per share. A total of
117,200 shares and 43,698 shares, respectively, of our common stock, including shares rolled forward from the 1997 Incentive Plan,
are reserved for issuance under our 2011 and 2006 Equity Incentive Plans as of June 30, 2012. As of June 30, 2012, there
are also warrants outstanding for the issuance of an aggregate of an additional 418,621 shares of our common stock, at a weighted
average exercise price of $1.56 per share. The foregoing information gives effect to a 1 for 25 reverse stock split effective December 11,
2008. Moreover, we expect to issue additional shares and options to purchase shares of our common stock to compensate employees,
consultants and directors, and we may issue additional shares to raise capital. Any such issuances will have the effect of further
diluting the interest of the holders of our securities.



ITEM 2.  PROPERTIES.



We conduct our domestic operations at two facilities in Gardner,
Massachusetts. The main Gardner facility is leased from a corporation owned by an individual who serves on our board of directors.
The lease terminated in December 1999 and we are currently a tenant-at-will. We rent the other Gardner facility on a month-to-month
basis. We rent office space in Hong Kong for sales, marketing and supplier quality control and liaison activities related to our
Hong Kong subsidiary.



10





We believe these facilities are adequate for our current operations
and are adequately covered by insurance. Significant increases in production or the addition of significant equipment additions
or manufacturing capabilities in connection with the production of our line of endoscopes and other products may, however, require
the acquisition or lease of additional facilities. We may establish production facilities domestically or overseas to produce key
assemblies or components, such as lenses, for our products. Overseas facilities may subject us to the political and economic risks
associated with overseas operations. The loss of or inability to establish or maintain such additional domestic or overseas facilities
could materially adversely affect our competitive position and profitability.



ITEM 3.  LEGAL PROCEEDINGS.



We may be involved from time to time in ordinary litigation,
negotiation and settlement matters that we believe will not have a material effect on our operations or finances. We are not aware
of any pending or threatened litigation against us or our officers and directors in their capacity as such that could have a material
impact on our operations or finances.



ITEM 4.  MINE SAFETY DISCLOSURES.



Not applicable.



PART II



ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY,
RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.



Market Information



Our common stock (OTCQB: PEYE) is quoted on OTCQB, the OTC market
tier for companies that report to the SEC. Our common stock was quoted on the OTCBB until February 23, 2011. The following
table sets forth the high and low bid prices for our common stock for each quarter during the last two fiscal years as quoted on
OTCQB. Such OTC market quotations reflect inter-dealer prices, without retail markup, markdown or commissions and may not necessarily
represent actual transactions.



|                                                                  |  | High |      |  | Low |  
|----------------------------------------------------------------- |  | ---- | ---- |  | --- | -
|For the Fiscal Year Ended June 30, 2011                           |  |      |      |  |     |  
|First Quarter ended September 30, 2010                            |  | $    | 3.60 |  |     | $
|Second Quarter ended December 31, 2010                            |  | $    | 1.50 |  |     | $
|Third Quarter ended March 31, 2011                                |  | $    | 0.27 |  |     | $
|Fourth Quarter ended June 30, 2011                                |  | $    | 0.30 |  |     | $
|                                                                  |  |      |      |  |     |  
|For the Fiscal Year Ended June 30, 2012                           |  |      |      |  |     |  
|First Quarter ended September 30, 2011                            |  | $    | 1.35 |  |     | $
|Second Quarter ended December 31, 2011                            |  | $    | 1.45 |  |     | $
|Third Quarter ended March 31, 2012                                |  | $    | 1.45 |  |     | $
|Fourth Quarter ended June 30, 2012                                |  | $    | 2.01 |  |     | $
|                                                                  |  |      |      |  |     |  
|For the Fiscal Year Ended June 30, 2013                           |  |      |      |  |     |  
|First Quarter ended September 30, 2012                            |  | $    | 1.50 |  |     | $
|Second Quarter ended December 31, 2012 (through October 12, 2012) |  | $    | 1.09 |  |     | $



Holders



As of October 5, 2012, we had approximately 100 holders of record
of our common stock. Holders of record include nominees who may hold shares on behalf of multiple owners.



11





Dividends



We have not declared any dividends during the last two fiscal
years. At present, we intend to retain our earnings, if any, to finance research and development and expansion of our business.



Recent Sales of Unregistered Securities; Use of Proceeds
from Registered Securities



Other than as previously disclosed, we did not issue any unregistered
equity securities during the quarter ended June 30, 2012.



Securities Authorized for Issuance under Equity Compensation
Plans



The following table summarizes information about our equity
compensation plans as of June 30, 2012.



|Plan category                                              | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
|---------------------------------------------------------- | ------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------
|Equity compensation plans approved by security holders     | 184,787                                                                                     | $      8.34                                                                 | 43,698                                                                                                                                     
|Equity compensation plans not approved by security holders | 207,800                                                                                     | $      1.20                                                                 | 117,200                                                                                                                                    
|Total                                                      | 392,587                                                                                     | $      4.56                                                                 | 160,898                                                                                                                                    



2006 Equity Incentive Plan



On November 28, 2006, our stockholders approved the Precision
Optics Corporation, Inc. 2006 Equity Incentive Plan (the “2006 Plan”), which succeeded the Precision Optics Corporation,
Inc. Amended and Restated 1997 Equity Incentive Plan (the “1997 Plan”). No further awards have been or will be granted
under the 1997 Plan. The 2006 Plan allows for the grant of stock options to selected employees, directors and other persons who
provide services to us or our affiliates.



2011 Equity Incentive Plan



The Precision Optics Corporation, Inc. 2011 Equity Incentive
Plan (the “2011 Plan”) was adopted by our Board of Directors on October 13, 2011. The 2011 Plan allows for the grant
of stock options to selected employees, directors and other persons who provide services to us or our affiliates.



ITEM 6.  SELECTED FINANCIAL DATA.



As a smaller reporting company as defined by Rule 12b-2
of the Exchange Act and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations
and therefore are not required to provide the information requested by this Item.



ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



The following discussion and analysis should
be read in conjunction with the Financial Statements and Notes thereto, and other financial information included elsewhere in this
Annual Report on Form 10-K. This Management’s Discussion and Analysis of Financial Condition and Results of Operations
contains descriptions of our expectations regarding future trends affecting our business. The following discussion sets forth certain
factors we believe could cause actual results to differ materially from those contemplated by the forward-looking statements.



12





Overview



We have been a developer and manufacturer of advanced optical
instruments since 1982. We design and produce high-quality micro-optics, medical instruments and other advanced optical systems.
Our medical instrumentation line includes endoscopes and endocouplers as well as next generation MicroprecisionTM optics,
micro medical cameras, and 3D endoscopes, for use in minimally invasive surgical procedures.



We are registered to the ISO 9001:2008 and ISO 13485:2003
Quality Standards and comply with the FDA Good Manufacturing Practices and the European Union Medical Device Directive for CE marking
of our medical products. Our internet website is www.poci.com. Information on our website is not intended to be integrated into
this report.



The areas in which we do business are highly competitive and
include both foreign and domestic competitors. Many of our competitors are larger and have substantially greater resources than
we do. Furthermore, other domestic or foreign companies, some with greater financial resources than we have, may seek to produce
products or services that compete with ours. We routinely outsource specialized production efforts as required to obtain the most
cost effective production. Over the years, we have achieved extensive experience with other optical specialists worldwide.



Since the 1990s, we have maintained a Hong Kong subsidiary to
support business and quality control activities as required throughout Asia. We believe that the cost savings from such production
are essential to our ability to compete on a price basis in the medical products area in particular and to our profitability in
general.



We believe that competition for sales of our medical products
and services, which have been principally sold to original equipment manufacturer, or OEM, customers, is based on performance and
other technical features, as well as other factors, such as scheduling and reliability, in addition to competitive price.



We believe that our future success depends to a large degree
on our ability to continue to conceive and to develop new optical products and services to enhance the performance characteristics
and methods of manufacture of existing products. Accordingly, we expect to continue to seek to obtain product-related design and
development contracts with customers and to selectively invest our own funds on research and development, particularly in the areas
of MicroprecisionTM optics, micro medical cameras and 3D endoscopes.



Critical Accounting Policies and Estimates



Our critical accounting policies are included in the Notes to
our Financial Statements contained in this Annual Report on Form 10-K.



Results of Operations for the Fiscal Year Ended June 30,
2012 Compared to the Fiscal Year Ended June 30, 2011



Total revenues for fiscal year 2012 were $2,152,396, a decrease
of $92,741, or 4.1%, from fiscal year 2011 revenues of $2,245,137. The decrease in revenues was due to lower unit volume sales
of micro optics and lower unit volume sales of the advanced surgical visualization system used in spinal surgery, partially offset
by higher sales of endoscopes. The reduction in unit volume sales was accompanied by decreases in average product prices totaling
approximately $25,000.



Revenues from our largest customers, as a percentage of total
revenues, were as follows:



|           |  | 2012 |     |   | 2011 | 
|---------- |  | ---- | --- | - | ---- | 
|Customer A |  |      | 34  | % |      | 
|Customer B |  |      | 22  |   |      | 
|Customer C |  |      | 3   |   |      | 
|All others |  |      | 41  |   |      | 
|           |  |      | 100 | % |      | 



13





No other customer accounted for more than 10% of our revenues
in fiscal years 2012 and 2011.



Gross profit for fiscal year 2012 of $557,406 reflected a decrease
of $194,710 compared to fiscal year 2011 gross profit of $752,116. Gross profit as a percentage of revenues decreased from 33.5%
in fiscal year 2011 to 25.9% in fiscal year 2012. The decrease in our gross profit percentage was due primarily to lower overall
unit sales volume, unfavorable product mix, and by higher provisions for slow-moving and obsolete inventories in fiscal year 2012
compared to fiscal year 2011.



Research and development expenses, net were $664,696 for fiscal
year 2012 compared to $825,033 for fiscal year 2011. The decrease of $160,337 , or 19.4%, was due primarily to lower spending on
R&D related efforts, partially offset by lower reimbursements of related costs from customers, which decreased by $115,653,
or 59.1%, in fiscal year 2012 compared to fiscal year 2011. Research and development expenses depend on our assessment of new product
opportunities and available resources. Research and development expenses were net of reimbursement of related costs of $80,023
during fiscal year 2012 and $195,676 during fiscal year 2011.



Selling, general and administrative expenses
increased by $229,156, or 23.9%, to $1,187,665 for fiscal year 2012 compared to $958,509 for fiscal year 2011. The increase was
primarily due to a reduction in the accrued vacation liabilities for certain officers in connection with the settlement of deferred
compensation liabilities recorded in fiscal year 2011, higher legal and accounting expenses, and higher noncash stock compensation
expenses primarily recorded in the quarter ended March 31, 2012.



The gain on sale of patents of $2,276,286 in fiscal year 2012
reflects gross proceeds of $2,500,000 (less transaction expenses of  $36,829 and book value
of patents of $186,885) in connection with the sale of certain intellectual property to Intuitive Surgical. See Note 8 in Notes
to Consolidated Financial Statements.



The gain on sale of assets and other in fiscal years 2012 and
2011 of $10,226 and $39,518, respectively, represents primarily the sale of previously written off assets for proceeds of $10,226
and $39,518, respectively.



Interest expense decreased by $29,792
during fiscal year 2012 to $30,208 compared to the fiscal year 2011 total of $60,000. The decrease was due to a partial
repayment of $740,972 of the 10% senior convertible notes in December 2011.



The income tax provisions in fiscal years 2012 and 2011 represent
the minimum statutory state income tax liability.



Liquidity and Capital Resources



In July 2011, we received $2.5
million in connection with an asset purchase agreement with Intuitive Surgical Operations, Inc. This influx of capital
allowed us to retire a substantial portion of outstanding long term debt and to satisfy operating cash requirements through
September 2012.



On September 28, 2012, we closed on agreements with accredited
investors (the “Investors”) for the sale and purchase of units consisting of an aggregate of (i) 2,777,795 shares of
our common stock, and (ii) warrants to purchase an aggregate of 1,944,475 shares of common stock, at a per unit price of $0.90.
Each unit consisted of one share of common stock and 70% warrant coverage. The warrants have an exercise price of $1.25 per share,
subject to adjustment and a call provision if certain market price targets are reached, will expire five years from September 28,
2012, and are exercisable in whole or in part, at any time prior to expiration. We received $2.5 million in gross proceeds from
the offering. Certain directors and officers participated in the offering and purchased a total aggregate amount of approximately
$80,000 of units in the offering.



14





In conjunction with the offering, we also entered into a registration
rights agreement dated September 28, 2012 with the Investors, whereby we are obligated to file a registration statement with the
Securities and Exchange Commission (the “SEC”) on or before thirty calendar days after September 28, 2012 to register
the resale by the Investors of the 2,777,795 shares of the common stock purchased in the offering, and the 1,944,475 shares of
common stock underlying the warrants purchased in the offering. If a registration statement covering the securities is not filed
with the SEC prior to the 30th day filing deadline (the “Filing Deadline”), we will have to pay an amount
equal to 1.0% of the aggregate amount invested by each Investor each month as liquidated damages, subject to certain conditions.
We are also obligated to use all commercially reasonable efforts to have the registration statement declared effective by the SEC
within 60 days after the registration statement is filed, or 90 days if we receive comments on the registration statement from
the SEC. If there is not an effective registration statement in place by the 60th day after the Filing Deadline, or
the 90th day after the Filing Deadline if we receive comments from the SEC, we will have to pay an amount equal to 1.0%
of the aggregate amount invested by each Investor each month as liquidated damages, subject to certain conditions.



We intend to build upon recent successes in operational results,
technology development and new product introductions. We believe the following technology areas continue to represent significant
opportunities for future sales growth:



| | — | MicroprecisionTM optical elements and micro medical camera assemblies with sizes on the order of 1 mm and smaller, that
enable the introduction of imaging capabilities in locations in the body previously inaccessible; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |   |                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------
| | — | next generation handheld 3D endoscopes that provide high definition 3D images for use in minimally invasive surgery



We compete in a highly technical, very competitive and in most
cases, price driven segment of the medical instrument marketplace where products can take years to develop and introduce to distributors
and end users. Furthermore, research and development, manufacturing, marketing and distribution activities are strictly regulated
by the FDA, ISO and other regulatory bodies that, while intended to enhance the ultimate quality and functionality of products
produced, can contribute to the significant cost and time needed to maintain existing products and develop and introduce product
enhancements and new product innovations.



We have traditionally funded working capital needs through product
sales, management of working capital components of our business, and by cash received from public and private offerings of our
common stock, warrants to purchase shares of our common stock and convertible notes. We have incurred quarter to quarter operating
losses during our efforts to develop current products including MicroprecisionTM optical elements, micro medical camera assemblies
and 3D endoscopes. Our management expects that such operating losses will continue until sales increase to breakeven and profitable
levels. Our management also believes that the opportunities represented by these products have the potential to generate sales
increases to achieve breakeven and profitable results.



We have sustained recurring net operating
losses for several years. During the year ended June 30, 2012, we incurred a net loss from operations of $1,284,729 and used
cash in operations of $1,585,515. For the quarter ended June 30, 2012, cash used for operating activities was $270,069, and
our operating loss for the quarter was $218,294. As of June 30, 2012, cash and cash equivalents were $145,923, accounts
receivable were $341,900, and current liabilities were $705,522.



Capital equipment expenditures during fiscal year 2012 and 2011
were $0. Future capital equipment expenditures will be dependent upon future sales and success of on-going research and development
efforts.



Contractual cash commitments for the fiscal years subsequent
to June 30, 2012 are summarized as follows:





|                         |  | 2013 |        |  | 2014 |   |       | Thereafter |  |   | Total | 
|------------------------ |  | ---- | ------ |  | ---- | - | ----- | ---------- |  | - | ----- | 
|Operating Leases         |  | $    | 31,353 |  |      | $ | 2,910 |            |  | $ | –     | 
|Principal & Interest (1) |  |      | 51,250 |  |      |   | –     |            |  |   | –     | 
|Totals                   |  | $    | 82,603 |  |      | $ | 2,910 |            |  | $ | –     | 










| | (1) | This amount may be reduced to the extent the holder of the Senior Secured Convertible Notes elects to convert the principal
on the Notes into our common stock.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



15





We have contractual cash commitments related to open purchase
orders for fiscal year 2013 of approximately $74,000.



Trends and Uncertainties That May Affect Future Results



During fiscal year 2010 after implementing a number of changes
to reduce cash usage and increase sales and profitability, our cash flow was positive for the first time in many years. In fiscal
year 2011, the major focus of our senior management shifted to finding a long-term solution to our obligations under the 10% Senior
Secured Convertible Notes which initially became due just before the beginning of fiscal year 2011. While we continued to work
during fiscal year 2011 to advance product development and sales and marketing efforts, the requirement to find a solution for
the Notes while simultaneously continuing operations of our Company with limited capital resources resulted in an overall reduction
in sales volume and delay of business plans. With the consummation of an asset purchase agreement with Intuitive Surgical in July 2011,
we received sufficient cash to retire the Notes, and to provide working capital for our Company. With renewed focus on sales of
existing and new products, our sales volume for the fourth quarter of fiscal year 2012 was the highest of any quarter in the previous
two years.



Due to the introductory stage of
many of our new products and the unpredictable timing of orders from customers, it is difficult to predict with certainty
the detailed rate of future revenue growth. However, during the last 12 months, we have received significant new orders for
a number of new products including an approximate $1 million order for small endoscopes and an approximate $250,000 order for
micro medical camera assemblies, both of which rely on our MicroprecisionTM lens technology. Also, we expect that
current discussions with existing and new potential customers could lead to increases in our revenues. To continue to support
orders for new products as well as ongoing and future discussions, we intend to continue to develop and commercialize new
products and technical innovations, in particular:



| | — | new components and instruments utilizing our patented MicroprecisionTM lens technology for optical components and micro
medical camera assemblies with sizes on the order of 1 mm and smaller; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | — | new handheld 3D endoscopes for use in minimally invasive surgery.
| | - | -----------------------------------------------------------------



Over the past few years, we have implemented significant changes
in new product and technology development by shifting the emphasis of research and development efforts from developing underlying
technologies to commercializing the applications of these new technologies. These efforts have already been realized to some degree
in the area of MicroprecisionTM lenses with ongoing shipments now in place and with shipments against new orders already received
for micro medical camera assemblies expected to begin during fiscal year 2013. Recent initiatives in the area of MicroprecisionTM
lenses address specific customer opportunities in different medical and military applications.



We have developed and manufactured prototypes of a new 3D endoscope
with high definition quality imaging and 10 mm diameter for use in general laparoscopic surgery. This next generation 3D endoscope
has been evaluated by a number of medical professionals and has been received enthusiastically. We believe that with the advent
of commercially available high quality flat panel 3D displays, hand-held 3D endoscopy represents an opportunity for sales growth
for our Company.



Off-Balance Sheet Arrangements



We currently have no off-balance sheet arrangements that have
or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.



ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.



As a smaller reporting company as defined by Rule 12b-2
of the Exchange Act and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations
and therefore are not required to provide the information requested by this Item.



16







ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.



Index to Financial Statements



|                                                                                           | Page
|------------------------------------------------------------------------------------------ | ----
|                                                                                           |     
|Report of Independent Registered Public Accounting Firm                                    | 18  
|                                                                                           |     
|Consolidated Balance Sheets at June 30, 2012 and 2011                                      | 19  
|                                                                                           |     
|Consolidated Statements of Operations for the Years Ended June 30, 2012 and 2011           | 20  
|                                                                                           |     
|Consolidated Statements of Stockholders’ Equity for the Years Ended June 30, 2012 and 2011 | 21  
|                                                                                           |     
|Consolidated Statements of Cash Flows for the Years Ended June 30, 2012 and 2011           | 22  
|                                                                                           |     
|Notes to Consolidated Financial Statements                                                 | 23  













17





Report of Independent Registered Public
Accounting Firm



To the Board of Directors and Shareholders of

Precision Optics Corporation, Inc.:



We have audited the accompanying consolidated
balance sheets of Precision Optics Corporation, Inc. and subsidiaries (the Company) as of June 30, 2012 and 2011 and
the related consolidated statements of operations, stockholders’ equity and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.



We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its internal controls over financial reporting. An audit includes
consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.



In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the consolidated financial position of Precision Optics
Corporation, Inc. and subsidiaries as of June 30, 2012 and 2011 and the results of their operations and their cash flows
for the years then ended in conformity with accounting principles generally accepted in the United States of America.



/s/ Stowe & Degon LLC



Westborough, Massachusetts

October 1, 2012





18





PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

Consolidated Balance Sheets at June 30, 2012 and 2011





|                                                                                                                                                                  |  | 2012 |             |   | 2011 |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | -
|ASSETS                                                                                                                                                            |  |      |             |   |      |  
|Current Assets:                                                                                                                                                   |  |      |             |   |      |  
|Cash and cash equivalents                                                                                                                                         |  | $    | 145,923     |   |      | $
|Accounts receivable (net of allowance for doubtful accounts of $11,446 in 2012 and 2011)                                                                          |  |      | 341,900     |   |      |  
|Inventories                                                                                                                                                       |  |      | 682,900     |   |      |  
|Prepaid expenses                                                                                                                                                  |  |      | 33,719      |   |      |  
|Total current assets                                                                                                                                              |  |      | 1,204,442   |   |      |  
|Fixed Assets:                                                                                                                                                     |  |      |             |   |      |  
|Machinery and equipment                                                                                                                                           |  |      | 2,355,968   |   |      |  
|Leasehold improvements                                                                                                                                            |  |      | 553,596     |   |      |  
|Furniture and fixtures                                                                                                                                            |  |      | 148,303     |   |      |  
|Vehicles                                                                                                                                                          |  |      | 19,674      |   |      |  
|                                                                                                                                                                  |  |      | 3,077,541   |   |      |  
|Less—Accumulated depreciation and amortization                                                                                                                    |  |      | 3,035,584   |   |      |  
|Net fixed assets                                                                                                                                                  |  |      | 41,957      |   |      |  
|Patents, net                                                                                                                                                      |  |      | –           |   |      |  
|                                                                                                                                                                  |  | $    | 1,246,399   |   |      | $
|LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                              |  |      |             |   |      |  
|Current Liabilities:                                                                                                                                              |  |      |             |   |      |  
|10% Senior secured convertible notes                                                                                                                              |  | $    | 51,250      |   |      | $
|Accounts payable                                                                                                                                                  |  |      | 410,316     |   |      |  
|Customer advances                                                                                                                                                 |  |      | 6,387       |   |      |  
|Accrued employee compensation                                                                                                                                     |  |      | 171,205     |   |      |  
|Accrued professional services                                                                                                                                     |  |      | 62,000      |   |      |  
|Accrued warranty expense                                                                                                                                          |  |      | 25,000      |   |      |  
|Other accrued liabilities                                                                                                                                         |  |      | 912         |   |      |  
|Total current liabilities                                                                                                                                         |  |      | 727,070     |   |      |  
|Commitments (Note 3)                                                                                                                                              |  |      |             |   |      |  
|Stockholders’ Equity (Deficit):                                                                                                                                   |  |      |             |   |      |  
|Common stock, $0.01 par value: 50,000,000 shares authorized; 1,251,339 and 971,013 shares issued and outstanding at June 30, 2012 and June 30, 2011, respectively |  |      | 12,513      |   |      |  
|Additional paid-in capital                                                                                                                                        |  |      | 39,009,215  |   |      |  
|Accumulated deficit                                                                                                                                               |  |      | (38,502,399 | ) |      |  
|                                                                                                                                                                  |  |      |             |   |      |  
|Total stockholders’ equity (deficit)                                                                                                                              |  |      | 519,329     |   |      |  
|                                                                                                                                                                  |  | $    | 1,246,399   |   |      | $





The accompanying notes are an integral part of these consolidated
financial statements.





19





PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

for the Years Ended June 30, 2012 and 2011





|                                                |  |   | 2012       |   |  |   | 2011       |  
|----------------------------------------------- |  | - | ---------- | - |  | - | ---------- | -
|Revenues                                        |  | $ | 2,152,396  |   |  | $ | 2,245,137  |  
|Cost of Goods Sold                              |  |   | 1,594,990  |   |  |   | 1,493,021  |  
|Gross profit                                    |  |   | 557,406    |   |  |   | 752,116    |  
|Research and Development Expenses, net          |  |   | 664,696    |   |  |   | 825,033    |  
|Selling, General and Administrative Expenses    |  |   | 1,187,665  |   |  |   | 958,509    |  
|Gain on Sale of Assets and Other                |  |   | (10,226    | ) |  |   | (39,518    | )
|Total operating expenses                        |  |   | 1,842,135  |   |  |   | 1,744,024  |  
|Operating loss                                  |  |   | (1,284,729 | ) |  |   | (991,908   | )
|Gain on Sale of Patents                         |  |   | 2,276,286  |   |  |   | –          |  
|Interest Income                                 |  |   | 535        |   |  |   | 207        |  
|Interest Expense                                |  |   | (30,208    | ) |  |   | (60,000    | )
|Income (Loss) before provision for income taxes |  |   | 961,884    |   |  |   | (1,051,701 | )
|Provision for Income Taxes                      |  |   | 912        |   |  |   | 912        |  
|Net Income (loss)                               |  | $ | 960,972    |   |  | $ | (1,052,613 | )
|Income (Loss) Per Share:                        |  |   |            |   |  |   |            |  
|Basic                                           |  | $ | 0.83       |   |  | $ | (1.06      | )
|Diluted                                         |  | $ | 0.78       |   |  | $ | (1.06      | )
|                                                |  |   |            |   |  |   |            |  
|Weighted Average Common Shares Outstanding:     |  |   |            |   |  |   |            |  
|Basic                                           |  |   | 1,163,775  |   |  |   | 994,777    |  
|Diluted                                         |  |   | 1,275,938  |   |  |   | 994,777    |  







The accompanying notes are an integral part of these consolidated
financial statements.





20









PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

for the Years Ended June 30, 2012 and 2011









|                                                  |  |  | Number
                                                                            of Shares |   |  |   | Common

                                                                            Stock |   |  |   | Additional
                                                                            
Paid-in 
Capital |  |  |   | Accumulated

                                                                            Deficit |   |  |   | Total
                                                                            Stockholders’
                                                                            Equity (Deficit) |  
|------------------------------------------------- |  |  | -------------------------------------------------------------------------------------------- | - |  | - | ----------------------------------------------------------------------------------------- | - |  | - | -------------------------------------------------------------------------------------------------------- |  |  | - | ------------------------------------------------------------------------------------------------ | - |  | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -
|                                                  |  |  |                                                                                              |   |  |   |                                                                                           |   |  |   |                                                                                                          |  |  |   |                                                                                                  |   |  |   |                                                                                                                                                                                              |  
|Balance, July 1, 2010                             |  |  | 1,018,411                                                                                    |   |  | $ | 10,184                                                                                    |   |  | $ | 38,236,325                                                                                               |  |  | $ | (38,410,758                                                                                      | ) |  | $ | (164,249                                                                                                                                                                                     | )
|Purchase of treasury stock                        |  |  | (47,398                                                                                      | ) |  |   | (474                                                                                      | ) |  |   |                                                                                                          |  |  |   |                                                                                                  |   |  |   | (474                                                                                                                                                                                         | )
|Stock-based compensation                          |  |  | –                                                                                            |   |  |   | –                                                                                         |   |  |   | 22,704                                                                                                   |  |  |   | –                                                                                                |   |  |   | 22,704                                                                                                                                                                                       |  
|Net loss                                          |  |  | –                                                                                            |   |  |   | –                                                                                         |   |  |   | –                                                                                                        |  |  |   | (1,052,613                                                                                       | ) |  |   | (1,052,613                                                                                                                                                                                   | )
|Balance, June 30, 2011                            |  |  | 971,013                                                                                      |   |  | $ | 9,710                                                                                     |   |  | $ | 38,259,029                                                                                               |  |  | $ | (39,463,371                                                                                      | ) |  | $ | (1,194,632                                                                                                                                                                                   | )
|Restricted stock issued to officers and directors |  |  | 245,326                                                                                      |   |  |   | 2,453                                                                                     |   |  |   | 672,192                                                                                                  |  |  |   |                                                                                                  |   |  |   | 674,645                                                                                                                                                                                      |  
|Stock-based compensation                          |  |  | 35,000                                                                                       |   |  |   | 350                                                                                       |   |  |   | 77,994                                                                                                   |  |  |   | –                                                                                                |   |  |   | 78,344                                                                                                                                                                                       |  
|Net income                                        |  |  | –                                                                                            |   |  |   | –                                                                                         |   |  |   | –                                                                                                        |  |  |   | 960,972                                                                                          |   |  |   | 960,972                                                                                                                                                                                      |  
|Balance, June 30, 2012                            |  |  | 1,251,339                                                                                    |   |  | $ | 12,513                                                                                    |   |  | $ | 39,009,215                                                                                               |  |  | $ | (38,502,399                                                                                      | ) |  | $ | 519,329                                                                                                                                                                                      |  







The accompanying notes are an integral part of these consolidated
financial statements.















21





PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows for the

Years Ended June 30, 2012 and 2011





|                                                                                       |  |   | 2012       |   |  |   | 2011       |  
|-------------------------------------------------------------------------------------- |  | - | ---------- | - |  | - | ---------- | -
|Cash Flows from Operating Activities:                                                  |  |   |            |   |  |   |            |  
|Net income (loss)                                                                      |  |   | 960,972    |   |  | $ | (1,052,613 | )
|Adjustments to reconcile net loss to net cash used in operating activities-            |  |   |            |   |  |   |            |  
|Depreciation and amortization                                                          |  |   | 23,368     |   |  |   | 57,605     |  
|Gain on sale of patents                                                                |  |   | (2,276,286 | ) |  |   | –          |  
|Gain on sale of assets                                                                 |  |   | (10,226    | ) |  |   | (35,967    | )
|Provision (benefit) for inventory write-down                                           |  |   | 14,033     |   |  |   | (10,363    | )
|Stock-based compensation expense                                                       |  |   | 78,344     |   |  |   | 22,704     |  
|Non-cash interest expense                                                              |  |   | 30,208     |   |  |   | 60,000     |  
|Changes in operating assets and liabilities-                                           |  |   |            |   |  |   |            |  
|Accounts receivable, net                                                               |  |   | (193,076   | ) |  |   | 356,376    |  
|Inventories                                                                            |  |   | (30,648    | ) |  |   | 28,399     |  
|Prepaid expenses                                                                       |  |   | 3,945      |   |  |   | (4,165     | )
|Accounts payable                                                                       |  |   | (129,079   | ) |  |   | 260,501    |  
|Customer advances                                                                      |  |   | (29,905    | ) |  |   | (64,776    | )
|Accrued expenses and other                                                             |  |   | (27,165    | ) |  |   | (31,226    | )
|Net cash provided by (used in) in operating activities                                 |  |   | (1,585,515 | ) |  |   | (413,525   | )
|                                                                                       |  |   |            |   |  |   |            |  
|Cash Flows from Investing Activities:                                                  |  |   |            |   |  |   |            |  
|Net proceeds from sale of patents                                                      |  |   | 2,463,171  |   |  |   | –          |  
|Proceeds from sale of assets                                                           |  |   | 10,226     |   |  |   | 35,967     |  
|Additional patent costs                                                                |  |   | (1,724     | ) |  |   | (18,452    | )
|Net cash provided by investing activities                                              |  |   | 2,471,673  |   |  |   | 17,515     |  
|                                                                                       |  |   |            |   |  |   |            |  
|Cash Flows from Financing Activities:                                                  |  |   |            |   |  |   |            |  
|Payment of principal and interest on 10% Senior Convertible Notes                      |  |   | (759,791   | ) |  |   | –          |  
|Purchase of treasury stock (47,398 shares)                                             |  |   | –          |   |  |   | (474       | )
|Net cash used in financing activities                                                  |  |   | (759,791   | ) |  |   | (474       | )
|Net increase (decrease) in cash and cash equivalents                                   |  |   | 126,367    |   |  |   | (396,484   | )
|Cash and cash equivalents, beginning of year                                           |  |   | 19,556     |   |  |   | 416,040    |  
|Cash and cash equivalents, end of year                                                 |  | $ | 145,923    |   |  | $ | 19,556     |  
|                                                                                       |  |   |            |   |  |   |            |  
|Supplemental Disclosure of Cash Flow Information:                                      |  |   |            |   |  |   |            |  
|Cash paid during the year for income taxes                                             |  | $ | 912        |   |  | $ | 912        |  
|                                                                                       |  |   |            |   |  |   |            |  
|Supplemental Disclosure of Noncash Investing and Financing Activities:                 |  |   |            |   |  |   |            |  
|Issuance of common stock to satisfy deferred compensation obligations (245,326 shares) |  | $ | 674,645    |   |  | $ | –          |  





The accompanying notes are an integral part of these consolidated
financial statements.



22





PRECISION OPTICS CORPORATION, INC. AND
SUBSIDIARIES



Notes to Consolidated Financial Statements



(1)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



(a)Nature of Business



Precision Optics Corporation, Inc. (the “Company”)
designs, develops, manufactures and sells specialized optical systems and components and optical thin-film coatings. The Company
conducts business in one industry segment only and its customers are primarily domestic. The Company’s products and services
fall into two principal areas: (i) medical products for use by hospitals and physicians; and (ii) advanced optical system design
and development services and products used by industrial customers.



(b)Principles of Consolidation



The accompanying consolidated financial statements include the
accounts of the Company and its two wholly-owned subsidiaries. All inter-company accounts and transactions have been eliminated
in consolidation. All shares and per share data reflect the effects of a 1-for-25 reverse stock split that became effective on
December 11, 2008.



(c)Revenues



The Company recognizes revenue when four basic criteria are
met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the price to the buyer
is fixed and determinable; and (4) collectability is reasonably assured. The Company’s shipping terms are customarily FOB
shipping point.



The sales price of products and services sold is fixed and determinable
after receipt and acceptance of a customer’s purchase order or properly executed sales contract, typically before any work
is performed. Management reviews each customer purchase order or sales contract to determine that the work to be performed is specified
and there are no unusual terms and conditions that would raise questions as to whether the sales price is fixed or determinable.
The Company assesses credit worthiness of customers based upon prior history with the customer and assessment of financial condition.
Accounts receivable are stated at the amount management expects to collect from outstanding balances. An allowance for doubtful
accounts is provided for that portion of accounts receivable considered to be uncollectible, based upon historical experience and
management’s evaluation of outstanding accounts receivable at the end of the year. Bad debts are written off against the
allowance when identified.



The Company’s revenue transactions typically do not contain
multiple deliverable elements for future performance obligations to customers, other than a standard one-year warranty on materials
and workmanship, the estimated costs for which are provided for at the time revenue is recognized.



Revenues for industrial and medical products sold in the normal
course of business are recognized upon shipment when delivery terms are FOB shipping point and all other revenue recognition criteria
have been met. Gross shipping charges reimbursable from customers, to deliver product, are insignificant and are included in “Revenues”
section of the Consolidated Statement of Operations, while shipping costs are classified in the “Selling, General and Administrative
Expenses” section of the Consolidated Statement of Operations.



(d)Cash and Cash Equivalents



The Company includes in cash
equivalents all highly liquid investments with original maturities of three months or less at the time of acquisition. Cash
and cash equivalents of $145,923 and $19,556 at June 30, 2012 and 2011, respectively, consist primarily of cash at banks and
money market funds. The Company maintains its cash and cash equivalents in bank deposit accounts that, at times, may exceed
federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed
to any significant credit risk on its cash and cash equivalents.



23





(e)Inventories



Inventories are stated at the lower of cost (first-in, first-out)
or market and include material, labor and manufacturing overhead. The components of inventories at June 30, 2012 and 2011 are as
follows:





|                 |  | 2012 |         |  | 2011 |  
|---------------- |  | ---- | ------- |  | ---- | -
|Raw material     |  | $    | 277,392 |  |      | $
|Work-in-progress |  |      | 289,748 |  |      |  
|Finished goods   |  |      | 115,760 |  |      |  
|                 |  | $    | 682,900 |  |      | $





The Company provides for estimated obsolescence on unmarketable
inventory based upon assumptions about future demand and market conditions. If actual demand and market conditions are less favorable
than those projected by management, additional inventory write-downs may be required. Inventory, once written down, is not subsequently
written back up, as these adjustments are considered permanent adjustments to the carrying value of the inventory.



During fiscal year 2012, the Company recorded a pre-tax non-cash
provision for slow-moving and obsolete inventories of $14,033. During fiscal year 2011, the Company recorded a pre-tax non-cash
benefit for slow-moving and obsolete inventories of $10,363.



(f)Property and Equipment



Property and equipment are recorded at cost. Maintenance and
repair items are expensed as incurred. The Company provides for depreciation and amortization by charges to operations, using the
straight-line and declining-balance methods, which allocate the cost of property and equipment over the following estimated useful
lives:



|Asset Classification    |  | Estimated Useful Life                         
|----------------------- |  | ----------------------------------------------
|Machinery and equipment |  | 2-7 years                                     
|Leasehold improvements  |  | Shorter of lease term or estimated useful life
|Furniture and fixtures  |  | 5 years                                       
|Vehicles                |  | 3 years                                       



Depreciation expense was $20,269 and $23,874
for the years ended June 30, 2012 and 2011, respectively.



(g)Significant Customers and Concentration of Credit Risk



Financial instruments that subject the Company to credit risk
consist primarily of cash equivalents and trade accounts receivable. The Company places its investments with highly rated financial
institutions. The Company has not experienced any losses on these investments to date. At June 30, 2012, receivables from the Company’s
two largest customers were 31% and 27% of the total accounts receivable. At June 30, 2011, receivables from the Company’s
five largest customers were 26%, 16%, 15%, 14% and 10% of the total accounts receivable. No other customer accounted for more than
10% of the Company’s receivables as of June 30, 2012 and 2011. The Company has not experienced any material losses related
to accounts receivable from individual customers. The Company generally does not require collateral or other security as a condition
of sale rather relying on credit approval, balance limitation and monitoring procedures to control credit risk of trade account
financial instruments. Management believes that allowances for doubtful accounts, which are established based upon review of specific
account balances and historical experience, are adequate.



Revenues from the Company’s largest customers, as a percentage
of total revenues, were as follows:



|           |  | 2012 |     |   | 2011 | 
|---------- |  | ---- | --- | - | ---- | 
|Customer A |  |      | 34  | % |      | 
|Customer B |  |      | 22  |   |      | 
|Customer C |  |      | 3   |   |      | 
|All others |  |      | 41  |   |      | 
|           |  |      | 100 | % |      | 



24





No other customer accounted for more than 10% of the Company’s
revenues in fiscal years 2012 and 2011.



(h)          Income
(Loss) per Share



Basic income (loss) per share is computed
by dividing net income or net loss by the weighted average number of shares of common stock outstanding during the period. Diluted
income (loss) per share is computed by dividing net income or net loss (adjusted by adding back interest expense on senior convertible
notes) by the weighted average number of shares of common stock outstanding during the period, plus the number of potentially dilutive
securities outstanding during the period such as stock options and warrants and shares issuable upon conversion of senior convertible
notes. For the year ended June 30, 2011, the effect of such securities was antidilutive and not included in the diluted calculation
because of the net loss generated in that period.



The following is the calculation of income
(loss) per share for the years ended June 30, 2012 and 2011:



|                                             |  | Year Ended June 30 |          
|-------------------------------------------- |  | ------------------ | ---------
|                                             |  | 2012               |          
|                                             |  |                    |          
|Net Income (Loss) – Basic                    |  | $                  | 960,972  
|Interest Expense on Senior Convertible Notes |  |                    | 30,208   
|Net Income (Loss) – Diluted                  |  | $                  | 991,180  
|                                             |  |                    |          
|Basic Weighted Average Shares Outstanding    |  |                    | 1,163,775
|Potentially Dilutive Securities              |  |                    | 112,114  
|Diluted Weighted Average Shares Outstanding  |  |                    | 1,275,889
|                                             |  |                    |          
|Income (Loss) Per Share                      |  |                    |          
|Basic                                        |  | $                  | 0.83     
|Diluted                                      |  | $                  | 0.78     



The number of shares issuable upon the
exercise of outstanding stock options and warrants that were excluded from the computation as their effect was antidilutive was
approximately 620,000 and 1,112,000 for the years ended June 30, 2012 and 2011, respectively.



(i)Stock-Based Compensation



The measurement and recognition of all compensation costs for
all stock-based awards made to employees and the Board of Directors are based upon fair value over the requisite service period
for awards expected to vest. The Company estimates the fair value of share-based awards on the date of grant using the Black-Scholes
option-pricing model. Stock-based compensation costs recognized for the years ended June 30, 2012 and 2011 amounted to $78,344
and $22,704, respectively.



(j)Patents



Patents are carried at cost less accumulated amortization of
$0 and $718,684 at June 30, 2012 and June 30, 2011, respectively. Such costs are amortized using the straight-line method over
the shorter of their legal or estimated useful lives, generally five to ten years. Amortization expense was $3,099 and $33,731
for the years ended June 30, 2012 and 2011, respectively.



In July 2011, the Company assigned all of its currently issued
and pending patents, as well as new inventions that it conceives before July 28, 2012, to Intuitive Surgical. See Note 8 of Notes
to Consolidated Financial Statements.



25





(k)Fair Value of Financial Instruments



Financial instruments consist principally of cash equivalents,
accounts receivable, senior secured convertible notes payable, accounts payable, and accrued expenses. The estimated fair value
of these financial instruments approximates their carrying value due to their short-term nature.



(l)Long-Lived Assets



Long-lived assets and certain identifiable intangibles are reviewed
for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted
net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized
is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to sell.



(m)Warranty Costs



The Company does not incur future performance obligations in
the normal course of business other than providing a standard one-year warranty on materials and workmanship to its customers.
The Company provides for estimated warranty costs at the time product revenue is recognized. Warranty costs have been included
as a component of cost of goods sold in the accompanying consolidated statements of operations. The following tables summarize
warranty reserve activity for the years ended June 30, 2012 and 2011:





|                               |  | 2012 |        |   | 2011 |  
|------------------------------ |  | ---- | ------ | - | ---- | -
|Balance at beginning of period |  | $    | 25,000 |   |      | $
|Provision for warranty claims  |  |      | 1,321  |   |      |  
|Warranty claims incurred       |  |      | (1,321 | ) |      |  
|Balance at end of period       |  | $    | 25,000 |   |      | $





(n)Research and Development



Research and development expenses are charged to operations
as incurred. The Company groups development and prototype costs and related reimbursements in research and development. For the
years ended June 30, 2012 and 2011, research and development expense is shown net of reimbursements of $80,023 and $195,676, respectively,
in the accompanying statements of operations.



(o)Comprehensive Income



Comprehensive income or loss is defined as the change in equity
of a business enterprise during a period from transactions and other events and circumstances from non-owners sources. The Company’s
comprehensive loss for the years ended June 30, 2012 and 2011 was equal to its net loss for the same periods.



(p)Income Taxes



Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and
tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In assessing the
likelihood of utilization of existing deferred tax assets, management has considered historical results of operations and the current
operating environment.



(q)Segment Reporting



Operating segments are identified as components of an enterprise
about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-making
group, in making decisions about how to allocate resources and assess performance. The Company’s chief decision-maker is
its Chief Executive Officer. To date, the Company has viewed its operations and manages its business as principally one segment.
For all periods presented, over 90% of the Company’s sales have been to customers in the United States.



26





(r)Use of Estimates



The preparation of financial statements in conformity with accounting
standards generally accepted in the United States requires 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. Actual results could differ from those estimates.



(s)         Recent
Accounting Pronouncements



In December 2011, the FASB issued an accounting standard update
requiring enhanced disclosure about certain financial instruments and derivative instruments that are offset in the balance sheet
or subject to an enforceable master netting arrangement or similar agreement. The disclosure requirement becomes effective retrospectively
in the first quarter of the Company's fiscal year ending June 30, 2014. The Company does not expect that the requirement will have
an impact on its financial position, results of operations or cash flows as it is disclosure-only in nature.



In
September 2011, the FASB issued an accounting standard update intended to simplify testing goodwill for impairment. The amendment
allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative
goodwill impairment test. An entity will no longer be required to calculate the fair value of a reporting unit unless the entity
determines, based on a qualitative assessment, that it is more likely than not that the fair value of the reporting unit is less
than its carrying amount. The amendment becomes effective for annual and interim goodwill impairment tests performed for the Company's
fiscal year ending June 30, 2013, and early adoption is permitted. The Company does not expect that the requirement will have an
impact on its financial position, results of operations or cash flows as it is disclosure-only in nature.



(2)10% SENIOR SECURED CONVERTIBLE NOTES



On June 25, 2008, the Company entered
into a Purchase Agreement, as amended on December 11, 2008, with institutional and other accredited investors (the “Investors”)
pursuant to which it sold a total of $600,000 of 10% Senior Secured Convertible Notes (the “Notes”) that are convertible
at the Investor’s option into a total of 480,000 shares of the Company’s common stock at a conversion rate of $1.25.
The Company also issued warrants to purchase a total of 316,800 shares of its common stock at an exercise price of $1.75 per share
(the “Warrants”). Interest accrues on the Notes at a rate of 10% per year and is payable in cash upon the earlier of
conversion or maturity of the Notes. The original maturity of the Notes was June 25, 2010 and the Warrants expire on June 25,
2015, subject to extension. By mutual agreement with the Company, the Investors amended the Notes on several dates to extend the
“Stated Maturity Date” of the Notes. The conversion price of the Notes and the exercise price of the Warrants may be
adjusted downward in the event the Company issues shares of common stock or securities convertible into common stock at a price
lower than the conversion price of the Notes or exercise price of the Warrants at the time of issuance.



Pursuant to the Purchase Agreement, the
Notes and Warrants were not convertible or exercisable until the Company implemented a 1 for 6 reverse stock split, which required
the approval of its stockholders. On November 25, 2008, the Company entered into a Side Letter Agreement in which the Investors
agreed to change the ratio of the reverse split from 1 for 6 to 1 for 25. On December 11, 2008, the Company effected a 1 for
25 reverse split of its common stock.



Pursuant to a Registration Rights Agreement
entered into with the Investors on June 25, 2008, the Company agreed to file a registration statement with the Securities
and Exchange Commission by the earlier of (i) two days following the effectiveness of the amendment to implement a reverse
stock split, and (ii) December 15, 2008, to register the resale of the common stock issuable upon the conversion of the
Notes and the exercise of the Warrants. The Company agreed to keep the registration statement effective until the earlier of (i) the
date on which all the securities have been sold, and (ii) the date on which all the securities may be sold without restriction
pursuant to Rule 144 of the Securities Act of 1933.



27





The Notes contain covenants binding on
the Company and certain events of default, including but not limited, to:



| | ● | the failure of the Company to make a scheduled payment;                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                 
| | ● | the failure of the Company to make payments in excess of $100,000 on any liability or obligation, or if there is an acceleration of the stated maturity of any liability or obligation in excess of $100,000; or
| |   |                                                                                                                                                                                                                 
| | ● | the Company entering bankruptcy.                                                                                                                                                                                



If an event of default occurs and is uncured
within the allowable grace period, if any, the Investors may declare all amounts under the Notes immediately due and payable and
may pursue any other available remedies.



On December 15, 2011, the Company repaid
Special Situations Fund III QP, L.P. a principal repayment of $275,000 and accrued interest of $95,486, for a total payment of
$370,486. On December 15, 2011, the Company repaid Special Situations Private Equity Fund, L.P. a principal repayment of $275,000
and accrued interest of $95,486, for a total payment of $370,486. The Notes held by Special Situations Fund III QP, L.P. and Special
Situations Private Equity Fund, L.P. have been satisfied in full and the obligations thereunder have been terminated.



On March 31, 2012, the remaining Investor,
Arnold Schumsky, further amended his remaining Note to extend the “Stated Maturity Date” of the principal to July 31,
2012 and to modify the Note such that all accrued and unpaid interest on the Note up to and including March 31, 2012 shall be due
on or before April 13, 2012, on the condition that the Company issue to him a warrant for 5,000 shares of common stock with an
exercise price of $1.20 per share and a term of three years. On April 13, 2012, the Company repaid Mr. Schumsky a payment of the
accrued interest of $18,819, and such payment included all accrued and unpaid interest on the Note up to and including March 31,
2012. On May 8, 2012, the Company issued Mr. Schumsky the warrant according to the terms described in the amended Note. On July
31, 2012, Mr. Schumsky further amended his remaining Note to extend the “Stated Maturity Date” of the principal to
August 31, 2012. On August 31, 2012, Mr. Schumsky further amended his remaining Note to extend the “Stated Maturity Date”
of the principal to September 30, 2012



The 10% Senior Secured Convertible Notes
consist of the following:



|                                                                                                                                                                                                                                      |  | June 30, 2012 |        |  | June 30, 2011 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------ |  | ------------- | -
|10% Senior Secured Convertible Notes issued on June 25, 2008, convertible into common stock at $1.25 per share, bearing interest at 10% per annum. Outstanding principal and accrued interest are due at maturity, September 30, 2012 |  | $             | 50,000 |  |               | $
|Accrued interest—10% coupon due on September  30, 2012                                                                                                                                                                                |  |               | 1,250  |  |               |  
|                                                                                                                                                                                                                                      |  |               |        |  |               |  
|                                                                                                                                                                                                                                      |  | $             | 51,250 |  |               | $



On September 28, 2012, the Company repaid Mr. Schumsky
the outstanding and accrued interest of $2,500 due under his Note and such payment satisfied its obligations in regards to the
accrued interest due on the Note in full. On that same date, Mr. Schumsky presented the outstanding principal balance of the Note
to the Company and agreed to exchange the $50,000 principal balance of his Note for participation in the Company’s September
2012 financing transaction (as described in further detail in Note 9, Subsequent Event) and was awarded units consisting of 55,555
shares of common stock and 38,889 warrants upon the same terms as the units sold in the September 2012 financing transaction. Accordingly,
the Note held by Mr. Schumsky has been satisfied in full and the obligations thereunder have been terminated.



28





(3)COMMITMENTS



(a)Related Party Transactions



The Company leases one of its facilities from a corporation
owned by an officer-director-shareholder of the Company. The Company is currently a tenant-at-will, paying rent of $9,000 per month.
Total rent expense paid or accrued to related parties was $108,000 in each of fiscal years 2012 and 2011, and is included in the
accompanying consolidated statements of operations.



The Company incurred fees to two directors totaling $20,000
and $25,000 in fiscal years 2012 and 2011, respectively, for consulting services.



(b)Operating Lease Commitments



The Company has entered into operating leases for its office
space and equipment that expire at various dates through fiscal year 2014. Total future minimum rental payments under all non-cancelable
operating leases are $31,353 in fiscal year 2013 and $388 in the fiscal years thereafter.



Rent expense on operating leases, excluding the related party
rent described above, was $45,896 and $46,335 for the years ended June 30, 2012 and 2011, respectively.



(4)STOCKHOLDERS’ EQUITY



(a)Stock Options



Stock-based compensation costs recognized during the year ended
June 30, 2012 and 2011 amounted to $78,344 and $22,704, respectively, and were included in the accompanying consolidated statements
of operations in: selling, general and administrative expenses (2012 — $64,910; 2011 — $10,000), cost of goods sold
(2012 — $11,234; 2011 — $12,704), and research and development expenses, net (2012 — $2,200; 2011 — $0).
No compensation has been capitalized because such amounts would have been immaterial. There was no net income tax benefit recognized
related to such compensation for the years ended June 30, 2012 or 2011, as the Company is currently in a loss position. There were
298,800 stock options granted (net) during the year ended June 30, 2012 and no stock options granted during the year ended June
30, 2011.



As of June 30, 2012, the unrecognized compensation costs related
to options vesting in the future is $228,966. The Company uses the Black-Scholes option-pricing model as the most appropriate method
for determining the estimated fair value for the stock awards. The Black-Scholes method of valuation requires several assumptions:
(1) the expected term of the stock award; (2) the expected future stock volatility over the expected term; and (3) risk-free interest
rate. The expected term represents the expected period of time the Company believes the options will be outstanding based on historical
information. Estimates of expected future stock price volatility are based on the historic volatility of the Company’s common
stock and the risk free interest rate is based on the U.S. Zero-Bond rate. The Company utilizes a forfeiture rate based on an analysis
of the Company’s actual experience. The fair value of options at date of grant was estimated with the following assumptions
for options granted in fiscal 2012:



|                                      |  | Year Ended    |          
|------------------------------------- |  | ------------- | ---------
|                                      |  | June 30, 2012 |          
|Assumptions:                          |  |               |          
|Option life                           |  |               | 5.3 years
|Risk-free interest rate               |  |               | 3.00%    
|Stock volatility                      |  |               | 480%     
|Dividend yield                        |  |               | 0        
|Weighted average fair value of grants |  | $             | 1.07     



29





Stock Option and Other Compensation Plans:



The type of share-based payments currently utilized by the Company
is stock options.



The Company has various stock option and other compensation
plans for directors, officers, and employees. The Company has the following stock option plans outstanding as of June 30, 2012:
the Precision Optics Corporation, Inc. 2011 Equity Incentive Plan (the “2011 Plan”); the Precision Optics Corporation,
Inc. 2006 Equity Incentive Plan (the “2006 Plan”), and the Precision Optics Corporation, Inc. Amended and Restated
1997 Incentive Plan (the “1997 Plan”). Vesting periods under the 2011 Plan, the 2006 Plan, and the 1997 Plan are at
the discretion of the Board of Directors and typically average three to five years. Options under these Plans are granted at fair
market value on the date of grant and have a term of ten years from the date of grant.



The 2011 Plan, which provides eligible participants (certain
employees, directors, consultants, etc.) the opportunity to receive a broad variety of equity based and cash awards. Options granted
vest and are exercisable for periods determined by the Board of Directors, not to exceed 10 years from the date of grant. A total
of 325,000 shares of common stock, including shares rolled forward from the 1997 Plan, have been reserved for issuance
under the 2011 Plan. At June 30, 2012, a total of 207,800 stock options are outstanding and 117,200 shares of common stock were
available for future grants under the 2011 Plan.



The 2006 Plan, which provides eligible participants (certain
employees, directors, consultants, etc.) the opportunity to receive a broad variety of equity based and cash awards. Options granted
vest and are exercisable for periods determined by the Board of Directors, not to exceed 10 years from the date of grant. A total
of 139,898 shares of common stock, including shares rolled forward from the 1997 Plan, have been reserved for issuance
under the 2006 Plan. At June 30, 2012, a total of 96,200 stock options are outstanding and 43,698 shares of common stock were available
for future grants under the 2006 Plan.



The 1997 Plan provided eligible participants (certain employees,
directors, consultants, etc.) the opportunity to receive a broad variety of equity based and cash awards. Options granted vested
and were exercisable for periods determined by the Board of Directors, not to exceed 10 years from the date of grant. Options for
a total of 88,938 shares of common stock were outstanding at June 30, 2012 under the 1997 Plan, as amended and restated in fiscal
year 2006. Prior to the adoption of the 2006 Plan, 9,000 stock options were granted in fiscal year 2007 under the 1997 Plan. Upon
the adoption of the 2006 Plan, no new awards were granted under the 1997 Plan. No shares are available for future grants under
the 1997 Plan.



The following tables summarize stock option activity for the
two years ended June 30, 2012:





|                             |  | Options Outstanding |         
|---------------------------- |  | ------------------- | --------
|                             |  | Number of Shares    |         
|Outstanding at July 1, 2010  |  |                     | 94,378  
|Cancellations                |  |                     | (240    
|Outstanding at June 30, 2011 |  |                     | 94,138  
|Grants                       |  |                     | 506,600 
|Cancellations                |  |                     | (208,151
|Outstanding at June 30, 2012 |  |                     | 392,587 





Information related to the stock options
outstanding as of June 30, 2012 is as follows:



|Range of Exercise Prices |              |  | Number of
        Shares |  |         | Weighted-Average
        Remaining
        Contractual
        Life (years) |  |  | Weighted-Average
        Exercise Price |  |  | Exercisable
        Number
        of Shares |       |  | Exercisable
        Weighted-Average
        Exercise Price | 
|------------------------ | ------------ |  | ------------------------ |  | ------- | --------------------------------------------------------------------------- |  |  | --------------------------------------- |  |  | -------------------------------------------- | ----- |  | ----------------------------------------------------------- | 
|$                        | 1.20         |  |                          |  | 207,800 |                                                                             |  |  | 9.68                                    |  |  | $                                            | 1.20  |  |                                                             | 
|$                        | 0.55         |  |                          |  | 51,000  |                                                                             |  |  | 9.62                                    |  |  |                                              | 0.55  |  |                                                             | 
|$                        | 0.27         |  |                          |  | 40,000  |                                                                             |  |  | 9.04                                    |  |  |                                              | 0.27  |  |                                                             | 
|$                        | 1.35         |  |                          |  | 1,200   |                                                                             |  |  | 7.41                                    |  |  |                                              | 1.35  |  |                                                             | 
|$                        | 1.25         |  |                          |  | 1,200   |                                                                             |  |  | 6.41                                    |  |  |                                              | 1.25  |  |                                                             | 
|$                        | 6.25         |  |                          |  | 1,600   |                                                                             |  |  | 4.42                                    |  |  |                                              | 6.25  |  |                                                             | 
|$                        | 7.75         |  |                          |  | 1,200   |                                                                             |  |  | 5.41                                    |  |  |                                              | 7.75  |  |                                                             | 
|$                        | 11.50        |  |                          |  | 800     |                                                                             |  |  | 3.42                                    |  |  |                                              | 11.50 |  |                                                             | 
|$                        | 13.75        |  |                          |  | 50,427  |                                                                             |  |  | 3.86                                    |  |  |                                              | 13.75 |  |                                                             | 
|$                        | 20.75        |  |                          |  | 37,360  |                                                                             |  |  | 2.96                                    |  |  |                                              | 20.75 |  |                                                             | 
|                         | $0.27–$20.75 |  |                          |  | 392,587 |                                                                             |  |  | 8.15                                    |  |  | $                                            | 4.56  |  |                                                             | 



30





The aggregate intrinsic value of the Company’s “in-the-money”
outstanding and exercisable options as of June 30, 2012 and 2011 was $145,410 and $0, respectively.



(b)Warrants



On June 25, 2008, the Company entered
into a Purchase Agreement, as amended on December 11, 2008, with institutional and other accredited investors pursuant to which
it sold a total of $600,000 of 10% Senior Secured Convertible Notes (the “Notes”) that are convertible at the investor’s
option into a total of 480,000 shares of the Company’s common stock at a conversion rate of $1.25. On March 31, 2012, the
remaining Investor, Arnold Schumsky, further amended his remaining Note to extend the “Stated Maturity Date” of the
principal to July 31, 2012 and to modify the Note such that all accrued and unpaid interest on the Note up to and including March
31, 2012 shall be due on or before April 13, 2012, on the condition that the Company issue to him a warrant for 5,000 shares of
common stock with an exercise price of $1.20 per share and a term of three years. On April 13, 2012, the Company repaid Mr. Schumsky
a payment of the accrued interest of $18,819, and such payment included all accrued and unpaid interest on the Note up to and including
March 31, 2012. On May 8, 2012, the Company issued Mr. Schumsky the warrant according to the terms described in the amended Note.



During the quarter ended December 31, 2010,
the Company issued warrants to purchase 100,000 shares of common stock at an exercise price of $1.00 per share to several consultants
to the Company. The warrants are exercisable beginning six months after December 16, 2010 (the issue date) and expire on December
16, 2013. The Black-Scholes option pricing model was used to calculate the fair value of the warrants, which was estimated to be
$0.10 per share, or $10,000 in total. The expense associated with issuing the warrants was recognized ratably over the six-month
vesting period. A non-cash charge of $10,000 was recorded in “Selling, General and Administrative Expenses” in the
year ended June 30, 2011 in the accompanying Consolidated Statements of Operations.



In conjunction with the sale of the Notes on June 25, 2008 mentioned above, the Company issued warrants to purchase an aggregate of 316,800
shares of common stock at an exercise price of $1.75 per share.  In conjunction with the issuance of warrants to purchase
100,000 shares of common stock in December 2010, certain anti-dilution provisions of the existing warrants were triggered. As a
result, the number of existing warrants was increased from 316,800 to 318,621 and the related exercise price was decreased from
$1.75 per share to $1.74 per share. In conjunction with the issuance of warrants to purchase 1,944,475 shares of common stock in
September 2012, certain anti-dilution provisions of the existing warrants were triggered. As a result, the number of existing warrants
was increased from 318,621 to 469,831 and the related exercise price was decreased from $1.74 per share to $1.18 per share. These
warrants expire on June 25, 2015.



In February 2007, the Company completed
a private placement with institutional and other accredited investors pursuant to which it sold an aggregate of 400,000 shares
of common stock, at a price of $6.25 per share and warrants to purchase an aggregate of 400,000 shares of common stock at an exercise
price of $8.00 per share. In conjunction with the issuance by the Company of the Notes and warrants
on June 25, 2008 and the issuance of warrants to purchase 100,000 shares of common stock in December 2010, certain anti-dilution
provisions of the existing warrants were triggered. As a result, the number of existing warrants was increased from 400,000 to
599,254 and the related exercise price was decreased from $8.00 per share to $5.34 per share. These warrants expired on February
1, 2012.



(c)Restricted Stock



On December 3, 2010, Richard Forkey, who
at the time of the agreement served as the Company’s Chief Executive Officer, agreed to reduce his annual salary to $100,000
per year, none of which would be deferred, and reduce his vacation accrual by $43,011, at his new rate of pay, to $10,000.  He
also entered into an agreement on December 3, 2010, as amended on October 14, 2011, to convert all $474,646 of his previously deferred
salary into 172,599 shares of the Company’s common stock. One-eighth of the shares vested on January 1, 2012, and one-eighth
will vest on the first day of each quarter thereafter, commencing on April 1, 2012, until the shares are fully vested.



31





On December 3, 2010, Joseph Forkey, who
at the time of the agreement served as the Company’s Chief Scientific Officer and currently serves as the Company’s
Chief Executive Officer, agreed to reduce his vacation accrual by $4,824, at his current rate of pay, to $10,000.  Joseph
Forkey’s salary will remain the same at $120,000 and none of it will be deferred. He also entered into an agreement
on December 3, 2010, as amended on October 14, 2011, to convert all $29,999 of his previously deferred salary into 10,909 shares
of the Company’s common stock. One-eighth of the shares vested on January 1, 2012, and one-eighth will vest on the first
day of each quarter thereafter, commencing on April 1, 2012, until the shares are fully vested.



On December 3, 2010, the Company agreed
with Joel Pitlor, one of the Company’s directors, to terminate his consulting agreement with the Company. The Company also
agreed on December 3, 2010, as amended on October 14, 2011, to convert all $170,000 of the previously deferred consulting compensation
owed to Mr. Pitlor into 61,818 shares of the Company’s common stock. One-eighth of the shares vested on January 1, 2012,
and one-eighth will vest on the first day of each quarter thereafter, commencing on April 1, 2012, until the shares are fully vested.
 Mr. Pitlor will remain as a director of the Company.



The shares referenced above totaling 245,326
shares of the Company’s common stock were issued in October 2011 pursuant to the Company’s 2011 Deferred Compensation
Plan. The shares were registered under the Company’s registration statement on Form S-8 filed October 14, 2011.



The following table indicates the effects on the Company’s
consolidated balance sheet upon the issuance of restricted stock in settlement of liabilities for deferred compensation and professional
services, as indicated above:



|                                     |  | Increase (Decrease) |         
|------------------------------------ |  | ------------------- | --------
|Accrued Employee Compensation        |  | $                   | (504,645
|Accounts Payable                     |  | $                   | (170,000
|Total Current Liabilities            |  | $                   | (674,645
|Total Stockholders’ Equity (Deficit) |  | $                   | 674,645 



(5)INCOME TAXES



We have identified our federal tax return
and our state tax return in Massachusetts as “major” tax jurisdictions. The periods subject to examination for our
federal and state income tax returns are the years ended in 2009 and thereafter. We believe our income tax filing positions and
deductions will be sustained on audit and we do not anticipate any adjustments that would result in a material change to our financial
position. Therefore, no liabilities for uncertain income tax positions have been recorded.



The provision for income taxes in the accompanying consolidated
statements of operations consists of the minimum statutory state income tax liability of $912 and $912 for the years ended June
30, 2012 and 2011, respectively.



A reconciliation of the federal statutory rate to the Company’s
effective tax rate for the two years ended June 30 is as follows:



|                                                       |  | 2012 |       |   | 2011 | 
|------------------------------------------------------ |  | ---- | ----- | - | ---- | 
|Income tax expense (benefit) at federal statutory rate |  |      | 34.0  | % |      | 
|Increase (decrease) in tax resulting from:             |  |      |       |   |      | 
|State taxes, net of federal benefit                    |  |      | 6.3   |   |      | 
|Change in valuation allowance                          |  |      | (94.3 | ) |      | 
|Nondeductible items                                    |  |      | 1.7   |   |      | 
|Prior-year tax adjustments                             |  |      | 48.8  |   |      | 
|Other                                                  |  |      | 3.6   |   |      | 
|Effective tax rate                                     |  |      | 0.1   | % |      | 



32





The components of deferred tax assets and liabilities at June
30, 2012 and 2011 are approximately as follows:





|                                                        |  | 2012 |            |   | 2011 |  
|------------------------------------------------------- |  | ---- | ---------- | - | ---- | -
|Deferred tax assets:                                    |  |      |            |   |      |  
|Net operating loss carry forwards                       |  | $    | 1,913,000  |   |      | $
|Tax credit carry forwards                               |  |      | 362,000    |   |      |  
|Reserves and accruals not yet deducted for tax purposes |  |      | 451,000    |   |      |  
|Total deferred tax assets                               |  |      | 2,726,000  |   |      |  
|Valuation allowance                                     |  |      | (2,726,000 | ) |      |  
|Net deferred tax asset                                  |  | $    | –          |   |      | $





The Company has provided a valuation allowance to reduce the
net deferred tax asset to an amount the Company believes is “more likely than not” to be realized. The valuation allowance
decreased in fiscal 2012 by approximately $905,000. The decrease in the valuation allowance was due primarily to adjustments to
net operating loss carryforwards of prior years and utilization of loss carryforwards to offset taxable income in fiscal year 2012.



At June 30, 2012, the Company had federal and state net operating
loss carry forwards of approximately $4,200,000 and $2,200,000, respectively, which will, if not used, expire at various dates
from 2013 through 2031. In addition, the Company had net operating loss carry forwards from its Hong Kong operations of approximately
$1,900,000, which carry forward indefinitely.



(6)PROFIT SHARING PLAN



The Company has a defined contribution 401(k) profit sharing
plan. Employer profit sharing and matching contributions to the plan are discretionary. No employer profit sharing or matching
contributions were made to the plan in fiscal years 2012 and 2011.



(7)SALE OF ASSETS



In fiscal year 2012, the Company sold equipment that was previously
written off for proceeds totaling $10,226 and recorded a gain of $10,226.  In fiscal year 2011, the Company sold equipment
that was previously written off for proceeds totaling $35,967 and recorded a gain of $35,967. These gains are included within operating
expenses in the accompanying consolidated statements of operations.



(8)SALE OF PATENTS



On July 28, 2011, the Company entered into
an asset purchase agreement with Intuitive Surgical Operations, Inc. (“Intuitive Surgical”), in which it received gross
proceeds of $2,500,000 (less transaction expenses of  $36,829) in connection with the sale of certain intellectual property.
Pursuant to the agreement, the Company agreed to assign to Intuitive Surgical all of its currently issued and non-expired patents
and pending patent applications, and Intuitive Surgical agreed to grant back to the Company a royalty-free, worldwide license to
the patents in all fields outside of medical robotics, except in certain exceptional circumstances.



In connection with this agreement, the
Company recorded a gain on the sale of such intellectual property of $2,276,286 in the quarter ended September 30, 2011.



(9)            SUBSEQUENT EVENT



On September 28, 2012, the Company closed on agreements with
accredited investors (the “Investors”) for the sale and purchase of units consisting of an aggregate of (i) 2,777,795
shares of the Company’s common stock, and (ii) warrants to purchase an aggregate of 1,944,475 shares of common stock, at
a per unit price of $0.90. Each unit consisted of one share of common stock and 70% warrant coverage. The warrants have an exercise
price of $1.25 per share, subject to adjustment and a call provision if certain market price targets are reached, will expire five
years from September 28, 2012, and are exercisable in whole or in part, at any time prior to expiration. Certain directors and
officers participated in the offering and purchased a total aggregate amount of approximately $80,000 of units in the offering.



33





The Company received $2.5 million in gross proceeds from the
offering. The Company retained Loewen, Ondaatje, McCutcheon USA LTD as the exclusive placement agent for the offering. In addition
to the payment of certain cash fees upon closing of the offering, the Company issued a warrant to the placement agent to purchase
up to 194,446 shares of common stock on substantially similar terms to the warrants issued in the offering, except that the placement
agent warrant has an exercise price of $0.95 per share. The Company anticipates using the net proceeds from the offering to fund
start-up costs associated with the previously-announced order for micro endoscopes as well as other recently received orders for
new products in addition to working capital needs and for general corporate purposes.



In conjunction with the offering, the Company also entered into
a registration rights agreement dated September 28, 2012 with the Investors, whereby it is obligated to file a registration statement
with the Securities and Exchange Commission (the “SEC”) on or before thirty calendar days after September 28, 2012
to register the resale by the Investors of the 2,777,795 shares of the common stock purchased in the offering, and the 1,944,475
shares of common stock underlying the warrants purchased in the offering. If a registration statement covering the securities is
not filed with the SEC prior to the 30th day filing deadline (the “Filing Deadline”), the Company will have to pay
an amount equal to 1.0% of the aggregate amount invested by each Investor each month as liquidated damages, subject to certain
conditions. The Company is also obligated to use all commercially reasonable efforts to have the registration statement declared
effective by the SEC within 60 days after the registration statement is filed, or 90 days if the Company receives comments on the
registration statement from the SEC. If there is not an effective registration statement in place by the 60th day after the Filing
Deadline, or the 90th day after the Filing Deadline if the Company receives comments from the SEC, the Company will have to pay
an amount equal to 1.0% of the aggregate amount invested by each Investor each month as liquidated damages, subject to certain
conditions.



Pursuant to the Tax Reform Act of 1986, the utilization of net
operating loss carryforwards and other tax benefits are subject to an annual limitation if a cumulative change of ownership of
more than 50% occurs over a three-year period. As a result of the September 2012 private placement of the Company’s common
stock, the Company believes it may have triggered significant limitations on the utilization of those tax attributes. The limitations,
if triggered, would allow the use of the value of approximately $34,000 of Federal carryforward losses annually for the next twenty
years, and the same amount for state purposes for 20 years.



ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.



None.



ITEM 9A.  CONTROLS AND PROCEDURES.



Management’s Evaluation of Disclosure Controls and
Procedures



Our Chief Executive Officer and our Chief Financial Officer
evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report
on Form 10-K. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure
controls and procedures, including internal control over financial reporting, were not effective, as of June 30, 2012, to ensure
that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934, as amended
(i) is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules
and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial
Officer, as appropriate to allow timely decisions regarding required disclosure. Our disclosure controls and procedures are intended
to be designed to provide reasonable assurance that such information is accumulated and communicated to our management.



Management’s Annual Report on Internal Control Over
Financial Reporting



Our disclosure controls and procedures include components of
our internal control over financial reporting. In designing and evaluating our disclosure controls and procedures management recognizes
that any controls, no matter how well designed and operated, can provide only reasonable, but not absolute, assurance that misstatements
due to error or fraud will not occur or that all control issues and instances of fraud, if any, with our Company have been detected.



34





A “material weakness” is defined as a significant
deficiency, or a combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement
of the annual or interim financial statements will not be prevented or detected. A “significant deficiency” is a control
deficiency, or a combination of control deficiencies, that adversely affects a company’s ability to initiate, authorize,
record, process, or report external financial data reliably in accordance with generally accepted accounting principles such that
there is more than a remote likelihood that a misstatement of the annual or interim financial statements that is more than inconsequential
will not be prevented or detected.



Under the supervision and with the participation of our management,
including our Chief Executive Officer and our Chief Financial Officer, we conducted an assessment of the effectiveness of our internal
control over financial reporting as of June 30, 2012. In making this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework.
Based on our evaluation, our management concluded that our internal control over financial reporting was not effective as of June
30, 2012.



The following is a description of two material weaknesses in
our internal control over financial reporting:



Segregation of Duties: As previously disclosed in our
Annual Reports on Form 10-K for the fiscal years ended June 30, 2008, 2009, 2010, and 2011, our management identified a control
deficiency during the 2008 fiscal year because we lacked sufficient staff to segregate accounting duties. We believe the control
deficiency resulted primarily because we have the equivalent of one and one-half persons performing all accounting-related on-site
duties. As a result, we did not maintain adequate segregation of duties within our critical financial reporting applications, the
related modules and financial reporting processes. This control deficiency could result in a misstatement of balance sheet and
income statement accounts in our interim or annual consolidated financial statements that would not be detected. Accordingly, management
has determined that this control deficiency constitutes a material weakness.



To address and remediate the material weakness in internal control
over financial reporting described above, beginning with the quarter ended September 30, 2008, we instituted a procedure whereby
our Chief Executive Officer, our Chief Financial Officer and other members of our Board of Directors perform a higher level review
of the quarterly and annual reports on Form 10-Q and Form 10-K prior to filing.



We believe that the step outlined above strengthens our internal
control over financial reporting and mitigates the material weakness described above. As part of our 2012 assessment of internal
control over financial reporting, our management has evaluated this additional control and has determined that it is operating
effectively.



Inventory Valuation: As previously disclosed in our Annual
Reports on Form 10-K for the fiscal years ended June 30, 2009, 2010, and 2011, we reported a material weakness with respect to the
valuation of our inventories. Specifically, the amounts used to value our inventory at June 30, 2009 with respect to overhead rates
and purchased items were often inconsistent with the supporting documentation, due to year-to-year changes in overhead rates and
costs of purchased items that were not properly reflected in inventory valuation. Accordingly, management had determined that this
control deficiency constituted a material weakness as of June 30, 2009. One audit adjustment of approximately $58,000 to our audited
financial statements as of June 30, 2011 was necessary as a result of this condition.



To address and remediate the material weakness in internal control
over financial reporting described above, beginning in the quarter ended September 30, 2009 and continuing through the year ended
June 30, 2012, we implemented procedures to improve our inventory controls and documentation surrounding inventory valuation for
overhead rates, and performed procedures to ensure that the pricing of inventory items was consistent with the supporting documentation.
We believe that the step outlined above strengthens our internal control over financial reporting and mitigates the material weakness
described above.



We intend to continue to remediate material weaknesses and enhance
our internal controls but cannot guarantee that our efforts will result in remediation of our material weaknesses or that new issues
will not be exposed in this process.



35





Changes in Internal Control over Financial Reporting



There was no change in our internal control over financial reporting
that occurred during the fourth quarter of our fiscal year covered by this Annual Report on Form 10-K that has materially affected,
or is reasonably likely to materially affect, our internal control over financial reporting.



ITEM 9B.  OTHER INFORMATION.



None.



PART III



ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.



Identification of Directors and Executive Officers



Set forth below is certain information with respect to the individuals
who are our directors and executive officers as of June 30, 2012.



|Name               |  | Age |  | Position(s) or Office(s) Held                                                       
|------------------ |  | --- |  | ------------------------------------------------------------------------------------
|Joseph N. Forkey   |  | 44  |  | Chairman of the Board of Directors, Chief Executive Officer, President and Treasurer
|Jack P. Dreimiller |  | 64  |  | Senior Vice President and Chief Financial Officer                                   
|Donald A. Major    |  | 51  |  | Executive Vice President for Corporate Development and Director                     
|Richard E. Forkey  |  | 72  |  | Director, Advisor to the Chief Executive Officer                                    
|Richard B. Miles   |  | 69  |  | Director                                                                            
|Joel R. Pitlor     |  | 74  |  | Director                                                                            



Board Composition. Our Board of Directors is divided
into three classes that are as nearly equal in number as possible, with each class serving for a staggered term of office. Only
one class is elected each year. Each director serves a three year term and until his or her successor has been duly elected and
qualified. Our Board currently consists of five directors. Our Class I director is Richard E. Forkey. Our Class II directors are
Joel R. Pitlor and Donald A. Major. Our Class III directors are Joseph N. Forkey and Richard Miles.



Biographies and Qualifications of Our Executive Officers
and Directors.The biographies of our executive officers and directors and certain information regarding each director’s
experience, attributes, skills and/or qualifications that led to the conclusion that the individual should be serving as an executive
officer and/or director of our Company are as follows:



Dr. Joseph N. Forkey



Dr. Joseph N. Forkey, son of Richard E. Forkey, has served as
Chairman of our Board of Directors, Chief Executive Officer, President and Treasurer since February 8, 2011. Dr. Forkey has been
a director since 2006.  He served as our Executive Vice President and Chief Scientific Officer from April 2006 to February
2011 and held the position of our Chief Scientist from September 2003 to April 2006. Since joining us, he has been involved in
general technical and management activities of our Company, as well as investigations of opportunities that leverage our newly
developed technologies. Dr. Forkey holds B.A. degrees in Mathematics and Physics from Cornell University, and a Ph.D. in Mechanical
and Aerospace Engineering from Princeton University. Prior to joining us, Dr. Forkey spent seven years at the University of Pennsylvania
Medical School as a postdoctoral fellow and research staff member. Dr. Forkey is a valuable member of our Board due to his depth
of scientific, operating, strategic, transactional, and senior management experience in our industry. Additionally, Dr. Forkey
has held positions of increasing responsibility at our Company and holds an intimate knowledge of our Company due to his longevity
in the industry and with us.



36





Jack P. Dreimiller



Mr. Jack P. Dreimiller has served as our Senior Vice President,
Finance and Chief Financial Officer since August 15, 2008. Prior to that time, he served as our Senior Vice President, Finance
and Chief Financial Officer from April 1992 until June 2005, and as an independent consultant to our Company from June 2005 to
December 2005. Since June 2005, he has served as an independent consultant serving various roles as financial/accounting executive,
including interim Chief Financial Officer, for a number of companies. Mr. Dreimiller is a Certified
Public Accountant (inactive) and holds a BS in Business Administration from the University of Buffalo. He has over twenty-five
years experience in various senior financial management positions, including audit and consulting experience with an international
accounting firm, and Controller and VP Finance experience with both small firms and multi-national corporations.



Donald A. Major



Effective February 9, 2012, our Board
of Directors appointed Mr. Donald A. Major as our Executive Vice President for Corporate Development, in addition to his
ongoing role as a member of our Board. He has served as a member of our Board of Directors since 2005. Mr. Major is
co-founder & Chief Manager of Window2Decor, LLC, a start-up e-commerce retailer of window coverings and complimentary
home accent products, andhas been employed as an independent consultant since October 2007, providing companies with
interim management, turnaround, restructuring and reorganization services as well as sourcing services for a private equity
firm. From October 2006 to May 2007, he served as Vice President of Corporate Development of Advanced Duplication Services
LLC. From February 2002 to late 2008, Mr. Major served as Vice President and Treasurer of Anderson Entertainment, LLC
(formerly Digital Excellence LLC), which was owned by a private equity firm and sold to Advanced Duplication Services LLC. He
earned his B.A. in Accounting in 1984 from Michigan State University. He is a Certified Public Accountant (inactive) and has
experience in the field of public accounting and in financial officer positions in publicly held and start-up medical device
companies. Mr. Major is a valuable member of our Board due to his depth of operating, financial, accounting, management, and
corporate efficiency experience.



Richard E. Forkey



Effective February 8, 2011, Mr. Richard E. Forkey resigned as
Chief Executive Officer, President, and Treasurer of our Company. He had served in that position since he founded our Company in
1982. Mr. Forkey remains a director of our Company, as he has since our inception in 1982, and also holds the executive position
of Advisor to the Chief Executive Officer. Mr. Forkey is a valuable member of our Board due to his depth of operating, strategic,
commercial, and senior management experience in our industry and his intimate knowledge of our Company as he was our original founder
and served as our Chief Executive Officer for nearly thirty years.



Richard B. Miles



Professor Richard B. Miles has been a member of the faculty at
Princeton University since 1972, and serves as the Director of the Applied Physics Group in Princeton University’s Mechanical
and Aerospace Engineering Department. Professor Miles is a valuable member of our Board due to his depth of scientific experience
and familiarity with the field of our technologies, the academic community, and the latest developments in science and technology.



Joel R. Pitlor



Mr. Joel R. Pitlor has, since 1979, served as president of J.R.
Pitlor, a management consulting firm which he founded that provides strategic business planning for executive officers. Mr. Pitlor
has provided business planning consultation to us since 1983. Mr. Pitlor is a valuable member of our Board due to his depth of
operating, strategic, financial planning, and management experience. Additionally, Mr. Pitlor has a detailed knowledge of the history
of our Company having advised senior management for over 25 years.



37





Other Involvement in Certain Legal Proceedings



None of our directors or executive officers has been involved
in any bankruptcy or criminal proceedings, nor have there been any judgments or injunctions brought against any of our directors
or executive officers during the last ten years that we consider material to the evaluation of the ability and integrity of any
director or executive officer.



SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING
COMPLIANCE



Section 16(a) of the Securities
Exchange Act of 1934, as amended, requires our directors, executive officers and persons who own more than 10% of a
registered class of our securities to file reports of beneficial ownership and changes in beneficial ownership with the
Securities and Exchange Commission on Forms 3 (Initial Statement of Beneficial Ownership), 4
(Statement of Changes of Beneficial Ownership of Securities) and 5 (Annual Statement of Beneficial Ownership of
Securities). Officers, directors and greater than 10% beneficial owners are required by SEC regulations to furnish us
with copies of all Section 16(a) forms they file.



Based solely upon a review of reports provided to us by our
officers and directors, we believe that, during the fiscal year ended June 30, 2012, no person required to file reports under Section
16(a) of the Securities Exchange Act of 1934 failed to file such reports on a timely basis during such fiscal year.



Code of Ethics



We previously adopted a Corporate Code of Ethics and Conduct
that applies to all employees, officers and directors of our Company, including our principal executive officer, principal financial
officer and principal accounting officer or controller, or persons performing similar functions, a copy of which was filed as Exhibit 14.1
to our Annual Report on Form 10-K filed September 28, 2008. A copy of our Corporate Code of Ethics and Conduct can be
obtained free of charge by contacting our Secretary, c/o Precision Optics Corporation, Inc., 22 East Broadway, Gardner, Massachusetts
01440.



Procedure for Nominating Directors



There have been no material changes to the procedures by which
security holders may recommend nominees to our Board of Directors.



The Board of Directors will consider candidates for director
positions that are recommended by any of our stockholders. Any such recommendation should be provided to our Secretary. The recommended
candidate should be submitted to us in writing addressed to our Secretary, c/o Precision Optics Corporation, Inc., 22 East
Broadway, Gardner, Massachusetts 01440. The recommendation should include the following information: name of candidate; address,
phone and fax number of candidate; a statement signed by the candidate certifying that the candidate wishes to be considered for
nomination to our Board of Directors and stating why the candidate believes that he or she would be a valuable addition to our
Board of Directors; a summary of the candidate’s work experience for the prior five years and the number of shares of our
stock beneficially owned by the candidate.



The Board will evaluate the recommended candidate and shall
determine whether or not to proceed with the candidate in accordance with our procedures. We reserve the right to change our procedures
at any time to comply with the requirements of applicable laws.



Committees of the Board of Directors



The Board of Directors has the responsibility for establishing
broad corporate policies and reviewing our overall performance rather than day-to-day operations. The Board's primary responsibility
is to oversee management of our Company and, in so doing, serve the best interests of our Company and our stockholders.



Our Board of Directors has the ability to establish, or disband,
such committees as necessary or appropriate to serve the needs of our Company. In February 2012, our Board of Directors made the
determination to restructure and unanimously voted to disband its committees, including its Audit Committee. Our full Board of
Directors performs all of the functions normally designated to an audit committee, compensation committee and nominating committee.



38





Audit Committee and Audit Committee Financial Expert



As of February 2012, the Board of
Directors no longer has a separately designated audit committee. Now, the functions of the audit committee are conducted by
the entire Board, whose members are named above. We do not currently have an “audit committee financial expert,”
as defined in Item 407(d)(5)(ii) of Regulation S-K.



Mr. Major, whom formerly served as Chair of the Audit Committee
and was determined by the Board to qualifies as an audit committee financial expert, no longer meets the criteria set forth in
Item 407(d)(5) of Regulation S-K as he is employed by our Company as an executive officer and therefore is not “independent”
as independence for audit committee members is defined in the NASDAQ Listing Rules. We believe that
each member of our Board is financially literate and possesses sufficient experience, both professionally and by virtue of his
service on our Board, to be fully capable of discharging his duties as a member of our Board performing audit committee functions.However, the Board believes that Mr. Major’s professional background and services assist the Board when additional
financial expertise is warranted.



ITEM 11.  EXECUTIVE COMPENSATION.



Executive and Director Compensation



Summary Compensation



The following table sets forth all
compensation for the last two completed fiscal years ended June 30, 2012 and 2011 awarded to, earned by, or paid to our
Principal Executive Officer and our most highly compensated employee, referred to herein as the “Named Executive
Officers.” No other executive officer earned over $100,000 in the last completed fiscal year.



Summary Compensation Table for the Fiscal
Years Ended June 30, 2012 and 2011





|Name and Principal Position (a)                                                      | Year June 30, (b) | Salary ($) (c) | Bonus ($) (d) | Stock Awards ($) (e) | Option Awards ($) (f) (1) | All other compensation ($) (i) | Total ($) (j)
|------------------------------------------------------------------------------------ | ----------------- | -------------- | ------------- | -------------------- | ------------------------- | ------------------------------ | -------------
|Joseph N. Forkey (2)                                                                 | 2012              | 120,000        | 0             | (3)                  | 180,000                   | 0                              | 300,000      
|Chairman of the Board of Directors, Chief Executive Officer, President and Treasurer | 2011              | 120,000        | 0             | (3)                  | 0                         | 0                              | 120,000      
|Richard G. Cyr                                                                       | 2012              | 112,300        | 1,000         | 0                    | 10,800                    | 0                              | 124,100      
|Optical Shop Manager                                                                 | 2011              | 114,018        | 500           | 0                    | 0                         | 0                              | 114,518      










|(1) | Represents the aggregate grant date fair value of stock option awards granted in
    the respective fiscal year as computed in accordance with FASB ASC Topic 718, Compensation — Stock Compensation.
    The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option valuation model.
    A     discussion of the assumptions used in calculating the amounts in this column may be found in Note 4(a) to our audited
    consolidated financial statements for the year ended June 30, 2012 set forth in this Annual Report on Form 10-K. These
    amounts do not represent the actual amounts paid to or realized by the Named Executive Officers during the fiscal year ended
    June     30, 2012 or 2011.                                                                          
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|(2) | Effective February 8, 2011, Dr. Joseph N. Forkey was appointed to serve as our Chief
    Executive Officer and Chairman of the Board of Directors. Dr. Forkey served as our Executive Vice President and Chief
    Scientific Officer from April 2006 to February 2011.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|(3) | Based upon a compensation arrangement approved by the Board of Directors on April 15, 2008, Dr. Forkey agreed to defer a portion of his salary. On December 3, 2010, we executed a compensation agreement where we agreed to pay Dr. Forkey $29,999, representing all deferred salary due to Dr. Forkey as of the date of the agreement. On October 14, 2011, we amended the compensation agreement to extend the deadline by which we were required to issue the shares of common stock. In return for Dr. Forkey’s consent to forgive the deferred salary owed to him by us, we issued him 10,909 shares of our restricted common stock in October 2011. The aggregate grant date fair value of the stock was reflected in the respective fiscal years it was earned by Dr. Forkey even though it was received by Dr. Forkey in FY 2012.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           



39





Employment Contracts and
Termination of Employment Arrangements



We have no employment contracts, other than the compensation
agreements disclosed above, in place with any Named Executive Officer. We have no compensatory plan or arrangement with respect
to any Named Executive Officer where such plan or arrangement will result in payments to such Named Executive Officer upon or following
his resignation, or other termination of employment with us and our subsidiaries, or as a result of a change-in-control of our
Company or a change in the Named Executive Officers’ responsibilities following a change-in-control.



Repricing of Certain Director and
Officer Option Grants



On February 9, 2012, our Board of Directors granted options
to purchase common stock to our directors and officers. Following our Company’s longstanding policy and consistent with the
terms of our qualified stock option plans, the options were granted with an exercise price set at the price of our common stock
at the close of business on the grant date.



After the Board approved these grants, but before the market
closed on February 9, 2012, a trade occurred in our common stock resulting in a closing stock price of $0.55, which was significantly
lower than recent historical and subsequent market prices, and lower than originally anticipated by the Board of Directors in regards
to the stock option grants.



In order to recover the original intent of the Board of Directors,
each of our directors and officers to whom options were granted on February 9, 2012 agreed to cancel the options granted on that
day and to accept an equal number of replacement options granted on March 2, 2012, with an exercise price of $1.20, which was the
closing stock price on the replacement grant date.



As a result, on March 2, 2012, the Board granted the following
options:



| | — | 7,600 options to Richard Miles, for his service on our Board of Directors;
| | - | --------------------------------------------------------------------------

| | — | 7,600 options to Joel Pitlor, for his service on our Board of Directors;
| | - | ------------------------------------------------------------------------

| | — | 27,600 options to Donald A. Major, consisting of 20,000 options as compensation for services provided to us, and 7,600 options
for his prior service on our Board of Directors;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | — | 150,000 options to Dr. Joseph N. Forkey, as compensation for services provided to us; and
| | - | -----------------------------------------------------------------------------------------

| | — | 15,000 options to Jack P. Dreimiller, as compensation for services provided to us.
| | - | ----------------------------------------------------------------------------------



Outstanding Equity Awards at Fiscal Year-End Table for the
Fiscal Year Ended June 30, 2012



The following table shows grants of options outstanding on June
30, 2012, the last day of our fiscal year, to each of the Named Executive Officers named in the Summary Compensation Table.



Option Awards



|Name (a)         |  | Number of securities underlying unexercised options exercisable (#) (b) |        |  | Number of securities underlying unexercised options unexercisable (#) (c) |  |             | Option exercise price ($) (e) |  |  | Option expiration date (f) | 
|---------------- |  | ----------------------------------------------------------------------- | ------ |  | ------------------------------------------------------------------------- |  | ----------- | ----------------------------- |  |  | -------------------------- | 
|Joseph N. Forkey |  |                                                                         | 600    |  |                                                                           |  | 0           |                               |  |  | 13.75                      | 
|                 |  |                                                                         | 11,208 |  |                                                                           |  | 0           |                               |  |  | 13.75                      | 
|                 |  |                                                                         | 22,416 |  |                                                                           |  | 0           |                               |  |  | 20.75                      | 
|                 |  |                                                                         | 0      |  |                                                                           |  | 150,000 (1) |                               |  |  | 1.20                       | 
|                 |  |                                                                         |        |  |                                                                           |  |             |                               |  |  |                            | 
|Richard G. Cyr   |  |                                                                         | 10,200 |  |                                                                           |  | 0           |                               |  |  | 13.75                      | 
|                 |  |                                                                         | 13,333 |  |                                                                           |  | 26,667      |                               |  |  | 0.27                       | 








| | (1) | Options with an expiration date of March 2, 2022 begin to vest 25,000 shares per quarter beginning January 1, 2013.
| | --- | -------------------------------------------------------------------------------------------------------------------



40





Profit Sharing and 401(k) Plan



We have a defined contribution 401(k) profit sharing plan.
Employer profit sharing and matching contributions to the plan are discretionary. No employer profit sharing contributions were
made to the plan in fiscal years 2012 and 2011. No employer matching contributions were made to the plan in fiscal years 2012 and
2011.



Director Compensation



The following table sets forth cash amounts and the value of
other compensation paid to our  directors, but does include the compensation of Dr. Joseph N. Forkey, our Chairman of the
Board of Directors, Chief Executive Officer, President and Treasurer, as his compensation is reflected in the Summary Compensation
Table.



Director Compensation Table for the
Fiscal Year Ended June 30, 2012



|Name of Director (a)  |  | Fees earned or paid in cash ($) (b) (1) |               |   | Stock awards ($) (c) |  |          | Option awards ($) (d) (2) |  |  | All other compensation ($) (g) |   |  | Total ($) (h) |           
|--------------------- |  | --------------------------------------- | ------------- | - | -------------------- |  | -------- | ------------------------- |  |  | ------------------------------ | - |  | ------------- | ----------
|Richard E. Forkey (3) |  |                                         | (1            | ) |                      |  | (5       | )                         |  |  | 0                              |   |  |               | 55,597 (6 
|Donald A. Major (4)   |  |                                         | 5,750 (1), (7 | ) |                      |  | 5,000 (8 | )                         |  |  | 33,120 (9                      | ) |  |               | 42,283 (10
|Richard B. Miles (11) |  |                                         | 1,750         |   |                      |  | 0        |                           |  |  | 9,120                          |   |  |               | 0         
|Joel R. Pitlor (12)   |  |                                         | 1,000         |   |                      |  | 0        |                           |  |  | 9,120                          |   |  |               | 0         










|(1) | Under our director compensation plan, each director receives $250 per board or committee meeting that
    the director attends. We also reimburse our directors for travel expenses. As Dr. Joseph N. Forkey and Mr. Richard E. Forkey
    are employees, the     Board     determined     that  Dr. Forkey and Mr. Forkey would not earn any fees related to
    service on     our     Board     of     Directors.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------







|(2) | Represents the aggregate grant date fair value of stock option awards granted in the respective fiscal year as computed in accordance
with FASB ASC Topic 718, Compensation — Stock Compensation. The fair value of each stock option award is estimated
on the date of grant using the Black-Scholes option valuation model. A discussion of the assumptions used in calculating the amounts
in this column may be found in Note 4(a) to our audited consolidated financial statements for the year ended June 30, 2012 set
forth in this Annual Report on Form 10-K. These amounts do not represent the actual amounts paid to or realized by the directors
during the fiscal year ended June 30, 2012.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Mr. Richard E. Forkey holds the executive position of Advisor to the Chief Executive Officer, in addition to his continued service
as a member of our Board of Directors. Mr. Forkey served as our Chief Executive Officer until February 8, 2011.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | Mr. Donald A. Major was appointed to serve as our Executive Vice President for Corporate Development on February 9, 2012, in addition
to his continued service as a member of our Board of Directors.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) | Based upon a compensation arrangement approved by the Board of Directors on April 15, 2008, Mr. Forkey agreed to defer a portion
of his salary. On December 3, 2010, we executed a compensation agreement where we agreed to pay Mr. Forkey $474,646, representing
all deferred salary due to Mr. Forkey as of the date of the agreement. On October 14, 2011, we amended the compensation agreement
to extend the deadline by which we were required to issue the shares of common stock. In return for Mr. Forkey’s consent
to forgive the deferred salary owed to him by us, we issued him 172,599 shares of our restricted common stock. The aggregate grant
date fair value of the stock was reflected in the respective fiscal years it was earned by Mr. Forkey, even though it was received
by Mr. Forkey in FY 2012.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



41





| | (6) | Mr. Forkey’s FY 2012 compensation consisted of: a) $36,488, earned as salary compensation for his services in the executive
position of Advisor to the Chief Executive Officer, and b) $19,109, which represents the value of premiums for a life insurance
and disability insurance policy we paid on Mr. Forkey’s behalf. On July 25, 2012, our Board of Directors approved an arrangement
with Mr. Forkey, whereby a payment of $40,000 will be made to Mr. Forkey in exchange for canceling Mr. Forkey’s life insurance
policy, on which we had been paying the policy premiums. Such payment will be reflected in Mr. Forkey’s FY 2013 compensation.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (7) | Mr.
Major received the standard compensation set forth under our  director compensation plan paid to   directors
of our Board of Directors for their services, and also received additional compensation of $500 per month for his services as Chair
of the Audit Committee. Therefore, in total, Mr. Major received $5,750 for his services as a  director and in his
capacity as Chair of the Audit Committee.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (8) | Mr. Major received $5,000 in restricted stock as compensation for consulting services provided to us prior to his appointment
as an executive officer of our Company in February 2012.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (9) | On March 2, 2012, we granted Mr. Major an aggregate of 27,600 options, consisting of options to purchase 7,600 shares of our
common stock with an exercise price of $1.20 as prior compensation for service on our Board and options to purchase 20,000 shares
of our common stock with an exercise price of $1.20 as compensation for services provided to us.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(10) | Mr. Major’s FY 2012 compensation also consisted of: a) $26,606, earned as compensation for consulting services provided
to us prior to his appointment as an executive officer of our Company in February 2012, and b) $15,677, earned as salary compensation
for his role as Executive Vice President for Corporate Development of our Company beginning in February 2012.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(11) | For the fiscal year ended June 30, 2012, Mr. Miles earned $1,750 for his services as a director. On March 2, 2012, we granted
Mr. Miles options to purchase 7,600 shares of our common stock with an exercise price of $1.20 as prior compensation for service
on our Board.  
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                                                                                                                                                               
|(12) | For the fiscal year ended June 30, 2012, Mr. Pitlor earned $1,000 for his services as a director. On March 2, 2012, we granted Mr. Pitlor options to purchase 7,600 shares of our common stock with
an exercise price of $1.20 as prior compensation for service on our Board.







42





ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.



Security Ownership of Certain Beneficial Owners and Management



The following tables set forth information regarding our common
stock owned as of the close of business on October 4, 2012 by the following persons: (i) each person who is known by us to
own beneficially more than 5% of our common stock, (ii) each of our directors who beneficially owns our common stock, (iii) each
of our Named Executive Officers who beneficially own our common stock and (iv) all executive officers and directors, as a
group, who beneficially own our common stock. The information on beneficial ownership in the table and footnotes thereto is based
upon data furnished to us by, or on behalf of, the persons listed in the table.



We have determined beneficial ownership
in accordance with the rules of the SEC. Except as indicated by the footnotes below, we believe, based on the information furnished
to us, that the persons and entities named in the table below have sole voting and investment power with respect to all shares
of common stock that they beneficially own, subject to applicable community property laws.



In computing the number of shares of common
stock beneficially owned by a person and the percentage ownership of that person, we deemed outstanding shares of common stock
subject to options held by that person that are currently exercisable or exercisable within 60 days after October 4, 2012.
We did not deem these shares outstanding, however, for the purpose of computing the percentage ownership of any other person.



Stockholders Known by Us to Own Over 5% of Our Common Stock









|                                                                                                       |  | Amount of beneficial ownership (1) |         |  | Percent of                 | 
|------------------------------------------------------------------------------------------------------ |  | ---------------------------------- | ------- |  | -------------------------- | 
|Name and Address of Beneficial Owner                                                                   |  | Shares Owned                       |         |  | Shares – Rights to Acquire | 
|Austin W. Marxe (3) c/o Special Situations Funds 527 Madison Avenue, Suite 2600 New York, NY 10022     |  |                                    | 931,113 |  |                            | 
|David M. Greenhouse (4) c/o Special Situations Funds 527 Madison Avenue, Suite 2600 New York, NY 10022 |  |                                    | 931,113 |  |                            | 
|Arnold Schumsky (5) 145 East 27th Street New York, New York 10016                                      |  |                                    | 120,430 |  |                            | 
|MHW Partners, L.P. (6) 150 East 52nd St. New York, New York 10022                                      |  |                                    | 222,223 |  |                            | 
|DAFNA Capital Management LLC (7) 10990 Wilshire Blvd. Los Angeles, CA 90024                            |  |                                    | 388,889 |  |                            | 
|Alpha Capital Anstalt (8) 150 Central Park South New York, New York 10019                              |  |                                    | 277,778 |  |                            | 









43
















|(1) | Represents shares with respect to which each beneficial owner listed has or will have, upon acquisition of such shares upon exercise or conversion of options, warrants, conversion privileges or other rights exercisable within sixty days, sole voting and investment power. Amounts listed have been adjusted to reflect a 1-for-25 reverse split, effective December 11, 2008. For the purposes of this table, we have not assumed the limitations on exercise set forth in certain warrants, which limit the number of shares of common stock that the holder, together with all other shares of common stock beneficially owned by such person, does not exceed 4.999% of the total outstanding shares of common stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|(2) | As of October 4, 2012, there were 4,029,134 shares of our common stock issued and outstanding. Percentages are calculated on the basis of the amount of issued and outstanding common stock plus, for each person or group, any securities that such person or group has the right to acquire within 60 days pursuant to options, warrants, conversion privileges or other rights.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|(3) | We relied, in part, on a Schedule 13D/A jointly
        filed with the SEC on October 9, 2012 by Austin W. Marxe and David M. Greenhouse for this information.
        
        Messrs. Marxe and Greenhouse are the
        controlling principals of AWM Investment Company, Inc., the general partner of and investment adviser to Special Situations
        Cayman Fund, L.P. AWM Investment Company also serves as the general partner of MGP Advisers Limited Partnership, the general partner
        of Special Situations Fund III QP, L.P. Messrs. Marxe and Greenhouse are also members of MG Advisers L.L.C., the general partner
        of Special Situations Private Equity Fund, L.P. AWM Investment Company serves as the investment adviser to Special Situations Fund
        III QP and Special Situations Private Equity Fund.
        
        Special Situations Cayman Fund owns 1 share
        of common stock. Special Situations Fund III QP owns 771,112 shares of common stock, 3,630,000 warrants to purchase 572,979 shares
        of common stock plus warrants to purchase an additional 70,139 shares of common stock as a result of an anti-dilution feature in
        the warrants. Special Situations Private Equity Fund owns 160,000 shares of common stock, 3,630,000 warrants to purchase 145,200
        shares of common stock plus warrants to purchase an additional 70,139 shares of common stock as a result of an anti-dilution feature
        in the warrants. Messrs. Marxe and Greenhouse share the power to vote and direct the disposition of all shares of common stock
        owned by Special Situations Cayman Fund, Special Situations Fund III QP, and Special Situations Private Equity Fund.
        
        Messrs. Marxe and Greenhouse
        are         deemed         to beneficially own a total of 931,113 shares of common stock, 7,260,000 warrants to purchase
        718,179 shares         of common stock plus         warrants to purchase an additional 140,278 shares of common stock as a
        result of an         anti-dilution feature in the warrants. However, the aggregate number of shares of common stock into
        which  427,779 warrants         of the total warrants held by Special Situations Fund III QP are exercisable, and which
        Messrs.         Marxe and         Greenhouse         have         the         right         to         acquire
        beneficial ownership,         is limited to the         number of         shares of         common stock         that,
        together         with all               other shares of                common stock         beneficially owned by
        Messrs. Marxe and         Greenhouse, does         not         exceed 4.999% of the         total         outstanding
        shares of common         stock. Accordingly, 427,779         warrants are not                currently         exercisable into
        common stock until the actual         shares of         common stock         held by         Messrs. Marxe and
        Greenhouse is less         than 4.999%         of the total         outstanding shares of             common stock. Special
        Situations         Fund III QP may waive         this         4.999%
        restriction with 61 days notice         to us.
        
        Mr. Marxe additionally holds
an additional 204 shares of common stock that may be acquired by Mr. Marxe as an individual upon the exercise of outstanding
stock options.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|(4) | We relied, in part, on a Schedule
13D/A jointly filed with the SEC on October 9, 2012 by Austin W. Marxe and David M. Greenhouse for this information.
        
        Messrs. Marxe and Greenhouse are the
        controlling principals of AWM Investment Company, Inc., the general partner of and investment adviser to Special Situations
        Cayman Fund, L.P. AWM Investment Company also serves as the general partner of MGP Advisers Limited Partnership, the general partner
        of Special Situations Fund III QP, L.P. Messrs. Marxe and Greenhouse are also members of MG Advisers L.L.C., the general partner
        of Special Situations Private Equity Fund, L.P. AWM Investment Company serves as the investment adviser to Special Situations Fund
        III QP and Special Situations Private Equity Fund.
        
        Special Situations Cayman Fund owns 1 share
        of common stock. Special Situations Fund III QP owns 771,112 shares of common stock, 3,630,000 warrants to purchase 572,979 shares
        of common stock plus warrants to purchase an additional 70,139 shares of common stock as a result of an anti-dilution feature in
        the warrants. Special Situations Private Equity Fund owns 160,000 shares of common stock, 3,630,000 warrants to purchase 145,200
        shares of common stock plus warrants to purchase an additional 70,139 shares of common stock as a result of an anti-dilution feature
        in the warrants. Messrs. Marxe and Greenhouse share the power to vote and direct the disposition of all shares of common stock
        owned by Special Situations Cayman Fund, Special Situations Fund III QP, and Special Situations Private Equity Fund.
        
        Messrs. Marxe and Greenhouse
are deemed to beneficially own a total of 931,113 shares of common stock, 7,260,000 warrants to purchase 718,179 shares of common
stock plus warrants to purchase an additional 140,278 shares of common stock as a result of an anti-dilution feature in the warrants. However, the aggregate number of shares of common stock into which 427,779 warrants of the total warrants held by Special Situations Fund III QP are exercisable, and which Messrs. Marxe and Greenhouse have the right to acquire beneficial ownership, is limited to the number of shares of common stock that, together with all other shares of common stock beneficially owned by Messrs. Marxe and Greenhouse, does not exceed 4.999% of the total outstanding shares of common stock. Accordingly, 427,779 warrants are not currently exercisable into common stock until the actual shares of common stock held by Messrs. Marxe and Greenhouse is less than 4.999% of the total outstanding shares of common stock. Special Situations Fund III QP may waive this 4.999% restriction with 61 days notice to us.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           





44











|(5) | We relied, in part, on a Schedule 13D filed with the SEC on
    June 6, 2007 by Arnold Schumsky for this information. Mr. Schumsky beneficially owns a total of 210,316 shares of
    common stock. His ownership consists of (i) 120,430 shares of common stock owned of record by Mr. Schumsky, and
    (ii) 89,886 shares that may be acquired upon the exercise of outstanding warrants which are immediately exercisable.
    However, the aggregate number of shares of common stock into which  58,334 warrants of the total warrants held by Mr.
    Schumsky are     exercisable,     and     which     Mr.     Schumsky     has the right to acquire beneficial ownership, is
    limited to the     number of shares of     common     stock that,     together     with all     other shares of common stock
    beneficially owned     by Mr. Schumsky, does not     exceed     4.999% of the total     outstanding     shares of     common
    stock. Accordingly, 58,334     warrants are not currently     exercisable     into common stock until     the actual     shares
    of common     stock held by     Mr. Schumsky is less than     4.999% of the total     outstanding shares of common     stock.
    Mr.     Schumsky may waive this     4.999% restriction with     61 days notice to us.                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(6) | MHW Partners, L.P. beneficially owns 222,223 shares of common stock, and
    155,557 shares that may be acquired upon the exercise of outstanding warrants. However, the aggregate number of shares of
    common stock into which such warrants are exercisable, and which MHW Partners, L.P. has the right to acquire beneficial
    ownership, is limited to the number of shares of common stock that, together with all other shares of common stock
    beneficially owned by MHW Partners, L.P., does not exceed 4.999% of the total outstanding shares of common stock. Accordingly,
    such warrants are not currently exercisable into common stock until the actual shares of common stock held by MHW Partners,
    L.P. is less than 4.999% of the total outstanding shares of common stock. MHW Partners, L.P. may waive this 4.999%
    restriction with 61 days notice to us. Peter Woodward is the managing member and     general partner of MHW Partners, L.P.
    and in such capacity, Mr. Woodward holds the power to vote and direct the disposition     of all shares of common stock owned
    by MHW Partners, L.P.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(7) | DAFNA Capital Management beneficially owns 388,889 shares of common stock, in the aggregate. DAFNA Capital Management holds common stock purchase warrants exercisable into 272,223 shares of common stock, in the aggregate. DAFNA LifeScience Market Neutral, Ltd. owns 77,778 shares of common stock and 54,445 shares that be acquired upon the exercise of outstanding warrants. DAFNA LifeScience Select, Ltd. owns 200,000 shares of common stock and 140,000 shares that be acquired upon the exercise of outstanding warrants. DAFNA LifeScience, Ltd. owns 111,111 shares of common stock and 77,778 shares that be acquired upon the exercise of outstanding warrants. However, the aggregate number of shares of common stock into which such warrants are exercisable, and which DAFNA Capital Management has the right to acquire beneficial ownership, is limited to the number of shares of common stock that, together with all other shares of common stock beneficially owned by DAFNA Capital Management, does not exceed 4.999% of the total outstanding shares of common stock. Accordingly, such warrants are not currently exercisable into common stock until the actual shares of common stock held by DAFNA Capital Management is less than 4.999% of the total outstanding shares of common stock. DAFNA LifeScience Market Neutral, Ltd., DAFNA LifeScience Select, Ltd., and DAFNA LifeScience, Ltd. may waive this 4.999% restriction with 61 days notice to us. Nathan Fischel, in his capacity as managing member of DAFNA Capital Management, may be deemed to beneficially own the securities owned by DAFNA LifeScience Market Neutral, DAFNA LifeScience Select, and DAFNA LifeScience.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(8) | Alpha Capital Anstalt beneficially owns 277,778 shares of common stock and
    194,445 shares that may be acquired upon the exercise of outstanding warrants. However, the aggregate number of shares of
    common stock into which such warrants are exercisable, and which Alpha Capital Anstalt has the right to acquire beneficial
    ownership, is limited to the number of shares of common stock that, together with all other shares of common stock
    beneficially owned by Alpha Capital Anstalt, does not exceed 4.999% of the total outstanding shares of common stock.
    Accordingly, such warrants are not currently exercisable into common stock until the actual shares of common stock held by
    Alpha Capital Anstalt is less than 4.999% of the total outstanding shares of common stock. Alpha Capital Anstalt may waive
    this 4.999% restriction with 61 days notice to us.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                





Officers and Directors



|                                                            |  |                                                                                      |  | Amount of beneficial ownership (2) |  | Percent of                 | 
|----------------------------------------------------------- |  | ------------------------------------------------------------------------------------ |  | ---------------------------------- |  | -------------------------- | 
|Name and address of
beneficial owner (1)                    |  | Nature of beneficial
ownership                                                       |  | Shares
Owned                       |  | Shares – Rights
to Acquire | 
|Joseph N. Forkey (4)                                        |  | Chairman of the Board of Directors, Chief Executive Officer, President and Treasurer |  | 33,620                             |  | 49,781                     | 
|Jack P. Dreimiller (5)                                      |  | Senior Vice President and Chief Financial Officer                                    |  | 583                                |  | 5,000                      | 
|Donald A. Major (6)                                         |  | Executive Vice President for Corporate Development and Director                      |  | 35,778                             |  | 44,445                     | 
|Richard E. Forkey (7)                                       |  | Advisor to the Chief Executive Officer and Director                                  |  | 212,993                            |  | 49,333                     | 
|Richard B. Miles (8)                                        |  | Director                                                                             |  | 15,112                             |  | 17,379                     | 
|Joel R. Pitlor (9)                                          |  | Director                                                                             |  | 195,395                            |  | 9,978                      | 
|Richard Cyr (10)                                            |  | Optical Shop Manager                                                                 |  | 0                                  |  | 23,533                     | 
|All directors and executive officers as a group (7 persons) |  |                                                                                      |  | 493,481                            |  | 199,449                    | 

_________________

* Percentage of shares beneficially owned does not exceed one percent of issued and outstanding shares of stock.



45







| | (1) | Unless otherwise stated, the address of each beneficial owners listed on the table is c/o Precision Optics Corporation, Inc., 22 East Broadway, Gardner, MA 01440.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | Represents shares with respect to which each beneficial owner listed has or will have, upon acquisition of such shares upon exercise or conversion of options, warrants, conversion privileges or other rights exercisable within sixty days, sole voting and investment power. Amounts listed have been adjusted to reflect a 1-for-25 reverse split, effective December 11, 2008.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | As of October 4, 2012, we had 4,029,134 shares of our common stock issued and outstanding. Percentages are calculated on the basis of the amount of issued and outstanding common stock plus, for each person or group, any securities that such person or group has the right to acquire within 60 days pursuant to options, warrants, conversion privileges or other rights.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (4) | Dr. Forkey is Chairman of our Board of Directors and serves as our
    Chief Executive Officer, President and Treasurer. Dr. Forkey beneficially owns 49,781 shares of common stock which may
    be acquired within 60 days of October 4, 2012 upon the exercise of outstanding stock options and warrants.
    Dr. Forkey also beneficially owns 33,620 shares of common stock through joint ownership with his wife, Heather C.
    Forkey, with whom he shares voting and dispositive control.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (5) | Mr. Dreimiller is our Senior Vice President and Chief Financial Officer. Mr. Dreimiller beneficially owns 583 shares of common stock and 5,000 shares of common stock which may be acquired within 60 days of October 4, 2012 upon the exercise of outstanding stock options.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (6) | Mr. Major is our Executive Vice President for Corporate Development and a member of our Board of Directors. Mr. Major beneficially owns 35,778 shares of common stock and 44,445 shares of common stock which may be acquired within 60 days of October 4, 2012 upon the exercise of outstanding stock options and warrants.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (7) | Mr. Forkey holds the executive position of Advisor to the Chief Executive Officer and is a member of our Board of Directors. He also served as our Chief Executive Officer until February 8, 2011. Mr. Forkey beneficially owns 212,993 shares of common stock and 49,333 shares of common stock which may be acquired within 60 days of October 4, 2012 upon the exercise of outstanding stock options and warrants.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (8) | Mr. Miles is a member of our Board of Directors. Mr. Miles beneficially owns 15,112 shares of common stock and 17,379 shares of common stock which may be acquired within 60 days of October 4, 2012 upon the exercise of outstanding stock options.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (9) | Mr. Pitlor is a member of our Board of Directors. Mr. Pitlor beneficially owns 195,395 shares of common stock, and 9,978 shares which may be acquired within 60 days of October 4, 2012 upon the exercise of outstanding stock options.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (10) | Mr. Cyr is our Optical Shop Manager and is considered a “named executive officer” as defined in Item 402(a)(3) of Regulation S-K for the purposes of this report. Mr. Cyr beneficially owns 23,533 shares of common stock which may be acquired within 60 days of October 4, 2012 upon the exercise of outstanding stock options.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------









46









ITEM 13.  CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.



Certain Relationships and Related Transactions



We lease our facility in Gardner, Massachusetts
from Equity Assets, Inc., a company wholly-owned by Mr. Richard E. Forkey, our current director and former President,
Chief Executive Officer, and Treasurer. We are currently a tenant-at-will, paying rent of $9,000 per month, or an aggregate of
$108,000 per year, for each of fiscal years 2012 and 2011.





On September 28, 2012, we closed on agreements with investors
for the sale and purchase of units consisting of an aggregate of (i) 2,777,795 shares of our common stock, and (ii) warrants to
purchase an aggregate of 1,944,475 shares of common stock, at a per unit price of $0.90. Each unit consisted of one share of common
stock and 70% warrant coverage. The warrants have an exercise price of $1.25 per share, subject to adjustment and a call provision
if certain market price targets are reached, will expire five years from September 28, 2012, and are exercisable in whole or in
part, at any time prior to expiration. We received $2.5 million in gross proceeds from the offering. Certain of our directors and
officers participated in the offering and purchased a total aggregate amount of approximately $80,000 of units in the offering.





Director Independence



During the fiscal year ended June 30,
2012, the Board of Directors has made the determination that Mr. Richard B. Miles and Mr. Joel R. Pitlor are “independent”
as defined under the standards of independence set forth in the NASDAQ Listing Rules and the rules under the Securities Exchange
Act of 1934.



ITEM 14.  PRINCIPAL ACCOUNTING FEES
AND SERVICES.



Independent Registered Public Accounting
Firm Fees



Our principal and sole independent registered
public accounting firm for the fiscal years ending June 30, 2012 and 2011 is Stowe & Degon LLC (“Stowe”).
The following table presents fees for professional audit services and other services rendered by Stowe, for the fiscal years ended
June 30, 2012 and 2011:



|                                   |  | 2012 |        |  | 2011 |  
|---------------------------------- |  | ---- | ------ |  | ---- | -
|Audit Fees (1)                     |  | $    | 72,000 |  |      | $
|Audit-Related Fees (2)             |  |      | –      |  |      |  
|Total Audit and Audit-Related Fees |  |      | 72,000 |  |      |  
|Tax Fees (3)                       |  |      | 14,135 |  |      |  
|All Other Fees (4)                 |  |      | –      |  |      |  
|Total Fees                         |  | $    | 86,135 |  |      | $





|(1) | Audit fees for fiscal 2012 are comprised of fees for professional services performed for the audit of our annual financial statements and review of our quarterly financial statements of $72,000, including direct out-of-pocket expenses in the amount of $1,500. Audit fees for fiscal 2011 are comprised of fees for professional services performed for the audit of our annual financial statements and review of our quarterly financial statements of $72,750, including direct out-of-pocket expenses in the amount of $1,750.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|(2) | Audit-related fees are comprised of fees for assurance and related attestation services that are reasonably related to the performance of the audit of our annual financial statements or the review thereof and fees for due diligence services.                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|(3) | Tax fees for fiscal 2012 and 2011 by Stowe are comprised of fees for professional services performed with respect to corporate tax compliance, tax planning and tax advice.                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|(4) | We did not incur any other fees during fiscal 2012 or 2011 for products and services provided by Stowe other than those disclosed above.                                                                                                                                                                                                                                                                                                                                                                                               



Pre-Approval Policies



Under the direction of our Chief Executive
Officer, our Board of Directors pre-approves all services provided by our independent registered public accounting firm. 100% of
the above services and fees were reviewed and approved by the Board of Directors either before or after the respective services
were rendered. The Board of Directors has considered the nature and amount of fees billed by Stowe and believes that the provision
of services for activities unrelated to the audit is compatible with maintaining the firm’s independence.







47







ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES.



a.            
The following documents are filed as part of this 10-K:



1.            
FINANCIAL STATEMENTS



The following documents are filed in Part II, Item 8 of
this Annual Report on Form 10-K:



Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets at June 30, 2012 and 2011

Consolidated Statements of Operations for the years ended June 30,
2012 and 2011

Consolidated Statements of Stockholders’ Equity for the years
ended June 30, 2012 and 2011

Consolidated Statements of Cash Flows for the years ended June 30,
2012 and 2011

Notes to Consolidated Financial Statements



2.            
FINANCIAL STATEMENT SCHEDULES



All financial statement schedules have been omitted as they are
not required, not applicable, or the required information is otherwise included.



3.            
EXHIBITS



The exhibits listed below are filed with or incorporated by reference
in this report.



|Exhibit |  | Description                                                                                                                                                                                                                                                                                                                                                 
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|        |  |                                                                                                                                                                                                                                                                                                                                                             
|2.1     |  | Asset Purchase Agreement between the Company and Optometrics Corporation, dated January 18, 2008 (included as Exhibit 2.1 to the Form 8-K filed January 25, 2008 and incorporated herein by reference).                                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                                                                                                             
|3.1     |  | Articles of Organization of Precision Optics Corporation, Inc., as amended (included as Exhibit 3.1 to the Form SB-2 filed March 16, 2007 and incorporated herein by reference).                                                                                                                                                                            
|        |  |                                                                                                                                                                                                                                                                                                                                                             
|3.2     |  | Bylaws of Precision Optics Corporation, Inc. (included as Exhibit 3.2 to the Form S-1 filed December 18, 2008 and incorporated herein by reference).                                                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                                                                                             
|3.3     |  | Articles of Amendment to the Articles of Organization of Precision Optics Corporation, Inc., dated November 25, 2008 and effective December 11, 2008 (included as Exhibit 3.1 to the Form 8-K filed December 11, 2008 and incorporated herein by reference).                                                                                                
|        |  |                                                                                                                                                                                                                                                                                                                                                             
|4.1     |  | Registration Rights Agreement by and among the Company and each investor named therein, dated March 17, 2000 (included as Exhibit 4.4 to the Form S-3 filed April 28, 2000 and incorporated herein by reference).                                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                                                             
|4.2     |  | Registration Rights Agreement, dated June 30, 1998 by and among the Company, Special Situations Private Equity Fund, L.P. and Special Situations Technology Fund, L.P. (included as Exhibit 4.9 to the Form 10-KSB filed September 29, 1998 and incorporated herein by reference).                                                                          
|        |  |                                                                                                                                                                                                                                                                                                                                                             
|4.3     |  | Registration Rights Agreement by and among the Company, Special Situations Cayman Fund, L.P., Special Situations Fund III, L.P., Special Situations Private Equity Fund, L.P. and Special Situations Technology Fund, L.P., dated August 5, 1999 (included as Exhibit 4.7 to the Form 10-KSB filed September 28, 1999 and incorporated herein by reference).
|        |  |                                                                                                                                                                                                                                                                                                                                                             
|4.4     |  | Registration Rights Agreement by and among the Company and each investor named therein, dated February 1, 2007 (included as Exhibit 4.1 to the Form 8-K filed February 2, 2007 and incorporated herein by reference).                                                                                                                                       
|        |  |                                                                                                                                                                                                                                                                                                                                                             
|4.5     |  | Form of Warrant to Purchase Shares of Common Stock (included as Exhibit 4.2 to the Form 8-K filed February 2, 2007 and incorporated herein by reference).                                                                                                                                                                                                   
|        |  |                                                                                                                                                                                                                                                                                                                                                             
|4.6     |  | Registration Rights Agreement by and among the Company and each investor named therein, dated June 25, 2008 (included as Exhibit 4.1 to the Form 8-K filed June 27, 2008 and incorporated herein by reference).                                                                                                                                             
|        |  |                                                                                                                                                                                                                                                                                                                                                             
|4.7     |  | Form of Warrant to Purchase Shares of Common Stock, dated June 25, 2008 (included as Exhibit 4.2 to the Form 8-K filed June 27, 2008 and incorporated herein by reference).                                                                                                                                                                                 
|        |  |                                                                                                                                                                                                                                                                                                                                                             
|4.8     |  | Form of 10% Senior Secured Convertible Note, dated June 25, 2008 (included as Exhibit 4.3 to the Form 8-K filed June 27, 2008 and incorporated herein by reference).                                                                                                                                                                                        





48











|4.9   |  | Form of Warrant to Purchase Shares of Common Stock, dated September 28, 2012 (included as Exhibit 4.1 to the Form 8-K filed October 2, 2012 and incorporated herein by reference).                                                               
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |  |                                                                                                                                                                                                                                                  
|4.10  |  | Registration Rights Agreement by and among the Company and each investor named therein, dated
    September 28, 2012 (included as Exhibit 4.2 to the Form 8-K filed October 2, 2012 and incorporated herein by reference).                       
|      |  |                                                                                                                                                                                                                                                  
|4.11  |  | Warrant to Purchase Shares of Common Stock issued to Loewen, Ondaatje, McCutcheon USA LTD, dated September 28, 2012 (included as Exhibit 4.3 to the Form 8-K filed October 2, 2012 and incorporated herein by reference).                        
|      |  |                                                                                                                                                                                                                                                  
|10.1  |  | Precision Optics Corporation, Inc. 1997 Incentive Plan, as amended and restated (included as Exhibit 10.1 to the Form 10-QSB filed November 13, 2003 and incorporated herein by reference).                                                      
|      |  |                                                                                                                                                                                                                                                  
|10.2  |  | Securities Purchase Agreement by and among the Company and each purchaser named therein, dated March 13, 2000 (included as Exhibit 2.1 to the Form S-3 filed April 28, 2000 and incorporated herein by reference).                               
|      |  |                                                                                                                                                                                                                                                  
|10.3  |  | Form of Securities Purchase Agreement between the Company and investors (included as Exhibit 10.1 to the Form 8-K filed April 19, 2006 and incorporated herein by reference).                                                                    
|      |  |                                                                                                                                                                                                                                                  
|10.4  |  | Precision Optics Corporation, Inc. 2006 Equity Incentive Plan (included as Exhibit 99.1 to the Form 8-K filed December 4, 2006 and incorporated herein by reference).                                                                            
|      |  |                                                                                                                                                                                                                                                  
|10.5  |  | Purchase Agreement by and among the Company and each investor named therein, dated February 1, 2007 (included as Exhibit 10.1 to the Form 8-K filed February 2, 2007 and incorporated herein by reference).                                      
|      |  |                                                                                                                                                                                                                                                  
|10.6  |  | Form of Incentive Stock Option Certificate (included as Exhibit 10.1 to the Form 10-QSB filed February 14, 2007 and incorporated herein by reference).                                                                                           
|      |  |                                                                                                                                                                                                                                                  
|10.7  |  | Form of Nonstatutory Stock Option Certificate (included as Exhibit 10.2 to the Form 10-QSB filed February 14, 2007 and incorporated herein by reference).                                                                                        
|      |  |                                                                                                                                                                                                                                                  
|10.8  |  | Purchase Agreement by and among the Company and each investor named therein, dated June 25, 2008 (included as Exhibit 10.1 to the Form 8-K filed June 27, 2008 and incorporated herein by reference).                                            
|      |  |                                                                                                                                                                                                                                                  
|10.9  |  | Pledge and Security Agreement by and among the Company and each investor named therein, dated June 25, 2008 (included as Exhibit 10.2 to the Form 8-K filed June 27, 2008 and incorporated herein by reference).                                 
|      |  |                                                                                                                                                                                                                                                  
|10.10 |  | Consulting Agreement between the Company and Jack P. Dreimiller, dated August 15, 2008 (included as Exhibit 10.1 to the Form 8-K filed August 18, 2008 and incorporated herein by reference).                                                    
|      |  |                                                                                                                                                                                                                                                  
|10.11 |  | Side Letter Agreement between the Company and the investors signatory to the Purchase Agreement, dated November 25, 2008 (included as Exhibit 10.1 to the Form 8-K filed December 11, 2008 and incorporated herein by reference).                
|      |  |                                                                                                                                                                                                                                                  
|10.12 |  | Side Letter Agreement between the Company and the holders signatory to the 10% Senior Secured Convertible Note, dated December 11, 2008 (included as Exhibit 10.15 to the Form S-1 filed December 18, 2008 and incorporated herein by reference).
|      |  |                                                                                                                                                                                                                                                  
|10.13 |  | Side Letter Agreement between the Company and the holders signatory to the 10% Senior Secured Convertible Note, dated April 2, 2009 (included as Exhibit 10.16 to the Form S-1/A filed April 6, 2009 and incorporated herein by reference).      
|      |  |                                                                                                                                                                                                                                                  
|10.14 |  | Compensation Agreement with Richard E. Forkey, dated December 3, 2010 (filed as Exhibit 10.11 to the Form 8-K filed December 6, 2010 and incorporated herein by reference).                                                                      
|      |  |                                                                                                                                                                                                                                                  
|10.15 |  | Compensation Agreement with Joseph N. Forkey, dated December 3, 2010 (filed as Exhibit 10.12 to the Form 8-K filed December 6, 2010 and incorporated herein by reference).                                                                       
|      |  |                                                                                                                                                                                                                                                  
|10.16 |  | Compensation Agreement with Joel R. Pitlor, dated December 3, 2010 (filed as Exhibit 10.13 to the Form 8-K filed December 6, 2010 and incorporated herein by reference).                                                                         
|      |  |                                                                                                                                                                                                                                                  
|10.17 |  | Asset Purchase Agreement between the Company and Intuitive Surgical Operations, Inc., dated July 27, 2011 (included as Exhibit 10.1 to the Form 8-K filed August 3, 2011 and incorporated herein by reference).                                  





49









|10.18 |  | Amendment to Pledge and Security Agreement by and among the Company and each investor named therein, dated July 27, 2011 (included as Exhibit 10.2 to the Form 8-K filed August 3, 2011 and incorporated herein by reference).
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |  |                                                                                                                                                                                                                               
|10.19 |  | Demand Note in the amount of $10,000, dated July 13, 2011, issued by the Company to Dr. Joseph N. Forkey (filed as Exhibit 10.22 to the Form 10-K filed September 28, 2011, and incorporated herein by reference.)            



|10.20 |  | Precision Optics Corporation, Inc. 2011 Equity Incentive Plan, dated October 13, 2011 (included as Exhibit 10.2 to Form S-8 filed October 14, 2011, and incorporated herein by reference.)                                                                     
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |  |                                                                                                                                                                                                                                                                
|10.21 |  | Precision Optics Corporation, Inc. 2011 Deferred Compensation Plan, dated October 13, 2011 (included as Exhibit 10.3 to Form S-8 filed October 14, 2011, and incorporated herein by reference.)                                                                
|      |  |                                                                                                                                                                                                                                                                
|10.22 |  | Side Letter Agreement to the Compensation Agreement
    with Richard E. Forkey, dated October 14, 2011 (included as Exhibit 10.4 to the Form 8-K filed October 19, 2011 and
    incorporated herein by reference).                                             
|      |  |                                                                                                                                                                                                                                                                
|10.23 |  | Side Letter Agreement to the Compensation Agreement
    with Joseph N. Forkey, dated October 14, 2011 (included as Exhibit 10.5 to the Form 8-K filed October 19, 2011 and
    incorporated herein by reference).                                              
|      |  |                                                                                                                                                                                                                                                                
|10.24 |  | Side Letter Agreement to the Compensation Agreement
    with Joel N. Pitlor, dated October 14, 2011 (included as Exhibit 10.6 to the Form 8-K filed October 19, 2011 and incorporated
    herein by reference).                                                
|      |  |                                                                                                                                                                                                                                                                
|10.25 |  | Endorsement to 10% Senior Secured Convertible Note by the Company, dated October 31, 2011, and accepted by Special Situations Private Equity Fund, L.P. (included as Exhibit 10.2 to the Form 8-K filed November 3, 2011 and incorporated herein by reference).





|10.26 |  | Endorsement to 10% Senior Secured Convertible Note by the Company, dated October 31,
2011, and accepted by Special Situations Fund III QP, L.P. (included as Exhibit 10.3 to the Form 8-K filed November 3, 2011 and
incorporated herein by reference).
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10.27 |  | Endorsement to 10% Senior Secured Convertible Note by the Company, dated July 31,
2012, and accepted by Arnold Schumsky (filed herewith).
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------



|10.28 |  | Endorsement to 10% Senior Secured Convertible Note by the Company, dated August 31,
2012, and  accepted by Arnold Schumsky (filed herewith).
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------





|10.29 |  | Notice of Repayment of 10% Senior Secured Convertible Note in Full by the Company,
dated September 28, 2012, and accepted by Arnold Schumsky (filed herewith).
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



|10.30 |  | Purchase Agreement by and among the Company and each investor named therein, dated
September 28, 2012 (included as Exhibit 10.1 to the Form 8-K filed October 2, 2012 and incorporated herein by reference).
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





|14.1 |  | Precision Optics Corporation, Inc. Corporate Code of Ethics and Conduct (included
as Exhibit 14.1 to the Form 10-K filed September 28, 2008 and incorporated herein by reference).
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|21.1 |  | Subsidiaries of the Registrant (included as Exhibit 21.1 to the Form 10-K
filed September 26, 2008 and incorporated herein by reference).
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------



|23.1 |  | Consent of Independent Registered Public Accounting Firm (filed herewith).
|---- |  | --------------------------------------------------------------------------



|31.1 |  | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (filed herewith).
|---- |  | ------------------------------------------------------------------------------------------------------------------------



|31.2 |  | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (filed herewith).
|---- |  | ------------------------------------------------------------------------------------------------------------------------



|32.1 |  | Certification of Officers pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



|101.INS* | XBRL Instance Document
|-------- | ----------------------

|101.SCH* | XBRL Taxonomy Extension Schema Document
|-------- | ---------------------------------------



|101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document
|-------- | -----------------------------------------------------

|101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document
|-------- | ----------------------------------------------------

|101.LAB* | XBRL Taxonomy Extension Label Linkbase Document
|-------- | -----------------------------------------------

|101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document
|-------- | ------------------------------------------------------



| | * | Pursuant to Rule 405(a)(2) of Regulation S-T, the Company will furnish the XBRL Interactive Data Files with detailed footnote
tagging as Exhibit 101 in an amendment to this Form 10-K within the permitted 30-day grace period for the period in which detailed
footnote tagging is required after the filing date of this Form 10-K.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



50







SIGNATURES



Pursuant to the requirements of Section 13
or 15(d) of the Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.





|                       | PRECISION OPTICS CORPORATION, INC.
|---------------------- | ----------------------------------
|                       |                                   
|                       |                                   
|Date: October 15, 2012 | By:                               
|                       |                                   
|                       |                                   
|                       |                                   
|                       |                                   
|Date: October 15, 2012 | By:                               
|                       |                                   
|                       |                                   





Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.



|Signature                                         | Capacity                                                                                                          | Date            
|------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------- | ----------------
|                                                  |                                                                                                                   |                 
|/s/ Joseph N. Forkey
        Joseph N. Forkey     | Chairman of the Board, Chief Executive Officer, President, and Treasurer
(Principal Executive Officer)            | October 15, 2012
|                                                  |                                                                                                                   |                 
|/s/ Jack P. Dreimiller
        Jack P. Dreimiller | Senior Vice President and Chief Financial Officer 
(Principal Financial Officer and Principal Accounting Officer) | October 15, 2012
|                                                  |                                                                                                                   |                 
|/s/ Donald A. Major                               | Executive Vice President for Corporate Development and Director                                                   | October 15, 2012
|Donald A. Major                                   |                                                                                                                   |                 
|/s/ Richard E. Forkey                             | Director                                                                                                          | October 15, 2012
|Richard E. Forkey                                 |                                                                                                                   |                 
|/s/ Richard B. Miles                              | Director                                                                                                          | October 15, 2012
|Richard B. Miles                                  |                                                                                                                   |                 
|/s/ Joel R. Pitlor                                | Director                                                                                                          | October 15, 2012
|Joel R. Pitlor                                    |                                                                                                                   |                 







51