6.	NOTES PAYABLE, RELATED PARTY PAYABLES, DEBT SUBJECT TO EQUITY BEING ISSUED AND SETTLEMENT OF DEBT

As a result of the sale of the Company’s Asset Sale to STUS the notes payable and convertible debentures of $17,269,689 and the related accrued interest of $3,671,137 as of May 31, 2010, have been settled in part with the December 2010 closing in the amount of $5,570,059 and the balance in June 2011 closing with cash of $3,526,523, an undetermined amount of equity yet to be issued and $688,768 of remaining notes payable as of May 31, 2012. As of May 31, 2013 there was $741,455 of notes payable, net of debt discount of $537,323, largely the result of additional debt investments during this year.

In November 2012, the Company received a loan in the form of a Convertible Note in the principal amount of $180,000. The note bears interest at 6% per year and matures on November 15, 2014. At any time during the length of the loan, the holder of the note has the right to convert any unpaid portion of the note into shares of common stock. The conversion price shall equal $0.01 per share. The beneficial conversion feature has been fair valued at $180,000 and will be amortized over the life the debt instrument.

In December 2012, the Company received a loan in the form of a Convertible Note in the principal amount of $20,000. The note bears interest at 6% per year and matures on November 15, 2014. If not paid upon maturity, the interest rate will increase to 12% per year. At any time during the length of the loan, the holder of the note has the right to convert any unpaid portion of the note into shares of common stock. The conversion price shall equal $0.01 per share. The beneficial conversion feature has been fair valued at $20,000 and will be amortized over the life the debt instrument.

On January 6, 2013, the Company and Andreas Typaldos, former officer and director, entered into a Separation and Release Agreement. Under the Separation Agreement all prior Typaldos Agreements will be terminated and certain debts and obligations to Typaldos will be released in exchange for (1) $15,920 and (2) 14,073,966 shares of common stock. In addition, $19,000 will be paid to Typaldos’ son for an existing loan with the Company. The Company has yet to issue such shares under this Separation Agreement. As of May 31, 2013, there was $945,000 of payables due to Andreas Typaldos, included in the balance sheet category “Debt subject to equity being issued.”

On April 22, 2013, the Company executed two Convertible Notes for loans in principal amount of $40,000 each. Each note bears interest at 6% per year and matures on April 30, 2015. At any time during the length of the loan, the holder of the note has the right to convert any unpaid portion of the note into shares of common stock. The conversion price shall equal $.02 per share for both notes. The beneficial conversion feature has been fair valued at $40,000 each and will be amortized over the life the debt instrument.

On April 22, 2013, the Company executed a Convertible Note for a loan in the principal amount of $120,000. The note bears interest at 6% per year and matures on April 30, 2015. At any time during the length of the loan, the holder of the note has the right to convert any unpaid portion of the note into shares of common stock. The conversion price shall equal $0.02 per share. The beneficial conversion feature has been fair valued at $120.000 and will be amortized over the life the debt instrument.

On May 2, 2013, the Company executed a Convertible Note for a loan in the principal amount of $200,000. The note bears interest at 6% per year and matures on April 30, 2015. At any time during the length of the loan, the holder of the note has the right to convert any unpaid portion of the note into shares of common stock. The conversion price shall equal $0.02 per share. The beneficial conversion feature has been fair valued at $200,000 and will be amortized over the life the debt instrument.

Related Party Activities – The Company received an aggregate of $130,000 from several of its then directors during the 1^st quarter of 2012. This obligation remains outstanding, therefore, the Company has reported a related party payable in the amount of $130,000 as of each of May 31, 2013 and 2012, respectively.

The five year maturity of debt is as follows:

Year ended May 31, 2014	$	0
Year ended May 31, 2015		600,000
Total long term debt		600,000
Less debt discount		(537,323)
Long term debt, net of debt discount	$	62,677

Effective June 1, 2009, the Company adopted the provisions of EITF 07-05 “Determining Whether an Instrument (or Embedded Feature) is Indexed to a Company's Own Stock,” which was codified into ASC Topic 815 – Derivatives and Hedging. ASC 815 applies to any freestanding financial instruments or embedded features that have characteristics of a derivative and to any freestanding financial instruments that are potentially settled in an entity’s own common stock. The Company has 11,735,004 of warrants with exercise reset provisions, with its debt issuances over the years, which are considered freestanding derivative instruments. ASC 815 requires these warrants to be recorded as liabilities as they are no longer afforded equity treatment assumptions: risk free rates from 1.32% to 1.39%, expected life terms ranging from 0.5 years to 2.0 years, an expected volatility range of 206% to 251% depending on the term of such equity contracts and a dividend rate of 0.0%. The fair value of the warrants issued and outstanding at May 31, 2010, attributed to this derivative liability has been determined to be immaterial due to the low stock price in comparison to the exercise price, hence there was no adjustment to make upon adoption of this accounting standard. As of May 31, 2013, 10,044,922 of these warrants expired. The stock price remains low and the fair value of the derivative liability remains immaterial.

SETTLEMENT OF DEBT

As a direct result of the Sale of the License and IP Agreements to STUS and the mandate to obtain debt releases, the Company has been able to settle its debts with its secured creditors and employees, with cash payments made as of the December 2010 and June 2011 closings.

The continuing settlements with unsecured and related parties have resulted in gain being recorded in the amount of $482,784 in fiscal 2012. As of May 31, 2012, there remained $5,259,926 of debts to be settled via the issuance of equity on as yet to be determined or negotiated terms. The majority of debt holders who have settled have agreed to accept equity for their remaining debt. As of May 31, 2013, and as a result of additional financing of operations throughout the fiscal year, the balance is $6,204,926.

During the quarter ended August 31, 2012 the Company negotiated the settlement of additional debts resulting in $10,000 being paid for the settlement of $12,025 of recorded liabilities, resulting in a gain on the settlement of such debts being recorded in the amount of $2,025.