Note 10 – Notes payable

Notes payable and accrued interest consisted of the following:

	September 30, 2012		September 30, 2011
Convertible debentures	$	111,000	$	210,534
Notes payable		39,289		181,592
Accrued Interest		3,401		23,273
Debt discount		(13,258)		(59,538)
Total	$	140,432	$	355,861

Settlement or Reduction of Notes Payable and Accounts Payable

During the year ended September 30, 2012, we entered into agreements with various vendors and note holders to settle or reduce outstanding balances. In return for the reduction of $777,882 in vendor debts, we paid $65,000 in cash, issued 26,840,900 of restricted common shares, and issued warrants for the purchase of 2,884,819 shares of common stock at an exercise price of $ 0.0106. Gains from these settlements of $714,710 were recorded as a gain on settlement of liabilities. For agreements convertible into restricted common stock, we recorded debt discounts for beneficial conversion features in the amount of $28,512.

During the year ended September 30, 2011, we entered into settlement agreements with certain of our vendors and note holders. Our outstanding accounts payable balances totaling approximately $112,000 were reduced to agreed upon balances due of approximately $11,000. The excess of accounts payable over the reduced amounts was recorded as a gain on debt extinguishment of $101,000. We also issued a total of 39,327,879 shares of our common stock valued at approximately $722,000 in payment for certain of our outstanding notes and accounts payable totaling approximately $243,000 and $168,000, respectively, and as a result recorded a loss on extinguishment of debt of approximately $311,000.

Issuance of Notes for Shares of Series A Preferred Stock

During the year ended September 30, 2012, we issued two convertible promissory notes in principal amount of $50,000 and $26,000, in exchange for the cancellation of 1,380,000 shares of our Series A preferred stock. Also during the year ended September 30, 2012, the promissory notes were fully converted into 18,660,540 shares of restricted common stock. For the year ended, September 30, 2012, we recorded to interest expense the estimated value of the beneficial conversion feature pertaining to these notes of $70,000.

Issuance of Convertible Promissory Note

In April 2012, we issued a convertible promissory note in the amount of $53,000 to an investor for net proceeds of $50,000. The note is interest bearing at an annual rate of 8% and has a maturity date of January 3, 2013. After six months from the date of issue, the promissory note may be converted into shares of common stock at a rate of 58% of the average of the three lowest closing bid prices during the ten trading days prior to notice to convert. During the year ended September 30, 2012, we recorded debt discount for beneficial conversion feature on this note in the amount of $38,000 and recognized debt discount as interest expense in the amount of $25,000.

Assignment and Amendment of Promissory Note

In September 2012, we issued a convertible redeemable promissory note in the amount of $65,000 to an investor in exchange for a note payable we had to a vendor in the amount of originally $95,000. The investor had purchased the note from the vendor. The note is interest bearing at an annual rate of 6% and has a maturity date of September 5, 2013. The convertible redeemable promissory note may be converted into shares of common stock at a rate of 70% of the lowest closing bid price during the five trading days prior to notice to convert. As of September 30, 2012 the investor had converted $7,000 of the principal balance of the note into common stock, leaving a balance of $58,000 outstanding as of September 30, 2012.

Contested Notes Payable

In November 2007 we issued to CAMHZN Master LDC (“CAMHZN”) a $500,000 12% convertible secured promissory note (the “Note”), originally maturing in September 2008, and amended to increase the principal balance by $567,000 as forbearance fees. We issued approximately 2,399,000 shares of our common stock as payments and collateral under the agreement. In 2011 we received a notice of default letter from CAMHZN, and subsequently issued notices to CAMHZN that under the terms of the Note Agreement, New York State law and given total payments made to CAMHZN through the issuance of our common stock, we have repaid the Note Agreement in full. As a result of additional information received, including communications from our legal counsel, during the fiscal year ended September 30, 2011, we concluded that equity payments made to CAMHZN to date represent payments in excess of the loan principal plus interest allowable under the applicable laws of the state of New York, the state by which the Note Agreement is governed. On the basis of these events and circumstances, we have written off the previously recorded balances of notes payable and accrued interest of approximately $740,000 and $549,000, respectively, and recognized a gain from the write-off of approximately $1.3 million during the year ended September 30, 2011.

During 2009 and 2010, we issued to Agile Opportunity Fund, LLC and Capitoline Advisors, Inc. (the “Investors”) secured notes as amended totaling approximately $1.3 million and original maturity in August 2009 (the “Secured Notes”). In 2010, we received a letter from the Investors stating that we were in default, and in 2011 we issued notices to the Investors that we believe that, under the terms of the Secured Notes and New York State law, and given the payments made to the Investors through the issuance of our common stock which totaled 10,506,000 shares, we have repaid the Secured Notes in full. As a result of additional information received, including communications received from our legal counsel, during the fiscal year ended September 30, 2011, we concluded that equity payments made to the Investors to date represent payments in excess of the loan principal plus interest allowable under the applicable laws of the state of New York, the state by which the Secured Notes are governed. On the basis of these events and circumstances, we have written off the balances of notes payable and accrued interest of approximately $61,000 and $205,000, respectively, and recognized a gain on write-off of approximately $266,000 during year ended September 30, 2011. As well, 2,422,979 shares of our common stock that were issuable to the Investors under the provisions of the Secured Notes had been recorded as issued and outstanding and previously accounted for in our consolidated financial statements. However, these shares had not been physically issued to the Investors. Given that we believe we have fulfilled our obligations under the Secured Notes we do not plan to issue these shares to the Investors. Thus, we have reflected these shares as rescinded in the consolidated statement of stockholders' deficit for the year ended September 30, 2011. No value has been recorded as we did not receive any benefit.

The total gain from the write-off of the debt with both CAMHZN and the Investors of approximately $1.6 million is reported as write off of contested notes payable and related accrued interest in the accompanying consolidated statement of operations for the year ended September 30, 2011.