NOTES PAYABLE

3 Months Ended

Mar. 31, 2012

Notes to Financial Statements

NOTES PAYABLE

F. NOTES PAYABLE

Notes payable consist of the following:

	March 31, 2012			June 30, 2011
	(UNAUDITED)
Convertible notes payable (includes $122,926 and $116,899, respectively, to non-related parties), unsecured, interest at 8%, due September 2010 through November 2010. The principal and accrued interest are convertible at a conversion price of $0.30. The principal and interest is due immediately on the event of default or change of control. The holders also received warrants to purchase one share of common stock for every $2 of investment. The Company recorded a $20,981 discount on the notes payable for the value of the warrants issued. The discount was fully amortized over the term of the notes payable. There was no unamortized discount as of March 31, 2012 and June 30, 2011, respectively. The notes are now in default.	$	684,845		$	651,629
Convertible notes payable to related parties, unsecured, principal and interest are convertible into common stock at $0.08 to $0.33 per share, interest at 8 % to 10%, due July to November 2010. The notes are now in default.		840,463			766,914
Convertible note payable to related party, secured by the Company’s intellectual property, principal and interest are convertible into common stock at $0.25 per share subject to board of directors’ approval, interest at 8%. The note was due November 2010 and is now in default.		238,882			226,828
Note payable to related party, secured by the Company’s intellectual property, interest at 8% due August 2010 and is now is default.		464,174			441,014
Notes payable to related parties, unsecured, interest at 0% to 8%, due on demand.		124,436			118,408
Note payable, unsecured, interest at 10%, due January 2010 and is now in default.		24,669			23,162
Convertible note payable, unsecured, principal and interest are convertible into common stock at $0.30 per share subject to board of directors’ approval, interest at 8%, due January 2011 and is now in default.		11,786			11,183
Notes payable, unsecured, interest at 5%, due January 2013.(1)		452,349			—
Convertible note payable, unsecured, principal and interest are convertible into common stock at $0.40 per share, interest at 5%, due March 2013.		10,034			—
Convertible note payable, unsecured, principal and interest are convertible into common stock at $1.00 per share subject to board of directors’ approval, interest at 8% due November 2009 and is now in default.		1,523			1,523
Total		2,853,161			2,240,661
Less valuation discount on note payable		(102,224	)		—
Grand total	$	2,750,937		$	2,240,661

(1) In connection with the issuance of the notes payable, two stockholders of the Company granted the lender the option to acquire 1,600,000 unrestricted shares of the Company’s common stock from the stockholder’s at a price of $0.40 per share. The agreement to provide the lender with the option to purchase shares of the two shareholders was presumed to be a separate arrangement between the Company and the lender. As such, the Company valued the shares as if they had provided the lender an option to acquire these shares. The aggregate value of the 1,600,000 shares was valued at $129,931 using Black-Scholes option valuation model. The value of the option is being considered as a valuation discount and will be amortized over the one year life of the Note. For the period ended March 31, 2012, the Company recognized $27,707 of expense related to the amortization of this discount and is included in the interest expense in the condensed consolidated statement of operations. The remaining valuation discount on note payable of $102,224 at March 31, 2012 is reflected as a valuation discount and offset to notes payable in the condensed consolidated balance sheets.

For the purposes of Balance Sheet presentation notes payable have been grouped as follows:

	March 31,	June 30,
	2012	2011
Notes payable, net of discount of $102,224 and $0, respectively	$ 521,064	$ 152,767
Notes payable, related party	2,229,873	2,087,894
	$ 2,750,937	$ 2,240,661