Notes Payable

3 Months Ended

Nov. 30, 2011

Notes to Financial Statements

Notes Payable

NOTE 4 — NOTES PAYABLE

CONVERTIBLE NOTES PAYABLE:

On May 19, 2011, the Company effected a one-for-four reverse stock split. All share and per share information have been restated to retroactively show the effect of this stock split. The reverse split was approved by a majority of the Company’s shareholders on March 24, 2011.

Convertible notes payable consist of the following as of November 30, 2011 and August 31, 2011:

	November 30,			August 31,
	2011			2011
8.0% convertible notes due March 31, 2012	$	125,000		$	125,000
6% convertible note converted October 6, 2011		—			25,000
Total unsecured convertible notes payable		125,000			150,000
Less:  Current portion		(125,000	)		(150,000	)
Long-term portion	$	—		$	—

During May and June 2007, we issued nine Convertible Promissory Notes in an aggregate principal amount of $700,000. These Convertible Promissory Notes are due May 7, 2008, bear interest at the rate of 8% per annum and are convertible into our common stock at a rate of $1.00. Eight of these notes were converted into common stock in fiscal 2009. The remaining Convertible Promissory Note, in the principal amount of $125,000, was extended on January 28, 2010 to March 31, 2012. In conjunction with the extension, the conversion price was reduced to $0.60.

On December 29, 2009, the Company issued a 60-Day Convertible promissory note in the principal amount of $25,000 to a non-related accredited investor who was not related to the Company. This convertible note bears interest at 6% and is convertible into the Company’s common stock at $0.08 per share. The Company recognized a beneficial conversion feature in the amount of $12,500 in connection with the issuance of this note. This note has been extended several times and is currently due November 30, 2011. On October 5, 2011, the Company’s Board of Directors authorized the reduction of the per share conversion price of this note from $0.08 to $0.04. On October 6, 2011, the holder elected to convert the principal amount of the note plus accrued interest of $402.75 into 635,069 shares of the Company’s common stock. In accordance with the reduction of the conversion price, the Company recognized $25,403 in induced conversion expense

CONVERTIBLE RELATED PARTY NOTES PAYABLE:

	November 30,		August 31,
	2011		2010
6.0% convertible note due April 4, 2012, net of a discount of
$4,000 as of November 30, 2011	$	6,000	$	—
6.0% convertible note due March 31, 2012 (2)		235,025		235,025
Outstanding unsecured related party convertible notes payable	$	241,025	$	235,025
(1)  Note payable to Anthony Silverman, the Company's President and CEO
(2)  Note payable to former CEO who resigned 4/1/09

On April 1, 2009, we issued to Ms. Lindstrom, our former Chief Executive Officer and current member of our subsidiary’s Board of Directors, a convertible promissory note in lieu of payment of $235,025 in accrued salary owed to Ms. Lindstrom. This note accrues interest at a rate of 6% per annum and is due on March 31, 2012. The note is convertible into shares of the Company’s common stock at a rate of $0.20 per common share. Ms. Lindstrom signed an abstention to convert this note until June 01, 2011. There was no beneficial conversion feature recognized upon the issuance of this note.

On October 6, 2011, the Company issued a convertible promissory note in principal amount of $70,000 to its President, Anthony Silverman, who is also a member of the Board of Directors. This note was issued as payment in full of the principal and accrued interest of three outstanding promissory notes in that aggregate amount. The newly issued convertible promissory note bears interest at 6% per annum and is convertible into the Company's common stock at $0.04 per share. On the same date, Mr. Silverman elected to convert this note plus accrued interest of $1,127.70 into 1,778,193 shares of the Company’s Common Stock. The company recognized a $70,000 loss upon the conversion of this note.

On October 7, 2011, the Company issued a 90-day convertible promissory note in the principal amount of $10,000 to our President, Anthony Silverman, who is also a member of the Board of Directors. This note, which was issued for operating capital, bears interest at 6% per annum and is convertible into the Company’s common stock at $0.04 per share. The Company recognized at $10,000 beneficial conversion feature upon the issuance of this note. During the three months ended November 30, 2011, $6,000 was expensed as interest and finance charges as a result of amortizing the discount from the beneficial conversion feature. This note was extended 90 days to April 4, 2012.

RELATED PARTY NOTES PAYABLE:

	November 30,		August 31,
	2011		2011
6.00% note payable paid off October 6, 2011 (1)	$	—	$	25,000
6.00% note payable paid off October 6, 2011 (1)		—		25,000
6.00% note payable paid off October 6, 2011 (1)		—		20,000
Outstanding unsecured related party convertible notes payable	$	—	$	70,000
(1)  Note payable to Anthony Silverman, the Company's President and CEO

On September 11, 2009, the Company issued a 90-Day promissory note to Anthony Silverman, its President and CEO, in the principal amount of $25,000. The note bears an interest rate of 6%. This note has been subsequently extended to July 6, 2011. On February 1, 2011, the Company paid accrued interest of $2,084 to Mr. Silverman. This note was paid off on October 6, 2011. This note was paid off with the issuance of a $70,000 convertible promissory note to Mr. Silverman.

On February 22, 2010, the Company issued a 60-Day promissory note to Anthony Silverman, its President and CEO, in the principal amount of $25,000. The note bears an interest rate of 6%. This note has been subsequently extended to July 17, 2011. On February 1, 2011, the Company paid accrued interest of $1,410 to Mr. Silverman. This note was paid off on October 6, 2011. This note was paid off with the issuance of a $70,000 convertible promissory note to Mr. Silverman.

On December 16, 2010, the Company issued a 30-Day promissory note to Anthony Silverman, its President and CEO, in the principal amount of $20,000. The note bears an interest rate of 6%. This note has been subsequently extended to July 14, 2011. On February 1, 2011, the Company paid accrued interest of $151 to Mr. Silverman. This note was paid off on October 6, 2011. This note was paid off with the issuance of a $70,000 convertible promissory note to Mr. Silverman.

On January 20, 2011, the Company issued a 30-Day promissory note to Anthony Silverman, its President and CEO, in the principal amount of $20,000. The note bears an interest rate of 6%. This note was repaid on February 19, 2011 along with $26 in accrued interest.

On April 26, 2011, the Company issued a 30-Day promissory note to Anthony Silverman, its President and CEO, in the principal amount of $10,000. The note bears an interest rate of 6%. This note was repaid on July 11, 2011 along with $125 in accrued interest.

On May 26, 2011, the Company issued a 60-Day promissory note to Anthony Silverman, its President and CEO, in the principal amount of $10,000. The note bears an interest rate of 6%. This note was repaid on July 11, 2011 along with $76 in accrued interest.

On June 15, 2011, the Company issued a 30-Day promissory note to Anthony Silverman, its President and CEO, in the principal amount of $15,000. The note bears an interest rate of 6%. This note was repaid on July 11, 2011 along with accrued interest.

OTHER NOTES PAYABLE:

On October 31, 2011, the Company entered into a note payable agreement to finance $8,078 of directors and officer’s insurance premiums. The note bears interest at a rate of 8.99% per annum and is due in nine monthly installments of $932, including principal and interest, beginning on November 30, 2011.

	November 30,		August 31,
	2011		2011
8.99% note payable due July 31, 2011	$	7,207	$	—
Outstanding unsecured related party convertible notes payable	$	7,207	$	—