Annual report pursuant to section 13 and 15(d)

NOTES PAYABLE

NOTES PAYABLE

12 Months Ended

Jun. 30, 2013

NOTE 8 – NOTES PAYABLE

	Maturity		Interest Rate			Conversion Price		June 30, 2013		June 30, 2012
Related Party
Senior Convertible Note		2013		8	%	$	0.60	$	1,053,000	$	1,053,000
Accrued Interest									274,078		189,834
Total									1,327,078		1,242,834
Less current portion									1,327,078		-
Total long-term									-		1,242,834

Others
Senior Convertible Note		2014		8	%	$	0.50		150,000		150,000
Senior Convertible Note		2014		8	%	$	0.50		100,000		100,000
Acrued interest									4,891		4,986
Total									254,891		254,986
Less current portion									254,891		-
Total long-term									-		254,986

Related Party
Note Payable		2013		8	%				59,155		89,155
Accrued interest									18,776		12,870
Total									77,931		102,025
Less current portion									77,931		30,000
Total long-term									-		72,025

Related Party
Senior Convertible Note		2013		6-8	%	$	.18-.74		3,547,580		3,547,580
Senior Convertible Note 2				8	%	$	.42-.63		375,000		375,000
Senior Convertible Note 3				8	%	$	0.60		600,000		600,000
Accrued interest									1,727,236		1,391,157
Total									6,249,816		5,913,737
Less current portion									6,249,816		-
Total long-term									-		5,913,737

On March 31, 2013, the Company combined several of its outstanding and previously issued notes payable to the largest shareholder into a single senior convertible promissory note in the amount of $3,547,580. The original notes were issued on September 30, 2003, June 14, 2007, October 30, 2007, February 11, 2008, May 17, 2008, September 12, 2008, February 26, 2009, May 12, 2009 and March 15, 2010 in the principal amounts of $1,268,625, $208,955, $300,000, $370,000, $485,000, $150,000, $175,000, $375,000 and $215,000, respectively. This senior convertible note is secured by the Company's revenues and assets and is subordinate to the additional senior convertible notes issued to the various parties listed below. Interest rates for these convertible notes range from 6% to 8% and conversion rates range from $0.18 to $0.74.

On March 31, 2010, the Company issued a senior convertible promissory note to a major shareholder for the principal amount of $1,053,000, which consisted of $600,164 in cash, $375,000 principal balance of a prior senior convertible note together with unpaid accrued interest thereon of $77,836. This senior convertible note is secured by the Company's revenues and assets with the same priority as the Notes 2 and 3 to the Shareholder and the senior convertible notes totaling $250,000. This note has an annual interest rate of 8%, a maturity date of December 31, 2013. This note has the conversion price of $0.60 per share of common stock. The Company has recorded approximately $859,950 as an interest expense as a result of the beneficial conversion feature.

On March 31, 2010, the Company issued two senior convertible promissory notes totaling $250,000 to third parties. These senior convertible notes are secured by the Company's revenues and assets with priority below Notes 2 and 3 to the Shareholder and the March 31, 2010 senior convertible note to a major shareholder. These notes have an annual interest rate of 8% with a maturity date of June 30, 2014. These notes have the convertible price of $1.00 per share of common stock. The Company has recorded approximately $22,500 as an interest expense as a result of the beneficial conversion feature. During the year ended June 30, 2011, the conversion price of the $150,000 senior convertible promissory note was reduced to $0.50 per share of common stock as part of the arrangement of the additional investment in the Company's restricted common stock by the note holder. In addition, the conversion price on the $100,000 senior convertible promissory note was also reduced to $0.50 per share of common stock as a result of the additional investment in the Company's restricted common stock.

On December 16, 2010, the Company issued a promissory note to an officer for the principal amount of $113,155, which consisted of a total 100,000 principal balance of four prior convertible notes together with unpaid accrued interest thereon of $13,155. This note has an annual interest rate of 8%, a maturity date of December 31, 2013. The outstanding principal amount will be paid at a rate of $1,000, $2,000 and $3,000 each month for the first 12 months, the second 12 months and the third 12 months, respectively. As of June 30 2013, and June 30, 2012, the Company paid an aggregate principal amount of approximately $30,000 and $18,000 respectively, to the officer. The remaining outstanding principal balance and accrued interest will be paid on the maturity date.

In November 2009, the Company finalized and issued a $600,000 2009 senior convertible note payable ("Note 3") to the Shareholder. The Company received the borrowings (the "Advances") in a series of $45,000 on September 8, 2009, $25,000 on September 11, 2009, $125,000 on September 23, 2009, $100,000 on October 14, 2009, $50,000 on October 28, 2009, $175,000 on November 12, 2009, $50,000 on December 14, 2009, and $30,000 on February 26, 2010 totaling $600,000. This senior convertible note is secured by the Company's revenues and assets with the same priority as the March 31, 2010 senior convertible notes, it has a 8% annual interest rate and has a maturity date of December 31, 2013. This note has the conversion price of $0.60 per share of common stock. The Company has recorded approximately $215,500 as an interest expense to date for the Advances received as a result of the beneficial conversion feature. As part of the terms of this note, the maturity dates of all other outstanding senior convertible notes owed to the Shareholder were extended to December 31, 2013. During the year ended June 30, 2011, the conversion price on a $135,000 portion of the Note 3 was also reduced to $0.50 per share of common stock as a result of the additional investment in the Company's restricted common stock.

Effective May 12, 2009, the Company issued a 2009 senior convertible note payable ("Note 2") to the Shareholder to combine the borrowings (the "Advances") in a series of $35,000 each from May 12, 2009 through August 12, 2009, $50,000 and $45,000 on August 14 and 27, 2009, respectively totaling $375,000. This senior convertible note is secured by the Company's revenues and assets with the same priority as the March 31, 2010 senior convertible notes and has a maturity date of December 31, 2013. This note has the conversion prices determined by the closing trading prices of the Company's common stock on the dates the Advances were received.

At June 30, 2013, the Company accrued interest of $1,727,236, $274,078, $4,891, and $18,776 on the convertible notes and the note payable with the Shareholder, the convertible notes with related parties, the convertible note with a third party, and the note payable to a related party, respectively.

- Definition

The entire disclosure for information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants.

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