NOTE 8 – NOTE OBLIGATIONS DUE WITHIN ONE YEAR

Note obligations due within one year consist of the following (amounts in thousands):


	June 30, 2011			December 31, 2010
7¹/2% convertible subordinated debentures due April 2010, interest payable semi-annually in April and October (1)	$	549		$	579
10% convertible promissory note due May 2012 (2)		50			50
7% and 10% convertible promissory notes due March 2012 (3)		150			150
24% convertible promissory note issued with detachable warrants and no specified maturity date (4)		2,000			2,100
Zero coupon convertible promissory note due August 2011 (5)		230			230
8¹/2% convertible promissory note due August 2011, interest payable monthly (6)		200			200
9% promissory note with no specified maturity date (7)		250			250
24% promissory note due October 1, 2011(8)		100			—
10% senior promissory notes due April 2012, interest payable semi-annually in April and October (9)		1,758			—

Total note obligations due within one year before discount		5,287			3,559
Less: Unamortized discount on notes payable		(529	)		(196	)

Total note obligations due within one year	$	4,758		$	3,363

(1)

Represents the remaining amount of our subordinated debentures due in April 2010 that we have not yet been able to exchange for our senior promissory notes. The remaining outstanding debentures are convertible into 12,263 shares of common stock at a conversion price of $44.77 per share. We are not able to estimate the financial effect resulting from a state of default with respect to the debentures held by the remaining bond holders.

(2)

In November 2009, we issued a convertible promissory note in the amount of $50,000 to one individual. The note bore interest at an annual rate of 10% with interest payable quarterly in arrears. At the option of the note holder, all or a portion of the principal and accrued but unpaid interest was convertible into shares of our common stock at maturity or at any time prior to maturity at a conversion price of $0.25 per share. At maturity, the balance of the note and accrued but unpaid interest not converted into shares of our common stock was to be repaid. With similar terms, the note was first renewed in November 2010 and most recently in May 2011. As consideration for the renewal of the note now due in May 2012, detachable warrants to purchase 25,000 shares of our common stock at $0.25 per share were issued. The warrants were vested upon issuance and have a three-year term. We used the Black-Scholes option valuation model in determining the allocation of the relative values of debt and warrants. The recently renewed note also contained a beneficial conversion feature, valued at $28,000. The relative value of the warrants and the value of the beneficial conversion feature were recorded as a discount on notes payable and will be amortized over the term of the note. At the stated interest rate of 10%, we recognized approximately $1,000 and $2,000 of interest expense for the three and six months ended June 30, 2011, respectively. For accounting purposes we also recognized for the three and six months ended June 30, 2011 approximately $3,000 and $4,000, respectively, of interest expense attributable to the amortization of the discount recorded on the notes. The overall theoretical return to the investor, computed taking into account the coupon and the warrants, was 129.1%.

(3)

In March 2010, we issued two one-year convertible promissory notes: $100,000 to one individual and $50,000 to one entity. The notes bore interest at an annual rate of 7%, payable quarterly in arrears. At the option of the note holders, the principal and accrued but unpaid interest was convertible into common stock of the Company at a conversion price of $0.25 and $0.50 per share, respectively. In conjunction with the loans, the note holders received warrants to purchase an aggregate of 75,000 shares of our common stock at $0.75 per share. The warrants were vested upon issuance and have a three-year term. In April 2011, the $100,000 note was renewed, effective March 2011, for an additional one year term at an annual interest rate of 10%. In conjunction with this renewal, we issued in April a three-year warrant for the purchase of 25,000 shares of our common stock at an exercise price of $0.25. Also in April 2011, the $50,000 note was renewed, effective in March 2011, for an additional one year term at an annual interest rate of 7%. We determined that the note renewed with warrant issuance contained a beneficial conversion feature valued at $76,000. The value of the beneficial conversion feature was recorded as a discount on notes payable. At the stated interest rates, we recognized approximately $3,000 and $6,000 of interest expense for the three and six months ended June 30, 2011, respectively. For accounting purposes we also recognized approximately $9,000 and $16,000 of interest expense for the three and six months ended June 30, 2011, respectively, attributable to the amortization of the discount recorded on the notes. The overall theoretical return to the investors, computed taking into account the coupon, the beneficial conversion feature and the warrants, is 139.1%.

(4)

In April and June 2010, we issued two one-year convertible promissory notes: $100,000 and $2,000,000 to two of our shareholders. The notes bear interest at the annual rate of 24%, payable quarterly in arrears. The principal and accrued but unpaid interest may be converted at any time prior to maturity into our common stock at a conversion price of $0.25 per share. In conjunction with the loans, the note holders received warrants to purchase an aggregate of 1,050,000 shares of our common stock at $0.25 per share. The warrants were vested upon issuance and have a five-year term. We allocated the proceeds from the notes into two components, debt and warrants, based on their relative fair values. The warrants were valued at approximately $220,000 using the Black-Scholes option valuation model. We also determined that the convertible promissory notes contained beneficial conversion features valued at $168,000. The allocated value of the warrants and the value of beneficial conversion features were recorded as a discount on notes payable. At the stated interest rate of 24%, we recognized approximately $121,000 and $245,000 of interest expense for the three and six months ended June 30, 2011, respectively. For accounting purposes we also recognized approximately $75,000 and $174,000 of interest expense for the three and six months ended June 30, 2011, respectively, which is attributable to the amortization of the discount recorded on the notes. As of June 30, 2011, interest of approximately $535,000 was due and not yet paid on the $2,000,000 note, which was not repaid on its maturity date of June 4, 2011. During the third quarter of 2011, we intend to negotiate a resolution to this promissory note. The overall theoretical return to the investors, computed taking into account the coupon, the beneficial conversion feature and the warrants, is 46.1%. The $100,000 promissory note was repaid in April 2011.

(5)

In February 2010, we issued to an individual a zero coupon convertible promissory note with a face value of $220,000 for net proceeds of $200,000 and a maturity date in April 2010. The net proceeds of $200,000 included an issuance fee of $6,000 plus a yield of 24%. The note holder may elect to convert all or a portion of the face value of the note into our common stock at a conversion price of $0.25 per share. The original note was later renewed on five occasions between April 2010 and June 2011. At the note's most recent maturity in May 2011, it was replaced by a new note of similar terms with a face value of $230,000 and a maturity date in August 2011. We also determined that the most recent renewal contained a beneficial conversion feature valued at $88,000, which we recorded as a discount on notes payable. For the three and six months ended June 30, 2011, approximately $70,000 and $100,000 of interest expense was recognized related to the accretion to its carrying value and the amortization of the beneficial conversion feature. The overall return to the investor was 203.6%.

(6)

In September 2008 we issued to a shareholder a convertible promissory note in the amount of $200,000. Interest is payable monthly at the rate of 8.5% and the note is convertible at the option of the note holder into 800,000 shares of common stock at a conversion price of $0.25 per share. The note matures in August 2011.

(7)

In March 2010, we issued to a shareholder a zero coupon convertible promissory note with a face value of $250,000 for net proceeds of $200,000 and a maturity date in May 2010. The net proceeds of $200,000 include an issuance fee of $42,000 plus a yield of 24%. In May 2010, the note's maturity was extended to July 2010 for an additional fee of 200,000 shares of our common stock, which were issued on July 9, 2010. In July 2010, the note's maturity was further extended to September 2010 for a fee of 300,000 shares of our common stock, issued on September 15, 2010. The note due in September 2010 was again extended to December 2010 in exchange for a monthly interest payment of 9% per annum. In December 2010, the note was further extended to March 31, 2011 but was not repaid. We are currently in negotiations with the note holder to establish a payment plan to satisfy the debt.

(8)	In April 2011, we issued to a shareholder a $100,000 promissory note bearing interest at 24% per annum. At the loan's maturity date of June 30, 2011, the note was renewed at the same rate of interest and is now due on October 1, 2011.

(9)

During 2010 and the first six months of 2011, we issued senior promissory notes in exchange for certain of our subordinated debentures that had matured on April 15, 2010 but were not repaid. We also issued warrants to purchase our common stock in conjunction with the notes. We used the Black-Scholes option valuation model in determining the relative values of debt and warrants. The value of the warrants was recognized as a discount on the notes payable, which is amortized over the term of the note. The senior promissory notes bear interest at a rate of 10% per annum, payable semiannually on April 15 and October 15 of each year through April 15, 2012, the maturity date of the senior promissory notes. The warrants allow for the purchase of an aggregate of approximately seven million shares of our common stock at an exercise price of $0.25 per share. All of the warrants have five year terms and are currently exercisable.