NOTE 5 — NOTES PAYABLE

Notes payable consists of the following as of December 31 (amounts in thousands):


	2011			2010
Note holders unrelated to the Company:
10% convertible promissory note due May 2012 (1)	$	50		$	50
7% and 10% convertible promissory notes due March 2012 (2)		150			150
24% convertible promissory notes issued with detachable warrants		—			100
Zero-coupon convertible promissory note due February 2012 (3)		230			230
24% promissory note due January 2012 (4)		90			—
14% promissory note due January 2012 (5)		200			—
9% promissory note (6)		—			250
Other		21			—

Total Notes Payable to unrelated parties	$	741		$	780

Related party note holders:
24% convertible promissory notes issued with detachable warrants and no specified maturity date (7)		2,000			2,000
Less unamortized discount		(71	)		(196	)

Total Notes Payable	$	2,670		$	2,584

(1)	This note was renewed 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.

(2)	During 2011, each of these two notes was renewed for additional one-year terms. For the renewal of one note, we issued a three-year warrant for the purchase of 25,000 shares of our common stock at an exercise price of $0.25.

(3)

Represents a zero-coupon convertible promissory note issued to an unrelated individual in exchange for net proceeds of $200,000. The note has been renewed several times since February 2010. 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. For 2011 and 2010, approximately $205,000 and $99,000 of interest expense was recognized related to the accretion to its carrying value. At the note's maturity in November 2011, it was replaced by a new note of similar terms with a face value of $230,000 and a maturity date in February 2012.

(4)

In April 2011, we issued to a stockholder a $100,000 promissory note bearing interest at 24% per annum. At the loan's maturity date in June it was renewed to October 2011 and was again renewed at the October maturity date until January 1, 2012. We made a principal payment of $10,000 in December 2011, and on January 3, 2012, renewed the note for another three month term at the same interest rate.

(5)

In December 2011, we issued a $200,000 promissory note to an unrelated individual bearing interest at 14%. The note and any unpaid interest thereon may be converted at any time during its term into our common stock at $0.25 per share. At maturity, we repaid $100,000 and executed a new note at 14% maturing April 30, 2012 for the remaining $100,000.

(6)	In August 2011, the note holder agreed to a long-term repayment plan as described in paragraph (3) of Note 6, and accordingly, the obligation, which was originally payable on demand, was transferred to long-term debt.

(7)

This convertible promissory note payable to a major stockholder bears interest annually at 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 loan, the note holder received warrants to purchase an aggregate of 1,000,000 shares of our common stock at $0.25 per share. The warrants were vested upon issuance and have a five-year term. The note was not repaid on its maturity date of June 4, 2011. While negotiating for a resolution with the note holder, we continue to accrue interest at the rate of 24%. As of December 31, 2011, interest of approximately $777,000 was due and not yet paid. For 2011 and 2010, we recognized approximately $648,000 and $458,000 of interest expense, respectively.