5% Notes due 2013: On July 16, 2010, the Company’s board of directors approved a private offering of its securities consisting of up to $120,000 in 5% Unsecured Convertible Debentures (“Debentures”). The Debentures will mature and be due and payable in July and August 2013. The principal amount of the Debentures accrue interest at the rate of 5% per annum and will be payable at the maturity date. The Debentures are convertible, at the option of the investor, at any time, into shares of the Company’s Series E Convertible Preferred Stock at a conversion price equal to $0.25 per share of Series E Preferred. At the time of issuance and based on the Company’s common stock trading activity, the Company determined that no beneficial conversion feature was associated with the Debentures. The Debentures will automatically convert into shares of Series E Preferred Stock under certain circumstances.

8% Notes due 2013 and Stock Purchase Warrants: On September 26, 2011 the Company’s Board of Directors approved a private offering of units of the Company’s securities of up to $720,000. On February 2, 2012, the Company’s Board of Directors approved an increase of the private offering of up to $850,000.

Each unit consists of an 8% Convertible Note and one Class A Warrant for each $1.00 in Note purchased. The Class A Warrants will be exercisable into shares of the Company’s common stock for a period of three years at an exercise price of $0.50 per share. The price of the offering is the principal amount of the Note. The Convertible Notes accrue interest at 8% per year, mature two years from the date of issuance with all principal and interest due at maturity. At the option of the holder, the Note principal and accrued interest are convertible to shares of the Company’s common stock at a conversion price of $0.50 per share. In addition, for every $1.00 in Note principal converted, the holder will receive one additional share of Common Stock and two Class B Warrants, each exercisable for a period of three years at an exercise price of $0.75 per share. As of December 31, 2011 none of the Notes have been converted.

As of December 31, 2011 a total of $703,500 of units had been sold and mature on October 31, 2013. We applied the provisions of ASC 470-20 “Debt With Conversions and Other Options” in which the fair value of the warrants are allocated to stockholders’ equity and considered as a discount to the face amount of the Note principal. The resulting discount to the Notes is amortized to interest expense over the life of the Notes. Should a Note be converted or paid prior to the maturity date, the related discount would be charged off, pro-rata, to interest expense. The initial estimated fair value of the warrants of $322,000 was determined using the following assumptions:

Expected volatility	139%
Contractual term	3 years
Risk free interest rate	0.48%
Expected dividend rate	0%

In addition, based on the trading price of the Company’s common stock on the date of issue of the Notes, in accordance with ASC 470 the conversion terms were considered a beneficial conversion features. The beneficial conversion feature representing the intrinsic value of the difference between the fair value of underlying common stock on the issue date and the terms of the conversion was calculated to be approximately $520,000. However, ASC 470-20-30-8 limits the amount of the beneficial conversion feature to be allocated to the proceeds of the debt, after the allocation of the fair value of the warrants, to the total proceeds of the debt. Therefore, $381,500 relating to the beneficial conversion features has been allocated to stockholders’ equity and is reflected as a discount to the amount of the notes and is being amortized to interest expense over the term of the notes. Should a Note be converted or paid prior to the maturity date, the related discount would be charged off, pro-rata, to interest expense.

For the three and six months ended December 31, 2011, interest expense relating to the amortization of the debt discount for the fair value of the warrants and the beneficial conversion feature was $58,625.

The Company engaged the services of a broker-dealer as a selling agent to assist in this offering of securities. On sales involving the assistance of the selling agent, the Company will pay the selling agent a fee equal to 5% of the price of the securities, and 10% common stock and warrant coverage on all shares of common stock underlying the securities sold by the selling agent. As of December 31, 2011 the Company had paid to the agent a total of $32,675, and accrued an additional $2,500 for sales of units attributable to the agent.

In addition to the agent’s cash fees, the agent was entitled to 140,700 Class A warrants for sales of units involving the agent’s assistance. The estimated fair value of the warrants in the amount of $65,000 has been allocated to stockholders’ equity and charged to the Company’s operations as financing costs for the three and six months ended December 31, 2011. The estimated fair value of the warrants was determined using the following assumptions:

Expected volatility	139%
Contractual term	3 years
Risk free interest rate	0.48%
Expected dividend rate	0%

In addition to the cash fees and warrant coverage for selling agent assisted sales, for each $100 of Notes converted, the agent would be entitled to an additional 10 shares of the company’s common stock and 20 Class B Warrants. Each Class B Warrant is exercisable for a period of three years at an exercise price of $0.75 per share. A contingency exists for this feature, the outcome of which cannot be determined.