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6. NOTES PAYABLE

12 Months Ended

Dec. 31, 2012

Notes payable consisted of the following at December 31, 2012:

	Gross		Unamortized Discount		Net
Notes payable to individuals, subject to contingent settlement agreement and summary judgment, interest at 11.67% per annum, principal and interest due January 1, 2006, in default, unsecured	$	95,740		–		95,740

Note payable, subject to settlement agreement, interest at 12% per annum, principal and interest due July 2005, in default, unsecured		161,000		–		161,000

Note payable, subject to settlement agreement, interest at 9.17% per annum, principal and interest due July 2005, unsecured		71,500		–		71,500

Note payable, subject to settlement agreement, interest at 12% per annum, principal and interest due December 2005, unsecured		100,000		–		100,000

Note payable, interest at 12.5%, due June 2007, verbally extended, unsecured		1,500		–		1,500

Note payable, interest at 12% per annum, due March 2010, verbally extended, unsecured		9,940		–		9,940

Note payable, interest at 12% per annum, due March 2010, verbally extended, unsecured		1,638		–		1,638

Note payable, interest at 12% per annum, due March 2010, verbally extended, unsecured		1,420		–		1,420

Note payable, interest at 12% per annum, due September 2010, verbally extended, unsecured		776		–		776

Note payable, interest at 12% per annum, due July 2014		36,500		26,095		10,405

Note payable, interest at 12% per annum, due August 2014		40,000		21,387		18,613

Note payable, interest at 12% per annum, due August 2014		35,000		18,969		16,031

Note payable, interest at 12% per annum, due November 2014		60,000		36,734		23,266

Note payable, interest at 12% per annum, due November 2014		60,000		37,828		22,172

Note payable, interest at 12% per annum, due December 2014		50,000		32,847		17,153

Note payable, interest at 12% per annum, due January 2015		50,000		34,535		15,465

Note payable, interest at 12% per annum, due January 2015		50,000		34,763		15,237

Note payable, interest at 12% per annum, due February 2015		60,000		42,591		17,409

		Gross		Unamortized Discount		Net
Note payable, interest at 12% per annum, due February 2015		40,000		28,577		11,423

Note payable, interest at 5% per annum, due July 2012, verbally extended, unsecured		30,000		–		30,000

Note payable, interest at 8% per annum, due April 2013, verbally extended, unsecured		27,500		10,672		16,828

Note payable, interest at 8% per annum, due August 2013, verbally extended, unsecured (net of discount of $26,503)		18,311		6,423		11,888

Note payable, interest at 8% per annum, due May 2013, verbally extended, unsecured (net of discount of $27,075)		17,721		6,423		11,298

Note payable, interest at 8% per annum, due May 2013, verbally extended, unsecured		32,500		17,247		15,253

Note payable, interest at 8% per annum, due September 2013, verbally extended, unsecured (net of discount of $87,536)		38,318		29,077		9,242

Note payable, interest at 8% per annum, due August 2013, verbally extended, unsecured		16,000		13,149		2,851

Note payable, interest at 8% per annum, due November 2013, verbally extended, unsecured (net of discount of $37,243)		8,939		–		8,939

Note payable, interest at 8% per annum, due September 2013, verbally extended, unsecured		22,500		21,938		562

Total Notes Payable		1,136,803		419,253		717,550

Less: Current Portion		655,303		104,928		550,375

Long-Term Notes Payable	$	481,500	$	314,325	$	167,175

Notes payable consisted of the following at December 31, 2011:

	Gross		Unamortized Discount		Net
Notes payable to individuals, subject to contingent settlement agreement and summary judgment, interest at 11.67% per annum, principal and interest due January 1, 2006, in default, unsecured	$	95,740		–		95,740

Note payable, subject to settlement agreement, interest at 12% per annum, principal and interest due July 2005, in default, unsecured		161,000		–		161,000

Note payable, subject to settlement agreement, interest at 9.17% per annum, principal and interest due July 2005, unsecured		71,500		–		71,500

Note payable, subject to settlement agreement, interest at 12% per annum, principal and interest due December 2005, unsecured		100,000		–		100,000

Note payable, interest at 12.5%, due June 2007, verbally extended, unsecured		1,500		–		1,500

Note payable, interest at 12% per annum, due March 2010, verbally extended, unsecured		9,940		–		9,940

Note payable, interest at 12% per annum, due March 2010, verbally extended, unsecured		1,638		–		1,638

Note payable, interest at 12% per annum, due March 2010, verbally extended, unsecured		1,420		–		1,420

Note payable, interest at 12% per annum, due September 2010, verbally extended, unsecured		776		–		776

Note payable, interest at 12% per annum, due April 2014		14,625		–		14,625

Note payable, interest at 12% per annum, due July 2014		50,000		42,746		7,254

Note payable, interest at 12% per annum, due August 2014		40,000		34,708		5,292

Note payable, interest at 12% per annum, due August 2014		35,000		30,625		4,375

Note payable, interest at 12% per annum, due November 2014		60,000		56,715		3,285

Note payable, interest at 12% per annum, due November 2014		60,000		57,810		2,190

Note payable, interest at 12% per annum, due December 2014		50,000		49,498		502

Total Notes Payable		753,139		272,103		481,036

Less: Current Portion		443,514		–		443,514

Long-Term Notes Payable	$	309,625	$	272,103	$	37,522

The interest expense for the years ended December 31, 2012 and December 31, 2011 is $464,694 and $78,382, respectively.

The Company entered into a contingent settlement agreement on July 26, 2004 related to $440,765 of notes payable to individuals and related accrued interest. In July 2004, the Company paid a total of $73,333 towards the debt and agreed to pay a total of $298,667, including interest through January 2006 in full payment. The Settlement Agreement provides for an accelerated payment schedule at the Company's option, which would reduce the total payment made by the Company by approximately $12,000. The Company defaulted on the two remaining payments totaling $80,000 at which time the entire remaining balance became due, including default interest and legal fees. The Company currently has accrued $566,189 for interest and legal fees (included in the accrued interest of $881,812 as of December 31, 2012) in addition to the $95,740 principal balance (included in the notes payable of $717,550 as of December 31, 2012).

During August 2004, the Company entered into an agreement to settle a note payable in the amount of $200,000 plus accrued interest. The parties agreed to settle the debt for $261,000 payable as follows: Twelve consecutive payments of $12,500 payable monthly commencing August 31, 2004 and ending July 31, 2005; a lump-sum payment of $95,000 payable on July 31, 2005; and a one-time interest payment of $16,000 on July 31, 2005. This agreement includes an additional $7,500 as inducement to the note holder to enter into the extended agreement, which was amortized as a loan fee over the term of the agreement. Scheduled payments were not made on the note and the company is currently in default. The Company currently has accrued $125,165 for interest (included in the accrued interest of $881,812 as of December 31, 2012) in addition to the $161,000 principal balance (included in the notes payable of $717,550 as of December 31, 2012.

During August 2004, the Company entered into an agreement to settle a note payable in the amount of $100,000 plus accrued interest. The parties agreed to settle the debt for $130,800 payable as follows: Twelve consecutive payments of $6,000 payable monthly commencing August 31, 2004 and ending July 31, 2005; a lump-sum payment of $50,500 payable on July 31, 2005; and a one-time interest payment of $8,300 on July 31, 2005. The Company has recognized a $38,610 gain on forgiveness of accrued interest related to this transaction. Scheduled payments were not made on the note and the company is currently in default. The Company currently has accrued $34,709 for interest (included in the accrued interest of $881,812 as of December 31, 2012) in addition to the $71,500 principal balance (included in the notes payable of $717,550 as of December 31, 2012.

During the year ended December 31, 2012, the Company entered into various note agreements to issue convertible notes and detachable warrants. The notes call for outstanding principal and interest to be converted into the Company’s common stock at $0.50 per share. During 2012, the Company issued the following convertible notes:

Issue Date	Principal		Warrants to be Granted		Notes Payable – Beneficial Conversion Feature as of Issue Date

8/14/2012		50,000		10,000		41,623
8/21/2012		50,000		10,000		41,848
9/26/2012		150,000		50,000		120,435
11/12/2012		50,000		10,000		42,867
	$	300,000		80,000		246,773

- 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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