NOTE 5 – LOAN PAYABLE – RELATED PARTY

In April of 2010 the Company entered into a line of credit agreement with a significant shareholder.  Under the terms of this line of credit agreement, the shareholder agreed to advance, upon request, a maximum of $675,000 as needed.   The company’s ability to draw from this line of credit expired April 24, 2011, and advances are to be repaid on or before April 24, 2012 with interest accrued at the rate of 7% annually.  During 2010 the Company received advances totaling $299,700, and accrued interest totaling $4,209.  During the quarter ended December 31, 2010,  the Company issued an aggregate of 1,940,000 shares of common stock to the shareholder as follows:  (i) 838,986 shares were issued upon exercise of outstanding warrants at an average exercise price of $.23 per share (the shareholder paid the exercise price by forgiving $188,898 in indebtedness owing to the shareholder), and 1,101,014 shares (valued at $374,344) were issued in full satisfaction of the approximately $110,000 in remaining principal amount plus accrued interest owing to this related party in connection with advances made to  the Company.  In connection with this loan repayment, the Company incurred finance charges of $259,293.  

The balance due under this line of credit agreement as of April 24, 2011 was $26,716.  Since the expiration of the line of credit, the Company has received an additional $69,241 in loans from this significant shareholder, accrued additional interest of $1,149 and repaid $14,000.  The balance owing this shareholder as of September 30, 2011 is $81,741 in principal and $1,365 in accrued interest.  Of this principal balance, $26,716 is due and payable on April 24, 2012, and the remaining principal balance of $55,025 represents additional advances after the expiration of the loan agreement, and is due and payable upon demand.