I think you are a little confused.
They are decreasing the strike price because they will be out of money by December 31, 2013 and will need to do a cash raise before the February 2014 Markman. The language is in the 2nd Quarter 10Q filing.
They aren't paying off the notes with cash, they want the holder to convert for SHARES at .135.
They also want the warrants to be exercised, which would raise $1M if they exercised all warrants. They reduced the strike price to $.05 to make them more attractive.
This would alleviate the short term cash problems and better position the company to raise money in the future if the Markman is successful.
One of the problems is the 9.99% restriction, so the holder would have to convert/exercise the warrant/notes and then sell into the public markets in order to stay under the 9.99% threshold. The convert note is about break even and the warrant would generate a profit of .10 or $2M if $.15 was to hold.
The dilution is roughly 35,000,000 shares.