DERIVATIVE LIABILITY	12 Months Ended
Dec. 31, 2012
Notes to Financial Statements
DERIVATIVE LIABILITY	NOTE 11 – DERIVATIVE LIABILITY In April 2008, the FASB issued a pronouncement that provides guidance on determining what types of instruments or embedded features in an instrument held by a reporting entity can be considered indexed to its own stock for the purpose of evaluating the first criteria of the scope exception in the pronouncement on accounting for derivatives. This pronouncement was effective for financial statements issued for fiscal years beginning after December 15, 2008. The adoption of these requirements can affect the accounting for warrants and many convertible instruments with provisions that protect holders from a decline in the stock price (or “down-round” provisions). For example, warrants or conversion features with such provisions are no longer recorded in equity. Down-round provisions reduce the exercise price of a warrant or convertible instrument if a company either issues equity shares for a price that is lower than the exercise price of those instruments or issues new warrants or convertible instruments that have a lower exercise price. We evaluated whether convertible debt and warrants to acquire stock of the Company contain provisions that protect holders from declines in the stock price or otherwise could result in modification of the exercise price under the respective convertible debt and warrant agreements. We determined that the conversion feature in the convertible notes issued during the second quarter of this year contained such provisions and recorded such instruments as derivative liabilities. Derivative liabilities were initially valued using the weighted-average Black-Scholes-Merton option pricing model, which approximates the Monte Carlo and other binomial valuation techniques, with the following assumptions; (i) dividend yield of 0%; (ii) expected volatility of 74%; (iii) risk free rate of 0.04% and (iv) expected term of 3.08 years. Based upon this model, the Company determined an initial value of $592,326. The Company revalued the derivative liability at June 30, 2012, and determined that the value of the derivative liability had increased to $968,325 and recorded a charge to other expense as as change in fair value of derivatives of $375,999. As described above, on September 28, 2012, the Company exchanged these notes for new notes that did not qualify for derivative liability treatment. Accordingly, the Company revalued the derivative liability at September 28, 2012 using the weighted average Black-Scholes-Merton option pricing model with the following assumptions; (i) dividend yield of 0%; (ii) expected volatility of 74%; (iii) risk free rate of 0.04% and (iv) expected term of 2.73 years. Due to the decline in the Company’s stock price from $0.05 at June 30, 2012 to $0.01 at September 28, 2012, the value of the derivative liability decreased to $66,707 and the Company recorded a credit to other income as change in fair value of derivatives of $901,618. The remaining $428,467 was debited to loss on extinguishment of debt at September 28, 2012 as part of the Exchange Agreement. The 6% Notes issued as part of the Exchange Agreement contain a provision whereby they are convertible into shares of common stock at an initial conversion price of $0.007 per share. The initial conversion price will be adjusted for stock splits and the like. However, the conversion price of the new 6% Notes will not be adjusted for a fundamental transaction or a down-round financing and do not qualify as a derivative liability.

DERIVATIVE LIABILITY

12 Months Ended

Dec. 31, 2012

NOTE 11 – DERIVATIVE LIABILITY

In April 2008, the FASB issued a pronouncement that provides guidance on determining what types of instruments or embedded features in an instrument held by a reporting entity can be considered indexed to its own stock for the purpose of evaluating the first criteria of the scope exception in the pronouncement on accounting for derivatives. This pronouncement was effective for financial statements issued for fiscal years beginning after December 15, 2008. The adoption of these requirements can affect the accounting for warrants and many convertible instruments with provisions that protect holders from a decline in the stock price (or “down-round” provisions). For example, warrants or conversion features with such provisions are no longer recorded in equity. Down-round provisions reduce the exercise price of a warrant or convertible instrument if a company either issues equity shares for a price that is lower than the exercise price of those instruments or issues new warrants or convertible instruments that have a lower exercise price.

We evaluated whether convertible debt and warrants to acquire stock of the Company contain provisions that protect holders from declines in the stock price or otherwise could result in modification of the exercise price under the respective convertible debt and warrant agreements. We determined that the conversion feature in the convertible notes issued during the second quarter of this year contained such provisions and recorded such instruments as derivative liabilities. Derivative liabilities were initially valued using the weighted-average Black-Scholes-Merton option pricing model, which approximates the Monte Carlo and other binomial valuation techniques, with the following assumptions; (i) dividend yield of 0%; (ii) expected volatility of 74%; (iii) risk free rate of 0.04% and (iv) expected term of 3.08 years. Based upon this model, the Company determined an initial value of $592,326. The Company revalued the derivative liability at June 30, 2012, and determined that the value of the derivative liability had increased to $968,325 and recorded a charge to other expense as as change in fair value of derivatives of $375,999. As described above, on September 28, 2012, the Company exchanged these notes for new notes that did not qualify for derivative liability treatment. Accordingly, the Company revalued the derivative liability at September 28, 2012 using the weighted average Black-Scholes-Merton option pricing model with the following assumptions; (i) dividend yield of 0%; (ii) expected volatility of 74%; (iii) risk free rate of 0.04% and (iv) expected term of 2.73 years. Due to the decline in the Company’s stock price from $0.05 at June 30, 2012 to $0.01 at September 28, 2012, the value of the derivative liability decreased to $66,707 and the Company recorded a credit to other income as change in fair value of derivatives of $901,618. The remaining $428,467 was debited to loss on extinguishment of debt at September 28, 2012 as part of the Exchange Agreement. The 6% Notes issued as part of the Exchange Agreement contain a provision whereby they are convertible into shares of common stock at an initial conversion price of $0.007 per share. The initial conversion price will be adjusted for stock splits and the like. However, the conversion price of the new 6% Notes will not be adjusted for a fundamental transaction or a down-round financing and do not qualify as a derivative liability.