Derivative Liabilities

3 Months Ended

Mar. 31, 2012

Notes to Financial Statements

Note 3. Derivative Liabilities

We apply the accounting standard that provides guidance for determining whether an equity-linked financial instrument, or embedded feature, is indexed to an entity’s own stock. The standard applies to any freestanding financial instrument or embedded features that have the characteristics of a derivative, and to any freestanding financial instruments that are potentially settled in an entity’s own common stock.

From time to time, the Company has issued notes with embedded conversion features and warrants to purchase common stock. Certain of the embedded conversion features and warrants contain price protection or anti-dilution features that result in these instruments being treated as derivatives. In addition, the Company has an insufficient amount of authorized shares to settle outstanding contracts (see Note 4). The Company estimates the fair value of these embedded conversion features, warrants and derivatives related to insufficient authorized shares to settle outstanding contracts using Black-Scholes with the following assumptions:

Expected volatility is based primarily on historical volatility. Historical volatility was computed using weekly pricing observations for recent periods. We believe this method produces an estimate that is representative of our expectations of future volatility over the expected term of these warrants and embedded conversion features.

We currently have no reason to believe that future volatility over the expected remaining life of these warrants and embedded conversion features is likely to differ materially from historical volatility. The expected life is based on the remaining term of the warrants and embedded conversion features. The risk-free interest rate is based on one-year to five-year U.S. Treasury securities consistent with the remaining term of the warrants and embedded conversion features.

The following table presents our warrants and embedded conversion options which have no observable market data and are derived using Black-Scholes measured at fair value on a recurring basis, using Level 3 inputs, as of March 31, 2012 and December 31, 2011:

	For the three months ended March 31, 2012			For the year ended December 31, 2011
Annual dividend yield		0	%		0	%
Expected life (years)		0.70– 2.70			0.01 – 4.35
Risk-free interest rate		0.15% - 0.51	%		0.01% - 1.29	%
Expected volatility		100	%		100	%

	Level 3 Carrying Value
	March 31, 2012		December 31, 2011
Embedded Conversion Options	$	1,091,382	$	-
Warrants		134,465		1,491
	$	1,225,847	$	1,491
Increase (Decrease) in fair value	$	1,224,356	$	(606,293	)

The following table presents the changes in fair value of our warrants and embedded conversion options measured at fair value on a recurring basis for the period ended March 31:

	March 31, 2012		March 31, 2011 (as restated)
Balance as of January 1	$	1,491	$	631,711
Change in fair  value		1,224,356		(375,141	)
Balance as of March 31	$	1,225,847	$	256,570