DERIVATIVE LIABILITY

12 Months Ended

Dec. 31, 2012

Notes to Financial Statements

Note 7. DERIVATIVE LIABILITY

The Company has determined that the conversion features of the Asher Notes represent an embedded derivative since the notes are convertible into a variable number of shares upon conversion. Accordingly, they are not considered to be conventional debt under EITF 00-19 and the embedded conversion feature must be bifurcated from the debt host and accounted for as a derivative liability. The fair value of this derivative instrument has been recorded as a liability on the balance sheet with the corresponding amount recorded as a discount to the notes. Such discount will be accreted from the commencing date of conversion period to the maturity date of the notes. The change in the fair value of the derivative liability will be recorded in other income or expenses in the statement of operations at the end of each period, with the offset to the derivative liability on the balance sheet. 

The beneficial conversion feature included in notes resulted in initial debt discounts of $193,500 and an initial loss on the valuation of the derivative liabilities of $168,950 based on the initial fair value of the derivative liabilities of $362,450. The fair value of the embedded derivative liabilities were calculated at the conversion commencing dates utilizing the following assumptions:

Note date	September 7, 2011			November 14, 2011			February 13, 2012			June 15, 2012
Note amount	$	50,000		$	32,500		$	27,500		$	83,500
Stock price at convertible date	$	0.035		$	0.011		$	0.035		$	0.001
Expected life (years)		.5			.5			.25			.25
Risk free interest rate		.14	%		.15	%		.10	%		.07	%
Volatility		142.25	%		215.97	%		234.41	%		364.13	%
Initial derivative value	$	78,107		$	58,991		$	39,363		$	185,989

At December 31, 2012, only one note remained convertible and not in default.  All convertible notes in default no longer were valued for the derivative liability and a loss on the conversion of stock will be recorded at the time of any future conversion. The fair value of the embedded derivative liability was calculated at December 31, 2012 utilizing the following assumptions:

Note date	June 15, 2012
Note amount	$	83,500
Stock price at convertible date	$	0.0022
Expected life (years)		.21
Risk free interest rate		.05	%
Volatility		518.08	%
Initial derivative value	$	214,807