Note 3 – Financing

At June 30, 2011, our financing transactions with YA Global, an accredited investor, included shares of our Series C preferred stock issued in February 2006, Series D preferred stock issued in January 2010, a series of twenty five secured convertible debentures issued between August 2006 and June 2011 and various warrants to purchase shares of our common stock. All of our assets are pledged to secure our obligations under these securities. At various times YA Global has assigned or distributed portions of its holdings of these securities to other holders, including persons who are officers of YA Global and its related entities, as well as to other holders who are investors in YA Global’s funds. As of June 30, 2011, approximately $826,000 has been assigned or distributed by YA Global to other holders which represents approximately 2% of YA Global’s holdings.

Conversions – Our preferred stock and convertible debentures are convertible into shares of our common stock. However, the conversion of each of these securities is limited such that the holder cannot exceed 9.99% beneficial ownership of our common stock, unless the holder waives their right to such limitation. Cumulatively, as of June 30, 2011, the holders of our Series C preferred stock have converted 15,896 shares of the original 22,000 shares of Series C preferred stock into 151,826,899 shares of common stock. YA Global has converted $888,000 of principal and accrued interest of those debentures into 1,317,747 shares of our common stock. Holders, other than YA Global, converted $197,000 of principal and accrued interest of debentures into 15,798,675 shares of common stock.

Debenture Interest Payments– On December 23, 2010 and again on February 18, 2011, we made payments to YA Global of $1.0 million each of accrued interest related to the March 27, 2007 debenture.

Secured Debentures - The underlying agreements for each of the twenty five debentures issued to YA Global are essentially the same, except in regard to the interest rate, varying conversion prices per share, and the number of warrants that were issued in conjunction with each of the debentures. The debentures are convertible into our common stock, at the option of the holder, at the lower of a fixed conversion price per share or a percentage of the lowest volume-weighted average price (“VWAP”) for a specified number of days prior to the conversion (the “look-back period”). The conversion is limited such that the holder cannot exceed 9.99% ownership, unless the holder waives their right to such limitation. All of the debentures are secured according to the terms of a Security Pledge Agreement dated August 23, 2006, which was entered into in connection with the first convertible debenture issued to YA Global and which provides YA Global with a security interest in substantially all of our assets. The debentures are also secured by a Patent Security Agreement dated July 29, 2008. On August 13, 2010 our wholly owned subsidiary, NeoMedia Europe AG, became a guarantor of all outstanding financing transactions between us and YA Global, through pledges of their intellectual property and other movable assets. As security for our obligations to YA Global, all of our Pledged Property, Patent Collateral and other collateral is affirmed through the several successive Ratification Agreements which have been executed in connection with each of the 2010 and 2011 financings.

2011 Financing Transactions - On January 10, 2011, February 8, 2011, March 11, 2011, April 13, 2011, May 31, 2011 and June 28, 2011, we entered into Securities Purchase Agreements to issue and sell debentures to YA Global in the principal amounts of $450,000, $650,000, $450,000, $450,000, $450,000 and $250,000, respectively. On June 28, 2011, we entered into a Securities Purchase agreement to issue and sell secured debentures to YA Global that combined will have an aggregate principal amount of $1,050,000 upon their issuance. As noted above, the first debenture in the principal amount of $250,000 was issued on June 28, 2011, a second convertible debenture in the amount of $450,000 was issued on July 13, 2011 and in accordance with the terms of the agreement, a third convertible debenture with a principal amount of $350,000 will be issued on or before August 15, 2011. The debentures are convertible, at the option of the holder, at a conversion price equal to the lesser of (i) $0.10 or (ii) 95% of the lowest closing bid price of our common stock for the 60 trading days preceding the date of conversion. The debentures bear interest at 14% and mature on July 29, 2012. The six debentures issued prior to June 30, 2011, provided net proceeds of $2,460,000 after payment of $240,000 in fees. These financing fees included a prepayment of $75,000 related to the debenture issued on July 13, 2011, and the debenture to be issued on or before August 15, 2011. We have the right to redeem a portion or all amounts outstanding under the debentures at a redemption premium of 10%, plus accrued interest. In connection with the six debentures issued prior to June 30, 2011, we also issued warrants to YA Global to purchase 1,250,000, 1,250,000, 1,000,000, 1,000,000, 1,000,000 and 3,000,000 shares of common stock, respectively. The warrants issued from January 2011 through April 2011 have an exercise price of $0.10 per share, and the warrants issued subsequently have an exercise price of $0.15 per share. All warrants issued during 2011 have a term of five years.

At inception, a summary of the allocation of the components of the new debentures and warrants issued this quarter was as follows:

	April 13, 2011 debenture			May 31, 2011 debenture			June 28, 2011 debenture
	(in thousands)
Gross proceeds	$	450		$	450		$	250
Structuring and due diligence fee		(25	)		(25	)		(25	)
	$	425		$	425		$	225

Derivative liabilities:
Investor warrants	$	(18	)	$	(90	)	$	(105	)
Compound derivative		(284	)		(310	)		(525	)
Total derivative liabilities		(302	)		(400	)		(630	)

Day one derivative loss		-			-			405
Convertible debenture-initial carrying
value		(123	)		(25	)		-
	$	(425	)	$	(425	)	$	(225	)

The compound derivatives were valued using the Monte Carlo Simulation valuation method. Significant assumptions used to value the compound derivatives as of inception of the financings included exercise estimates/behaviors and the following significant estimates:

	April 13, 2011 Financing			May 31, 2011 Financing			June 28, 2011 Financing
Conversion price	$	0.0152		$	0.0688		$	0.0128
Equivalent volatility		127	%		122	%		190	%
Equivalent interest risk		14.00	%		14.00	%		14.00	%
Equivalent credit risk		7.40	%		7.54	%			7.40%

The warrants are valued using a binomial option valuation methodology. Significant assumptions used to value the warrants as of their inception included the following significant estimates:

	April 13, 2011			May 31, 2011				June 28, 2011
Exercise price	$	0.02		$	0.11			$	0.04
Expected life	5 years			5 years			5 years
Estimated volatility		254	%		278	%			271	%
Risk free rate of return		0.92	%		0.64	%			0.63	%
Dividend yield		—			—					—

For the risk-free rates of return, we use the published yields on zero-coupon Treasury Securities with maturities consistent with the term of the warrants and volatility is based upon our expected stock price volatility over the term of the warrants.

The table below summarizes the significant terms of each of the debentures as of June 30, 2011:

										Conversion Price – Lower of Fixed Price or Percentage of VWAP for Preceding Period
Debenture Issue Date	Face Amount		Maturity	Interest Rate			Default Interest Rate			Fixed Price		%			Default %			Preceding Period
August 24, 2006	$	5,000,000	7/29/2012		10	%		n/a		$	2.00		90	%		n/a		125 Days
December 29, 2006	$	2,500,000	7/29/2012		10	%		n/a		$	2.00		90	%		n/a		125 Days
March 27, 2007	$	7,458,651	7/29/2012		13	%		n/a		$	2.00		90	%		n/a		125 Days
August 24, 2007	$	1,775,000	7/29/2012		14	%		n/a		$	2.00		80	%		n/a		125 Days
April 11, 2008	$	390,000	7/29/2012		15	%		24	%	$	1.50		80	%		75	%	125 Days
May 16, 2008	$	500,000	7/29/2012		15	%		24	%	$	1.50		80	%		50	%	125 Days
May 29, 2008	$	790,000	7/29/2012		15	%		24	%	$	1.00		80	%		50	%	125 Days
July 10, 2008	$	137,750	7/29/2012		15	%		24	%	$	1.00		80	%		50	%	125 Days
July 29, 2008	$	2,325,000	7/29/2012		14	%		24	%	$	2.00		95	%		50	%	125 Days
October 28, 2008	$	2,325,000	7/29/2012		14	%		20	%	$	2.00		95	%		50	%	125 Days
May 1, 2009	$	258,037	7/29/2012		14	%		20	%	$	2.00		95	%		50	%	125 Days
June 5, 2009	$	715,000	7/29/2012		14	%		20	%	$	2.00		95	%		50	%	125 Days
July 15, 2009	$	535,000	7/29/2012		14	%		20	%	$	2.00		95	%		50	%	125 Days
August 14, 2009	$	475,000	7/29/2012		14	%		20	%	$	2.00		95	%		50	%	125 Days
May 27, 2010	$	2,006,137	7/29/2012		14	%		20	%	$	0.30		95	%		50	%	60 Days
August 13, 2010	$	550,000	7/29/2012		14	%		20	%	$	0.20		95	%		50	%	60 Days
September 29, 2010	$	475,000	7/29/2012		14	%		20	%	$	0.20		95	%		50	%	60 Days
October 28, 2010	$	400,000	7/29/2012		14	%		20	%	$	0.20		95	%		50	%	60 Days
December 15, 2010	$	450,000	7/29/2012		14	%		20	%	$	0.10		95	%		50	%	60 Days
January 10, 2011	$	450,000	7/29/2012		14	%		20	%	$	0.10		95	%		50	%	60 Days
February 8, 2011	$	650,000	7/29/2012		14	%		20	%	$	0.10		95	%		50	%	60 Days
March 11, 2011	$	450,000	7/29/2012		14	%		20	%	$	0.10		95	%		50	%	60 Days
April 13, 2011	$	450,000	7/29/2012		14	%		20	%	$	0.10		95	%		50	%	60 Days
May 31, 2011	$	450,000	7/29/2012		14	%		20	%	$	0.10		95	%		50	%	60 Days
June 28, 2011	$	250,000	7/29/2012		14	%		20	%	$	0.10		95	%		50	%	60 Days

All debentures with YA Global contain provisions for acceleration of principal and interest upon default. Certain debentures also contain default interest rates and conversion prices, as reflected in the table above.

In our evaluation of these financing transactions, we concluded that the conversion features were not afforded the exemption for conventional convertible instruments due to the variable conversion rate, and they did not otherwise meet the conditions set forth in current accounting standards for equity classification. Because equity classification was not available for the conversion features, we elected to bifurcate the compound derivatives, and carry them as derivative liabilities, at fair value. Each compound derivative consists of (i) the embedded conversion feature, (ii) down-round anti-dilution protection features, and (iii) default, non-delivery and buy-in puts which were combined into one compound instrument that is carried as a component of derivative liabilities.

Fair Value Considerations - In accordance with FASB ASC 815, Derivatives and Hedging , we determined that the conversion features of the Series C and Series D preferred stock, and the August 2006, December 2006, July 2008, October 2008, April 2009, May 2009, June 2009, July 2009, August 2009, May 2010, August 2010, September 2010, October 2010, December 2010, January 2011, February 2011, March 2011, April 2011, May 2011 and June 2011 Debentures met the criteria of embedded derivatives and that the conversion features of these instruments required bifurcation and accounting as derivative instrument liabilities. Changes in the fair value of the compound derivative liability, including the embedded conversion option, are charged or credited to income each period. As permitted by FASB ASC 815-15-25, Recognition of Embedded Derivatives , we elected not to bifurcate the embedded derivatives in the March 2007, August 2007, April 2008 or May 2008 Debentures and accordingly, these convertible instruments are being carried in their entirety at their fair values, with the changes in the fair value of the debentures charged or credited to income each period.

Derivative financial instruments arising from the issuance of convertible financial instruments are initially recorded, and continuously carried, at fair value. Upon conversion of any of the convertible financial instruments, the carrying amount of the debt, including any unamortized premium or discount, and the related derivative instrument liability are credited to the capital accounts upon conversion to reflect the stock issued and no gain or loss is recognized.

Embedded Derivative Instruments – Series C and Series D preferred stock and August 2006, December 2006, July 2008, October 2008, April 2009, May 2009, June 2009, July 2009, August 2009, May 2010, August 2010, September 2010, October 2010, December 2010, January 2011, February 2011, March 2011, April 2011, May 2011 and June 2011 Convertible Debentures - Embedded derivative financial instruments arising from the convertible instruments consist of multiple individual features that were embedded in each instrument. For each convertible instrument, we evaluated all significant features and, as required under current accounting standards, aggregated the components into one compound derivative financial instrument for financial reporting purposes. For financings recorded in accordance with FASB ASC 815, the compound embedded derivative instruments are valued using a Monte Carlo Simulation methodology because that model embodies certain relevant assumptions (including, but not limited to, interest rate risk, credit risk, and conversion/redemption privileges) that are necessary to value these complex derivatives.

The conversion price in each of the convertible debentures is subject to adjustment for down-round, anti-dilution protection. Accordingly, if we sell common stock or common share indexed financial instruments below the stated or variable conversion price in the agreement, the conversion price adjusts to that lower amount.

The assumptions included in the calculations are highly subjective and subject to interpretation. Assumptions used as of June 30, 2011 included exercise estimates/behaviors and the following other significant estimates:

	Conversion Prices		Remaining Term (years)		Equivalent Volatility			Equivalent Interest-Risk Adjusted Rate			Equivalent Credit-Risk Adjusted Rate
Series C preferred Stock	$	0.01		1.08		190	%		8.00	%		7.40	%
Series D preferred Stock	$	0.01		1.08		190	%		8.00	%		7.40	%

August 24, 2006	$	0.01		1.08		190	%		10.00	%		7.40	%
December 29, 2006	$	0.01		1.08		190	%		10.00	%		7.40	%
July 10, 2008	$	0.01		1.08		190	%		15.00	%		7.40	%
July 29, 2008	$	0.01		1.08		190	%		14.00	%		7.40	%
October 28, 2008	$	0.01		1.08		190	%		14.00	%		7.40	%
May 1, 2009	$	0.01		1.08		190	%		14.00	%		7.40	%
June 5, 2009	$	0.01		1.08		190	%		14.00	%		7.40	%
July 15, 2009	$	0.01		1.08		190	%		14.00	%		7.40	%
August 14, 2009	$	0.01		1.08		190	%		14.00	%		7.40	%
May 27, 2010	$	0.01		1.08		190	%		14.00	%		7.40	%
August 13, 2010	$	0.01		1.08		190	%		14.00	%		7.40	%
September 29, 2010	$	0.01		1.08		190	%		14.00	%		7.40	%
October 28, 2010	$	0.01		1.08		190	%		14.00	%		7.40	%
December 15, 2010	$	0.01		1.08		190	%		14.00	%		7.40	%
January 10, 2011	$	0.01		1.08		190	%		14.00	%		7.40	%
February 8, 2011	$	0.01		1.08		190	%		14.00	%		7.40	%
March 11, 2011	$	0.01		1.08		190	%		14.00	%		7.40	%
April 13, 2011	$	0.01		1.08		190	%		14.00	%		7.40	%
May 31, 2011	$	0.01		1.08		190	%		14.00	%		7.40	%
June 28, 2011	$	0.01		1.08		190	%		14.00	%		7.40	%

Equivalent amounts reflect the net results of multiple modeling simulations that the Monte Carlo Simulation methodology applies to underlying assumptions.

Due to the variable component of the conversion price, rapid fluctuations in the trading market price may result in significant variations to the calculated conversion price. For each debenture, we analyze the ratio of the conversion price (as calculated based on the percentage of VWAP for the appropriate look back period) to the trading market price for a period of time equal to the term of the debenture to determine the average ratio for the term of the note. Each quarter, the ratio in effect on the date of the valuation is compared with the average ratio over the term of the debenture to determine if the calculated conversion price is representative of past trends or if it is considered unrepresentative due to a large fluctuation in the stock price over a short period of time. If the calculated conversion price results in a ratio that deviates significantly from the average ratio over the term of the agreement, the average ratio of the conversion price to the trading market price is then multiplied by the current trading market price to determine the variable portion of the conversion price for use in the fair value calculations. This variable conversion price is then compared with the fixed conversion price and, as required by the terms of the debentures, the lower of the two amounts is used as the conversion price in the Monte Carlo Simulation model used for valuation purposes. On June 30, 2011, the fixed conversion price for each of the debentures was equal to or higher than the calculated variable conversion price. Accordingly, the variable conversion price was used in the Monte Carlo Simulation model. This analysis is performed each quarter to determine if the calculated conversion price is reasonable for purposes of determining the fair value of the embedded conversion features (for instruments recorded under FASB ASC 815-15-25-1) or the fair value of the hybrid instrument (for instruments recorded under FASB ASC 815-15-25-4).

Hybrid Financial Instruments Carried at Fair Value – 2007 and 2008 Convertible Debentures - The March 2007, August 2007, April 2008 and May 2008 convertible debentures are recorded in accordance with FASB ASC 815-15-25-4 and the entire hybrid instrument was initially recorded at fair value, with subsequent changes in fair value charged or credited to income each period. These financial instruments are valued using the common stock equivalent approach. The common stock equivalent is calculated using the shares indexed to the debentures valued at the market price of our stock and the present value of the coupon.

Subsequent to a January 5, 2010 amendment, the shares indexed to the debentures were calculated using the variable conversion price based on the 125 day look-back period and the present value of the coupon from inception of the debentures to the revised maturity date of July 29, 2012.

Current Period Valuations - For the Series C and D preferred stock and the August 2006, December 2006, July 2008, October 2008, May 2009, June 2009, July 2009, August 2009, May 2010, August 2010, September 2010, October 2010, December 2010, January 2011, February 2011, March 2011, April 2011, May 2011 and June 2011 debentures, the embedded derivative instrument, primarily the conversion feature, has been separated and accounted for as a derivative instrument liability, as discussed above. This derivative instrument liability is marked-to-market each reporting period.

The March 2007, August 2007, April 2008 and May 2008 debentures were each initially recorded at their full fair value pursuant to FASB ASC 815-15-25-4. That fair value is marked-to-market each reporting period, with any changes in the fair value charged or credited to income.

On January 5, 2010, the terms of all of the debentures issued prior to that date were modified to increase the look-back period used to calculate the variable conversion price per share for all debentures to a period of 125 days and to extend the stated maturity date to July 29, 2012, which increased our future anticipated cash flows related to those instruments. Because that increase exceeded the threshold prescribed by FASB ASC 470-50, Debt Modifications and Extinguishments , the modification of the amounts due under these instruments was accounted for as an extinguishment. Accordingly, the original convertible debentures were considered extinguished and the revised convertible debentures were recorded at their fair value, resulting in an extinguishment loss of approximately $5.6 million.

For instruments which were recorded under FASB ASC 815-15-25-4, the instruments were first adjusted to fair value as of January 5, 2010 using the conversion rate and maturity date prior to the amendment. The fair value of the instrument was then calculated using the modified conversion rate and maturity date to determine the fair value of the instrument subsequent to the amendment. The difference in the fair value before and after the amendment was recorded as an extinguishment loss.

For instruments recorded under FASB ASC 815-15-25-1, the embedded conversion feature was first adjusted to fair value as of the date of the amendment using the conversion rate and maturity date prior to the amendment. The carrying value of the host instrument and the embedded conversion feature, less any deferred financing costs, was then compared with the fair value of the hybrid instrument subsequent to the amendment and the difference was recorded as an extinguishment loss.

For our Series C and Series D preferred stock and our convertible debentures, the following table reflects the face value of the instruments and, as appropriate, either their amortized cost carrying value and the fair value of the separately-recognized compound embedded derivative or, for those debentures recorded in their entirety at fair value, their fair value, as well as for each of the instruments the number of common shares (in thousands) into which the instruments are convertible as of June 30, 2011 and December 31, 2010.

June 30, 2011	Face Value		Carrying Value		Accrued Interest		Embedded Conversion Feature		Fair Value		Common Stock Shares
	(in thousands)
Series C preferred Stock	$	6,104	$	6,104	$	-	$	10,204	$	-		465,929
Series D preferred Stock	$	2,500	$	2,500	$	-		4,179		-		190,840

August 24, 2006	$	5,000	$	5,000	$	2,125		9,682		-		583,985
December 29, 2006		2,500		2,500		1,064		4,840		-		292,092
March 27, 2007		7,312		n/a		n/a		n/a		23,778		611,365
August 24, 2007		1,775		n/a		n/a		n/a		6,890		164,352
April 11, 2008		390		n/a		n/a		n/a		1,883		36,111
May 16 ,2008		500		n/a		n/a		n/a		2,406		46,296
May 29, 2008		790		n/a		n/a		n/a		3,798		73,148
July 10, 2008		138		138		62		334		-		18,526
July 29, 2008		2,325		2,325		953		4,382		-		256,130
October 23, 2008		2,325		2,325		871		4,389		-		249,702
May 1, 2009		258		258		109		465		-		31,493
June 5, 2009		715		682		209		1,386		-		72,195
July 15, 2009		535		535		149		1,012		-		53,435
August 14, 2009		475		475		127		902		-		47,009
May 27, 2010		2,006		548		307		4,966		-		180,715
August 13, 2010		550		43		68		1,294		-		48,259
September 29, 2010		475		32		50		1,100		-		41,009
October 28, 2010		400		23		38		917		-		34,199
December 15, 2010		450		24		34		1,015		-		37,826
January 10, 2011		450		16		30		1,006		-		37,476
February 8, 2011		650		22		36		1,438		-		53,567
March 11, 2011		450		12		19		984		-		36,667
April 13, 2011		450		153		14		972		-		36,222
May 31, 2011		450		27		5		955		-		35,561
June 28, 2011		250		2		-		525		-		19,554
Total	$	31,619	$	15,140	$	6,270	$	56,947	$	38,755		3,753,663

December 31, 2010	Face Value		Carrying Value		Accrued Interest		Embedded Conversion Feature		Fair Value		Common Stock Shares
	(in thousands)
Series C preferred Stock	$	8,336	$	8,336	$	-	$	6,706	$	-		125,348
Series D preferred Stock	$	2,500	$	2,500	$	-		1,918		-		36,819

August 24, 2006	$	5,000	$	5,000	$	1,876		5,007		-		109,154
December 29, 2006		2,500		2,500		940		2,502		-		54,596
March 27, 2007		7,459		n/a		n/a		n/a		17,905		118,391
August 24, 2007		1,775		n/a		n/a		n/a		4,888		31,696
April 11, 2008		390		n/a		n/a		n/a		1,106		6,964
May 16 ,2008		500		n/a		n/a		n/a		1,392		8,929
May 29, 2008		790		n/a		n/a		n/a		2,193		14,107
July 10, 2008		138		138		51		180		-		3,387
July 29, 2008		2,325		2,325		792		2,381		-		46,873
October 23, 2008		2,325		2,325		709		2,279		-		46,873
May 1, 2009		258		258		92		237		-		5,249
June 5, 2009		715		668		158		771		-		13,139
July 15, 2009		535		535		111		404		-		9,719
August 14, 2009		475		475		93		482		-		8,546
May 27, 2010		2,006		302		168		2,785		-		32,690
August 13, 2010		550		13		29		732		-		8,715
September 29, 2010		475		9		17		620		-		7,398
October 28, 2010		400		6		10		517		-		6,163
December 15, 2010		450		6		3		571		-		6,811
Total	$	29,066	$	14,560	$	5,049	$	28,092	$	27,484		701,567

The terms of the embedded conversion features in the convertible instruments presented above provide for variable conversion rates that are indexed to our common stock price. As a result, the number of indexed shares is subject to continuous fluctuation. For presentation purposes, the number of shares of common stock into which the embedded conversion feature of the Series C and Series D preferred stock was convertible as of June 30, 2011 was calculated as face value plus assumed dividends (if declared), divided by the lesser of the fixed rate or the calculated variable conversion price using the 125 day look-back period. The number of shares of common stock into which the embedded conversion feature in the convertible debentures was convertible as of June 30, 2011 was calculated as the face value of each instrument divided by the variable conversion price using the appropriate look-back period.

The March 2007, August 2007, April 2008 and May 2008 debentures are carried in their entirety at fair value in accordance with FASB ASC 815-15-25-4 and the value of the embedded conversion feature is effectively embodied in those fair values.

Changes in the fair value of convertible instruments that are carried in their entirety at fair value (the March 2007, August 2007, April 2008 and May 2008 debentures) are reported as “Gain (loss) from change in fair value of hybrid financial instruments” in the accompanying consolidated statements of operations. The changes in fair value of these hybrid financial instruments were as follows:

	Three Months Ended June 30,					Six Months Ended June 30,
	2011			2010		2011			2010
	(in thousands)					(in thousands)
March 27, 2007	$	(9,606	)	$	717	$	(8,030	)	$	12,805
August 24, 2007		(2,446	)		227		(2,002	)		3,439
April 11, 2008		(893	)		55		(777	)		768
May 16, 2008		(1,145	)		69		(1,014	)		984
May 29, 2008		(1,809	)		112		(1,605	)		1,556
Gain (loss) from changes in fair value of
hybrid instruments	$	(15,899	)	$	1,180	$	(13,428	)	$	19,552

The carrying value of our liability for convertible instruments carried at fair value increased $14.8 million during the three month period ended June 30, 2011. However, the fair values of these liabilities increased $15.9 million. The difference between the change in carrying value and change in fair value was due to the conversion of $147,121 in principal and $50,000 in accrued interest related to the March 2007 debenture which resulted in a decrease in fair value of approximately $1.1 million.

The carrying value of our liability for convertible instruments carried at fair value increased $11.3 million during the six month period ended June 30, 2011. However, the fair values of these liabilities increased $13.4 million. The difference between the change in carrying value and change in fair value was due to the payment of $1.0 million in interest and the conversion of $147,121 in principal and $50,000 in accrued interest related to the March 2007 debenture which resulted in a decrease in fair value of approximately $1.1 million.

Changes in the fair value of derivative instrument liabilities related to the bifurcated embedded derivative features of convertible instruments not carried at fair value are reported as “Gain (loss) from change in fair value of derivative liability – Series C and Series D preferred stock and debentures” in the accompanying consolidated statement of operations.

The changes in fair value of these derivative financial instruments were as follows:

	Three Months Ended June 30,							Six Months Ended June 30,
		2011			2010			2011			2010
		(in thousands)						(in thousands)
Series C preferred Stock		$	(10,285	)	$	907		$	(7,845	)	$	15,536
Series D preferred Stock			(2,813	)		262			(2,261	)		4,302

August 24, 2006			(5,934	)		2,118			(4,675	)		13,080
December 29, 2006			(2,967	)		1,060			(2,338	)		6,403
July 10, 2008			(187	)		61			(154	)		328
July 29, 2008			(2,659	)		875			(2,001	)		4,372
October 28, 2008			(2,657	)		792			(2,110	)		4,092
May 1, 2009			(296	)		102			(228	)		572
June 5, 2009			(809	)		192			(615	)		1,188
July 15, 2009			(610	)		485			(608	)		990
August 14, 2009			(545	)		112			(420	)		865
May 27, 2010			(2,511	)		426			(2,181	)		425
August 13, 2010			(655	)		-			(562	)		-
September 29, 2010			(557	)		-			(480	)		-
October 28, 2010			(464	)		-			(400	)		-
December 15, 2010			(515	)		-			(444	)		-
January 10, 2011			(510	)		-			(433	)
February 8, 2011			(730	)		-			(694	)
March 11, 2011			(499	)		-			(307	)
April 13, 2011			(688	)		-			(688	)
May 31, 2011			(645	)		-			(645	)
June 28, 2011			-			-			-
			(37,536	)		7,392			(30,089	)		52,153
Less: Day-one loss from Series D Convertible Preferred financing			-			-			-			(4,582	)
Less: Day-one loss from May 27, 2010 financing						(747	)					(747	)
Less: Day-one loss from January 10, 2011 financing			-			-			(292	)		-
Less: Day-one loss from February 8, 2011 financing			-			-			(193	)		-
Less: Day-one loss from March 11, 2011 financing			-			-			(291	)		-
Less: Day-one loss from June 28, 2011 financing			(405	)		-			(405	)		-
Gain (loss) from change in fair value of derivative liability		$	(37,941	)	$	6,645		$	(31,270	)	$	46,824

The carrying value of the derivative liabilities-Series C and Series D preferred stock and debentures increased $34.5 million during the three month period ended June 30, 2011 resulting from i) $37.5 million increase in the fair value of the derivative liability, as shown in the table above, ii) less conversion of a portion of the Series C preferred stock resulting in a reduction of $4.2 million, iii) an increase of $284,000, $310,000 and $525,000 due to the inception date fair value of the derivative liabilities resulting from the April 13, 2011, May 31, 2011 and June 28, 2011 financings, respectively.

The carrying value of the derivative liabilities-Series C and Series D preferred stock and debentures increased $28.9 million during the six month period ended June 30, 2011 resulting from i) $30.1 million increase in the fair value of the derivative liability, as shown in the table above, ii) less conversion of a portion of the Series C preferred stock resulting in a reduction of $4.3 million, iii) an increase of $573,000, $744,000, $677,000, $284,000, $310,000 and $525,000 due to the inception date fair value of the derivative liabilities resulting from the January 10, 2011, February 8, 2011, March 11, 2011, April 13, 2011, May 31, 2011 and June 28, 2011 financings, respectively.

Warrants - YA Global holds warrants to purchase shares of our common stock that were issued in connection with the convertible debentures and the Series C and Series D preferred stock. The warrants are exercisable at the lower of a fixed exercise price or a specified percentage of the current market price. From time to time, the fixed exercise prices of the warrants held by YA Global have been reduced as an inducement for YA Global to enter into subsequent financing arrangements.

The warrants issued to YA Global do not meet all of the established criteria for equity classification in FASB ASC 815-40, Derivatives and Hedging – Contracts in Entity’s Own Equity, and accordingly, are recorded as derivative liabilities at fair value. Changes in the fair value of the warrants are charged or credited to income each period.

The following table summarizes the warrants outstanding (in thousands) and their fair value:

	June 30, 2011		December 31, 2010			June 30, 2011				December 31, 2010
	Exercise Price		Exercise Price		Expiration Date	Warrants		Fair Value		Warrants		Fair Value
						(in thousands)				(in thousands)
Series C preferred Stock		n/a	$	0.06	2/17/2011		-	$	-		750	$	53
Series D preferred Stock		0.01		0.10	1/5/2017		2,250		77		2,250		255

August 24, 2006		0.01		0.06	8/24/2011		1,750		45		1,750		148
December 29, 2006		0.01		0.06	12/29/2011		420		13		420		37
March 27, 2007		0.01		0.06	3/27/2012		1,250		40		1,250		122
August 24, 2007		0.01		0.06	8/24/2012		750		25		750		72
May 16, 2008		0.01		0.06	5/16/2015		75		2		75		8
May 29, 2008		0.01		0.06	5/29/2015		500		17		500		56
July 29, 2008		0.01		0.07	7/29/2015		1,000		53		1,000		112
July 29, 2008		0.01		0.10	7/29/2015		3,500		104		3,500		383
May 27, 2010		0.01		0.10	5/27/2015		5,000		174		5,000		563
August 13, 2010		0.01		0.10	8/13/2015		1,000		35		1,000		113
September 29, 2010		0.01		0.10	9/29/2015		750		26		750		84
October 15, 2010		0.01		0.10	10/15/2015		600		21		600		67
December 15, 2010		0.01		0.10	12/15/2015		1,250		43		1,250		140
January 10, 2011		0.01		n/a	1/10/2016		1,250		44		-		-
February 8, 2011		0.01		n/a	2/8/2016		1,250		44		-		-
March 11, 2011		0.01		n/a	3/11/2016		1,000		35		-		-
April 13, 2011		0.01		n/a	4/13/2016		1,000		35		-		-
May 31, 2011		0.01		n/a	5/31/2016		1,000		35		-		-
June 28, 2011		0.01		n/a	6/28/2016		3,000		105		-		-
Other warrants		n/a		1.10	1/16/2011		-		-		1		-
					Total		28,595	$	973		20,846	$	2,213

The warrants are valued using a binomial option valuation methodology because that model embodies all of the relevant assumptions that address the features underlying these instruments. Significant assumptions used in this model as of June 30, 2011 included an expected life equal to the remaining term of the warrants, an expected dividend yield of zero, estimated volatility ranging from 224% to 328%, and risk-free rates of return of 0.03% to 1.09%. For the risk-free rates of return, we use the published yields on zero-coupon Treasury Securities with maturities consistent with the remaining term of the warrants and volatility is based upon our expected stock price volatility over the remaining term of the warrants. To encompass the value of the anti-dilution provisions, the exercise price input into the model equals the lowest price of any subsequently issued common share indexed instruments with a conversion price below the stated exercise price of the warrant.

Changes in the fair value of the warrants are reported as "(Gain) loss from change in fair value of derivative liability - warrants" in the accompanying consolidated statement of operations.

The changes in the fair value of the warrants were as follows:

	Three Months Ended June 30,					Six Months Ended June 30,
	2011			2010		2011			2010
	(in thousands)					(in thousands)
Series C preferred Stock	$	-		$	171	$	53		$	645
Series D preferred Stock		(11	)	$	806		178			2,088

August 24, 2006		(10	)		581		103			1,508
December 29, 2006		(3	)		139		24			357
March 27, 2007		(9	)		423		82			1,074
August 24, 2007		(5	)		246		47			644
May 16, 2008		-			26		6			66
May 28, 2008		(2	)		176		39			441
July 29, 2008		(23	)		1,551		338			3,836
May 27, 2010		(26	)		186		389			186
August 13, 2010		(5	)		-		78			-
September 29, 2010		(3	)		-		58			-
October 28, 2010		(3	)		-		46			-
December 15, 2010		(6	)		-		97			-
January 10, 2011		(7	)		-		100			-
February 8, 2011		(7	)		-		15			-
March 11, 2011		(5	)		-		4			-
April 13, 2011		(17	)		-		(17	)		-
May 31, 2011		55			-		55			-
June 28, 2011		-			-		-			-
Other warrants		-			-		-			11
Total	$	(87	)	$	4,305	$	1,695		$	10,856

The carrying value of warrants decreased during the three months ended June 30, 2011 due to warrant fair value adjustments of $87,000 as shown in the table above, less the issuance of warrants on April 13, 2011, May 31, 2011 and June 30, 2011 with a fair value of $18,000, $90,000 and $104,700 respectively.

The carrying value of warrants increased during the six months ended June 30, 2011 due to warrant fair value adjustments of $1.7 million as shown in the table above, less the issuance of warrants on January 10, 2011, February 8, 2011, March 31, 2011, April 13, 2011, May 31, 2011 and June 30, 2011 with a fair value of $143,700, $58,800, $38,600, $18,000, $90,000 and $104,700 respectively.

Fair Value Considerations – As required by FASB ASC 820, assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to their fair value measurement. Our derivative financial instruments that are measured at fair value on a recurring basis under FASB ASC 815 are all measured at fair value using Level 3 inputs. Level 3 inputs are unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following represents a reconciliation of the changes in fair value of financial instruments measured at fair value using Level 3 inputs during the three months and six months ended June 30, 2011:

	Compound Embedded Derivatives			Warrant Derivatives			Total
Beginning balance, December 31, 2010:	$	28,092		$	2,213		$	30,305

Issuances:
January 10, 2011		573			144			717
February 8, 2011		744			59			803
March 11, 2011		677			39			716

Fair value adjustments:
Compound embedded derivatives		(7,447	)		-			(7,447	)
Warrant derivatives		-			(1,782	)		(1,782	)

Conversions:
Series C Convertible Preferred Stock		(157	)		-			(157	)

Ending balance, March 31, 2011		22,482			673			23,155

Issuances:
April 13, 2011		284			18			302
May 31, 2011		310			90			400
June 28, 2011		525			105			630

Fair value adjustments:
Compound embedded derivatives		37,536			-			37,536
Warrant derivatives		-			87			87

Conversions:
Series C Convertible Preferred Stock		(4,190	)		-			(4,190	)
Ending balance, June 30, 2011	$	56,947		$	973		$	57,920

Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, valuation techniques are sensitive to changes in the trading market price of our common stock, which has a high estimated historical volatility. Because derivative financial instruments are initially and subsequently carried at fair values, our income will reflect the volatility in these estimate and assumption changes.

Subsequent events

As noted above, a secured convertible debenture in the amount of $450,000 was issued on July 13, 2011 in accordance with the terms of the Securities Purchase Agreement dated June 28, 2011. The debenture is convertible, at the option of the holder, at a conversion price equal to the lesser of (i) $0.10 or (ii) 95% of the lowest closing bid price of our common stock for the 60 trading days preceding the date of conversion. The stated maturity date of the debenture is July 29, 2012.

Subsequent to June 30, 2011, holders of convertible debentures, other than YA Global converted $272,176 of principal and accrued interest of those debentures into 21,946,237 shares of our common stock.