Note 6. Derivative Liabilities

6 Months Ended

Jun. 30, 2011

Derivative Instruments and Hedging Activities Disclosure [Text Block]

Note 6.  Derivative Liabilities

As described more fully in Note 2.  Significant Accounting Policies – Derivative Financial Instruments of the notes to the Company’s audited financials statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, the Company changed the method by which it valued the conversion features in its convertible notes and convertible debentures by switching from the binomial lattice valuation model to the Black-Scholes pricing model duringthe three months ended June 30, 2010.

In March 2011, the Company entered into a settlement agreement with Rockmore Investment Master Fund LTD (“Rockmore”) pursuant to which the Company agreed to issue 12 million shares of its common stock to Rockmore in full payment of the outstanding balance of the debenture in the amount of $31,677 and accrued interest thereon, and for a full release from all claims filed by Rockmore against the Company.  The Company recorded a contingent loss in the amount of $169,818 in its financial statements for the year ended December 31, 2010 in accordance with the provisions of ASC 450.  The Company recognized a reduction in derivative liability of $78,490 which resulted in a corresponding increase in additional paid-in capital.

The Company’s derivative liabilities were $431,414 and $1,460,472 at June 30, 2011 and December 31, 2010, respectively.  The Company recognized gains of $197,757 for derivative liabilities during the three months ended June 30, 2011 and losses of $123,340 for derivative liabilities during the three months ended June 30, 2010.  The Company recognized gains of $950,568 for derivative liabilities during the six months ended June 30, 2011 and recognized gains of $10,580,355 for derivative liabilities during the six months ended June 30, 2010.

The derivative gains recognized during these periods were due primarily to the decrease in the Company’s stock price during 2011 and 2010, respectively.

The components of derivative financial instruments on the Company’s balance sheet at June 30, 2011 and December 31, 2010 are as follows:

	June 30, 2011		December 31,  2010
Common Stock Warrants	$	155,624	$	513,028
Convertible Promissory Notes and Debentures		275,790		947,444
Total	$	431,414	$	1,460,472

Under the Black-Scholes pricing model, the Company used the following weighted-average assumptions to determine the fair value of its notes, debentures and warrants:

	Dividend Yield			Expected Volatility			Risk-Free Interest Rate			Remaining Contractual  Life (Years)
Common Stock Warrants		0	%		114.6	%		0.03	%		1.81
Convertible Promissory Notes and Debentures		0	%		122.4	%		0.19	%		4.75