8. DERIVATIVE LIABILITIES

6 Months Ended

Jun. 30, 2013

DERIVATIVE LIABILITIES AND FAIR VALUE ASSUMPTIONS:

DERIVATIVE LIABILITIES

Beginning in 2008, the Company issued stock purchase warrants to various lenders and investors as part of note payable agreements and stock subscription agreements. These warrants were immediately exercisable and some contained provisions for cashless exercise under certain circumstances. The warrants ranged in term from three to five years and had expiration dates ranging from December 31, 2012, to December 31, 2016. The warrants also contained anti-dilution provisions including provisions for the adjustment of the exercise price if the Company issues shares of Common Stock or Common Stock equivalents at a price less than the exercise price. As of June 30, 2013, the Company had outstanding warrants entitling the holders to purchase 15,653,699 shares of Common Stock upon exercise.

In addition, beginning in 2010, the Company issued convertible debentures and notes payable to various lenders. These debentures and notes were convertible at discounts ranging from 30% to 50% of the fair market value of the Common Stock. In accordance with ASC Topic No. 470-20-25-4, the Company recorded the intrinsic value of the embedded beneficial conversion feature present in the convertible instruments by allocating a portion of the debt equal to the intrinsic value of that feature to additional paid in capital. As of June 30, 2013, the Company had outstanding convertible debt in the principal amount of $802,673 and outstanding convertible debentures in the principal amount of $225,000.

As of June 30, 2013 and December 31, 2012, the Company did not have a sufficient number of common shares authorized to fulfill the possible exercise of all outstanding warrants and the conversion of all outstanding debentures and convertible notes payable. As a result, the Company determined that the warrants and the embedded beneficial conversion features of the debt instruments did not qualify for equity classification. Accordingly, the warrants and beneficial conversion features are treated as derivative liabilities and are carried at fair value.

The Company estimates the fair value of the derivative warrant liabilities by using the American Option Binomial Model, a Level 3 input, with the following assumptions used:

Dividend yield:	1%
Expected volatility	283.86% to 549.88%
Risk free interest rate	.31% to 1.41%
Expected life (years)	1.00 to 5.00

The following table sets forth the changes in the fair value of derivative liabilities for the year ended December 31, 2012 and the six months ended June 30, 2013:

Balance, December 31, 2011	$	(5,417,525	)
Change in Fair Value of Warrant Derivative Liability		3,461,614
Change in Fair Value of Beneficial Conversion Derivative Liability		879,514
Change in Fair Value of Debenture Derivative Liability		309,933
Adjustments to Warrant Derivative Liability		(1,245,647	)
Adjustment to Beneficial Conversion Derivative Liability		164,657
Adjustment to Debenture Derivative Liability		510,880
Balance, December 31, 2012		(1,336,574	)
Change in Fair Value of Warrant Derivative Liability		(308,449	)
Change in Fair Value of Beneficial Conversion Derivative Liability		90,421
Change in Fair Value of Debenture Derivative Liability		73,607
Adjustments to Warrant Derivative Liability		81,573
Adjustment to Beneficial Conversion Derivative Liability		(494	)
Adjustment to Debenture Derivative Liability		174,140
Balance, June 30, 2013		(1,225,776	)