Quarterly report pursuant to sections 13 or 15(d)

NOTE 5 - DERIVATIVE LIABILITIES

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NOTE 5 - DERIVATIVE LIABILITIES
6 Months Ended
Jun. 30, 2011
Derivative Instruments and Hedging Activities Disclosure [Text Block]
NOTE 5 - DERIVATIVE LIABILITIES

CONVERTIBLE DEBENTURES

The conversion feature associated with the Convertible Debentures represents an embedded derivative which the Company has accounted for as a free-standing financial instrument.  As of December 31, 2010 the embedded derivative amounted to $1,177,845. This amount was adjusted to $767,279 at April 12, 2011, the date of repayment of the convertible debentures. The $767,279 was recorded as a gain on the extinguishment of the derivative liability since the convertible debentures have been repaid. For the three and six months ended June 30, 2011 the Company recorded a gain on valuation of derivative in the amounts of $99,247 and $410,566, respectively, as compared to a loss on valuation of derivative in the amount of $447,327 for the three months ended June 30, 2010, and a gain of $182,756 for the six months ended June 30, 2010. The estimated fair value of the financial instruments has been calculated based on a Black-Scholes pricing model using the following assumptions:

   
April 12, 2011
   
December 31, 2010
 
Fair market value of stock
 
$
0.00013
   
$
0.00013
 
Exercise price
 
$
0.0001
   
$
0.0001
 
Dividend yield
   
0.00
%
   
0.00
%
Risk free interest rate
   
0.24
%
   
0.29
%
Expected volatility
   
145.01
%
   
183.32
%
Expected life
 
0.71 Year
   
1 Year
 

CONVERTIBLE PROMISSORY NOTE

The conversion feature associated with the convertible promissory note represents an embedded derivative. At January 28, 2011 the Company recorded the conversion option as a liability, recorded a debt discount of $51,000, and charged Other Expense - Loss on Valuation of Derivative for $53,821, resulting primarily from calculation of the conversion price, and a derivative liability of $104,821. For the six months ended June 30, 2011, the Company recorded a Gain on Valuation of Derivative in the amount of $5,290 from the calculation of the derivative liability.

In May 2011 the conversion feature was modified, which resulted in the extinguishment of this derivative liability in the amount of $99,531 recorded through additional paid-in capital

The estimated fair value of the embedded derivative has been calculated based on a Black-Scholes pricing model using the following assumptions:

   
May 17 , 2011
   
At Inception
 
Fair market value of stock
 
$
0.00013
   
$
0.00013
 
Exercise price
 
$
0.00005
   
$
0.00005
 
Dividend yield
   
0.00
%
   
0.00
%
Risk free interest rate
   
0.41
%
   
0.24
%
Expected volatility
   
169.92
%
   
182.35
%
Expected life
 
0.83 Year
   
1 Year