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NOTE 9. FAIR VALUE MEASUREMENTS
 3 Months Ended
Jun. 30, 2011
Fair Value Disclosures [Text Block]
NOTE 9. FAIR VALUE MEASUREMENTS

We follow FASB ASC 820, "FAIR VALUE MEASUREMENTS AND DISCLOSURES" (“ASC 820”) in connection with financial assets and liabilities measured at fair value on a recurring basis subsequent to initial recognition. The guidance applies to our derivative liabilities.

ASC 820 requires that assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories: We measure the fair value of applicable financial and non-financial assets based on the following fair value hierarchy:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

The hierarchy noted above requires us to minimize the use of unobservable inputs and to use observable market data, if available, when determining fair value.

The fair value of our recorded derivative liabilities is determined based on unobservable inputs that are not corroborated by market data, which is a Level 3 classification. We record derivative liabilities on our balance sheet at fair value with changes in fair value recorded in our consolidated statements of operations.

Our fair value measurements at the June 30, 2011 reporting date are classified based on the valuation technique level noted in the table below:

         
Quoted Prices
   
Significant
       
         
in Active
   
Other
   
Significant
 
         
Markets for
   
Observable
   
Unobservable
 
   
June 30,
   
Identical Assets
   
Inputs
   
Inputs
 
Description
 
2011
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Derivative Liabilities
 
$
2,221,224
   
$
--
   
$
--
   
$
2,221,224
 
Total Assets
 
$
2,221,224
   
$
--
   
$
--
   
$
2,221,224
 

Prior to the third fiscal quarter ended December 31, 2010 (“Q3 2011”), the fair value estimate relating to an aggregate of 25,066,944 warrants classified as derivative liabilities had been based on a Black-Scholes valuation model.  During Q3 2011, we changed to a binomial lattice model for valuation of these warrants as we determined that use of a binomial lattice model was more representative of fair value in the circumstances. In accordance with accounting guidance in ASC 820-10, Fair Value Measurements and Disclosures, this was accounted for as a change in accounting estimate.

The following outlines the significant weighted average assumptions used to estimate the fair value information presented, in connection with our April 2011 convertible notes and with respect to warrant and embedded conversion option derivative instruments utilizing the Binomial Lattice option pricing model:

 
Three Months Ended June 30, 2011
Risk free interest rate
0.03% - 2.24%
Average expected life
0.25 - 5 years
Expected volatility
67.1% - 90.8%
Expected dividends
None

The table below sets forth a summary of changes in the fair value of our Level 3 financial instruments for the three months ended June 30, 2011:

           
Change in
 
Reclassification
   
           
estimated fair
 
of Derivative
   
       
Recorded
 
value recognized
 
Liability to
   
   
April 1,
 
New Derivative
 
in results
 
Paid in
 
June 30,
   
2011
 
Liabilities
 
of operations
 
capital
 
2011
                     
Derivative liabilities
 
$ 2,002,896
 
$ 939,136
 
($ 686,072)
 
(228,981)
 
$2,221,224

The fair value of derivative liabilities that we recorded in the three months ended June 30, 2011 was related to our April 2011 convertible note offering (see Note 5) and was based upon an independent valuation report.

The table below sets forth a summary of changes in the fair value of our Level 3 financial instruments for the three months ended June 30, 2010:

           
Change in
   
           
estimated fair
   
       
Recorded
 
value recognized
   
   
April 1,
 
New Derivative
 
in results
 
June 30,
   
2010
 
Liabilities
 
of operations
 
2010
                 
Derivative liabilities
 
$ 1,054,716
 
$ 3,200,961
 
($   543,122)
 
$3,712,555

The fair value of derivative liabilities that we recorded in the three months ended June 2010 was related to the restructuring of the Amended and Restated Convertible Notes (see Note 5) and was based upon an independent valuation report.