CONVERTIBLE DEBENTURES

9 Months Ended

Sep. 30, 2011

10.	CONVERTIBLE DEBENTURES

The Company has outstanding convertible debentures as of September 30, 2011, as follows:

Effective October 4, 2010, the Company converted an accounts payable for legal services to a $20,635 convertible debenture. The debenture matured on April 4, 2011, and bears interest at 5% per annum. At the option of the lender, the principal amount of the note plus any accrued interest may be converted in whole or in part into Common Stock at the conversion price per share of $.001 by written notice. The lender will be limited to maximum conversion of 4.99% of the outstanding Common Stock of the Company at any one time. The debenture and the shares referenced within the debenture may be assignable in whole or in part to a third party at any time during the term.

The Company valued the beneficial conversion feature (BCF) of the convertible debenture at $20,635, the “ceiling” of its intrinsic value. Accordingly, the $20,635 debenture is discounted by the amount of the BCF. The Company will accrete the discount to the convertible debenture and recognize interest expense through its maturity on April 4, 2011. At maturity the Company did not redeem the convertible debenture, but rather the holder sold and assigned it to an unrelated third party for the face value of the debenture. At September 30, 2011, the balance of the convertible debenture, net is $15,135, which is $20,635 debenture, less $20,635 discount, plus $20,635 discount accretion, less $5,500 converted to stock. At December 31, 2010, the balance of the convertible debenture, net is $10,318 which is $20,635 debenture, less $20,635 discount, plus $10,318 of accretion.

Effective November 27, 2010, the Company purchased exclusive rights for license of certain intellectual property from an unrelated party for an initial sum of $125,000. Payment was in the form of a convertible debenture bearing simple interest of 10% per annum to accrue until paid in full or converted. The parties agreed to a royalty of 2.5% of net revenues generated from the sale, sub-license or use of the technology or a reasonable negotiated rate based on similar invention. The debenture is convertible to common shares of the Company at May 27, 2011, along with accrued interest at the option of the lender. Conversion price per share is 30% discount as determined from the weighted average of the preceding 12 trading days’ closing market price.

The Company valued the BCF of the convertible debenture at $53,517, its intrinsic value. Accordingly, the $125,000 debenture is discounted by the amount of the BCF. The Company accreted the discount to the convertible debenture and will recognize interest expense through repayment in full or conversion. The debenture matured on May 27, 2011. At September 30, 2011, the balance of the convertible debenture, net is $125,000, which is $125,000 debenture, less $53,571 discount, plus $53,571 of accretion. At December 31, 2010, the balance of the convertible debenture, net is $80,358, which is $125,000 debenture, less $53,571 discount, plus $8,929 of accretion. Because there is no assurance of success and the invention is still in design and pre-prototype phase, the Company recorded the initial net value of the debenture, $71,483, as research and development expense. Both parties have agreed to confidentiality regarding the invention during the pre-prototype stage. In addition, the Company has agreed to provide the licensor with design services, as well as assist in completing the prototype and initial production at the Company’s prevailing wholesale rate for comparable services.

Effective January 7, 2011, the Company ratified a technology and license agreement with commitment for purchase of inventory related to an agreement signed in 2010, which set pricing for products if minimum quantity purchases were met. Since the Company did not purchase the minimum quantities, but desired to maintain the technology and licensing rights along with the pricing, it agreed to purchase the 2010 balance shortage in 2011, as well as the 2011 minimum quantities. The agreement required the Company issue a convertible debenture for $76,000, and $38,000 of restricted common stock at $.15 per share. On January 7, 2011, the Company issued a $76,000 convertible debenture for purchase of the product with $28,000 maturing on June 7, 2011, and $48,000 maturing on November 12, 2011. The debenture bears interest at 5% per annum. The lender at their option may convert all or part of the note plus accrued interest into common stock at a price of thirty percent (30%) discount as determined from the average four (4) deep highest closing bid prices over the preceding five (5) trading days. On June 1, 2011, the Company issued 253,334 shares of restricted common stock at $.15 per share, or $38,000 as required by the agreement.

The Company valued the BCF of the convertible debenture at $76,000, the “ceiling” of its intrinsic value. Accordingly, the $76,000 debenture is discounted by the amount of the BCF. The Company will accrete the discount to the convertible debenture and recognize interest expense through paid in full or converted. At September 30, 2011, the balance of the convertible debenture, net is $34,667, which is $76,000 debenture, less $76,000 discount, plus $58,667 discount accretion, less $24,000 repayment.

On February 10, 2011, the Company borrowed $42,500 in exchange for a convertible debenture. The debenture bears 8% interest per annum and matures on November 14, 2011. The interest rate on the debenture will revert to 22% per annum upon nonpayment of any amounts when due. Beginning 180 days after the date of the debenture, the lender may convert the note to common shares at a 42% discount of the “Market Price” of the stock based on the average of the lowest three (3) closing bid prices on the date prior to the notice of conversion. In addition, if the Company grants a lower price for common stock purchase or conversion to anyone else during the term of this agreement, the lender’s conversion price will be adjusted downward to the same. Since as of March 31, 2011, the Company has another outstanding debenture with a conversion price to common shares at $.001, this conversion price would also apply to this debenture. The lender cannot convert an amount greater than 4.99% of the outstanding common stock at any one time. The Company may prepay the debenture at any time before maturity at graduated amounts depending on the date of prepayment ranging from 130% to 150% of the debenture balance plus accrued and unpaid interest. There is a $2,000 per day penalty for not timely delivering shares upon conversion notice. The Company is also required to maintain a reserve of shares sufficient to cover the lender’s conversion to common stock of the total amount of the debenture. The Company issued and reserved 1,465,517, related to this debenture.

The Company valued the BCF of the convertible debenture at $42,500, the “ceiling” of its intrinsic value. Accordingly, the $42,500 debenture is discounted by the amount of the BCF. The Company will accrete the discount to the convertible debenture through its maturity on November 14, 2011 and recognize interest expense until paid in full or converted. At September 30, 2011, the balance of the convertible debenture, net is $11,416, which is $42,500 debenture, less $42,500 discount, plus $35,416 accretion, less $24,000 conversion. As of September 30, 2011, the Company issued 2,026,568 shares to lender related to the $24,000 conversion. The 2,026,568 shares included all 1,465,517 shares reserved related to this debenture, plus an additional 561,051 of 19,600,000 shares reserved for the same lender as part of another debenture issued September 12, 2011 for $42,500, as discussed below.

On March 9, 2011, the Company borrowed $50,000 in exchange for a convertible debenture maturing on March 9, 2012. The Debenture bears 10% interest per annum. The lender may at any time convert any portion of the debenture to common shares at a 30% discount of the “Market Price” of the stock based on the average of the previous ten (10) days weighted average closing prices on the date prior to the notice of conversion. The Company may prepay the debenture plus accrued interest at any time before maturity. In addition, as further inducement for loaning the Company the funds, the Company granted the lender 50,000 and 100,000 warrants at $.25 and $.35 per share, respectively. As a result, the Company had to allocate fair market value (“FMV”) to both the BCF and to the warrants. The Company determined the FMV of the warrants as $7,500 using the Black-Scholes valuation model.

Since the combined FMV allocated to the warrants and BCF cannot exceed the convertible debenture amount (“the ceiling”), the BCF was valued at $50,000, the “ceiling” of its intrinsic value. Accordingly, the $50,000 debenture is discounted by the BCF and the warrants. The Company will accrete the discount to the convertible debenture through its maturity on March 9, 2012 and recognize interest expense until paid in full or converted. At September 30, 2011, the balance of the convertible debenture, net is $27,957, which is $50,000 debenture, net $50,000 discount, plus $27,957 discount accretion.

On May 3, 2011, the Company borrowed $300,000 in exchange for a convertible debenture maturing on May 5, 2012. The Debenture bears 10% interest per annum. The lender may at any time convert any portion of the debenture to common shares at a 30% discount of the “Market Price” of the stock based on the average of the previous ten (10) days weighted average closing prices on the date prior to the notice of conversion. The Company may prepay the debenture plus accrued interest at any time before maturity. In addition, as further inducement for loaning the Company the funds, the Company granted the lender 300,000 and 600,000 warrants at $.25 and $.35 per share, respectively. As a result, the Company had to allocate fair market value (“FMV”) to both the BCF and to the warrants. The Company determined the FMV of the warrants as $7,500 using the Black-Scholes valuation model.

Since the combined FMV allocated to the warrants and BCF cannot exceed the convertible debenture amount (“the ceiling”), the BCF was valued at $300,000, the “ceiling” of its intrinsic value. Accordingly, the $300,000 debenture is discounted by the BCF and the warrants. The Company will accrete the discount to the convertible debenture through its maturity on May 5, 2012 and recognize interest expense until paid in full or converted. At September 30, 2011, the balance of the convertible debenture, net is $125,000, which is $300,000 debenture, less $300,000 discount, plus $125,000 discount accretion.

On August 31, 2011, the Company borrowed $10,000 in exchange for a convertible debenture maturing August 31, 2013. The debenture bears interest at 5% per annum. The lender at their option may convert all or part of the note plus accrued interest into common stock at a price of thirty percent (30%) discount as determined from the average four (4) deep highest closing bid prices over the preceding five (5) trading days.

The Company valued the BCF of the convertible debenture at $4,286. Accordingly, the $4,286 debenture is discounted by the amount of the BCF. The Company will accrete the discount to the convertible debenture and recognize interest expense through paid in full or converted. At September 30, 2011, the balance of the convertible debenture, net is $5,893, which is $10,000 debenture, less $4,286 discount, plus $179 discount accretion.

On September 8, 2011, the Company converted a note payable and related accrued interest of $39,724 into a convertible debenture. The debenture bears interest at 10% per annum and matured on September 20, 2011. The lender at thier option may convert all or part of the note plus accrued interest into common stock at a price of thirty percent (30%) discount as determined from the average four (4) deep highest closing bid prices over the preceding five (5) trading days. The Company valued the BCF of the convertible debenture at $17,025. Because the debenture was issued and matured in the third quarter of 2011, the full amount of the discount, $17,025 was accreted and recognized as interest expense during the period. As of September 30, 2011, the balance of the convertible debenture, net is $39,724.

On September 12, 2011, the Company borrowed $37,500 in exchange for a convertible debenture. The debenture bears 8% interest per annum and matures on June 14, 2012. The interest rate on the debenture will revert to 22% per annum upon nonpayment of any amounts when due. Beginning 180 days after the date of the debenture, the lender may convert the note to common shares at a 42% discount of the “Market Price” of the stock based on the average of the lowest three (3) closing bid prices on the date prior to the notice of conversion. In addition, if the Company grants a lower price for common stock purchase or conversion to anyone else during the term of this agreement, the lender’s conversion price will be adjusted downward to the same. Since as of March 31, 2011, the Company has another outstanding debenture with a conversion price to common shares at $.001, this conversion price would also apply to this debenture. The lender cannot convert an amount greater than 4.99% of the outstanding common stock at any one time. The Company may prepay the debenture at any time before maturity at graduated amounts depending on the date of prepayment ranging from 130% to 150% of the debenture balance plus accrued and unpaid interest. There is a $2,000 per day penalty for not timely delivering shares upon conversion notice. The Company is also required to maintain a reserve of shares sufficient to cover the lender’s conversion to common stock of the total amount of the debenture. The Company issued and reserved 19,600,000 shares related to this debenture. As of September 30, 2011, the Company converted 561,051 of these reserved shares as part of a conversion by the lender on another debenture due them dated February 10, 2011, as discussed above. This left a balance of 19,038,949 shares reserved for this lender.

The Company valued the BCF of the convertible debenture at $37,500, the “ceiling” of its intrinsic value. Accordingly, the $42,500 debenture is discounted by the amount of the BCF. The Company will accrete the discount to the convertible debenture through its maturity on June 12, 2012 and recognize interest expense until paid in full or converted. At September 30, 2011, the balance of the convertible debenture, net is $2,083, which is $37,500 debenture, less $37,500 discount, plus $2,083 discount accretion.