As discussed in Note 7, the Company entered into three separate issuances of convertible debentures, dated December 14, 2009, April 23, 2010 and October 20, 2010, which contained provisions allowing holders of the debentures to convert outstanding debt to shares of the Company's common stock. The debentures contain anti-dilution provisions which call for the debt conversion and warrant exercise prices to be reduced based on future issues of debt or equity with more favorable provisions. Management has determined that these provisions cause the conversion options and warrants to require derivative liability accounting. As such, management has valued them at fair value at the date of issuance and bifurcated the option from the host instruments.

The debentures are convertible at any time after the original issue date into a number of shares of the Company’s common stock, determined by dividing the amount to be converted by a conversion price which is $0.05 per share at December 31, 2012, and September 30, 2012, or an aggregate of 23,279,993 shares. Additionally common share purchase warrants were issued, expiring 42 months from the original issue date and permit the holders two exercisable options. The warrants were exercisable by purchase of the Company’s common stock for cash, or alternatively, in a cashless exercise, the number of shares being determined in accordance with a predetermined formula based on the Company’s then current stock price.

For the three months ended December 31, 2012 and year ended September 30, 2012, the fair value of conversion options was estimated at the date of grant using the Black-Scholes option pricing model using the following weighted average assumptions and the associated revaluation range of assumptions on designated event dates, including end of quarter revaluations:


	December 31, 2012	September 30, 2012
Risk-free interest rate	0.11%	0.09% to 0.17%
Expected term	.25 years	.25 years to 1 year
Expected volatility	340.9%	140.3% - 248.3%
Per unit value of conversion option derivative	$0.0028	$0.005

Below is detail of the conversion option liability balance at December 31, 2012 and September 30, 2012.


			December 31, 2012		September 30, 2012
Beginning balance		$	109,414	$	286,498
	Revaluation of conversion option liability resulting from conversion of debentures		-		731,085
	Net change in fair value of conversion option liability		(44,232)		(908,169)
Ending balance		$	65,182	$	109,414

Conversion options outstanding at year-end			23,279,333		23,279,333
	Period end weighted average fair value per unit	$	0.0028	$	0.005
Ending balance		$	65,182	$	109,414

For the three months ended December 31, 2012 and the year ended September 30, 2012, the fair value of warrants was estimated at the date of grant using the Black-Scholes option pricing model using the following weighted average assumptions and the associated revaluation range of assumptions on designated event dates over the past two years:


	December 31, 2012	September 30, 2012
Risk-free interest rate	0.11% to 0.72%	0.11% to 0.33%
Expected term	6 months to 1 year	6 months to 2 years
Expected volatility	191.2% to 306.9%	148.0% to 244.3%
Per unit value of conversion option derivative	$0.0088	$0.012

As discussed in Note 11, 1,000,000 warrants were issued to an investment banking advisor for services rendered. The warrants contained anti-dilution provisions which call for the warrant exercise price to be reduced based on future issues of debt or equity with more favorable provisions. Therefore, based on current guidance, the warrants were treated as derivatives. The warrants were valued at $59,200 using the Black-Scholes option pricing model with the following assumptions: risk free interest rate of 0.81%, volatility of 158.4%, exercise price of $0.06, current market price of $0.06 per share and an expected life of 5 years. The warrants expire February 15, 2017.

Below is detail of the warrant derivative balance at December 31, 2012 and September 30, 2012.

			December 31, 2012		September 30, 2012

Beginning balance		$	58,257	$	299,947
	Initial fair value of warrant derivative		59,200		-
	Revaluation of warrant derivatives resulting from modification of warrant terms		-		159,271
	Net change in fair value of warrant derivatives		(80,328)		(400,961)
Ending balance		$	37,129	$	58,257

Warrants outstanding			5,999,113		4,999,113
	Period end weighted average fair value per unit		$0.006		$0.012
Ending balance		$	37,129	$	58,257