6. DERIVATIVE LIABILITIES

9 Months Ended

Sep. 30, 2013

DerivativeInstrumentsAndHedgingActivitiesAbstract

DERIVATIVE LIABILITIES

As of September 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 following table sets forth the fair value hierarchy within our financial assets and liabilities by level that they were accounted for at fair value on a recurring basis as of September 30, 2013.

			Fair Value Measurement at September 30, 2013
Liabilities	Carrying Value at September 30, 2013		Level 1		Level 2		Level 3
Warrant Derivative Liability	$	837,373	$	-	$	-	$	837,373
Convertible Debt Derivative Liability	$	1,072,580	$	-	$	-	$	1,072,580
Debenture Derivative Liability	$	243,842	$	-	$	-	$	243,842

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 nine months ended September 30, 2013:

Balance, December 31, 2012	(1,336,574	)
Change in Fair Value of Warrant Derivative Liability	(79,125	)
Change in Fair Value of Beneficial Conversion Derivative Liability	(762,204	)
Change in Fair Value of Debenture Derivative Liability	(40,364	)
Adjustments to Warrant Derivative Liability	(171,627	)
Adjustment to Beneficial Conversion Derivative Liability	(10,152	)
Adjustment to Debenture Derivative Liability	246,251
Balance, September 30, 2013	(2,153,795	)