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DERIVATIVE LIABILITY (Tables)

9 Months Ended

Sep. 30, 2013

Convertible Debt Conversion Option Liability

Fair Values of Financial Liabilities Conversion Feature

The table below summarizes the fair values of the Company’s financial liabilities:

	Fair Value at
	September 30,		Fair Value Measurement Using
	2013		Level 1		Level 2		Level 3
Derivative liability – Conversion Feature	$	32,000		-		-	$	32,000
	$	32,000		-		-	$	32,000

Summary of Changes in Fair Value of Level 3 Financial Liabilities

The table below sets forth a summary of changes in the fair value of the Company’s Level 3 financial liabilities (Derivative liability – Conversion Feature) for the nine months ended September 30, 2013:

	September 30,
	2013
Balance at December 31, 2012	$	49,000
Additions to derivative instruments		-
Change in fair market value of Conversion Feature		(17,000)
Balance at September 30, 2013	$	32,000

Key Assumptions Used in Connection with Computation Conversion Feature

The following are the key assumptions used in connection with this computation:

		September 30, 2013

Number of shares		625,000
Conversion Price		.20
Volatility		123.00 – 125.62%
Risk-free interest rate		2%
Expected dividend yield		0%
Life of Notes		18 months

Warrant

Fair Values of Financial Liabilities Conversion Feature

The table below summarizes the fair values of the Company’s financial liabilities:

	Fair Value at
	September 30,		Fair Value Measurement Using
	2013		Level 1		Level 2		Level 3
Derivative liability – Warrants	$	131,000		-		-	$	131,000
	$	131,000		-		-	$	131,000

Summary of Changes in Fair Value of Level 3 Financial Liabilities

The table below sets forth a summary of changes in the fair value of the Company’s Level 3 financial liabilities Derivative Liability - Warrant for the nine months ended September 30, 2013:

	September 30,
	2013
Balance at December 31, 2012	$	178,000
Canceled warrants		(19,000)
Change in fair market value of Warrants		(28,000)

Balance at September 30, 2013	$	131,000

Key Assumptions Used in Connection with Computation Conversion Feature

The following are the key assumptions used in connection with this computation:

		September 30, 2013
Number of shares		2,625,000
Conversion Price		.20
Volatility		120.60-126.70%
Risk-free interest rate		2%
Expected dividend yield		0%
Life of Warrants		15 - 18 months

- Definition

Tabular disclosure of the fair value measurement of liabilities using significant unobservable inputs (Level 3), a reconciliation of the beginning and ending balances, separately presenting changes attributable to the following: (1) total gains or losses for the period (realized and unrealized), segregating those gains or losses included in earnings (or changes in net assets), and gains or losses recognized in other comprehensive income (loss) and a description of where those gains or losses included in earnings (or changes in net assets) are reported in the statement of income (or activities); (2) purchases, sales, issues, and settlements (each type disclosed separately); and (3) transfers in and transfers out of Level 3 (for example, transfers due to changes in the observability of significant inputs) by class of liability.

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