7. Warrant Liability

We account for certain common stock purchase warrants with exercise price reset features in accordance with the applicable FASB guidance. Under this guidance, warrants with these reset features are accounted for as fair value liabilities, with changes in fair value now included in net earnings (loss).

The fair value of the liability associated with the warrants with this reset feature decreased to $2,809,000 as of June 30, 2011, which resulted in a $5,649,000 and $2,178,000 gain from the change in fair value of warrants for the three and six months ended June 30, 2011, respectively.

Since these warrants do not qualify for hedge accounting, all future changes in the fair value of the warrants will be recognized currently in earnings until such time as the warrants are exercised or expire. These warrants are not traded in an active securities market, and as such, we estimated the fair value of these warrants using the Black-Scholes option pricing model using the following assumptions:

	As of June 30, 2011			As of December 31, 2010
Expected term	2.12 years			2.61 years
Common stock market price	$	4.79		$	5.19
Risk-free interest rate		0.45	%		0.82	%
Expected volatility		66.51	%		86.03	%
Resulting fair value (per warrant)	$	1.46		$	2.50

Expected volatility is based primarily on historical volatility. Historical volatility was computed using daily pricing observations for recent periods that correspond to the expected term of the warrants. We believe this method produces an estimate that is representative of our expectations of future volatility over the expected term of these warrants. We currently have no reason to believe future volatility over the expected remaining life of these warrants is likely to differ materially from historical volatility. The expected life is based on the remaining term of the warrants. The risk-free interest rate is the interest rate for treasury constant maturity instruments published by the Federal Reserve Board that is closest to the expected term of the warrants.