5. Warrant Liability

Warrants with exercise price reset features (down-round protection) are accounted for as liabilities, with changes in fair value included in net earnings (loss). The fair value of the liability associated with the warrants with this reset feature increased to $1,871,000 as of September 30, 2012, which resulted in a $863,000 and $1,244,000 loss from the change in fair value of warrants for the three and nine months ended September 30, 2012, respectively.

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 an option pricing model with the following assumptions:

	As of September 30, 2012			As of December 31, 2011
Expected term	0.87 years			1.61 years
Common stock market price	$	4.41		$	2.20
Risk-free interest rate		0.17	%		0.19	%
Expected volatility		74.94	%		69.98	%
Resulting fair value (per warrant)	$	0.93		$	0.32

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 contractual 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. The fair value of these warrants also incorporates our assumptions about future equity issuances and their impact to the down-round protection feature.

Fluctuations in the fair value of the warrants are impacted by unobservable inputs, most significantly the assumption with regards to future equity issuances and their impact to the down-round protection feature. Significant increases (decreases) in this input in isolation would result in a significantly higher (lower) fair value measurement.