FAIR VALUE

Financial Accounting Standards Board (“FASB”) guidance on fair value measurements, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements for our financial assets and liabilities, as well as for other assets and liabilities that are carried at fair value on a recurring basis in our consolidated financial statements.

FASB guidance establishes a three-level fair value hierarchy based upon the assumptions (inputs) used to price assets or liabilities. The three levels of inputs used to measure fair value are as follows:

Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities,

Level 2—Observable inputs other than those included in Level 1, such as quoted prices for similar assets and liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets, and

Level 3—Unobservable inputs reflecting our own assumptions and best estimate of what inputs market participants would use in pricing the asset or liability.

The preferred stock warrant liability and preferred stock conversion feature are recorded separately and are recorded at fair value. We are required to record these instruments at fair value at each reporting date and changes are recorded as an adjustment to earnings. The preferred stock warrant liability and preferred stock conversion feature are considered Level 3 financial instruments which are valued using the Black Scholes call option pricing formula.

During the three months ended June 30, 2011, the changes in the fair value of the liabilities measured using significant unobservable inputs (Level 3) were comprised of the following:



	Dollars in Thousands
	For the six months ended
	June 30, 2011
	Preferred Stock Conversion Feature		Preferred Stock Warrant Liability		Total
Beginning balance at April 1, 2011	$	5,078	$	1,283	$	6,361
Total gains or losses:
Recognized in earnings	2,522		1,717		4,239
Balance at June 30, 2011	$	7,600	$	3,000	$	10,600

During the six months ended June 30, 2011, the changes in the fair value of the liabilities measured using significant unobservable inputs (Level 3) were comprised of the following:



	Dollars in Thousands
	For the six months ended
	June 30, 2011
	Preferred Stock Conversion Feature		Warrants		Total
Beginning balance at January 1, 2011	$	1,983	$	2,351	$	4,334
Total gains or losses:
Recognized in earnings	5,617		649		6,266
Balance at June 30, 2011	$	7,600	$	3,000	$	10,600

We had no Level 3 liabilities at June 30, 2010. There were no purchases, sales, issuances or settlements in the three or six months ended June 30, 2011 and 2010. The gains or losses included in earnings are reported in other income (expense) in our Statement of Operations.