Note 11- Derivative Liabilities

Accounting Standard Codification “ASC” 815 – Derivatives and Hedging, which provides guidance on determining what types of instruments or embedded features in an instrument issued by a reporting entity can be considered indexed to its own stock for the purpose of evaluating the first criteria of the scope exception in the pronouncement on accounting for derivatives. These requirements can affect the accounting for the Warrants and Notes issued by the Company. As the conversion features within, and the detachable warrants issued with the Company’s Notes do not have fixed settlement provisions because their conversion and exercise prices may be lowered if the Company issues securities at lower prices in the future, we have concluded that the instruments are not indexed to the Company’s stock, are to be bifurcated from notes and are to be treated as derivative liabilities. The derivative liability is booked as a current liability in the Company's balance sheet and will be marked to market each reporting period, with a corresponding entry to interest income or expense, until their respective exercise or extinguishment.

The following table shows the inputs and assumptions used to determine the fair market values of the Warrants and embedded derivative portion of the Notes as of September 30, 2011. The table also discloses the number of underlying common shares into which the Notes or Warrants can be converted or exercised.

	Series A			Series B			Series C			Convertible Notes
	Warrants			Warrants			Warrants			Imbedded Derivative
Stock price	$	2.25		$	2.25		$	2.25		$	2.25
Strike price	$	2.90		$	2.93		$	2.97		$	2.90	(1)
Maturity (years)		4.67			0.42			4.67			0.67
Risk free interest rate		0.96	%		0.06	%		0.96	%		0.13	%
Volatility		65	%		57	%		65	%		54	%
Fair market value of derivative liability (in thousands)	$	822		$	10		$	53		$	984	(2)
Underlying Common Shares		2,004,656			1,002,329			952,212			2,004,656

(1)

Strike price based on original contractual agreement

(2)

The convertible note embedded derivative liability is calculated as the full value of the convertible note, using the assumptions above, minus the straight debt and dilution protection value of $5.3 million.

The Company engaged Wedbush Securities, Inc. to act as placement agent, on a reasonable best efforts basis in connection with the offering and in addition to a placement fee, received five year warrants to purchase 41,234 shares of the Company’s common stock. The warrant is exercisable immediately at an exercise price of $2.90 per share. The fair value of Series D Warrants was $14,000 as of September 30, 2011.