Derivative Financial Instruments

6 Months Ended

Jun. 30, 2011

Derivative Financial Instruments

(4)  Derivative Financial Instruments

Effective January 1, 2009, the Company adopted provisions of ASC Topic 815-40, “Derivatives and Hedging: Contracts in Entity’s Own Equity” (“ASC Topic 815-40”). ASC Topic 815-40 clarifies the determination of whether an instrument issued by an entity (or an embedded feature in the instrument) is indexed to an entity’s own stock, which would qualify as a scope exception.

Based upon the Company’s analysis of the criteria contained in ASC Topic 815-40, all warrants (the “Warrants”) issued in connection with the issuance of the Notes, the Series C Convertible Preferred Stock, par value $0.10 per share (the “Series C Stock”), and the Series D Convertible Preferred Stock, par value $0.10 per share (the “Series D Stock”) must be treated as derivative liabilities on the Company’s balance sheet.

The Warrants are re-measured at each balance sheet date based on estimated fair value, and any resultant changes in estimated fair value are recorded as non-cash valuation adjustments within other income (expense) in the Company’s statement of operations.  The Company recorded other income relating to the change in estimated fair value of the Warrants of $1,323 for the three months ended June 30, 2011 and other expense relating to the change in estimated fair value of the warrants issued in connection with the issuance of the Series C Stock and the Series D Stock of $2,232 for the three months ended June 30, 2010. The Company recorded other income relating to the change in estimated fair value of the Warrants of $2,666 for the six months ended June 30, 2011 and other expense relating to the change in estimated fair value of warrants issued in connection with the Series C Stock and the Series D Stock of $2,588 for the six months ended June 30, 2010.

The Company estimates the fair value of the Warrants using a probability-weighted Black-Scholes option pricing model.  The assumptions used for the three and six months ended June 30, 2011 and 2010 are noted in the following table:

	Three and Six Months Ended June 30,
	2011			2010
Expected option term	2 to 7 years			2.9 to 4.4 years
Risk-free interest rate		0.45% - 2.90	%		1.79% - 3.28	%
Expected volatility		127% - 128	%		129% - 130	%
Dividend yield		0	%		0	%

Expected volatility is based on historical volatility of the Common Stock.  The Warrants have a transferability provision and based on guidance provided in SAB 107 for options issued with such a provision, the Company used the full contractual term as the initial expected term of the Warrants.  The risk free interest rate is based on the U.S. Treasury security rates for the remaining term of the Warrants at the measurement date.