NOTE 8—BANK LINE OF CREDIT AND DEBT

On May 27, 2010, the Company entered into the Loan and Security Agreement with MidCap Financial, LLC, whose interests were later assigned to its affiliate MidCap Funding III, LLC, and Silicon Valley Bank. The Loan and Security Agreement evidenced a $5 million term loan, of which $3 million was borrowed on such date. In connection with the Loan and Security Agreement, the Company issued to Secured Promissory Notes in an aggregate principal amount of $3 million, at 14.25%, secured by the Company’s assets, and warrants to purchase up to an aggregate of 101,694 shares of Common Stock at an exercise price of $1.77 per share with an expiration date of May 26, 2015.

On August 10, 2010, the Company entered into a Forbearance Agreement pursuant to which MidCap Funding III, LLC and Silicon Valley Bank agreed not to exercise their rights and remedies for a certain period of time with respect to the Company’s non-compliance with a financial covenant in the Loan and Security Agreement. On September 23, 2010, the Company entered into Waiver and Amendment No.1 to the Loan and Security Agreement which, among other things, waived its non-compliance at certain testing dates, with a financial covenant contained in the Loan and Security Agreement and amended the per share price of the warrants to $0.84.

On February 4, 2011, MidCap Financial, LLC and Silicon Valley Bank exercised all of their warrants on a cashless basis for 54,893 and 23,279 shares of common stock, respectively.

The warrant fair values were estimated using the Black-Scholes option-pricing model with the following assumptions:

Expected term (years)			5.00
Volatility			87	%
Annual dividend per share		$	0.00
Risk-free interest rate			1.34	%

On February 8, 2011, the Company repaid all outstanding balances under the Loan and Security Agreement, which included $2.6 million in principal, $30,000 of accrued interest and $169,000 of loan related expenses, and MidCap Funding III, LLC and Silicon Valley Bank released their security interest in the Company’s assets. Unamortized costs totaling approximately $225,000, excluding interest, associated with the term loan payable were expensed in February 2011.

In December 2010, the Company financed approximately $389,000 of insurance premiums payable in nine equal monthly installments of approximately $43,000 each, including a finance charge of 2.92%. As of June 30, 2011, there was $87,000 outstanding under this arrangement. Such amount is included in Accrued Liabilities in the Consolidated Balance Sheets of the accompanying consolidated financial statements.