NOTE 2. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES

Securities classified as cash and cash equivalents and available-for-sale marketable securities as of June 30, 2012 and December 31, 2011 are summarized below (in thousands). Estimated fair value is based on quoted market prices for these investments.



			Gross		Gross
	Amortized		Unrealized		Unrealized
June 30, 2012	Cost		Gains		Losses		Fair Value

Cash and cash equivalents:
Cash	$	7,640	$	—	$	—	$	7,640
Money market funds		882		—		—		882
Corporate debt securities		4,999		—		—		4,999
U.S. government agency debt securities		—		—		—		-
Total cash and cash equivalents	$	13,521	$	—	$	—	$	13,521

Available-for-sale securities:
Total maturing within 1 year and included in marketable securities:
Corporate debt securities	$	35,512	$	33	$	(5)	$	35,540
Government agency debt securities		19,815		21		—		19,836
U.S. Treasury securities		3,314		1		—		3,315
Total maturing between 1 and 2 years and included in marketable securities:								-
Corporate debt securities		4,934		14		—		4,948
U.S. government agency debt securities		5,505		10		—		5,515
U.S. Treasury securities		6,359		—		(3)		6,356
Total available-for-sale securities	$	75,439	$	79	$	(8)	$	75,510

Total cash, cash equivalents and marketable securities	$	88,960	$	79	$	(8)	$	89,031


	Amortized		Unrealized		Unrealized
December 31, 2011	Cost		Gains		Losses		Fair Value

Cash and cash equivalents:
Cash	$	5,629	$	—	$	—	$	5,629
Money market funds		12,467		—		—		12,467
U.S. corporate debt securities		5,947		—		—		5,947
Total cash and cash equivalents	$	24,043	$	—	$	—	$	24,043
Available-for-sale securities:
Total maturing within 1 year and included in marketable securities:
Corporate debt securities	$	49,717	$	10	$	(9)	$	49,718
U.S. government agency debt securities		5,503		2		—		5,505
U.S. Treasury securities		6,870		13		—		6,883
Total maturing between 1 and 2 years and included in marketable securities:
Corporate debt securities		17,767		7		(62)		17,712
U.S. government agency debt securities		35,906		30		(4)		35,932
Total available-for-sale securities	$	115,763	$	62	$	(75)	$	115,750

Total cash, cash equivalents and marketable securities	$	139,806	$	62	$	(75)	$	139,793

The Company considers all highly liquid investments with a maturity at date of purchase of three months or less to be cash equivalents. Cash and cash equivalents consist of cash on deposit with banks, money market instruments and commercial paper. The Company places its cash, cash equivalents and marketable securities with U.S. Treasury and government agency securities, and high quality securities of U.S. and international financial and commercial institutions and, to date has not experienced material losses on any of its balances. All marketable securities are classified as available-for-sale since these instruments are readily marketable. These securities are carried at fair value, which is based on readily available market information, with unrealized gains and losses included in accumulated other comprehensive gain within shareholders’ equity. The Company uses the specific identification method to determine the amount of realized gains or losses on sales of marketable securities. Realized gains or losses have been insignificant and are included in “interest and other income” in the condensed statement of operations.

At June 30, 2012 the Company had eighteen securities in an unrealized loss position. The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2012 (in thousands):



	Less than 12 months				12 months or greater				Total
			Gross				Gross				Gross
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses

Corporate debt securities	$	16,215	$	(5)	$	—	$	—	$	16,215	$	(5)
U.S. Treasury securities		8,370		(3)		—		—		8,370		(3)
U.S. government agency debt securities		—		—		—		—		-		-
Total available-for-sale	$	24,585	$	(8)	$	—	$	—	$	24,585	$	(8)

The gross unrealized losses above were caused by interest rate increases. No significant facts or circumstances have arisen to indicate that there has been any deterioration in the creditworthiness of the issuers of the Company’s securities. Based on the Company’s review of these securities, including the assessment of the duration and severity of the unrealized losses and the Company’s ability and intent to hold the investments until maturity, there were no material other-than-temporary impairments for these securities at June 30, 2012.

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.

The Company utilizes the following fair value hierarchy based on three levels of inputs:

· Level 1: Quoted prices in active markets for identical assets or liabilities.

· Level 2: Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

· Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following table represents the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2012 (in thousands):

Assets:



	Level 1		Level 2		Level 3		Total

Money market funds	$	882	$	—	$	—	$	882
Corporate debt securities		—		45,487		—		45,487
Government agency debt securities		—		25,350		—		25,350
U.S. Treasury securities		—		9,672		—		9,672
Total	$	882	$	80,509	$	—	$	81,391


Liabilities:

Contingent consideration	$	—	$	—	$	1,303	$	1,303

The fair value measurement of the contingent consideration obligations arises from the Zipsor acquisition and relates to the potential future milestone payments under the Zipsor agreement which is determined using Level 3 inputs. The key assumptions in determining the fair value are the discount rate and the probability assigned to the potential milestones being achieved. At each reporting date, the Company will re-measure the contingent consideration obligation arising from the Zipsor acquisition to its estimated fair value. Any changes in the fair value of contingent consideration will be recognized in operating expenses until the contingent consideration arrangement is settled.

The following table represents the Company’s fair value hierarchy for its financial assets measured at fair value on a recurring basis as of December 31, 2011 (in thousands):



	Level 1		Level 2		Level 3		Total

Money market funds	$	12,467	$	—	$	—	$	12,467
U.S. corporate debt securities		—		73,378		—		73,378
U.S. Government agency debt securities		—		41,437		—		41,437
U.S. Treasury securities		—		6,882		—		6,882
Total	$	12,467	$	121,697	$	—	$	134,164

There are no financial liabilities measured at fair value on a recurring basis as of December 31, 2011.