Hedging

The Company’s activities expose it to a variety of market risks, including the effects of changes in foreign currency exchange rates. The Company manages these risks through the use of forward exchange contracts, designated as foreign currency cash flow hedges, in an attempt to reduce the potentially adverse effects of foreign currency exchange rate fluctuations that occur in the normal course of business. As such, the Company’s hedging activities are all employed solely for risk management purposes. All hedging transactions are conducted with, in the opinion of management, financially stable and reputable financial institutions. For the year ended December 31, 2010 and for the six months ended June 30, 2011, the only hedge instruments executed by the Company are associated with its exposure to fluctuations in the Canadian Dollar which result from obligations such as payroll and rent paid in Canadian Dollar.

These derivatives are recognized on the balance sheet at their fair value. Unrealized gain positions are recorded as other current assets and unrealized loss positions are recorded as other current liabilities. Changes in the fair values of the outstanding derivatives that are highly effective are recorded in other comprehensive income (loss) until net income is affected by the variability of the cash flows of the hedged transaction. Typically, hedge ineffectiveness could result when the amount of the Company’s hedge contracts exceed the Company’s forecasted or actual transactions for which the hedge contracts were designed to hedge. Once a hedge contract matures the associated gain (loss) on the contract will remain in other comprehensive income (loss) until the underlying hedged transaction affects net income (loss), at which time the gain (loss) will be recorded to the expense line item being hedged, which is primarily R&D. The Company only enters into derivative contracts in order to hedge foreign currency exposure. If the Company entered into a contract for speculative reasons or if the Company’s current hedge position becomes ineffective, changes in the fair values of the derivatives would be recognized in earnings in the current period.

During the three months ended June 30, 2011, the Company did not enter into any new foreign currency contracts, while during the six months ended June 30, 2011, the Company entered into 12 new foreign currency forward contracts, with total contractual values of $2.2 million. During the three and six months ended June 30, 2010, the Company entered into 12 and 32 new foreign currency forward contracts, with total contractual values of $1.7 million and $4.5 million.

The Company assesses, both at the inception of the hedge and on an ongoing basis, whether the derivatives that are used in hedging transactions have been highly effective in offsetting changes in the cash flows of hedged items and whether those derivatives are expected to remain highly effective in future periods. For the three and six months ended June 30, 2011 and for the year ended December 31, 2010, the Company had no hedge ineffectiveness.

A summary of the aggregate contractual or notional amounts, balance sheet location and estimated fair values of derivative financial instruments designated as cash flow hedges at June 30, 2011 is as follows (in thousands):

Contractual/Notional

Amount

Consolidated Balance Sheet

Classification

Estimated Fair Value

Type of Cash Flow Hedge

Asset

(Liability)

Foreign currency forward exchange contracts

10,464

Other current assets

561

—

Contractual/Notional

Amount

Consolidated Balance Sheet

Classification

Estimated Fair Value

Type of Cash Flow Hedge

Asset

(Liability)

Foreign currency forward exchange contracts

12,547

Other current assets

432

—

The effect of derivative instruments on the consolidated financial statements for the three months ended June 30, 2011 was as follows (in thousands):



	Effective Portion						Ineffective Portion
Type of Cash Flow Hedge	Hedge Loss Recognized in Other Comprehensive Income			Consolidated Statement of Operations Classification of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income	Hedge Gain Reclassified from Accumulated Other Comprehensive Income		Consolidated Statement of Operations Classification of Gain (Loss) Recognized	Hedge Gain (Loss) Recognized
Foreign currency forward exchange contracts	$	(55	)
				Cost of sales	$	20	None	$	—
				Research and development	127		None	—
				Selling, general and administrative	31		None	—

The effect of derivative instruments on the consolidated financial statements for the six months ended June 30, 2011 was as follows (in thousands):



	Effective Portion					Ineffective Portion
Type of Cash Flow Hedge	Hedge Gain Recognized in Other Comprehensive Income		Consolidated Statement of Operations Classification of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income	Hedge Gain Reclassified from Accumulated Other Comprehensive Income		Consolidated Statement of Operations Classification of Gain (Loss) Recognized	Hedge Gain (Loss) Recognized
Foreign currency forward exchange contracts	$	57
			Cost of sales	$	35	None	$	—
			Research and development	230		None	—
			Selling, general and administrative	74		None	—

The effect of derivative instruments on the consolidated financial statements for the three months ended June 30, 2010 was as follows (in thousands):



	Effective Portion						Ineffective Portion
Type of Cash Flow Hedge	Hedge Loss Recognized in Other Comprehensive Income			Consolidated Statement of Operations Classification of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income	Hedge Gain Reclassified from Accumulated Other Comprehensive Income		Consolidated Statement of Operations Classification of Gain (Loss) Recognized	Hedge Gain (Loss) Recognized
Foreign currency forward exchange contracts	$	(645	)
				Cost of sales	$	31	None	$	—
				Research and development	208		None	—
				Selling, general and administrative	47		None	—

The effect of derivative instruments on the consolidated financial statements for the six months ended June 30, 2010 was as follows (in thousands):



	Effective Portion						Ineffective Portion
Type of Cash Flow Hedge	Hedge Loss Recognized in Other Comprehensive Income			Consolidated Statement of Operations Classification of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income	Hedge Gain Reclassified from Accumulated Other Comprehensive Income		Consolidated Statement of Operations Classification of Gain (Loss) Recognized	Hedge Gain (Loss) Recognized
Foreign currency forward exchange contracts	$	(618	)
				Cost of sales	$	59	None	$	—
				Research and development	398		None	—
				Selling, general and administrative	91		None	—

Over the next twelve months, the Company expects to reclassify into earnings a gain of approximately $502,000, currently recorded as other comprehensive income, as a result of the maturity of currently held forward exchange contracts.

The bank counterparties in these contracts expose the Company to credit-related losses in the event of their nonperformance. However, to mitigate that risk, the Company only contracts with counterparties who meet its minimum requirements regarding counterparty credit worthiness. In addition, the Company monitors credit ratings, credit spreads and potential downgrades prior to entering into any new hedging contracts