NOTE 7. WARRANTY RESERVES

We provide for the estimated future costs to be incurred under our standard warranty obligation on our instruments and reagent discs.

Instruments. Our standard warranty obligation on instruments ranges from one to three years. The estimated contractual warranty obligation is recorded when the related revenue is recognized and any additional amount is recorded when such cost is probable and can be reasonably estimated. Cost of revenues reflects estimated warranty expense for instruments sold in the current period and any adjustments in estimated warranty expense for the installed base under our standard warranty obligation based on our quarterly evaluation of service experience. The estimated accrual for warranty exposure is based on historical experience as to product failures, estimated product failure rates, estimated repair costs, material usage and freight incurred in repairing the instrument after failure and known design changes under the warranty plan.

During the six months ended September 30, 2011, we recorded an additional accrual to pre-existing warranties of $257,000, which increased our warranty reserves and our cost of revenues, based on both historical and projected product performance rates. Management continually evaluates the sufficiency of the warranty provisions and makes adjustments when necessary. If an unusual performance rate related to warranty claims is noted, an additional warranty accrual may be assessed and recorded when a failure event is probable and the cost can be reasonably estimated.

Reagent Discs. We record a provision for defective reagent discs when the related sale is recognized and any additional amount is recorded when such cost is probable and can be reasonably estimated. The warranty cost includes the replacement costs and freight of a defective reagent disc. During the three and six months ended September 30, 2011, the provision for warranty expense related to replacement of defective reagent discs was $103,000 and $194,000, respectively. The balance of accrued warranty reserve related to replacement of defective reagent discs at September 30, 2011 and 2010 was $539,000 and $329,000, respectively, which was classified as a current liability on the condensed consolidated balance sheets.

We evaluate our estimates for warranty reserves on an ongoing basis and believe we have the ability to reasonably estimate warranty costs. However, unforeseeable changes in factors may impact the estimate for warranty and such changes could cause a material change in our warranty reserve accrual in the period in which the change was identified.

The change in our accrued warranty reserve during the three and six months ended September 30, 2011 and 2010 is summarized as follows (in thousands):

	Three Months Ended September 30,						Six Months Ended September 30,
	2011			2010			2011			2010
Balance at beginning of period	$	1,470		$	1,014		$	1,222		$	1,343
Provision for warranty expense		270			285			613			410
Warranty costs incurred		(304	)		(191	)		(656	)		(338	)
Adjustment to pre-existing warranties		-			(257	)		257			(564	)
Balance at end of period		1,436			851			1,436			851
Non-current portion of warranty reserve		313			53			313			53
Current portion of warranty reserve	$	1,123		$	798		$	1,123		$	798