All components of inventory are valued at the lower of cost (first-in, first-out) or market. We adjust inventory to market value when the net realizable value is lower than the carrying cost of the inventory. Market value is determined based on estimated sales activity and margins. From time to time, we capitalize certain inventory costs associated with our Lymphoseek^® product prior to regulatory approval and product launch based on management's judgment of probable future commercial use and net realizable value of the inventory. We could be required to permanently write down previously capitalized costs related to pre-approval or pre-launch inventory upon a change in such judgment, due to a denial or delay of approval by regulatory bodies, a delay in commercialization, slower than expected sales, or other potential factors. Conversely, our gross margins may be favorably impacted if some or all of the inventory previously expensed becomes available and is used for commercial sale. During the nine-month periods ended September 30, 2012 and 2011, we capitalized $525,000 and $213,000, respectively, of inventory costs associated with our Lymphoseek product. During the three-month periods ended September 30, 2012 and 2011, we did not capitalize any such costs. During the three-month and nine-month periods ended September 30, 2012, we wrote off $278,000 and $378,000, respectively, of previously capitalized Lymphoseek inventory due to its use in previously unanticipated product development activities. During the three-month and nine-month periods ended September 30, 2011, we did not write off any such costs.

The components of net inventory as of September 30, 2012 and December 31, 2011, net of reserves of $327,000 and $0, respectively, are as follows:

We estimate a reserve for obsolete inventory based on management's judgment of probable future commercial use, which is based on an analysis of current inventory levels, historical and estimated future sales and production rates, and estimated shelf lives. During the nine-month period ended September 30, 2012, we recorded an obsolescence reserve for $339,000 of Lymphoseek inventory based on the potential for the delay in U.S. regulatory approval to impact the timing of future commercial use of the specific lots previously capitalized.