2.	Supplemental Balance Sheet Information

Restricted Cash

Restricted cash balance of $386,000 as of September 30, 2012 consists of secured performance and deposit guarantees given to customers. Upon satisfaction of these guarantees, the restriction on these funds will be released.

Receivables

Accounts receivable consist of the following (in thousands):

	September 30, 2012			December 31, 2011
Trade receivables	$	18,328		$	11,500
Allowance for doubtful accounts		(662	)		(337	)
	$	17,666		$	11,163

Inventory

We state inventories at the lower of cost or market, using the first-in-first-out-method (in thousands):

	September 30, 2012			December 31, 2011
Raw materials	$	6,897		$	6,493
Work in process		2,769			3,085
Finished goods		942			1,680
Allowances for obsolescence		(1,246	)		(1,819	)
	$	9,362		$	9,439

Property and Equipment

Property and equipment consist of the following (in thousands):

	September 30, 2012			December 31, 2011
Equipment	$	10,060		$	9,980
Demonstration units		2,149			1,345
Computers and purchased software		4,177			4,029
Furniture and fixtures		375			369
Leasehold improvements		7,647			7,425
Construction in progress		653			1,107
		25,061			24,255
Accumulated depreciation		(22,165	)		(21,394	)
	$	2,896		$	2,861

Accrued Expenses

Accrued expenses consist of the following (in thousands):

	September 30, 2012		December 31, 2011
Compensation and benefits	$	1,844	$	3,037
Warranty liability		614		583
Property, income, state, sales and franchise tax		336		529
Professional fees		466		463
Other		589		739
	$	3,849	$	5,351

Warranty Liability

Generally, the warranty period for our power quality products is 12 months from the date of commissioning or 18 months from the date of shipment from Active Power, whichever period is shorter. Occasionally we offer longer warranty periods to certain customers. The warranty period for products sold to our primary OEM customer, Caterpillar, is 12 months from the date of shipment to the end-user, or up to 36 months from shipment to Caterpillar. This is dependent upon Caterpillar complying with our storage requirements for our products in order to preserve this warranty period beyond the standard 18-month limit. We provide for the estimated cost of product warranties at the time revenue is recognized and this accrual is included in accrued expenses and long-term liabilities on the accompanying consolidated balance sheet.

Changes in our warranty liability are presented in the following table (in thousands):


Balance at December 31, 2011	$	613
Warranty expense		1,060
Warranty charges incurred		(1,009	)
Balance at September 30, 2012	$	664
Warranty liability included in accrued expenses	$	614
Long-term warranty liability		50
Balance at September 30, 2012	$	664

Revenue Recognition

In general, we recognize revenue when four criteria are met: (i) persuasive evidence that an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) the sales price is fixed or determinable; and (iv) collectability is reasonably assured. Revenue-generating transactions generally fall into one of the following categories of revenue recognition:

●

We recognize product revenue at the time of shipment for substantially all products sold directly to customers and through distributors because title and risk of loss pass on delivery to the common carrier. Our customers and distributors do not have the right to return products. If title and risk of loss pass at some other point in time, we recognize such revenue for our customers when the product is delivered to the customer and title and risk of loss have passed.

●

We recognize installation and service and maintenance revenue at the time the service is performed.

●

We recognize revenue associated with extended maintenance agreements ("EMAs") over the life of the contracts using the straight-line method, which approximates the expected timing in which applicable services are performed. Amounts collected in advance of revenue recognition are recorded as a current or long-term liability based on the time from the balance sheet date to the future date of revenue recognition.

●

We recognize revenue on certain rental programs over the life of the rental agreement using the straight-line method. Amounts collected in advance of revenue recognition are recorded as a current or long-term liability based on the time from the balance sheet date to the future date of revenue recognition.

●

Shipping costs reimbursed by the customer are included in revenue.

Multiple element arrangements ("MEAs"). Arrangements to sell products to customers frequently include multiple deliverables. Our most significant MEAs include the sale of one or more of our CleanSource UPS or PowerHouse products, combined with one or more of the following products: design services, project management, commissioning and installation services, spare parts or consumables, and EMAs. Delivery of the various products or performance of services within the arrangement may or may not coincide. Certain services related to design and consulting may occur prior to delivery of product and commissioning and installation typically takes place within six months of product delivery, depending upon customer requirements. EMAs, consumables, and repair, maintenance or consulting services generally are delivered over a period of one to five years. In certain arrangements revenue recognized is limited to the amount invoiced or received that is not contingent on the delivery of future products and services.

When arrangements include multiple elements, we allocate revenue to each element based on the relative selling price and recognize revenue when the elements have stand-alone value and the four criteria for revenue recognition have been met for each element. We establish the selling price of each element based on Vendor Specific Objective Evidence ("VSOE") if available, Third Party Evidence ("TPE") if VSOE is not available, or best estimate of selling price ("BESP") if neither VSOE nor TPE is available. We generally determine selling price based on amounts charged separately for the delivered and undelivered elements to similar customers in stand-alone sales of the specific elements. When arrangements include an EMA, we recognize revenue related to the EMA at the stated contractual price on a straight-line basis over the life of the agreement.

Any taxes imposed by governmental authorities on our revenue-producing transactions with customers are shown in our consolidated statements of operations on a net-basis; that is, excluded from our reported revenues.