NOTE 7 —ACCRUED LIABILITIES AND DEFERRED REVENUE

Accrued liabilities are comprised of the following (in thousands):

		September 30,				December 31,
		2011				2010
Payroll and benefits		$	1,633			$	1,180
Warranty accrual, current portion			2,447				2,301
Sales tax credit			525				429
Deferred rent credit			—				37
Accrued professional services			676				583
Accrued insurance premium			—				342
Accrued support services			200				173
Other			278				437
Accrued liabilities		$	5,759			$	5,482

Changes in the initial product warranty accrual, and the expenses incurred under our initial and extended warranties, for the three and nine months ended September 30, 2011 and 2010 were as follows (in thousands):

		Three Months Ended September 30,								Nine Months Ended September 30,
		2011				2010				2011				2010
Initial warranty accrual, beginning balance		$	2,686			$	2,715			$	2,725			$	2,235
Provision for estimated warranty cost			644				798				1,600				2,794
Warranty expenditures			(498	)			(661	)			(1,493	)			(2,177	)
Initial warranty accrual, ending balance			2,832				2,852				2,832				2,852
Total warranty accrual, long term			385				636				385				636
Total warranty accrual, current portion		$	2,447			$	2,216			$	2,447			$	2,216

Deferred revenue is comprised of the following (in thousands):

		September 30,				December 31,
		2011				2010
Royalty advances from Procter & Gamble		$	—			$	375
Undelivered elements (training, installation and product and support services)			899				616
Extended warranty contracts			1,039				1,092
Total deferred revenue			1,938				2,083
Less long-term amounts:
Royalty advances from Proctor & Gamble			—				(375	)
Extended warranty contracts			(33	)			(58	)
Total deferred revenue, long-term			(33	)			(433	)
Total deferred revenue, current portion		$	1,905			$	1,650

In June 2006, the Company received a one-time payment from The Procter & Gamble Company (“P&G”) totaling $3.0 million for a license to certain patents pursuant to a binding letter agreement, subsequently replaced by a definitive agreement effective January 24, 2007 (the “2006 P&G Agreement”). Pursuant to the 2006 P&G Agreement, the entire amount was recorded as deferred revenue when received and $1.5 million was recognized in license fees and royalty revenue for each of the years ended December 31, 2008 and 2007. Additionally, beginning with a payment for the third quarter of 2006, P&G was required to make $250,000 quarterly payments until the first product under the agreement was shipped by P&G for large-scale commercial distribution in the United States. Seventy-five percent of each $250,000 payment received was treated as prepaid royalties and was credited against royalty payments and the remainder was credited to revenue. No payments were received from P&G subsequent to December 31, 2008. The Company recognized revenue related to these payments of $0 and $250,000 for the years ended December 31, 2009 and 2008, respectively.

On May 20, 2010, the Company and P&G entered into a license agreement (the “2010 P&G Agreement”), effective January 1, 2009 which superseded the prior 2006 P&G Agreement. Pursuant to the 2010 P&G Agreement, the Company agreed to continue granting P&G an exclusive license to certain of the Company’s patents to enable P&G to develop products aimed at the consumer market and P&G will pay royalties based on sales of products developed with such intellectual property.

Pursuant to the 2010 P&G Agreement, the prepaid royalty payments previously paid by P&G have been applied to the new exclusive license period which was effective as of January 1, 2009, and continued through December 31, 2010. Previously recorded deferred revenue of $1.5 million, which was accounted for pursuant to the 2006 P&G Agreement, was recognized concurrent with the related exclusivity period. The Company recognized $1.5 million of revenue for the year ended December 31, 2010. As of December 31, 2010, $375,000 remained in long term deferred revenue to be applied against future earned royalties. On June 28, 2011, the Company entered into an amendment to the 2010 P&G Agreement which extended the effective period for the 2010 P&G Agreement from January 1, 2009 through June 30, 2011. The extension of the effective period allowed the Company to recognize the previously deferred $375,000 of revenue as royalty revenue during the quarter ended June 30, 2011.

The 2010 P&G Agreement, as amended, also provides that effective July 1, 2011, P&G’s exclusive license to our patents will convert to a non-exclusive license unless P&G pays the Company a $187,500 license payment by the end of the third quarter of 2011, and at the end of each quarter thereafter, during the term of the 2010 P&G Agreement. P&G did not make any payments to the Company in the quarter ended September 30, 2011. The Company is currently engaged in discussions with P&G concerning the sufficiency of P&G’s efforts to commercialize a consumer product utilizing our patents and is working with P&G to develop a framework for the parties’ commercialization efforts.