Income Taxes

The components of income tax expense (benefit) for the fiscal years indicated are as follows:



	2011			2010			2009
Current:
Federal	$	(77,000	)	$	(57,000	)	$	243,000
State	—			(1,000		)	22,000
Foreign	75,000			(53,000		)	117,000
	(2,000		)	(111,000		)	382,000
Deferred:
Federal	1,855,000			(276,000		)	729,000
State	159,000			(16,000		)	63,000
Foreign	126,000			(90,000		)	28,000
	2,140,000			(382,000		)	820,000
Total	$	2,138,000		$	(493,000	)	$	1,202,000

A reconciliation of the U.S statutory tax rate to the Company’s effective tax rate follows:



	2011					2010					2009
	Amount			Percent		Amount			Percent		Amount			Percent
U.S. statutory tax	$	(3,169,000	)	(34.0	)%	$	(593,000	)	34.0	%	$	1,094,000		34.0	%
Increase (decrease) in
valuation allowance	5,314,000			57.0		36,000			(2.1	)	(17,000		)	(0.5	)
Foreign tax rate differences	94,000			1.0		82,000			(4.7	)	(26,000		)	(0.8	)
Permanent differences	72,000			0.8		71,000			(4.1	)	78,000			2.4
State tax, net of federal benefit	(232,000		)	(2.5	)	(16,000		)	1.0		87,000			2.7
Other, net	59,000			0.6		(73,000		)	4.2		(14,000		)	(0.5	)
Effective tax rate	$	2,138,000		22.9	%	$	(493,000	)	28.3	%	$	1,202,000		37.3	%

The tax effects of temporary differences that give rise to deferred tax assets and liabilities at September 30, 2011 and 2010 are presented below:



	2011			2010
Deferred tax assets:
Inventories	$	118,000		$	95,000
Accrued compensation	458,000			476,000
Warranty accrual	149,000			149,000
Depreciation	421,000			500,000
Allowance for doubtful accounts receivable	381,000			348,000
Unearned revenue	270,000			375,000
U.S. net operating loss carryforwards	2,769,000			—
Foreign net operating loss carryforwards	838,000			383,000
Foreign tax credits	165,000			90,000
Other	221,000			228,000
Gross deferred tax assets	5,790,000			2,644,000
Deferred tax liabilities:
Other	93,000			118,000
Gross deferred tax liabilities	93,000			118,000
Total deferred tax assets and liabilities	5,697,000			2,526,000
Less valuation allowance	(5,697,000		)	(383,000		)
Net deferred tax assets and liabilities	$	—		$	2,143,000

Deferred tax assets and liabilities are recognized based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities. Deferred tax assets represent items to be used as a tax deduction or credit in future tax returns for which a tax benefit has been recorded in the income statement. Deferred U.S. income taxes are not provided on undistributed earnings of foreign subsidiaries as the Company presently intends to reinvest such earnings indefinitely, and any plan to repatriate any of such earnings in the future is not expected to result in a material incremental tax liability to the Company.

In the third quarter ended June 30, 2011, the Company recognized a $2.6 million income tax charge to provide a valuation allowance against its deferred tax assets due to the uncertainty of future realization. The establishment of such valuation allowance was determined to be appropriate during the period due to updated judgments of future results in light of the Company's operating losses since fiscal year 2010 and the inherent uncertainties of predicting future operating results in periods over which such net tax differences become deductible. Income tax expense for fiscal 2011 includes the recognition of available U.S. and U.K. tax effected net operating loss carrybacks of $92,811.

Pretax domestic income (loss) amounted to approximately ($7,885,000), ($754,000) and $2,660,000 in fiscal years 2011, 2010 and 2009, respectively. Pretax foreign income (loss) amounted to approximately ($1,437,000), ($989,000) and $559,000 in fiscal years 2011, 2010 and 2009 respectively.

The Company adopted the provisions of ASC 740 (Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109” (“FIN 48”) effective as of October 1, 2007. The entire amount of unrecognized tax benefits at September 30, 2011 and 2010, if recognized, would reduce the Company’s effective tax rate.

Unrecognized tax benefits activity for the years ended September 30, 2011, 2010 and 2009 is summarized below:



	2011		2010			2009
Beginning balance	$	462,000	$	514,000		$	250,000
Additions (reductions) based on tax positions related to prior years
	26,000		(3,000		)	264,000
Additions (reductions) based on tax positions related to the current year
	—		(49,000		)	—
Ending balance	$	488,000	$	462,000		$	514,000

The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits in income tax expense. At September 30, 2011 and 2010, the combined amount of accrued net interest and penalties related to tax positions taken or to be taken on the Company’s tax returns and recorded as part of the reserves for uncertain tax positions was $142,000 and $138,000, respectively. The Company files U.S. Federal and State income tax returns and foreign tax returns in the United Kingdom, Germany and Israel. The Company is generally no longer subject to tax examinations for fiscal years prior to 2004 in the U.S. and 2006 in the U.K., Germany and Israel.