Income Taxes

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



	2012		2011			2010
Current:
Federal	$	—	$	(77,000	)	$	(57,000	)
State	—		—			(1,000		)
Foreign	57,000		75,000			(53,000		)
	57,000		(2,000		)	(111,000		)
Deferred:
Federal	—		1,855,000			(276,000		)
State	—		159,000			(16,000		)
Foreign	—		126,000			(90,000		)
	—		2,140,000			(382,000		)
Total	$	57,000	$	2,138,000		$	(493,000	)

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



	2012					2011					2010
	Amount			Percent		Amount			Percent		Amount			Percent
U.S. statutory tax	$	(450,000	)	(34.0	)%	$	(3,169,000	)	(34.0	)%	$	(593,000	)	(34.0	)%
Increase in valuation allowance	432,000			32.6		5,314,000			57.0		36,000			2.1
Foreign tax rate differences	62,000			4.7		94,000			1.0		82,000			4.7
Permanent differences	84,000			6.3		72,000			0.8		71,000			4.1
State tax, net of federal benefit	(16,000		)	(1.2	)	(232,000		)	(2.5	)	(16,000		)	(1.0	)
Other, net	(55,000		)	(4.1	)	59,000			0.6		(73,000		)	(4.2	)
Effective tax rate	$	57,000		4.3	%	$	2,138,000		22.9	%	$	(493,000	)	(28.3	)%

The tax effects of temporary differences that give rise to deferred tax assets and liabilities at September 30, 2012 and 2011 are presented below:



	2012			2011
Deferred tax assets:
Inventories	$	41,000		$	118,000
Accrued compensation	450,000			458,000
Warranty accrual	148,000			149,000
Depreciation	507,000			421,000
Allowance for doubtful accounts receivable	341,000			381,000
Unearned revenue	224,000			270,000
U.S. net operating loss carryforwards	3,043,000			2,769,000
Foreign net operating loss carryforwards	915,000			838,000
Foreign tax credits	222,000			165,000
Other	286,000			221,000
Gross deferred tax assets	6,177,000			5,790,000
Deferred tax liabilities:
Other	48,000			93,000
Gross deferred tax liabilities	48,000			93,000
Total deferred tax assets and liabilities	6,129,000			5,697,000
Less valuation allowance	(6,129,000		)	(5,697,000		)
Net deferred tax assets and liabilities	$	—		$	—

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 loss amounted to approximately ($797,000), ($7,885,000) and ($754,000) in fiscal years 2012, 2011 and 2010, respectively. Pretax foreign loss amounted to approximately ($526,000), ($1,437,000) and ($989,000) in fiscal years 2012, 2011 and 2010 respectively.

The Company follows 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.

Unrecognized tax benefits activity for the years ended September 30, 2012, 2011 and 2010 is summarized below:



	2012		2011		2010
Beginning balance	$	488,000	$	462,000	$	514,000
Additions (reductions) based on tax positions related to prior years
	24,000		26,000		(3,000		)
Additions (reductions) based on tax positions related to the current year
	—		—		(49,000		)
Ending balance	$	512,000	$	488,000	$	462,000

The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits in income tax expense. At September 30, 2012 and 2011, 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 $118,000 and $142,000, 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 2005 in the U.S. and 2007 in the U.K., Germany and Israel.