8. INCOME TAXES

Significant components of our deferred tax assets and liabilities as of September 30 are as follows:

	2011			2010
Deferred tax assets - Current:
Inventory	$	236		$	232
Accrued compensation and vacation		271			283
Accrued expenses and other		118			171
Total current deferred tax assets		625			686

Deferred tax liabilities – Current:
Prepaid expenses		(116	)		(136	)
Total net current deferred tax assets		509			550

Deferred tax assets - Noncurrent:
Domestic net operating loss carryforwards		1,585			2,396
Stock compensation expense		29			416
Foreign net operating loss		1,326			1,592
Foreign tax credit carryover		119			119
AMT credit carryover		45			13
Total noncurrent deferred tax assets		3,104			4,536

Deferred tax liabilities - Noncurrent:
Basis difference for fixed assets		(562	)		(709	)
Basis difference for intangibles		(21	)		(448	)
		(583	)		(1,157	)

Total net noncurrent deferred tax assets		2,521			3,379

Valuation allowance for net deferred tax assets		(3,030	)		(3,929	)
Net deferred tax asset (liability)	$	-		$	-

Significant components of the provision (benefit) for income taxes are as follows as of the year ended September 30:

	2011		2010
Current:
Federal	$	37	$	-
State and local		13		(345	)
Foreign		-		-

Deferred:
Federal		-		-
State and local		-		-
Foreign		-		12
Income tax expense	$	50	$	(333	)

The effective income tax rate on continuing operations varied from the statutory federal income tax rate as follows:

	2011			2010
Statutory federal income tax rate		34 .0	%		(34 .0	)%
Increases (decreases):
State and local income taxes, net of Federal tax benefit, if applicable		1 .4			—
Nondeductible expenses		11 .6			3 .2
Nontaxable foreign (gains) losses		—			4 .6
Uncertain tax positions		—			(15 .6	)
Valuation allowance changes		(39 .4	)		33 .3
Other		0 .9			(2 .5	)

Effective income tax rate		8 .5	%		(11 .0	)%

In fiscal 2011 and 2010, our foreign operations generated losses before income taxes of $745 and $993, respectively. We have foreign net operating loss carryforwards of $4,735 that have an indefinite life under current UK tax law. We have a valuation allowance for the deferred tax asset related to the foreign net operating losses.

Realization of deferred tax assets associated with the net operating loss carryforward and credit carryforward is dependent upon generating sufficient taxable income prior to their expiration. The valuation allowance in fiscal 2011 and 2010 was $1,706 and $2,337, respectively for our domestic operations. Payments made in fiscal 2011 and 2010 for income taxes amounted to $8 and $3, respectively.

At September 30, 2011, we had domestic net operating loss carryforwards of approximately $2,645 for federal and $8,030 for state, which expire from September 30, 2013 through 2028. Also, we have a foreign tax credit carryforward of approximately $119, which expires September 30, 2016. Further, we have an alternative minimum tax credit carryforward of approximately $45 available to offset future federal income taxes. This credit has an unlimited carryforward period.

We may recognize the tax benefit from an uncertain tax position only if it is more likely than not to be sustained upon regulatory examination based on the technical merits of the position. The amount of the benefit for which an exposure exists is measured as the largest amount of benefit determined on a cumulative probability basis that we believe is more likely than not to be realized upon ultimate settlement of the position. At September 30, 2011, a $16 liability remained for other uncertain income tax positions.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

Change in unrecognized tax benefits:
	2011			2010
Balance at beginning of the year	$	30		$	473
Additions based on tax positions related to the current year		-			-
Additions for tax positions of prior years		-			-
Reductions for tax positions of prior years		(14	)		(344	)
Settlements		-			(99	)
Balance at end of the year	$	16		$	30

As noted in the table above, we had a reduction of $14 in our gross uncertain tax positions during fiscal 2011 based on correspondence with a state taxing authority. For fiscal 2010, we had a reduction of $443 in our gross uncertain tax positions during fiscal 2010. This was a result of the settlement of our state tax litigation. We paid approximately $98 and released the remaining $345 of unrecognized tax benefits associated with our state tax litigation.

We are no longer subject to U.S. federal tax examinations for years before 2007 or state and local for years before 2006, with limited exceptions. For federal purposes, the tax attributes carried forward could be adjusted through the examination process and are subject to examination 3 years from the date of utilization. Furthermore, we are no longer subject to income tax examinations in the United Kingdom for years prior to 2006.