INCOME TAXES:

12 Months Ended

Sep. 30, 2012

INCOME TAXES:

INCOME TAXES:

(5) INCOME TAXES:

        DLH accounts for income taxes in accordance with the "liability" method. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are reflected on the balance sheet when it is determined that it is more likely than not that the asset will be realized. This guidance also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax asset will not be realized.

        After an assessment of all available evidence (including historical and forecasted operating results), management has concluded that realization of the Company's net operating loss carryforwards (which included those amounts acquired in previous years' business combinations, collectively "NOLs"), tax credits and other deferred tax assets, could not be considered more likely than not. Accordingly, for the fiscal years ended September 30, 2012 and 2011, the Company did not record a tax benefit for NOLs and other deferred tax assets.

        Based on similar assessments, the Company increased the valuation allowance established on deferred tax assets by approximately $0.8 million and $1.0 million in 2012 and 2011, respectively. The increase in the valuation allowance is primarily due to increased Federal and state NOLs and stock based compensation expense (not currently deductible) for the fiscal years ended September 30, 2012 andSeptember 30, 2011.

        In prospective periods, there may be reductions to the valuation allowance to the extent that the Company concludes that it is more likely than not that all or a portion of the deferred tax assets can be utilized (subject to annual limitations and prior to the expiration of such NOLs), to offset future periods' taxable income.

        In the fiscal years ended September 30, 2012 and 2011, the Company did not recognize a tax expense or benefit.

        At September 30, 2012 the Company had net operating losses of approximately $ 40.2 million and $28.2 million for U.S. and state tax return purposes, respectively, and unutilized tax credits of approximately $1.1 million. As a result of previous business combinations and changes in its ownership, there is a substantial amount of NOLs that are subject to annual limitations on utilization. The U.S. NOLs begin to expire in 2021 and continue to expire through 2032.

        An analysis of DLH's deferred tax asset and liability is as follows (amounts in thousands):

	Years Ended September 30,
	2012			2011
Deferred income tax asset (liability):
Net operating loss carry forwards and tax credits	$	16,459		$	15,669
Prepaid workers' compensation		111			55
Deferred rent		3			4
Accrued liabilities		474			445
Stock based compensation		424			372
Fixed and intangible assets		(1,460	)		(1,276	)
Other items, net		12			(11	)
Valuation allowance		(16,023	)		(15,258	)
	$	—		$	—

        The significant components of the expense (benefit) for income taxes from continuing operations are summarized as follows:

	Years Ended September 30,
(amounts in thousands)	2012		2011
Current expense (benefit)	$	—	$	—
Deferred expense (benefit)		—		—
Total expense (benefit)	$	—	$	—

        The following table indicates the significant differences between the Federal statutory rate and DLH's effective tax rate for continuing operations:

	Years Ended September 30,
(amounts in thousands)	2012			2011
Federal statutory rate	$	(689	)	$	(1,561	)
State taxes, net		—			—
Tradename impairment					878
Other permanent items		13			18
Valuation allowance		676			665
	$	—		$	—