INCOME TAXES

The Company has adopted ASC 740, which clarifies the accounting for uncertainty in income taxes recognized in a company's financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Further, ASC 740 gives guidance regarding the recognition of a tax position based on a "more likely than not" recognition threshold; that is, evaluating whether it is more likely than not that the position would be sustained upon examination by the appropriate taxing authorities, based on the technical merits of the position. The adoption of ASC 740 did not impact the Company's financial condition, results of operations or cash flows.

The Company had no activity related to unrecognized tax benefits during the year ended September 30, 2011.

For the fiscal years ended September 30, 2011 and 2010 the provisions for income taxes were as follows:


	2011		2010
Federal—current	$	—	$	—
State—current		2,492		2,338

Total	$	2,492	$	2,338

Under ASC 740, deferred income tax assets and liabilities reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

Significant components of the Company's net deferred tax assets and liabilities as of September 30, 2011 and 2010 are as follows:


	2011			2010
Deferred tax assets (liabilities):
Net operating loss carryforwards	$	6,031,000		$	6,045,000
Capitalized research and development costs		519,000			683,000
Stock based compensation		281,000			108,000
Prepaid License Fees		51,000			97,000
AMT credit carryforwards		71,000			69,000
Other		86,000			68,000
Research credit carryforwards		58,000			44,000

Total deferred assets		7,097,000			7,114,000
Valuation allowance for net deferred tax assets		(7,097,000	)		(7,114,000	)

Total	$	—		$	—

The Company has provided a valuation allowance against deferred tax assets recorded as of September 30, 2011 and 2010 due to uncertainties regarding the realization of such assets.

The net change in the total valuation allowance for the year ended September 30, 2011 was a decrease of approximately $17,000. The net change in the total valuation allowance for the year ended September 30, 2010 was a decrease of approximately $122,000. In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible. The Company considers projected future taxable income and planning strategies in making this assessment. Based on the level of historical operating results and projections for the taxable income for the future, the Company has determined that it is more likely than not that the deferred tax assets will not be realized. Accordingly, the Company has recorded a valuation allowance to reduce deferred tax assets to zero. There can be no assurance that the Company will ever be able to realize the benefit of some or all of the federal and state loss carryforwards or the credit carryforwards, either due to ongoing operating losses or due to ownership changes, which limit the usefulness of the loss carryforwards.

As of September 30, 2011, the Company has available net operating loss carryforwards of approximately $16,400,000 for federal income tax purposes, which will start to expire in 2018. The net operating loss carryforwards for state purposes are approximately $8,100,000 and began to expire in the current year. As of September 30, 2011, the Company has available federal research and development credit carryforwards of approximately $29,000 and alternative minimum tax credit carryforwards of approximately $71,000. The research and development credits will start to expire in 2023. As of September 30, 2011, the Company has available California research and development credit carryforwards and manufacturers' investment credit carryforwards of approximately $22,000 respectively. The state research and development credits have no expiration date and the state manufacturers' investment credits will start to expire in 2012.

The difference between the provision for income taxes and income taxes computed using the U.S. federal income tax rate was as follows for the years ended September 30, 2011 and 2010:


	2011			2010
Amount computed using statutory rate	$	(43,000	)	$	(232,000	)
Net change in valuation allowance for net deferred tax assets		(18,000	)		(122,000	)
Non-deductible items		1,000			187,000
Other		(19,000	)		175,000
State income tax		79,000			(8,000	)
State tax expense		2,492			2,338

Provision for income taxes	$	2,492		$	2,338