11. INCOME TAXES

Income taxes consisted of the following:


Years Ended September 30,	2011			2010
Current tax expense
Federal	$	88,000		$	50,000
State		(13,000	)		117,000

		75,000			167,000
Deferred (benefit)
Federal		93,000			(994,000	)
State		16,000			(175,000	)

		109,000			(1,169,000	)
Change in valuation allowance		(109,000	)		1,169,000

Provision for income taxes	$	75,000		$	167,000

A reconciliation of income taxes at the federal statutory rate of 34% to the effective tax rate was as follows:


Years Ended September 30,	2011			2010
Income taxes computed at the federal statutory rate	$	1,710,000		$	1,088,000
Change in valuation allowance		109,000			(1,169,000	)
Nondeductible compensation, interest expense and other		4,000			(292,000	)
State income taxes, net of federal tax benefit		283,000			184,000
Change in R&D credit carryover		(2,094,000	)		—
Net Operating Loss/Prior year true-ups		357,000			427,000
State business credit utilization		(294,000	)		(75,000	)
Other		—			4,000

	$	75,000		$	167,000

The types of temporary differences between the tax basis of assets and liabilities and their approximate tax effects that give rise to a significant portion of the net deferred tax asset at September 30, 2011 and 2010 were as follows:


	At September 30,
	2011			2010
Deferred tax assets:
Net operating loss carryforwards	$	20,928,000		$	22,619,000
Research and development credit		2,094,000			—
Share-based compensation		1,761,000			2,024,000
Equipment		90,000			118,000
Patents		252,000			270,000
Accruals and other		490,000			502,000
State Tax Deduction		4,000			36,800
Federal AMT Credit		155,000			56,000
Allowances		213,000			279,000

Gross deferred tax asset		25,987,000			25,904,800
Less valuation allowance		(25,987,000	)		(25,904,800	)

	$	—		$	—

A valuation allowance has been recorded to offset the net deferred tax assets as realization of such assets has not met the threshold under ASC 740-10, "Income Taxes."

At September 30, 2011, the Company had net deferred tax assets of approximately $25,987,000. The deferred tax assets are primarily composed of federal and state NOL carryforwards and federal and state research and development ("R&D") credit carryforwards. At September 30, 2011, the Company, for federal income tax purposes, had NOL carryforwards of approximately $55,128,000, which expire through 2030. The Company recognizes windfall tax benefits associated with the exercise of stock options directly to stockholders' equity only when realized. Accordingly, deferred tax assets are not recognized for NOL carryforwards resulting from windfall tax benefits occurring from October 1, 2008 onward. At September 30, 2011, deferred tax assets do not include excess tax benefits from stock-based compensation of approximately $179,000.

Due to uncertainties surrounding the Company's ability to generate future taxable income to realize these assets, a full valuation allowance has been established to offset net deferred tax assets. The future utilization of the Company's NOL carryforwards to offset future taxable income may be subject to a substantial annual limitation as a result of ownership changes that could occur in the future. The Company had an estimated $1,566,000 and $800,000 of federal and state R&D tax credits, respectively, at September 30, 2011, a portion of which began to expire in the 2010 tax year. The Company is in the process of completing a comprehensive review of the components of its R&D credits. Based on preliminary findings, the Company has included the deferred tax assets associated with the tax credit carryforwards from its deferred tax assets recording a corresponding decrease in the valuation allowance. Once the analysis is completed, any adjustments will be made to update its unrecognized R&D tax benefits. Further, due to a change in California tax law in fiscal year 2008, NOL carryforwards may not be used in tax years 2008, 2009, 2010 and 2011, and R&D credits were limited to fifty percent of the Company's net tax in tax years 2008 and 2009.

The Company adopted ASC 740-10-25, "Income Taxes—Recognition" as of October 1, 2007. As of the date of the adoption, the Company had no unrecognized tax benefits and there were no material changes during the year. Due to the valuation allowance, future changes in the Company's unrecognized tax benefits will not impact its effective tax rate. The Company's practice is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company did not record any interest or penalties during the periods presented.

The Company is subject to taxation in the U.S. and various state jurisdictions. All of the Company's historical tax years are subject to examination by the Internal Revenue Service and various state jurisdictions due to the generation of NOL and credit carryforwards.