Note 10. Income Taxes

The provision (benefit) for income taxes attributable to income from operations includes the following (in thousands):

	For the Years Ended December 31,

	2011			2010		2009
Current provision
Federal	$	3,426		$	2,588	$	156
State		621			605		820

Total current		4,047			3,193		976

Deferred (benefit) provision
Federal		(718	)		1,473		2,941
State		(91	)		42		346

Total deferred		(809	)		1,515		3,287

Total provision	$	3,238		$	4,708	$	4,263

The provision (benefit) for income taxes related to operations varies from the amount determined by applying the federal income tax statutory rate to the income or loss before income taxes, exclusive of net income attributable to non-controlling interest. The reconciliation of these differences is as follows:

	For the Years Ended December 31,

	2011			2010			2009
Computed expected income tax provision		35.0	%		35.0	%		34.0	%
State income taxes, net of federal income tax benefit		3.5			5.6			16.0
Change in valuation allowance for deferred tax assets		(1.4	)		(0.1	)		5.0
Other permanent differences		1.0			2.2			3.6
Dividend and accretion on preferred stock		34.1			19.1			26.1
FIN 48 reversal		(1.6	)		----			----
R&D credit		(1.8	)		----			----
Other		0.2			(1.1	)		(7.8	)
		69.0	%		60.7	%		76.9	%

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2011 and 2010 are as follows (in thousands):

	December 31,

	2011			2010
Deferred tax assets:
Accounts receivable, principally due to allowance for doubtful accounts	$	144		$	140
Allowance for inventory obsolescence and amortization		785			104
Accrued liabilities not currently deductible		2,475			2,211
Accrued compensation		562			468
Amortization and depreciation		1,682			1,465
Telos ID basis difference		57			34
Net operating loss carryforwards - state		623			671

Total gross deferred tax assets		6,328			5,093
Less valuation allowance		(2,281	)		(2,348	)

Total deferred tax assets, net of valuation allowance		4,047			2,745

Deferred tax liabilities:
Unbilled accounts receivable, deferred for tax purposes		(1,374	)		(1,514	)
Section 481(a) adjustment - inventory		(440	)		----
Goodwill amortization		(193	)		----

Total deferred tax liabilities		(2,007	)		(1,514	)

Net deferred tax assets	$	2,040		$	1,231

The components of the valuation allowance are as follows (in thousands):

	Balance Beginning of Period		Additions		Deductions		Balance End of Period

December 31, 2011	$	2,348	$	----	$	67	$	2,281
December 31, 2010	$	2,388	$	----	$	40	$	2,348
December 31, 2009	$	1,965	$	423	$	----	$	2,388

At December 31, 2011, for federal income tax purposes all available net operating loss carryforwards and alternative minimum tax credits have been fully utilized.

We adopted the provisions of ASC 740 as of January 1, 2007 and determined that there were approximately $400,000 and $501,000 of unrecognized tax benefits required to be recorded in other current liabilities as of December 31, 2011 or 2010, respectively. We believe that the total amounts of unrecognized tax benefits will not significantly increase or decrease within the next 12 months. The period for which tax years are open, 2008 to 2011, has not been extended beyond the applicable statute of limitations.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

	2011			2010			2009
Unrecognized tax benefits, beginning of period	$	501		$	316		$	----
Gross increases-tax positions in prior period		20			83			298
Gross increases-tax positions in current period		90			139			18
Settlements		(211	)		(37	)		----

Unrecognized tax benefits, end of period	$	400		$	501		$	316