The income tax provision of $2,000, $1,938 and $988 for the years ended August 31, 2014, 2013 and 2012, respectively, is comprised of a current provision for state income taxes.

The income tax (provision) benefit differs from the amount computed at federal statutory rates as follows:

	Years Ended August 31,
	2014			2013			2012

Income tax benefit at federal statutory rate	$	2,428,000		$	2,805,000		$	2,706,000
Stock-based compensation		(287,000	)		(335,000	)		(324,000	)
State income taxes, net of federal benefit		236,000			272,000			263,000
Research and development credit		99,000			106,000			88,000
Change in valuation allowance		(2,480,000	)		(2,905,000	)		(3,000,000	)
Other		2,000			55,062			266,012

	$	(2,000	)	$	(1,938	)	$	(988	)

	August 31,
	2014		2013
Current Asset:
Accruals and reserves	$	62,000	$	26,000
Deferred revenue		33,000		266,000
Inventories		90,000		68,000
Valuation allowance		(185,000)		(360,000)

	$	-	$	-
Long-Term Asset (Liability):
Deferred compensation	$	601,000	$	601,000
Research and development and other tax credits		1,896,000		1,804,000
Net operating loss carryforwards		13,938,000		11,380,000
Depreciation and amortization		8,000		3,000
Valuation allowance		(16,443,000)		(13,788,000)

	$	-	$	-

The ultimate realization of the deferred tax assets is dependent, in part, upon the tax laws in effect, our future earnings, and other events. As of August 31, 2014, we recorded a valuation allowance of $185,000 against current deferred tax assets, and a valuation allowance of $16,443,000 against net long-term deferred tax assets. The increase in the valuation allowance for the year ended August 31, 2014 relates primarily to our operating losses. In recording the valuation allowance, we were unable to conclude that it is more likely than not that our deferred tax assets will be realized.

In addition to the deferred tax assets listed above, the Company has unrecorded tax benefits of approximately $2,600,000 attributable to the difference between the amount of the financial statement expense and the allowable tax deduction associated with stock-based compensation. As a result of net operating loss carryforwards, the Company was not able to recognize the excess tax benefits of share-based compensation deductions because the deductions did not reduce income tax payable. Although not recognized for financial reporting purposes, this unrecorded tax benefit is available to reduce future income and is incorporated into the disclosed amounts of the Company’s net operating loss carryforwards, discussed below. If subsequently realized, the benefit will be recorded to contributed capital.

As of August 31, 2014, we had a net operating loss carryforward available to offset future taxable income of approximately $37,800,000, which will begin to expire in 2029. If substantial changes in the Company’s ownership should occur, there would be an annual limitation of the amount of the net operating loss carryforward which could be utilized.

We perform a review of our material tax positions in accordance with recognition and measurement standards established by authoritative accounting literature, which requires a company to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. If the more-likely-than-not threshold is met, a company must measure the tax position to determine the amount to recognize in the financial statements. Based upon our review and evaluation, during the years ended August 31, 2014, 2013 and 2012, we concluded the Company had no unrecognized tax benefit which would affect its effective tax rate if recognized.

We classify any interest and penalties arising from the underpayment of income taxes in our statements of comprehensive loss in other income (expense). As of August 31, 2014 and 2013, we had no accrued interest or penalties related to uncertain tax positions.

We file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. U.S. federal income tax returns from the year ended August 31, 2011 through the year ended August 31, 2014 are subject to examination.