NOTE 13 - INCOME TAXES

12 Months Ended

Dec. 31, 2012

Notes to Financial Statements

NOTE 13 - INCOME TAXES

Components of income (loss) before taxes:

	Year Ended Dec. 31,
(in thousands)	2012			2011
U.S. operations	$	(6,484	)	$	(207	)
Foreign operations		(272	)		1,503
Total income (loss) before taxes	$	(6,756	)	$	1,296
Income tax expense (benefit) consists of:
U.S. federal	$	(8	)	$	20
State		(19	)		22
Foreign		(300	)		191
		(327	)		233
Deferred tax expense (benefit) – U.S. federal		-			-
Total income tax expense (benefit)	$	(327	)	$	233

A reconciliation of our effective income tax and the U.S. federal tax rate is as follows:

	Year Ended Dec. 31,
	2012			2011
(in thousands)
Statutory tax	$	(1,937	)	$	441
State and foreign income tax, net of
federal income tax benefit		(324	)		(323	)
Valuation allowance for deferred tax assets		1,934			115
Total income tax expense (benefit)	$	(327	)	$	233

The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets are presented below:

	Year Ended December 31,
	2012			2011
(in thousands)
Deferred income tax assets:
Allowance for doubtful accounts	$	25		$	28
Inventory and product return reserves		786			699
Compensation accruals		1,116			963
Accrued liabilities		697			29
Book-over-tax depreciation and amortization		262			274
Foreign net operating loss carryforwards		800			704
U.S. net operating loss carryforwards		6,054			5,156
U.S. credit carryforwards		951			1,053
		10,691			8,906
Valuation Allowance		(10,691	)		(8,906	)
Total Deferred Income Tax Assets	$	-		$	-

The valuation allowance for deferred tax assets increased $1,785,000 during the year ended December 31, 2012, and decreased $57,000 during the year ended December 31, 2011.  The net deferred tax assets have a full valuation allowance provided due to uncertainty regarding our ability to utilize such assets in future years.  This full valuation allowance evaluation is based upon our volatile history of losses and the cyclical nature of our industry and capital spending.  Credit carryforwards consist primarily of research and experimental and alternative minimum tax credits with expiration years from 2020 to 2032.  U.S. net operating loss carryforwards are $17,804,000 at December 31, 2012 with expiration years from 2020 to 2032.  Utilization of net operating loss and credit carryforwards is subject to certain limitations under Section 382 of the Internal Revenue Code of 1986, as amended.

The gross changes in uncertain tax positions resulting in unrecognized tax benefits are presented below:

	Year Ended Dec. 31,
	2012		2011
(in thousands)
Unrecognized tax benefits, opening balance	$	113	$	98
Prior period tax position increases		19		5
Additions based on tax positions related to current year		-		10
Unrecognized tax benefits, ending balance	$	132	$	113

Historically, we have not incurred any interest or penalties associated with tax matters and no interest or penalties were recognized during 2012.  However, we have adopted a policy whereby amounts related to penalties associated with tax matters are classified as general and administrative expense when incurred and amounts related to interest associated with tax matters are classified as interest income or interest expense.

Tax years that remain open for examination include 2009, 2010, 2011 and 2012 in the United States of America.  In addition, tax years from 2000 to 2008 may be subject to examination in the event that we utilize the net operating losses and credit carryforwards from those years in its current or future year tax returns.