12. Income Taxes

At March 31, 2012, the Company had net operating loss carry forwards (NOL’s) of approximately $20.6 million for Federal income tax purposes and $5.9 million for Michigan and California state income tax purposes that expire at various dates through fiscal year 2032. The tax laws related to the utilization of loss carry forwards are complex and the amount of the Company’s loss carry forward that will ultimately be available to offset future taxable income may be subject to annual limitations under Internal Revenue Code (IRC) Section 382 resulting from changes in the ownership of the Company’s common stock.

The Company performed an analysis to determine whether an ownership change under IRC Section 382 had occurred. The effect of an ownership change would be the imposition of an annual limitation on the use of the net operating loss carry forwards attributable to periods before the change. As of March 31, 2012, the Company believes there are no limitations on the use of these Federal NOLs.

At March 31, 2012, our net deferred tax asset before consideration of a valuation allowance was approximately $9.2 million, mainly consisting of net operating loss carry-forwards which expire at various amounts over an approximate 20 year period. In assessing the realizability of deferred tax assets, the Company has determined that at this time it is “more likely than not” that deferred tax assets will not be realized , primarily due to uncertainties related to its ability to utilize the net operating loss carry-forwards before they expire based on the negative evidence of its recent years’ history of losses, including tax losses in two of the last three years and cumulative taxable losses over the past three years, outweighing the positive evidence of taxable income projections in future years. The ultimate realization of these deferred tax assets is dependent upon the generation of future taxable income during those periods in which those temporary differences become deductible or within the periods before NOL carry forwards expire. As of both March 31, 2012 and 2011, the Company recorded a full valuation allowance on its net deferred taxes.

Below are reconciliations between the provisions for income taxes compared with the amounts at the United States federal statutory rate:

Years Ended	March 31, 2012			March 31, 2011
Federal income tax at statutory rates	$	(718,000	)	$	(640,000	)
State income taxes, net of federal benefit		(14,000	)		(169,000	)
Expiration of NOL carry-forwards		418,000			0
Change in valuation allowance		634,000			843,000
Change in R&D credit carry-forwards		(269,000	)		(200,000	)
Permanent items		(51,000	)		252,000
Other		0			(86,000	)
Effective federal income tax	$	0		$	0

The Company’s net deferred tax assets (liabilities) consisted of the following components for fiscal years 2012 and 2011:

	2012			2011
Sec. 263A adjustment	$	37,000		$	48,000
Inventory reserve		704,000			556,000
Utility accruals		2,000			2,000
Warranty reserve		9,000			20,000
Accounts receivable allowance		14,000			17,000
Accrued vacation		129,000			131,000
Accrued professional fees		44,000			39,000
Accrued commissions		1,000			0
Charitable contributions		6,000			17,000
NOL carry forwards		7,349,000			7,352,000
Basis difference of intangibles		(1,258,000	)		(1,655,000	)
Basis difference of equipment		(750,000	)		(686,000	)
R&D credits		2,681,000			2,412,000
Goodwill amortization		91,000			107,000
California Mfg. credit		39,000			39,000
AMT credit		20,000			20,000
Loss on Debt Extinguishment		33,000			98,000
Total		9,151,000			8,517 ,000
Valuation allowance		(9,151,000	)		(8,517,000	)
Net deferred tax asset	$	0		$	0

At March 31, 2012, the Company’s Federal R&D tax credit carry forwards totaled approximately $2.2 million. These will expire annually at March 31 over the next twenty (20) years.