NOTE 5 - INCOME TAXES

The components of income tax expense (benefit) are as follows (in thousands):

	Year ended June 30,
	2012			2011			2010

Current
Federal	$	80		$	(1,161	)	$	3,206
State		8			(65	)		322
		88			(1,226	)		3,528

Deferred
Federal		1,038			(305	)		1,535
State		(3	)		15			16
		1,035			(290	)		1,551
	$	1,123		$	(1,516	)	$	5,079

The reconciliation of the statutory income tax rate to the Company's effective income tax rate for the fiscal years ended June 30, 2012, 2011 and 2010 is as follows:

	Year Ended June 30,
	2012			2011			2010

Statutory rate		34.0	%		34.0	%		35.0	%
State income taxes, net		0.0	%		1.0	%		1.3	%
Meals and entertainment		(0.5	%)		(0.4	%)		0.2	%
Section 199 deduction (1)		0.0	%		(1.3	%)		(1.0	%)
Return to provision differences and other		0.0	%		0.5	%		(0.3	%)
		33.5	%		33.8	%		35.2	%

Change in valuation allowance		(78.5	%)		0.0	%		0.0	%
Effective tax rate		(45.0	%)		33.8	%		35.2	%

(1) Section 199 refers to Internal Revenue Service deduction for Income Attributable to Manufacturing Activities

For the fiscal years ended June 30, 2012, 2011 and 2010, state income taxes relate to the Texas Franchise Tax and Georgia Income Tax. For the fiscal years ended June 30, 2012, 2011 and 2010, the Company evaluated the need for a valuation allowance on its deferred tax asset balances. Based on that evaluation, the Company determined as of June 30, 2011 and 2010 that it was more likely than not that the Company would realize these deferred tax assets and as such that there was no valuation allowance provided. During the year ended June 30, 2012, the Company recorded $2.0 million to establish a deferred tax valuation allowance to fully reserve net deferred tax assets. The establishment of valuation allowances and development of projected annual effective tax rates requires significant judgment and is impacted by various estimates. Both positive and negative evidence including losses over nine of the past ten quarters, as well as the objectivity and verifiability of that evidence, is considered in determining the appropriateness of recording a valuation allowance on deferred tax assets. Under generally accepted accounting principles, the valuation allowance has been recorded to reduce our deferred asset to an amount that is more likely than not to be realized and is based upon the uncertainty of the realization of certain federal and state deferred assets related to net operating loss carryforwards and other tax attributes.

At June 30, 2012 and 2011, the significant components of deferred tax assets and liabilities are approximated as follows (in thousands):

	June 30,
	2012			2011
Deferred tax assets relating to:
Stock compensation	$	583		$	413
AMT and research and development credits		397			317
Deferred rent		145			132
Inventory		119			124
Professional fees		72			50
Accrued vacation		21			21
Accounts receivable allowance		9			9
Contribution carryovers		3			-
Net operating loss carryforwards		1,215			556
Total deferred tax assets		2,564			1,622

Deferred tax liablities related to depreciation differences		(603	)		(671	)

Net deferred tax assets before valuation allowance		1,961			951

Valuation allowance		(1,961	)		-
Net deferred tax assets	$	-		$	951

During the year ended June 30, 2012, the net deferred tax asset decreased $1.0 million. The decrease was due to the recording of a deferred tax valuation allowance of $2.0 million offset by the generation of net operating loss carryforwards and other tax credits.

During the years ended June 30, 2012 and 2011, the Company did not utilize any net operating loss carryforwards for income tax purposes. In addition, during the years ended June 30, 2012, 2011 and 2010, $0.1 million, $1.0 million, and $1.1 million, respectively, of benefit was recorded to additional paid in capital which related to excess tax deductions for stock-based compensation accounted for in accordance with the FASB's guidance.

At June 30, 2012, the Company had net operating loss and various tax credit carryforwards which expire as follows (dollars in millions):

Carryforwards	June 30, 2012		Expiration Date

Net operating loss	$	3.6	June 30, 2032
Research and development credit		0.2	June 30, 2031
Mininum tax credit		0.2	Indefinite