NOTE D – INCOME TAXES

We account for income taxes in accordance with ASC 740, "Income Taxes," which requires the use of the liability method of accounting for deferred income taxes. We follow ASC 740 Subtopic 10, "Accounting for Uncertainty in Income Taxes." ASC 740 Subtopic 10 in accounting for uncertainty in income taxes recognized in the financial statements by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.

We do not anticipate any material changes in the uncertain tax positions during the 2012 year.

We recorded a tax provision of $2,000 for the three months ended March 31, 2012, as compared to a tax provision of $14,000 for the three months ended March 31, 2011, representing effective tax rates of 0.62% and 5.79%, respectively. The difference between our effective tax rate and the 34% federal statutory rate in both the three months ended March 31, 2012 and the three months ended March 31, 2011 resulted primarily from our valuation allowance against all net deferred tax assets, incentive stock option exercises, the amortization of goodwill and state tax accruals related to unrecognized tax benefits. Management continues to review the allowance for deferred taxes on a periodic basis and concluded no change in the reserve was necessary. Management will continue to monitor prospectively in order to determine if an adjustment to the allowance in the future will be necessary if the current earnings trend continues.

We file U.S., state and foreign income tax returns in jurisdictions with varying statutes of limitation. The 2008 through 2011 tax years generally remain subject to examination by federal and most state tax authorities. However, certain returns from years in which net operating losses have arisen are still open for examination by the tax authorities.