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Basis of presentation</font> </div><br/><div style="TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">The accompanying unaudited financial statements of TransAct Technologies Incorporated have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information.&#160;&#160;Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America to be included in full year financial statements.&#160;&#160;In the opinion of management, all adjustments considered necessary for a fair statement of the results for the periods presented have been included.&#160;&#160;The December 31, 2011 Condensed Consolidated Balance Sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.&#160;&#160;These interim financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2011 included in our Annual Report on Form 10-K.</font> </div><br/><div style="TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">The financial position and results of operations of our U.K. foreign subsidiary are measured using local currency as the functional currency.&#160;&#160;Assets and liabilities of such subsidiary have been translated at the end of period exchange rates, and related revenues and expenses have been translated at the weighted average exchange rates with the resulting translation gain or loss recorded in accumulated other comprehensive income (loss) in the Condensed Consolidated Balance Sheets.&#160;&#160;Transaction gains and losses are included in other income in the Condensed Consolidated Statements of Income.</font> </div><br/><div style="TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">The results of operations for the three and nine months ended September 30, 2012 are not necessarily indicative of the results to be expected for the full year.&#160;&#160;Certain prior period amounts in the Condensed Consolidated Financial Statements have been reclassified to conform with the current period presentation.</font> </div><br/> <div style="TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt; FONT-WEIGHT: bold">2. 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Income taxes</font> </div><br/><div style="TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt"><font style="DISPLAY: inline; FONT-FAMILY: Times New Roman">We recorded an income tax provision for the third quarter of 2012 of $13,000 at an effective tax rate of 36.1%, compared to an income tax provision during the third quarter of 2011 of $276,000 at an effective tax rate of 24.8%.</font> For the nine months ended September 30, 2012, we recorded an income tax provision of $979,000 at an effective tax rate of 36.0%, compared to an income tax provision during the nine months ended September 30, 2011 of $2,035,000 at an effective tax rate of 33.1%. Our effective tax rate for the third quarter and nine months of 2012 is higher than the corresponding 2011 periods because it does not include any benefit from the federal research and development credit that expired at the end of 2011. <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman">Additionally, the effective tax rate for the third quarter and nine months ended September 30, 2011 was favorably impacted by the recognition of $53,000 for certain discrete tax benefits.</font></font> </div><br/><div style="TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">We are subject to U.S. federal income tax as well as income tax of certain state and foreign jurisdictions.&#160;&#160;We have substantially concluded all U.S. federal income tax, state and local, and foreign tax matters through 2003.&#160;&#160;During 2008, a limited scope examination of our 2005 and 2006 federal tax returns was completed.&#160;&#160;However, our federal tax returns for the years 2004 through 2011 remain open to examination.&#160;&#160;Various state and foreign tax jurisdiction tax years remain open to examination as well, though we believe that any additional assessment would be immaterial to the Condensed Consolidated Financial Statements.&#160;&#160;No federal, state or foreign tax jurisdiction income tax returns are currently under examination. As of <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman">September 30, 2012</font>, we had $228,000 of total gross unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in any future periods.&#160;&#160;</font> </div><br/> 13000 0.361 276000 0.248 979000 0.360 2035000 0.331 53000 228000 <div style="TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt; FONT-WEIGHT: bold"><a id="item2" name="item2"><!--EFPlaceholder--></a>9. Commitments &amp; contingencies</font> </div><br/><div style="TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">On June 8, 2012, Avery Dennison Corporation (&#8220;AD&#8221;) filed a civil complaint against the Company and a former employee of the Company and of AD, in the Court of Common Pleas in Lake County, Ohio.&#160; The complaint alleges that this former employee and the Company misappropriated unspecified trade secrets and confidential information related to the design of our food safety terminals from AD.&#160; The complaint requests a preliminary and permanent injunction against the Company from manufacturing and selling our Ithaca&#174; 9700 and 9800 food safety terminals.&#160; On July 16, 2012, the Company filed its answer, affirmative defenses and counterclaims, seeking all available damages including legal fees.&#160; A hearing on the plaintiff's motion for preliminary injunction took place in August 2012 and we are awaiting a ruling from the Court on this matter.</font> </div><br/><div style="TEXT-INDENT: 0pt; DISPLAY: block; MARGIN-LEFT: 0pt; MARGIN-RIGHT: 0pt" align="justify"> <font style="DISPLAY: inline; FONT-FAMILY: Times New Roman; FONT-SIZE: 10pt">We are currently unable to estimate any potential liability or range of loss, if any, associated with this litigation. 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