INCOME TAXES - Note 2

12 Months Ended

Mar. 31, 2012

Notes to Financial Statements

INCOME TAXES - Note 2

2. INCOME TAXES

For the year ended March 31, 2012, the Company recorded a benefit for income taxes of $62.4 million which was primarily attributable to the release of a portion of the valuation allowance related to the Company's deferred tax assets. For the years ended March 31, 2011 and 2010, the Company recorded a provision for income taxes of $55,000, and $3,000, respectively, which was attributable to state tax in several states and foreign tax, offset by federal refund in lieu of bonus depreciation (in accordance with the Economic Stimulus Act of 2010). The components of the consolidated provision for income taxes for fiscal 2012, 2011 and 2010 consisted of the following (in thousands):

		March 31,
Current:		2012		2011		2010
Federal	$	-	$	-	$	(77)
State		76		53		70
Foreign		(8)		2		10
		68		55		3
Deferred
Federal		(56,665)		-		-
State		(5,757)		-		-
Foreign		-		-		-
Total deferred tax benefit		(62,422)		-		-
Income tax provision (benefit)	$	(62,354)	$	55	$	3

The Company's income before income taxes included $0, $3,000 and $38,000 of foreign subsidiary income for the fiscal years ended March 31, 2012, 2011 and 2010, respectively.

Deferred tax assets were comprised of the following (in thousands):

		March 31,
Current deferred tax assets		2012		2011
Net operating loss carryforwards	$	6,518	$	-
Inventory valuation		45		133
Reserves and allowances		1,167		1,392
Net current deferred tax assets		7,730		1,525
Net operating loss carryforwards		54,783		57,484
Research and development and other credit carryforwards		2,436		2,196
Fixed assets and intangibles		(1,172)		4,279
Net non-current deferred tax assets		56,047		63,959
Valuation allowance		(2,070)		(65,484)
Total	$	61,707	$	-

As required, the Company assessed the recoverability of its deferred tax assets. To assess the likelihood that the deferred tax assets will be recovered from taxable income, the Company considered both positive evidence that indicates a valuation allowance is not needed and negative evidence that indicates a valuation allowance is needed. At March 31, 2012, the Company considered its recent history of three consecutive years profitability and anticipated profit in future periods, and as a result of these and other factors, it released the valuation allowance recorded against its deferred tax assets of approximately $62.1 million as it believes that it is more likely than not the deferred tax assets will be realized in the future.

At March 31, 2012, the Company had net operating loss carryforwards for federal and state income tax purposes of approximately $168.8 million and $105.5 million, respectively, which expire at various dates beginning in 2013 and continuing through 2032. The net operating loss carryforwards include approximately $7.3 million resulting from employee exercises of non-qualified stock options or disqualifying dispositions, the tax benefits of which, when realized, will be accounted for as an addition to additional paid-in capital rather than as a reduction of the provision for income taxes. In addition, at March 31, 2012, the Company had research and development credit carryforwards for federal and state tax reporting purposes of approximately $1.8 million and $3.2 million, respectively. The federal credit carryforwards will expire at various dates beginning in 2021 and continuing through 2032, while the California credits will carry forward indefinitely. A reconciliation of the tax provision to the amounts computed using the statutory U.S. federal income tax rate of 34% is as follows (in thousands):

		Years Ended March 31,
		2012		2011		2010
Tax provision at statutory rate	$	2,337	$	2,226	$	1,320
State income taxes before valuation allowance,
net of federal effect		408		372		298
Research and development credits		(211)		(128)		(112)
Change in valuation allowance		(65,042)		(2,147)		(1,536)
Income (loss) from change in fair value of warrant liability		-		(57)		50
Compensation/option differences		(87)		(291)		(20)
Non-deductible compensation		220		75		51
Other		21		5		(48)
	$	(62,354)	$	55	$	3

The Company recognizes the tax benefit from uncertain tax positions if it is more likely than not that the tax positions will be sustained on examination by the tax authorities, based on the technical merits of the position. The tax benefit is measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

		Unrecognized Tax Benefits
		2012		2011		2010
Balance at beginning of year	$	1,726	$	1,743	$	2,206
Gross increases - tax position in prior period		111		-		-
Gross decreases - tax position in prior period		-		(157)		(586)
Gross increases - tax positions related to the current year		646		140		123
Settlements		-		-		-
Lapse of statue of limitations		-		-		-
Balance at end of year	$	2,483	$	1,726	$	1,743

The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $2.5 million, but any effect would have been fully offset by the application of the valuation allowance. To the extent that the unrecognized tax benefits are ultimately recognized, they may have an impact on the effective tax rate in future periods; however, such impact on the effective tax rate would only occur if the recognition of such unrecognized tax benefits occurs in a future period when the Company has already determined that its deferred tax assets are more likely than not realizable. The Company does not expect the unrecognized tax benefits to change significantly over the next 12 months.

The Company files U.S. federal, state and foreign income tax returns in jurisdictions with varying statutes of limitations. The Company has not been under examination by income tax authorities in federal, state or other foreign jurisdictions. The 1995 through fiscal 2012 tax years generally remain subject to examination by federal and most state tax authorities. In significant foreign jurisdictions, the fiscal year 2009 and 2010 tax years remain subject to examination by their respective tax authorities.

The Company's policy for recording interest and penalties associated with audits is to record such items as a component of operating expense income before taxes. During the fiscal year ended March 31, 2012, 2011 and 2010, the Company did not recognize any interest or penalties related to unrecognized tax benefits.

Undistributed earnings of the Company's foreign subsidiaries are indefinitely reinvested in foreign operations. No provision has been made for taxes that might be payable upon remittance of such earnings, nor is it practicable to determine the amount of this liability.

The Company has performed an analysis of its changes in ownership under Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"), and has determined that any ownership changes which have occurred do not result in a permanent limitation on usage of the Company's federal and state net operating losses.