7. Income Taxes

12 Months Ended

May 31, 2012

Income Taxes

7. Income Taxes

7. INCOME TAXES:

Domestic and foreign components of loss before income tax expense (benefit) are as follows (in thousands):

	Year Ended May 31,
	2012			2011			2010
Domestic	$	(3,590	)	$	(4,424	)	$	(805	)
Foreign		186			1,002			185
	$	(3,404	)	$	(3,422	)	$	(620	)

The income tax benefit consists of the following (in thousands):

	Year Ended May 31,
	2012			2011			2010
Federal income taxes:
Current		--			--		$	185
Deferred		--			--			--
State income taxes:
Current	$	(12	)	$	(30	)		(4	)
Deferred		--			--			--
Foreign income taxes:
Current		27			79			(42	)
Deferred		--			--			--
	$	15		$	49		$	139

The Company’s effective tax rate differs from the U.S. federal statutory tax rate, as follows:

	Year Ended May 31,
	2012			2011			2010
U.S. federal statutory tax rate		34.0	%		34.0	%		34.0	%
State taxes, net of federal tax effect		(0.2	)		(0.6	)		(0.6	)
Foreign rate differential		2.9			12.4			4.7
Stock-based compensation		(6.0	)		(8.5	)		(92.6	)
Research and development credit		0.1			--			13.2
Change in valuation allowance		(30.2	)		(35.7	)		64.5
Other		(0.2	)		(0.2	)		(0.8	)
Effective tax rate		0.4	%		1.4	%		22.4	%

The components of the net deferred tax asset (liability) are as follows (in thousands):

	Year Ended May 31,
	2012			2011
Net operating losses	$	11,106		$	9,675
Credit carryforwards		3,696			3,548
Inventory reserves		2,686			2,945
Reserves and accruals		2,957			3,506
Other		665			725
		21,110			20,399
Less: Valuation allowance		(21,110	)		(20,399	)
Net deferred tax asset	$	--		$	--

The valuation allowance increased by $711,000 during fiscal 2012, $1,861,000 during fiscal 2011, and $56,000 during fiscal 2010.  As of May 31, 2012 and 2011, the Company concluded that it is more likely than not that the deferred tax assets will not be realized and therefore provided a full valuation allowance against the deferred tax assets.  The Company will continue to evaluate the need for a valuation allowance against its deferred tax assets on a quarterly basis.

At May 31, 2012, the Company had federal and state net operating loss carryforwards of $28,774,000 and $26,365,000, respectively.  These carryforwards will begin to expire in 2024 and 2014, respectively.  At May 31, 2012, the Company also had federal and state research and development tax credit carryforwards of $1,693,000 and $4,149,000, respectively.  The federal credit carryforward will begin to expire in 2016, and the California credit will carryforward indefinitely.  These carryforwards may be subject to certain limitations on annual utilization in case of a change in ownership, as defined by tax law.  The Company also has alternative minimum tax credit carryforwards of $91,000 for federal tax purposes and $34,000 for state purposes.  The credits may be used to offset regular tax and do not expire.

The Company has made no provision for U.S. income taxes on undistributed earnings of certain foreign subsidiaries because it is the Company’s intention to permanently reinvest such earnings in its foreign subsidiaries.  If such earnings were distributed, the Company would be subject to additional U.S. income tax expense.  Determination of the amount of unrecognized deferred income tax liability related to these earnings is not practicable.

Foreign net operating loss carryforwards of $1,209,000 are available to reduce future foreign taxable income.  The foreign net operating losses will begin to expire in 2012.

The Company maintains liabilities for uncertain tax positions.  These liabilities involve considerable judgment and estimation and are continuously monitored by management based on the best information available.  The aggregate changes in the balance of gross unrecognized tax benefits are as follows: (in thousands) 

Beginning balance as of May 31, 2009	$	1,190
Decreases related to prior year tax positions		(5	)
Decreases related to lapse of statute of limitations		(4	)
Balance at May 31, 2010	$	1,181
Decreases related to prior year tax positions		--
Decreases related to lapse of statute of limitations		(88	)
Balance at May 31, 2011	$	1,093
Decreases related to prior year tax positions		--
Decreases related to lapse of statute of limitations		(71	)
Balance at May 31, 2012	$	1,022

If the ending balance of $1,022,000 of unrecognized tax benefits at May 31, 2012 were recognized, $125,000 would affect the effective income tax rate.  In accordance with the Company’s accounting policy, it recognizes accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes.  The Company had accrued interest and penalties of $15,000 at May 31, 2012.

Although the Company files U.S. federal, various state, and foreign tax returns, the Company’s only major tax jurisdictions are the United States, California, Germany and Japan.  Tax years 1996 – 2011 remain subject to examination by the appropriate governmental agencies due to tax loss carryovers from those years.