NOTE 8 - INCOME TAXES

The Company's income before income taxes consists of the following (in thousands):

	Year Ended February 28,
	2014		2013		2012
Domestic	$	17,185	$	14,811	$	6,047
Foreign		726		637		(768	)
Total income before income taxes	$	17,911	$	15,448	$	5,279

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

	Year Ended February 28,
	2014			2013			2012
Current:
Federal	$	-		$	-		$	(52	)
State		(42	)		(9	)		(9	)
Foreign		(45	)		(44	)		-
Total current		(87	)		(53	)		(61	)

Deferred:
Federal		(6,346	)		21,465			-
State		325			7,766			-
Total deferred		(6,021	)		29,231			-

Total income tax benefit (provision)	$	(6,108	)	$	29,178		$	(61	)

Differences between the income tax benefit (provision) reported in the consolidated statements of income and the income tax amount computed using the statutory U.S. federal income tax rate are as follows (in thousands):

	Year Ended February 28,
	2014			2013			2012
Income tax provision at U.S. statutory federal rate of 35%	$	(6,269	)	$	(5,407	)	$	(1,848	)
State income tax provision, net of federal income tax effect		(770	)		(570	)		(245	)
Foreign taxes		209			178			(268	)
Valuation allowance reductions (increases)		(865	)		35,148			1,816
Research and development tax credits		1,126			721			590
Other, net		461			(892	)		(106	)
Total income tax benefit (provision)	$	(6,108	)	$	29,178		$	(61	)

The components of net deferred income tax assets for U.S. income tax purposes are as follows (in thousands):

	February 28,
	2014			2013
Net operating loss carryforwards	$	31,546		$	22,977
Depreciation, amortization and impairments		1,332			9,585
Research and development credits		7,238			6,089
Stock-based compensation		1,639			1,990
Capital loss carryforward		840			831
Other tax credits		551			636
Inventory reserve		576			534
Warranty reserve		593			515
Payroll and employee benefit accruals		1,185			469
Allowance for doubtful accounts		298			179
Other accrued liabilities		1,568			343
Other, net		233			827
Gross deferred tax assets		47,599			44,975
Valuation allowance		(4,849	)		(3,959	)
Net deferred tax assets		42,750			41,016
Less current portion		7,619			6,400
Non-current portion	$	35,131		$	34,616

The Company also has deferred tax assets for Canadian income tax purposes amounting to $4.0 million at February 28, 2014 which relate primarily to research and development expenditures pool and non-capital loss carryforwards. The Company has provided a 100% valuation allowance against these Canadian deferred tax assets.

During fiscal 2013, the Company reversed a portion of its deferred tax asset valuation allowance corresponding to the amount of net operating loss carryforwards ("NOLs") utilized to offset taxable income in that year. In addition, pursuant to the fiscal 2013 evaluation of the future utilizability of deferred tax assets, the Company reversed a substantial portion of the remaining valuation allowance at the end of fiscal 2013, resulting in an income tax benefit of $29.2 million for the year. The Company believes that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax assets.

At February 28, 2014, the Company had NOLs of approximately $99 million and $84 million for federal and state purposes, respectively, expiring at various dates through fiscal 2033. If certain substantial changes in the Company's ownership were to occur, there could be an annual limitation on the amount of the NOL carryforwards that can be utilized.

As of February 28, 2014, the Company had research and development ("R&D") tax credit carryforwards of $5.1 million and $4.8 million for federal and state income tax purposes, respectively. The federal R&D credits expire at various dates through 2034. A substantial portion of the state R&D tax credits have no expiration date.

As described further in Note 9, the Company has tax deductions on exercised stock options and vested restricted stock awards that exceed stock compensation expense amounts recognized for financial reporting purposes. These excess tax deductions, which amounted to $12.8 million and $5.3 million in fiscal 2014 and 2013, respectively, reduce current taxable income and thereby prolong the tax shelter period of the NOL and R&D tax credit carryforwards referred to above.

In 2007, the Company adopted FASB ASC Topic 740, "Income Taxes," which clarifies the accounting for income taxes by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. Management determined based on its evaluation of the Company's income tax positions that it has one uncertain tax position relating to federal research and development ("R&D") tax credits of $1.0 million at February 28, 2014 for which the Company has not yet recognized an income tax benefit for financial reporting purposes.

Activity in the amount of unrecognized tax benefits for uncertain tax positions during the past three years is as follows (in thousands):

Balance at February 28, 2011	$	1,265
Decrease in fiscal 2012		(174	)
Balance at February 28, 2012		1,091
Decrease in fiscal 2013		(2	)
Balance at February 28, 2013		1,089
Decrease in fiscal 2014		(60	)
Balance at February 28, 2014	$	1,029

The Company files income tax returns in the U.S. federal jurisdiction, various U.S. states, Canada, United Kingdom, and New Zealand. Income tax returns filed for fiscal years 2009 and earlier are not subject to examination by U.S. federal and state tax authorities. Certain income tax returns for fiscal years 2010 through 2013 remain open to examination by U.S. federal and state tax authorities. Income tax returns for fiscal years 2010 through 2013 remain open to examination by tax authorities in Canada. The Company believes that it has made adequate provision for all income tax uncertainties pertaining to these open tax years.