Income Tax

9 Months Ended

Sep. 30, 2011

Income Tax

Income Tax

Note 8. Income Tax

The Company recorded income tax expense of $138,000 and $266,000 for the three and nine months ended September 30, 2011, respectively, which was computed using the “discrete” (or “cut-off”) method and was principally comprised of state income taxes and foreign taxes. The Company recorded an income tax benefit of $215,000 and income tax expense of $182,000 for the three and nine months ended September 30, 2010, respectively, which was computed using the “discrete” (or “cut-off”) method and was principally comprised of California alternative minimum tax, other state income taxes and foreign taxes. The difference of income tax expense between the provision and the statutory rate of the Company’s loss before income taxes and provision actually recorded was primarily due to the impact of nondeductible stock-based compensation expenses. No federal tax provision was recorded due to the utilization of net operating loss carryforwards for federal and alternative minimum tax purposes.

The Company is required to reduce its deferred tax assets by a valuation allowance if it is more likely than not that some or all of its deferred tax assets will not be realized. Management must use judgment in assessing the potential need for a valuation allowance, which requires an evaluation of both negative and positive evidence. The weight given to the potential effect of negative and positive evidence should be commensurate with the extent to which it can be objectively verified. In determining the need for and amount of the valuation allowance, if any, the Company assesses the likelihood that it will be able to recover its deferred tax assets using historical levels of income, estimates of future income and tax planning strategies. As a result of historical cumulative losses, the Company determined that, based on all available evidence, there was substantial uncertainty as to whether it will recover recorded net deferred taxes in future periods. Accordingly, the Company recorded a valuation allowance against all of its net deferred tax assets at both September 30, 2011 and December 31, 2010. The Company intends to continue maintaining a full valuation allowance on its deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. Should the actual timing differences differ from the Company’s estimates, the amount of its valuation allowance could be materially impacted.

The Company had $768,000 of unrecognized tax benefits as of September 30, 2011 and December 31, 2010. The Company does not anticipate a material change to its unrecognized tax benefits over the next twelve months. Unrecognized tax benefits may change during the next twelve months for items that arise in the ordinary course of business.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits as part of its income tax provision in its consolidated statements of income. All tax years from 2000 forward remain subject to future examination by federal, state and foreign tax authorities.