Income Taxes

The Company adjusts its effective tax rate each quarter based on its current estimated annual effective tax rate. The Company also records the tax impact of certain discrete items, unusual or infrequently occurring tax events and the effects of changes in tax laws or rates, in the interim period in which they occur. In addition, the Company evaluates its deferred tax assets quarterly to determine if a valuation allowance is required.

The Company considered whether a valuation allowance should be recorded against deferred tax assets based on the likelihood that the benefits of the deferred tax assets would or would not ultimately be realized in future periods. In making this assessment, significant weight was given to evidence that could be objectively verified such as recent operating results and less consideration was given to less objective indicators such as future earnings projections.

After consideration of positive and negative evidence, including the recent history of losses, the Company cannot conclude that it is more likely than not that it will generate future earnings sufficient to realize the Company’s deferred tax assets. Accordingly, the Company increased its valuation allowance by $2.8 million in the three months ended March 31, 2012 to $67.9 million. The valuation allowance as of June 30, 2011 was $60.4 million.

In January 2012, the State of California completed an audit of the Company's June 30, 2006 and June 30, 2007 tax returns, and the Company also reached a settlement agreement with the State of California regarding its audit of the Company’s June 30, 2002 to June 30, 2005 R&D tax credit claims. As a result of these decisions, the Company released $0.7 million related to uncertain tax positions during the three months ended March 31, 2012, which resulted in an income tax benefit of $0.6 million, excluding interest and penalties.

A summary of the income tax (benefit) expense recorded in the three and nine months ended March 31, 2012 and 2011 is as follows:



(In thousands)	Three Months Ended March 31,						Nine Months Ended March 31,
	2012			2011			2012			2011
	(Unaudited)
Loss before taxes	$	(6,078	)	$	(13,140	)	$	(17,366	)	$	(31,475	)
Income tax expense at federal statutory rate	(2,066		)	(4,467		)	(5,904		)	(10,701		)
State income taxes and credits	(238		)	(522		)	(687		)	(1,305		)
Dividends received deduction	(79		)	(4		)	(137		)	(500		)
Valuation allowance	2,794			5,047			7,478			12,943
ESOP dividend	(464		)	—			(464		)	—
Changes in uncertain tax positions	(673		)	—			(673		)	—
Other permanent items	149			2			216			69
Income tax (benefit) expense	$	(577	)	$	56		$	(171	)	$	506

As of March 31, 2012 and June 30, 2011 the Company had not recognized the following tax benefits in its consolidated financial statements:



	As of
(In thousands)	March 31, 2012		June 30, 2011
	(Unaudited)
Total unrecognized tax benefits*	$	3,211	$	3,902

Unrecognized benefits that, if recognized, would affect the Company's effective tax rate, subject to the valuation allowance*	$	3,064	$	3,637

_______________


*	Excluding interest and penalties

The Company believes it is reasonably possible that $40,000 of its total unrecognized tax benefits could be released in the next twelve months.

The Company is currently appealing a decision reached by the Internal Revenue Service in connection with the audit of the Company's June 30, 2003 through June 30, 2008 tax returns. Based on the preliminary indication of the Appeals Officer in January 2012, the Company expects that the audit results will be upheld.