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 to generate future earnings sufficient to realize the Company's deferred tax assets. Accordingly, the Company decreased its valuation allowance by $1.2 million in the three months ended September 30, 2012 to $83.8 million. The valuation allowance at June 30, 2012 was $85.0 million.

A summary of the income tax expense recorded for the three months ended September 30, 2012 and 2011 is as follows:



(In thousands)	Three Months Ended
	September 30, 2012			September 30, 2011
	(Unaudited)
Income (loss) before taxes	$	3,296		$	(7,238	)
Income tax expense (benefit) at statutory rate	$	1,121		$	(2,461	)
State income tax (net of federal tax benefit)	429			(280		)
Dividend income exclusion	—			(50		)
Valuation allowance	(1,235		)	3,082
Other permanent items	107			55
Income tax expense	$	422		$	346

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



	As of
(In thousands)	September 30, 2012		June 30, 2012
	(Unaudited)
Total unrecognized tax benefits*	$	3,211	$	3,211
Unrecognized benefits that, if recognized, would affect the Company's effective tax rate, subject to the valuation allowance*	$	3,064	$	3,064

____________

* Excluding interest and penalties

The Company believes it is reasonably possible that approximately $43,000 of its total unrecognized tax benefits could be released in the next 12 months.

The Company is currently appealing a decision reached by the Internal Revenue Service regarding its June 30, 2003 through June 30, 2008 tax returns. In January 2012, the appeals officer gave a preliminary indication that the audit results will be upheld.