Rosetta Stone 2009 Annual Report Download - page 109

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Table of Contents
ROSETTA STONE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. INCOME TAXES (Continued)
Reconciliation of income tax expense computed at the U.S. federal statutory rate to income tax expense is as follows (in thousands):
Year Ended December 31,
2009 2008 2007
Income tax expense at statutory federal rate $ 7,157 $ 9,565 $ 2,805
State income tax expense, net of federal income tax effect 809 1,529 568
Domestic production activities deduction (481) (811) (348)
Nondeductible intercompany interest 205 174 122
Other nondeductible expenses 143 101 92
Tax rate differential on foreign operations (192) 90 (53)
Increase (decrease) in valuation allowance (566) 2,791 2,293
Other 9 (4) (44)
Income tax expense $ 7,084 $ 13,435 $ 5,435
The Company adopted Accounting Standards Codification topic 740-10-25, Income Taxes: Overall: Recognition,("ASC 740-10-25") on January 1, 2007,
which clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with Accounting Standards
Codification topic 740, Income Taxes. ASC 740-10-25 prescribes a recognition threshold and measurement attribute for the financial statement recognition
and measurement of a tax position taken or expected to be taken in a tax return. ASC 740-10-25 also provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosure, and transition.
At the adoption date and as of December 31, 2009, the Company had no material unrecognized tax benefits and no adjustments to liabilities or operations
were required under ASC 740-10-25. The Company's practice is to recognize interest and penalty expense related to uncertain tax positions in income tax
expense, which were zero at the adoption date and for the year ended December 31, 2009.
The Company is subject to taxation in the United States and various states and foreign jurisdictions. The Company's tax years 2008, 2007 and 2006 are
subject to examination by the tax authorities. There were no income tax examinations in process as of December 31, 2009. While the ultimate results cannot
be predicted with certainty, the Company's management believes that examinations, if any, will not have a material adverse effect on its consolidated financial
condition or results of operations, and that the accrued tax liabilities are adequate for all years.
The Company made income tax payments of $6.4 million, $14.6 million and $4.8 million in 2009, 2008 and 2007, respectively.
16. SEGMENT INFORMATION
The Company operates as one operating segment as the principal business activity relates to developing and selling language learning software. The chief
operating decision maker, the Chief Executive Officer, evaluates the performance of the Company based upon software revenues.
Products and services are sold primarily in the United States, but are also sold through direct and indirect sales channels in other countries, primarily in
Japan, South Korea and Europe. Less than 5%
F-33