Rosetta Stone 2010 Annual Report Download - page 107

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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,
2010 2009 2008
Income tax expense at statutory federal rate $ 4,506 $ 7,157 $ 9,565
State income tax expense, net of federal income tax effect 229 809 1,529
Domestic production activities deduction (315) (481) (811)
Nondeductible intercompany interest 134 205 174
Other nondeductible expenses 161 143 101
Tax rate differential on foreign operations 16 (192) 90
Increase (decrease) in valuation allowance (4,872) (566) 2,791
Other (270) 9 (4)
Income tax expense (benefit) $ (411)$ 7,084 $ 13,435
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, 2010, 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, 2010.
The Company is subject to taxation in the United States and various states and foreign jurisdictions. The Company's tax years 2009, 2008, 2007 and 2006
are subject to examination by the tax authorities. There was one state income tax examination in process as of December 31, 2010. While the ultimate results
cannot be predicted with certainty, the Company believes that adjustments resulting from 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 $10.0 million, $6.4 million and $14.6 million in 2010, 2009 and 2008, 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.
F-33