Note 10. Income Taxes

The Company uses an estimated annual effective tax rate based on expected annual income to determine the quarterly provision for income taxes. The impact of discrete items is recorded in the quarter in which they occur. In assessing the realizability of the deferred tax assets, the Company considered whether it is more likely than not that some portion or all of the deferred tax assets will not be realized through the generation of future taxable income. In the fourth quarter of fiscal year 2011, after considering both the positive and negative evidence including improved financial performance, expected future taxable income, the exit of a three-year cumulative loss, and the then anticipated CNS asset sale, the Company concluded that it was more likely than not that it would be able to utilize the majority of its deferred tax assets. The Company therefore released substantially all of the valuation allowance recorded against tax assets in the fourth quarter of fiscal year 2011. During the first three quarters of fiscal year 2011, a full valuation allowance on deferred tax assets has been recorded and was released against earnings quarterly. The Company will continue to reassess realizability of the deferred tax assets going forward.

In the three and nine months ended December 31, 2011, the Company recorded a tax benefit of $0.3 million and tax expense of $11.1 million. These tax provisions resulted from an effective tax rate of 43% for the fiscal year plus separate discrete items. For the nine months ended December 31, 2011, the Company recorded a discrete tax benefit of $2.1 million for a reduction in an uncertain tax position that was settled during the period and the $12.5 million tax expense on the gain on the CNS asset sale, which also was treated as a discrete item. Approximately $559,000 of an unrecognized tax benefit and the related deferred tax asset are anticipated to expire unused in March 2012.

The Company recorded a tax benefit of $4,000 and $444,000 for the three months and nine months ended December 31, 2010. In the nine months ended December 31, 2010, the benefit included a $375,000 benefit related to the reversal of a reserve against an uncertain tax position because the statute of limitations related to the position expired during the first quarter. The benefit also included a $178,000 benefit related to the Company's ability to fully offset alternative minimum taxable income with alternative minimum tax net operating loss carryforwards that were generated in prior years. The net benefit was offset, in part, by $109,000 of tax expense that was recorded using an effective tax rate of 1.3% based on projected income for the fiscal year. Tax expense resulted from foreign and state tax. The Company was able to utilize its net operating loss carryforwards to offset federal taxable income and federal alternative minimum taxable income generated for the three and nine months ended December 31, 2010.