Activision, Inc. — 2004 Annual Report Notes to Consolidated Financial Statements Deferred income taxes reflect the net tax effects of temporary differences between the amounts of assets and liabilities for accounting purposes and the amounts used for income tax purposes. The components of the net deferred tax asset and liability are as follows (amounts in thousands): The tax benefits associated with certain net operating loss carryovers relate to employee stock options. Pursuant to SFAS No. 109, net operating losses have been reduced by $12.7 million relating to these items which will be cred- ited to additional paid-in capital when realized. As of March 31, 2004, our available federal net operating loss carryforward of approximately $62.0 million is  subject to certain limitations as defined under Section 382 of the Internal Revenue Code. The net operating loss  carryforwards expire between 2020 and 2023. We have various state net operating loss carryforwards which are  not subject to limitations under Section 382 of the Internal Revenue Code. We have tax credit carryforwards of $22.8 million and $13.8 million for federal and state purposes, respectively, which begin to expire in 2006. At March 31, 2004, our deferred income tax asset for tax credit carryforwards and net operating loss carryforwards was reduced by a valuation allowance of $18.9 million as compared to $27.6 million in the prior fiscal year. Realization of the deferred tax assets is dependent upon the continued generation of sufficient taxable income prior to expiration of tax credits and loss carryforwards. Although realization is not assured, management believes it is more likely than not that the net carrying value of the deferred tax asset will be realized. Cumulative undistributed earnings of foreign subsidiaries for which no deferred taxes have been provided approximated $52.7 million at March 31, 2004. Deferred income taxes on these earnings have not been provided as these amounts are considered to be permanent in duration. page 64 March 31, 2004 2003 Deferred asset: Allowance for doubtful accounts $ 634 $ 1,538 Allowance for sales returns 8,334 10,511 Inventory reserve 385 775 Vacation and bonus reserve 2,771 2,409 Amortization and depreciation 5,036 4,794 Tax credit carryforwards 36,599 25,741 Net operating loss carryforwards 25,851 47,399 Other 2,248 3,946 Deferred asset 81,858 97,113 Valuation allowance (18,857) (27,606) Net deferred asset 63,001 69,507 Deferred liability: Capitalized research expenses 25,252 18,775 State taxes 2,558 2,120 Deferred liability 27,810 20,895 Net deferred asset $ 35,191 $ 48,612