Corning 2007 Annual Report

We continue to provide a full valuation allowance against our entire U.S. deferred tax assets as of December 31, 2007 because we do
not believe it is more likely than not that we will be able to generate in the future sufficient levels of profitability in the U.S. to realize
some or all of the deferred tax assets. U.S. profits of approximately $8.3 billion dollars would be required to fully realize the deferred
tax assets as of December 31, 2007. Of that amount, $4.2 billion of U.S. profits would be required over the next 19 years to fully
realize the deferred tax assets associated with federal net operating loss carry forwards. Our evaluation of the realizability of our
deferred tax assets is inherently subjective and is based on our analysis and weighting of all positive and negative evidence available
to us. This evaluation includes estimates and assumptions about a number of market, execution and economic variables. Our judgment
as of December 31, 2007 has been formed based on these variables which include:
• We had a taxable loss in the U.S. in 2005 and, absent nonrecurring items, we would have also had a taxable loss in the U.S. in
2006. 2007 is the only year in the last three years in which we have generated income in the U.S. when considering only recurring
items.
• Although our consolidated net income has reached record levels, we have continued to incur losses or have generated only
marginal profitability in the U.S. because (a) Display Technologies, the key driver of our consolidated profitability, is largely a
foreign-based business with only net royalty income occurring in the U.S.; (b) our Environmental and Life Sciences segments
have lost money or have been only marginally profitable due to very significant U.S.-based factory start-up costs and
developmental spending; and (c) improvement in our Telecommunications segment has been more than offset by higher U.S.based
research, development, and engineering, stock and incentive compensation and other administrative expenses.
• A significant factor in our forecasts of future U.S. taxable profitability is the amount of assumed royalties to be paid by our
Display Technologies businesses to the U.S. The amount of such royalties could decline if our sales of LCD glass are impacted by:
‰ manufacturing capacity constraints;
‰ (a) reduced demand due to the slowing of corporate information technology and consumer spending or (b) challenges to
pricing, both of which may arise from global economic pressures; or
‰ shifts in the global market share of our customers which manufacture flat panel TV and computer monitors.
Additionally, a change in our judgment regarding the sustainability of the level of these royalties in accordance with the principles
of FIN 48, “Accounting for Uncertainty in Income Taxes” (FIN 48) may also impact our forecasts of U.S. profitability.
Although we remain optimistic about our consolidated outlook for 2008 and beyond, as of December 31, 2007, we are sufficiently
uncertain about our U.S.-based results primarily due to the current economic uncertainty but also due to a number of market and
execution risks in our operating segments, particularly those pertaining to Display Technologies, as noted above that we have
concluded that the positive evidence supporting realization of our U.S deferred tax assets does not sufficiently outweigh the negative
evidence that we may not realize our U.S. deferred tax assets.
We will update our assessment of the realizability of our U.S. deferred tax assets on a quarterly basis in 2008, taking into account
year-to-date actual as well as forecasted U.S. results. If, after considering the actual results and the potential impact of the economic
uncertainties and business risks considered in our 2007 year-end assessment as well as our FIN 48 assessment of the Display
Technologies U.S. royalties, we conclude that it is more likely than not that we will be profitable in the U.S. in 2008 and future years,
we will quantify the portion of our U.S. deferred tax assets we believe to be realizable and reduce our valuation allowance
accordingly. Until that time, we will continue to adjust the valuation allowance to offset the current U.S. income tax expense (or
benefit) that would otherwise be recorded on income (or losses) in the U.S. and, therefore, reflect no net U.S. income tax expense.
In 2004, we recorded valuation allowances against our entire German and Australian deferred tax assets due to losses in recent years.
In 2007, due to sustained profitability and positive earnings projections for our overall German operations, we have concluded that it
is more likely than not that the German national deferred tax assets are realizable and that the related valuation allowance is no longer
required. In 2006, due to sustained profitability and positive earnings projections in Australia and at certain of our German operations,
we concluded that it was more likely than not that a portion of the German local and the entire Australian deferred tax assets were
realizable and that the related valuation allowances were no longer required. The impact of the releases of the valuation allowances on
our effective rate is a reduction in the rate of 12.4% and 8.7% for 2007 and 2006, respectively.
Certain foreign subsidiaries in China, South Africa and Taiwan are or were operating under tax holiday arrangements. The nature and
extent of such arrangements vary, and the benefits of such arrangements phase out in years (2006 to 2011) according to the specific
terms and schedules of the relevant taxing jurisdictions. The impact of the tax holidays on our effective rate is a reduction in the rate
of 12.1%, 10.1%, and 8.9%, for 2007, 2006, and 2005, respectively.
In addition to the aforementioned benefit of tax holidays, the effective income tax rate for 2005 differed from the U.S. statutory rate of
35% primarily due to increasing the valuation allowance against our U.S. deferred tax assets.
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