Stericycle, Inc.

Table of Contents

PART I. – FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

STERICYCLE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these financial statements.

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STERICYCLE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

The accompanying notes are an integral part of these financial statements.

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STERICYCLE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

The accompanying notes are an integral part of these financial statements.

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STERICYCLE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

March 31, 2010 (Unaudited) and

Year Ended December 31, 2009 (Audited)

The accompanying notes are an integral part of these financial statements.

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STERICYCLE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Unless the context requires otherwise, “we”, “us” or “our” refers to Stericycle, Inc. and its subsidiaries on a consolidated basis.

NOTE 1 – BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations; but the Company believes the disclosures in the accompanying condensed consolidated financial statements are adequate to make the information presented not misleading.  In our opinion, all adjustments necessary for a fair presentation for the periods presented have been reflected and are of a normal recurring nature.  These condensed consolidated financial statements should be read in conjunction with the Consolidated Financial Statements and notes thereto for the year ended December 31, 2008,2009, as filed with our Annual Report on Form 10-K for the year ended December 31, 2008.2009.  The results of operations for the sixthree months ended June 30, 2009March 31, 2010 are not necessarily indicative of the results that may be achieved for the entire year ending December 31, 2009.2010.

NOTE 2 – ACQUISITIONS AND DIVESTITURES

During the quarter ended March 31, 2009,2010, we acquired selected assets of threetwo domestic regulated waste businesses, and completed the funding on a 2008 acquisition.

During the quarter ended June 30, 2009, we completed seven acquisitions.  Domestically, we acquired five regulated waste businesses four of which were selected assets and one was a stock purchase.  Internationally, we acquired all100% of the stock of two regulated waste businesses one located in the United KingdomUK, 70% of the stock of a regulated waste business in Brazil, and 100% of the other locatedstock of a regulated waste business in Romania.  Chile.  We also increased our majority share in a previous acquisition in Chile.

The aggregate purchase price of our acquisitions during the six monthsquarter ended June 30, 2009March 31, 2010, was approximately $81.3$66.9 million, of which approximately $14.2 million in cash payments related to transactions that closed in 2008 and were disbursed in 2009.  The purchase price of our 2009 acquisitions was approximately $67.1 million, of which $46.3$50.4 million was paid in cash, and $20.8$10.0 million was paid by the issuance of promissory notes.notes, and $6.5 million was recorded as part of contingent consideration.  For financial reporting purposes, our 20092010 acquisitions were accounted for using the acquisition method of accounting.  The purchase prices of these acquisitions, in excess of acquired tangible assets, have been primarily allocated to goodwill and other intangibles and are preliminary pending completion of certain intangible asset valuations. 

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The results of operations of these acquired businesses have been included in the consolidated statements

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of income from the dates of acquisition.  These acquisitions resulted in recognition of goodwill in our financial statements reflecting the complementary strategic fit that the acquired businesses brought to us.

On May 9,Our acquisition of MedServe in December of 2009 werequired us to divest of certain acquired assets.  We have assigned a value of $4.2 million to these assets, made up primarily of fixed assets and our wholly-owned subsidiary, ATMW Acquisition Corp., entered into an agreement and plangoodwill, which are recorded as part of merger with MedServe, Inc. a Delaware corporation, and Avista Capital Partners, L.P., a Delaware limited partnership, as the stockholders’ representative. Pursuant to the merger agreement and upon completion of the merger, our subsidiary will be merged with and into MedServe and MedServe will become a wholly-owned subsidiary of ours.  MedServe is privately held. It is engaged in the collection, transportation, treatment and disposal of medical waste, hazardous waste, universal waste and other regulated wastes, sharps management services, safety and compliance training services, and other related businesses.

The total merger consideration payable by us is $185 million in cash, subject to reduction for MedServe’s indebtedness as of the closing date, MedServe’s expenses in connection with the transaction, and other expenses related to the transaction. In addition, $27.8 million of the merger consideration will be deposited in escrow to cover indemnification obligations of the MedServe stockholders under the merger agreement.

Concurrently with the parties’ execution of the merger agreement, MedServe stockholders holding a majority of its outstanding shares entitled to vote delivered their written consent approving the merger agreement and the merger.

The merger is subject to customary closing conditions and regulatory reviews, including clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (See Note 10 – Legal Proceedings).current assets.

NOTE 3 – INCOME TAXESNEW ACCOUNTING STANDARDS

WeAccounting Standards Recently Adopted

Consolidation

On January 1, 2010, Stericycle adopted changes issued by the FASB related to amendments to previous guidance on the consolidation of variable interest entities (“VIE”).  This standard clarifies the characteristics that identify a VIE and our subsidiaries file U.S. federal income tax returnschanges how a reporting entity identifies a primary beneficiary that would consolidate the VIE from a quantitative risk and income tax returnsrewards calculation to a qualitative approach based on which variable interest holder has controlling financial interest and the ability to direct the most significant activities that impact the VIE’s economic performance.  This statement requires the primary beneficiary assessment to be performed on a continuous basis.  It also requires additional disclosures about an entity’s involvement with a VIE, restrictions on the VIE’s assets and liabilities that are included in various statesthe reporting entity’s consolidated balance sheet , significant risk exposures due to the entity’s involvement with the VIE, and foreign jurisdictions.  Withhow its involvement with a few exceptions, we are no longer subject to U.S. federal, state, local, or non-U.S. income tax examinations by tax authorities for years before 2002.  The Internal Revenue Service (“IRS”) concluded an examinationVIE impacts the reporting entity’s consolidated financial statements.  Our adoption of the Company's U.S. income tax return for 2004; subsequent tax years remain open and subjectstandard did not have an impact to examination by the IRS. Our subsidiaries in foreign countries have tax years open ranging from 2002 through 2008.our financial statements.

The total amount of unrecognized tax benefits as of June 30, 2009 and 2008 was $8.2 million and $3.7 million, respectively, which included immaterial amounts of interest and penalties reflected as a liability on the balance sheet. The amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is approximately $8.2 million. We recognize interest and penalties accrued related to income tax reserves in income tax expense.  This method of accounting is consistent with prior years.Accounting Standards not yet adopted

Revenue Recognition

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The following table summarizesIn October 2009, the changes in unrecognized tax positions during the six months ended June 30, 2009:

NOTE 4 – STOCK BASED COMPENSATION

At June 30, 2009, we had stock options outstanding under the following plans:

·

the 2008 Incentive Stock Plan, which our stockholders approved in May 2008;

·

the 2005 Incentive Stock Plan, which our stockholders approved in April 2005;

·

the 2000 Nonstatutory Stock Option Plan, which our Board of Directors adopted in February 2000;

·

the 1997 Stock Option Plan, which expired in January 2007;

·

the Directors Stock Option Plan, which expired in May 2006;

·

the 1995 Incentive Compensation Plan, which expired in July 2005;

·

and our Employee Stock Purchase Plan, which our stockholders approved in May 2001.

The following table sets forth the expense relatedFASB issued an update to stock compensation:

The following table sets forth the tax benefits related to stock compensation:

The Black-Scholes option-pricing model is used in determining the fair value of each option grant using the assumptions noted in the table below.  The expected term of options granted is basedexisting guidance on historical experience and represents the period of time that awards granted are expected to be outstanding.  Expected volatility is based upon historical volatility of the company’s stock.  The expected dividend yield is zero.  The risk-free interest rate is based upon the U.S. Treasury yield rates of a comparable period.revenue recognition for arrangements with multiple deliverables.  This update will allow

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The assumptions that wecompanies to allocate consideration received for qualified separate deliverables using estimated selling price for both delivered and undelivered items when vendor-specific objective evidence or third-party evidence is unavailable.  Additional disclosures discussing the nature of multiple element arrangements, the types of deliverables under the arrangements, the general timing of their delivery, and significant factors and estimates used in the Black-Scholes modelto determine estimated selling prices are as follows:

The weighted average grant date fair value of the stock options granted during the threerequired.  We will adopt this update for new revenue arrangements entered into or materially modified beginning January 1, 2011.  We do not generally have arrangements with multiple deliverables and six months ended June 30, 2009 and 2008, was $13.87 and $16.33, and $11.89 and $13.51, respectively.

Stock option activity for the six months ended June 30, 2009, was as follows:

The total intrinsic value of options exercised for the three and six months ended June 30, 2009 and 2008 was $4.7 million and $14.7 million, and $8.9 million and $21.2 million, respectively.  Intrinsic value is measured using the fair market value at the date of the exercise (for options exercised) or at June 30, 2009 (for outstanding options), less the applicable exercise price.

As of June 30, 2009, there was $26.7 million of total unrecognized compensation expense, relatedtherefore do not expect any material impact to non-vested stock options, which is expected to be recognized over a weighted average period of 1.93 years.our financial statements upon adoption.

NOTE 5 – COMMON STOCK

During the quarters ended March 31, 2009 and 2008, we repurchased on the open market, and subsequently cancelled, 536,346 and 1,482,185 shares of common stock, respectively.  The weighted average repurchase price was $47.59 and $53.56 per share, respectively.

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During the quarters ended June 30, 2009 and 2008, we repurchased on the open market, and subsequently cancelled, 40,162 and 984,533 shares of common stock, respectively.  The weighted average repurchase price was $48.51 and $52.49 per share, respectively.  

During the quarter ended March 31, 2009, we settled in cash $2.5 million of share repurchases that were executed in December 2008.  

NOTE 6 – NET INCOME PER COMMON SHARE

The following table sets forth the computation of basic and diluted net income per share:

NOTE 7 – COMPREHENSIVE INCOME

The components of total comprehensive income are net income, the change in cumulative currency translation adjustments and gains and losses on derivative instruments qualifying as cash flow hedges.The following table sets forth the components of total comprehensive income for the three and six months ended June 30, 2009 and 2008:

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NOTE 8 – GUARANTEE

We have guaranteed a loan to JPMorganChase Bank N.A. on behalf of Shiraishi-Sogyo Co. Ltd (“Shiraishi”).  Shiraishi is a customer in Japan that is expanding their medical waste management business and has a one year loan with a current balance of $5.1 million with JPMorganChase Bank N.A. that expires in May 2010.  

NOTE 9 – GOODWILL

We have two geographical reporting segments, United States and Foreign Countries, both of which have goodwill.  The changes in the carrying amount of goodwill, for the six months ended June 30, 2009 were as follows:

During the quarter ended June 30, 2009 we performed our annual goodwill impairment evaluation for our three reporting units, Domestic Regulated Waste, Domestic Regulated Returns Management, and Foreign Countries, and determined that none of our recorded goodwill was impaired.  During this evaluation we calculated the fair value of the reporting units by multiplying their Earnings Before Interest, Tax, Depreciation and Amortization (“EBITDA”) for the prior twelve months times by a valuation multiple.  The valuation multiple is the average market price of our stock for the prior twelve month period times the outstanding shares at June 30, 2009, divided by the trailing twelve month EBITDA.  This EBITDA multiple is an indication of the fair value of the company, per the marketplace.  The fair value was then compared to the reporting units’ book value and determined to be in excess of the book value by a considerable margin.  The book value was determined by subtracting their total liabilities from their total assets.  We complete our annual impairment analysis of our indefinite lived intangibles (facility permits) during the quarter ended December 31 of each year.

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NOTE 10 – LEGAL PROCEEDINGS

We operate in a highly regulated industry and must deal with regulatory inquiries or investigations from time to time that may be instituted for a variety of reasons.  We are also involved in a variety of civil litigation from time to time.

We received a request from the U.S. Department of Justice (“DOJ”) on June 22, 2009 for additional information in connection with their review pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“HSR”) of our proposed acquisition of MedServe, Inc.  We are in the process of complying with the DOJ’s request.  The effect of the DOJ’s request for additional information is to extend the waiting period imposed by HSR until 30 days after we have submitted the requested information, unless the 30-day period is extended voluntarily by the parties or is terminated earlier by the DOJ.

NOTE 11 – NEW ACCOUNTING STANDARDS

Effective January 1, 2009 we adopted Statement of Financial Accounting Standards No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141(R)”). SFAS No. 141(R) replaces SFAS No. 141, Business Combinations. SFAS No. 141(R) requires the acquiring entity in a business combination to recognize the full fair value of assets acquired and liabilities assumed in the transaction; requires certain contingent assets and liabilities acquired to be recognized at their fair values on the acquisition date; requires contingent consideration to be recognized at its fair value on the acquisition date and changes in the fair value to be recognized in earnings until settled; requires the expensing of most transaction and restructuring costs; and generally requires the reversals of valuation allowances related to acquired deferred tax assets and changes to acquired income tax uncertainties to also be recognized i n earnings.  This new accounting standard requires the company to recognize expenses to the income statement that were previously accounted for as acquisition accounting and reflected on the balance sheet.  Net income for the first six months of 2009 included the effect of $0.7 million of charges related to the adoption of SFAS No. 141(R).  Because of the inherent uncertainty of the number, structure and complexity of the acquisitions that we may complete in the future and the magnitude of the transaction expenses that we may incur in completing these acquisitions, the future impact of the adoption of SFAS No. 141(R) is not reasonably estimable.

Effective January 1, 2009 we adopted SFAS Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS No. 160”).  The objective of SFAS No. 160 is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements.  SFAS No. 160 requires that minority interests be identified and presented on the consolidated statements of income in the equity section, but separate from the parent’s equity;  that changes in the parent’s ownership interest be accounted for consistently and similarly as equity transactions; in a deconsolidation situation, any remaining noncontrolling equity investment and gain or loss on the deconsolidation is to be measured at fair value; that entities provide sufficient disclosures that clearly

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distinguish between the ownership interests of the parent and the interests of the noncontrolling owner.  For the six months ended June 30, 2009, the adoption of SFAS No. 160 did not result in a material impact to our financial statements.

Effective January 1, 2009 we adopted SFAS Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS No. 161”), to enhance the disclosure regarding the Company’s derivative and hedging activities to improve the transparency of financial reporting.  The adoption of SFAS No. 161 did not have a material impact to our financial statements.

In April 2009, FASB issued FSP No. FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies” (“FSP FAS 141(R)-1”). The Company adopted FSP FAS 141(R)-1 on January 1, 2009, as required, and it did not have a material impact on our financial statements.

In April 2009, FASB issued FSP No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1 and APB 28-1”). FSP FAS 107-1 and APB 28-1 amends FASB Statement No. 107, “Disclosures about Fair Values of Financial Instruments”, and requires a publicly traded entity to include disclosures about the fair value of its financial instruments for its interim reporting periods as well as its annual financial statements. FSP FAS 107-1 and APB 28-1 is effective for interim periods ending after June 15, 2009. We adopted FSP FAS 107-1 and APB 28-1 on June 30, 2009, as required, and it did not have a material impact on our financial statements; however, it did result in enhanced disclosure about the fair value of financial instruments in the Company’s interim financial statements.

In May 2009, the FASB issued SFAS No. 165, "Subsequent Events." SFAS No. 165 establishes authoritative accounting and disclosure guidance for recognized and non-recognized subsequent events that occur after the balance sheet date but before financial statements are issued. SFAS No. 165 also requires disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. SFAS No. 165 was effective for our Company beginning with our Quarterly Report on Form 10-Q for the three and six months ended June 30, 2009, and will be applied prospectively. The adoption of SFAS No. 165 did not have a material impact on our consolidated financial statements.

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162” (“SFAS No. 168”). SFAS No. 168 replaces FASB Statement No. 162 to allow the FASB Accounting Standards Codification to become the single source of authoritative U.S. accounting and reporting standards, other than guidance issued by the SEC. The Company adopted SFAS No. 168 on July 1, 2009, as required, and it did not have a material impact on our financial statements.

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NOTE 12 – GEOGRAPHIC INFORMATION

Management has determined that we have two reportable segments, United States and Foreign Countries based on our consideration of the criteria detailed in SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.”  Revenues are attributed to countries based on the location of customers.  Inter-company revenues recorded by the United States for work performed in Canada, which are immaterial, are eliminated prior to reporting United States revenues.  The same accounting principles and critical accounting policies are used in the preparation of the financial statements for both reporting segments.

Detailed information for our United States reporting segment is as follows:

Detailed information for our Foreign Countries reporting segment is as follows:

NOTE 134 – FAIR VALUE MEASUREMENTS

We adopted SFAS No. 157 “Fair Value Measurements” (“SFAS No. 157”) on January 1, 2008, which clarifies that fairFair value refers tois defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants inat the market in which the reporting entity transacts. Under SFAS No. 157,

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fair value should be based on the assumptions market participants would use when pricing the asset or liability and establishes ameasurement date.  The fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs are inputs thatdistinguishes between (1) market participants would use in pricing the asset or liabilityparticipant assumptions developed based on market data obtained from independent sources independent of our company. Unobservable inputs are those that reflect the company’s(observable inputs) and (2) an entity’s own assumptions about what market participants would use in pricing the asset or liabilityparticipant assumptions developed based on the best information available in the circumstances.circumstances (unobservable inputs).  The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).  The three levels of the fair value hierarchy defined by SFAS No. 157 are as follows:described below:

As required by SFAS No. 157, financialFinancial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.  Our assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of assets and liabilities and their placement within the fair value hierarchy levels.  The impact of our creditworthiness has been considered in the fair value measurements noted below.  In addition, under SFAS No. 157, the fair value measurement of a liability must reflect the nonperformance risk of an entity.

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Level 1: At June 30, 2009,March 31, 2010, we have $2.7$22.9 million in cash and cash equivalents, and $1.0$1.8 million of short-term investments that we carry on our books at fair value using Level 1 inputs.  At December 31, 2008,2009, we had $9.1$15.8 million in cash and cash equivalents and $1.4$1.1 million of short-term investments on our books at fair value using Level 1market price inputs.

At June 30, 2009, the fair value of the Company’s debt obligations was estimated at $768.4 million, compared to a carrying amount of $785.6 million.  At December 31, 2008, the fair value of the Company’s debt obligations was estimated at $771.5 million, compared to a carrying amount of $792.7 million.  This fair value was estimated using market interest rates for comparable instruments.  The Company has no current plans to retire a significant amount of its debt prior to maturity.

We have a cash flow hedge with an objective to offset foreign currency exchange risk to the U.S. dollar equivalent cash inflows on the settlement of a GBP denominated intercompany loan.  The fair value of the hedge was calculated using Level 2 inputs and was recorded as a current asset of $0.7 million as of June 30, 2009 and as a current asset of $2.3 million at December 31, 2008.

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: In October 2008, we entered into three interest rate swap contracts, covering $225 million of our borrowings outstanding under our senior credit facility.  The objective of the swapswaps is to reduce the risk of volatile interest expense by fixing the rate.  The fair valueinterest rate swaps are designated as cash flow hedges; the notional amounts and all other significant terms of the swap agreement are matched to the provisions and terms of the variable rate debt hedged.  We apply hedge is calculated using Level 2 inputs and is recorded as a liability of $3.1 million at June 30, 2009, of which $2.4 million is current. At December 31, 2008accounting to these instruments with changes in the fair value of the hedge wasswap agreements recorded as a liabilitycomponent of $4.8 million, of which $2.1 million was current.other comprehensive income.  The fair value was determined using market data inputs to calculate expected future interest rates.  The cash streams attributable to the difference between expected future rates and the fixed rate payable is discounted to arrive at the fair value of the threetwo hedges.

Level 3: As part of our acquisition accounting, we assign fair values to identifiable intangible assets; primarily customer relationships and operating permits.  We use a discounted income approach whereby the expected after tax cash flows of the acquired entity are present valued.  We use the financial information provided by the

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acquired company, and management assumptions related to future growth to determine expected future cash flows.  We use data provided by unaffiliated external parties as well as internal financial information to calculate a weighted average cost of capital (“WACC”) for the acquired company.  The expected cash flows and the calculated WACC are significant inputs in determining the fair value of our intangibles. 

At March 31, 2010, the fair value of the Company’s debt obligations was estimated at $1.0 billion, compared to a carrying amount of $996.7 million.  At December 31, 2009, the fair value of the Company’s debt obligations was estimated at $985.0 million, compared to a carrying amount of $988.9 million.  This fair value was estimated using market interest rates for comparable instruments.  The Company has no current plans to retire a significant amount of its debt prior to maturity.

There were no movements of items between fair value hierarchies.

NOTE 145 – DERIVATIVE INSTRUMENTS

In July 2004, we entered into four forward contracts, of which three have settled as of the balance sheet date and the fourth settled in July 2009, to hedge a GBP Sterling-based intercompany loan between our US-based subsidiary, Stericycle International L.L.C. and our subsidiary in the United Kingdom, Stericycle International Ltd.  The subsidiary borrowed the funds for the purchase of White Rose Environmental Ltd.  The remaining forward contract settled in July 2009.  Initially, we did not elect hedge accounting on the forward contracts and had recognized the change in value of the hedges through other income (expense).  This amount was generally offset by the currency adjustment to the intercompany receivable.

On October 1, 2005, we prospectively designated these existing forward contracts as cash flow hedges and are using hedge accounting.  The objective of our cash flow hedges is to offset the foreign exchange risk to the U.S. dollar equivalent cash inflows on the settlement of the GBP denominated intercompany loan.  At June 30, 2009, the fair market value of the hedge was recorded as a current asset of $0.7 million.  As of June 30, 2009, the total notional amount of hedges outstanding is GBP 8.0 million.  At June 30, 2009, the hedges were determined to be 100% effective.

In October 2008, Stericycle entered into threeMarch 31, 2010 we have two interest rate swap contracts covering $225$100 million of our borrowings outstanding under our senior credit facility.  The objective of the swap is to reduce the risk of volatile interest expense by fixing the rate.  The details of these two contracts are as follows:

We entered into the interest rate swaps in order to manage the risk of interest rate changes to our interest expense.  The interest rate swaps are designated as cash flow hedges; the notional amounts and all other significant terms of the swap agreement are

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matched to the provisions and terms of the variable rate debt hedged.  The fair market of the threetwo hedges is recorded as a current liability of $3.1$0.6 million at June 30, 2009, of which $2.4 million is current.March 31, 2010.  At June 30, 2009,March 31, 2010, the hedges were determined to be 100% effective.  Gains or losses on hedges are reclassified into interest expense when the effect of the hedged item is recognized in earnings.  The fair market value was determined using market data inputs to calculate expected future interest rates.  The cash streams attributable to the difference between expected future rates and the fixed rate payable is discounted to arrive at the fair value of the two hedg es.

NOTE 6 – INCOME TAXES

We and our subsidiaries file U.S. federal income tax returns and income tax returns in various states and foreign jurisdictions.  With a few exceptions, we are no longer subject to U.S. federal, state, local, or non-U.S. income tax examinations by tax authorities for years before 2003.  The Internal Revenue Service (“IRS”) concluded an examination of the Company's U.S. income tax return for 2004.  Tax years after 2005

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remain open and subject to examination by the IRS.  In addition, our subsidiaries in foreign countries have tax years open ranging from 2003 through 2009.

The Company has recorded accruals to cover certain unresolved tax issues.  Such contingent liabilities relate to additional taxes and interest the Company may be required to pay in various tax jurisdictions.  During the course of examinations by various taxing authorities, proposed adjustments may be asserted.  The Company evaluates such items on a case-by-case basis and adjusts the accrual for contingent liabilities as deemed necessary.

The total amount of unrecognized tax benefit reserve as of March 31, 2010 is $9.0 million, which includes immaterial amounts of interest and penalties and is reflected as a liability on the balance sheet.  The amount of income tax contingency reserve that, if recognized, would affect the effective tax rate is approximately $9.0 million.  We recognize interest and penalties accrued related to income tax reserves in income tax expense.

The following table summarizes the changes in unrecognized tax positions during the quarter ended March 31, 2010:

NOTE 7 – STOCK BASED COMPENSATION

At March 31, 2010 we had stock options outstanding under the following plans:

(i)

The 2008 Incentive Stock Plan, which our stockholders approved in May 2008;

(ii)

the 2005 Incentive Stock Plan, which our stockholders approved in April 2005;

(iii)

the 2000 Nonstatutory Stock Option Plan, which our Board of Directors adopted in February 2000;

(iv)

the 1997 Stock Option Plan, which expired in January 2008;

(v)

the Directors Stock Option Plan, which expired in May 2006;

(vi)

the 1995 Incentive Compensation Plan, which expired in July 2005;

(vii)

our Employee Stock Purchase Plan, which our stockholders approved in May 2001.

The following table sets forth the expense related to stock compensation:

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The following table sets forth the tax benefits related to stock compensation: