7. INCOME TAXES

Income tax expense (benefit) is summarized as follows:

	Years Ended January 31,
	2012			2011			2010
	(in thousands)
Current:
Federal	$	1,669		$	679		$	598
State		376			268			658
Foreign		3,231			2,663			1,196
Subtotal		5,276			3,610			2,452
Deferred:
Federal		889			(1,206	)		(49	)
State		21			35			(829	)
Foreign		(175	)		(317	)		(466	)
Subtotal		735			(1,488	)		(1,344	)
Equity		5			721			¾
Total	$	6,016		$	2,843		$	1,108

Actual income tax expense (benefit) differs from that obtained by applying the statutory federal income tax rate of 34% to income before income taxes as follows:

	Years Ended January 31,
	2012			2011			2010
	(in thousands)
Computed expected tax expense	$	5,712		$	1,888		$	836
State income taxes, net of federal income tax expense		580			491			804
Incremental tax benefit from foreign operations		(1,945	)		(1,474	)		(1,611	)
Non-deductible equity compensation		898			335			795
Foreign withholding taxes		981			776			891
Net change in valuation allowance		(336	)		99			(679	)
Net change in contingency reserve		147			91			(433	)
Non-deductible expenses		354			969			79
Benefit of tax credits		(1,437	)		(456	)		(702	)
Subpart F Income		784			383			312
Rate change impact		(61	)		20			(9	)
Dividend income		¾			¾			848
Other		339			(279	)		(23	)
	$	6,016		$	2,843		$	1,108

Consolidated U.S. income (loss) before income taxes was $4.4 million, $(2.8) million, and $(2.6) million for the fiscal years ended January 31, 2012, 2011 and 2010, respectively. The corresponding income before income taxes for foreign operations was $12.4 million, $8.4 million and $5.1 million for the fiscal years ended January 31, 2012, 2011 and 2010, respectively.

The Company files U.S. federal, state, and foreign tax returns that are subject to audit by various tax authorities. The Company is currently under audit in India for fiscal years ended March 31, 1998, 1999, 2008, 2009, and 2010, South Africa for fiscal year 2010 and in California for fiscal years ended 2004 and 2005.

U.S. income and foreign withholding taxes have not been recorded on permanently reinvested earnings of our foreign subsidiaries. These permanently reinvested earnings are approximately $49.1 million at January 31, 2012. It is not practicable for the Company to determine the amount of the related unrecognized deferred income tax liability. Such earnings would become taxable upon the sale or liquidation of these subsidiaries or upon the remittance of dividends.

Deferred income taxes reflect the net effects of the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

Significant components of the Company's deferred tax assets and liabilities are as follows:

	January 31,
	2012			2011
	(in thousands)
Deferred tax assets:
Allowance for doubtful accounts and sales adjustments	$	713		$	559
Accrued vacation		1,850			1,570
Tax credits		7,455			7,749
Deferred revenue		5,607			6,063
Net operating loss carry forwards		12,066			13,703
Accrued expenses - other		1,751			1,569
Section 263(a) interest capitalization		395			406
Equity compensation		5,338			5,376
Other		1,517			1,464
Total deferred tax assets		36,692			38,459
Less valuation allowance		(11,008	)		(10,571	)
Deferred tax assets, net of valuation allowance	$	25,684		$	27,888
Deferred tax liabilities:
Unrecognized capital gain		914			947
Other comprehensive income		2,823			2,559
Other		307			348
Total deferred tax liabilities		4,044			3,854
Total net deferred tax asset	$	21,640		$	24,034
Current portion of deferred tax asset, net		4,355			3,954
Non-current portion of deferred tax asset, net		17,285			20,080
Total net deferred tax asset	$	21,640		$	24,034

The Company reviews its net deferred tax assets by jurisdiction on a quarterly basis to determine whether a valuation allowance is necessary based on the more-likely-than-not standard. If and when the Company's operating performance improves on a sustained basis, the conclusion regarding the need for a valuation allowance could change, resulting in the reversal of some or all of the valuation allowance in the future. At January 31, 2012 and 2011, the valuation allowance attributable to deferred tax assets was $11.0 million and $10.6 million, respectively.

Deferred tax assets at January 31, 2012 and 2011 do not include $1.0 million and $0.9 million, respectively, of excess tax benefits from employee stock exercises. Prior to fiscal 2011, the U.S. Consolidated Group was utilizing net operating loss carryforwards to offset its tax liability and therefore was unable to recognize the excess tax benefits from employee stock exercises. During fiscal 2012, the Company was able to recognize $5,000 of excess tax benefits. Equity will be increased by an additional $1.0 million when such excess tax benefits are ultimately realized.

The Company has net operating loss carryforwards of $45.9 million and tax credit carryforwards of $9.3 million as of January 31, 2012. The majority of the Company's net operating loss carryforwards do not expire, the remaining begin to expire in fiscal year 2013. The majority of the Company's tax credit carryforwards do not expire, the remaining begin to expire in fiscal year 2018.

During the fiscal year ended January 31, 2012, the Company increased its reserves for uncertain tax positions by $0.1 million. Interest and penalties on accrued but unpaid taxes are classified in the Consolidated Statements of Income as income tax expense. The liability for unrecognized tax benefits that may be recognized in the next twelve months is classified as short-term in the Company's Consolidated Balance Sheet while the remainder is classified as long-term.

The following table reconciles the gross amounts of unrecognized tax benefits at the beginning and end of the period:

	Years Ended January 31,
	2012			2011
	(in thousands)
Unrecognized tax benefits at beginning of the year	$	2,502		$	2,411
Increases as a result of tax positions taken in a prior period		258			115
Increases as a result of tax positions taken in the current period		69			¾
Reduction as a result of a lapse of the statute of limitations		(180	)		(11	)
Decreases as a result of tax settlements		¾			(13	)
Unrecognized tax benefit at end of year	$	2,649		$	2,502

All of the unrecognized tax benefits included in the balance sheet at January 31, 2012 would impact the effective tax rate on income from continuing operations, if recognized.

The total amount of interest expense recognized in the Consolidated Statement of Income for unpaid taxes was zero for the year ended January 31, 2012. The total amount of interest and penalties recognized in the Consolidated Balance Sheet at January 31, 2012 is $0.2 million.

In the next twelve months, due to a potential tax credit settlement and a statute expiration an estimated $0.3 million of gross unrecognized tax benefits may be recognized.

The Company files U.S. federal, state, and foreign income tax returns in jurisdictions with varying statute of limitations. The years that may be subject to examination will vary by jurisdiction. Below is a list of our material jurisdictions and the years open for audit as of fiscal 2012:

Jurisdiction	Years Open for Audit
U.S. Federal	FY09 and beyond
California	FY08 and beyond
Michigan	FY08 and beyond
New Jersey	FY08 and beyond
Texas	FY07 and beyond
Australia	FY08 and beyond
France	FY09 and beyond
Germany	FY06 and beyond
Ireland	FY08 and beyond
Netherlands	FY06 and beyond
United Kingdom	FY09 and beyond