INCOME TAXES

Income (loss) from continuing operations before income taxes in the years ended December 31, 2011 and 2010 consisted of the following (in thousands):



	2011		2010
United States	$	2,876	$	(11,077	)
Non-U.S.	311		1,847
Total income (loss) from continuing operations before income taxes	$	3,187	$	(9,230	)

Income tax expense for continuing operations in the years ended December 31, 2011 and 2010 consisted of the following (in thousands):



	2011		2010
Current:
U.S. federal	$	172	$	(349	)
U.S. state	26		26
Non-U.S.	77		656
Total current	275		333
Deferred:
U.S. federal	314		202
U.S. state	27		17
Non-U.S.	70		36
Total deferred	411		255
Total income tax expense	$	686	$	588

The tax effect of deferred income tax assets and liabilities arising from temporary differences and carryforwards as of December 31, 2011 and 2010 was as follows (in thousands):



	December 31,
	2011			2010
Deferred income tax assets:
Accrued liabilities	$	2,703		$	3,227
Allowance for doubtful accounts	27			13
Inventory valuation	388			408
Capitalized indirect inventory costs	183			167
Stock-based compensation expense	721			781
Net operating loss carryforward	39,777			36,933
Basis difference on assets held-for-sale	1,821			1,702
Capital loss carryforward	4,319			4,319
Basis difference on long-lived assets	8,332			10,110
Other	3,317			3,553
Total deferred income tax assets before valuation allowance	61,588			61,213
Valuation allowance	(60,328		)	(59,550		)
Total deferred income tax assets, net of valuation allowance	1,260			1,663
Deferred income tax liabilities:
Prepaid advertising	(287		)	(301		)
Other prepaids	(311		)	(366		)
Basis difference on long-lived assets	(2,409		)	(2,135		)
Undistributed earnings of foreign subsidiaries	(89		)	(34		)
Other	(288		)	(543		)
Total deferred income tax liabilities	(3,384		)	(3,379		)
Net deferred income tax liability	$	(2,124	)	$	(1,716	)

Net deferred income tax liability in the Company's consolidated balance sheets as of December 31, 2011 and 2010 consisted of the following (in thousands):



	December 31,
	2011			2010
Current deferred income tax assets	$	75		$	57
Current deferred income tax liabilities	(1,064		)	(1,160		)
Non-current deferred income tax assets, included in “Other assets”	299			395
Non-current deferred income tax liabilities	(1,434		)	(1,008		)
Net deferred income tax liability	$	(2,124	)	$	(1,716	)

Following is a reconciliation of the U.S. statutory federal income tax rate with the Company's effective income tax rate for continuing operations in years ended December 31, 2011 and 2010:



	2011		2010
U.S. statutory income tax rate	35.0	%	35.0	%
State tax, net of U.S. federal tax benefit	5.2		2.2
Nondeductible incentive stock option expense	—		0.2
Non-U.S. income taxes	2.1		13.1
Effect of double taxation dividend received	—		(13.6	)
Nondeductible operating expenses	(1.8	)	(0.1	)
Research and development credit	(2.6	)	—
Change in deferred tax measurement rate	(0.3	)	0.3
Change in uncertain tax positions	13.0		(1.0	)
Valuation allowance	(29.0	)	(40.4	)
Other	(0.1	)	(2.1	)
Effective income tax rate	21.5	%	(6.4	)%

Nautilus must periodically evaluate the potential realization of its deferred income tax assets and, if necessary, record a valuation allowance to reduce the net carrying value of such assets to the amount expected to be realized. In 2011 and 2010 Nautilus concluded that cumulative taxable losses in recent years indicated a valuation allowance against its deferred income tax assets was required. If and when a review of objective evidence indicates that some or all of the Company's valuation allowance is no longer appropriate, release of the valuation allowance would be recognized as an income tax benefit to continuing operations in the period in which such assessment is made. The amount of valuation allowance offsetting the Company's deferred income tax assets was $60.3 million and $59.6 million as of December 31, 2011 and 2010, respectively.

Nautilus has net operating loss, capital loss and income tax credit carryforwards in various jurisdictions, all of which are fully offset by valuation allowances and are available to offset future taxable income, if any. The timing and manner in which the Company is permitted to utilize its net operating loss carryforwards may be limited by Internal Revenue Code Section 382, Limitation on Net Operating Loss Carry-forwards and Certain Built-in-Losses Following Ownership Change.

As of December 31, 2011, the Company had the following income tax carryforwards (in millions):



		Amount		Expires in
Net operating loss carryforwards:
	Federal	$	79.0	2029 - 2031
	State	106.3		2012 - 2031
	Germany	11.4		Indefinite
	Switzerland	18.6		2012 - 2018
	China	3.7		2012 - 2014
	Italy	2.5		2013 - 2016
Federal capital loss carryforward		11.3		2013
Income tax credit carryforwards:
	Federal	2.6		2018 - 2031
	State	0.4		2018 - 2022

Under accounting guidance, an uncertain tax position represents the Company's expected treatment of a tax position taken in a filed tax return, or planned to be taken in a future tax return, that has not been reflected in measuring income tax expense for financial reporting purposes. Following is a reconciliation of gross unrecognized tax benefits from uncertain tax positions (excluding the impact of penalties and interest) in the years ended December 31, 2011 and 2010 (in thousands):



	2011			2010
Balance, January 1	$	3,342		$	3,249
Increases due to tax positions taken in previous periods	1,017			52
Decreases due to tax positions taken in previous periods	—			(75		)
Increases due to tax positions taken in the current period	73			125
Decreases due to settlements with taxing authorities	—			—
Decreases due to lapse of statute of limitations	(56		)	(9		)
Balance, December 31	$	4,376		$	3,342

Of the $4.4 million of gross unrecognized tax benefits from uncertain tax positions outstanding as of December 31, 2011, $2.1 million would, if recognized, affect the Company's effective tax rate.

The Company recognizes tax-related interest and penalties as a component of income tax expense. The Company had a cumulative liability for interest and penalties related to uncertain tax positions as of December 31, 2011 and 2010 of $1.6 million and $1.2 million, respectively.

The Company's U.S. federal income tax returns for 2003 through 2011 are open to review by the U.S. Internal Revenue Service. The Company's state income tax returns for 2005 through 2011 are open to review, depending on the respective statute of limitation in each state. In addition, the Company files income tax returns in several non-U.S. jurisdictions with varying statutes of limitation.

As of December 31, 2011, the Company believes it is reasonably likely that, within the next 12 months, $0.9 million of previously unrecognized tax benefits related to certain U.S. and foreign filing positions will be recognized, primarily as reductions to income tax expense, as statutes of limitation expire.