6. Income Taxes

The following table presents the components of our provision (benefit) for income taxes (in thousands):


	July 31,
	2012			2011		2010
Current:
Federal	$	(30	)	$	134	$	(611	)
State		4			19		14
Foreign		231			127		289

		205			280		(308	)

Deferred:
Federal		—			—		—
State		—			—		—
Foreign		(141	)		78		(58	)

		(141	)		78		(58	)

Total tax provision (benefit)	$	64		$	358	$	(366	)

A reconciliation between the statutory federal income tax and the Company’s actual tax provision follows (in thousands):


	July 31,
	2012			2011			2010
Statutory federal income tax benefit .	$	(4,500	)	$	(6,104	)	$	(5,310	)
State taxes, net of federal benefit .		(407	)		(560	)		(485	)
Research and development credits		—			—			(281	)
Valuation allowance .		4,545			6,625			6,101
Federal tax refund		—			—			(831	)
Other .		426			397			440

Tax provision (benefit)	$	64		$	358		$	(366	)

The components of the Company’s net deferred tax assets at July 31, 2012 and 2011 are as follows (in thousands):


	2012			2011
Deferred tax assets:
Net operating loss carryforwards	$	288,381		$	284,269
Credit carryforwards		21,457			21,467
Restructuring and related accruals		4,442			4,405
Accrued expenses		810			847
Share based compensation expense		5,035			4,000
Capital loss carryforwards		783			934
Depreciation		5,646			5,829
Other, net		6,411			6,602

Total net deferred tax assets		332,965			328,353

Valuation allowance		(332,748	)		(328,277	)

Net deferred tax assets	$	217		$	76

Substantially all of the loss before income taxes as shown in the Consolidated Statement of Operations for the years ended July 31, 2012, 2011 and 2010 is derived in the United States. Certain foreign wholly owned subsidiary companies are compensated on a cost plus basis resulting in the recognition of foreign taxable income and tax expense.

During the years ended July 31, 2012, 2011 and 2010, the Company did not record a current tax benefit for the net operating losses due to the Company’s substantial losses.

The Company is currently open to audit under statutes of limitation by the Internal Revenue Service, various foreign jurisdictions, and state jurisdictions for the fiscal years ended July 31, 2006 through July 31, 2012. However, limited adjustments can be made to federal and state tax returns in earlier years in order to reduce net operating loss carryforwards.

As of July 31, 2012, the Company had federal and state net operating loss (“NOL”) carryforwards of approximately $815.6 million and $151.9 million, respectively. The federal and state net operating loss carryforwards will expire at various dates through 2032. The Company also has federal and state research and development credit carryforwards of approximately $11.2 million and $10.3 million, respectively, which begin to expire in 2020 and 2014, respectively.

The occurrence of ownership changes, as defined in Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), is not controlled by the Company, and could significantly limit the amount of net operating loss carryforwards and research and development credits that can be utilized annually to offset future taxable income. The Company completed an updated Section 382 study through July 31, 2011 and the results of this study showed that no ownership change within the meaning of the Code had occurred through July 31, 2011 that would limit the annual utilization of available tax attributes.

The Company has evaluated the positive and negative evidence bearing upon the realization of its deferred tax assets and has established a valuation allowance of $332.7 million and $328.3 million as of July 31, 2012 and July 31, 2011, respectively, for such assets, which are comprised principally of net operating loss carryforwards, research and development credits and stock based compensation. The Company recorded an increase to the valuation allowance during the year ended July 31, 2012 of $4.5 million and a $0.7 million decrease in the valuation allowance during the year ended July 31, 2011, which offset the change in the net deferred tax assets. The increase in the valuation allowance for the year ended July 31, 2012 was primarily related to an increase in available net operating loss carryforwards and stock based compensation. The decrease in the valuation allowance for the year ended July 31, 2011 was primarily related to a reduction in the stock based compensation and capital loss carryover deferred tax assets.

Included in the net operating loss carryforwards are stock option deductions of approximately $125.0 million. The benefits of these stock option deductions approximate $47.8 million and will be credited to additional paid-in capital when realized. As of July 31, 2012, the Company had net operating loss carryforwards of approximately $7.1 million related to the exercise of stock options subsequent to the adoption of fair value accounting. This amount represents the excess benefit and has not been included in the gross deferred tax asset reflected for net operating losses. The benefit of approximately $2.7 million will be credited to additional paid-in capital when the Company recognizes a cash savings.

As of July 31, 2012, the total amount of unrecognized tax benefit is $1.7 million. If recognized, the entire amount would impact the Company’s effective tax rate.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in thousands):


	2012			2011		2010
Beginning balance .	$	1,702		$	1,568	$	1,349
Increase for current year .		137			134		219
Reductions related to expiration of statute of limitations .		(166	)		—		—

Ending balance	$	1,673		$	1,702	$	1,568

As of July 31, 2012 and July 31, 2011, the total amount of accrued interest and penalties related to uncertain tax positions is $0.5 million and $0.4 million, respectively. The Company accounts for interest and penalties related to uncertain tax positions as part of its provision for federal, international, and state income taxes.