Note 10—Income Taxes

For financial reporting purposes, net income (loss) before income taxes includes the following components (in thousands):


	Years Ended December 31,
	2011			2010			2009
United States	$	(7,062	)	$	(12,903	)	$	(40,013	)
Foreign		9,767			8,478			19,641

Total	$	2,705		$	(4,425	)	$	(20,372	)

The provision (benefit) for income taxes based on income (loss) before income taxes is as follows (in thousands):


	Years Ended December 31,
	2011			2010			2009
Federal:
Current	$	—		$	13		$	—
Deferred		(2,001	)		(4,183	)		(8,452	)

		(2,001	)		(4,170	)		(8,452	)
State:
Current		6			5			5
Deferred		280			60			(1,457	)

		286			65			(1,452	)
Foreign:
Current		3,089			1,006			1,454
Deferred		(1,216	)		607			625

		1,873			1,613			2,079
Valuation allowance		1,698			4,123			10,365

	$	1,856		$	1,631		$	2,540

The provision for income taxes in the accompanying consolidated statements of operations differs from the amount calculated by applying the statutory income tax rate to income (loss) from continuing operations before income taxes. The primary components of such difference are as follows (in thousands):


	Years Ended December 31,
	2011			2010			2009
Taxes at federal statutory rate	$	884		$	(1,504	)	$	(6,891	)
State taxes, net of federal benefit		(249	)		(284	)		(677	)
Effect of tax rate differential for foreign subsidiary		(1,576	)		(1,356	)		(1,801	)
Valuation allowance, including tax benefits of stock activity		1,698			4,123			10,365
Nondeductible interest		462			(313	)		852
Foreign tax credit		(128	)		(183	)		—
Stock compensation		73			155			306
FCPA settlement		—			1,156			408
Return to provision adjustments		393			(1,512	)		(40	)
Subpart F income inclusion		—			948			—
Other		299			401			18

Tax provision	$	1,856		$	1,631		$	2,540

The Company has established a valuation allowance against its U.S. federal and state deferred tax assets due to the uncertainty surrounding the realization of such assets as evidenced by the cumulative losses from operations through December 31, 2011. Management periodically evaluates the recoverability of the deferred tax assets. At such time as it is determined that it is more likely than not that deferred assets are realizable, the valuation allowance will be reduced accordingly, and recorded as a tax benefit with the exception of $15.5 million which will result in additional paid in capital as discussed below. The Company has recorded a valuation allowance of $67.3 million as of December 31, 2011 to reflect the estimated amount of deferred tax assets that may not be realized. The Company increased its valuation allowance by $1.7 million for the year ended December 31, 2011.

Pursuant to Internal Revenue Code Sections 382 and 383, use of the Company's federal net operating loss and credit carryforwards may be limited due to a cumulative change in ownership of more than 50% within a three-year period.

At December 31, 2011, the Company has federal and state net operating loss carryforwards of approximately $164.6 million and $102.9 million, respectively. The federal tax loss carryforwards will begin to expire in 2020 and the state tax loss carryforwards will begin to expire in 2012. The excess tax benefits associated with the exercise of non-qualified stock options, restricted stock grants, and disqualifying dispositions of both incentive stock option stock and stock acquired from the Company's Employee Stock Purchase Plan, for 2011 and 2010 in the amount of $3.3 million and $2.8 million, respectively, did not reduce current income taxes payable and, accordingly, are not included in the deferred tax asset relating to net operating loss ("NOL") carryforwards, but are included with the federal and state NOL carryforwards disclosed in this footnote. The tax benefits associated with stock option deductions from 1998 to 2005 in the amount of $15.5 million were not recorded in additional paid-in capital because their realization was not more likely than not to occur and, consequently, a valuation allowance was recorded against the entire benefit. In addition, the Company has research and development and other tax credit carryforwards for federal and state income tax purposes as of December 31, 2011 of $5.4 million and $4.9 million, respectively. The federal credits will begin to expire in 2012 unless utilized and the state credits have an indefinite life.

The Company has been granted a tax holiday in Switzerland, which is effective as of January 1, 2012 and is for 10 years. The tax holiday is conditional upon our meeting certain employment and investment thresholds. The impact of this tax holiday decreased deferred foreign taxes by $997,000 for 2011. The benefit of the tax holiday on net income per share (diluted) was $.04, for 2011.

U.S. and foreign withholding taxes have not been recognized on the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that are essentially permanent in duration. This amount becomes taxable upon a repatriation of assets from the subsidiary or a sale or liquidation of the subsidiary. The amount of unremitted earnings from foreign subsidiaries totaled $12.6 million as of December 31, 2011. Determination of the amount of any unrecognized deferred income tax liability on the excess of the financial reporting basis over the tax basis of investments in foreign subsidiaries is not practicable because of the complexities of the hypothetical calculation.

Items that give rise to significant portions of the deferred tax accounts are as follows (in thousands):


	December 31,
	2011			2010
Deferred tax assets:
Tax loss carryforwards	$	58,643		$	57,354
Debt conversion rights		—			784
Tax credit carryforwards		329			202
Uniform capitalization, contract and inventory related reserves		1,319			952
Accrued vacation		631			630
Stock-based compensation		763			537
Tax basis depreciation less book depreciation		984			979
Intangible assets		1,232			1,272
Deferred revenue		265			—
FCPA settlement		1,187			2,379
Other		1,849			656

		67,202			65,745
Deferred tax liabilities:
Inventory deduction		(185	)		(270	)
Pension assets		(933	)		(1,166	)
Allowance for doubtful accounts		(245	)		(1,109	)
Other		(1	)		(167	)

		(1,364	)		(2,712	)

Net deferred tax assets before valuation allowance		65,838			63,033
Valuation allowance		(67,270	)		(65,572	)

Net deferred tax liabilities	$	(1,432	)	$	(2,539	)

The Company adopted the provisions of section 740-10 of the Accounting for Uncertainty in Income Taxes Topic of the FASB ASC on January 1, 2007. Of the total unrecognized benefits at December 31, 2011, approximately $10.0 million was recorded as a reduction to deferred tax assets, which caused a corresponding reduction in the Company's valuation allowance of $10.0 million. To the extent unrecognized tax benefits are recognized at a time when a valuation allowance does not exist, the recognition of the tax benefit would reduce the effective tax rate. The Company does not anticipate that the amount of unrecognized tax benefits as of December 31, 2011 will significantly increase or decrease within 12 months.

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


Balance at January 1, 2011	$	9,372
Increase in prior period positions		66
Increase in current period positions		995

Balance at December 31, 2011	$	10,433

The Company recognizes interest and penalties as a component of income tax expense. Interest and penalties for the years ended December 31, 2011 and 2010 were $37,000 and $14,000, respectively, and for the year ended December 31, 2009 was zero.

The Company's U.S. federal income tax returns for tax years subsequent to 2007 are subject to examination by the Internal Revenue Service and its state income tax returns subsequent to 2006 are subject to examination by state tax authorities. The Company's foreign tax returns subsequent to 2001 are subject to examination by the foreign tax authorities.

Net operating losses from years from which the statute of limitations have expired (2006 and prior for federal and 2005 and prior for state) could be adjusted in the event that the taxing jurisdictions challenge the amounts of net operating loss carryforwards from such years.