Income Taxes

The income tax provision consists of the following (in thousands):



	For the Years Ended December 31,
	2011			2010			2009
Current provision (benefit):
Federal	$	—		$	(358	)	$	12
State	38			26			37
Foreign	548			(573		)	532
Total current provision (benefit)	586			(905		)	581
Deferred provision (benefit):
Federal	(6,683		)	—			38,640
State	(55		)	—			3,363
Foreign	(2,284		)	420			(3,249		)
Total deferred provision (benefit)	(9,022		)	420			38,754
Total income tax provision (benefit)	$	(8,436	)	$	(485	)	$	39,335

The income tax provision (benefit) differs from the amount computed by applying the statutory federal income tax rate to pretax income as a result of the following differences (dollar amounts in thousands):



	For the Years Ended December 31,
	2011					2010					2009
	$			%		$			%		$			%
Statutory federal tax (benefit) rate	$	(4,431	)	35.0	%	$	(299	)	(35.0	)%	$	(1,131	)	(35.0	)%
Increase (decrease) in rates resulting from:
State taxes	(131		)	1.0		(132		)	(15.5	)	(127		)	(3.9	)
Foreign dividend	—			—		—			—		3,195			98.9
Goodwill impairment expense and (benefit) from acquisitions	(81		)	0.6		(251		)	(29.4	)	(250		)	(7.7	)
Valuation allowance	(2,835		)	22.4		1,173			137.3		42,828			1,325.5
Taxes on foreign income that differ from U.S. tax rate	(2,797		)	22.1		(2,886		)	(338.0	)	(2,973		)	(92.0	)
Tax credits	(737		)	5.8		142			16.7		(2,031		)	(62.9	)
Non-deductible stock-based compensation expense	1,275			(10.1	)	1,528			179.0		2,056			63.6
Foreign currency adjustments	—			—		—			—		(3,205		)	(99.2	)
Transaction costs	1,183			(9.3	)
Other	118			(0.9	)	240			28.1		973			30.0
Effective tax rate	$	(8,436	)	66.6	%	$	(485	)	(56.8	)%	$	39,335		1,217.3	%

The Company's 2011 effective tax rate differs from the statutory rate primarily due to a full valuation allowance provided against its United States (“U.S.”) net deferred tax assets, Canadian research and experimental development claims, the impact of stock option expense, the amortization of goodwill for tax purposes and taxes on foreign income that differ from the U.S. tax rate. In addition to the aforementioned items, the effective tax rate for 2011 differs from the statutory rate due to a partial release of the Company's valuation allowance provided against its U.S. net deferred tax assets as a result of the purchase accounting associated with the acquisition of Continuous Computing. Purchase accounting includes the establishment of a deferred tax liability due to the book tax basis differences related to specifically identified non-goodwill intangibles resulting from the acquisition. The net liability from the acquisition created an additional source of income to utilize our deferred tax assets. As such, an income tax benefit of $7.7 million was recognized upon the partial valuation allowance release.

The components of deferred taxes consist of the following (in thousands):



	December 31, 2011			December 31, 2010
Deferred tax assets:
Accrued warranty	$	1,167		$	1,010
Inventory	2,904			2,356
Restructuring accrual	1,331			678
Net operating loss carryforwards	37,401			14,610
Tax credit carryforwards	26,196			23,014
Stock-based compensation	4,261			3,862
Capitalized research and development	1,241			811
Fixed assets	2,783			3,483
Intangible Assets	—			6,900
Goodwill	4,628			5,786
Other	7,306			3,851
Total deferred tax assets	89,218			66,361
Less: valuation allowance	(49,117		)	(49,558		)
Net deferred tax assets	40,101			16,803
Deferred tax liabilities:
Intangible assets	(21,721		)	—
Other	(239		)	(247		)
Total deferred tax liabilities	(21,960		)	(247		)
Total net deferred tax assets	$	18,141		$	16,556

At December 31, 2011, our unrecognized tax benefits associated with uncertain tax positions were $2.4 million, of which $2.1 million, if recognized, would favorably affect the effective tax rate.

The Company's ongoing practice is to recognize potential accrued interest and penalties related to unrecognized tax benefits within its global operations in income tax expense. During 2011, the Company recognized a net increase of approximately $43,000 in potential interest and penalties associated with uncertain tax positions in the Consolidated Statements of Operations. The Company had approximately $211,000 and $154,000 of interest and penalties associated with uncertain tax positions at December 31, 2011, which are excluded from the unrecognized tax benefits table below.

The Company’s total amounts of unrecognized tax benefits at the beginning and end of the period are as follows (in thousands):



	Total
Balance accrued as of December 31, 2009	$	2,178
Additions based on tax positions related to the current year	—
Additions for tax positions of prior years	400
Reductions for tax positions of prior years	(171		)
Settlements	(901		)
Reductions as a result of a lapse of applicable statute of limitations	(148		)
Other	—
Balance accrued as of December 31, 2010	$	1,358
Additions based on tax positions related to the current year	—
Additions for tax positions of prior years	74
Reductions for tax positions of prior years	(81		)
Settlements	(1,057		)
Increase due to acquisition of Continuous Computing	2,084
Other	(18		)
Balance accrued as of December 31, 2011	$	2,360

The Company and its subsidiaries are subject to federal income tax as well as income tax of multiple state and foreign jurisdictions. The Company's statute of limitations are closed for all federal and state income tax years before 2008 and 2007. The statute of limitations for the Company's other foreign subsidiaries are closed for all income tax years before 2000.The statute of limitations for the Company's Canadian subsidiary are closed for all tax years ended before August 31, 2006. However, to the extent allowed by law, the taxing authorities may have the right to examine prior periods where net operating losses and credits were generated and carried forward, and make adjustments up to the net operating loss and credit carryforward amounts. It is reasonably possible that the Company's uncertain tax positions, including interest and penalties, could decrease by approximately $375,000 in the next twelve months.

During 2010 an Internal Revenue Service ("IRS") examination was effectively settled when we agreed to a Notice of Proposed Adjustment that was issued by the IRS. The Proposed Adjustment was provided in full as an uncertain tax position at December 31, 2009.

The Canada Revenue Agency ("CRA") completed an examination of the Company for tax years 2006 through 2008 during the three months ended September 30, 2011. The Company agreed to the proposed adjustments and effectively settled the examination during 2011. The effective settlement did not have a significant impact on the Company's financial statements.

The Company is currently under tax examination in India. The periods covered under examination are the Company's financial years 2004 through 2009. The examination is in various stages of appellate proceedings and all material uncertain tax positions associated with the examination have been taken into account in the ending balance of the unrecognized tax benefits at December 31, 2011.

The Company has recorded valuation allowances of $49.1 million and $49.6 million, as of December 31, 2011 and 2010. This represents a full valuation allowance against the Company's U.S. net deferred tax assets. In evaluating its valuation allowance, the Company considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent financial performance. Based on the Company's review of all positive and negative evidence, including a three year U.S. cumulative pre-tax loss it concluded that a full valuation allowance should be recorded against its U.S. net deferred tax assets.

At December 31, 2011 and 2010, the Company had total available federal net operating loss carryforwards of approximately $103.2 million and $43.0 million. The state net operating loss carryforwards expire between 2012 and 2031. The net operating losses from acquisitions are stated net of limitations pursuant to Section 382 of the Internal Revenue Code. The total annual utilization limitation is approximately $l2.1 million. The Company had total state net operating loss carryforwards of approximately $69.8 million and $44.9 million at December 31, 2011 and 2010. The Company also had net operating loss carryforwards of approximately $2.0 million from certain non-U.S. jurisdictions. The non-U.S. net operating loss carryforwards are primarily attributable to the United Kingdom (“U.K.”) and China. The U.K. tax losses may be carried forward indefinitely provided certain requirements are met. The Chinese tax losses may be carried forward 5 years.

The Company has federal and state research and development tax credit and other federal tax credit carryforwards of approximately $17.9 million at December 31, 2011, to reduce future income tax liabilities. The federal and Oregon tax credits expire between 2012 and 2031. The California research and development credits do not expire. The utilization of acquired credits is subject to an annual limitation pursuant to Section 383 of the Internal Revenue Code. The Company's Canadian subsidiary also had approximately $8.3 million in investment tax credit, $9.1 million in unclaimed scientific research and experimental expenditures and $7.5 million in undepreciated capital cost to be carried forward and applied against future income in Canada.

Realization of the foreign deferred tax assets is dependent on generating sufficient taxable income prior to the expiration of the net operating loss and tax credit carryforwards. Although realization is not assured, management believes that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the balance of the deferred tax assets, net of the valuation allowance, as of December 31, 2011. The amount of the net deferred tax assets that is considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward periods are reduced. Should management determine that the Company would not be able to realize all or part of the net deferred tax assets in the future, adjustments to the valuation allowance for deferred tax assets may be required.

The Company did not repatriate any earnings of its foreign subsidiaries in 2011. The Company plans to indefinitely reinvest the remaining earnings of all its foreign subsidiaries. Should the Company plan to repatriate any foreign earnings in the future, it will be required to establish an income tax liability and recognize additional income tax expense related to such earnings. The Company has indefinitely reinvested approximately $34.2 million of the undistributed earnings of certain foreign subsidiaries at December 31, 2011. Such earnings would be subject to U.S. taxation if repatriated to the U.S.

Pretax book loss from domestic operations for the fiscal years 2011, 2010 and 2009 was $23.2 million, $12.8 million, and $15.6 million. Pretax book income from foreign operations for the fiscal years 2011, 2010 and 2009 was $10.5 million, $11.9 million, and $12.3 million.