Note 9. Income Taxes

The components of our loss before income taxes are as follows (in thousands):

	Year Ended December 31,
	2011			2010			2009
United States	$	(18,455	)	$	(17,794	)	$	(5,292	)
Foreign		457			(158	)		(9,415	)
Total	$	(17,998	)	$	(17,952	)	$	(14,707	)
Loss from discontinued operations, before income taxes	$	(90	)	$	(58	)	$	(11,815	)
Loss from continuing operations, before income taxes	$	(18,088	)	$	(18,010	)	$	(26,522	)

The provision for income taxes from continuing operations consisted of the following (in thousands):

	Year Ended December 31,
	2011			2010			2009
Current:
Federal	$	-		$	58		$	(4,534	)
State		99			30			(407	)
Foreign		53			48			29
Total current		152			136			(4,912	)
Deferred:
Federal		324			(48	)		(29	)
State		13			-			-
Foreign		(88	)		-			-
Total provision for income taxes	$	401		$	88		$	(4,941	)

The provision for income taxes is comprised of estimates of current taxes due in domestic and foreign jurisdictions. Due to the expiration of the Company's tax holiday in India, the Company's foreign tax provision for the current period includes India taxes, which are partially offset by an India tax benefit related to minimum alternative taxes paid during the holiday period.

The reconciliation of the Federal statutory income tax rate to our effective income tax rate is as follows (in thousands):

	Year Ended December 31,
	2011			2010			2009
Provision at Federal statutory rate	$	(6,330	)	$	(6,283	)	$	(9,283	)
State taxes		111			30			(407	)
Permanent differences/other		416			254			207
Stock-based compensation		568			(1	)		105
Federal valuation allowance provided		5,636			6,030			693
Impact of discontinued operations		-			58			3,744
Provision for income taxes	$	401		$	88		$	(4,941	)

Deferred income taxes reflect the net tax effects of 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 our deferred tax assets and liabilities are as follows (in thousands):

	December 31,
	2011			2010
Deferred tax assets:
Accruals and reserves	$	5,352		$	4,358
Net operating loss carryforwards		47,007			41,966
Federal and State tax credits		3,761			4,392
Other credits		165			196
Intangible assets		516			86
Fixed assets		292			372
Gross deferred tax assets		57,093			51,370
Valuation allowance		(56,679	)		(51,043	)
Total deferred tax assets		414			327
Deferred tax liabilities:
Intangible Assets		(467	)
Total deferred tax liabilities		(467	)		-
Net deferred tax assets(liabilities)	$	(53	)	$	327

ASC 740 provides for the recognition of deferred tax assets if realization of such assets is more likely than not to occur. Based on management's review of both the positive and negative evidence, which includes our historical operating performance, reported cumulative net losses since inception and difficulty in accurately forecasting its results, the Company has concluded that it is not more likely than not that the Company will be able to realize all of the Company's U.S. deferred tax assets. Therefore, the Company has provided a full valuation allowance against our U.S. deferred tax assets.

Based on management's review of both positive and negative evidence, which includes the historical operating performance of our Canadian subsidiary, the Company has concluded that it is more likely than not that the Company will be able to realize a portion of the Company's Canadian deferred tax assets. Therefore, the Company has released $118,000 of the related valuation allowance. There is no valuation allowance against the Company's India deferred tax assets primarily relating to Minimum Alternative Tax (MAT). The Company reassesses the need for its valuation allowance on a quarterly basis.

Based on management's review discussed above, the realization of deferred tax assets is dependent on improvements over present levels of consolidated pre-tax income. Until the Company reaches profitability in the U.S., it will not realize its deferred tax assets. When the Company reaches Federal taxable income, the Company may be subject to alternative minimum tax.

The net valuation allowance increased by approximately $5.6 million, and $6.0 million, during the years ended December 31, 2011 and 2010, respectively. The increase in the Company's net operating losses for the year ended December 31, 2011 is primarily due to the addition of Federal net operating losses of $5.0 million.

As of December 31, 2011, the Company had Federal and state net operating loss carryforwards of approximately $114.7 million and $83.5 million, respectively. The Company also had Federal and state research and development credit carryforwards of approximately $2.1 million and $1.9 million, respectively. Of these amounts, approximately $6.5 million of Federal net operating loss carryforwards are related to stock option deductions which, if utilized, will be accounted for as an addition to equity rather than as a reduction of the provision for income taxes. The Federal net operating loss and credit carryforwards will expire at various dates beginning in 2019 through 2031, if not utilized. The state net operating loss carryforwards will expire at various dates beginning in 2013 through 2031, if not utilized. The state research and development credit carryforwards do not have an expiration date.

Utilization of net operating loss carryforwards and credits may be subject to substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization.

ASC 740 clarifies the accounting for uncertainties in income taxes by prescribing guidance for the recognition, de-recognition and measurement in financial statements of income tax positions taken in previously filed tax returns or tax positions expected to be taken in tax returns, including a decision whether to file or not to file in a particular jurisdiction. ASC 740 requires the disclosure of any liability created for unrecognized tax benefits. The application of ASC 740 may also affect the tax bases of assets and liabilities and therefore may change or create deferred tax liabilities or assets.

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

	Year Ended December 31,
	2011			2010			2009
Balance at beginning of year	$	3,776		$	3,706		$	2,361
Increase related to prior year tax positions		-			226			1,331
Decrease related to prior year tax positions		(494	)		(5	)		-
Increase related to current year tax positions		55			63			211
Settlements with tax authorities		-			-			(90	)
Decrease related to lapse of statute of limitations		(127	)		(214	)		(107	)
Balance at end of year	$	3,210		$	3,776		$	3,706

The Company's total amounts of unrecognized tax benefits that, if recognized, that would affect its tax rate are $0.6 million and $0.8 million as of December 31, 2011 and 2010, respectively.

With the adoption of ASC 740-10, the Company's policy to include interest and penalties related to unrecognized tax benefits within its provision for (benefit from) income taxes did not change. The Company had $91,000 accrued for payment of interest and penalties related to unrecognized tax benefit as of December 31, 2011. The company had $117,000 and $121,000 accrued for payment of interest and penalties related to unrecognized tax benefit as of December 31, 2010 and 2009, respectively. The Company recognized $28,000 of interest and penalties related to unrecognized tax benefits during the year ended December 31, 2011.

As of December 31, 2011, the amount of recognized tax benefit where it is reasonably possible that a significant change may occur in the next 12 months is approximately $143,000. The change would result from expiration of a statute of limitations in a foreign jurisdiction.

The Company and its subsidiaries are subject to United States federal income tax, as well as income tax in multiple state and foreign jurisdictions. The tax returns for the years 1998 to 2011 remain subject to examination.