(12) Income Taxes

The total provision for income taxes relates to current tax expense and was $40,000 and $41,000 for the years ended October 31, 2011 and 2010, respectively.

The Company has federal net operating loss ("NOL") and general business tax credit carry forwards; however, the utilization of these tax loss and tax credit carry forwards is limited under Internal Revenue Code ("IRC") §382 and §383, respectively, as a result of a IRS-deemed change in ownership that occurred in the fourth quarter of fiscal 2006. The Company estimates that the amount of federal NOL carry forward that is not limited is approximately $15.9 million. These loss carry forwards will expire in years 2012 through 2031. Additionally, the Company has concluded that all general business credit carry forwards are limited and not available for use in future years. The Company also has $109,000 of alternative minimum tax credit carry forwards that do not have expiration dates. The alternative minimum tax credit carry forwards are limited by IRC §383 but their ultimate use is not affected since these do not expire. The following table summarizes the expiration of federal NOL carry forwards over the next five years, after considering the statutory limitations described above:

(In thousands)		Net Operating Losses
Year Ended October 31,
2012		$ 1,491
2013		−
2014		−
2015		−
2016		−
Total		$ 1,491

The actual tax expense attributable to loss from continuing operations differs from the expected tax benefit computed by applying the U.S. federal corporate income tax rate of 34% to the loss from continuing operations as follows:

	2011	2010
Federal statutory rate	(34.0)%	(34.0)%
State taxes, net of federal benefit	33.0	2.7
Change in federal valuation allowance	(1,055.0)	(47.2)
Impact of expiration of net operating losses	1,052.6	69.5
Non-deductible meals and entertainment	27.9	3.6
Stock-based compensation	10.9	9.7
Other	0.3	0.8
Effective income tax rate	35.7%	5.1%

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are presented below:

(In thousands)	2011	2010
Deferred tax assets:
Net operating loss carry forwards	$ 4,762	$ 5,787
Tax credit carry forwards	109	109
Deferred revenue	286	271
Inventory reserve	228	291
Stock-based compensation	208	179
Other	263	344
Valuation allowance	(5,609)	(6,828)
Total deferred tax assets	247	153
Deferred tax liabilities:
Intangible assets	(162)	(143)
Fixed assets	(85)	(10)
Total deferred tax liabilities	(247)	(153)
Net deferred income tax asset/(liability)	$ −	$ −

The valuation allowance for deferred tax assets as of October 31, 2011 and 2010 was $5,609,000 and $6,828,000, respectively. The total valuation allowance decreased by $1,219,000 for the year ended October 31, 2011 and decreased $381,000 for the year ended October 31, 2010. A significant portion of the current year decrease in valuation allowance is attributable to expiring NOL carry forward tax benefits as well as a change in the presentation of the tax benefit of the excess deduction related to stock option exercises discussed below. In assessing the need for a valuation allowance, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based on the Company's assessment of these factors, the net deferred tax assets as of October 31, 2011 and 2010 have been fully reduced by the valuation allowance.

Deferred tax assets relating to the tax benefits of employee stock option grants have been reduced to reflect exercises through the year ended October 31, 2011. Certain exercises resulted in tax deductions in excess of previously recorded tax benefits. The Company's NOL carry forwards of $15.9 million referenced above at October 31, 2011 include $2.5 million of income tax deductions in excess of previously recorded tax benefits. Although these additional tax deductions are reflected in NOL carry forwards referenced above, the related tax benefit of $905,000 will not be recognized until the deductions reduce taxes payable. Accordingly, since the tax benefit does not reduce the Company's current taxes payable in 2011, these tax benefits are not reflected in the Company's deferred tax assets presented above. The tax benefit of these excess deductions will be reflected as a credit to additional paid-in capital when recognized.

Under the application of fresh-start accounting, as amended by ASC 805 Business Combinations, when the valuation allowance relating to pre-emergence bankruptcy net operating loss and other deferred tax assets is reversed, tax benefits will be recorded as a reduction to income tax expense. In prior years, the tax benefit from the valuation allowance release would have been credited to intangibles and then to additional paid-in-capital.

Any reduction of the valuation allowance related to post-bankruptcy net operating losses and other deferred tax assets would (i) first affect earnings as a reduction in the provision for taxes and (ii) thereafter, the remainder related to employee stock-based compensation tax deductions would increase additional paid-in capital as noted above.

In accounting for uncertainty in income taxes we recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company recognizes interest and penalties on any unrecognized tax benefits as a component of income tax expense. For the year ended October 31, 2011 and 2010, the liability for uncertainties in income taxes was increased by $2,000 and $4,000, respectively, for interest costs.

A reconciliation of the beginning and ending amount of unrecognized tax benefits at October 31, 2011 follows:

(In thousands)		Amount
Balance as of November 1, 2009		$ 35
Additions during year ended October 31, 2010		4
Additions during year ended October 31, 2011		2
Balance as of October 31, 2011		$ 41

If recognized, these benefits would lower the effective tax rate. The increase in tax liabilities is due to the Company's decision to not file income tax returns in certain states where income tax nexus may ultimately be asserted by the state. Included in the ending liability for unrecognized tax benefits is an estimate for interest and penalties totaling $16,000.

Our federal income tax returns are closed for all tax years up to and including the year ended October 31, 2007. The expiration of the statute of limitations related to the various state income tax returns that the Company file varies by state.