Income Taxes

Income before income taxes is as follows (in thousands):



	Year Ended
	June 30, 2013			June 30, 2012			July 3, 2011
Domestic	$	14,692		$	20,839		$	4,416
Foreign	(3,341		)	(3,771		)	(704		)
Total	$	11,351		$	17,068		$	3,712

The provision for income taxes for fiscal 2013, 2012 and fiscal 2011 consisted of the following (in thousands):



	Year Ended
	June 30, 2013		June 30, 2012		July 3, 2011
Current:
Federal	$	225	$	114	$	142
State	140		79		92
Foreign	1,163		916		1,613
Total current	1,528		1,109		1,847
Deferred:
Federal	15		30		(639		)
Foreign	135		57		(209		)
Total deferred	150		87		(848		)
Provision for income taxes	$	1,678	$	1,196	$	999

The difference between the provision for income taxes and the amount computed by applying the federal statutory income tax rate (35 percent) to income before taxes is explained below (in thousands):



	Year Ended
	June 30, 2013			June 30, 2012			July 3, 2011
Tax at federal statutory rate	$	3,973		$	5,974		$	1,299
State income tax, net of federal benefit	105			51			57
Valuation allowance	(3,687		)	(8,035		)	(2,492		)
Foreign earnings taxed at other than U.S. rates	498			3,607			1,576
Deferred compensation	845			170			398
Other	(56		)	(571		)	161
Provision for income taxes	$	1,678		$	1,196		$	999

Significant components of the Company’s deferred tax assets are as follows (in thousands):



	June 30, 2013			June 30, 2012
Deferred tax assets:
Net operating loss carry-forwards	$	85,276		$	73,413
Tax credit carry-forwards	28,882			23,051
Depreciation	—			14,074
Deferred revenue (net)	9,710			8,722
Warrant amortization	3,991			5,489
Inventory write-downs	2,759			2,803
Other allowances and accruals	3,658			2,901
Other	8,714			10,895
Total deferred tax assets	142,990			141,348
Valuation allowance	(142,023		)	(140,641		)
Total net deferred tax assets	967			707
Deferred tax liabilities:
Depreciation	(388		)	—
Deferred tax liability on foreign withholdings	(134		)	(120		)
Total deferred tax liabilities	(522		)	(120		)
Net deferred tax assets	$	445		$	587
Recorded as:
Net current deferred tax assets	$	386		$	644
Net non-current deferred tax assets	294			178
Net current deferred tax liabilities	(235		)	(235		)
Net deferred tax assets	$	445		$	587

The Company's valuation allowance increased by $1.4 million in fiscal 2013 and decreased by $9.9 million in fiscal 2012. The Company has provided a full valuation allowance against all of its U.S. federal and state deferred tax assets, and no valuation allowance against any of its non-U.S. deferred tax assets. The valuation allowance is determined by assessing both negative and positive evidence to determine whether it is more likely than not that the deferred tax assets are recoverable; such assessment is required on a jurisdiction by jurisdiction basis. The Company's inconsistent earnings in recent periods, coupled with the Company's inability to forecast greater than one quarter in advance and the cyclical nature of its business represent sufficient negative evidence to require a full valuation allowance against its U.S. federal and state net deferred tax assets. This valuation allowance will be evaluated periodically and can be reversed partially or totally if business results and the economic environment have sufficiently improved to support realization of the Company's deferred tax assets.

As of June 30, 2013, the Company had net operating loss carry-forwards for federal and state tax purposes of $270.7 million and $87.9 million, respectively, of which $35.3 million and $32.7 million, respectively, represent deductions from share-based compensation for which a benefit would be recorded in additional paid-in capital when realized. The Company also had federal and state tax credit carry-forwards of $18.7 million and $15.6 million, respectively, as of June 30, 2013. Federal net operating loss carry-forwards of $270.7 million will expire between 2020 through 2032 and state net operating losses of $87.9 million will expire between 2013 through 2030, if not utilized. Federal tax credits of $18.7 million will expire beginning in 2018, if not utilized and state tax credits of $0.2 million will expire beginning in 2013, if not utilized. The additional state tax credits of $15.4 million will carry forward indefinitely.

As of June 30, 2013, the Company conducted an Internal Revenue Code Section 382 (“Sec. 382”) analysis with respect to its net operating loss and credit carry-forwards and determined that there was no limitation. It is possible that subsequent ownership changes may limit the utilization of these tax attributes.

As of June 30, 2013, the Company intends to indefinitely reinvest the earnings of approximately $42.1 million of certain foreign corporations. If such earnings were distributed, the Company would accrue an additional income tax expense of approximately $1.2 million.

As of June 30, 2013, the Company had $10.9 million of unrecognized tax benefits. If fully recognized in the future, $0.3 million would impact the effective tax rate, and $10.6 million would result in adjustments to deferred tax assets and corresponding adjustments to the valuation allowance. It is reasonably possible that the amount of unrealized tax benefit could decrease by approximately $0.1 million during the next twelve months due to the expiration of the statute of limitations in certain foreign jurisdictions. During the year ended June 30, 2013 the Company performed a study on its research and development credits documenting the historic credits as prescribed by Internal Revenue Service. As a result of this study the company adjusted its available federal and state research credits as well as the amount of these credits that would be unrecognized tax benefits. The credits classified as unrecognized tax benefits decreased by approximately $15.0 million as a result of this study.

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



Balance at June 27, 2010	$	23,910
Increases related to prior year tax positions	464
Increases related to current year tax positions	1,636
Balance at July 3, 2011	$	26,010
Decrease related to prior year tax positions	(444		)
Increase related to current year tax positions	729
Lapse of statute of limitations	(549		)
Balance at June 30, 2012	$	25,746
Decrease related to prior year tax positions	(14,966		)
Increase related to prior year tax positions	45
Increase related to current year tax positions	270
Lapse of statute of limitations	(197		)
Balance at June 30, 2013	$	10,898

Estimated interest and penalties related to the underpayment of income taxes are classified as a component of tax expense in the Consolidated Statement of Income and totaled approximately $14,000, $28,000, and $30,000 for the years ended June 30, 2013, June 30, 2012, and July 3, 2011, respectively. Accrued interest and penalties were approximately $40,000 and $77,000 as of June 30, 2013 and June 30, 2012, respectively.

In general, the Company's U.S. federal income tax returns are subject to examination by tax authorities for fiscal years 1999 forward due to net operating losses and the Company's state income tax returns are subject to examination for fiscal years 1997 forward due to net operating losses.