INCOME TAXES

The provision for income taxes consisted of the following:



	For the Year Ended
	June 25, 2011		June 26, 2010			June 27, 2009
	(in thousands)
Federal
Current	$	44,579	$	151,786		$	30,237
Deferred	118,351		12,340			(7,447		)
State
Current	781		4,092			(2,056		)
Deferred	4,204		(1,464		)	(681		)
Foreign
Current	2,810		14,345			2,995
Deferred	1,937		(6,175		)	1,116
	$	172,662	$	174,924		$	24,164

Pretax income (loss) from the Company's foreign subsidiaries was approximately $285.0 million, $(95.5) million and $(63.3) million for fiscal years ended June 25, 2011, June 26, 2010 and June 27, 2009, respectively.

The Company has tax holidays with respect to certain operations in Thailand and the Philippines. The Thailand and Philippines tax holidays will expire at various dates between the fiscal years 2012 and 2019. The impact of the tax holidays on net income was not material for fiscal years 2011, 2010, and 2009.

As of June 25, 2011, the Company's foreign subsidiaries have accumulated undistributed earnings of approximately $123.8 million that are intended to be indefinitely reinvested outside the U.S. and, accordingly, no provision for U.S. federal and state tax has been made for the distribution of these earnings. At June 25, 2011 the amount of the unrecognized deferred tax liability on the indefinitely reinvested earnings was $39.9 million.

The provision for income taxes differs from the amount computed by applying the statutory rate as follows:



	For the Year Ended
	June 25, 2011		June 26, 2010		June 27, 2009

Federal statutory rate	35.0	%	35.0	%	35.0	%
State tax, net of federal benefit	0.7		0.4		(10.8	)
General business credits	(1.5	)	(1.2	)	(25.6	)
Domestic production deduction benefit	(0.1	)	(2.1	)	(16.1	)
Foreign earnings and losses taxed or benefitted at different rates	(4.6	)	21.0		76.5
Stock-based compensation	1.3		3.0		8.4
Acquired in process R&D	—		—		3.9
Executive compensation	0.1		0.1		(11.2	)
Release of unrecognized tax benefits	(4.1	)	—		—
Interest accrual for unrecognized tax benefits	(1.6	)	0.9		9.9
Other	0.9		1.2		(0.2	)

Income tax rate	26.1	%	58.3	%	69.8	%

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. The components of the Company's deferred tax assets and liabilities are as follows:



	For the Year Ended
	June 25, 2011			June 26, 2010
	(in thousands)
Deferred tax assets:
Inventory valuation and reserves	$	11,768		$	66,087
Distributor related accruals and sales return and allowance accruals	21,334			14,168
Deferred revenue	2,233			3,187
Accrued compensation	56,467			47,500
Stock-based compensation	73,295			84,225
Net operating loss carryovers	20,827			31,450
Tax credit carryovers	43,285			46,025
Other reserves and accruals not currently deductible for tax purposes	10,608			75,782
Other	8,940			18,437

Total deferred tax assets	248,757			386,861

Deferred tax liabilities:
Fixed assets cost recovery, net	(257,647		)	(240,463		)
Other	(12,168		)	(10,524		)

Net deferred tax assets /(liabilities) before valuation allowance	(21,058		)	135,874
Valuation allowance	(44,562		)	(47,006		)

Net deferred tax assets/(liabilities)	$	(65,620	)	$	88,868

The valuation allowance decreased by $2.4 million in fiscal year 2011 primarily due to benefits realized for state research tax credit carryforwards. $37.4 million of the valuation allowance is attributable to the tax benefits of income tax deductions generated by the exercise of stock options that when realized, will be recorded as a credit to additional paid-in-capital.

As of June 25, 2011, the Company has $29.1 million of federal net operating loss carryforwards expiring at various dates between fiscal years 2024 and 2028, $57.7 million of state net operating loss carryforwards expiring at various dates through the fiscal years 2029, $22.5 million of foreign net operating losses with no expiration date, $8.3 million of state credit carryforwards expiring at various dates between fiscal years 2012 and 2026 and $62.9 million of state credit carryforwards with no expiration date.

The Company classifies unrecognized tax benefits as (i) a current liability to the extent that payment is anticipated within one year; (ii) a non current liability to the extent that payment is not anticipated within one year; or (iii) as a reduction to deferred tax assets to the extent that the unrecognized tax benefit relates to deferred tax assets such as operating loss or tax credit carryforwards.

A reconciliation of the change in gross unrecognized tax benefits, excluding interest, penalties and the federal benefit for state unrecognized tax benefits, is as follows:



	For the Year Ended
	June 25, 2011			June 26, 2010
	(in thousands)
Balance as of beginning of year	$	151,464		$	137,298
Tax positions related to current year:
Addition	59,345			31,491
Tax positions related to prior year:
Addition	7,935			5,696
Reduction	(21,399		)	(190		)
Settlements	(16,636		)	(22,831		)
Lapses in statutes of limitations	(63,296		)	—

Balance as of end of year	$	117,413		$	151,464

The total amount of gross unrecognized tax benefits as of June 25, 2011 that, if recognized, would affect the effective tax rate and additional paid in capital is $107.9 million and $9.5 million, respectively. During fiscal year 2011, $33.1 million of prior year unrecognized tax benefits were recognized, due to the lapse of the statute of limitations, and credited to additional paid in capital.

Consistent with prior years, the Company reports interest and penalties related to unrecognized tax benefits as a component of income tax expense. The gross amount of interest and penalties recognized in income tax expense during fiscal years ended June 25, 2011, June 26, 2010, and June 27, 2009 was $(17.1) million, $4.4 million and $5.5 million, respectively, and the total amount of interest and penalties accrued as of June 25, 2011, June 26, 2010, and June 27, 2009 was $3.3 million, $20.4 million, and $21.8 million, respectively. The fiscal year 2011 interest and penalty net benefit of $17.1 million is primarily due to a $19.5 million reversal of prior year interest and penalties due to the expiration of the statute of limitations.

Management estimates that it is reasonably possible that the liability for gross unrecognized tax benefits, including accrued interest and penalties, could decrease within the next 12 months by $3.4 million. Such changes could occur based on the expiration of various statutes of limitations and the possible conclusion of ongoing tax audits.

During the second quarter of fiscal year 2011 the Internal Revenue Service ("IRS") completed its examination of the Company's federal corporate income tax returns for the fiscal years 2007- 2008 and issued a Revenue Agents Report ("RAR"). The Company agreed with the RAR findings and made a payment of $0.8 million that reduced the Company's liability for unrecognized tax benefits. During the fourth quarter of fiscal year 2011, an examination of the Company's California corporate income tax returns for the fiscal years 2006 - 2007 was completed. The Company agreed with the examination results, which reduced California research tax credit carryforwards and unrecognized tax benefits by $14.5 million.

In the first quarter of fiscal year 2012 the IRS intends to commence an examination of the Company's federal corporate income tax returns for the fiscal years 2009 and 2010. Management believes that it has adequately provided for any adjustments that may result from the IRS examination, however, the outcome of tax examinations cannot be predicted with certainty.

A summary of the fiscal tax years that remain subject to examination, as of June 25, 2011, for the Company's major tax jurisdictions are:



United States - Federal	2008 - forward
United States - Various States	2007 - forward
Japan	2006 - forward
Philippines	2008 - forward
Thailand	2009 - forward
United Kingdom	2008 - forward