Income Taxes

Income before provision for income taxes consisted of the following:



	2012			2011		2010
	(in thousands)
United States	$	9,723		$	12,931	$	25,675
International	(5,816		)	15,854		18,234
Total pre-tax income	$	3,907		$	28,785	$	43,909

The provision (benefit) for income taxes consisted of the following for the years ended September 30:



	2012			2011			2010
	(in thousands)
Current:
Federal	$	235		$	—		$	(207	)
State	141			4			318
Foreign	1,120			1,020			1,043
Total current	$	1,496		$	1,024		$	1,154
Deferred:
Federal	5,470			(19,340		)	—
State	95			(4,561		)	—
Foreign	(549		)	(4,461		)	—
Total deferred	5,016			(28,362		)	—
Total provision (benefit)	$	6,512		$	(27,338	)	$	1,154

The Company’s provision (benefit) for income taxes differs from the amount computed by applying the U.S. federal statutory rate (35%) to income before taxes and minority interest as follows for the years ended September 30:



	2012			2011			2010
	(in thousands)
Income taxes computed at the U.S. federal statutory rate	$	1,367		$	10,075		$	15,368
Federal refundable credit	—			—			(207		)
State income taxes	69			3			207
Research credits	757			—			—
Foreign losses not benefited (benefited)	1,377			(5,549		)	(6,382		)
Non-deductible stock compensation	672			527			375
Non-deductible impairment charges	3,321			—			—
U.S. operating loss not benefited (benefited)	—			(5,123		)	(9,286		)
Valuation allowance changes	1,384			(28,136		)	—
Reversal of previously provided taxes	—			—			(140		)
Foreign taxes	(2,523		)	1,020			1,183
Other individually immaterial items	88			(155		)	36
Total provision (benefit)	$	6,512		$	(27,338	)	$	1,154

As of September 30, 2012, the Company had net operating loss carryforwards for federal, state and foreign income tax purposes of approximately $56.8 million, $80.7 million and $14.5 million, respectively. The federal, state and foreign net operating loss carryforwards will expire at various dates beginning in 2013, if not utilized. The Company has federal research and development tax credits and foreign tax and minimum tax credit carryforwards of approximately $3.4 million, $1.3 million and $0.6 million, respectively. The Company also has state research and development tax credit carryforwards of approximately $2.6 million. The Company has foreign research and development tax credit carryforwards of approximately $3.6 million. The federal tax credits will expire at various dates beginning in 2013 through 2031, if not utilized. The California state research and development tax credit can be carried forward indefinitely. The foreign research and development tax credit carryforwards will expire beginning 2013 through 2014, if not utilized.

Utilization of the federal net operating loss carryforwards and credits may be subject to a 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, should the Company undergo an ownership change, may result in the expiration of federal or state net operating losses and credits before utilization.

The Company’s China operation was under a tax holiday program which began on January 1, 2007 and expired on December 31, 2011. The tax benefit resulting from the holiday was $0, $57,000 and $307,000 for fiscal 2012, fiscal 2011 and fiscal 2010, respectively.

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 deferred taxes consisted of the following at September 30:



	2012			2011
	(in thousands)
Deferred tax assets:
Depreciation	$	215		$	87
Inventory and other valuation reserves	1,136			788
Accrued expenses	6,255			2,608
Federal, state and foreign credit carryforwards	7,695			11,143
Federal, state and foreign net operating loss carryforwards	27,041			31,466
Non-deductible stock options	2,714			2,850
Other, net	2,444			2,484
Subtotal	47,500			51,426
Valuation allowance	(24,887		)	(22,228		)
Total deferred tax assets	$	22,613		$	29,198

Deferred tax liabilities:
Purchased intangibles	(1,500		)	(1,649		)
Net deferred tax assets	$	21,113		$	27,549

Reported as:
Current deferred tax assets	$	8,940		$	10,044
Non-current deferred tax assets	13,588			19,028
Non-current deferred tax liabilities	(1,415		)	(1,523		)
Net deferred tax assets	$	21,113		$	27,549

Non-current deferred tax liabilities are included within other long-term liabilities in the consolidated balance sheets.

Management has established a valuation allowance for a portion of the gross deferred tax assets based on management’s expectations of future taxable income and the actual taxable income during the three years ended September 30, 2012. The valuation allowance for deferred tax assets increased by $2.7 million in fiscal 2012, decreased by $40.5 million in fiscal 2011 and decreased by $16.1 million in fiscal 2010. Approximately $13.1 million of the valuation allowance is attributable to tax benefits of stock option deductions which will be credited to paid-in capital when recognized.

A reconciliation of the beginning and ending amount of the consolidated liability for unrecognized income tax benefits during the tax year ended September 30 is as follows:



	2012			2011		2010
	(in thousands)
Balance at the beginning of the year	$	4,533		$	3,460	$	3,790
Increases (decreases) related to current year positions	68			112		(330		)
Increases (decreases) related to prior year positions	(1,695		)	961		—
Balance at the end of the year	$	2,906		$	4,533	$	3,460

The remaining amount of the unrecognized tax benefit as of September 30, 2012 is offset by a full valuation allowance. The Company does not anticipate a significant change in unrecognized tax benefits within the next twelve months except for any adjustments related to the expiration of the statute of limitations.

The Company anticipates the unrecognized tax benefits may increase during the year for items that arise in the ordinary course of business. These increases will be considered in the determination of the Company’s annual effective tax rate. The amount of the unrecognized tax benefit classified as a long term tax payable, if recognized, would reduce the annual income tax provision.

The Company’s policy to include interest and penalties related to unrecognized tax benefits within the Company’s provision for (benefit from) income taxes did not change. As of September 30, 2012, the Company has not accrued any potential penalties and interest related to these unrecognized tax benefits.

The Company files U.S., state and foreign income tax returns in jurisdictions with varying statutes of limitations during which such tax returns may be audited and adjusted by the relevant tax authorities. The 2005 through 2012 tax years generally remain subject to examination by federal and most state tax authorities, and tax years 2005 through 2012 generally remain subject to examination by foreign tax authorities. In addition, U.S. tax returns are open from the 2000 tax year through the 2003 tax year to the extent that net operating losses generated during these periods are being utilized in open tax periods. Also, U.S. tax returns are open for the tax years from 1996 through 2003 and from 2007 through 2012 to the extent research and development credits were generated during these periods and are being utilized in open years.