9. Income Taxes

Income from continuing operations before income taxes for U.S. and foreign operations was as follows (in thousands):



	2013		2012		2011
U.S.	$	1,272	$	3,192	$	2,671
Foreign		6,259		2,183		1,432
Total	$	7,531	$	5,375	$	4,103

The income tax (provision) benefit reflected in the statement of income consists of the following (in thousands):



	2013		2012		2011
Current (provision) benefit:
U.S. Federal & State	$	39	$	(1,614)	$	(541)
Foreign		(977)		(829)		(235)
Deferred taxes
U.S.		(48)		(444)		(390)
Foreign		(415)		339		(287)
Total provision	$	(1,401)	$	(2,548)	$	(1,453)

The Company’s deferred tax assets are substantially represented by the tax benefit of net operating losses, tax credit carry-forwards and the tax benefit of future deductions represented by timing differences for deferred revenue, inventory obsolescence, allowances for bad debts, warranty expenses, and unrealized losses on investments,. The Company has a valuation allowance for tax credit carry-forwards in the United States that it expects will more likely than not expire prior to the tax benefit being realized. The components of deferred tax assets were as follows (in thousands):



	2013		2012		2011

Benefit of net operating losses	$	6,617	$	6,136	$	5,481
Tax credit carry-forwards		4,866		4,685		4,486
Other, principally reserves		2,381		3,973		3,971
Deferred tax asset		13,864		14,794		13,938
Valuation allowance		(3,224)		(3,691)		(2,730)
Net deferred tax asset	$	10,640	$	11,103	$	11,208

Rate Reconciliation:
Provision at U.S. statutory rate		34.0%		34.0%		34.0%
Net effect of taxes on foreign activities		(7.7)%		(1.1)%		1.6%
Tax effect of U.S. permanent differences		0.2%		(4.1)%		(3.1)%
State taxes and other, net		(1.9)%		0.6%		0.5%
Adjustment of federal/foreign income taxes related to prior years		0.2%		0.1%		3.3%
Valuation allowance		(6.2)%		17.9%		(0.9)%
Effective tax rate		18.6%		47.4%		35.4%

No provision was made with respect to earnings as of June 30, 2013 that have been retained for use by foreign subsidiaries. It is not practicable to estimate the amount of unrecognized deferred tax liability for the undistributed foreign earnings. At June 30, 2013, the Company had net operating loss carry-forwards for U.S. federal income tax purposes of $19.7 million that expire in the years 2022 through 2033 and tax credit carry-forwards of $4.9 million of which $4.6 million expire in the years 2013 through 2032. Included in the U.S. federal net operating loss carry-forward is $6.7 million from the exercise of employee stock options, the tax benefit of which, when recognized, will be accounted for as an increase to additional paid-in-capital rather than a reduction of the income tax provision. The net change in the total valuation allowance for the years ended June 30, 2013, 2012 and 2011 was a decrease of $467,000, an increase of $961,000, and a decrease of $39,000, respectively.

On June 30, 2013 and 2012, the Company had $1.2 million of unrecognized tax benefits, of which $1.2 million would affect the effective tax rate if recognized. The Company’s policy is to classify interest and penalties related to unrecognized tax benefits as interest expense and income tax expense, respectively. As of June 30, 2013 there was no accrued interest or penalties related to uncertain tax positions recorded on the Company’s financial statements. For U.S. federal income tax purposes, the tax years 2010 through 2013 remain open to examination by government tax authorities. For German income tax purposes, the 2011 through 2013 tax years remain open to examination by government tax authorities. China has no tax years open to examination.

The aggregate changes in the balance of unrecognized tax benefits were as follows (in thousands):



Year End June 30	2013
Balance, beginning of year	$	1,172
Increases for tax positions related to the current year		65
Balance, year end	$	1,237