NOTE 16—INCOME TAXES

The following table presents the U.S. and foreign components of consolidated loss before income taxes (in thousands):

	Year Ended December 31,
	2012				2011				2010
(LOSS) INCOME BEFORE INCOME TAXES:
U.S.		$	(36,248	)		$	(26,778	)		$	(15,722	)
Foreign			(10,301	)			22				7,659
Loss before income taxes		$	(46,549	)		$	(26,756	)		$	(8,063	)

The following table presents the (benefit) provision for income taxes (in thousands):

	Year Ended December 31,
	2012			2011		2010
(BENEFIT) PROVISION FOR INCOME TAXES:
Current:
Federal	$	(28	)	$	-	$	-
State		568			106		37
Foreign		1,104			1,038		2,222
Subtotal		1,644			1,144		2,259
Deferred:
Federal		(35,329	)		-		-
State		(1,811	)		-		-
Foreign		(357	)		261		(89	)
Subtotal		(37,497	)		261		(89	)
Income tax (benefit) provision	$	(35,853	)	$	1,405	$	2,170

The difference between the (benefit) provision for income taxes and the amount computed by applying the federal statutory income tax rate (35%) to loss before taxes is explained as follows (in thousands):

	Year Ended December 31,
	2012			2011			2010
Tax at federal statutory rate	$	(16,292	)	$	(9,364	)	$	(2,822	)
State taxes, net		(1,136	)		(1,740	)		(1,646	)
Non-deductible stock compensation		3,470			453			626
Non-deductible acquisition costs		410			878			-
Foreign rate differential		4,353			1,274			(547	)
Research credits		-			(692	)		(991	)
Change in valuation allowance		(26,795	)		10,461			7,026
Other		137			135			524
Income tax (benefit) provision	$	(35,853	)	$	1,405		$	2,170

During the year ended December 31, 2012, the Company recognized a reduction in the valuation allowance recorded against the Company's net deferred tax assets of $37.1 million. The reduction was related to net deferred tax liabilities recognized for the difference between the fair value and carrying basis of certain tangible and intangible assets obtained as part of the Acquisition, which can be used as a source of income to support realization of certain domestic deferred tax assets. Under US GAAP, changes in an acquirer's valuation allowances that stem from a business combination should be recognized as an element of the acquirer's deferred income tax expense (benefit) in the reporting period that includes the business combination. There were no changes to the valuation allowance recorded as deferred income tax expense (benefit) during the years ended December 31, 2011 and 2010.

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 the Company's assets and liabilities are as follows (in thousands):

	December 31,
	2012			2011
Deferred tax assets:
Net operating loss carryforwards	$	75,622		$	57,677
Tax credit carryforwards		50,704			47,513
Deferred revenue		1,537			1,632
Capitalized research and development costs		394			487
Intangibles		21,175			20,462
Share-based compensation		5,808			4,284
Accrued compensation		1,775			2,025
Accrued warranty		446			570
Inventory reserves		5,664			4,860
Reserves and other		13,216			10,928
Depreciation and amortization		6,731			21,323
Other, net		6,069			1,742
Total deferred tax assets		189,141			173,503
Valuation allowance for deferred tax assets		(130,979	)		(154,107	)
Net deferred tax assets		58,162			19,396
Net deferred tax liabilities:
Acquired intangible assets		(45,397	)		(2,459	)
Acquired tangible assets		(7,701	)		-
Cancellation of debt		(9,669	)		(9,669	)
Foreign earnings		(3,282	)		(5,139	)
Other, net		(1,296	)		(1,315	)
Total deferred tax liabilities		(67,345	)		(18,582	)
Net deferred tax (liabilities) assets	$	(9,183	)	$	814

The deferred tax liabilities for 2012 include amounts related to the Acquisition and therefore the change in total deferred tax liabilities in 2012 includes changes that are recorded to goodwill.

As of December 31, 2012, the Company had total U.S. net operating loss carryforwards of $356.1 million, comprised of $210.4 million for U.S. federal purposes, which expire in the years 2021 through 2032 if not utilized, and $145.7 million for state purposes, the majority of which expire in the years 2013 through 2032 if not utilized. Additionally, the Company has federal research and development tax credit carryforwards of approximately $23.7 million, which expire in the years 2017 through 2032 if not utilized. The Company also has state research and development tax credit carryforwards and other various tax credit carryforwards of approximately $41.3 million. Substantially all of the state tax credits can be carried forward indefinitely. Certain of the net operating loss and tax credit carryforwards are subject to annual limitations due to the ownership change provisions under Internal Revenue Code Section 382 and similar state provisions. The limitations will not result in significant expirations of the net operating loss carryforwards before utilization.

As of December 31, 2012, the Company has recorded a full valuation allowance against all U.S. and certain foreign deferred tax assets. The valuation allowance decrease of $23.1 million from $154.1 million in 2011 to $131.0 in 2012 is primarily attributable to the reduction in the valuation allowance recorded against the Company's net deferred tax assets of $37.1 million as part of the Acquisition, partially offset by U.S losses which was recorded as a tax benefit through the income statement. Approximately $26.5 million of the valuation allowance as of December 31, 2012 is attributable to the income tax benefits of share-based compensation, the benefit of which will be credited to stockholders' equity when, and if, realized. The valuation allowance increase of $11.5 million from $142.6 million in 2010 to $154.1 million in 2011 was primarily attributable to U.S. losses and a release in reserves related to uncertain tax positions.

Not included in the deferred tax assets as of December 31, 2012 is approximately $4.8 million of tax benefits related to share-based compensation. When, and if, realized the tax benefit of these assets will be accounted for as a credit to stockholders' equity, rather than a reduction of the income tax provision.

Of the total tax benefits realized from the share-based compensation nominal amounts were recorded to stockholders' equity for the years ended December 31, 2012 and 2011, respectively.

The Company provides for U.S. income tax on the earnings of foreign subsidiaries unless the earnings are considered indefinitely reinvested outside the U.S. As of December 31, 2012, the Company has a nominal amount of previously untaxed earnings from its foreign subsidiaries which were not indefinitely reinvested outside the U.S. The potential federal and state taxes on these repatriations is nominal.

A portion of the Company's operations in Singapore operate under various tax holidays and tax incentive programs, which expire in whole or in part at various dates through 2017. There was a minimal net impact of these tax holidays and tax incentive programs for the year ended December 31, 2012.

The following table presents the Company's total amount of gross unrecognized tax benefits (in thousands):

	2012			2011
Unrecognized tax benefits, beginning of year	$	16,480		$	20,758
Gross increases - tax positions in prior period		3,027			517
Gross decreases - tax positions in prior period		(376	)		(201	)
Gross increases - current period tax positions		1,282			1,203
Settlements		-			(5,797	)
Unrecognized tax benefits, end of year	$	20,413		$	16,480

If recognized, the amount of unrecognized tax benefits that would impact income tax expense is $5.3 million. As of December 31, 2012, the Company does not anticipate any material changes to the amount of unrecognized tax benefits during the next 12 months. The Company classifies interest and penalties related to tax positions as components of income tax expense. For the year ended December 31, 2012, the amount of accrued interest and penalties related to tax uncertainties was approximately $0.2 million for a total cumulative amount included in non-current income taxes payable of $1.1 million as of December 31, 2012. A number of major tax jurisdictions are currently subject to examination. The amount of unrecognized tax benefits that could change in the next 12 months as a result is $1.9 million.

The Company files U.S. federal, state, and foreign income tax returns in jurisdictions with varying statutes of limitations. The Company's major tax jurisdictions are the U.S. federal, California, Singapore, the United Kingdom and Austria. The federal and California statute of limitations on assessments remain open for substantially all tax years. The major foreign jurisdictions remain open for primarily tax years 2007 through 2012.