INCOME TAXES

The Company recognizes the impact of an uncertain income tax position on its income tax return at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained.

The following is a summary of the changes in the amount of unrecognized tax benefits (in thousands):



	Fiscal Year
	2012			2011
Unrecognized tax benefits at the beginning of the period	$	383		$	383
Decrease related to prior periods	(76		)	—
Increase related to prior periods	—			—
Unrecognized tax benefits	$	307		$	383

At June 30, 2012, there were no unrecognized tax benefits presented as a component of long-term liabilities in the accompanying consolidated balance sheet. At June 30, 2012, there was $0.3 million presented as a reduction of the related deferred tax asset for which there is full valuation allowance. The entire amount of unrecognized tax benefits at June 30, 2012 will affect the effective tax rate if recognized. However, the portion that would be recognized as an increase to deferred tax assets may result in a corresponding increase in the valuation allowance at the time of recognition resulting in no net effect to the effective tax rate, depending upon the Company's assessment of the likelihood of realization of the tax benefits at the time they are recognized.

The Company believes it is reasonably possible that, within the next twelve months, the amount of unrecognized tax benefits may remain unchanged. The Company recognizes interest and penalties related to unrecognized tax benefits in its provision for income taxes. The Company had no material accrual for interest and penalties on its consolidated balance sheet at fiscal years ended June 30, 2012 and 2011, and recognized no interest and/or penalties in the consolidated statement of operations for the fiscal years ended June 30, 2012 and 2011.

During fiscal 2012, the Company's liability for unrecognized tax benefits decreased by $0.1 million from the prior year. The full amount was recognized as a tax benefit in the Company's consolidated financial statements.

The Company is subject to federal and state taxation in the United States and also in certain foreign tax jurisdictions. Generally, the Company's tax returns for fiscal 2009 and forward are subject to examination by the U. S. federal tax authorities and fiscal 2008 and forward are subject to examination by state tax authorities.

The Company's ability to use its net operating loss and research and development credit carryforwards may be substantially limited due to ownership change limitations that may have occurred or that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended, as well as similar state provisions. The Company has not completed a study to assess whether an ownership change has occurred or whether there have been multiple ownership changes since the Company became a “loss corporation” under the definition of Section 382. Due to the existence of the valuation allowance, it is not expected that any possible limitation will have an impact on the results of operations or financial position of the Company.

The components of loss before income taxes were as follows (in thousands):



	Fiscal Year
	2012			2011
Domestic	$	(16,677	)	$	(14,691	)
Foreign	595			477
	$	(16,082	)	$	(14,214	)

The provision for income taxes includes the following (in thousands):



	Fiscal Year
	2012			2011
Current:
Federal	$	(15	)	$	108
State	(57		)	(49		)
Foreign	151			226
Total current	$	79		$	285

A reconciliation of income taxes computed by applying the federal statutory income tax rate of 34.0% to loss before income taxes to the total income tax provision reported in the accompanying consolidated statements of operations is as follows (in thousands):



	Fiscal Year
	2012			2011
U.S. federal income tax at statutory rate	$	(5,469	)	$	(4,833	)
State income taxes, net of federal benefit	(876		)	(695		)
Increase in valuation allowance	6,159			5,057
Share-based compensation expense	103			236
Net operating loss carryback	—			108
Foreign dividend	—			271
Federal R&D tax credit	(129		)	—
Permanent differences	291			141
Total provision for (benefit from) income taxes	$	79		$	285

Deferred income taxes reflect the net 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 deferred tax assets and liabilities are shown below. A full valuation allowance has been recorded, as realization of such assets is uncertain. Deferred income taxes comprised (in thousands):



	June 30,
	2012			2011
Deferred tax assets:
Net operating loss carryforward	$	45,061		$	40,039
Warranty and extended warranty	1,635			1,676
Property and equipment	362			36
Capital loss carryforward	1,162			1,260
Tax credits	3,243			2,568
Inventory	1,751			1,799
Share-based compensation	1,999			1,260
Intangible assets	1,612			1,365
Deferred compensation	117			233
Allowance for doubtful accounts	84			104
Other	263			329
Gross deferred tax asset	57,289			50,669
Valuation allowance for deferred tax assets	(57,289		)	(50,669		)
Net deferred tax asset	$	—		$	—

At June 30, 2012, the Company has federal and state net operating loss carryforwards of $120.3 million and $80.7 million, respectively. These amounts include share-based compensation deductions of $1.0 million that will be recorded to contributed capital when realized. The remaining federal net operating loss will begin expiring in 2023, unless previously utilized. State net operating loss carryforwards generally begin to expire in 2015, unless previously utilized.

At June 30, 2012, the Company had federal and California research and development tax credit carryforwards totaling $1.0 million and $2.9 million, respectively. The California research credit may be carried forward indefinitely. The federal research credit will begin expiring in 2024, unless previously utilized. In addition, the Company has foreign tax credit carryforwards totaling $0.3 million, which will begin expiring in 2015, unless previously utilized. The Company has federal alternative minimum tax credit carryforwards totaling $0.2 million which can be carried forward indefinitely.