Income (loss) before income taxes consists of the following (in thousands):

 

 

The federal, state and foreign income tax provision (benefit) is summarized as follows (in thousands):

 

 

The tax effects of significant items comprising our deferred tax assets and liabilities are as follows (in thousands):

 

 

We must regularly assess the likelihood that future taxable income levels will be sufficient to ultimately realize the tax benefits of our deferred tax assets. During the quarter of fiscal we concluded it was necessary to establish a valuation allowance for certain deferred tax assets (“DTA”) related to Federal taxes in the United States. Due to the history of losses in the United States, it was determined that it is more likely than not that certain Federal DTAs would not be recognized. As of we continue to maintain a full valuation allowance against our US Federal and California deferred tax assets and a partial valuation allowance against foreign net operating losses. However, as a result of our continued efforts to reduce expenses and improve efficiency, competitiveness and profitability, it is possible that our net deferred tax assets will become realizable and a valuation allowance no longer be needed. The valuation allowance increased by approximately

million in fiscal

 

As of net operating loss carry forwards amounted to approximately

million and million for federal and California tax purposes, respectively, which will expire in fiscal through Of the total net operating loss carryover, the tax effect of million federal and million state losses will be recorded to additional paid-in capital when utilized in the future. We also had federal and state research credit carryovers of

million and

million, respectively. Federal research credits will start expiring from fiscal The state research credit has no expiration. Of the total research credit carryover, the tax effect of million federal and million state credits will be recorded to additional paid-in capital when utilized in the future. We also have million of foreign operating loss carry forwards through the acquisition of a foreign operation

.

 

Net operating losses and tax credit carry forwards as of are as follows (in thousands):

 

 

Current federal and California tax laws include substantial restrictions on the utilization of net operating losses and tax credits in the event of an “ownership change” of a corporation.  Accordingly, our ability to utilize net operating loss and tax credit carryforwards be limited as a result of such ownership changes.  Such a limitation could result in the expiration of carryforwards before they are utilized.

 

The effective tax rate of our provision (benefit) for income taxes differs from the federal statutory rate as follows (in thousands):

 

 

 

Included in the balance of unrecognized tax benefits as of are

million of tax benefits that, if recognized, would reduce our effective tax rate.  The remaining amount would be offset by the reversal of related deferred tax assets on which a valuation allowance is placed.  A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):

 

 

We have adopted the accounting policy that interest and penalties recognized are classified as part of our income taxes.  In fiscal we increased our accrual of such interest and penalties expense by million, whereas we increased our accrual by million in fiscal   As of and the balance of such accrued interest and penalties was million and million, respectively. We believe that it is reasonably possible that a decrease of up to million in unrecognized tax benefits related to U.S. and foreign exposures be necessary within the coming year.

 

Our operations are subject to income and transaction taxes in the United States and in multiple foreign jurisdictions.  Significant estimates and judgments are required in determining our worldwide provision for income taxes.  Some of these estimates are based on interpretations of existing tax laws or regulations. The ultimate amount of tax liability be uncertain as a result.

Our tax filings for the fiscal years from to remain open in various taxing jurisdictions. 

 

U.S. income taxes and foreign withholding taxes associated with the repatriation of earnings of foreign subsidiaries were not provided for on a cumulative total of million of undistributed earnings of certain foreign subsidiaries as of the end of fiscal The Company intends to reinvest these earnings indefinitely in its foreign subsidiaries. If these earnings were distributed to the United States in the form of dividends or otherwise, the Company would be subject to additional U.S. income taxes (subject to an adjustment for foreign tax credits) and foreign withholding taxes. Determination of the amount of unrecognized deferred income tax liability related to these earnings is not practicable.

Our acquired Israeli subsidiary, Sigma Designs Israel S.D.I. (formerly known as CopperGate Communications Ltd.), was granted “Approved Enterprise” status under the Law for the Encouragement of Capital Investments, (the “Law”) in which became effective in fiscal and elected (which became effective in fiscal and as election years of the “Benefited Enterprise” under the Law. In fiscal the Company activated its Beneficiary Enterprise commencing in fiscal Sigma Designs Israel’s taxable income allocated to each enterprise is tax-exempt for a period of years commencing with the year it earns taxable income, and subject to corporate taxes at the reduced rate for an additional period of to years. The period of tax benefits, as detailed above, is limited to the earlier of years from the “operational year” of the “Benefited Enterprise” or years from the year the grant of “Approved Enterprise” status. The impact of this tax holiday was to increase net income by approximately million or per diluted share in fiscal million or per diluted share in fiscal and million or per diluted share in fiscal