8. INCOME TAXES

The domestic and foreign components of income before income taxes are (in thousands):

	Fiscal Years Ended
	March 31, 2012		April 2, 2011		April 3, 2010
United States	$	1,952	$	15,663	$	4,690
Foreign		2,893		2,117		1,686
Income before provision for income taxes	$	4,845	$	17,780	$	6,376

During the quarter ended October 2, 2010, the Company identified the inclusion of certain R&D expenses in the calculation of the R&D tax credit which were not in compliance with IRS regulations. As a result, the income tax expense for the quarter ended December 26, 2009 and year ended April 3, 2010 was understated by $217,000. This amount was corrected in the three months ended October 2, 2010. The Company assessed the materiality of this adjustment on the prior periods and concluded that it was not material to those periods. The Company also concluded that the out of period adjustment, which resulted in a $217,000 increase in tax expense for the fiscal year ended April 2, 2011, was not material to such period.

The components of the provision for income taxes are as follows (in thousands):

	Fiscal Years Ended
	March 31, 2012			April 2, 2011			April 3, 2010
Current:
Federal	$	375		$	4,416		$	2,091
State		115			(33	)		15
Non-US		573			716			76
		1,063			5,099			2,182
Deferred:
Federal		(915	)		(593	)		(882	)
State		(22	)		998			6
Non-US		(30	)		(6	)		(55	)
		(967	)		399			(931	)
Total provision for income taxes	$	96		$	5,498		$	1,251

The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate to income before provision for income taxes as follows:

	Fiscal Years Ended
	March 31, 2012		April 2, 2011		April 3, 2010
Tax provision at US statutory rates	35	%	35	%	35	%
State tax provision, net of Federal benefits	(9)		7		3
Tax credits	(10)		(3)		(12)
Domestic production activity deduction	-		(5)		(1)
Foreign earnings tax differential	(10)		-		(1)
Tax exempt investment income	(3)		(1)		(5)
Stock based compensation	1		-		4
Other	(2)		(2)		(3)
Effective income tax rate	2	%	31	%	20	%

Significant components of deferred tax assets are as follows (in thousands):

	Fiscal Years Ended
Deferred tax assets:	March 31, 2012			April 2, 2011
Inventory write downs	$	3,277		$	2,928
Temporary investment impairment		757			941
Accrued liabilities		3,206			2,946
Depreciation and amortization		533			624
Stock compensation		3,444			2,606
Deferred revenue on shipments to distributors		528			593
Allowances for doubtful accounts and sales returns		138			145
Accrued employee benefits		673			876
Other		1,295			973
Gross deferred tax assets		13,851			12,632
Valuation allowance		(947	)		(424	)
Net deferred tax assets	$	12,904		$	12,208

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. Management has concluded it is more likely than not that the Company will realize the benefit of its net deferred tax assets. Management reached this conclusion based on its current expectations of future income. Therefore, the amount of the deferred tax asset that is realizable could be reduced in the near term if actual results differ significantly from estimates of future taxable income.

Changes in valuation allowance for the fiscal years ended March 31, 2012, April 2, 2011, and April 3, 2010 are as follows (in thousands):

Description	Balance at Beginning of Period		Charge		(1)	Deductions and Other			Balance at End of Period
Twelve months ended March 31, 2012	$	424	$	419		$	104		$	947
Twelve months ended April 2, 2011	$	816	$	1,161		$	(1,553	)	$	424
Twelve months ended April 3, 2010	$	283	$	534		$	(1	)	$	816

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(1)	A valuation allowance was placed on the Company's California deferred tax assets.

Management's intent is to indefinitely reinvest any undistributed earnings from its Hong Kong subsidiary. Accordingly, no provision for Federal and state income taxes has been provided thereon, nor is it practical to determine the amount of this liability. Upon distribution of those earnings in the form of dividends or otherwise, the Company will be subject to United States income taxes.

In fiscal 2012, the Company reversed tax benefits of $82,000 which had been previously recorded on the recognition of stock-based compensation expense for non-qualified stock options whereas in fiscal 2011 and 2010 the Company had recorded such tax benefits of $13,000 and $63,000, respectively. Such benefits were recognized as an increase to shareholders' equity while the fiscal 2012 reversal was recognized as a decrease to shareholders' equity.

During the year ended March 31, 2012, the liability for uncertain tax positions less accrued interest and penalties decreased from $4,052,000 to $3,661,000. Of the total $3,661,000 of unrecognized tax benefits, $2,844,000 represents the amount that if recognized, would favorably affect the effective income tax rate in any future periods. The Company cannot conclude on the range of cash payments that will be made within the next twelve months associated with its uncertain tax positions.

A reconciliation of the April 3, 2010 through March 31, 2012 amount of unrecognized tax benefits ("UTB") is as follows (in thousands):

	Fiscal Years Ended
	March 31, 2012			April 2, 2011			April 3, 2010
Beginning balance	$	4,052		$	4,142		$	4,219
(Decreases) increases of unrecognized tax benefits related to prior years' UTB		(3	)		141			(90	)
Increases of unrecognized tax benefits related to current year's UTB		174			481			387
Reductions to unrecognized tax benefits related to lapsing statute of limitations		(562	)		(712	)		(374	)
Ending balance	$	3,661		$	4,052		$	4,142

The Company records interest and penalties related to unrecognized tax benefits in income tax expense. For the year ended March 31, 2012, the Company recorded estimated interest of $127,000 and estimated penalties of $6,000, which accumulated to balances of $494,000 for estimated interest and $152,000 for estimated penalties related to uncertain tax positions.

The liability for uncertain tax positions, including accrued interest and accrued penalties as of March 31, 2012 was $800,000 related to tax positions for which it is reasonably possible that the statute of limitations will expire in various jurisdictions within the next twelve months.

The Company and its subsidiaries are subject to taxation in various jurisdictions, including federal, state and foreign. The Company's federal and state income tax returns are generally not subject to examination by taxing authorities for fiscal years before 2002. The Company has filed all tax returns for jurisdictions in which the Company does business.