12. INCOME TAXES

The components of the income tax (expense) benefit are as follows (in thousands):


	January 3, 2012			December 28, 2010			December 29, 2009
Current:
Federal	$	—		$	919		$	(1	)
State		(36	)		46			423
Foreign		(8	)		(165	)		—

	$	(44	)	$	800		$	422


Deferred and Others:
Federal	$	300		$	(890	)	$	644
State		84			(68	)		—
Foreign		—			—			—

	$	384		$	(959	)	$	644

Income tax (expense) benefit	$	340		$	(159	)	$	1,066

The difference between the effective income tax rate and the United States federal income tax rate is summarized as follows:


	January 3, 2012			December 28, 2010			December 29, 2009
Statutory federal rate		(34.0	)%		(34.0	)%		(34.0	)%
State income taxes less federal benefit		(5.7	)		(5.5	)		(5.5	)
Foreign income taxes		0.1			1.0			0.0
Change in valuation allowance		46.3			36.5			34.7
Nontaxable gain on derivative liability		0.0			(0.0	)		(0.2	)
Stock options		0.5			1.8			1.5
Write-off of goodwill		(5.4	)		0.0			0.0
Changes of liability related to uncertain tax positions		(4.5	)		0.4			0.7
Other		(1.2	)		0.8			(1.4	)

		(3.9	)%		1.0	%		(4.2	)%

Deferred income taxes are provided for the temporary differences between the carrying values of the Company's assets and liabilities for financial reporting purposes and their corresponding income tax bases. The temporary differences give rise to either a deferred tax asset or liability in the financial statements that is computed by applying current statutory tax rates to taxable and deductible temporary differences based upon the classification (i.e., current or noncurrent) of the asset or liability in the financial statements that relates to the particular temporary difference. Deferred taxes related to differences that are not attributable to a specific asset or liability are classified in accordance with the future period in which they are expected to reverse and be recognized for income tax purposes. The deferred tax asset (liability) consisted of the following temporary differences as of January 3, 2012 and December 28, 2010 (in thousands):


	January 3, 2012			December 28, 2010
Reserves and accruals	$	8,248		$	10,184

Total current deferred tax asset		8,248			10,184

Net operating losses		48,425			40,269
Deferred rent		2,444			2,384
Tax credit attributes		1,523			1,543
Basis difference in intangibles		5,213			6,194
Share-based compensation		1,059			981
Basis difference in fixed assets		12,588			13,128
Basis difference in investments		(153	)		(157	)
Reserves and accruals		70			590
Other		—			134

Total non-current deferred tax asset		71,169			65,066

Valuation allowance		(79,417	)		(75,210	)

Total net deferred tax asset	$	—		$	40

Tax benefit of net operating losses, temporary differences and credit carryforwards are recorded as an asset to the extent that management assesses that these items are "more likely than not" to be realized. Realization of the future tax benefits is dependent on the Company's ability to generate sufficient taxable income within the carryforward period. A valuation allowance is provided for deferred tax assets when it is "more likely than not" that some portion of the deferred tax asset will not be realized. Because of the Company's recent history of operating losses, management believes the recognition of the deferred tax assets arising from the above-mentioned future tax benefits is currently not likely to be realized and, accordingly, has provided a valuation allowance. A valuation allowance has been recorded for the net deferred tax assets at January 3, 2012, which increases the valuation allowance by $4.2 million for the fiscal year ended January 3, 2012.

At January 3, 2012, the Company has federal and state net operating loss carryovers of $115.8 million and $132.9 million, respectively, which, if not used earlier, will expire between 2017 and 2031. In addition, the Company also has tax credit carryforwards for federal and state purposes of $1.0 million and $0.8 million, respectively. Of the federal tax credit carryforwards, approximately $233,000 will expire in 2031 if unused before that year. The remaining federal tax credits and the state tax credits do not expire.

The Company underwent an "ownership change" as defined in section 382 of the Internal Revenue Code during the second quarter of our 2009 fiscal year, as a result of our issuance of Series B-1 Convertible Preferred Stock and Series B-2 Convertible Preferred Stock and other prior trading in our stock.

The amount of our taxable income for tax years ending after our ownership change which may be offset by net operating loss carryovers ("NOL") and tax credits from pre-change years will be subject to an annual limitation, known as a section 382 limitation. As of January 3, 2012, the amount of pre-change federal NOL is $55.3 and the pre-change state NOL is $73.0 million, the post-change federal NOL is $60.5 million and the post-change state NOL is $59.8 million (before considering the annual 382 limitation and any built-in losses).

The Company has determined the annual section 382 limitation to be approximately $3.4 million. To the extent that the section 382 limitation exceeds the amount of taxable income offset by the net operating loss carryforwards from the pre-change years, the excess may increase the future section 382 limitation. The NOL from the post-change years are generally not subject to the section 382 limitation. However, due to the existence of a net unrealized built-in loss at the ownership change date, section 382 further limits the Company's ability to fully utilize the tax deductions associated with certain of its assets, including depreciation and amortization deductions recognized during the 5 post-change years ending in 2014. Although these deductions will occur in the post-change period, section 382 treats the deductions as pre-change losses subject to the annual 382 limitation. A valuation study is currently in process to ascertain the net unrealized built-in loss associated with these assets at the ownership change date.

As a result of certain realization requirements of Accounting Standards Codification Topic 718, the table of deferred tax assets and liabilities shown above does not include certain deferred tax assets as of January 3, 2012 and December 28, 2010 that arose directly from tax deductions related to equity compensation in excess of compensation recognized for financial reporting. The deferred tax assets include primarily net operating loss carryforwards. Equity will be increased by $0.3 million if and when such deferred tax assets are ultimately recognized. The Company uses tax law ordering when determining when excess tax benefits have been realized.

Changes in the Company's unrecognized tax benefits are as follows (in thousands):


	Fiscal Year Ended January 3, 2012		Fiscal Year Ended December 28, 2010
Beginning balance	$	693	$	604
Increases attributable to tax positions taken during prior periods		—		89
Increases attributable to tax positions taken during current periods		—		—
Decreases resulting from lapse of applicable statutes of limitations		517		—

Ending balance	$	176	$	693

As of January 3, 2012, the entire unrecognized tax benefits reduce the deferred tax asset of the net operating loss carryforwards. If recognized, none of the unrecognized tax benefits would impact the Company's effective tax rate. As of January 3, 2012, it is reasonably possible that the unrecognized tax benefits will not significantly increase or decrease in the next twelve months.

The Company is subject to taxation in the United States and various state and local jurisdictions. As of January 3, 2012, the Company is subject to U.S. federal income tax examinations for the tax years ended December 30, 2008 through December 28, 2010. With few exceptions, as of January 3, 2012, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for the tax years ended before December 30, 2008.