INCOME TAXES

Pretax income (loss) was generated from the following sources (amounts in thousands):



	For each of the three fiscal years in the period ended September 30, 2012
	2012			2011			2010
Domestic	$	(88,964	)	$	(40,359	)	$	(19,878	)
Foreign	74,239			62,408			74,909
Total	$	(14,725	)	$	22,049		$	55,031

The provision (benefit) for income taxes consisted of the following components (amounts in thousands):



	For each of the three fiscal years in the period ended September 30, 2012
	2012			2011			2010
Current:
Federal	$	(16	)	$	314		$	(17,830	)
State	228			10			533
Foreign	3,458			8,324			7,345
Deferred:
Federal	5,061			(25,962		)	5,352
State	2,255			(1,609		)	373
Foreign	3,964			(14,758		)	220
	$	14,950		$	(33,681	)	$	(4,007	)

We recorded a provision for income taxes of $15.0 million on pretax loss of $14.7 million in 2012 compared to a benefit for income taxes of $33.7 million on pre-tax income of $22.0 million in 2011. During 2012, we generated tax expense of $15.0 million primarily due to the tax provision on profitable entities in foreign jurisdictions and U.S. tax provision relating to deferred tax liabilities that will not provide future sources of income to reduce deferred tax assets. During 2011, the income tax benefit we generated was primarily due to the release of the entire valuation allowance on our Israeli operations, and due to the release of valuation allowance resulting from the recording of the deferred tax liability related to acquisitions completed during the year. We had cumulative operating losses for the three years ended in 2012 for our U.S. operations and several foreign operations and accordingly, have reflected a full valuation allowance on our U.S. and such foreign net deferred tax assets as we have determined that it is more likely than not that the tax benefits will not be realized in the future.

During 2010 we decreased our valuation allowance by $15.6 million primarily due to the utilization of certain foreign net operating losses and the recording of the deferred tax liability related to the acquisition of White Electronic Designs Corporation.

During fiscal year 2011 we released the remaining valuation allowance related to our Israel operation, based on evaluation of key positive and negative evidence including the history of substantial losses in past years but cumulative income for the past three year period, and the indefinite carryforward period for the Israeli net operating loss carryforwards which are the principal component of our deferred tax assets in Israel.

During fiscal year 2012 we increased the valuation allowance by $194.7 million, which primarily related to the acquisition of Zarlink Semiconductor, Inc. during the quarter ended January 1, 2012, and the recording of the deferred tax assets related to the acquisition.

We have federal and state net operating losses (“NOLs”) of approximately $209.6 million and $140.7 million that begin expiring in 2021 and 2014, respectively. Of the total NOL carryforward, $8.2 million related to the excess tax benefit from employee stock compensation and stockholders' equity will increase by $8.2 million if and when such excess tax benefits are ultimately realized. We have foreign NOLs of approximately $245.6 million that carry forward indefinitely. We have federal and state research and experimentation credits of approximately $19.2 million and $40.5 million, respectively. We have federal foreign tax credits of approximately $2.6 million. We have federal and state enterprise zone credits, state investment tax credits, and alternative minimum tax credits totaling $4.1 million that carry forward indefinitely.

The utilization of the NOLs and credits acquired with the acquisitions of Advance Power Technology, Inc. in 2006, White Electronic in 2010, Actel Corporation, AML Corporation, and ASIC Advantage, Inc., each in 2011, and Zarlink Semiconductor, Inc. in 2012, may be subject to limitations due to change in control.

No provision has been made for future U.S. income taxes on undistributed earnings of foreign operations since they have been indefinitely reinvested in these operations. Determination of the amount of unrecognized deferred tax liability for temporary differences related to these undistributed earnings is not practicable, as such liability is dependent upon a number of factors, including U.S. foreign tax credit position that would exist at the time any remittance would occur. At the end of fiscal years 2012 and 2011, these undistributed earnings aggregated approximately $311.3 million and $253.8 million, respectively.

The following is a reconciliation of income tax computed at the federal statutory rate to our actual tax expense (amounts in thousands):



	For each of the three fiscal years in the period ended September 30, 2012
	2012			2011			2010
Tax computed at federal statutory rate	$	(5,153	)	$	7,717		$	19,261
State taxes, net of federal impact	(3,244		)	(7,023		)	2,147
Foreign income taxed at different rates	(18,207		)	(9,830		)	(14,621		)
Tax credits	(1,096		)	(4,234		)	(3,025		)
Stock award compensation	295			347			3,288
Unrecognized tax benefits	1,981			1,541			2,325
Executive compensation	—			444			1,312
U.S. tax on foreign income	2,767			—			212
Income tax return to provision	(3,153		)	55			(347		)
Non-deductible permanent items	1,682			2,748			862
Pre-acquisition loss carryforwards	(4,043		)	(2,298		)	—
Other differences, net	9			(261		)	195
Valuation allowance	43,112			(22,887		)	(15,616		)
	$	14,950		$	(33,681	)	$	(4,007	)

The tax effected deferred tax assets (liabilities) are comprised of the following components (amounts in thousands):



	September 30, 2012			October 2, 2011
Accounts receivable, net	$	925		$	1,159
Inventories	12,109			22,041
Accrued employee benefit expenses	5,230			6,209
Net operating losses	142,986			32,095
Tax credits	137,628			31,051
Accrued other expenses	7,776			9,296
Deferred equity compensation	14,111			12,075
Property and equipment, net	3,152			(465		)
Other assets	17,155			7,822
Total deferred tax assets	341,072			121,283
Intangible assets	(101,250		)	(96,624		)
Total deferred tax liabilities	(101,250		)	(96,624		)
Less valuation allowance	(211,530		)	(16,803		)
	$	28,292		$	7,856

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (amounts in thousands):



	September 30, 2012			October 2, 2011			October 3, 2010
Beginning gross unrecognized tax benefits	$	32,370		$	21,719		$	16,431
Additions based on tax positions related to the current year	12,786			2,665			4,757
Additions based on current year acquisitions	10,615			8,164			349
Additions based on tax positions of prior years	2,436			382			2,408
Reductions for lapses and settlements	(191		)	(560		)	(2,226		)
Ending gross unrecognized tax benefit	$	58,016		$	32,370		$	21,719

We recognize interest and penalties accrued related to unrecognized tax benefits in tax expense. During the years ended September 30, 2012, October 2, 2011, and October 3, 2010, we recognized approximately $2.0 million, $0.7 million, and $0.2 million, respectively, in interest and penalties. The cumulative interest and penalties at September 30, 2012, October 2, 2011, and October 3, 2010 were $6.0 million, $4.2 million, and $3.5 million, respectively.

Unrecognized tax benefits of $52.4 million (including interest) at September 30, 2012 would impact the effective tax rate if recognized after the valuation allowance has been released. We anticipate a decrease in gross unrecognized tax benefits of approximately $10.1 million within the next twelve months based on federal, state, and foreign expirations in various jurisdictions.

We file U.S. state, and foreign income tax returns in jurisdictions with varying statutes of limitations. Fiscal years 2007 to 2012 generally remain subject to examination by federal and most state tax authorities. In significant foreign jurisdictions, the 2009 to 2012 tax years generally remain subject to examination by tax authorities. We establish liabilities for possible assessments by tax authorities resulting from known tax exposures including, but not limited to, international tax issues and certain tax credits. We are currently undergoing an Internal Revenue Service examination as well as certain state examinations. There have been no significant proposed adjustments to date. We do not believe the results of any audits would have a material impact on our financial position, results of operations or cash flows. We will continue to monitor the status of these audits.