Note 7. Income Taxes

Loss before income taxes and income tax provision consist of the following for fiscal 2012, 2011 and 2010:

(in thousands)	2012			2011			2010
Income (loss) before income taxes:
Domestic	$	(34,410	)	$	(27,176	)	$	(18,880	)
Foreign		345			1,009			1,109
Total	$	(34,065	)	$	(26,167	)	$	(17,771	)
Income tax provision (benefit):
Current:
Federal	$	(14	)	$	(21	)	$	(77	)
State		3			(2	)		10
Foreign		(272	)		23			(14	)
		(283	)		-			(81	)
Deferred:
Federal		-			-			-
State		-			-			-
Foreign		361			131			153
		361			131			153
	$	78		$	131		$	72

The Company's tax expense for fiscal 2012, 2011 and 2010 primarily related to international operations.

The income tax expense reconciles to the amount computed by applying the statutory United States federal rate of 35% to income (loss) before income taxes as follows:

(in thousands)		2012			2011			2010
Statutory federal tax position	$	(11,923	)	$	(9,159	)	$	(6,223	)
State tax, net of federal benefit		(1,225	)		(712	)		(585	)
Foreign tax rate differential		(32	)		(199	)		(380	)
Research and development, and manufacturers' investment credits		(224	)		(1,085	)		85
Change in valuation allowance		14,183			10,588			6,452
Provision (release) of tax contingency reserve		(285	)		(32	)		(22	)
Permanent differences		911			560			121
Other		(1,327	)		170			624
Income tax expense	$	78		$	131		$	72

Deferred tax assets are comprised of the following at March 30, 2012 and March 25, 2011:

(in thousands)	2012			2011
Gross deferred tax assets:
Allowances not currently deductible for tax purposes	$	9,570		$	8,981
Loss carryforwards		86,876			73,003
Credit carryforwards		13,126			12,902
Depreciation		6,158			7,022
Gross deferred tax assets		115,370			101,908
Deferred tax liabilities:		-			-
Net deferred tax assets		115,370			101,908
Valuation allowance		(114,910	)		(100,727	)
Net deferred tax assets	$	820		$	1,181

The valuation allowance increased by $14.2 million, $10.6 million and $6.5 million in fiscal 2012, 2011 and 2010, respectively. The Company's operating loss carryforwards and credits, which have been offset by the valuation allowance, include $4.7 million of deferred tax benefits associated with stock -based compensation, which will be credited to additional-paid-in-capital when realized. The Company has incurred tax losses in the last several fiscal years and, at March 30, 2012, has approximately $230.3 million of federal net operating loss carryforwards and $171.4 million of state net operating loss carryforwards available, expiring in the years 2013 through 2032. In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of its deferred tax assets will not be realized. FASB ASC Topic 740, Income Taxes, provides for the recognition of deferred tax assets if realization of such assets is more likely than not to occur. Based upon the weight of available evidence, which includes the Company's historical operating performance and reported cumulative net losses, the Company provided a full valuation allowance against its United States and most foreign net deferred tax assets. There is no valuation allowance against the Company's United Kingdom deferred tax assets. The Company reassesses the need for its valuation allowance on a quarterly basis.

As of March 30, 2012, the Company has available federal research and development tax credit carryforwards of approximately $5.6 million expiring in the years 2013 through 2032 and alternative minimum tax credit carryforwards of approximately $2.5 million available indefinitely. At March 30, 2012, state research and development tax credit carryforwards of approximately $15.3 million are also available indefinitely. The Company considers all undistributed earnings of its foreign subsidiaries to be permanently invested in foreign operations. Accordingly, no deferred tax assets or liabilities have been established in this regard.

Current federal and state tax laws include provisions that could limit the annual use of our net operating loss carryforwards in the event of certain defined changes in stock ownership. The Company's issuance of common and preferred stock could result in such a change. Accordingly, the annual use of net operating loss carryforwards may be limited by these provisions, and this limitation may result in the loss of carryforward benefits to the extent the above-limit portion expires before it can be used. The Company has determined the extent of the limitation at March 30, 2012, and the losses reflected in the deferred tax assets will not be subject to limitation.

A reconciliation of the Company's changes in uncertain tax position to March 30, 2012, March 25, 2011 and March 26, 2010 is as follows:

(in thousands)	2012			2011			2010
Beginning balance, gross uncertain tax positions	$	7,024		$	6,769		$	7,400
Additions to tax positions related to prior years		-			49			-
Reductions to tax positions related to prior years		-			-			(605	)
Additions to tax positions related to current year		354			122			86
Reductions to tax positions related to lapse of statute		(211	)		(52	)		(24	)
Effect of exchange rates		19			136			(88	)

Ending balance, gross uncertain tax positions	$	7,186		$	7,024		$	6,769

The amount of tax benefits that would, if recognized, affect the effective tax rate at March 30, 2012 was $280,000, as the Company maintains a full valuation allowance against the remaining uncertain tax benefits. Interest and penalties of $9,000, $30,000 and $2,000, respectively, for fiscal 2012, 2011 and 2010 related to income tax matters are recorded in income tax expense. At March 30, 2012, March 25, 2011 and March 26, 2010, $79,000, $148,000 and $118,000, respectively, was accrued for interest and penalties related to uncertain tax benefits.

As of March 30, 2012, tax years from 1998 in the U.S. and 2006 in the Company's primary foreign jurisdictions remain open for examination. Although the timing of resolution and closure of audits is highly uncertain, the Company does not believe it is reasonably possible that the unrecognized tax benefits would materially change in the next twelve months.