PROVISION FOR INCOME TAXES:

Income Taxes

The Company accounts for income taxes under the provisions of ASC 740. Under the provisions of ASC 740, deferred tax assets and liabilities are recognized based on the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, utilizing the tax rates that are expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

U.S. and foreign components of income before income taxes were (in thousands):



	Year Ended December 31,
	2011		2010		2009
U.S. operations	$	18,884	$	22,312	$	5,093
Foreign operations	26,211		39,493		25,430
Total pretax income	$	45,095	$	61,805	$	30,523

Undistributed earnings of the Company's foreign subsidiaries of approximately $175.9 million at December 31, 2011, are considered to be indefinitely reinvested and, accordingly, no provision for Federal income taxes has been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to both U.S. Federal and State income taxes (subject to an adjustment for foreign tax credits, where applicable) and withholding taxes payable to various foreign countries. It is not practicable to determine the income tax liability that might be incurred if these earnings were to be distributed.

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



	Year Ended December 31,
	2011		2010		2009
Current provision:
Federal	$	7,758	$	9,179	$	5,469
State	246		585		3,347
Foreign	474		98		476
	8,478		9,862		9,292
Deferred provision (benefit):
Federal	1,458		2,280		(1,201		)
State	845		160		(811		)
Foreign	23		39		(26		)
	2,326		2,479		(2,038		)
Total	$	10,804	$	12,341	7,254

The Company is entitled to a deduction for Federal and State tax purposes with respect to employees' stock option activity. The net reduction in taxes otherwise payable in excess of any amount credited to income tax expense has been reflected as an adjustment to additional paid-in capital. For 2011, 2010 and 2009, the benefit arising from employee stock option activity that resulted in an adjustment to additional paid in capital was approximately $2.2 million, $2.9 million and $1.6 million, respectively.

The provision for income taxes differs from the amount, which would result by applying the applicable Federal income tax rate to income before provision for income taxes as follows:




	2011	2010	2009
Provision computed at Federal statutory rate	35.0%	35.0%	35.0%
State tax provision, net of Federal benefit	0.5%	1.3%	0.5%
Business tax credits	(5.7)%	(5.6)%	(7.5)%
Stock-based compensation	(0.2)%	2.6%	4.5%
Foreign income taxed at different rate	(10.9)%	(14.7)%	(15.5)%
Valuation allowance	3.4%	0.2%	7.9%
Other	1.9%	1.2%	(1.1)%
Total	24.0%	20.0%	23.8%

The components of the net deferred income tax asset /(liabilities) were as follows (in thousands):



	December 31,
	2011			2010
Deferred tax assets
Tax credit carry-forwards	$	7,002		$	5,375
Other reserves and accruals	5,424			5,419
Stock compensation	6,808			7,609
	19,234			18,403
Valuation allowance	$	(5,955	)	$	(3,547	)
Net deferred tax asset	$	13,279		$	14,856

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities and projected future taxable income. The Company limits the deferred tax assets recognized related to certain highly-paid officers of the Company to amounts that it estimates will be deductible in future periods based upon the provisions of the Internal Revenue Code Section 162(m). In the event that the Company determines, based on available evidence and management judgment, that all or part of the net deferred tax assets will not be realized in the future, the Company would record a valuation allowance in the period the determination is made. In addition, the calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with the Company’s expectations could have a material impact on its results of operations and financial position.

As of December 31, 2011, the Company continues to maintain a valuation allowance on a portion of its California deferred tax assets as the Company believes that it is not more likely than not that the deferred tax assets will be fully realized. The Company also maintains a valuation allowance with respect to certain of its deferred tax assets relating primarily to tax credits in certain non-U.S. jurisdictions.

As of December 31, 2011, the Company had California research and development tax credit carryforwards of approximately $13.0 million. There is no expiration of research and development tax credit carryforwards for the state of California. As of December 31, 2011, the company had Federal research and development tax credit carryforwards of approximately $1.6 million, and Canadian scientific research and experimental development tax credit carryforwards of $1.8 million, which will start to expire in 2026 and 2027, respectively, if unutilized.

Although the Company files U.S. federal, U.S. state, and foreign tax returns, its major tax jurisdiction is the U.S. In

the quarter ended March 31, 2011, the IRS informed the Company that the IRS intends to propose material adjustments to the

Company's taxable income for fiscal years 2003 through 2006 related to the Company's intercompany research and

development cost-sharing arrangement and related issues. In December 2011, the Company received an addendum to the notice of proposed adjustments from the IRS related to the Company's intercompany research and development cost sharing arrangement. The Company believes that the IRS position is without merit and intends to defend its tax return position vigorously. The fiscal years 2007 through 2009 are also under audit by the IRS.

Unrecognized Tax Benefits

The Company applies the provisions of ASC 740-10, relating to accounting for uncertain income taxes.



Reconciliation of the Beginning and Ending Amount of Unrecognized Tax Benefits (in thousands):
Unrecognized Tax Benefits Balance at January 1, 2009	$	20,680
Gross Increases for Tax Positions of Current Year	4,189
Gross Decreases for Tax Positions of Prior Years	—
Settlements	—
Lapse of Statute of Limitations	—
Unrecognized Tax Benefits Balance at December 31, 2009	24,869
Gross Increases for Tax Positions of Current Year	5,269
Gross Decreases for Tax Positions of Prior Years	(227		)
Settlements	—
Lapse of Statute of Limitations	—
Unrecognized Tax Benefits Balance at December 31, 2010	29,911
Gross Increases for Tax Positions of Current Year	4,944
Gross Decreases for Tax Positions of Prior Years	—
Settlements	—
Lapse of Statute of Limitations	—
Unrecognized Tax Benefits Balance at December 31, 2011	$	34,855

The Company's total unrecognized tax benefits as of December 31, 2011, 2010 and 2009 was $34.9 million, $29.9 million and $24.9 million, respectively. An income tax benefit of $31.6 million would be recorded if these unrecognized tax benefits are recognized. Although it is possible some of the unrecognized tax benefits could be settled within the next 12 months, the Company cannot reasonably estimate the outcome at this time.

As of December 31, 2011, the Company had accrued $4.4 million for payment of such interest and penalties, which was classified as non-current taxes payable. Approximately, $0.7 million of interest and penalties were included in the Company's provision for income taxes for the year-ended December 31, 2011.

Determining the consolidated provision for income tax expense, income tax liabilities and deferred tax assets and liabilities involves judgment. The Company calculates and provides for income taxes in each of the tax jurisdictions in which it operates, which involves estimating current tax exposures as well as making judgments regarding the recoverability of deferred tax assets in each jurisdiction. The estimates used could differ from actual results, which may have a significant impact on operating results in future periods.