Income Taxes:

The domestic and foreign components of income (loss) before Benefit (provision) for income taxes consist of the following (in thousands):



	Year Ended
	December 31,		January 1,		January 2,
	2011		2011		2010
Domestic	$	42,619	$	56,782	$	(8,588	)
Foreign	104		821		2,148
Income (loss) before income taxes	$	42,723	$	57,603	$	(6,440	)

The components of the income tax Benefit (provisions) are as follows (in thousands):



	Year Ended
	December 31, 2011			January 1, 2011			January 2, 2010
Current:
Federal	$	(13,463	)	$	(83	)	$	(74	)
State	137			(47		)	(55		)
Foreign	(541		)	(880		)	(377		)
	(13,867		)	(1,010		)	(506		)
Deferred:
Federal	45,423			296			—
State	3,894			8			—
Foreign	59			175			(11		)
	49,376			479			(11		)
Benefit (provision) for income taxes	$	35,509		$	(531	)	$	(517	)

The Benefit (provision) for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to pretax income as a result of the following differences:



	Year Ended
	December 31, 2011	January 1, 2011	January 2, 2010
	%	%	%
Statutory federal rate	35	35	35
Adjustments for tax effects of:
State taxes, net	3	—	11
Intellectual property sale	144	—	—
Research and development credits	(3)	(2)	14
Foreign taxes	2	—	7
Foreign dividends	1	—	(13)
Valuation allowance	(289)	(37)	1
Change in uncertain tax benefit accrual	31	—	(6)
Stock-based compensation	—	—	(32)
Tax rate change	(7)	5	(22)
Other	—	—	(3)
Effective income tax rate	(83)	1	(8)

ASC 740, “Income Taxes”, provides for the recognition of deferred tax assets if realization of these assets is more likely than not. We evaluate both positive and negative evidence to determine if some or all of our deferred tax assets should be recognized on a quarterly basis.

On December 31, 2011, we began to implement a global tax structure to more effectively align the Company's corporate structure and transaction flows with the Company's geographic business operations including responsibility for sales and purchasing activities. We have numerous sales offices in foreign locations, operational centers in the Philippines and Singapore, and research and development sites in China, India and the Philippines. Revenues from non-Domestic regions account for over 80% of all revenue. In addition, the large majority of our suppliers are located in the Asia Pacific region. Based on these factors we have created new and realigned existing legal entities, intercompany sales of rights to intellectual property, inventory and fixed assets across different tax jurisdictions, and implemented cost-sharing and intellectual property licensing and royalty agreements between our U.S. and low cost tax jurisdictions. These actions created a gain for tax purposes, for which we recorded a $76.8 million tax provision in the fourth quarter of fiscal 2011. This provision was fully offset by the release of valuation allowance on deferred tax assets of $76.8 million recorded as a tax benefit during the fourth quarter of fiscal 2011. We expect that the global tax structure will be completed during the first quarter of 2012 upon the intercompany sale of inventory and fixed assets, and we expect to record approximately $9.7 million in additional income tax provision during the first quarter of fiscal 2012.

During the fourth quarter of 2011, we also concluded that it was more likely than not that we would be able to realize the benefit of a portion of our remaining deferred tax assets. We based this conclusion on improved operating results over the past two years and our expectations about generating taxable income in the foreseeable future including the implementation of a global tax structure discussed above. Based on our assessment regarding the potential to realize deferred tax assets, we reversed additional valuation allowance, which when offset by the provision recorded related to our new global tax structure, resulted in an income tax benefit of $35.2 million. We exercised significant judgment and considered estimates about our ability to generate revenues, gross profits, operating income and taxable income in future periods under our new tax structure in reaching this decision.

The components of our net deferred tax assets are as follows (in thousands):



	December 31, 2011			January 1, 2011
Deferred tax assets:
Accrued expenses and reserves	$	4,011		$	3,843
Inventory	4,036			4,396
Deferred revenue	13,047			15,326
Stock-based and deferred compensation	3,716			2,731
Intangible assets	9,277			71,891
Fixed assets	124			1,266
Net operating loss carry forwards	125,013			137,387
Tax credit carry forwards	31,768			29,095
Capital loss carry forwards	6,916			6,106
Unrealized loss on securities	925			1,042
Other	81			—
	198,914			273,083
Less: valuation allowance	(147,499		)	(271,208		)
Net deferred tax assets	51,415			1,875
Deferred tax liabilities:
Prepaid expenses	768			732
Other	977			849
Total deferred tax liabilities	1,745			1,581
Net deferred tax assets	$	49,670		$	294

Of the total Net deferred tax assets, $4.5 million is considered current and included in Prepaid expenses and other current assets on the consolidated balance sheet as of December 31, 2011.

At December 31, 2011, we have federal net operating loss carry forwards (pre-tax) of approximately $290.6 million that expire at various dates between 2023 and 2029. We have state net operating loss carryforwards (pre-tax) of approximately $171.6 million that expire at various dates from 2012 through 2029. We also have federal and state credit carryforwards of $14.1 million, $21.4 million of which do not expire. The remainder credits expire at various dates from 2012 through 2031.

Future utilization of federal and state net operating losses and tax credit carry forwards may be limited if cumulative changes to ownership exceed 50% within any three-year period, which has not occurred through fiscal 2011. However, if there is a significant change in ownership the future utilization may be limited and an allowance will be recorded for that amount.

U.S. income taxes and foreign withholding taxes were not provided for on a cumulative total of approximately $1.6 million of the undistributed earnings of our Chinese subsidiary. We intend to reinvest these earnings indefinitely in our Chinese subsidiary. If these earnings were distributed to the U.S. in the form of dividends or otherwise, we would be subject to additional U.S. income taxes and foreign withholding taxes.

At December 31, 2011, our unrecognized tax benefits associated with uncertain tax positions were $21.6 million, of which $20.4 million, if recognized, would affect the effective tax rate. As of December 31, 2011, interest and penalties associated with unrecognized tax benefits were $0.4 million.

The following table summarizes the changes to unrecognized tax benefits for fiscal years 2011, 2010 and 2009 (in thousands):



Unrecognized tax benefit	Amount
Balance at January 3, 2009	$	6,238
Additions based on tax positions related to the current year	473
Additions based on tax positions of prior years	341
Reduction for tax positions of prior years	—
Settlements	—
Reduction as a result of lapse of applicable statute of limitations	(83		)
Balance at January 2, 2010	6,969
Additions based on tax positions related to the current year	786
Additions based on tax positions of prior years	60
Reduction for tax positions of prior years	—
Settlements	—
Reduction as a result of lapse of applicable statute of limitations	(74		)
Balance at January 1, 2011	7,741
Additions based on tax positions related to the current year	15,005
Additions based on tax positions of prior years	—
Additions for acquisition of SiliconBlue	298
Reduction for tax positions of prior years	(106		)
Settlements	(1,248		)
Reduction as a result of lapse of applicable statute of limitations	(138		)
Balance at December 31, 2011	$	21,552

At December 31, 2011, it is reasonably possible that $0.4 million of unrecognized tax benefits and $0.1 million of associated interest and penalties could significantly change during the next twelve months. The $0.5 million potential change would represent a decrease in unrecognized tax benefits, comprised of items related to certain domestic tax credits and uncertain income tax positions related to foreign tax filings for years no longer subject to examination under expiring statutes of limitations.

The Internal Revenue Service has examined our income tax returns for 2001 and 2002, and issued proposed adjustments of $1.4 million, plus interest. These adjustments relate to the treatment of acquisition costs and a tax accounting method change for prepaid expenses. We reached an agreement regarding the acquisition costs during the three months ended March 29, 2008. We made a payment of $0.3 million related to this settlement agreement. On May 23, 2008, we filed a petition with the Tax Court seeking a redetermination of the prepaid expense adjustment. On May 9, 2011 the United States Tax Court ruled that the IRS did not err in denying our request to change our accounting method with respect to prepaid expenses and held that we were not allowed a deduction for prepaid expenses on our 2002 tax return. During the quarter ended October 1, 2011, we decided not to pursue further litigation with regard to the prepaid expense adjustment and paid the adjustments to the IRS. As a result, we paid $1.0 million in October 2011 related to disallowed prepaid expense deductions and the corresponding carry back of those deductions to the 1999 and 2000 tax returns through a net operating loss carry back. The amount paid was fully reserved. A benefit of approximately $0.9 million was recognized in the three months ended October 1, 2011 for the reversal of uncertain tax positions and related interest for the years effectively settled.

We are not currently under examination in any state or local jurisdictions. We are currently under examination in Taiwan. To date, there are no proposed adjustments that are expected to have a material adverse effect on our results of operations.

We are subject to federal and state income tax as well as income tax in the various foreign jurisdictions in which we operate. Additionally, the tax years that remain subject to examination are 2008 for federal income taxes, 2007 for state income taxes, and 2005 for foreign income taxes, including years ending thereafter. However, to the extent allowed by law, the tax authorities may have the right to examine prior periods where net operating losses or tax credits were generated and carried forward, and make adjustments up to the amount of the net operating losses or credit carry forward amount.