Activision, Inc. — 2004 Annual Report page 63 Domestic and foreign income before income taxes and details of the income tax provision are as follows (amounts  in thousands): 12. Income Taxes The items accounting for the difference between income taxes computed at the U.S. federal statutory income tax rate and the income tax provision for each of the years are as follows: Year ended March 31, 2004 2003 2002 Federal income tax provision at statutory rate 35.0% 35.0% 35.0% State taxes, net of federal benefit 2.3 2.4 3.5 Research and development credits (8.0) (6.0) (1.8) Incremental (decremental) effect of foreign tax rates (2.3) (0.2) (1.4) Increase of valuation allowance 5.8 2.1 2.4 Rate changes — 0.8 — Other 0.2 1.9 (0.5) 33.0% 36.0% 37.2% Year ended March 31, 2004 2003 2002 Income before income taxes: Domestic $ 84,339 $ 78,761 $ 67,553 Foreign 31,653 24,646 15,567 $115,992 $103,407 $ 83,120 Income tax expense (benefit): Current: Federal $ 502 $ 1,703 $ 648 State 311 413 20 Foreign 9,899 7,872 5,053 Total current 10,712 9,988 5,721 Deferred: Federal 14,113 1,794 (18,751) State (871) 3,065 (4,555) Foreign 1,906 (1,504) (46) Total deferred 15,148 3,355 (23,352) Add back benefit credited to additional paid-in capital: Tax benefit related to stock option and warrant exercises 12,417 23,884 48,513 Income tax provision $ 38,277 $ 37,227 $ 30,882