7. Income Taxes

We have recorded a net tax benefit (expense) of $(32,000) and $31,000 for the years ended December 31, 2011 and 2010, respectively, related to foreign income taxes in 2011 and to refundable income tax credits partially offset by foreign income tax expense in 2010. The amounts have been included in other income in the consolidated financial statements.

At December 31, 2011, we had federal and state tax net operating loss carryforwards of approximately $287.4 million and $192.2 million, respectively. The federal and state tax loss carryforwards will begin to expire in 2019 and 2012, respectively, unless previously utilized. We also had federal and state research and development tax credit carryforwards of approximately $4.1 million and $6.7 million, respectively. The federal research and development tax credit will begin to expire in 2020, unless previously utilized.

Utilization of net operating losses and credit carryforwards are subject to an annual limitation due to ownership change limitations provided by Section 382 and 383 of the Internal Revenue Code of 1986, as amended, and similar state provisions. An ownership change limitation occurred as a result of the stock offering completed in February 2009. The limitation will likely result in approximately $2.1 million of U.S. income tax credits and approximately $9.2 million of state net operating loss carryforwards that will expire unused. The related deferred tax assets have been removed from the components of our deferred tax assets as summarized below. The tax benefits related to the remaining federal and state net operating losses and tax credit carryforwards may be further limited or lost if future cumulative changes in ownership exceed 50% within any three-year period.

Significant components of our deferred tax assets as of December 31, 2011 and 2010 are shown below (in thousands). A valuation allowance of approximately $134.7 million has been established as of December 31, 2011 to offset the deferred tax assets, as realization of such assets is uncertain.


	December 31,
	2011			2010
Deferred tax assets:
Net operating loss carryforwards	$	106,456		$	89,069
Capitalized research and development expenses		10,532			15,743
Tax credits		5,021			3,975
Share-based compensation		9,798			6,750
Fixed and intangible assets		960			1,397
Other, net		1,885			1,329

Total gross deferred tax assets		134,652			118,263
Less: valuation allowance		(134,652	)		(118,263	)
Net deferred tax assets		0			0

We recognize windfall tax benefits associated with the exercise of share-based compensation directly to stockholders' equity only when realized. Accordingly, deferred tax assets are not recognized for net operating loss carryforwards resulting from windfall tax benefits occurring from January 1, 2006 onward. At December 31, 2011, deferred tax assets do not include $4.9 million of excess tax benefits from share-based compensation.

The reconciliation between our effective tax rate on income (loss) from continuing operations and the statutory rate is as follows:


	December 31,
	2011			2010			2009
Income taxes (benefit) at statutory rates		35.00	%		35.00	%		35.00	%
State income tax, net of federal benefit		2.45	%		3.46	%		3.16	%
Permanent items		(2.79	)%		(2.68	)%		(2.20	)%
Research and development credits		3.93	%		2.51	%		2.32	%
Tax attribute carryover limitation		0	%		0	%		(4.89	)%
Other		(2.02	)%		(0.36	)%		1.09	%
Change in valuation allowance		(36.65	)%		(37.88	)%		(34.45	)%

		(0.07	)%		0.06	%		0.03	%

The following table summarizes the activity related to our gross unrecognized tax benefits (in thousands):


Balance at January 1, 2009	$	3,077
Adjustments related to prior year tax positions		51
Increases related to current year tax positions		604
Decreases due to IRC Section 382 limitation		(837	)

Balance at December 31, 2009		2,895

Increases related to current year tax positions		677

Balance at December 31, 2010		3,572

Increases related to current year tax positions		857

Balance at December 31, 2011	$	4,429

Due to the valuation allowance recorded against our deferred tax assets, $51,000 of the total unrecognized tax benefits as of December 31, 2011 would reduce our annual effective tax rate if recognized. Interest and penalties are classified as a component of income tax expense. Due to net operating losses incurred, tax years from 1999 to 2011 remain open to examination by the major taxing jurisdictions to which we are subject.