Note 11—Income Taxes

We have a history of losses and therefore have made no provision for income taxes. Deferred income taxes reflect the tax effect of net operating loss and tax credit carryforwards and the net temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

Significant components of deferred tax assets are as follows:


	December 31,
	2011			2010
	(in thousands)
Deferred tax assets:
Net operating loss carryforwards	$	48,901		$	39,820
Deferred revenue		14			91
Stock-based compensation		1,306			991
Research and development tax credits		3,560			3,192
Investment in Partnership		547			604
Other		303			388

		54,631			45,086
Less valuation allowance		(54,631	)		(45,086	)

Net deferred tax assets	$	—		$	—

As of December 31, 2011 and 2010, we had net operating loss carryforwards of approximately $143.8 million and $117.1 million, respectively, and research and development tax credit carryforwards of approximately $3.6 million and $3.2 million, respectively. Unless previously utilized, our net operating loss and research and development tax credit carryforwards expire between 2012 and 2031

In certain circumstances, due to ownership changes, the net operating loss and tax credit carryforwards may be subject to limitations under the Internal Revenue Code of 1986, as amended (the Code). Our ability to utilize our net operating loss and tax credit carryforwards may be limited in the event that a change in ownership, as defined in Section 382 of the Code, has occurred or may occur in the future. Approximately $2.7 million of our net operating loss carryforwards relate to tax deductible stock-based compensation in excess of amounts recognized for financial statement purposes. To the extent that net operating loss carryforwards, if realized, relate to stock-based compensation, the resulting tax benefits will be recorded to shareholders’ equity, rather than to the results of operations.

We have established a 100% valuation allowance due to the uncertainty of our ability to generate sufficient taxable income to realize the deferred tax assets. Our valuation allowance increased $9.5 million, $11.1 million and $6.8 million in 2011, 2010 and 2009, respectively, primarily due to net operating losses incurred during these periods.

A reconciliation of the Federal statutory tax rate of 34% to our effective income tax rate follows:


	December 31,
	2011			2010			2009
Statutory tax rate		(34	)%		(34	)%		(34	)%
Permanent difference		1			(1	)		4
Change in valuation allowance		33			27			20
Other		—			8			10

Effective tax rate		—			—			—

We file income tax returns in the United States, which typically provides for a three-year statute of limitations on assessments. However, because of net operating loss carryforwards, substantially all of our tax years remain open to federal tax examination.

The guidance for accounting for uncertainties in income taxes requires that we recognize the financial statement effects of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. As a result of the implementation of this guidance, we identified certain adjustments to our research and development tax credit, which was accounted for as a reduction to the deferred tax assets. There have been no changes in unrecognized tax benefits for the years ended December 31, 2011, 2010 and 2009. Further, there were no unrecognized tax benefits that impacted our effective tax rate and accordingly, there was no material effect to our financial position, results of operations or cash flows.

Our policy is to recognize interest and penalties related to the underpayment of income taxes as a component of income tax expense. To date, there have been no interest or penalties charged to us in relation to the underpayment of income taxes.

We do not anticipate that our unrecognized tax benefits will significantly increase in the next 12 months.