10.	Income Taxes

Due to our net losses for the years ended December 31, 2011, 2010 and 2009, and since we have recorded a full valuation allowance against deferred tax assets, there was no provision or benefit for income taxes recorded. There were no components of current or deferred federal or state income tax provisions for the years ended December 31, 2011, 2010 and 2009.

A reconciliation of the total income tax provision tax rate to the statutory federal income tax rate of 34% for the years ended December 31, 2011, 2010 and 2009 is as follows:

	2011			2010			2009
Income tax expense (benefit) at federal statutory rate		(34.00	) %		(34.00	) %		(34.00	) %
Income tax expense (benefit) at state statutory rate		(3.36	) %		(2.62	) %		(2.61	) %
Mark to market permanent adjustment		(5.02	) %		(1.71	) %		7.21	%
Change in federal valuation allowance		45.72	%		40.47	%		8.16	%
Change in State Rate		(3.29	) %		0.00	%		24.55	%
Deferred revenue		(2.09	) %		(2.82	) %		(0.28	) %
Other, net		2.04	%		0.68	%		(3.03	) %
		0.00	%		0.00	%		0.00	%

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of December 31, 2011 and 2010 are as follows:

	2011			2010
Deferred tax assets:
Allowances and reserves	$	292,000		$	217,000
Accrued expenses		587,000			540,000
Deferred revenue		3,276,000			3,164,000
Stock based compensation		4,886,000			3,860,000
Net operating loss carryforwards		73,774,000			61,398,000
Income tax credit carryforwards		5,569,000			5,242,000
Property and equipment, principally due to differences in depreciation		707,000			821,000
Other		181,000			0
		89,272,000			75,242,000
Valuation allowance		(89,200,000	)		(74,994,000	)

Total deferred tax assets, net of allowance		72,000			248,000

Deferred tax liabilities:
Intangibles		(72,000	)		(151,000	)
Capitalized Assets and other		0			(97,000	)

Total deferred tax liability		(72,000	)		(248,000	)

Net deferred tax assets (liability)	$	-		$	-

We have established a valuation allowance against our net deferred tax assets due to the uncertainty surrounding the realization of such assets. We periodically evaluate the recoverability of the deferred tax assets. At such time as it is determined that it is more likely than not that deferred assets are realizable, the valuation allowance will be reduced. We have recorded a valuation allowance of $89,200,000 as of December 31, 2011 to reflect the estimated amount of deferred tax assets that may not be realized. We increased our valuation allowance by approximately $14,206,000 during the year ended December 31, 2011. The valuation allowance includes approximately $579,000 related to stock option deductions, the benefit of which, if realized, will eventually be credited to equity and not to income.

At December 31, 2011, we had federal, California, and Massachusetts tax loss carryforwards of approximately $193,511,000, $127,557,000, and $164,000 respectively. The federal and state net operating loss carryforwards begin to expire in 2019 and 2012 respectively, if unused. At December 31, 2011, we had federal and state tax credit carryforwards of approximately $3,808,000 and $3,594,000 respectively. The federal credits will begin to expire in 2017, if unused, and the state credits carry forward indefinitely. In addition, we had a foreign tax loss carryforward of $10,694,000 in Japan, $1,226,000 in Italy, $1,295,000 in Switzerland, and $51,000 in India.

Pursuant to the Internal Revenue Code (“IRC”) of 1986, as amended, specifically IRC §382 and IRC §383, our ability to use net operating loss and R&D tax credit carry forwards to offset future taxable income is limited if we experience a cumulative change in ownership of more than 50% within a three-year period. We have completed an ownership change analysis pursuant to IRC Section 382 through April 17, 2007. We did not have any ownership change limitations based on that study. If ownership changes within the meaning of IRC Section 382 are identified as having occurred subsequent to April 17, 2007, the amount of remaining tax carry forwards available to offset future taxable income in future years may be significantly restricted or eliminated.

We recognize tax benefits associated with the exercise of stock options directly to stockholders' equity only when realized. Accordingly, deferred tax assets are not recognized for net operating loss carryforwards resulting from windfall tax benefits. At December 31, 2011, deferred tax assets do not include $1,225,000 of excess tax benefits from stock-based compensation.

We changed our accounting method of accounting for uncertain tax positions on January 1, 2007. We had no unrecognized tax benefits as of the date of adoption.

Following is a tabular reconciliation of the unrecognized tax benefits activity during the years ended December 31, 2011, 2010 and 2009:

	2011		2010			2009
Unrecognized Tax Benefits – Beginning	$	1,166,000	$	1,115,000		$	952,000
Gross increases – tax positions in prior period		-		-			4,000
Gross decreases – tax positions in prior period		-		(49,000	)		-
Gross increase – current-period tax positions		138,000		100,000			159,000
Settlements		-		-			-
Lapse of statute of limitations		-		-			-
Unrecognized Tax Benefits – Ending	$	1,304,000	$	1,166,000		$	1,115,000

None of the amount included in our liability for uncertain tax benefits if recognized would affect the Company's effective tax rate, since it would be offset by an equal reduction in the deferred tax asset valuation allowance. The Company's deferred tax assets are fully reserved.

The Company did not recognize interest related to unrecognized tax benefits in interest expense and penalties in operating expenses as of December 31, 2011.

The Company's material tax jurisdictions are United States and California. The Company is currently not under examination by the Internal Revenue Service or any other taxing authority.

The Company's tax years for 1999 and forward can be subject to examination by the United States and California tax authorities due to the carryforward of net operating losses and research development credits.

The Company does not foresee material changes to its liability for uncertain tax benefits within the next twelve months.