(12) INCOME TAXES

The Company is subject to taxation in the U.S. and various state jurisdictions. All of the Company's tax years are subject to examination by the U.S. and state tax authorities due to the carryforward of unutilized net operating losses.

Under financial accounting standards, deferred tax assets or liabilities are computed based on the differences between the financial statement and income tax bases of assets and liabilities using the enacted tax rates. Deferred income tax expense or benefit represents the change in the deferred tax assets or liabilities from period to period. At December 31, 2012, the Company had federal net operating loss and state net operating loss carryforward of approximately $250.7 million and $158.7 million, respectively for financial reporting purposes, which may be used to offset future taxable income. The Company also had federal and state research tax credit carryforwards of $4.2 million and $9.0 million, respectively which may be used to offset future income tax liability. The federal and state carryforwards expire beginning 2013 through 2032 and are subject to review and possible adjustment by the Internal Revenue Service. In the event of a change of ownership, the federal and state net operating loss and research and development tax credit carryforwards may be subject to annual limitations provided by the Internal Revenue Code and similar state provisions.

As of December 31, 2012 and 2011, the Company had $14.2 million and $10.6 million respectively in excess tax benefit stock option deductions. The excess tax benefit arising from these deductions is credited to additional paid in capital as the benefit is realized.

The components of the net deferred tax asset with the approximate income tax effect of each type of carryforward, credit and temporary differences are as follows. Amounts included in the table are in thousands.

	December 31,

	2012			2011
Deferred tax assets:
Operating loss carryforwards	$	88,532		$	71,471
Tax credit carryforwards		10,184			7,511
Deferred revenue		1,758			3,399
Other temporary differences		3,445			2,257

Tax assets before valuation allowance		103,919			84,638
Less—Valuation allowance		(103,919	)		(84,638	)

Net deferred taxes	$	—		$	—

A valuation allowance to reduce the deferred tax assets is reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company has incurred significant losses since its inception and due to the uncertainty of the amount and timing of future taxable income, management has determined that a $103.9 million and $84.6 million valuation allowance at December 31, 2012 and 2011 is necessary to reduce the tax assets to the amount that is more likely than not to be realized. The change in valuation allowance for the current year is $19.3 million. Due to the existence of the valuation allowance, future changes in our unrecognized tax benefits will not impact the Company's effective tax rate.

The effective tax rate differs from the statutory tax rate due to the following:

	December 31,

	2012			2011			2010
U.S. Federal statutory rate		34.0	%		34.0	%		34.0	%
State taxes		1.7			5.6			5.6
Research and development tax credit		5.1			1.7			2.6
Stock-based compensation expense		(0.6	)		(2.4	)		(1.9	)
Other adjustments		(0.1	)		0.1			(0.1	)
Valuation allowance		(40.1	)		(39.0	)		(40.1	)

Effective tax rate		0.0	%		0.0	%		0.1	%

The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. The amount of unrecognized tax benefits as of January 1, 2010 was none. There have been no changes in unrecognized tax benefits since January 1, 2010, nor are there any tax positions where it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within the 12 months following December 31, 2012.

As of December 31, 2012, due to the carryforward of unutilized net operating losses and research and development credits, the Company is subject to U.S. Federal income tax examinations for the tax years 1995 through 2012, and to state income tax examinations for the tax years 1995 through 2012. Interest and penalties are recorded as income tax expense in the period incurred. There were no interest or penalties related to income taxes that have been accrued or recognized as of and for the years ended December 31, 2012, 2011 and 2010.