Income Taxes

12 Months Ended

Dec. 31, 2011

Income Taxes

Income Taxes

H.    Income Taxes

        For the years ended December 31, 2011, 2010 and 2009, we recognized $1.2 million, $0.5 million and $1.1 million in tax benefits, respectively, which were the result of our recognition of corresponding income tax expense associated with the increase in the value of certain securities that we carried at fair market value during the same respective periods. The corresponding income tax expense has been recorded in other comprehensive income. In addition, during 2009, we recognized an additional $0.2 million in tax benefits associated with U.S. research and development tax credits against which we had previously provided a full valuation allowance, but which became refundable as a result of legislation passed in that year.

        The reconciliation of the statutory U.S. federal income tax rate to our effective income tax rate is as follows:

	Years Ended December 31,
	2011			2010			2009
Statutory U.S. federal tax rate		(34.0	)%		(34.0	)%		(34.0	)%
State taxes, net of federal benefit		(3.4	)%		(5.8	)%		(2.3	)%
Permanent items, net		2.8	%		2.2	%		2.1	%
Tax credits		(1.6	)%		(2.2	)%		(1.0	)%
Valuation allowance		34.7	%		39.2	%		33.9	%
Total tax (benefit) expense		(1.5	)%		(0.6	)%		(1.3	)%

        Deferred tax assets and deferred tax liabilities are recognized based on temporary differences between the financial reporting and tax basis of assets and liabilities using future enacted rates. A valuation allowance is recorded against deferred tax assets if it is more likely than not that some or all of the deferred tax assets will not be realized. The components of our deferred tax assets and liabilities are as follows (in thousands):

	December 31,
	2011			2010
Assets
Net operating loss carryforwards	$	75,738		$	61,097
Tax credit carryforwards		12,560			11,279
Deferred revenue		19,321			21,861
Equity award expense		10,331			9,534
Capitalized research & development		43,463			29,146
Other		6,406			8,257
Liabilities
Depreciation		(130	)		(331	)
		167,689			140,843
Valuation allowance		(167,689	)		(140,843	)
Net deferred taxes	$	—		$	—

        Due to the uncertainty surrounding the realization of favorable tax attributes in future tax returns, we have recorded a full valuation allowance against our otherwise recognizable net deferred tax assets. The valuation allowance increased by approximately $26.8 million, $27.9 million and $28.7 million for the years ended December 31, 2011, 2010 and 2009, respectively, primarily due to an increase in our net operating loss, or NOL, carryforwards, capitalized research and development expense, and equity-based compensation expense.

        At December 31, 2011, we had federal NOL carryforwards of approximately $202.1 million and state NOL carryforwards of up to $138.1 million. We also had federal capital loss carryforwards of $1.7 million to offset future capital gains and an additional $24.4 million and $16.5 million of federal and state NOLs, respectively, not reflected above which were attributable to deductions from the exercise of equity awards. The benefit from these deductions will be recorded as a credit to additional paid-in capital if and when realized through a reduction of taxes paid in cash. Our federal NOLs will begin to expire in 2011, and our most significant state NOLs expire at various dates through 2032. Our capital loss carryforwards will expire in 2015. In addition, we have federal and state tax credits of approximately $9.5 million and $4.7 million, respectively, to offset future tax liabilities. Our tax credits will expire periodically through 2032 if not utilized.

        Utilization of our NOLs and research and development, or R&D, credit carryforwards may be subject to a substantial annual limitation due to ownership change limitations that have occurred previously or that could occur in the future in accordance with Section 382 of the Internal Revenue Code of 1986, or Section 382, as well as similar state provisions. These ownership changes may limit the amount of NOL and R&D credit carryforwards that can be utilized annually to offset future taxable income and taxes, respectively. In general, an ownership change as defined by Section 382 results from transactions increasing the ownership of certain shareholders or public groups in the stock of a corporation by more than 50 percentage points over a three-year period. Since our formation, we have raised capital through the issuance of capital stock on several occasions. These financings, combined with the purchasing shareholders' subsequent disposition of those shares, may have resulted in a change of control as defined by Section 382 or could result in a change of control in the future upon subsequent disposition. In May 2011, we conducted an analysis under Section 382 to determine if historical changes in ownership through December 31, 2010 would limit or otherwise restrict our ability to utilize these NOL and R&D credit carryforwards. As a result of this analysis, we do not believe there are any significant limitations on our ability to utilize these carryforwards. However, changes in ownership after December 31, 2010 could affect the limitation in future years. Any limitation may result in expiration of a portion of the NOL or R&D credit carryforwards before utilization.

        At December 31, 2011 and 2010, we had no unrecognized tax benefits. We have not, as yet, conducted a study of our R&D credit carryforwards. Such a study could result in an adjustment to our R&D credit carryforwards; however, until a study is completed and any adjustment is known, no amounts are being presented as an uncertain tax position. A full valuation allowance has been provided against our R&D credits and, if an adjustment is required, this adjustment would be offset by an adjustment to the valuation allowance. Thus, there would be no impact to the consolidated balance sheet or statement of operations if an adjustment were required.

        We would recognize both accrued interest and penalties related to unrecognized benefits in income tax expense. We have not recorded any interest or penalties on any unrecognized benefits since inception.

        The statute of limitations for assessment by the Internal Revenue Service, or the IRS, and state tax authorities is closed for tax years prior to September 30, 2007, although carryforward attributes that were generated prior to tax year 2007 may still be adjusted upon examination by the IRS or state tax authorities if they either have been or will be used in a future period. We file income tax returns in the U.S. federal and various state jurisdictions. There are currently no federal or state audits in progress.