10. INCOME TAXES

        For the years ended December 31, 2011, 2010 and 2009, our income (loss) before income taxes was from domestic operations. For the year ended December 31, 2011, we did not record a provision for income taxes due to our net loss. For the year ended December 31, 2010, we did not record a provision for income taxes because of the utilization of net operating loss carryforwards for federal tax purposes and manufacturing investment credits for state tax purposes. For the year ended December 31, 2009, we recorded an income tax benefit of approximately $93,000 related to a refund of research tax credits as provided by the American Recovery and Reinvestment Act of 2009.

        Deferred income taxes reflect the net tax effects of 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 our deferred tax assets are as follows (in thousands):

        The reconciliation of the statutory federal income tax rate to the effective tax rate was as follows:

        As of December 31, 2011, we had net operating loss carryforwards for federal income tax purposes of approximately $441.4 million, which expire beginning in the year 2023 and state net operating loss carryforwards of approximately $234.8 million, which expire beginning in the year 2014.

        We also have federal research and development tax credits of approximately $9.4 million, which begin to expire in the year 2018 and state research and development tax credits of approximately $17.5 million, which have no expiration date.

        Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. The valuation allowance increased by approximately $34.5 million for the year ended December 31, 2011 and decreased by approximately $13.9 million for the year ended December 31, 2010.

        Included in the valuation allowance balance at December 31, 2011 and 2010 is approximately $2.5 million of tax deductions related to the exercise of stock options prior to the adoption of ASC 718 which have not reflected as an expense for financial reporting purposes. Accordingly, any future reduction in the valuation allowance relating to this amount will be credited directly to equity and not reflected as an income tax benefit in the statement of operations. As a result of certain realization requirements, the table of deferred tax assets and liabilities shown above does not include loss carryforward tax assets of approximately $1.7 million at December 31, 2011 and 2010 that arose directly from (or the use of which was postponed by) tax deductions related to stock-based compensation expense in excess of compensation expense recognized for financial reporting. Equity will be increased by approximately $1.7 million if and when such deferred tax assets are ultimately realized.

        Utilization of our net operating losses may be subject to substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such an annual limitation could result in the expiration of the net operating losses before utilization.

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

        We do not anticipate a significant change to the unrecognized tax benefits over the next twelve months.

        We are subject to taxation in the United States and in California. Because of net operating loss and research credit carryovers, substantially all of our tax years remain open to examination.

        Our policy is that we recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. We currently have no tax positions that would be subject to interest or penalties.