Note 18. Income Taxes

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 at the enacted rates. The significant components of the Company's deferred tax assets at December 31, 2011 and 2010 were as follows (in thousands):


	December 31,
	2011			2010
Net operating loss carryforwards	$	137,800		$	132,600
Research and development credit carryforwards		31,400			31,600
Capitalized inventory costs		500			700
Inventory reserve		200			200
Capitalized research and development		10,300			13,000
Capitalized trademark		200			300
Capitalized revenue sharing rights		600			900
Deferred compensation		4,200			3,600
Accrued liabilities		400			300
Depreciation		1,400			2,200
Acqusition costs		200			0
Deferred tenant allowance		200			0
Capital loss carryforwards		3,900			3,900

Total deferred tax assets		191,300			189,300
Valuation allowance		(191,300	)		(189,300	)

Net deferred tax assets	$	0		$	0

The valuation allowance increased by $2.0 million, $7.2 million and $2.5 million for the years ended December 31, 2011, 2010 and 2009, respectively. The Company believes that, based on a number of factors, the available objective evidence creates sufficient uncertainty regarding the realizability of the deferred tax assets such that a full valuation allowance has been recorded. These factors include the Company's history of net losses since its inception, the need for regulatory approval of the Company's products prior to commercialization, expected near-term future losses and the absence of taxable income in prior carryback years. The Company expects to maintain a full valuation allowance until circumstances change. Undistributed earnings of the Company's foreign subsidiary, Cerus Europe B.V., amounted to approximately $0.4 million at December 31, 2011. The earnings are considered to be permanently reinvested and accordingly, no deferred United States income taxes have been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to United States income taxes. At the Federal statutory income tax rate of 34%, this would result in taxes of approximately $0.2 million.

For the year ended December 31, 2011, the Company reported net losses of $17.0 million on its consolidated statement of operations and calculated taxable losses for both federal and state taxes. The difference between reported net loss and taxable loss are due to temporary differences between book accounting and the respective tax laws.

At December 31, 2011, the Company had net operating loss carryforwards of approximately $354.1 million for federal and $297.4 million for state income tax purposes. The Company also had research and development tax credit carryforwards of approximately $21.2 million for federal income tax purposes and approximately $15.4 million for state income tax purposes at December 31, 2011. The federal net operating loss and tax credit carryforwards expire between the years 2012 and 2031. The state net operating loss carryforwards expire between the years 2012 and 2031. The state research and development credits do not expire and are carryforward indefinitely until fully exhausted.

The utilization of net operating loss carryforwards, as well as research and development credit carryforwards, is limited by current tax regulations. These net operating loss carryforwards, as well as research and development credit carryforwards, will be utilized in future periods if sufficient income is generated. The Company believes it more likely than not that its tax positions would be recognized upon review by a taxing authority having full knowledge of all relevant information. The Company's ability to utilize certain loss carryforwards and certain research credit carryforwards are subject to limitations pursuant to the ownership change rules of Internal Revenue Code Section 382.