Income Taxes

The Company provides for income taxes using an asset and liability approach, where deferred income taxes are provided based upon enacted tax laws and rates applicable to periods in which the taxes become payable. The Company is subject to taxation in the U.S. and various states and foreign jurisdictions. With few exceptions, as of December 31, 2012 and 2011, the Company is no longer subject to U.S. federal, state, local, or foreign examinations by tax authorities for years before 2008.

Income (loss) from continuing operations before income taxes consists of the following components (in thousands):



	Year ended December 31,
	2012		2011			2010
United States	$	1,811	$	(4,584	)	$	(4,161	)

During the years ended December 31, 2012, December 31, 2011 and December 31, 2010, the Company paid income taxes of $0.1 million, $0.0 million and $0.1 million, respectively.

A summary of total tax expense, by classification, included in the accompanying consolidated statements of income is as follows (in thousands):



	Year ended December 31,
	2012		2011			2010
Current:
Federal	$	6	$	(1,171	)	$	25
State	—		34			73
	$	6	$	(1,137	)	$	98

The income tax benefit recognized in 2011 is offset by a tax provision in discontinued operations as there was a loss in continuing operations and income in discontinued operations in that same year. There was not a similar benefit in 2012 and 2010 as there was income or loss in both continuing and discontinuing operations in those years.

Deferred tax assets consist of the following (in thousands):



	Year ended December 31,
	2012			2011
Deferred tax assets:
Accruals and reserves	$	2,271		$	3,288
Net operating loss carryforwards	14,816			21,125
Research and development credit carryforward	858			556
Gross deferred tax asset	$	17,945		$	24,969
Valuation allowance	(17,945		)	(24,969		)
Net deferred tax asset	$	—		$	—

The Company has recently completed a study addressing the recoverability of our net operating loss carryforwards. The results of the study indicated that there was a change of control as defined by Section 382 of the Internal Revenue Code (“IRC”) in 2008. As a result of the change of control, certain net operating losses previously included in the Company's deferred tax disclosures will not be available to offset future taxable income as the IRC limits the annual utilization of these carryforwards. Consistent with historical practices, the Company continues to fully reduce the net operating loss carryforwards and all other deferred tax assets by a valuation allowance. This is due to the conclusion that it was more-likely-than-not that the Company would not recover the deferred tax assets because of uncertainties about the Company's ability to generate taxable income in the future.

The Company's previously reported net operating loss carryforwards of $280.6 million as of December 31, 2011 is limited to $49.9 million, of which $13.0 million will be utilized to offset taxable income in 2012. Also reducing the net operating loss carryforwards was $1.4 million of recognized built in losses. The amount of net operating losses available to offset taxable income in 2013 and beyond as of December 31, 2012 is $35.5 million. Approximately $1.8 million of the net operating loss carryforwards have not been recognized as they related to benefits associated with stock option exercises that have not reduced current taxes payable.

This change in control also limits the amount of net operating loss carry-forwards available to offset future California taxable income. As of December 31, 2011, the previously reported net operating loss carryforwards of $76.2 million is limited to $38.9 million, of which $2.0 million will be utilized to offset taxable income in 2012 with $36.9 million available to offset California taxable income in 2013 and beyond.

The net operating losses not expected to be utilized in 2012 expire between 2013 and 2031. The net operating loss carryforwards stated above are reflective of various federal and state tax limitations. As of December 31, 2012 and December 31, 2011, the Company has gross federal and California state research and development credit carryforwards of $0.8 million and $0.2 million, respectively, which expire between 2019 and 2031.

Reconciliation of the statutory federal income tax to the Company’s effective tax is as follows:



	Year ended December 31,
	2012		2011		2010
Tax Benefit at Federal statutory rate	34.0	%	34.0	%	34.0	%
State, net of Federal benefit	0.9	%	(0.1	)%	3.6	%
Stock compensation	—	%	0.3	%	(3.5	)%
Research and development credit	—	%	6.5	%	6.9	%
Return to Provision and True-ups	—	%	(2.8	)%	3.8	%
Change in valuation allowance	(35.9	)%	(12.7	)%	(44.6	)%
Other	1.3	%	(0.4	)%	(2.5	)%
Benefit (Provision) for taxes	0.3	%	24.8	%	(2.3	)%

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):



	Year ended December 31,
	2012			2011			2010
Unrecognized tax benefits at beginning of period	$	1,192		$	1,234		$	810
Gross increases to current period tax positions	—			59			180
Gross (decreases) increases to prior period tax positions	(848		)	(101		)	244
Unrecognized tax benefits at end of period	$	344		$	1,192		$	1,234

The Company classifies interest expense and penalties related to unrecognized tax benefits and interest income on tax overpayments as components of its income tax expense. During the years ended December 31, 2012, December 31, 2011 and December 31, 2010 no interest or penalties were recognized. The Company does not expect its unrecognized tax benefits to change significantly over the next 12 months. There are no unrecognized tax benefits that would affect the actual tax rate at December 31, 2012, as the full valuation is recorded as deferred tax asset.