INCOME TAXES

12 Months Ended

Dec. 31, 2011

Notes to Financial Statements

Note 11. INCOME TAXES

No provision or benefit for federal or state income taxes has been recorded because the Company has incurred a net loss for all periods presented and has provided a valuation allowance against its deferred tax assets.

At December 31, 2011, the Company had federal net operating loss carryforwards of approximately $55,000,000, which will expire in varying amounts beginning in 2018. The Company also had research and development tax credit carryforwards of approximately $1,340,000 which will begin to expire in 2018 unless previously utilized. The United States Tax Reform Act of 1986 contains provisions that may limit the Company’s net operating loss carryforwards available to be used in any given year in the event of significant changes in the ownership interests of significant stockholders, as defined.

Significant components of the Company’s net deferred tax asset are as follows:

	December 31,
	2011			2010
Deferred Tax Assets/(Liabilities):
Net operating loss carryforwards	$	19,913,000		$	17,594,000
Research credit carryforward		1,344,000			1,518,000
Acquired intangible assets, net		(3,781,000	)		(3,781,000	)
Other temporary differences		156,000			141,000
Total deferred tax assets, net		17,632,000			15,472,000
Valuation allowance		(17,632,000	)		(15,472,000	)
Net deferred tax asset	$	—		$	—

The Company has maintained a full valuation allowance against its deferred tax items in both 2011 and 2010. A valuation allowance is required to be recorded when it is more likely than not that some portion or all of the net deferred tax assets will not be realized. Since the Company cannot be assured of realizing the net deferred tax asset, a full valuation allowance has been provided.

The Company has no uncertain tax positions as of December 31, 2011 and 2010 that would affect its effective tax rate. The Company does not anticipate a significant change in the amount of unrecognized tax benefits over the next twelve months. Since the Company is in a loss carryforward position, the Company is generally subject to US federal and state income tax examinations by tax authorities for all years for which a loss carryforward is available.

Income taxes computed using the federal statutory income tax rate differs from the Company’s effective tax rate primarily due to the following:

	Years Ended December 31,
	2011			2010
Income taxes benefit (expense) at statutory rate		35.0	%		35.0	%
State income tax, net of federal benefit		(2.2	)%		(0.5	)%
Permanent Differences:
Derivative loss		(6.2	)%		3.1	%
Loss on extinguishment of debt		0.0	%		1.6	%
Stock compensation expense		(2.9	)%		(1.4	)%
Stock for services		(1.6	)%		(8.6	)%
Other		0.0	%		(3.5	)%
R&D credits		(0.6	)%		2.5	%
Change in valuation allowance		(21.5	)%		(28.2	)%
		0.0	%		0.0	%