Income Taxes

The Company accounts for income taxes under FASB ASC 740 “Accounting for Income Taxes.” Deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities in the Company’s financial statements and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that all or some portion of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

Federal and state income tax returns for the years ended December 31, 2010, 2009 and 2008 are subject to review by the taxing authorities.

The Company has evaluated and concluded that there are no uncertain tax positions requiring recognition in the Company’s financial statements for the year ended December 31, 2011. The tax expense for the years ended December 31, 2011 and 2010 is $800.

Income tax provision consisted of the following for 2011:

	Federal		California		2011

Current provision	$	-	$	800	$	800

Deferred provision:
Deferred tax – beg of year		-		-		-
Deferred tax – end of year		-		-		-
Change in deferred		-		-		-
Subtotal		-		-		-

Total Provision	$	-	$	800	$	800

Income tax provision consisted of the following for 2010:

	Federal		California		2010

Current provision	$	-	$	800	$	800

Deferred provision:
Deferred tax – beg of year		-		-		-
Deferred tax – end of year		-		-		-
Change in deferred		-		-		-
Subtotal		-		-		-

Total Provision	$	-	$	800	$	800

As of December 31, 2011, and December 31, 2010 the Company had deferred tax assets primarily consisting of its net operating loss carryforward. However, because of the cumulative losses in several consecutive years, the Company has recorded a full valuation allowance such that its net deferred tax asset is zero.

Deferred tax assets consist of the following components:

	2011			2010
Current
Current state taxes	$	-		$	-
Accrued and other related costs		39,000			9,000
Total current		39,000			9,000

Non-current
Net operating loss carryforward		14,509,000			15,685,000
Research and development credit		1,820,000			1,419,000
Total non-current		16,329,000			17,104,000

Total deferred tax asset		16,368,000			17,113,000

Less valuation allowance		(16,368,000	)		(17,113,000	)

Net deferred tax asset	$	-		$	-

The Company must also make judgments as to whether the deferred tax assets will be recovered from future taxable income. To the extent that the Company believes that recovery is not likely, it must establish a valuation allowance. A valuation allowance has been established for deferred tax assets which the Company does not believe meet the “more likely than not” criteria. The Company’s judgments regarding future taxable income may change due to changes in market conditions, changes in tax laws, tax planning strategies or other factors. If the Company’s assumptions and consequently its estimates change in the future, the valuation allowances it has established may be increased or decreased, resulting in a respective increase or decrease in income tax expense.

In July 2006, the FASB issued authoritative guidance on accounting for uncertainty in income taxes, contained in ASC 740-10, which requires that realization of an uncertain income tax position must be more likely than not (i.e., greater than 50% likelihood of receiving a benefit) before it can be recognized in the financial statements. The guidance further prescribes the benefit to be realized assuming a review by tax authorities having all relevant information and applying current conventions. The interpretation also clarifies the financial statements classification of tax related penalties and interest and set forth new disclosures regarding unrecognized tax benefits.

At December 31, 2011 the Company had net operating loss carryforwards of approximately $42,784,000 and $4,987,000 for federal income and California tax purposes, respectively. Such carryforwards may be used to reduce taxable income, if any, in future years through their expiration in 2012 to 2031 subject to limitations of Sec 382 of the Internal Revenue Code for federal income, and 2012 to 2024 for California tax purposes. The Company believes an ownership change may have occurred, as defined by Sections 382 and 383 of the Internal Revenue Code (IRC), which could result in the forfeiture of a significant portion of its net operating loss and credit carryforwards. The Company is not using any tax attributes in the current year, but will analyze whether a change occurred and the related impact on its gross deferred tax assets, if needed. As the Company's analysis is not complete, the impact to its gross deferred tax assets is uncertain.

In addition, the Company has research and development credits aggregating approximately $854,000 for federal income tax purposes and approximately $966,000 for California tax purposes at December 31, 2011, which are net of potentially ineligible Research and Development credits. Such credits may be used to reduce federal income taxes payable if any, in future years through their expiration in 2023; such credits have no expiration in California.

For 2011 and 2010, the provision for income taxes on the statements of operations differs from the amount computed by applying the statutory Federal income tax rate to income before the provision for income taxes, as follows:

	2011			2010

Federal expense expected at statutory rate	$	(89,063	)	$	(69,173	)
State income taxes, net of Federal benefit		(15,283	)		(11,870	)
Other		528			528
Change in valuation allowance		104,618			81,315

Effective Income Tax	$	800		$	800

The Company follows guidance issued by the FASB with regard to its accounting for uncertainty in income taxes recognized in the financial statements. Such guidance prescribes a recognition threshold of more likely than not and a measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In making this assessment, a company must determine whether it is more likely than not that a tax position will be sustained upon examination, based solely on the technical merits of the position and must assume that the tax position will be examined by taxing authorities. The Company’s policy is to include interest and penalties in general and administrative expenses. There were no interest and penalties recorded for the years ended December 31, 2011 and 2010. The Company’s review of prior year tax positions using the criteria and provisions presented in guidance issued by the FASB did not result in a material impact on the Company’s financial position or results of operations.