Note 15 – Income Taxes

Since our inception, we have never recorded a provision or benefit for Federal and state income taxes.

The reconciliation of the income tax benefit computed at the Federal statutory rates to our recorded tax benefit for the years ended December 31, 2011 and 2010 is as follows:

(in thousands)	December 31,
	2011			2010
Income tax benefit, statutory rates	$	7,128		$	6,519
State taxes on income, net of Federal benefit		1,633			1,206
Research and development tax credit		662			656
Employee Related		(1,758	)		(4,746	)
Warrant Valuation Related		1,210			2,184
Other		–			18
Income tax benefit		8,875			5,837
Valuation allowance		(8,875	)		(5,837	)
Income tax benefit	$	–		$	–

The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities, at December 31, 2011 and 2010, are as follows:

(in thousands)	December 31,
	2011			2010
Long-term deferred tax assets:
Net operating loss carryforwards(Federal and state)	$	147,045		$	132,994
Research and development tax credits		9,080			8,447
Compensation expense on stock		3,535			5,126
Charitable contribution carryforward		7			7
Other accrued		608			607
Depreciation		2,682			2,493
Capitalized research and development		1,740			1,932
Total long-term deferred tax assets		164,697			151,606

Long-term deferred tax liabilities		–			–
Net deferred tax assets		164,697			151,606
Less: valuation allowance		(164,697	)		(151,606	)
Deferred tax assets, net of valuation allowance	$	–		$	–

We are in a net deferred tax asset position at December 31, 2011 and 2010 before the consideration of a valuation allowance. Because we have never realized a profit, management has fully reserved the net deferred tax asset since realization is not assured.

At December 31, 2011 and 2010, we had available carryforward net operating losses for Federal tax purposes of $363.3 million and $329.7 million, respectively, and a research and development tax credit carryforward of $9.1 million and $8.4 million, respectively. The Federal net operating loss and research and development tax credit carryforwards began to expire in 2008 and will continue through 2031. Approximately $3.1 million of the $363.3 million net operating loss carryforwards expire prior to 2013.

At December 31, 2011, we had available carryforward Federal and State net operating losses of $5.2 million and $0.4 million, respectively, related to stock-based compensation, the tax effect of which will result in a credit to equity as opposed to income tax expense, to the extent these losses are utilized in the future.

At December 31, 2011 and 2010, we had available carryforward losses of approximately $360.1 million and $319.9 million, respectively, for state tax purposes. Of the $360.1 million state tax carryforward losses, $325.6 million is associated with the state of Pennsylvania, with the remainder associated with New Jersey and California.

Utilization of net operating loss (NOL) and research and development (R&D) credit carryforwards may be subject to a substantial annual limitation under Section 382 of the Internal Revenue Code of 1986 due to ownership change limitations that have occurred previously or that could occur in the future. These ownership changes may limit the amount of NOL and R&D credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively. There also could be additional ownership changes in the future, which may result in additional limitations in the utilization of the carryforward NOLs and credits.

A full valuation allowance has been provided against our research and development credits and, if a future assessment requires an adjustment, an adjustment would be offset by an adjustment to the valuation allowance. Thus, there would be no impact to the consolidated balance sheet or statement of operations if an adjustment were required.