12.	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. Significant components of the Company's deferred tax assets and liabilities are as follows:

	December 31,
	2011			2010
Deferred tax assets and liabilities:
Accrued liabilities	$	131,000		$	1,000
Beneficial conversion feature on convertible financial instruments		(927,000	)		-
Intangible assets		249,000			269,000
Property and equipment		(18,000	)		-
R&D tax credit carryforwards		494,000			424,000
Net operating loss carryforwards		15,524,000			11,901,000
Net deferred tax assets	$	15,453,000		$	12,595,000

Valuation allowance		(15,453,000	)		(12,595,000	)

	$	-		$	-

The reconciliation of the Federal statutory income tax rate of 34% to the effective rate is as follows:

	December 31,
	2011			2010
Federal statutory rate		34.00	%		34.00	%
State taxes, net of federal benefit		5.34	%		3.96	%
Permanent difference & other		(11.30	%)		(7.50	%)
Valuation allowance		(28.04	%)		(30.46	%)
		-	%		-	%

Income taxes are based on estimates of the annual effective tax rate and evaluations of possible future events and transactions and may be subject to subsequent refinement or revision.

The Company has incurred net losses since its inception and, therefore, no current income tax liabilities have been incurred for the periods presented. The amount of federal operating loss carryforwards, included in the table above, was approximately $41,400,000 at December 31, 2011, and $39,083,000 at December 31, 2010. The loss carryforwards will expire at various dates beginning in 2026 through 2031 if not utilized. The amount of state net operating loss carryforwards was approximately $61,800,000 at December 31, 2011. The state loss carryforwards will expire at various dates beginning in 2016 through 2031 if not utilized. Additionally, the Company has various tax credit carryforwards of approximately $1,300,000 as of December 31, 2011. The tax credit carryforwards will expire at various dates beginning in 2025 through 2031 if not utilized. Due to the Company's losses, management has established a valuation allowance equal to the amount of net deferred tax assets since management cannot determine that realization of these benefits is more likely than not.

The Company's net operating losses and credits could be subject to annual limitations due to ownership change limitations provided by Internal Revenue Code Section 382. An annual limitation could result in the expiration of net operating losses and tax credit carryforwards before utilization. At this time the Company does not believe its carryforwards or credits will be materially impacted by such limitations.

The Company files income tax returns in the U.S. federal jurisdiction and various states. With few exceptions, the Company is subject to U.S. federal, state and local income tax examinations for the years 2008 through 2011.