TAXES AND NET OPERATING LOSS CARRYFORWARDS

12 Months Ended

Dec. 31, 2011

TAXES AND NET OPERATING LOSS CARRYFORWARDS [Abstract]

TAXES AND NET OPERATING LOSS CARRYFORWARDS

NOTE 9. TAXES AND NET OPERATING LOSS CARRYFORWARDS

During 2010, our 2008 and 2009 federal tax returns were selected for examination by the United States Internal Revenue Service (“the IRS”). The exam was concluded in March, 2011. As a result of the IRS exam, our federal net operating loss carryforwards were reduced by approximately $350,000 and R&D credits were reduced by approximately $55,000.

Deferred income taxes reflect the impact of temporary differences between the amount of assets and liabilities recognized for financial reporting purposes and such amounts recognized for income tax purposes. The tax effects of these temporary differences representing the components of deferred tax assets (liabilities) at December 31 were approximately as follows (in thousands):

	2011			2010
Deferred tax assets, current:
U.S. net operating loss carryforwards	$	980		$	1,011
State net operating loss carryforwards		176			189
Research and development credits		774			743
AMT credits		73			73
Asset impairment		--			486
Accounts receivable		16			5
Inventory		1			2
Charitable		9			4
Accrued expenses		56			72
Unrecognized tax benefit liability for current temporary differences		--			--
Accrued Settlement		593			--
Non-current estimate of loss and credit carryforwards		(2,178	)		(2,185	)
Total deferred tax assets, current		500			400
Deferred tax assets, non-current:
Loss and credit carryforwards		2,178			2,185
Stock based compensation		70			49
Total deferred tax assets, non- current		2,248			2,234
Deferred tax liabilities, non-current:
Property and equipment		(422	)		(410	)
Intangibles		(254	)		(217	)
Unrecognized tax benefit liability for non-current temporary differences		(63	)		(74	)
Total deferred tax liabilities, non- current		(739	)		(701	)
Net non-current deferred income tax asset	$	1,509		$	1,533

Pursuant to ASC 740, we must consider all positive and negative evidence regarding the realization of deferred tax assets, including past operating results and future sources of taxable income. U.S. net operating losses will begin to expire in years beginning in 2019.

We have adopted the provisions of FIN48, now under ASC 740. Under ASC 740, the impact of an uncertain tax position taken or expected to be taken on an income tax return must be recognized in the financial statements at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized in the financial statements unless it is more likely than not of being sustained. All of our positions arise from taxable temporary differences and, as such, the liability has been recognized in the net deferred tax asset, current and non-current items to which they relate.  The calculated amount of penalties and interest related to these timing differences were immaterial at December 31, 2011 and 2010.  In addition, because the amounts are related to temporary timing differences, there would be no material impact on our effective tax rate if recognized.

Below is a reconciliation of the statutory federal income tax rate to our effective tax rate for the fiscal years ended December 31, 2011, 2010 and 2009:

	2011			2010			2009
Federal Tax Provision		34.0	%		34.0	%		34.0	%
State taxes (net of federal benefit)		(32.0	%)		4.3	%		2.6	%
Stock based compensation*		(27.8	%)		0.5	%		(15.9	%)
Research and development credits*		(78.0	%)		5.0	%		(12.8	%)
Warrant Gains		(372.4	%)		-			-
Meals and Entertainment		39.1	%		-			-
Other		-			(6.1	%)		2.3	%
		(437.1	%)		37.7	%		10.2	%

* Net of IRS Exam adjustments for 2010