NOTE 12 - INCOME TAXES

Income tax expense differs from the statutory amounts as follows:

	2012			2011

Income taxes at U.S. statutory rate	$	(4,260,000	)	$	(861,000	)
State taxes		-			17,000
Current year reserve		3,578,000			857,000
Expenses not deductible		682,000			4,000

Total tax expense	$	-		$	17,000

Deferred taxes are provided for the temporary differences between the financial reporting bases and the tax bases of our assets and liabilities. The temporary differences that give rise to deferred tax assets were as follows:

	December 31,
	2012			2011
Deferred tax assets
Net operating loss carryforwards	$	64,147,000		$	63,830,000
General business credit carryforwards		2,450,000			2,439,000
State credits		3,072,000			3,097,000
Property and equipment		57,000			46,000
Stock options		1,531,000			1,480,000
Derivatives		4,007,000			2,018,000
Deferred revenue		899,000			1,221,000
Intangible assets		517,000			415,000
Accrued interest		253,000			253,000
Other		230,000			231,000
Gross deferred tax assets		77,163,000			75,030,000
Valuation allowance		(77,163,000	)		(75,030,000	)
Net deferred taxes	$	-		$	-

At December 31, 2012, we had approximately $188,666,000 of net operating loss carryforwards and approximately $2,450,000 of general business credit carryforwards. These carryforwards expire as follows:

	Net operating		General business
	loss carryforwards		credit carryforwards
2012	$	-	$	-
2013		-		-
2014		-		-
2015		-		-
Thereafter		188,666,000		2,450,000
	$	188,666,000	$	2,450,000

As a result of a merger on January 25, 1996, a change in control occurred for federal income tax purposes, which limits the utilization of pre-merger net operating loss carryforwards of approximately $3,100,000 to approximately $530,000 per year.

Additionally, we acquired MacroChem Corporation on February 25, 2009 and Somanta Pharmaceuticals, Inc. on January 4, 2008. Both corporations were loss companies at the time of the acquisition. Therefore, the net operating losses related to those acquisitions may be subject to annual limitations as provided by IRC Sec. 382.

We account for uncertain income tax positions in accordance with FASB ASC 740, Income Taxes. Interest costs and penalties related to income taxes are classified as interest expense and general and administrative costs, respectively, in our consolidated financial statements. For the years ended December 31, 2012 and 2011, we did not recognize any uncertain income tax positions or interest or penalty expense related to income taxes. It is determined not to be reasonably likely for the amounts of unrecognized tax benefits to significantly increase or decrease within the next 12 months. We are currently subject to a three year statute of limitations by major tax jurisdictions. We and our subsidiaries file income tax returns in the U.S. federal jurisdiction.