NOTE 10. - INCOME TAXES

Following is a summary of the components giving rise to the income tax provision (benefit) for the years ended December 31:

The provision (benefit) for income taxes consists of the following:

	2011			2010
Currently payable:
Federal	$	-		$	-
State		-			-
Total currently payable		-			-
Deferred:
Federal		(1,138,075	)		(1,150,430	)
State		(272,176	)		(274,396	)
Total deferred		(1,410,251	)		(1,424,826	)
Less increase in allowance		1,260,068			302,735
Net deferred		(150,183	)		(1,122,091	)
Total income tax provision (benefit)	$	(150,183	)	$	(1,122,091	)

Individual components of deferred taxes are as follows:

	2011			2010
Deferred tax assets:
Net operating loss carry forwards	$	13,131,941		$	11,909,891
Equity issued for services		576,761			801,204
Other		144,172			138,291
Total		13,852,874			12,849,386
Less valuation allowance		(12,804,923	)		(11,903,718	)
Gross deferred tax assets		1,047,951			945,668

Deferred tax liabilities:
Goodwill and other intangibles		245,898			87,452
Depreciation and amortization		910,780			947,995
Gross deferred tax liabilities		1,156,678			1,035,447

Net deferred tax liabilities	$	(108,727	)	$	(89,779	)

During 2010, the Company acquired the stock of Premier Packaging. As part of the business combination, various intangible assets and equipment with fair market values of $1,372,000 and $1,557,500, respectively, were recorded along with a deferred tax liability of approximately $1,141,000. As a result of the business combination, the Company determined that its valuation allowance could be reduced by this amount. In accordance with ASC 805 the Company recognized the related deferred tax benefit in the tax provision and not as a component of acquisition accounting.

During 2011, the Company acquired the stock of ExtraDev Inc. As part of the business combination, various intangible assets and equipment with fair market values of $408,000 and $85,000, respectively, were recorded along with a deferred tax liability of approximately $169,000. As a result of the business combination, the Company determined that its valuation allowance could be reduced by this amount. In accordance with ASC 805 the Company recognized the related deferred tax benefit in the tax provision and not as a component of acquisition accounting.

The Company has approximately $35,247,000 in net operating loss carryforwards (“NOLs”) available to reduce future taxable income, of which approximately $1,412,000 is subject to change of control limitations that generally restricts the utilization of the NOL per year and $909,000 of the NOL will be allocated to contributed capital when subsequently realized. Due to the uncertainty as to the Company’s ability to generate sufficient taxable income in the future and utilize the NOLs before they expire, the Company has recorded a valuation allowance accordingly.

The excess tax benefits associated with stock option exercises are recorded directly to stockholders’ equity only when realized. As a result, the excess tax benefits available in net operating loss carryforwards but not reflected in deferred tax assets was approximately $1,019,000. These carryforwards expire at various dates from 2022 through 2031. In addition, a portion of the valuation allowance amounting to approximately $318,000 will be recorded as a reduction to additional paid in capital in the event it is determined that a valuation allowance is no longer considered necessary. Stock options granted by the Company in prior years as compensation for services were forfeited in 2011, this resulted in the reversal of $380,000 of deferred tax assets and a corresponding reduction of the valuation allowance.

The differences between the United States statutory federal income tax rate and the effective income tax rate in the accompanying consolidated statements of operations are as follows:

	2011			2010

Statutory United States federal rate		34	%		34	%
State income taxes net of federal benefit		4.6			4.0
Permanent differences		2.9			(6.5	)
Other		(0.1	)		-
Change in valuation reserves		(36.9	)		(7.1	)

Effective tax rate		4.5	%		24.4	%

At December 31, 2011 and 2010, the total unrecognized tax benefits of $446,000 have been netted against the related deferred tax assets.

The Company recognizes interest accrued and penalties related to unrecognized tax benefits in tax expense. During the years ended December 31, 2011 and 2010 the Company recognized no interest and penalties.

The Company files income tax returns in the U.S. federal jurisdiction and various states. The tax years 2008-2011 generally remain open to examination by major taxing jurisdictions to which the Company is subject.