NOTE 9 – Income Taxes

The consolidated income tax expense for the 3 months ended October 31, 2013 and 2012 was determined based upon estimates of the Company’s consolidated effective income tax rates for the years ending July 31, 2014 and 2013, respectively. The difference between the consolidated effective income tax rate and the U.S. federal statutory rate is primarily attributable to state income taxes, and the effect of certain permanent differences.

FASB Topic 740, Accounting for Uncertainty in Income Taxes, prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Generally accepted accounting principles require that the Company recognizes in the financial statements a liability for tax uncertainty if it is more likely than not that the position will be sustained on an audit, based on the technical merits of the position. They also provide guidance on de-recognition, classification, interest and penalties, accounting in interim periods and disclosure. The Company has not recorded any liability for unrecognized tax benefits as of October 31, 2013. There have been no material changes in unrecognized tax benefits at October 31, 2013.

The Company’s tax returns are subject to examination by federal, state and foreign taxing authorities. As of October 31, 2013, the statute of limitations for examining the Company’s federal income tax returns has not expired for the years ended July 31, 2010 through 2012. As of October 31, 2013, the statutes of limitation for tax examinations in the state of California have not expired for tax returns filed for the years ended July 31, 2009 through 2012.

The Company did not make any provision for income taxes in the three months ended October 31, 2013. Our effective tax rate take into consideration federal and state minimum tax rates, foreign taxes and net operating loss (“NOL”) carry-forwards.

The Company has accumulated NOLs of $2.16 million, which, if unutilized, will begin to expire in 2018. Future tax benefits, which may arise as a result of these losses, have not been recognized in these financial statements, and have been offset by a valuation allowance since there is no assurance that we will be able to utilize these NOLs.