8.	Income Taxes

As of January 26, 2013 and July 31, 2012, the Company had a liability of $1.7 million for taxes, interest and penalties for unrecognized tax benefits related to various foreign income tax matters. If recognized, the entire amount would impact the Company’s effective tax rate. During fiscal 2013 it is possible that we may recognize up to $0.2 million of previously unrecognized tax benefits related to various foreign tax positions.

As of January 26, 2013 and July 31, 2012, the Company had $0.5 million accrued for interest and penalties related to uncertain tax positions. The Company accounts for interest and penalties related to uncertain tax positions as part of its provision for federal, international, and state income taxes.

The Company is currently open to audit under statutes of limitation by the Internal Revenue Service, various foreign jurisdictions and state jurisdictions for the fiscal years ended July 31, 2005 through July 31, 2012. However, limited audit adjustments could be made to federal and state tax returns in earlier years resulting in a reduction of net operating loss carryforwards.

Income tax expense was $1.2 million and $1.4 million for the three and six months ended January 26, 2013, respectively, primarily related to the forgiveness in December 2012 of an intercompany receivable due from the Company’s Shanghai subsidiary in connection with the Asset Sale creating an income tax liability in China of $1.1 million, which was paid in the quarter ended January 26, 2013. Income tax expense for the three and six month periods ended January 28, 2012 of $0.1 million and $0.2 million, respectively, related to income tax expense in certain states and profitable foreign jurisdictions.

As a result of having substantial accumulated net operating losses, the Company determined that it is more likely than not that our deferred tax assets will not be realized. Therefore, we maintain a valuation allowance on the full amount of our net deferred tax assets. If the Company generates future taxable income against which these tax attributes may be applied, the net operating loss carryforwards may be utilized and some or all of the valuation allowance reversed. If the valuation allowance is reversed, portions would be recorded as an increase to paid-in capital and the remainder would be recorded as a reduction in income tax expense.

The occurrence of ownership changes, as defined in Section 382 of the Internal Revenue Code, as amended (the “Code”), is not controlled by the Company, and could significantly limit the amount of net operating loss carryforwards and research and development credits that could be utilized annually to offset future taxable income. The Company completed an updated Section 382 study for the period April 2006 through July 31, 2011 and the results of this study showed that no ownership change within the meaning of the Code had occurred from April 2006 through July 31, 2011.