UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549


FORM
10-Q


(Mark One)





x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the quarter ended December 31, 2009oro
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the Transition Period
      from          to





Commission
File Number: 0-29174





LOGITECH
INTERNATIONAL S.A.


(Exact
name of registrant as specified in its charter)








Canton
      of Vaud, Switzerland
              (State
      or other jurisdiction
              of
      incorporation or organization)
            None
              (I.R.S.
      Employer
              Identification
      No.)





Logitech
      International S.A.
              Apples,
      Switzerland
              c/o
      Logitech Inc.
              6505
      Kaiser Drive
              Fremont,
      California 94555
              (Address
      of principal executive offices and zip code)(510)
      795-8500
              (Registrant’s
      telephone number, including area
code)




Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes      No




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such
files).    Yes      No




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated
      filer
            Accelerated
      filerNon-accelerated
      filer    (Do not check if a smaller reporting
      company)
            Smaller
      reporting company




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).Yes      No




As of
January 22, 2010, there were 175,771,554 shares of the Registrant’s share
capital outstanding.


















TABLE
OF CONTENTS





Part I
            FINANCIAL INFORMATION
            PageItem
      1.
            Consolidated
      Financial Statements (Unaudited)
            3Item
      2.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            30Item
      3.
            Quantitative
      and Qualitative Disclosures About Market Risk
            48Item
      4.
            Controls
      and Procedures
            50Part II
            OTHER INFORMATIONItem
      1.
            Legal
      Proceedings
            51Item
      1A.
            Risk
      Factors
            51Item
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            60Item 6.
            Exhibit
      Index
            61Signatures
            62Exhibits





In this
document, unless otherwise indicated, references to the “Company” or “Logitech”
are to Logitech International S.A., its consolidated subsidiaries and
predecessor entities. Unless otherwise specified, all references to U.S. dollar,
dollar or $ are to the United States dollar, the legal currency of the United
States of America. All references to CHF are to the Swiss franc, the legal
currency of Switzerland.





Logitech,
the Logitech logo, and the Logitech products referred to herein are either the
trademarks or the registered trademarks of Logitech. All other trademarks are
the property of their respective owners.





2


PART
I – FINANCIAL INFORMATION





ITEM
1.   CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)





Financial Statement
    Description
            Page•
            Consolidated
      Statements of Income for the three and nine months ended December 31, 2009
      and 2008
            4•
            Consolidated
      Balance Sheets as of December 31, 2009 and March 31, 2009
            5•
            Consolidated
      Statements of Cash Flows for the nine months ended December 31, 2009 and
      2008
            6•
            Consolidated
      Statements of Changes in Shareholders’ Equity for the nine months ended
      December 31, 2009 and 2008
            7•
            Notes
      to Consolidated Financial Statements
            8











3


LOGITECH
INTERNATIONAL S.A.


CONSOLIDATED
STATEMENTS OF INCOME


(In
thousands, except per share amounts)











Three
      months ended
            
            
            Nine
      months endedDecember
      31,
            
            
            December
      31,2009
            
            
            2008
            
            
            2009
            
            
            2008(Unaudited)Net
      sales
            
            $
            617,101
            
            
            $
            627,466
            
            
            $
            1,441,304
            
            
            $
            1,800,884Cost
      of goods sold
            
            
            408,137
            
            
            
            439,970
            
            
            
            1,002,730
            
            
            
            1,211,742Gross
      profit
            
            
            208,964
            
            
            
            187,496
            
            
            
            438,574
            
            
            
            589,142Operating
      expenses:Marketing
      and selling
            
            
            87,322
            
            
            
            86,046
            
            
            
            215,095
            
            
            
            248,066Research
      and development
            
            
            32,931
            
            
            
            32,401
            
            
            
            96,116
            
            
            
            99,011General
      and administrative
            
            
            30,284
            
            
            
            26,273
            
            
            
            75,204
            
            
            
            89,202Restructuring
      charges
            
            
            -
            
            
            
            -
            
            
            
            1,494
            
            
            
            -Total
      operating expenses
            
            
            150,537
            
            
            
            144,720
            
            
            
            387,909
            
            
            
            436,279Operating
      income
            
            
            58,427
            
            
            
            42,776
            
            
            
            50,665
            
            
            
            152,863Interest
      income, net
            
            
            414
            
            
            
            2,212
            
            
            
            1,645
            
            
            
            7,539Other
      income, net
            
            
            3,052
            
            
            
            8,101
            
            
            
            2,416
            
            
            
            7,809Income
      before income taxes
            
            
            61,893
            
            
            
            53,089
            
            
            
            54,726
            
            
            
            168,211Provision
      for income taxes
            
            
            4,807
            
            
            
            12,596
            
            
            
            14,262
            
            
            
            26,101Net
      income
            
            $
            57,086
            
            
            $
            40,493
            
            
            $
            40,464
            
            
            $
            142,110Net
      income per share:Basic
            
            $
            0.33
            
            
            $
            0.23
            
            
            $
            0.23
            
            
            $
            0.80Diluted
            
            $
            0.32
            
            
            $
            0.22
            
            
            $
            0.22
            
            
            $
            0.77Shares
      used to compute net income per share:Basic
            
            
            175,426
            
            
            
            178,497
            
            
            
            177,829
            
            
            
            178,721Diluted
            
            
            177,668
            
            
            
            181,145
            
            
            
            179,866
            
            
            
            183,484
























































The
accompanying notes are an integral part of these consolidated financial
statements.


4


LOGITECH
INTERNATIONAL S.A.


CONSOLIDATED
BALANCE SHEETS


(In
thousands, except share and per share amounts)








December
      31,
            
            
            March
      31,2009
            
            
            2009(Unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
            
            $
            281,052
            
            
            $
            492,759Short-term
      investments
            
            
            -
            
            
            
            1,637Accounts
      receivable
            
            
            248,625
            
            
            
            213,929Inventories
            
            
            235,012
            
            
            
            233,467Other
      current assets
            
            
            71,803
            
            
            
            56,884Total
      current assets
            
            
            836,492
            
            
            
            998,676Property,
      plant and equipment
            
            
            92,452
            
            
            
            104,132Goodwill
            
            
            547,816
            
            
            
            242,909Other
      intangible assets
            
            
            102,307
            
            
            
            32,109Other
      assets
            
            
            66,798
            
            
            
            43,704Total
      assets
            
            $
            1,645,865
            
            
            $
            1,421,530LIABILITIES
      AND SHAREHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
            
            $
            316,651
            
            
            $
            157,798Accrued
      liabilities
            
            
            192,234
            
            
            
            131,496Total
      current liabilities
            
            
            508,885
            
            
            
            289,294Other
      liabilities
            
            
            155,811
            
            
            
            134,528Total
      liabilities
            
            
            664,696
            
            
            
            423,822Commitments
      and contingenciesShareholders'
      equity:Shares,
      par value CHF 0.25 - 191,606,620 issued and authorizedand
      50,000,000 conditionally authorized at December 31, 2009
    andMarch
      31, 2009
            
            
            33,370
            
            
            
            33,370Additional
      paid-in capital
            
            
            25,982
            
            
            
            45,012Less
      shares in treasury, at cost, 15,981,692 at December 31,
    2009and
      12,124,078 at March 31, 2009
            
            
            (387,833
            )
            
            
            (341,454
            )Retained
      earnings
            
            
            1,382,125
            
            
            
            1,341,661Accumulated
      other comprehensive loss
            
            
            (72,475
            )
            
            
            (80,881
            )Total
      shareholders' equity
            
            
            981,169
            
            
            
            997,708Total
      liabilities and shareholders' equity
            
            $
            1,645,865
            
            
            $
            1,421,530























The
accompanying notes are an integral part of these consolidated financial
statements.


5


LOGITECH
INTERNATIONAL S.A.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(In
thousands)








Nine
      months endedDecember
      31,2009
            
            
            2008(Unaudited)Cash
      flows from operating activities:Net
      income
            
            $
            40,464
            
            
            $
            142,110Non-cash
      items included in net income:Depreciation
            
            
            41,852
            
            
            
            33,850Amortization
      of other intangible assets
            
            
            7,602
            
            
            
            5,808Share-based
      compensation expense related to options, RSUs andpurchase
      rights
            
            
            17,249
            
            
            
            17,952Write-down
      of investments
            
            
            -
            
            
            
            1,764Excess
      tax benefits from share-based compensation
            
            
            (1,708
            )
            
            
            (6,641
            )Loss
      (gain) on cash surrender value of life insurance policies
            
            
            (1,216
            )
            
            
            1,440In-process
      research and development
            
            
            -
            
            
            
            1,000Deferred
      income taxes and other
            
            
            (23,414
            )
            
            
            (3,495
            )Changes
      in assets and liabilities:Accounts
      receivable
            
            
            (22,470
            )
            
            
            (10,916
            )Inventories
            
            
            19,405
            
            
            
            (100,063
            )Other
      assets
            
            
            12,314
            
            
            
            (7,058
            )Accounts
      payable
            
            
            151,042
            
            
            
            75,945Accrued
      liabilities
            
            
            58,230
            
            
            
            23,273Net
      cash provided by operating activities
            
            
            299,350
            
            
            
            174,969Cash
      flows from investing activities:Purchases
      of property, plant and equipment
            
            
            (26,438
            )
            
            
            (38,631
            )Proceeds
      from cash surrender of life insurance policies
            
            
            813
            
            
            
            -Acquisitions
      and investments, net of cash acquired
            
            
            (388,807
            )
            
            
            (64,430
            )Premiums
      paid on cash surrender value life insurance policies
            
            
            -
            
            
            
            (427
            )Net
      cash used in investing activities
            
            
            (414,432
            )
            
            
            (103,488
            )Cash
      flows from financing activities:Repayment
      of short and long-term debt
            
            
            (13,601
            )
            
            
            -Purchases
      of treasury shares
            
            
            (101,267
            )
            
            
            (78,870
            )Proceeds
      from sale of shares upon exercise of options and purchase
      rights
            
            
            15,979
            
            
            
            23,496Excess
      tax benefits from share-based compensation
            
            
            1,708
            
            
            
            6,641Net
      cash used in financing activities
            
            
            (97,181
            )
            
            
            (48,733
            )Effect
      of exchange rate changes on cash and cash equivalents
            
            
            556
            
            
            
            (24,924
            )Net
      decrease in cash and cash equivalents
            
            
            (211,707
            )
            
            
            (2,176
            )Cash
      and cash equivalents at beginning of period
            
            
            492,759
            
            
            
            482,352Cash
      and cash equivalents at end of period
            
            $
            281,052
            
            
            $
            480,176

















The
accompanying notes are an integral part of these consolidated financial
statements.


6


LOGITECH
INTERNATIONAL S.A.


CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY


(In
thousands)


(Unaudited)








AccumulatedAdditional
            
            
            
            
            
            
            
            
            
            
            
            otherRegistered
      shares
            
            
            paid-in
            
            
            Treasury
      shares
            
            
            Retained
            
            
            comprehensiveShares
            
            
            Amount
            
            
            capital
            
            
            Shares
            
            
            Amount
            
            
            earnings
            
            
            loss
            
            
            TotalMarch
      31, 2008
            
            
            191,606
            
            
            $
            33,370
            
            
            $
            49,821
            
            
            
            12,431
            
            
            $
            (338,293
            )
            
            $
            1,234,629
            
            
            $
            (19,483
            )
            
            $
            960,044Net
      income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            142,110
            
            
            
            -
            
            
            
            142,110Cumulative
      translationadjustment
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (34,987
            )
            
            
            (34,987
            )Minimum
      pension liability adjustment
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            261
            
            
            
            261Deferred
      hedging loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (191
            )
            
            
            (191
            )Total
      comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            107,193Tax
      benefit from exercise of stock options
            
            
            -
            
            
            
            -
            
            
            
            12,245
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            12,245Purchase
      of treasury shares
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,803
            
            
            
            (78,870
            )
            
            
            -
            
            
            
            -
            
            
            
            (78,870
            )Sale
      of shares upon exercise of options and purchase rights
            
            
            -
            
            
            
            -
            
            
            
            (25,042
            )
            
            
            (2,164
            )
            
            
            48,538
            
            
            
            -
            
            
            
            -
            
            
            
            23,496Share-based
      compensation expense related to
              employee
      stock options and stock purchase rights
            
            
            -
            
            
            
            -
            
            
            
            18,052
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            18,052December
      31, 2008
            
            
            191,606
            
            
            $
            33,370
            
            
            $
            55,076
            
            
            
            13,070
            
            
            $
            (368,625
            )
            
            $
            1,376,739
            
            
            $
            (54,400
            )
            
            $
            1,042,160March
      31, 2009
            
            
            191,606
            
            
            $
            33,370
            
            
            $
            45,012
            
            
            
            12,124
            
            
            $
            (341,454
            )
            
            $
            1,341,661
            
            
            $
            (80,881
            )
            
            $
            997,708Net
      income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            40,464
            
            
            
            
            
            
            
            40,464Cumulative
      translation adjustment
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            7,519
            
            
            
            7,519Minimum
      pension liability adjustment
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            347
            
            
            
            347Net
      deferred hedging loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            540
            
            
            
            540Total
      comprehensive loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            48,870Purchase
      of treasury shares
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            5,838
            
            
            
            (101,267
            )
            
            
            -
            
            
            
            -
            
            
            
            (101,267
            )Tax
      benefit from exercise of stock options
            
            
            -
            
            
            
            -
            
            
            
            2,576
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,576Sale
      of shares upon exercise of options and purchase rights
            
            
            -
            
            
            
            -
            
            
            
            (38,909
            )
            
            
            (1,981
            )
            
            
            54,888
            
            
            
            -
            
            
            
            -
            
            
            
            15,979Share-based
      compensation expense
              related
      to employee stock options,
              RSUs
      and stock purchase rights
            
            
            -
            
            
            
            -
            
            
            
            17,303
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            17,303December
      31, 2009
            
            
            191,606
            
            
            $
            33,370
            
            
            $
            25,982
            
            
            
            15,981
            
            
            $
            (387,833
            )
            
            $
            1,382,125
            
            
            $
            (72,475
            )
            
            $
            981,169












































The
accompanying notes are an integral part of these consolidated financial
statements.


7


LOGITECH
INTERNATIONAL S.A.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)








Note
1 — The Company





Logitech
is a world leader in personal peripherals for computers and other digital
platforms. We develop and market innovative products in PC navigation, Internet
communications, digital music, home-entertainment control, gaming and wireless
devices. For the PC, our products include mice, trackballs, keyboards,
interactive gaming controllers, multimedia speakers, headsets, webcams, 3D
control devices and lapdesks. Our Internet communications products include
webcams, headsets, video communications services, and digital video security
systems for a home or small business. Also, in December 2009 we acquired
LifeSize Communications, Inc., which provides scalable high-definition
enterprise video conferencing solutions. Our digital music products include
speakers, earphones, and custom in-ear monitors. For home entertainment systems,
we offer the Harmony line of advanced remote controls and the Squeezebox and
Transporter wireless music solutions for the home. For gaming consoles, we offer
a range of gaming controllers, including racing wheels, wireless guitar and drum
controllers, and microphones, as well as other accessories. We sell our products
to a network of distributors and resellers (“retail”) and to original equipment
manufacturers (“OEMs”). The large majority of our revenues are derived from
sales of our products for use by consumers.





Logitech
was founded in Switzerland in 1981, and Logitech International S.A. has been the
parent holding company of Logitech since 1988. Logitech International S.A. is a
Swiss holding company with its registered office in Apples, Switzerland, which
conducts its business through subsidiaries in the Americas, Europe, Middle East,
Africa (“EMEA”) and Asia Pacific. Shares of Logitech International S.A. are
listed on both the Nasdaq Global Select Market, under the trading symbol LOGI,
and the SIX Swiss Exchange, under the trading symbol LOGN.





Note
2 — Summary of Significant Accounting Policies





Basis
of Presentation





The
consolidated financial statements include the accounts of Logitech and its
subsidiaries. All intercompany balances and transactions have been eliminated.
The consolidated financial statements are presented in accordance with
accounting principles generally accepted in the United States of America (“U.S.
GAAP”) for interim financial information and therefore do not include all the
information required by U.S. GAAP for complete financial statements. They should
be read in conjunction with the Company’s audited consolidated financial
statements for the fiscal year ended March 31, 2009 included in its Annual
Report on Form 10-K.





Net
income for the nine months ended December 31, 2009 includes $2.2 million in
pretax charges related to restructuring accruals, bonus accruals, and revenue
related adjustments from fiscal year 2009. We reviewed the accounting errors
utilizing SEC Staff Accounting Bulletin No. 99, Materiality and SEC Staff
Accounting Bulletin No. 108, Effects of Prior Year Misstatements
on Current Year Financial Statements, and determined the impact of errors
to be immaterial to the current and prior quarterly and annual
periods.





Certain
prior year financial statement amounts have been reclassified to conform to the
current year presentation with no impact on previously reported net
income.





Subsequent
events were evaluated through the time of filing this Form 10-Q with the SEC on
February 2, 2010 and are disclosed as applicable in the notes to the
consolidated financial statements.





In the
opinion of management, these financial statements include all adjustments,
consisting of normal recurring adjustments, necessary for a fair statement of
the results for the periods presented. Operating results for the three and nine
months ended December 31, 2009 are not necessarily indicative of the results
that may be expected for the year ending March 31, 2010 or any future
periods.





Fiscal
Year





The
Company’s fiscal year ends on March 31. Interim quarters are thirteen-week
periods, each ending on a Friday. For purposes of presentation, the Company has
indicated its quarterly periods as ending on the month end.





Changes
in Significant Accounting Policies





There
have been no substantial changes in our significant accounting policies during
the three and nine months ended December 31, 2009 compared with the significant
accounting policies described in our Annual Report on Form 10-K for the fiscal
year ended March 31, 2009.





Use
of Estimates





The
preparation of financial statements in conformity with U.S. GAAP requires
management to make judgments, estimates and assumptions that affect reported
amounts of assets, liabilities, net sales and expenses, and the disclosure of
contingent assets and liabilities. Although these estimates are based on
management’s best knowledge of current events and actions that may impact the
Company in the future, actual results could differ from those
estimates.





Recent
Accounting Pronouncements




In
October 2009, the Financial Accounting Standards Board (“FASB”) published
FASB Accounting Standards Update (“ASU”) 2009-14, Certain Revenue Arrangements That
Include Software Elements,toprovide guidance for
revenue arrangements that include both tangible products and software
elements.  Under this guidance, tangible products containing software
components and non-software components that function together to deliver the
product’s essential functionality are excluded from the software revenue
guidance in Accounting Standards Codification (“ASC”) Subtopic 985-605, Software-Revenue Recognition.
In addition, hardware components of a tangible product containing software
components are always excluded from the software revenue guidance. ASU 2009-14
is effective for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010, with early adoption
permitted. We are currently evaluating the appropriate timing for the adoption
of ASU 2009-14 and its potential impact on the Company’s consolidated financial
statements.




In
October 2009, the FASB published ASU 2009-13,Multiple Deliverable Revenue
Arrangements, which addresses the accounting for multiple-deliverable
arrangements to enable vendors to account for products or services separately
rather than as a combined unit. This guidance amends the criteria in Subtopic
605-25, Revenue
Recognition--Multiple-Element Arrangements,to establish a selling price
hierarchy for determining the selling price of a deliverable, based on vendor
specific objective evidence, acceptable third party evidence, or estimates. This
guidance also eliminates the residual method of allocation and requires that
arrangement consideration be allocated at the inception of the arrangement to
all deliverables using the relative selling price method. In addition, the
disclosures required for multiple-deliverable revenue arrangements are expanded.
ASU 2009-13 is effective for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15, 2010, with early
adoption permitted. We are currently evaluating the appropriate timing for the
adoption of ASU 2009-13 and its potential impact on the Company’s consolidated
financial statements and disclosures.





8


Note
3 — Net Income per Share





The
computations of basic and diluted net income per share for the Company were as
follows (in thousands except per share amounts):








Three
      months ended
            
            
            Nine
      months endedDecember
      31,
            
            
            December
      31,2009
            
            
            2008
            
            
            2009
            
            
            2008Net
      income
            
            $
            57,086
            
            
            $
            40,493
            
            
            $
            40,464
            
            
            $
            142,110.Weighted
      average shares - basic
            
            
            175,426
            
            
            
            178,497
            
            
            
            177,829
            
            
            
            178,721Effect
      of potentially dilutive stock optionsand
      stock purchase rights
            
            
            2,242
            
            
            
            2,648
            
            
            
            2,037
            
            
            
            4,763Weighted
      average shares - diluted
            
            
            177,668
            
            
            
            181,145
            
            
            
            179,866
            
            
            
            183,484Net
      income per share - basic
            
            $
            0.33
            
            
            $
            0.23
            
            
            $
            0.23
            
            
            $
            0.80Net
      income per share - diluted
            
            $
            0.32
            
            
            $
            0.22
            
            
            $
            0.22
            
            
            $
            0.77





Basic and
diluted weighted average shares outstanding for the three and nine months ended
December 31, 2009, as reported in the Company’s earnings release included in its
current report on Form 8-K filed on January 21, 2009, were adjusted subsequent
to the filing. The adjustment increased the basic net income per share for the
three months ended December 31, 2009 from $0.32 per share as previously reported
to $0.33 per share. The adjustment did not impact the basic net income per share
for the nine months ended December 31, 2009 and diluted net income per share for
the three and nine months ended December 31, 2009.





Share
equivalents attributable to outstanding stock options and restricted stock units
(“RSUs”) of 12,677,929 and 11,941,055 for the three months ended December 31,
2009 and 2008 and 13,277,283 and 8,711,837 for the nine months ended December
31, 2009 and 2008 were excluded from the calculation of diluted net income per
share because the combined exercise price, average unamortized fair value and
assumed tax benefits upon exercise of these options and RSUs were greater than
the average market price of the Company’s shares, and therefore their inclusion
would have been anti-dilutive.





Employee
equity share options, non-vested shares and similar equity instruments granted
by the Company are treated as potential shares in computing diluted net income
per share. Diluted shares outstanding include the dilutive effect of
in-the-money options which is calculated based on the average share price for
each fiscal period using the treasury stock method. Under the treasury stock
method, the amount that the employee must pay for exercising stock options, the
amount of compensation cost for future service that the Company has not yet
recognized, and the amount of tax impact that would be recorded in additional
paid-in capital when the award becomes deductible are assumed to be used to
repurchase shares.







Note
4 — Fair Value Measurements





The
Company considers fair value as the exchange price that would be received for an
asset or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants at the measurement date. The Company utilizes the following
three-level fair value hierarchy to establish the priorities of the inputs used
to measure fair value:





·
            Level 1 – Quoted prices in active
      markets for identical assets or
liabilities.





·
            Level 2 – Observable inputs other
      than quoted market prices included in Level 1, such as quoted prices for
      similar assets and liabilities in active markets; quoted prices for
      identical or similar assets and liabilities in markets that are not
      active; or other inputs that are observable or can be corroborated by
      observable market data.





·
            Level 3 – Unobservable inputs
      that are supported by little or no market activity and that are
      significant to the fair value of the assets or liabilities. This includes
      certain pricing models, discounted cash flow methodologies and similar
      techniques that use significant unobservable
  inputs.





The
following table presents the Company’s financial assets and liabilities that
were accounted for at fair value as of December 31, 2009, classified by the
level within the fair value hierarchy (in thousands):








Level
      1
            
            
            Level
      2
            
            
            Level
      3Cash
      and cash equivalents
            
            $
            281,052
            
            
            $
            -
            
            
            $
            -Investment
      securities
            
            
            -
            
            
            
            -
            
            
            
            1,637Foreign
      exchange derivative assets
            
            
            2,168
            
            
            
            -
            
            
            
            -Total
      assets at fair value
            
            $
            283,220
            
            
            $
            -
            
            
            $
            1,637Foreign
      exchange derivative liabilities
            
            $
            453
            
            
            $
            -
            
            
            $
            -Total
      liabilities at fair value
            
            $
            453
            
            
            $
            -
            
            
            $
            -








The
following table presents the Company’s financial assets and liabilities that
were accounted for at fair value as of March 31, 2009, classified by the level
within the fair value hierarchy (in thousands):








Level
      1
            
            
            Level
      2
            
            
            Level
      3Cash
      and cash equivalents
            
            $
            492,759
            
            
            $
            -
            
            
            $
            -Investment
      securities
            
            
            -
            
            
            
            -
            
            
            
            1,637Foreign
      exchange derivative assets
            
            
            208
            
            
            
            -
            
            
            
            -Total
      assets at fair value
            
            $
            492,967
            
            
            $
            -
            
            
            $
            1,637Foreign
      exchange derivative liabilities
            
            $
            1,849
            
            
            $
            -
            
            
            $
            -Total
      liabilities at fair value
            
            $
            1,849
            
            
            $
            -
            
            
            $
            -








Notes 5
and 15 describe the inputs and valuation techniques used to determine fair
value.





9


Note
5 — Cash and Cash Equivalents and Investment Securities





Cash and
cash equivalents consist of bank demand deposits and time deposits. The time
deposits have terms of less than 30 days. Cash and cash equivalents are carried
at cost, which is equivalent to fair value.





The
Company’s investment securities portfolio as of December 31, 2009 and March 31,
2009 consisted of auction rate securities collateralized by residential and
commercial mortgages. The investment securities are classified as
available-for-sale and are reported at estimated fair value. Auction rate
securities generally have maturity dates greater than 10 years, with interest
rates that typically reset through an auction every 28 days. All our investment
securities as of December 31, 2009 have maturity dates in excess of 10 years.
Since August 2007, auctions for these investments have failed. Consequently, the
investments are not currently liquid and the Company will not be able to realize
the proceeds, if any, from these investments until a future auction of these
investments is successful or a buyer is found outside of the auction process.
Management has determined that sale or realization of proceeds from the sale of
these investment securities is not expected within the Company’s normal
operating cycle of one year, and hence the investment securities were
reclassified to non-current assets as of April 1, 2009.





The fair
value of our auction rate securities is determined by estimating the values of
the underlying collateral using published mortgage indices or interest rate
spreads for comparably-rated collateral and applying discounted cash flow or
option pricing methods to the estimated collateral value. The mortgage indices
and spreads are adjusted for factors such as the issuance date of the auction
rate security and the rating of the underlying assets. In addition, inputs to
the valuation methods include factors such as the timing and amount of cash flow
streams, the default risk underlying the collateral, discount rates, and overall
capital market liquidity. Such adjustments indicate the inputs fall within Level
3 of the fair value hierarchy.





The
following table presents the change in fair value of the Company’s investment
securities during the nine months ended December 31, 2009:








Balance
      as of March 31, 2009
            
            $
            1,637Unrealized
      loss
            
            
            -Balance
      as of June 30, 2009
            
            
            1,637Unrealized
      loss
            
            
            -Balance
      as of September 30, 2009
            
            
            1,637Unrealized
      loss
            
            
            -Balance
      as of December 31, 2009
            
            $
            1,637








The par
value of our investment securities portfolio at December 31, 2009 and March 31,
2009 was $47.5 million.





10


Note
6 — Acquisitions





LifeSize





On
December 11, 2009, pursuant to a merger agreement signed November 10, 2009,
Logitech acquired LifeSize Communications, Inc. (“LifeSize”), an Austin, Texas
based privately-held company specializing in high definition video communication
solutions. Logitech expects the acquisition to drive growth in video
communication for the enterprise and small-to-medium business markets by
leveraging the two companies’ technology expertise, including camera design,
firewall traversal, video compression and bandwidth management.





The total
consideration paid to acquire LifeSize was $382.8 million, not including cash
acquired of $3.7 million. Logitech paid $382.3 million in cash to the holders of
all outstanding shares of LifeSize capital stock, all vested options issued by
LifeSize, and all outstanding warrants to purchase LifeSize stock. As part of
the acquisition, Logitech assumed all outstanding unvested LifeSize stock
options and unvested restricted stock held by continuing LifeSize employees at
December 11, 2009. The assumed options are exercisable for a total of
approximately 1.0 million Logitech shares and the assumed restricted stock was
exchanged for 0.1 million Logitech shares. The stock options and restricted
stock continue to have the same terms and conditions as under LifeSize’s option
plan. The fair value attributable to precombination employee services for the
stock options assumed, which is part of the consideration paid to acquire
LifeSize, was $0.5 million. The weighted average fair value of $12.07 per share
for the stock options assumed was determined using a Black-Scholes-Merton
option-pricing valuation model with the followingweighted-average assumptions: expected
term of 2.0 years, expected volatility of 57%, and risk-free interest rate
of 0.7%.





The total
cash consideration paid of $382.3 million included $37.0 million deposited into
an escrow account as security for indemnification claims under the merger
agreement and $0.5 million deposited in a stockholder representative expense
fund. The escrow fund will be disbursed by the escrow trustee to the former
holders of LifeSize capital stock, vested options and warrants with 50%
disbursed in December 2010 and the remaining fifty percent in June 2011, subject
in each case to indemnification claims.





In
connection with the merger, Logitech also agreed to establish a cash and stock
option retention and incentive plan for certain LifeSize employees, linked to
the achievement of LifeSize performance targets. The duration of the plan’s
performance period is two years, from January 1, 2010 to December 31, 2011. The
total available cash incentive is $9.0 million over the two year performance
period. In December 2009, options to purchase 850,000 shares of Logitech stock
were issued in connection with the retention and incentive plan.





The
acquisition has been accounted for using the purchase method of accounting.
Accordingly, the total consideration was allocated to the tangible and
intangible assets acquired and liabilities assumed based on their estimated fair
values as of the acquisition date. Fair values were determined by Logitech
management based on information available at the date of acquisition. The
results of operations of LifeSize were included in Logitech’s consolidated
financial statements from the date of acquisition, and were not material to the
Company’s reported results.





The
preliminary allocation of total consideration to the assets acquired and
liabilities assumed based on the estimated fair value of LifeSize was as follows
(in thousands):








December
      11, 2009
            
            
            Estimated
      LifeTangible
      assets acquired
            
            $
            33,635Deferred
      tax asset, net
            
            
            13,460Intangible
      assets acquiredExisting
      technology
            
            
            30,000
            
            
            4
      yearsPatents
      and core technology
            
            
            4,500
            
            
            3
      yearsTrademark/trade
      name
            
            
            7,600
            
            
            5
      yearsCustomer
      relationships and other
            
            
            31,500
            
            
            5
      yearsGoodwill
            
            
            302,670
            
            
            
            -423,365Liabilities
      assumed
            
            
            (27,047
            )Debt
      assumed
            
            
            (13,504
            )Total
      consideration
            
            $
            382,814








The
deferred tax asset primarily relates to the tax benefit of a net operating loss
carryforward, net of the deferred tax liability related to intangible assets.
The existing technology of LifeSize relates to the platform technology used in
LifeSize’s high-definition video conferencing systems. The value of the
technology was determined based on the present value of estimated expected cash
flows attributable to the technology, assuming the highest and best use by a
market participant. The patents and core technology represent awarded patents,
filed patent applications and core architectures, trade secrets or processes
used in LifeSize’s current and planned future products. Trademark/trade name
relates to the LifeSize brand names. The value of the patents, core technology
and trademark/trade name was estimated by capitalizing the estimated profits
saved as a result of acquiring or licensing the asset. Customer relationships
and other relates to the ability to sell existing, in-process, and future
versions of the technology and services to LifeSize’s existing customer base,
valued based on projected discounted cash flows generated from customers in
place. The intangible assets acquired are amortized on a straight-line basis
over their estimated useful lives. The goodwill associated with the acquisition
is primarily attributable to the opportunities and economies of scale from
combining the operations and technologies of Logitech and LifeSize. This
goodwill is not subject to amortization and is not expected to be deductible for
income tax purposes. The debt that Logitech assumed as part of the acquisition
was repaid in full on December 18, 2009.




TV
Compass





On
November 27, 2009, Logitech acquired certain assets from TV Compass, Inc. (“TV
Compass”), a Chicago-based company providing video software and services for the
Web and mobile devices. The acquisition has been treated as an acquisition of a
business and has been accounted for using the purchase method of accounting. The
total consideration paid of $10.0 million was allocated based on estimated fair
values to $4.2 million of identifiable intangible assets, with the balance
allocated to goodwill. Fair values were determined by Company management based
on information available at the date of acquisition. The intangible assets
acquired are amortized on a straight-line basis over their estimated useful
lives of 6 years. The goodwill results from expected incremental revenue from
the use of the acquired technology in enhancing our products. The goodwill is
not subject to amortization and is not expected to be deductible for income tax
purposes.





11


Unaudited
pro forma financial information





The
unaudited pro forma financial information in the table below summarizes the
combined results of operations of Logitech and LifeSize during the three and
nine months ended December 31, 2009 as though the acquisition took place as of
the beginning of fiscal years 2010 and 2009. The pro forma financial information
also includes certain adjustments such as amortization expense from acquired
intangible assets, share-based compensation expense related to unvested stock
options assumed, depreciation adjustments from alignment of the companies’
policies related to property, plant and equipment, interest expense related to
debt assumed, expense related to retention bonuses, pre-acquisition transaction
costs, and the income tax impact of the pro forma adjustments. The pro forma
financial information presented below (in thousands) is for informational
purposes only and is not indicative of the results of operations that would have
been achieved if the acquisition had taken place at the beginning of the periods
presented.








Three
      months ended
            
            
            Nine
      months endedDecember
      31,
            
            
            December
      31,2009
            
            
            2008
            
            
            2009
            
            
            2008(Unaudited)Net
      sales
            
            $
            630,505
            
            
            $
            647,808
            
            
            $
            1,497,189
            
            
            $
            1,854,641Net
      income
            
            $
            45,694
            
            
            $
            38,856
            
            
            $
            19,912
            
            
            $
            124,768Net
      income per share - basic
            
            $
            0.26
            
            
            $
            0.22
            
            
            $
            0.11
            
            
            $
            0.70Net
      income per share - diluted
            
            $
            0.26
            
            
            $
            0.21
            
            
            $
            0.11
            
            
            $
            0.68





12


Note
7 — Balance Sheet Components





The
following provides the components of certain balance sheet amounts (in
thousands):








December
      31,
            
            
            March
      31,2009
            
            
            2009Accounts
      receivable:Accounts
      receivable
            
            $
            413,416
            
            
            $
            339,903Allowance
      for doubtful accounts
            
            
            (6,688
            )
            
            
            (6,705
            )Allowance
      for returns
            
            
            (17,908
            )
            
            
            (25,470
            )Cooperative
      marketing arrangements
            
            
            (32,038
            )
            
            
            (33,892
            )Customer
      incentive programs
            
            
            (96,772
            )
            
            
            (47,559
            )Price
      protection
            
            
            (11,385
            )
            
            
            (12,348
            )$
            248,625
            
            
            $
            213,929Inventories:Raw
      materials
            
            $
            36,801
            
            
            $
            30,959Work-in-process
            
            
            74
            
            
            
            19Finished
      goods
            
            
            198,137
            
            
            
            202,489$
            235,012
            
            
            $
            233,467Other
      current assets:Tax
      and VAT refund receivables
            
            $
            24,306
            
            
            $
            17,275Deferred
      taxes
            
            
            33,076
            
            
            
            25,546Prepaid
      expenses and other
            
            
            14,421
            
            
            
            14,063$
            71,803
            
            
            $
            56,884Property,
      plant and equipment:Plant
      and buildings
            
            $
            58,969
            
            
            $
            56,211Equipment
            
            
            114,541
            
            
            
            108,779Computer
      equipment
            
            
            59,475
            
            
            
            49,532Computer
      software
            
            
            70,805
            
            
            
            60,259303,790
            
            
            
            274,781Less:
      accumulated depreciation
            
            
            (221,545
            )
            
            
            (188,371
            )82,245
            
            
            
            86,410Construction-in-progress
            
            
            7,082
            
            
            
            14,708Land
            
            
            3,125
            
            
            
            3,014$
            92,452
            
            
            $
            104,132Other
      assets:Deferred
      taxes
            
            $
            43,906
            
            
            $
            27,718Cash
      surrender value of life insurance contracts
            
            
            11,090
            
            
            
            10,685Investment
      securities
            
            
            1,637
            
            
            
            -Deposits
      and other
            
            
            10,165
            
            
            
            5,301$
            66,798
            
            
            $
            43,704Accrued
      liabilities:Accrued
      marketing expenses
            
            $
            33,521
            
            
            $
            21,984Accrued
      personnel expenses
            
            
            53,050
            
            
            
            34,373Income
      taxes payable - current
            
            
            5,950
            
            
            
            6,828Accrued
      freight and duty
            
            
            19,064
            
            
            
            9,048Accrued
      restructuring
            
            
            210
            
            
            
            3,794Other
      accrued liabilities
            
            
            80,439
            
            
            
            55,469$
            192,234
            
            
            $
            131,496Long-term
      liabilities:Income
      taxes payable - non-current
            
            $
            116,064
            
            
            $
            101,463Obligation
      for management deferred compensation
            
            
            10,504
            
            
            
            10,499Defined
      benefit pension plan liability
            
            
            20,375
            
            
            
            19,822Other
      long-term liabilities
            
            
            8,868
            
            
            
            2,744$
            155,811
            
            
            $
            134,528




The following
table presents the changes in the allowance for doubtful accounts during the
nine months ended December 31, 2009 and 2008 (in thousands):








December
      31,2009
            
            
            2008Balance
      as of March 31
            
            $
            6,705
            
            
            $
            2,497Bad
      debt expense
            
            
            (1,194
            )
            
            
            821Write-offs
      net of recoveries
            
            
            446
            
            
            
            (161
            )Balance
      as of June 30
            
            $
            5,957
            
            
            $
            3,157Bad
      debt expense
            
            
            599
            
            
            
            20Write-offs
      net of recoveries
            
            
            (158
            )
            
            
            (369
            )Balance
      as of September 30
            
            $
            6,398
            
            
            $
            2,808Bad
      debt expense
            
            
            505
            
            
            
            643Write-offs,
      net of recoveries
            
            
            (215
            )
            
            
            (265
            )Balance
      as of December 31
            
            $
            6,688
            
            
            $
            3,186








13


Note
8 —Goodwill and Other Intangible Assets





The
following table summarizes the activity in the Company’s goodwill account during
the nine months ended December 31, 2009 (in thousands):








Balance
      as of March 31, 2009
            
            $
            242,909Additions
            
            
            308,669Adjustment
            
            
            (3,762
            )Balance
      as of December 31, 2009
            
            $
            547,816





Additions
to goodwill primarily related to our acquisitions of LifeSize and TV Compass.
Logitech will maintain discrete financial information for LifeSize and
accordingly, the acquired goodwill related to the LifeSize acquisition will be
evaluated for impairment separately. TV Compass’s business will be fully
integrated into the Company’s existing operations, and discrete financial
information for TV Compass will not be maintained. Accordingly, the acquired
goodwill related to TV Compass will be evaluated for impairment at the total
enterprise level. The Company performs its annual goodwill impairment test
during its fiscal fourth quarter. The adjustment to goodwill represents an
adjustment of the deferred tax asset recognized in connection with the
acquisition of SightSpeed, Inc.





The
Company’s acquired other intangible assets subject to amortization were as
follows (in thousands):








December
      31, 2009
            
            
            March
      31, 2009Gross
      Carrying
            
            
            Accumulated
            
            
            Net
      Carrying
            
            
            Gross
      Carrying
            
            
            Accumulated
            
            
            Net
      CarryingAmount
            
            
            Amortization
            
            
            Amount
            
            
            Amount
            
            
            Amortization
            
            
            AmountTrademark/tradename
            
            $
            32,062
            
            
            $
            (19,718
            )
            
            $
            12,344
            
            
            $
            24,398
            
            
            $
            (18,559
            )
            
            $
            5,839Technology
            
            
            87,968
            
            
            
            (32,070
            )
            
            
            55,898
            
            
            
            49,268
            
            
            
            (26,598
            )
            
            
            22,670Customer
      contracts
            
            
            38,518
            
            
            
            (4,453
            )
            
            
            34,065
            
            
            
            7,018
            
            
            
            (3,418
            )
            
            
            3,600$
            158,548
            
            
            $
            (56,241
            )
            
            $
            102,307
            
            
            $
            80,684
            
            
            $
            (48,575
            )
            
            $
            32,109





During
the nine months ended December 31, 2009, changes in the gross carrying value of
other intangible assets related to our acquisitions of LifeSize and TV
Compass.





For the
three months ended December 31, 2009 and 2008, amortization expense for other
intangibles was $3.0 million and $2.3 million. For the nine months ended
December 31, 2009 and 2008, amortization expense for other intangible assets was
$7.6 million and $5.8 million. The Company expects that amortization expense for
the three-month period ending March 31, 2010 will be $5.8 million, and annual
amortization expense for fiscal years 2011, 2012, 2013 and 2014 will be $26.9
million, $24.7 million, $21.7 million and $15.8 million; and $7.4 million
thereafter.





Note
9 — Financing Arrangements





The
Company had several uncommitted, unsecured bank lines of credit aggregating
$148.6 million at December 31, 2009. There are no financial covenants under
these lines of credit with which the Company must comply. At December 31, 2009,
the Company had no outstanding borrowings under these lines of
credit.





Note
10 — Shareholders’ Equity





Share
Repurchases





During
the three and nine months ended December 31, 2009 and 2008, the Company had the
following approved share buyback program in place (in thousands):





Date
      of Announcement
              
              Approved
      Buyback Amount
              
              Expiration
      Date
              
              Completion
      Date
              
              
              Amount
      RemainingJune
      2007
              
              $
              250,000
              
              June
      2010
              
              
              -
              
              
              $
              24,985
 
 In
September 2008, the Company’s Board of Directors approved a share buyback
program which authorizes the Company to invest up to $250 million to purchase
its own shares. The September 2008 program is subject to the approval of the
Swiss Takeover Board and the completion of the current share buyback program of
$250 million.
 
 During the
three and nine months ended December 31, 2009 and 2008, the Company repurchased
shares under its share buyback program as follows (in
thousands):


Three
      months ended December 31, (1)
            
            
            Nine
      months ended December 31, (1)Date
      of
            
            2009
            
            
            2008
            
            
            2009
            
            
            2008Announcement
            
            Shares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Shares
            
            
            AmountJune
      2007
            
            
            -
            
            
            $
            -
            
            
            
            200
            
            
            $
            2,853
            
            
            
            5,838
            
            
            $
            101,267
            
            
            
            2,803
            
            
            $
            78,870


(1)Represents
      the amount in U.S. dollars, calculated based on exchange rates on the
      repurchase dates.
 14


Note
11 — Comprehensive Income





Comprehensive
income is defined as the total change in shareholders’ equity during the period
other than from transactions with shareholders. Comprehensive income consists of
net income and other comprehensive income, a component of shareholders’
equity.





Comprehensive
income for the three and nine months ended December 31, 2009 and 2008 was as
follows (in thousands):








Three
      months ended
            
            
            Nine
      months endedDecember
      31
            
            
            December
      312009
            
            
            2008
            
            
            2009
            
            
            2008Net
      income
            
            $
            57,086
            
            
            $
            40,493
            
            
            $
            40,464
            
            
            $
            142,110Other
      comprehensive income (loss), net of tax:Cumulative
      translation adjustment
            
            
            (4,527
            )
            
            
            (21,216
            )
            
            
            7,519
            
            
            
            (34,987
            )Minimum
      pension liability adjustment
            
            
            317
            
            
            
            113
            
            
            
            347
            
            
            
            261Reversal
      of unrealized gain on investment
            
            
            -
            
            
            
            (457
            )
            
            
            -
            
            
            
            -Net
      deferred hedging gains (losses)
            
            
            4,803
            
            
            
            (191
            )
            
            
            540
            
            
            
            (191
            )Comprehensive
      income
            
            $
            57,679
            
            
            $
            18,742
            
            
            $
            48,870
            
            
            $
            107,193








The
components of accumulated other comprehensive loss were as follows (in
thousands):








December
      31,
            
            
            March
      31,2009
            
            
            2009Cumulative
      translation adjustment
            
            $
            (58,880
            )
            
            $
            (66,399
            )Pension
      liability adjustments, net of tax of $990 and $990
            
            
            (14,775
            )
            
            
            (15,122
            )Unrealized
      gain on investment
            
            
            424
            
            
            
            424Net
      deferred hedging gains
            
            
            756
            
            
            
            216$
            (72,475
            )
            
            $
            (80,881
            )








Note
12 — Restructuring





In
January 2009, Logitech initiated a restructuring plan (“2009 Restructuring
Plan”) in order to reduce operating expenses and improve financial results in
response to deteriorating global economic conditions. We completed a majority of
the restructuring activity during the fourth quarter of fiscal year 2009.
Restructuring activities primarily consisted of a reduction in salaried
workforce, abandonment of projects, and facilities closures. All charges related
to the 2009 Restructuring Plan are presented as restructuring charges in our
consolidated statements of income.





The
following table summarizes restructuring related activities during the nine
months ended December 31, 2009 (in thousands):





Total
            
            
            Termination
      Benefits
            
            
            Contract
      Termination Costs
            
            
            OtherBalance
      at March 31, 2009
            
            $
            3,794
            
            
            $
            3,779
            
            
            $
            15
            
            
            $
            -Charges
            
            
            1,449
            
            
            
            1,366
            
            
            
            83
            
            
            
            -Cash
      payments
            
            
            (4,245
            )
            
            
            (4,220
            )
            
            
            (25
            )
            
            
            -Other
            
            
            (8
            )
            
            
            (4
            )
            
            
            (4
            )
            
            
            -Foreign
      exchange
            
            
            91
            
            
            
            91
            
            
            
            -
            
            
            
            -Balance
      at June 30, 2009
            
            $
            1,081
            
            
            $
            1,012
            
            
            $
            69
            
            
            $
            -Charges
            
            
            45
            
            
            
            (22
            )
            
            
            9
            
            
            
            58Cash
      payments
            
            
            (718
            )
            
            
            (698
            )
            
            
            (20
            )
            
            
            -Other
            
            
            (4
            )
            
            
            63
            
            
            
            -
            
            
            
            (67
            )Foreign
      exchange
            
            
            19
            
            
            
            19
            
            
            
            -
            
            
            
            -Balance
      at September 30, 2009
            
            $
            423
            
            
            $
            374
            
            
            $
            58
            
            
            $
            (9
            )Charges
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Cash
      payments
            
            
            (200
            )
            
            
            (180
            )
            
            
            (20
            )
            
            
            -Other
            
            
            (6
            )
            
            
            (6
            )
            
            
            -
            
            
            
            -Foreign
      exchange
            
            
            (7
            )
            
            
            (4
            )
            
            
            -
            
            
            
            (3
            )Balance
      at December 31, 2009
            
            $
            210
            
            
            $
            184
            
            
            $
            38
            
            
            $
            (12
            )





Termination
benefits incurred pursuant to the 2009 Restructuring Plan are calculated based
on regional benefit practices and local statutory requirements. Contract
termination costs relate to exit costs associated with the closure of existing
facilities.





The Company
recorded a total of $22.0 million in restructuring charges in the period from
January 1, 2009 to December 31, 2009, which included $17.8 million for
termination benefits, $0.5 million for asset impairments, $0.3 million for
contract termination costs and $3.4 million for other charges, primarily
consisting of pension curtailment and settlement costs. In addition, we expect
to record approximately $0.5 million in contract termination costs during the
remainder of fiscal year 2010. We expect to complete the restructuring in fiscal
year 2010.








15


Note
13 — Employee Benefit Plans





Employee
Share Purchase Plans and Stock Option Plans





As of
December 31, 2009, the Company offers the 2006 Employee Share Purchase Plan
(Non-U.S.) (“2006 ESPP”), the 1996 Employee Share Purchase Plan (U.S.) (“1996
ESPP”), and the 2006 Stock Incentive Plan. Share-based awards granted to
employees and directors include stock options, RSUs granted under the 2006 Stock
Incentive Plan and share purchase rights granted under the 2006 ESPP and 1996
ESPP. Shares issued to employees as a result of purchases or exercises under
these plans are generally issued from shares held in treasury.





The
following table summarizes the share-based compensation expense and related tax
benefit included in the Company’s consolidated statements of income for the
three and nine months ended December 31, 2009 and 2008 (in
thousands).








Three
      months ended
            
            
            Nine
      months endedDecember
      31
            
            
            December
      312009
            
            
            2008
            
            
            2009
            
            
            2008Cost
      of goods sold
            
            $
            709
            
            
            $
            888
            
            
            $
            2,135
            
            
            $
            2,288Share-based
      compensation expense included in gross profit
            
            
            709
            
            
            
            888
            
            
            
            2,135
            
            
            
            2,288Operating
      expenses:Marketing
      and selling
            
            
            2,018
            
            
            
            2,070
            
            
            
            5,931
            
            
            
            5,908Research
      and development
            
            
            1,139
            
            
            
            1,157
            
            
            
            3,048
            
            
            
            3,266General
      and administrative
            
            
            2,217
            
            
            
            2,126
            
            
            
            6,135
            
            
            
            6,490Share-based
      compensation expense included inoperating
      expenses
            
            
            5,374
            
            
            
            5,353
            
            
            
            15,114
            
            
            
            15,664Total
      share-based compensation expense related to employeestock
      options, RSUs and employee stock purchases
            
            
            6,083
            
            
            
            6,241
            
            
            
            17,249
            
            
            
            17,952Tax
      benefit
            
            
            3,324
            
            
            
            2,386
            
            
            
            4,157
            
            
            
            4,584Share-based
      compensation expense related to employee stockoptions,
      RSUs and employee stock purchases, net of tax
            
            $
            2,759
            
            
            $
            3,855
            
            
            $
            13,092
            
            
            $
            13,368





As of
December 31, 2009 and 2008, $0.8 million and $0.8 million of share-based
compensation cost was capitalized to inventory. As of December 31, 2009, total
compensation cost related to non-vested stock options not yet recognized was
$61.8 million, which is expected to be recognized over the next 33 months on a
weighted-average basis.





The fair
value of employee stock options granted and shares purchased under the Company’s
employee purchase plans was estimated using the Black-Scholes-Merton
option-pricing valuation model applying the following assumptions and
values:








Three
      Months Ended December 31,
            
            Nine
      Months Ended December 31,2009
            
            2008
            
            2009
            
            2008
            
            2009
            
            2008
            
            2009
            
            2008Purchase
      Plans
            
            Stock
      Option Plans
            
            Purchase
      Plans
            
            Stock
      Option PlansDividend
      yield
            0%
            
            0%
            
            0%
            
            0%
            
            0%
            
            0%
            
            0%
            
            0%Expected
      life
            6
      months
            
            6
      months
            
            2.9
      years
            
            3.7
      years
            
            6
      months
            
            6
      months
            
            3.4
      years
            
            3.7
      yearsExpected
      volatility
            59%
            
            41%
            
            53%
            
            36%
            
            70%
            
            45%
            
            50%
            
            35%Risk-free
      interest rate
            0.07%
            
            1.96%
            
            1.28%
            
            2.48%
            
            0.21%
            
            2.38%
            
            1.72%
            
            2.46%





The
dividend yield assumption is based on the Company’s history and future
expectations of dividend payouts. The Company has not paid dividends since
1996.





The
expected option life represents the weighted-average period the stock options or
purchase offerings are expected to remain outstanding. The expected life is
based on historical settlement rates, which the Company believes are most
representative of future exercise and post-vesting termination
behaviors.





Expected
share price volatility is based on historical volatility using daily prices over
the term of past options or purchase offerings.  The Company considers
historical share price volatility as most representative of future stock option
volatility. The risk-free interest rate assumptions are based upon the implied
yield of U.S. Treasury zero-coupon issues appropriate for the term of the
Company’s stock options or purchase offerings.





The
Company estimates forfeitures at the time of grant and revises those estimates
in subsequent periods if actual forfeitures differ from those estimates. The
Company uses historical data to estimate pre-vesting option forfeitures and
records share-based compensation expense only for those awards that are expected
to vest.





The
following table represents the weighted average grant-date fair values of
options granted and the expected forfeiture rates:








Three
      Months Ended December 31,
            
            
            Nine
      Months Ended December 31,2009
            
            
            2008
            
            
            2009
            
            
            2008
            
            
            2009
            
            
            2008
            
            
            2009
            
            
            2008Purchase
      Plans
            
            
            Stock
      Option Plans
            
            
            Purchase
      Plans
            
            
            Stock
      Option PlansExpected
      forfeitures
            
            
            0
            %
            
            
            0
            %
            
            
            10
            %
            
            
            7
            %
            
            
            0
            %
            
            
            0
            %
            
            
            10
            %
            
            
            7
            %Weighted
      average grant-datefair
      value of options granted
            
            $
            5.29
            
            
            $
            7.01
            
            
            $
            9.10
            
            
            $
            6.23
            
            
            $
            4.25
            
            
            $
            7.94
            
            
            $
            7.14
            
            
            $
            6.42





16


A summary
of activity under the stock option plans is as follows (in thousands, except per
share data; exercise prices are weighted averages):








Three
      Months ended December 31,
            
            
            Nine
      Months ended December 31,2009
            
            
            2008
            
            
            2009
            
            
            2008Number
            
            
            Exercise
      Price
            
            
            Number
            
            
            Exercise
      Price
            
            
            Number
            
            
            Exercise
      Price
            
            
            Number
            
            
            Exercise
      PriceOutstanding,
      beginning of period
            
            
            19,130
            
            
            $
            18
            
            
            
            16,585
            
            
            $
            18
            
            
            
            18,897
            
            
            $
            18
            
            
            
            17,952
            
            
            $
            17Granted
            
            
            2,179
            
            
            $
            11
            
            
            
            3,484
            
            
            $
            21
            
            
            
            4,568
            
            
            $
            12
            
            
            
            3,936
            
            
            $
            21Exercised
            
            
            (275
            )
            
            $
            10
            
            
            
            (304
            )
            
            $
            4
            
            
            
            (1,310
            )
            
            $
            8
            
            
            
            (1,847
            )
            
            $
            9Cancelled
      or expired
            
            
            (191
            )
            
            $
            22
            
            
            
            (184
            )
            
            $
            25
            
            
            
            (1,312
            )
            
            $
            21
            
            
            
            (460
            )
            
            $
            25Outstanding,
      end of period
            
            
            20,843
            
            
            $
            17
            
            
            
            19,581
            
            
            $
            18
            
            
            
            20,843
            
            
            $
            17
            
            
            
            19,581
            
            
            $
            18Exercisable,
      end of period
            
            
            11,751
            
            
            $
            16
            
            
            
            11,203
            
            
            $
            14
            
            
            
            11,751
            
            
            $
            16
            
            
            
            11,203
            
            
            $
            14





The total
pretax intrinsic value of options exercised during the three months ended
December 31, 2009 and 2008 was $1.9 million and $3.3 million and the tax benefit
realized for the tax deduction from options exercised during those periods was
$0.7 million and $0.6 million. The total pretax intrinsic value of options
exercised during the nine months ended December 31, 2009 and 2008 was $9.8
million and $32.5 million and the tax benefit realized for the tax deduction
from options exercised during those periods was $2.0 million and $8.4 million.
The total fair value of options vested as of December 31, 2009 and 2008 was
$70.7 million and $56.8 million.





During
the second quarter of fiscal year 2010, the Company granted time-based RSUs to
employees and board members pursuant to the 2006 Stock Incentive Plan. The
time-based RSUs vest ratably over service periods of four years for employees
and one year for non-executive board members. The Company estimates the fair
value of these RSUs based on the share market price on the date of grant.
Compensation expense related to time-based RSUs is recognized over the vesting
period and is included in the total share-based compensation expense disclosed
above. As of December 31, 2009, total compensation cost related to time-based
RSUs not yet recognized was $2.8 million, which is expected to be recognized
over the next 42 months.





The
Company has also granted RSUs to certain senior company executives pursuant to
the 2006 Stock Incentive Plan. The RSUs vest at the end of two years from the
grant date upon meeting certain share price performance criteria measured
against market conditions. Compensation expense related to these RSUs is
recognized over the two year performance period and is included in the total
share-based compensation expense disclosed above. As of December 31, 2009, total
compensation cost related to these RSUs not yet recognized was $2.4 million,
which is expected to be recognized over the next 18 months.





The fair
value of these RSUs granted was estimated using the Monte-Carlo simulation
method applying the following assumptions:








FY
      2009 Grants
            
            FY
      2010 GrantsDividend
      yield
            0%
            
            0%Expected
      life
            2
      years
            
            2
      yearsExpected
      volatility
            41%
            
            58%Risk-free
      interest rate
            1.82%
            
            1.11%








The
dividend yield assumption is based on the Company’s history and future
expectations of dividend payouts. The expected life of the RSUs is the service
period at the end of which the RSUs will vest if the minimum performance is
achieved. The volatility assumption is based on the actual volatility of
Logitech’s daily closing share price over a look-back period of two years. The
risk free interest rate is derived from the yield on U.S. Treasury Bonds for a
two year term.





Defined
Contribution Plans





Certain
of the Company’s subsidiaries have defined contribution employee benefit plans
covering all or a portion of their employees. Contributions to these plans are
discretionary for certain plans and are based on specified or statutory
requirements for others. The charges to expense for these plans for the three
months ended December 31, 2009 and 2008 were $2.0 million and $1.9 million and
during the nine months ended December 31, 2009 and 2008 were $5.5 million and
$6.1 million.





Defined
Benefit Plans





Certain
of the Company’s subsidiaries sponsor defined benefit pension plans covering
substantially all of their employees. Retirement benefits are provided based on
employees’ years of service and earnings, or in accordance with applicable
employee benefit regulations. The Company’s practice is to fund amounts
sufficient to meet the requirements set forth in the applicable employee benefit
and tax regulations.





The net
periodic benefit cost for the three and nine months ended December 31, 2009 and
2008 was as follows (in thousands):





Three
      months ended
            
            
            Nine
      months endedDecember
      31,
            
            
            December
      31,2009
            
            
            2008
            
            
            2009
            
            
            2008Service
      cost
            
            $
            911
            
            
            $
            567
            
            
            $
            2,623
            
            
            $
            1,815Interest
      cost
            
            
            357
            
            
            
            344
            
            
            
            1,031
            
            
            
            1,102Expected
      return on plan assets
            
            
            (312
            )
            
            
            (352
            )
            
            
            (898
            )
            
            
            (1,131
            )Amortization
      of net transition obligation
            
            
            1
            
            
            
            1
            
            
            
            3
            
            
            
            3Amortization
      of net prior service cost
            
            
            34
            
            
            
            -
            
            
            
            102
            
            
            
            -Recognized
      net actuarial loss
            
            
            221
            
            
            
            104
            
            
            
            635
            
            
            
            331Net
      periodic benefit cost
            
            $
            1,212
            
            
            $
            664
            
            
            $
            3,496
            
            
            $
            2,120


17


Note
14 — Income Taxes





The
Company is incorporated in Switzerland but operates in various countries with
differing tax laws and rates. Further, a portion of the Company’s income before
taxes and the provision for income taxes are generated outside of Switzerland.
Prior to the first quarter of fiscal year 2010, the Company’s effective income
tax rate was calculated using an estimate of its annual pre-tax income. Due to
the impact of the economic downturn, management determined that, for the three
months ended June 30, 2009 and September 30, 2009, reliable estimates of its
annual pre-tax income and related annual effective income tax rates could not be
made. Therefore, the Company used the actual year-to-date effective income tax
rate for those periods.





For the
three and nine months ended December 31, 2009, management has determined that a
reliable estimate of its annual pre-tax income can be made. The Company’s
effective income tax rate is therefore calculated using an estimate of its
annual pre-tax income. For the three months ended December 31, 2009 and 2008,
the income tax provision was $4.8 million and $12.6 million based on effective
income tax rates of 7.8% and 23.7%. For the nine months ended December 31, 2009
and 2008, the income tax provision was $14.3 million and $26.1 million based on
effective income tax rates of 26.1% and 15.5%. The change in effective income
tax rates for the three and nine months ended December 31, 2009 compared with
the same periods in 2008 is primarily due to the mix of income and losses in the
various tax jurisdictions in which the Company operates.





As of
December 31, 2009 and March 31, 2009, the total amount of unrecognized tax
benefits and related accrued interest and penalties due to uncertain tax
positions was $122.7 million and $108.2 million, of which $97.9 million and
$88.1 million would affect the effective income tax rate if
recognized.





The
Company continues to recognize interest and penalties related to unrecognized
tax positions in income tax expense. As of December 31, 2009 and March 31, 2009,
the Company had approximately $12.2 million and $10.7 million of accrued
interest and penalties related to uncertain tax positions.





The
federal research tax credit has expired as of December 31, 2009. On December 9,
2009, the House of Representatives passed H.R. 4213, The Tax Extenders Act of 2009which would extend the federal research tax credit for one year. The
Senate, however, did not consider the proposed legislation before December 31,
2009. As a result, the Company's effective income tax rate, calculated using an
estimate of annual pre-tax income, includes a $0.9 million tax benefit for
federal research tax credits, which represents the tax benefit only for the nine
months ended December 31, 2009.





On
February 20, 2009, California budget legislation was enacted that will affect
the methodology used by corporate taxpayers to apportion income to California.
These changes will become effective for the Company's fiscal year ending March
31, 2012. The Company believes that these changes will not have a material
impact on its results of operations or financial condition.





The
Company files Swiss and foreign tax returns. For all these tax returns, the
Company is generally not subject to tax examinations for years prior to
1999. In fiscal year 2009, the Internal Revenue Service initiated an
examination of the Company’s U.S. subsidiary for fiscal year 2006. During the
third quarter of fiscal year 2010, the Internal Revenue Service expanded its
examination to include fiscal year 2007. At this time it is not possible to
estimate the potential impact that the examination may have on income tax
expense.





Although
timing of the resolution or closure on audits is highly uncertain, the Company
does not believe it is reasonably possible that the unrecognized tax benefits
would materially change in the next 12 months.


Note
15 — Derivative Financial Instruments – Foreign Exchange Hedging





Cash
Flow Hedges





The Company enters into foreign
exchange forward contracts to hedge against exposure to changes in foreign
currency exchange rates related to its subsidiaries’ forecasted inventory
purchases. The primary risk managed by using derivative instruments is the
foreign currency exchange rate risk. The Company has designated these
derivatives as cash flow hedges. These hedging contracts generally mature within
six months. Gains and losses in the fair value of the effective portion of the
hedges are deferred as a component of accumulated other comprehensive loss until
the hedged inventory purchases are sold, at which time the gains or losses are
reclassified to cost of goods sold. The Company assesses the effectiveness of
the hedges by comparing changes in the spot rate of the currency underlying the
forward contract with changes in the spot rate of the currency in which the
forecasted transaction will be consummated. If the underlying transaction being
hedged fails to occur or if a portion of the hedge does not generate offsetting
changes in the foreign currency exposure of forecasted inventory purchases, the
Company immediately recognizes the gain or loss on the associated financial
instrument in other income (expense). Such losses were immaterial during the
three and nine months ended December 31, 2009. The notional amounts of foreign
exchange forward contracts outstanding related to forecasted inventory purchases
were $39.9 million (26.7 million euros) and $39.0 million (27.9 million euros)
at December 31, 2009 and 2008. The notional amount represents the future cash
flows under contracts to purchase foreign currencies.





Other
Derivatives





The Company also enters into foreign
exchange forward contracts to reduce the short-term effects of foreign currency
fluctuations on certain foreign currency receivables or payables. These forward
contracts generally mature within one to three months. The Company may also
enter into foreign exchange swap contracts to economically extend the terms of
its foreign exchange forward contracts. The primary risk managed by using
forward and swap contracts is the foreign currency exchange rate risk. The gains
or losses on foreign exchange forward contracts are recognized in earnings based
on the changes in fair value.





The
notional amounts of foreign exchange forward contracts outstanding at December
31, 2009 and 2008 relating to foreign currency receivables or payables were
$15.3 million and $15.5 million. Open forward contracts as of December 31, 2009
consisted of contracts in British pounds to purchase euros at a future date at a
pre-determined exchange rate. The notional amounts of foreign exchange swap
contracts outstanding at December 31, 2009 and 2008 were $37.9 million and $24.4
million. Swap contracts outstanding at December 31, 2009 consisted of contracts
in Mexican pesos, Japanese yen, Canadian dollars and British
pounds.





The fair
value of all our foreign exchange forward contracts and foreign exchange swap
contracts is determined based on quoted foreign exchange forward rates. Quoted
foreign exchange forward rates are observable inputs that are classified as
Level 1 within the fair value hierarchy.


18





The
following table presents the fair values of the Company’s derivative instruments
and their locations on the Balance Sheet as of December 31, 2009 (in
thousands):








Asset
      Derivatives
            
            Liability
      DerivativesLocation
            
            Fair
      Value
            
            Location
            
            Fair
      ValueDerivatives
      designated as hedginginstruments:Cash
      Flow Hedges
            Other
      assets
            
            $
            1,766
            
            Other
      liabilities
            
            $
            211,766
            
            
            
            
            21Derivatives
      not designated as hedginginstruments:Foreign
      Exchange Forward Contracts
            Other
      assets
            
            
            -
            
            Other
      liabilities
            
            
            213Foreign
      Exchange Swap Contracts
            Other
      assets
            
            
            402
            
            Other
      liabilities
            
            
            219402
            
            
            
            
            432$
            2,168
            
            
            
            $
            453





The
following table presents the amounts of gains and losses on the Company’s
derivative instruments for the three months ended December 31, 2009 and their
locations on its Financial Statements (in thousands):








Net
      amount of gain (loss) deferred as a component of accumulated other
      comprehensive loss
            
            Location
      of gain (loss) reclassified from accumulated other comprehensive loss into
      income
            
            Amount
      of gain (loss) reclassified from accumulated other comprehensive loss into
      income
            
            Location
      of gain (loss) recognized in income immediately
            
            Amount
      of gain (loss) recognized in income immediatelyDerivatives
      designated as hedginginstruments:Cash
      Flow Hedges
            
            $
            4,804
            
            Cost
      of goods sold
            
            $
            (3,733
            )
            Other
      income/expense
            
            $
            (28
            )4,804
            
            
            
            
            (3,733
            )
            
            
            
            (28
            )Derivatives
      not designated as hedginginstruments:Foreign
      Exchange Forward Contracts
            
            
            -
            
            
            
            
            -
            
            Other
      income/expense
            
            
            (763
            )Foreign
      Exchange Swap Contracts
            
            
            -
            
            
            
            
            -
            
            Other
      income/expense
            
            
            (454
            )-
            
            
            
            
            -
            
            
            
            
            (1,217
            )$
            4,804
            
            
            
            $
            (3,733
            )
            
            
            $
            (1,245
            )








The
following table presents the amounts of gains and losses on the Company’s
derivative instruments for the nine months ended December 31, 2009 and their
locations on its Financial Statements (in thousands):








Net
      amount of gain (loss) deferred as a component of accumulated other
      comprehensive loss
            
            Location
      of gain (loss) reclassified from accumulated other comprehensive loss into
      income
            
            Amount
      of gain (loss) reclassified from accumulated other comprehensive loss into
      income
            
            Location
      of gain (loss) recognized in income immediately
            
            Amount
      of gain (loss) recognized in income immediatelyDerivatives
      designated as hedginginstruments:Cash
      Flow Hedges
            
            $
            540
            
            Cost
      of goods sold
            
            $
            (5,676
            )
            Other
      income/expense
            
            $
            (59
            )540
            
            
            
            
            (5,676
            )
            
            
            
            (59
            )Derivatives
      not designated as hedginginstruments:Foreign
      Exchange Forward Contracts
            
            
            -
            
            
            
            
            -
            
            Other
      income/expense
            
            
            (922
            )Foreign
      Exchange Swap Contracts
            
            
            -
            
            
            
            
            -
            
            Other
      income/expense
            
            
            (2,398
            )-
            
            
            
            
            -
            
            
            
            
            (3,320
            )$
            540
            
            
            
            $
            (5,676
            )
            
            
            $
            (3,379
            )





19





Note
16 — Commitments and Contingencies





The
Company leases facilities under operating leases, certain of which require it to
pay property taxes, insurance and maintenance costs. Operating leases for
facilities are generally renewable at the Company’s option and usually include
escalation clauses linked to inflation. Total future minimum annual rentals
under non-cancelable operating leases at December 31, 2009 amounted to $49.4
million.





At
December 31, 2009, fixed purchase commitments for capital expenditures amounted
to $15.2 million, and primarily related to commitments for manufacturing
equipment, tooling, computer software and computer hardware. Also, the Company
has commitments for inventory purchases made in the normal course of business to
original design manufacturers, contract manufacturers and other suppliers. At
December 31, 2009, fixed purchase commitments for inventory amounted to $132.5
million, which are expected to be fulfilled by August 31, 2010. The Company also
had other commitments totaling $34.9 million for consulting services, marketing
arrangements, advertising and other services. Although open purchase orders are
considered enforceable and legally binding, the terms generally allow the
Company the option to reschedule and adjust its requirements based on the
business needs prior to delivery of goods or performance of
services.





The
Company has guaranteed the purchase obligations of some of its contract
manufacturers and original design manufacturers to certain component suppliers.
These guarantees generally have a term of one year and are automatically
extended for one or more years as long as a liability exists. The amount of the
purchase obligations of these manufacturers varies over time, and therefore the
amounts subject to Logitech’s guarantees similarly vary. At December 31, 2009,
there were no outstanding guaranteed purchase obligations. The maximum total
potential future payments under three of the five guarantee arrangements is
limited to $30.8 million. The remaining two guarantees are limited to purchases
of specified components from the named suppliers. The Company does not believe,
based on historical experience and information currently available, that it is
probable that any amounts will be required to be paid under these guarantee
arrangements.





Logitech
International S.A., the parent holding company, has guaranteed certain
contingent liabilities of various subsidiaries related to specific transactions
occurring in the normal course of business. The maximum amount of the guarantees
was $5.3 million as of December 31, 2009. As of December 31, 2009, $5.3 million
was outstanding under these guarantees. The parent holding company has also
guaranteed the purchases of one of its subsidiaries under two guarantee
agreements. These guarantees do not specify a maximum amount. As of December 31,
2009, $8.7 million was outstanding under these guarantees.





Logitech
indemnifies some of its suppliers and customers for losses arising from matters
such as intellectual property rights and product safety defects, subject to
certain restrictions. The scope of these indemnities varies, but in some
instances, includes indemnification for damages and expenses, including
reasonable attorneys’ fees. No amounts have been accrued for indemnification
provisions at December 31, 2009. The Company does not believe, based on
historical experience and information currently available, that it is probable
that any amounts will be required to be paid under its indemnification
arrangements.





In
December 2006, the Company acquired Slim Devices, Inc., a privately held company
specializing in network-based audio systems for digital music. The purchase
agreement provides for a possible performance-based payment, payable in the
first calendar quarter of 2010. The performance-based payment is based on net
revenues from the sale of products and services in calendar year 2009 derived
from Slim Devices’ technology. The maximum performance-based payment is $89.5
million, and no payment is due if the applicable net revenues total $40.0
million or less. As of December 31, 2009, no amounts were payable towards
performance-based payments under our acquisition agreement.


In November
2007, the Company acquired WiLife, Inc., a privately held company that
manufactures PC-based video cameras for self-monitoring a home or a small
business. The purchase agreement provides for a possible performance-based
payment, payable in the first calendar quarter of 2011. The performance-based
payment is based on net revenues attributed to WiLife during calendar 2010. No
payment is due if the applicable net revenues total $40.0 million or less. The
maximum performance-based payment is $64.0 million. The total performance-based
payment amount, if any, will be recorded in goodwill and will not be known until
the end of calendar year 2010.





The
Company is involved in a number of lawsuits and claims relating to commercial
matters that arise in the normal course of business. The Company believes these
lawsuits and claims are without merit and intends to vigorously defend against
them. However, there can be no assurances that its defenses will be successful,
or that any judgment or settlement in any of these lawsuits would not have a
material adverse impact on the Company's business, financial condition and
results of operations. The Company’s accruals for lawsuits and claims as of
December 31, 2009 were not material.





Note
17 — Segment Information





The
Company operates in one operating segment, which is the design, manufacturing
and marketing of personal peripherals for personal computers and other digital
platforms. Geographic net sales information in the table below is based on the
location of the selling entity. Long-lived assets, primarily fixed assets, are
reported below based on the location of the asset.





Net sales
to unaffiliated customers by geographic region were as follows (in
thousands):








Three
      months ended
            
            
            Nine
      months endedDecember
      31,
            
            
            December
      31,2009
            
            
            2008
            
            
            2009
            
            
            2008EMEA
            
            $
            309,800
            
            
            $
            297,741
            
            
            $
            664,347
            
            
            $
            810,619Americas
            
            
            217,454
            
            
            
            218,029
            
            
            
            515,395
            
            
            
            654,796Asia
      Pacific
            
            
            89,847
            
            
            
            111,696
            
            
            
            261,562
            
            
            
            335,469Total
      net sales
            
            $
            617,101
            
            
            $
            627,466
            
            
            $
            1,441,304
            
            
            $
            1,800,884








The
United States and Germany each represented more than 10% of the Company’s total
consolidated net sales for the three and nine months ended December 31, 2009 and
for the three months ended December 31, 2008. No single country other than the
United States represented more than 10% of the Company’s total consolidated net
sales for the nine months ended December 31, 2008. One customer group
represented 15% of net sales in both the three months ended December 31, 2009
and 2008. The same customer group represented 13% and 15% of net sales in the
nine months ended December 31, 2009 and 2008.





20


Net sales
by product family were as follows (in thousands):








Three
      months ended
            
            
            Nine
      months endedDecember
      31,
            
            
            December
      31,2009
            
            
            2008
            
            
            2009
            
            
            2008Retail
      - Pointing Devices
            
            $
            166,703
            
            
            $
            149,060
            
            
            $
            387,550
            
            
            $
            473,503Retail
      - Keyboards & Desktops
            
            
            104,624
            
            
            
            106,294
            
            
            
            242,539
            
            
            
            312,324Retail
      - Audio
            
            
            147,945
            
            
            
            152,429
            
            
            
            341,066
            
            
            
            352,459Retail
      - Video
            
            
            67,321
            
            
            
            71,153
            
            
            
            168,398
            
            
            
            198,631Retail
      - Gaming
            
            
            36,359
            
            
            
            38,111
            
            
            
            82,001
            
            
            
            107,651Retail
      - Remotes
            
            
            41,306
            
            
            
            28,490
            
            
            
            69,172
            
            
            
            84,353OEM
            
            
            50,502
            
            
            
            81,929
            
            
            
            148,237
            
            
            
            271,963LifeSize
            
            
            2,341
            
            
            
            -
            
            
            
            2,341
            
            
            
            -Total
      net sales
            
            $
            617,101
            
            
            $
            627,466
            
            
            $
            1,441,304
            
            
            $
            1,800,884








Long-lived
assets by geographic region were as follows (in thousands):








December
      31,
            
            
            March
      31,2009
            
            
            2009EMEA
            
            $
            12,171
            
            
            $
            13,947Americas
            
            
            40,508
            
            
            
            40,093Asia
      Pacific
            
            
            43,492
            
            
            
            53,541Total
      long-lived assets
            
            $
            96,171
            
            
            $
            107,581








Long-lived assets in China and the
United States each represented more than 10% of the Company’s total consolidated
long-lived assets at December 31, 2009 and March 31, 2009.


21


ITEM
2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS







You
should read the following discussion in conjunction with the interim unaudited
Consolidated Financial Statements and related notes.







This
Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934. These
forward-looking statements include, among other things, statements regarding
current or future general economic conditions, trends in consumer demand for our
products, plans, strategies and objectives of management for future operations,
our current or future revenue mix, potential promotional actions, our
competitive position, the impact of new product introductions and product
innovation on future performance, or our anticipated costs and expenses.
Forward-looking statements also include, among others, those statements
including the words “expects,” “anticipates,” “intends,” “believes” and similar
language. These forward-looking statements involve risks and uncertainties that
could cause our results to differ materially from those anticipated in the
forward-looking statements.  Factors that might cause or contribute to
such differences include, but are not limited to, those discussed in the section
titled “Risk Factors” in Part II, Item 1A of this quarterly report on
Form 10-Q. You should carefully review the risks described in other documents we
file from time to time with the Securities and Exchange Commission, including
the Quarterly Reports on Form 10-Q or Current Reports on Form 8-K that we file
in fiscal year 2010 and our fiscal year 2009 Form 10-K, which was filed on June
1, 2009, which discuss our business in greater detail. You are cautioned not to
place undue reliance on the forward-looking statements, which speak only as of
the date of this Quarterly Report on Form 10-Q. We undertake no obligation to
publicly release any revisions to the forward-looking statements or reflect
events or circumstances after the date of this document.





Overview
of Our Company





Logitech
is a world leader in personal peripherals for computers and other digital
platforms. We develop and market innovative products in PC navigation, Internet
communications, digital music, home-entertainment control, gaming and wireless
devices. Our products combine essential core technologies, continuing
innovation, award-winning industrial design and excellent value.





For the
PC, our products include mice, trackballs, keyboards, interactive gaming
controllers, multimedia speakers, headsets, webcams, 3D control devices and
lapdesks. Our Internet communications products include webcams, headsets, video
communications services, and digital video security systems for a home or small
business. Also, in December 2009 we acquired LifeSize Communications, Inc.,
which provides scalable high-definition enterprise video conferencing solutions.
Our digital music products include speakers, earphones, and custom in-ear
monitors. For home entertainment systems, we offer the Harmony line of advanced
remote controls and the Squeezebox and Transporter wireless music solutions for
the home. For gaming consoles, we offer a range of gaming controllers, including
racing wheels, wireless guitar and drum controllers, and microphones, as well as
other accessories.





We sell
our peripheral products to a network of retail distributors and resellers and to
original equipment manufacturers, or OEMs. Our worldwide retail network for our
peripherals includes wholesale distributors, consumer electronics retailers,
mass merchandisers, specialty electronics stores, computer and
telecommunications stores, value-added resellers and online merchants. Our sales
to our retail channels for our peripherals were 90% and 85% of our net sales for
the nine months ended December 31, 2009 and 2008. The large majority of our
revenues have historically been derived from sales of our products for use by
consumers.





With our
acquisition of LifeSize, we provide scalable high-definition enterprise video
conferencing solutions. We sell our LifeSize products and services to
distributors, value-added resellers, OEMs and direct enterprise
customers.  The large majority of LifeSize revenues have historically
been derived from sales of products for use within enterprises.





Our
markets are extremely competitive and characterized by short product life
cycles, frequent new product introductions, rapidly changing technology,
evolving customer demands, and aggressive promotional and pricing practices. We
believe that the global economic downturn has further increased competition in
our markets, as competitors with larger financial resources, such as Microsoft,
Sony and others, seek to gain market share by discounting prices or offering
more favorable terms to customers, and competitors with smaller financial
resources also discount prices or engage in other promotional practices in order
to maintain their market share.





We
believe continued investment in product research and development is critical to
creating the innovation required to strengthen our competitive advantage and to
drive future sales growth. We are committed to identifying and meeting current
and future customer trends with new and improved product technologies, as well
as leveraging the value of the Logitech brand from a competitive, channel
partner and consumer experience perspective. We believe innovation and product
quality are important to gaining market acceptance and maintaining market
leadership.





The
broadening of our product lines has been primarily organic. However we also seek
to acquire, when appropriate, companies that have products, personnel, and
technologies that complement our strategic direction. With our acquisition of
LifeSize in December 2009, we entered the video conferencing market. Together,
Logitech and LifeSize plan to pursue existing and new relationships with unified
communications, collaboration and voice-over Internet protocol (VoIP) industry
partners and competitors to drive the development of an open eco-system for
interoperable video communications. Also as part of our corporate strategy, we
plan to increase investments in and realign resources to focus on certain market
adjacencies, geographic markets or new categories, including video
communications, open platforms, the China market and smartphone accessories. We
continually evaluate our product offerings and our strategic direction in light
of current global economic conditions, changing consumer trends, and the
evolving nature of the interface between the consumer and the digital
world.





Summary
of Financial Results





Our total
net sales for the three and nine months ended December 31, 2009 decreased 2% and
20% compared with the three and nine months ended December 31, 2008. Excluding
the favorable impact of exchange rate changes, total net sales for the three and
nine months declined 7% and 21%.





Retail
sales in the three months ended December 31, 2009 increased 3% compared with the
three months ended December 31, 2008 and decreased 2% excluding the favorable
impact of exchange rate changes. For the nine months ended December 31, 2009,
retail sales decreased 16% compared with the same period in the prior year.
Exchange rate changes had no impact on the percentage decline in retail sales
for the nine month period. Retail units sold increased 6% in the three months
and decreased 10% in the nine months ended December 31, 2009, compared with the
same periods in the prior year.





OEM sales
decreased 38% and 45% in the three and nine months ended December 31, 2009
compared with the three and nine months ended December 31, 2008. Foreign
currency exchange rates did not significantly affect the OEM sales decline. OEM
units sold decreased 22% and 32% in the same periods. The substantial decline in
OEM sales was related to console microphones, which sold well in the prior
fiscal year, but have reached the latter stages of the typical gaming sales
cycle in the current fiscal year.





The sales
of LifeSize for the period from December 11, 2009, the date of acquisition, to
the end of the fiscal quarter, are included in our financial
results.





Retail
sales in our Americas and Europe-Middle East-Africa (“EMEA”) regions increased
8% and 6% in the three months ended December 31, 2009 compared with the three
months ended December 31, 2008. Retail sales in our Asia Pacific region declined
17% in the same period. For the nine months ended December 31, 2009, retail
sales declined 10%, 17% and 22% in the Americas, EMEA and Asia Pacific regions,
compared with the prior year.





Our gross
margins for the three and nine months ended December 31, 2009 were 33.9% and
30.4% compared with 29.9% and 32.7% in the same periods of the prior fiscal
year. The improvement in gross margin for the three month period compared with
the prior year was primarily due to the effect on net sales of foreign currency
exchange rate fluctuations and the change in channel mix between retail and
OEM.





Net
income for the three and nine months ended December 31, 2009 was $57.1 million
and $40.5 million, compared with net income of $40.5 million and $142.1 million
in the three and nine months ended December 31, 2008. The 41% growth in net
income for the third quarter of fiscal year 2010 reflected improved gross margin
and expense control.





22


Trends
in Our Business





We have a
large and varied portfolio of product lines, grouped in several product
families. In addition to changes resulting from general global economic trends,
we believe that normal increases or decreases in the retail sales level of a
product family are dependent on the innovation we have designed into the
product, customer acceptance of the product line, the popularity of the digital
platforms the product line relates to, competitive activity in the product
family, and the prices at which products are available. Historically, sales of
individual product lines rise and fall over time, causing our overall product
mix to shift both between and within product lines, and we expect these types of
trends to continue under all economic conditions.





We have
historically targeted peripherals for the PC platform, a market that is
dynamically changing as a result of the declining popularity of desktop PCs and
the increasing popularity of notebook PCs and mobile devices, such as netbooks,
smartphones and smaller form factor devices with computing or web surfing
capabilities. In our retail channels, notebook PCs and mobile devices are sold
by retailers without peripherals. We believe this creates opportunities to sell
products to consumers to help make their devices more productive and
comfortable. However, consumer acceptance and demand for peripherals for use
with smaller form factor computing devices such as notebook PCs and mobile
devices is still uncertain. The increasing popularity of notebook PCs and mobile
devices may result in a decreased demand by consumers for keyboards and
speakers, which could negatively affect our sales of these products. The
increasing popularity of mobile devices has coincided with a steadily decreasing
average sales price for computing devices, including for desktop and notebook
PCs. As a result, there is a risk that the demand for those of our products that
have a relatively high average sales price in relation to the price of a desktop
or notebook PC will decline. We believe our future sales growth will be
significantly affected by our ability to develop sales and innovations in our
current products for notebook PCs and other mobile devices, as well as for
emerging product categories which are not PC-dependent.





Most of
our revenue comes from sales to our retail channels, which resell to consumers
and other retailers. As a result, our customers’ demand for our products depends
in substantial part on trends in consumer confidence and consumer spending, as
well as the levels of inventory which our customers choose to maintain. We use
sell-through data, which represents sales of our products by our retailer
customers to consumers and by our distributor customers to retailers, to
indicate consumer demand for our products. However, sell-through data is subject
to limitations due to collection methods and the third-party nature of the data
and thus may not be an entirely accurate indicator of actual consumer demand for
our products. In addition, the customers supplying sell-through data vary by
geographic region and from period to period, but typically represent a majority
of our retail sales.





In our
OEM channel, the shift away from desktop PCs has adversely affected our sales of
OEM mice, which are sold with name-brand desktop PCs. Our OEM mice sales have
historically made up the bulk of our OEM sales. Our OEM sales accounted for 10%
and 15% of total revenues during the nine months ended December 31, 2009 and
2008.  We expect the trend of slowing OEM mice sales to continue. In
addition, in fiscal year 2009 we had substantial sales of our microphones for
use with particular game titles for gaming consoles. However, these sales have
declined as the game titles have reached the latter stages of the typical gaming
cycle. We believe future OEM sales growth depends on the development of new game
titles or other products, consumers’ purchase activity, and manufacturers’
decisions to combine our products with theirs, none of which is assured to
occur.





Although
our financial results are reported in U.S. dollars, approximately half of our
sales are made in currencies other than the U.S. dollar, such as the euro,
British pound, Japanese yen, Chinese renminbi and Canadian dollar. Our product
costs are primarily in U.S. dollars and Chinese renminbi. Our operating expenses
are incurred in U.S. dollars, euros, Chinese renminbi, Swiss francs, Taiwanese
dollars, and, to a lesser extent, 25 other currencies. To the extent that the
U.S. dollar significantly increases or decreases in value relative to the
currencies in which  our sales and operating expenses are denominated,
the reported dollar amounts of our sales and expenses may decrease or increase.
In the nine months ended December 31, 2009, the impact of foreign currency
exchange rates on our results of operations was not material.





Our gross
margins vary with the mix of products sold, competitive activity, product life
cycle, new product introductions, unit volumes, commodity and supply chain
costs, foreign currency exchange rate fluctuations, geographic sales mix, and
the complexity and functionality of new product introductions. Changes in
consumer demand affect the need for us to undertake promotional efforts, such as
cooperative marketing arrangements, customer incentive programs or price
protection, which alters our product gross margins. Gross margins for the nine
months ended December 31, 2009 were 30.4%, compared with 32.7% in the same
period in the prior fiscal year, primarily due to lower net sales and a change
in product mix, partially offset by the channel shift between retail and
OEM.





Logitech is incorporated in
Switzerland but operates in various countries with differing tax laws and rates.
A portion of our income before taxes and the provision for income taxes are
generated outside of Switzerland. Therefore, our effective income tax rate
depends on the amount of profits generated in each of the various tax
jurisdictions in which we operate. For the nine months ended December 31, 2009
and 2008, the income tax provision was $14.3 million and $26.1 million based on
effective income tax rates of 26.1% and 15.5%. The change in effective income
tax rate for the nine months ended December 31, 2009 and 2008 is primarily due
to the mix of income and losses in the various tax jurisdictions in which the
Company operates. We expect future effective income tax rates to fluctuate for
similar reasons.





In the
fiscal quarter ended March 31, 2009, we implemented a restructuring plan which
included a reduction in Logitech’s salaried workforce and other actions aimed at
reducing operating expenses. We incurred $20.5 million in pre-tax restructuring
charges in the fourth quarter of fiscal year 2009 and $1.5 million in the nine
months ended December 31, 2009 related to employee termination costs, contract
termination costs and other associated costs. We expect to complete the
restructuring by the end of fiscal year 2010, and incur approximately $0.5
million in additional contract termination costs.





Critical
Accounting Estimates





The
preparation of financial statements and related disclosures in conformity with
generally accepted accounting principles in the United States of America (“U.S.
GAAP”) requires the Company to make judgments, estimates and assumptions that
affect reported amounts of assets, liabilities, net sales and expenses, and the
disclosure of contingent assets and liabilities.





We
consider an accounting estimate critical if it: (i) requires management to make
judgments and estimates about matters that are inherently uncertain; and (ii) is
important to an understanding of Logitech’s financial condition and operating
results.





We
base our estimates on historical experience and on various other assumptions we
believe to be reasonable under the circumstances. Although these estimates are
based on management’s best knowledge of current events and actions that may
impact the Company in the future, actual results could differ from those
estimates. Management has discussed the development, selection and disclosure of
these critical accounting estimates with the Audit Committee of the Board of
Directors.





There
have been no significant changes during the nine months ended December 31, 2009
to the nature of the critical accounting estimates disclosed in the Management’s
Discussion and Analysis of Financial Condition and Results of Operations in our
Annual Report on Form 10-K for the fiscal year ended March 31,
2009.





23


Recent
Accounting Pronouncements




In
October 2009, the Financial Accounting Standards Board (“FASB”) published
FASB Accounting Standards Update (“ASU”) 2009-14, Certain Revenue Arrangements That
Include Software Elements,toprovide guidance for
revenue arrangements that include both tangible products and software
elements.  Under this guidance, tangible products containing software
components and non-software components that function together to deliver the
product’s essential functionality are excluded from the software revenue
guidance in Accounting Standards Codification (“ASC”) Subtopic 985-605, Software-Revenue Recognition.
In addition, hardware components of a tangible product containing software
components are always excluded from the software revenue guidance. ASU 2009-14
is effective for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010, with early adoption
permitted. We are currently evaluating the appropriate timing for the adoption
of ASU 2009-14 and its potential impact on the Company’s consolidated financial
statements.




In
October 2009, the FASB published ASU 2009-13,Multiple Deliverable Revenue
Arrangements, which addresses the accounting for multiple-deliverable
arrangements to enable vendors to account for products or services separately
rather than as a combined unit. This guidance amends the criteria in Subtopic
605-25, Revenue
Recognition--Multiple-Element Arrangements,to establish a selling price
hierarchy for determining the selling price of a deliverable, based on vendor
specific objective evidence, acceptable third party evidence, or estimates. This
guidance also eliminates the residual method of allocation and requires that
arrangement consideration be allocated at the inception of the arrangement to
all deliverables using the relative selling price method. In addition, the
disclosures required for multiple-deliverable revenue arrangements are expanded.
ASU 2009-13 is effective for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15, 2010, with early
adoption permitted. We are currently evaluating the appropriate timing for the
adoption of ASU 2009-13 and its potential impact on the Company’s consolidated
financial statements and disclosures.




Results
of Operations





Net
Sales





Net sales
by channel for the three and nine months ended December 31, 2009 and 2008 were
as follows (in thousands):








Three
      months ended December 31,
            
            
            
            
            
            Nine
      months ended December 31,2009
            
            
            2008
            
            
            Change
      %
            
            
            2009
            
            
            2008
            
            
            Change
      %Net
      sales by channel:Retail
            
            $
            564,258
            
            
            $
            545,537
            
            
            
            3
            %
            
            $
            1,290,726
            
            
            $
            1,528,921
            
            
            
            (16
            %)OEM
            
            
            50,502
            
            
            
            81,929
            
            
            
            (38
            %)
            
            
            148,237
            
            
            
            271,963
            
            
            
            (45
            %)LifeSize
            
            
            2,341
            
            
            
            -
            
            
            
            0
            %
            
            
            2,341
            
            
            
            -
            
            
            
            0
            %Total
      net sales
            
            $
            617,101
            
            
            $
            627,466
            
            
            
            (2
            %)
            
            $
            1,441,304
            
            
            $
            1,800,884
            
            
            
            (20
            %)





Retail
sales increased 3% and retail units sold grew 6% in the three months ended
December 31, 2009 compared with 2008, primarily due to improved sales of
cordless mice and Harmony remotes. Our overall retail average selling price for
the three month period was down 2% compared with the same period in 2008. Sales
of our products priced above $100 represented 17% of our retail sales in the
quarter, as compared with 15% in the prior year. Retail sales of products priced
below $60 were 67% of total retail sales in the three months ended December 31,
2009, compared with 61% in the prior year.





For the
nine months ended December 31, 2009, retail sales were negatively impacted by
the global economic downturn, resulting in consumers’ reluctance to spend, their
buying preference for lower-price products and their strong response to
promotions, as well as our customers’ alignment of inventory levels with
consumer demand. Retail units decreased 10% in the nine months ended December
31, 2009, with sales of products priced above $100 representing 14% of retail
sales, as compared with 17% in the prior year.





The
significant decline in OEM sales for the three and nine months ended December
31, 2009 compared with 2008 was attributable to the popularity of our console
microphones in 2008, which in 2009 have reached the latter stages of the typical
gaming sales cycle. Foreign currency exchange rates had no significant effect on
OEM sales for the three and nine months ended December 31, 2009.





LifeSize
net sales for the three months ended December 31, 2009 represent sales of video
conferencing units and related software and services for the period from
December 11, 2009, the date of acquisition, to the end of the fiscal
quarter.





Approximately
54% and 51% of the Company’s total net sales were denominated in currencies
other than the U.S. dollar in the three and nine months ended December 31, 2009
compared with approximately 49% and 44% in the three and nine months ended
December 31, 2008. If foreign currency exchange rates had been the same in the
three and nine months ended December 31, 2009 and 2008, our total sales decline
would have been 7% and 21% instead of 2% and 20%.





Retail
Sales by Region





The
following table presents the change in retail sales by region for the three and
nine months ended December 31, 2009 compared with the three and nine months
ended December 31, 2008.








Three
      months ended
            
            Nine
      months endedDecember
      31, 2009
            
            December
      31, 2009Change
      in retail sales by region:EMEA
            
            6%
            
            (17%)Americas
            
            8%
            
            (10%)Asia
      Pacific
            
            (17%)
            
            (22%)Total
      net sales
            
            3%
            
            (16%)








For the
three months ended December 31, 2009 compared with 2008, sales in the EMEA
region increased in all product families except gaming. Total units sold in the
EMEA region increased by 5% for the three months ended December 31, 2009
compared with the prior year. If foreign currency exchange rates had been the
same in the three months ended December 31, 2009 and 2008, EMEA region sales
would have declined 4%. Retail sell-through in the EMEA region for the third
quarter of our fiscal year 2010 declined compared with the third quarter of
fiscal year 2009, but improved significantly compared with the second quarter of
fiscal year 2010. For the nine months ended December 31, 2009, the EMEA region
experienced sales decreases in all product families, reflecting the effects of
the global economic downturn. Retail units sold declined 13% in the nine months
ended December 31, 2009 compared with the prior year. Foreign currency exchange
rates had no impact on the EMEA region sales decline for the nine months ended
December 31, 2009 compared with 2008.





The
retail sales increase in the Americas region for the three months ended December
31, 2009 compared with 2008 was driven by the remotes and pointing devices
product families. Total retail units sold in the Americas region in the three
months increased 11% over the prior year. Retail sell-through improved in the
Americas region for the three month period ended December 31, 2009 compared with
the prior year, reflecting increased consumer demand. For the nine months ended
December 31, 2009, retail sales in the Americas region declined over the prior
year in all product families, and retail units sold were approximately the same
in both nine month periods. Foreign currency exchange rates had no significant
effect on retail sales in the Americas region.





24


Retail
sales in the Asia Pacific region declined in all product families during the
three and nine months ended December 31, 2009 compared with the same period in
the prior fiscal year, as our channel partners completed their alignment of
inventory levels with consumer demand. For the three month period, sell-through
data in the Asia Pacific region showed positive growth over the same period in
the prior year, indicating improving consumer demand. Total retail units sold in
the Asia Pacific region declined 11% and 20% in the three and nine months ended
December 31, 2009. If foreign currency exchange rates had been the same in the
three and nine months ended December 31, 2009 and 2008, the Asia Pacific region
sales declines would have been 18% and 23%.




Net
Sales by Product Family





Net
retail sales by product family during the three and nine months ended December
31, 2009 and 2008 were as follows (in thousands):




Three
      months ended December 31,
            
            
            
            
            
            Nine
      months ended December 31,2009
            
            
            2008
            
            
            Change
      %
            
            
            2009
            
            
            2008
            
            
            Change
      %Net
      retail sales by product family:Retail
      - Pointing Devices
            
            $
            166,703
            
            
            $
            149,060
            
            
            
            12
            %
            
            $
            387,550
            
            
            $
            473,503
            
            
            
            (18
            %)Retail
      - Keyboards & Desktops
            
            
            104,624
            
            
            
            106,294
            
            
            
            (2
            %)
            
            
            242,539
            
            
            
            312,324
            
            
            
            (22
            %)Retail
      - Audio
            
            
            147,945
            
            
            
            152,429
            
            
            
            (3
            %)
            
            
            341,066
            
            
            
            352,459
            
            
            
            (3
            %)Retail
      - Video
            
            
            67,321
            
            
            
            71,153
            
            
            
            (5
            %)
            
            
            168,398
            
            
            
            198,631
            
            
            
            (15
            %)Retail
      - Gaming
            
            
            36,359
            
            
            
            38,111
            
            
            
            (5
            %)
            
            
            82,001
            
            
            
            107,651
            
            
            
            (24
            %)Retail
      - Remotes
            
            
            41,306
            
            
            
            28,490
            
            
            
            45
            %
            
            
            69,172
            
            
            
            84,353
            
            
            
            (18
            %)Total
      net retail sales
            
            $
            564,258
            
            
            $
            545,537
            
            
            
            3
            %
            
            $
            1,290,726
            
            
            $
            1,528,921
            
            
            
            (16
            %)





Logitech’s
Pointing Devices product family includes our mice, trackballs and other pointing
devices. Keyboards and desktops (mouse and keyboard combined) include cordless
and corded keyboards and desktops. Audio includes speakers and headset products
for the PC, the home, and mobile entertainment platforms, and wireless music
systems. Our video product family is comprised of PC webcams and WiLife video
security systems. Gaming includes console and PC gaming peripherals. The Remotes
product family is comprised of our advanced remote controls. Net sales reflect
accruals for product returns, cooperative marketing arrangements, customer
incentive programs and price protection.


Retail-Pointing
Devices





Retail
units sold in our pointing devices product family grew 18% in the three months
and decreased 10% in the nine months ended December 31, 2009 compared with the
same periods in 2008. Sales of cordless mice increased 20% and units increased
34% in the three months ended December 31, 2009 compared with the prior year.
The sales improvement was led by the V220 cordless optical mouse for notebooks,
the Performance Mouse MX and the Anywhere Mouse MX. For the nine months ended
December 31, 2009, retail sales of cordless mice decreased 14% and units
increased 3%. Retail sales of corded mice increased 1% and decreased 24%, and
units increased 9% and decreased 18% in the three and nine months ended December
31, 2009 compared with the same periods in the prior year.





Retail-Keyboards
and Desktops





Retail
unit sales of keyboards and desktops decreased 5% and 19% in the three and nine
months ended December 31, 2009 compared with the same periods ended December 31,
2008. Retail sales of cordless keyboards and desktops declined 4% and 29% in the
three and nine months ended December 31, 2009, with units increasing 3% and
decreasing 15%. Retail sales of corded keyboards and desktops were flat in the
three month period and declined 15% in the nine month period, while unit sales
decreased 10% and 23% in those periods compared with the prior
year.





Retail Audio





Retail
unit sales of our audio products increased 5% in the three months and 7% in the
nine months ended December 31, 2009 compared with the prior fiscal year. Retail
sales of headsets increased 18% and 16% in dollars, and 13% and 14% in units, in
the three and nine months compared with the prior year, led by the G35 Surround
Sound headset. Speaker sales decreased 9% in both the three and nine month
periods, with units increasing 4% and 2%. Our Ultimate Ears line of in-ear
monitors and earphones made a positive contribution to sales in both the three
and nine month periods.





Retail Video





The
decline in video retail sales for the three and nine months ended December 31,
2009 was primarily due to a product transition in our digital video security
family, in preparation for the next generation offerings to be released later in
calendar 2010. Video unit sales increased 3% in the three months and declined 5%
in the nine months ended December 31, 2009 compared with the prior fiscal year.
Retail sales of webcams increased 5% and units sold increased 4% in the three
months ended December 31, 2009. In the nine month period, webcam sales decreased
5% and units sold decreased 3%.





Retail Gaming





Without
the support of new or growing game titles, retail unit sales of our gaming
peripherals decreased 20% and 31% in the three and nine months ended December
31, 2009 compared with the same period in 2008. PC gaming sales decreased 14%
and 20% in the three and nine months, with units decreasing 27% and 31%. Console
gaming sales increased 17% and decreased 35% in the three and nine month
periods, with units decreasing 6% and 30%.





Retail Remotes





Retail
remote unit sales increased 13% in the three months and decreased 22% in the
nine months ended December 31, 2009 compared with 2008. Sales were strongest in
the Americas region. Our new Harmony 900 and the Harmony One were significant
contributors to the sales and unit increases in the three month
period.





25


OEM





OEM unit
sales declined 22% in the three months and 32% in the nine months ended December
31, 2009 compared with the same period in 2008, due to the decline in sales of
our microphones, which have reached the latter stages of the typical gaming
sales cycle. Unit sales of pointing devices decreased 6% in the three months and
16% in the nine months.





LifeSize





LifeSize
net sales for the three months ended December 31, 2009 represent sales of video
conferencing units and related software and services for the period from
December 11, 2009, the date of acquisition, to the end of the fiscal
quarter.





Gross
Profit





Gross profit for the three and nine
months ended December 31, 2009 and 2008 was as follows (in
thousands):








Three
      months ended December 31,
            
            
            
            
            
            Nine
      months ended December 31,2009
            
            
            2008
            
            
            Change
            
            
            2009
            
            
            2008
            
            
            ChangeNet
      sales
            
            $
            617,101
            
            
            $
            627,466
            
            
            
            (2
            %)
            
            $
            1,441,304
            
            
            $
            1,800,884
            
            
            
            (20
            %)Cost
      of goods sold
            
            
            408,137
            
            
            
            439,970
            
            
            
            (7
            %)
            
            
            1,002,730
            
            
            
            1,211,742
            
            
            
            (17
            %)Gross
      profit
            
            $
            208,964
            
            
            $
            187,496
            
            
            
            11
            %
            
            $
            438,574
            
            
            $
            589,142
            
            
            
            (26
            %)Gross
      margin
            
            
            33.9
            %
            
            
            29.9
            %
            
            
            13
            %
            
            
            30.4
            %
            
            
            32.7
            %
            
            
            (7
            %)








Gross
profit consists of net sales, less cost of goods sold which includes materials,
direct labor and related overhead costs, costs of manufacturing facilities,
costs of purchasing components from outside suppliers, distribution costs and
write-down of inventories.





Gross
profit improved in the three months ended December 31, 2009 compared with the
prior fiscal year primarily due to the effect on net sales of the weaker U.S.
dollar compared with the prior fiscal year, as well as the shift in channel mix
between retail and OEM. For the nine months ended December 31, 2009, gross
margin declined primarily due to lower net sales and an unfavorable shift in
product mix both between and within product categories, partially offset by the
channel shift between retail and OEM.





Operating
Expenses





Operating
expenses for the three and nine months ended December 31, 2009 and 2008 were as
follows (in thousands):








Three
      months ended December 31,
            
            
            
            
            
            Nine
      months ended December 31,2009
            
            
            2008
            
            
            Change
            
            
            2009
            
            
            2008
            
            
            ChangeMarketing
      and selling
            
            $
            87,322
            
            
            $
            86,046
            
            
            
            1
            %
            
            $
            215,095
            
            
            $
            248,066
            
            
            
            (13
            %)%
      of net sales
            
            
            14
            %
            
            
            14
            %
            
            
            
            
            
            
            15
            %
            
            
            14
            %Research
      and development
            
            
            32,931
            
            
            
            32,401
            
            
            
            2
            %
            
            
            96,116
            
            
            
            99,011
            
            
            
            (3
            %)%
      of net sales
            
            
            5
            %
            
            
            5
            %
            
            
            
            
            
            
            7
            %
            
            
            5
            %General
      and administrative
            
            
            30,284
            
            
            
            26,273
            
            
            
            15
            %
            
            
            75,204
            
            
            
            89,202
            
            
            
            (16
            %)%
      of net sales
            
            
            5
            %
            
            
            4
            %
            
            
            
            
            
            
            5
            %
            
            
            5
            %Restructuring
      Charges
            
            
            -
            
            
            
            -
            
            
            
            
            
            
            
            1,494
            
            
            
            -%
      of net sales
            
            
            0
            %
            
            
            0
            %
            
            
            
            
            
            
            0
            %
            
            
            0
            %Total
      operating expenses
            
            $
            150,537
            
            
            $
            144,720
            
            
            
            4
            %
            
            $
            387,909
            
            
            $
            436,279
            
            
            
            (11
            %)








Marketing
and Selling





Marketing
and selling expense consists of personnel and related overhead costs, corporate
and product marketing, promotions, advertising, trade shows, customer and
technical support and facilities costs.





Marketing
and selling expenses in the three months ended December 31, 2009 were
approximately the same as in the prior fiscal year, as declines in marketing
development funds were offset by higher personnel expenses. For the nine months
ended December 31, 2009, marketing and selling expenses declined due to a 12%
reduction in headcount, lower travel expenses reflecting the reduction in
headcount and cost management efforts, and declines in marketing development
funds, advertising and marketing related expenses. The decrease in marketing
costs for the nine month period compared with the prior year related to the
alignment of promotional expenditures with current sales levels and targeted
product promotion activities which occurred in the prior year. If foreign
currency exchange rates had been the same in the three months ended December 31,
2009 and 2008, the change in marketing and selling expense would have been a
decline of 3% instead of an increase of 1%. The percentage decrease in marketing
and selling expense for the nine months ended December 31, 2009 would not have
changed if foreign currency exchange rates had been the same as the nine months
ended December 31, 2008.





26


Research
and Development





Research
and development expense consists of personnel and related overhead costs,
contractors and outside consultants, supplies and materials, equipment
depreciation and facilities costs, all associated with the design and
development of new products and enhancements of existing products.





The 2%
increase in research and development expense for the three months ended December
31, 2009 compared with the same period in the prior year reflects a slight
increase in personnel costs. The 3% decrease in research and development expense
for the nine months ended December 31, 2009 compared with 2008 reflected lower
travel costs resulting from cost containment efforts. If foreign currency
exchange rates had been the same in the three months ended December 31, 2009 and
2008, the change in research and development expense would have been a decline
of 2% instead of an increase of 2%. The percentage decrease in research and
development expenses for the nine months ended December 31, 2009 would not have
changed if foreign currency exchange rates had been the same as the nine months
ended December 31, 2008.





General
and Administrative





General
and administrative expense consists primarily of personnel and related overhead
and facilities costs for the finance, information systems, executive, human
resources and legal functions.





General
and administrative expense increased 15% in the three months ended December 31,
2009 compared with the same period in the prior fiscal year due to $5.8 million
in transaction costs related to the acquisition of LifeSize Communications,
which occurred in December 2009. For the nine months ended December 31, 2009,
the LifeSize transaction costs were more than offset by the decline in personnel
costs resulting from a 25% reduction in headcount compared with the same period
in the prior year. If foreign currency exchange rates had been the same in the
three months ended December 31, 2009 and 2008, the increase in general and
administrative expenses would have been 13% instead of 15%. The decrease in
general and administrative expenses for the nine months ended December 31, 2009
would not have changed if foreign currency exchange rates had been the same as
the nine months ended December 31, 2008.





Restructuring
Charges





Restructuring
charges consist of termination benefits, asset impairment charges, contract
termination costs and other charges associated with the restructuring plan
initiated in January 2009. We completed a majority of the restructuring activity
during the fourth quarter of fiscal year 2009. We incurred pre-tax restructuring
charges of $22.0 million in the period from January 1, 2009 to December 31,
2009, related to employee termination costs, contract termination costs and
other associated costs. We expect to complete the restructuring by the end of
fiscal year 2010, and incur approximately $0.5 million in additional contract
termination costs.





The
following table summarizes restructuring related activities during the nine
months ended December 31, 2009 (in thousands):








Total
            
            
            Termination
      Benefits
            
            
            Contract
      Termination Costs
            
            
            OtherBalance
      at March 31, 2009
            
            $
            3,794
            
            
            $
            3,779
            
            
            $
            15
            
            
            $
            -Charges
            
            
            1,449
            
            
            
            1,366
            
            
            
            83
            
            
            
            -Cash
      payments
            
            
            (4,245
            )
            
            
            (4,220
            )
            
            
            (25
            )
            
            
            -Other
            
            
            (8
            )
            
            
            (4
            )
            
            
            (4
            )
            
            
            -Foreign
      exchange
            
            
            91
            
            
            
            91
            
            
            
            -
            
            
            
            -Balance
      at June 30, 2009
            
            $
            1,081
            
            
            $
            1,012
            
            
            $
            69
            
            
            $
            -Charges
            
            
            45
            
            
            
            (22
            )
            
            
            9
            
            
            
            58Cash
      payments
            
            
            (718
            )
            
            
            (698
            )
            
            
            (20
            )
            
            
            -Other
            
            
            (4
            )
            
            
            63
            
            
            
            -
            
            
            
            (67
            )Foreign
      exchange
            
            
            19
            
            
            
            19
            
            
            
            -
            
            
            
            -Balance
      at September 30, 2009
            
            $
            423
            
            
            $
            374
            
            
            $
            58
            
            
            $
            (9
            )Charges
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Cash
      payments
            
            
            (63
            )
            
            
            (43
            )
            
            
            (20
            )
            
            
            -Other
            
            
            (143
            )
            
            
            (143
            )
            
            
            -
            
            
            
            -Foreign
      exchange
            
            
            (7
            )
            
            
            (4
            )
            
            
            -
            
            
            
            (3
            )Balance
      at December 31, 2009
            
            $
            210
            
            
            $
            184
            
            
            $
            38
            
            
            $
            (12
            )








Interest
Income, Net





Interest
income and expense for the three and nine months ended December 31, 2009 and
2008 were as follows (in thousands):








Three
      months ended December 31,
            
            
            
            
            
            Nine
      months ended December 31,2009
            
            
            2008
            
            
            Change
            
            
            2009
            
            
            2008
            
            
            ChangeInterest
      income
            
            $
            668
            
            
            $
            2,223
            
            
            
            (70
            %)
            
            $
            1,913
            
            
            $
            7,680
            
            
            
            (75
            %)Interest
      expense
            
            
            (254
            )
            
            
            (11
            )
            
            
            (2209
            %)
            
            
            (268
            )
            
            
            (141
            )
            
            
            (90
            %)Interest
      income, net
            
            $
            414
            
            
            $
            2,212
            
            
            
            (81
            %)
            
            $
            1,645
            
            
            $
            7,539
            
            
            
            (78
            %)





Interest
income was lower for the three and nine months ended December 31, 2009 due to
lower invested balances and significantly lower interest rates compared with the
prior year.





27


Other
Expense, Net





Other
income and expense for the three and nine months ended December 31, 2009 and
2008 were as follows (in thousands):








Three
      months ended December 31,
            
            
            
            
            
            Nine
      months ended December 31,2009
            
            
            2008
            
            
            Change
            
            
            2009
            
            
            2008
            
            
            ChangeForeign
      currency exchange gains(losses),
      net
            
            $
            1,998
            
            
            $
            9,824
            
            
            
            (80
            %)
            
            $
            860
            
            
            $
            10,995
            
            
            
            (92
            %)Insurance
      investment income (loss)
            
            
            815
            
            
            
            (1,089
            )
            
            
            (175
            %)
            
            
            1,219
            
            
            
            (1,454
            )
            
            
            (184
            %)Write-down
      of investments
            
            
            -
            
            
            
            (785
            )
            
            
            (100
            %)
            
            
            -
            
            
            
            (1,764
            )
            
            
            (100
            %)Other,
      net
            
            
            239
            
            
            
            151
            
            
            
            58
            %
            
            
            337
            
            
            
            32
            
            
            
            953
            %Other
      income, net
            
            $
            3,052
            
            
            $
            8,101
            
            
            
            (62
            %)
            
            $
            2,416
            
            
            $
            7,809
            
            
            
            (69
            %)





Foreign
currency exchange gains or losses relate to balances denominated in currencies
other than the functional currency of a particular subsidiary or to the sale of
currencies. The gains in the three and nine months ended December 31, 2009 were
lower compared with higher gains recognized in the prior year related to sales
of Euros for U.S. dollars. We do not speculate in currency positions, but we are
alert to opportunities to maximize foreign exchange gains.





Insurance
investment income or loss represents changes in the cash surrender value of
Company-owned life insurance contracts related to a management deferred
compensation plan offered by one of the Company’s subsidiaries.





During
the three months ended December 31, 2008, we recorded unrealized losses of $1.2
million related to other-than-temporary declines in the estimated fair value of
our auction-rate investment securities; $0.5 million of the loss represented a
reversal of the unrealized temporary gain recorded in accumulated other
comprehensive loss during the three months ended September 30, 2008. During the
nine months ended December 31, 2008, we recorded unrealized losses of $1.8
million related to other-than-temporary declines in the estimated fair value of
our auction-rate investment securities.





Provision
for Income Taxes





The
provision for income taxes and effective income tax rates for the three and nine
months ended December 31, 2009 and 2008 were as follows (in
thousands):








Three
      months ended December 31,
            
            
            
            
            
            Nine
      months ended December 31,2009
            
            
            2008
            
            
            Change
            
            
            2009
            
            
            2008
            
            
            ChangeProvision
      for income taxes
            
            $
            4,807
            
            
            $
            12,596
            
            
            
            (62
            %)
            
            $
            14,262
            
            
            $
            26,101
            
            
            
            (45
            %)Effective
      income tax rate
            
            
            7.8
            %
            
            
            23.7
            %
            
            
            
            
            
            
            26.1
            %
            
            
            15.5
            %








The
provision for income taxes consists of income and withholding taxes. Logitech
operates in multiple jurisdictions and its profits are taxed pursuant to tax
laws of these jurisdictions. The Company’s effective income tax rate may be
affected by changes in tax laws or interpretations of tax laws in any given
jurisdiction, utilization of net operating loss and tax credit carryforwards,
changes in geographical mix of income and expense, and changes in management’s
assessment of matters such as the ability to realize deferred tax
assets.





Prior to
the first quarter of fiscal year 2010, the Company’s effective income tax rate
was calculated using an estimate of its annual pre-tax income. Due to the impact
of the economic downturn, management determined that, for the three months ended
June 30, 2009 and September 30, 2009, a reliable estimate of its annual pre-tax
income and related annual effective income tax rate could not be
made.  Therefore, the Company used the actual year-to-date effective
income tax rate for those periods.





For the
three and nine months ended December 31, 2009, management has determined that a
reliable estimate of its annual pre-tax income can be made. The Company’s
effective income tax rate is therefore calculated using an estimate of its
annual pre-tax income. For the three months ended December 31, 2009 and 2008,
the income tax provision was $4.8 million and $12.6 million based on effective
income tax rates of 7.8% and 23.7%. For the nine months ended December 31, 2009
and 2008, the income tax provision was $14.3 million and $26.1 million based on
effective income tax rates of 26.1% and 15.5%.





The
change in effective income tax rates for the three and nine months ended
December 31, 2009 compared with the same periods in 2008 is primarily due to the
mix of income and losses in the various tax jurisdictions in which the Company
operates.





Liquidity
and Capital Resources





Cash
Balances, Available Borrowings, and Capital Resources





At
December 31, 2009, net working capital was $327.6 million, compared with $709.4
million at March 31, 2009. The decrease in working capital was primarily related
to the use of cash for the acquisition of LifeSize and higher accounts
payable.





During
the nine months ended December 31, 2009, operating activities generated cash of
$299.4 million. Our largest sources of operating cash flows were increased
accounts payable and accrued liabilities. We invested $388.8 million, net of
cash acquired, during the nine months ended December 31, 2009, primarily for the
acquisition of LifeSize. We also invested $26.4 million in tooling, computer
hardware, and software. Net cash used in financing activities was $97.2 million,
primarily due to the purchase of treasury stock and the repayment of the short
and long-term debt assumed in the LifeSize acquisition, offset in part by
proceeds from employee stock purchases and the exercise of stock
options.





At
December 31, 2009, we had cash and cash equivalents of $281.1 million and
investment securities of $1.6 million. Cash and cash equivalents are carried at
cost, which is equivalent to fair value. Investment securities are carried at
fair value, determined by estimating the value of the underlying collateral
using published mortgage indices or interest rate spreads for comparably rated
collateral and applying discounted cash flow or option pricing methods to the
estimated value. The Company considers the inputs used to measure the fair value
of its investment securities as Level 3 within the fair value hierarchy. During
the nine months ended December 31, 2009, Logitech’s management decided that sale
or realization of proceeds from the sale of these investment securities is not
expected within the Company’s normal operating cycle of one year, and hence the
securities were reclassified from short-term investments to non-current assets.
Further changes in the fair value of these investment securities would not
materially affect the Company’s liquidity or capital resources.





28


The
Company has credit lines with several European and Asian banks totaling $148.6
million as of December 31, 2009. As is common for businesses in European and
Asian countries, these credit lines are uncommitted and unsecured. Despite the
lack of formal commitments from the banks, we believe that these lines of credit
will continue to be made available because of our long-standing relationships
with these banks. At December 31, 2009, the Company had no outstanding
borrowings under these lines of credit. There are no financial covenants under
these lines of credit with which the Company must comply.





The
Company has financed its operating and capital requirements primarily through
cash flow from operations and, to a lesser extent, from capital markets and bank
borrowings. The Company’s normal short-term liquidity and long-term capital
resource requirements are provided from three sources: cash flow generated from
operations, cash and cash equivalents on hand, and borrowings, as needed, under
our credit facilities.





Based
upon our available cash balances and credit lines, and the trend of our
historical cash flow generation, we believe we have sufficient liquidity to fund
operations for the foreseeable future.




Cash
Flow from Operating Activities





The
following table presents selected financial information and statistics as of
December 31, 2009 and 2008 (dollars in thousands):








December
      31,2009
            
            
            2008Accounts
      receivable, net
            
            $
            248,625
            
            
            $
            374,968Inventories
            
            
            235,012
            
            
            
            339,518Working
      capital
            
            
            327,607
            
            
            
            740,721Days
      sales in accounts receivable (DSO)(1)
            
            36
      days
            
            
            54
      daysInventory
      turnover (ITO) (2)
            
            
            6.9
            x
            
            
            5.2
            xNet
      cash provided by operating activities
            
            $
            299,350
            
            
            $
            174,969




(1)
            DSO is determined using ending
      accounts receivable as of the most recent quarter-end and net sales for
      the most recent quarter.


(2)
            ITO
      is determined using ending inventories and annualized cost of goods sold
      (based on the most recent quarterly cost of goods
  sold).





Net cash
provided by operating activities increased to $299.4 million in the nine months
ended December 31, 2009, from $175.0 million for the same period in the prior
year. The increased cash flow resulted from lower accounts receivable and
inventory levels and increased accounts payable.





DSO for
the three months ended December 31, 2009 was 18 days lower than the same period
in the prior year, primarily due to lower accounts receivable at December 31,
2009 which resulted from improved sales linearity during the quarter. Typical
payment terms require customers to pay for product sales generally within 30 to
60 days. However, terms may vary by customer type, by country and by selling
season.  Extended payment terms are sometimes offered to a limited
number of customers during the second and third fiscal quarters. The Company
does not modify payment terms on existing receivables, but may offer discounts
for early payment.





Inventory
turns for the nine months ended December 31, 2009 improved over the nine months
ended December 31, 2008, as we reduced inventory levels in line with the weak
demand environment.





Cash
Flow from Investing Activities





Cash
flows from investing activities during the nine months ended December 31, 2009
and 2008 were as follows (in thousands):





Nine
      months ended December 31,2009
            
            
            2008Purchases
      of property, plant and equipment
            
            $
            (26,438
            )
            
            $
            (38,631
            )Acquisitions,
      net of cash acquired
            
            
            (388,807
            )
            
            
            (64,430
            )Proceeds
      from cash surrender of life insurance policies
            
            
            813
            
            
            
            -Premiums
      paid on cash surrender value life insurance policies
            
            
            -
            
            
            
            (427
            )Net
      cash used in investing activities
            
            $
            (414,432
            )
            
            $
            (103,488
            )








Our
capital expenditures during the nine months ended December 31, 2009 and 2008
were principally for computer hardware and software purchases and normal
expenditures for tooling. Purchasing activity was lower in the nine months ended
December 31, 2009, as we focused our cash outlays on critical capital
needs.





In the
nine months ended December 31, 2009, we acquired LifeSize Communications for
$378.6 million, net of cash acquired of $3.7 million, and certain assets of TV
Compass for $10.0 million.





In the
nine months ended December 31, 2008, we acquired the Ultimate Ears companies for
$31.8 million, net of cash acquired of $0.2 million and including $0.5 million
in transaction costs. During the same period, we also acquired SightSpeed for
$31.1 million in cash including transaction costs of $1.0 million.





Cash
Flow from Financing Activities





The
following tables present information on our cash flows from financing
activities, including information on our share repurchases during the nine
months ended December 31, 2009 and 2008 (in thousands except per share
amounts):








Nine
      months ended December 31,2009
            
            
            2008Repayment
      of short and long-term debt
            
            $
            (13,601
            )
            
            $
            -Purchases
      of treasury shares
            
            
            (101,267
            )
            
            
            (78,870
            )Proceeds
      from sale of shares upon exercise of options and purchase
      rights
            
            
            15,979
            
            
            
            23,496Excess
      tax benefits from share-based compensation
            
            
            1,708
            
            
            
            6,641Net
      cash used in financing activities
            
            $
            (97,181
            )
            
            $
            (48,733
            )Nine
      months ended December 31,2009
            
            
            
            2008Number
      of shares repurchased
            
            
            5,838
            
            
            
            2,803Value
      of shares repurchased
            
            $
            101,267
            
            
            $
            78,870Average
      price per share
            
            $
            17.35
            
            
            $
            28.14








During
the nine months ended December 31, 2009, we repaid $13.6 million of short and
long-term debt assumed when we acquired LifeSize Communications. We also
repurchased 5.8 million shares for $101.3 million under the Company’s June 2007
buyback program. The sale of shares upon exercise of options and purchase rights
pursuant to the Company’s stock plans realized $16.0 million. Tax benefits
recognized on the exercise of share-based payment awards provided $1.7
million.





During
the nine months ended December 31, 2008, we repurchased 2.8 million shares for
$78.9 million under our June 2007 buyback program. The sale of shares upon
exercise of options realized $23.5 million. In addition, cash of $6.6 million
was provided by tax benefits recognized on the exercise of share-based payment
awards.





29


Cash
Outlook





We have
financed our operations and capital requirements primarily through cash flow
from operations and, to a lesser extent, capital markets and bank borrowings.
Our working capital requirements and capital expenditures may increase to
support future expansion of Logitech operations. Future acquisitions or
expansion of our operations may be significant and may require the use of cash.
In addition, future deterioration of global economic conditions could adversely
affect our operations and may also require the use of cash.





In June
2007, we announced the approval by our Board of Directors of a share buyback
program authorizing the repurchase of up to $250 million of our shares. The
approved amount remaining under the June 2007 program at December 31, 2009 was
$25.0 million. The program expires in June 2010. We lowered our share repurchase
activity beginning in the second half of fiscal year 2009 in order to maximize
our cash position. Beginning July 29, 2009, the Company resumed the repurchase
of its shares under the June 2007 share repurchase program and repurchased 5.8
million shares on the open market for $101.3 million, calculated based on
exchange rates on the repurchase dates. No shares were repurchased during the
three months ended December 31, 2009.





In
September 2008, our Board of Directors approved a new share buyback program,
which authorizes the Company to invest up to $250 million to purchase its own
shares.  The September 2008 program is subject to the approval of the
Swiss Takeover Board and the completion of our current share buyback program of
$250 million.





In
January 2009, Logitech initiated a restructuring plan in order to reduce
operating expenses and improve financial results in response to deteriorating
global economic conditions. We incurred pre-tax restructuring charges of $20.5
million in the three months ended March 31, 2009 and $1.5 million in the nine
months ended December 31, 2009. During the remainder of fiscal year 2010, we
expect to incur approximately $0.5 million in additional contract termination
costs. We expect to complete the restructuring in fiscal year 2010.





In
December 2006, the Company acquired Slim Devices, Inc., a privately held company
specializing in network-based audio systems for digital music. The purchase
agreement provides for a possible performance-based payment, payable in the
first calendar quarter of 2010. The performance-based payment is based on net
revenues from the sale of products and services in calendar year 2009 derived
from Slim Devices’ technology. The maximum performance-based payment is $89.5
million, and no payment is due if the applicable net revenues total $40.0
million or less. As of December 31, 2009, no amounts are payable towards
performance-based payments under our acquisition agreement.





In
November 2007, the Company acquired WiLife, Inc., a privately held company that
manufactures PC-based video cameras for self-monitoring a home or a small
business.  The purchase agreement provides for a possible
performance-based payment, payable in the first calendar quarter of 2011. The
performance-based payment is based on net revenues attributed to WiLife during
calendar year 2010. No payment is due if the applicable net revenues total $40.0
million or less. The maximum performance-based payment is $64.0
million.  The total performance-based payment amount, if any, will be
recorded in goodwill and will not be known until the end of calendar year
2010.





On
February 20, 2009, California budget legislation was enacted that will affect
the methodology used by corporate taxpayers to apportion income to California.
These changes will become effective for the Company's fiscal year ending March
31, 2012. The Company believes that these changes will not have a material
impact on its results of operations or financial condition.





In fiscal
year 2009, the U.S. Internal Revenue Service initiated an examination of the
Company’s U.S. subsidiary for fiscal year 2006. During the third quarter of
fiscal year 2010, the Internal Revenue Service expanded its examination to
include fiscal year 2007. As of December 31, 2009, the Company is not able to
estimate the potential future liability, if any, which may result from this
examination.





Other
contractual obligations and commitments of the Company which require cash are
described in the following sections.





Over the
past several years, we have generated positive cash flow from our operating
activities, including cash from operations of $200.6 million in fiscal year 2009
and $299.4 million in the nine months ended December 31, 2009. Despite the
uncertain economic environment, we believe that our cash and cash equivalents,
cash flow generated from operations, and available borrowings under our bank
lines of credit will be sufficient to fund our operations for the foreseeable
future.




Contractual
Obligations and Commitments





As of
December 31, 2009, the Company’s outstanding contractual obligations and
commitments included the following (in thousands), in addition to the
performance based payments we may have to make as part of our acquisition
agreements described above:








December
      31, 2009Operating
      leases
            
            $
            49,443Purchase
      commitments - inventory
            
            
            132,451Purchase
      obligations - capital expenditures
            
            
            15,224Purchase
      obligations - operating expenses
            
            
            34,863Income
      taxes payable - non-current
            
            
            116,064Obligation
      for management deferred compensation
            
            
            10,504Defined
      benefit pension plan liability
            
            
            20,375Other
      long-term liabilities
            
            
            8,868Total
      contractual obligations and commitments
            
            $
            387,792





The Company
leases facilities under operating leases, certain of which require it to pay
property taxes, insurance and maintenance costs. Operating leases for facilities
are generally renewable at the Company’s option and usually include escalation
clauses linked to inflation. The remaining terms on our non-cancelable operating
leases expire in various years through 2027.





Commitments
for inventory purchases are made in the normal course of business to original
design manufacturers, contract manufacturers and other suppliers, and are
expected to be fulfilled by August 31, 2010. Purchase obligations for future
capital expenditures support product development activities and ongoing and
expanded operations. At December 31, 2009, these purchase obligations primarily
related to commitments for manufacturing equipment and tooling. Purchase
obligations for operating expenses related to consulting, marketing
arrangements, advertising and other services. Although open purchase commitments
are considered enforceable and legally binding, the terms generally allow us the
option to reschedule and adjust our requirements based on business needs prior
to the delivery of the purchases.





The
non-current income taxes payable relates to the net unrecognized tax benefits
and related accrued interest and penalties of uncertain tax positions. We are
unable make a reasonably reliable estimate of the period in which a cash
settlement may be made with the tax authorities.





For
further detail about our contractual obligations and commitments, please refer
to our Annual Report on Form 10-K for the fiscal year ended March 31,
2009.




30


Off-Balance
Sheet Arrangements




The
Company has not entered into any transactions with unconsolidated entities
whereby we have financial guarantees, subordinated retained interests,
derivative instruments or other contingent arrangements that expose us to
material continuing risks, contingent liabilities, or any other obligation under
a variable interest in an unconsolidated entity that provides financing,
liquidity, market risk or credit risk support to the Company.





Guarantees





The
Company has guaranteed the purchase obligations of some of its contract
manufacturers and original design manufacturers to certain component suppliers.
These guarantees generally have a term of one year and are automatically
extended for one or more years as long as a liability exists. The amount of the
purchase obligations of these manufacturers varies over time, and therefore the
amounts subject to Logitech’s guarantees similarly vary. At December 31, 2009,
there were no outstanding guaranteed purchase obligations. The maximum total
potential future payments under three of the five guarantee arrangements is
limited to $30.8 million. The remaining two guarantees are limited to purchases
of specified components from the named suppliers. The Company does not believe,
based on historical experience and information currently available, that it is
probable that any amounts will be required to be paid under these guarantee
arrangements.





Logitech
International S.A., the parent holding company, has guaranteed certain
contingent liabilities of various subsidiaries related to specific transactions
occurring in the normal course of business. The maximum amount of the guarantees
was $5.3 million as of December 31, 2009. As of December 31, 2009, $5.3 million
was outstanding under these guarantees. The parent holding company has also
guaranteed the purchases of one of its subsidiaries under two guarantee
agreements. These guarantees do not specify a maximum amount. As of December 31,
2009, $8.7 million was outstanding under these guarantees.





Indemnifications





Logitech
indemnifies some of its suppliers and customers for losses arising from matters
such as intellectual property rights and product safety defects, subject to
certain restrictions. The scope of these indemnities varies, but in some
instances, includes indemnification for damages and expenses, including
reasonable attorneys’ fees. No amounts have been accrued for indemnification
provisions at December 31, 2009. The Company does not believe, based on
historical experience and information currently available, that it is probable
that any amounts will be required to be paid under its indemnification
arrangements.





31


ITEM
3.   QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET
RISK





Market
Risk





Market
risk represents the potential for loss due to adverse changes in the fair value
of financial instruments. As a global concern, the Company faces exposure to
adverse movements in foreign currency exchange rates and interest rates. These
exposures may change over time as business practices evolve and could have a
material adverse impact on the Company’s financial results.





Foreign
Currency Exchange Rates





The
Company is exposed to foreign currency exchange rate risk as it transacts
business in multiple foreign currencies, including exposure related to
anticipated sales, anticipated purchases and assets and liabilities denominated
in currencies other than the U.S. dollar. Logitech transacts business in over 30
currencies worldwide, of which the most significant to operations are the
Chinese renminbi (“CNY”), euro, British pound, Taiwanese dollar, Japanese yen,
Canadian dollar and Mexican peso. The functional currency of the Company’s
operations is primarily the U.S. dollar. To a lesser extent, certain operations
use the euro, Swiss franc, Japanese yen or the local currency of the country as
their functional currencies. Accordingly, unrealized foreign currency gains or
losses resulting from the translation of net assets or liabilities denominated
in foreign currencies to the U.S. dollar are accumulated in the cumulative
translation adjustment component of other comprehensive loss in shareholders’
equity.





The table
below provides information about the Company’s underlying transactions that are
sensitive to foreign exchange rate changes, primarily assets and liabilities
denominated in currencies other than the functional currency, where the net
exposure is greater than $0.5 million at December 31, 2009. The table below
represents the U.S. dollar impact on earnings of a 10% appreciation and a 10%
depreciation of the functional currency as compared with the transaction
currency (in thousands):








Functional
    Currency
            Transaction
      Currency
            
            Net
      Exposed Long (Short) Currency Position
            
            
            FX
      Gain (Loss) From 10% Appreciation of Functional Currency
            
            
            FX
      Gain (Loss) From 10% Depreciation of Functional CurrencyU.S.
      dollar
            Chinese
      renminbi
            
            $
            29,476
            
            
            $
            (2,680
            )
            
            $
            3,275Euro
            British
      pound
            
            
            25,561
            
            
            
            (2,324
            )
            
            
            2,840Taiwanese
      dollar
            U.S.
      dollar
            
            
            14,066
            
            
            
            (1,279
            )
            
            
            1,563Japanese
      yen
            U.S.
      dollar
            
            
            (11,802
            )
            
            
            1,073
            
            
            
            (1,311
            )U.S.
      dollar
            Canadian
      dollar
            
            
            11,254
            
            
            
            (1,023
            )
            
            
            1,250Mexican
      peso
            U.S.
      dollar
            
            
            (9,187
            )
            
            
            835
            
            
            
            (1,021
            )Swiss
      franc
            Euro
            
            
            (2,410
            )
            
            
            219
            
            
            
            (268
            )Swiss
      franc
            U.S.
      dollar
            
            
            (1,926
            )
            
            
            175
            
            
            
            (214
            )Euro
            U.S.
      dollar
            
            
            (1,183
            )
            
            
            108
            
            
            
            (131
            )USD
            Hong
      Kong Dollar
            
            
            (1,106
            )
            
            
            101
            
            
            
            (123
            )Euro
            Swedish
      krona
            
            
            (691
            )
            
            
            63
            
            
            
            (77
            )Euro
            Croatian
      kuna
            
            
            565
            
            
            
            (51
            )
            
            
            63$
            52,617
            
            
            $
            (4,783
            )
            
            $
            5,846








Long
currency positions represent net assets being held in the transaction currency
while short currency positions represent net liabilities being held in the
transaction currency.





The
Company’s principal manufacturing operations are located in China, with much of
its component and raw material costs transacted in CNY. However, the functional
currency of its Chinese operating subsidiary is the U.S. dollar as its sales and
trade receivables are transacted in U.S. dollars. To hedge against any potential
significant appreciation of the CNY, the Company holds a portion of its cash
investments in CNY-denominated deposit accounts. At December 31, 2009, net
assets held in CNY totaled $29.5 million.  The Company continues to
evaluate the level of net assets held in CNY relative to component and raw
material purchases and interest rates on cash equivalents.





The
Company enters into foreign exchange forward contracts to hedge against exposure
to changes in foreign currency exchange rates related to its subsidiaries’
forecasted inventory purchases. The Company has designated these derivatives as
cash flow hedges. Logitech does not use derivative financial instruments for
trading or speculative purposes. These hedging contracts generally mature within
six months, and are denominated in the same currency as the underlying
transactions. Gains and losses in the fair value of the effective portion of the
hedges are deferred as a component of accumulated other comprehensive loss until
the hedged inventory purchases are sold, at which time the gains or losses are
reclassified to cost of goods sold. The notional amounts of foreign exchange
forward contracts outstanding related to forecasted inventory purchases were
$39.9 million (27.9 million euros) at December 31, 2009. The notional amount
represents the future cash flows under contracts to purchase foreign currencies.
Deferred realized losses of $1.0 million are recorded in accumulated other
comprehensive loss at December 31, 2009, and are expected to be reclassified to
cost of goods sold when the related inventory is sold. Deferred unrealized gains
of $1.8 million related to open cash flow hedges are also recorded in
accumulated other comprehensive loss as of December 31, 2009 and will be
revalued in future periods until the related inventory is sold, at which time
the resulting gains or losses will be reclassified to cost of good
sold.





The
Company also enters into foreign exchange forward contracts to reduce the
short-term effects of foreign currency fluctuations on certain foreign currency
receivables or payables. These forward contracts generally mature within one to
three months. The Company may also enter into foreign exchange swap contracts to
economically extend the terms of its foreign exchange forward contracts. The
gains or losses on foreign exchange forward contracts are recognized in earnings
based on the changes in fair value.





The
notional amounts of foreign exchange forward contracts outstanding at December
31, 2009 relating to foreign currency receivables or payables were $15.3
million.  Open forward contracts as of December 31, 2009 consisted of
contracts in British pounds to purchase euros at a future date at a
pre-determined exchange rate. The notional amounts of foreign exchange swap
contracts outstanding at December 31, 2009 were $37.9 million. Swap contracts
outstanding at December 31, 2009 consisted of contracts in Mexican pesos,
Japanese yen, Canadian dollars and British pounds.





If the
U.S. dollar had appreciated by 10% compared with the hedged foreign currency, an
unrealized gain of $9.1 million in our forward foreign exchange contract
portfolio would have occurred. If the U.S. dollar had depreciated by 10%
compared with the hedged foreign currency, a $5.6 million unrealized loss in our
forward foreign exchange contract portfolio would have occurred.





Interest
Rates





Changes
in interest rates could impact the Company’s anticipated interest income on its
cash equivalents and investment securities and interest expense on variable rate
short-term debt. The Company prepared sensitivity analyses of its interest rate
exposures to assess the impact of hypothetical changes in interest rates. Based
on the results of these analyses, a 100 basis point decrease or increase in
interest rates from the December 31, 2009 and March 31, 2009 period end rates
would not have a material effect on the Company’s results of operations or cash
flows.


32


ITEM
4.   CONTROLS AND PROCEDURES





Disclosure
Controls and Procedures





Logitech’s
Chief Executive Officer and Chief Financial Officer, after evaluating the
effectiveness of our disclosure controls and procedures (as defined in Exchange
Act Rule 13a-15(e)) as of the end of the period covered by this Form 10-Q, have
concluded that, as of such date, our disclosure controls and procedures are
effective.





Disclosure
controls are controls and procedures designed to reasonably assure that
information required to be disclosed in our reports filed under the Exchange
Act, such as this Form 10-Q, is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission’s
rules and forms. Disclosure controls are also designed to reasonably assure that
this information is accumulated and communicated to our management, including
the Chief Executive Officer and the Chief Financial Officer, to allow timely
decisions regarding required disclosure.





Changes
in Internal Control over Financial Reporting





There
have been no changes in the Company’s internal control over financial reporting
during the fiscal quarter ended December 31, 2009, that have materially
affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.


33


PART
II – OTHER INFORMATION





ITEM
1.   LEGAL PROCEEDINGS





From time to time, we become involved in claims and legal proceedings which
arise in the ordinary course of our business. We are currently subject to
several such claims and a small number of legal proceedings. We presently do not
believe that the resolution of these claims and legal proceedings will have a
material impact on our results of operations or financial
condition.





ITEM
1A.   RISK FACTORS





The
strength and timing of the anticipated improvement of our business is uncertain,
and economic conditions have and could continue to significantly harm our
operating results.





The
global economic recession has had a significant negative impact on our
business.  We anticipate that our business and operating results will
improve, in part as a result of the steps we have taken in response to general
economic conditions. However, the strength and precise timing of the anticipated
improvement of our business is uncertain. In addition, the recession may
continue to have the following negative effects on our business, operating
results, and financial condition:





·
            Reduced
      sales to our customers, reflecting current and anticipated lower end-user
      consumer demand for our products as well as a shift in consumer buying
      patterns toward lower-priced
products.





·
            Reduced
      sales to those customers that continue to lower their required inventory
      levels.





·
            Risk
      of further customer bankruptcy or business failures, resulting in lower
      sales levels and increases in bad debt write-offs and receivables
      reserves.





·
            Higher
      costs for customer incentive programs, cooperative marketing arrangements
      and price protection used to stimulate demand, which lowers our net
      sales.





·
            Increased
      downward pressure on our product prices as we lower prices to stimulate
      demand or reduce inventory, or as competitors lower prices to gain market
      share in slow-growing or shrinking
markets.





·
            Product
      returns in excess of our historical experience rate, resulting in higher
      returns reserves rates.





·
            Risk
      of excess and obsolete inventories.





·
            Financial
      distress or bankruptcy of key suppliers, resulting in insufficient product
      quantities to meet demand for particular
  products.





·
            Risk
      of counterparty failures due to continuing stress on financial
      institutions, which may negatively impact cash, cash equivalents and
      investment securities.





If our
business does not improve as we expect, or if global economic conditions
deteriorate, our operating results in a given quarter could be below the
expectations of financial analysts and investors, which could cause the price of
our shares to decline.





Our
operating results are difficult to predict and fluctuations in results may cause
volatility in the price of our shares.





Our
revenues and profitability are difficult to predict due to the nature of the
markets in which we compete and for many other reasons, including the
following:





·
            Our
      operating results are highly dependent on the volume and timing of orders
      received during the quarter, which are difficult to forecast. Customers
      generally order on an as-needed basis and we typically do not obtain firm,
      long-term purchase commitments from our customers. As a result, our
      revenues in any quarter depend primarily on orders booked and shipped in
      that quarter.





·
            A
      significant portion of our quarterly retail sales typically occurs in the
      last weeks of each quarter, further increasing the difficulty in
      predicting quarterly revenues and
profitability.





·
            We
      must incur a large portion of our costs in advance of sales orders,
      because we must plan research and production, order components, buy
      tooling equipment, and enter into development, sales and marketing, and
      other operating commitments prior to obtaining firm commitments from our
      customers. This makes it difficult for us to rapidly adjust our costs
      during the quarter in response to a revenue shortfall, which could
      adversely affect our operating
results.





·
            Fluctuations
      in currency exchange rates can impact our revenues, expenses and
      profitability because we report our financial statements in U.S. dollars,
      whereas a significant portion of our revenues and expenses are in other
      currencies. We attempt to adjust product prices over time to offset the
      impact of currency movements. However, the weakness in consumer spending
      caused by the current global economic recession has limited our ability to
      increase local currency selling prices, which has negatively affected and
      may continue to negatively affect our ability to offset the impact of
      currency fluctuations.





Because our operating results are difficult to predict, our results may be below
the expectations of financial analysts and investors, which could cause the
price of our shares to decline.





34


If we fail to successfully innovate in our current and emerging product
categories, our business and operating results could suffer.





The
personal peripherals industry is characterized by short product life cycles,
frequent new product introductions, rapidly changing technology and evolving
industry standards. As a result, we must continually innovate in our current and
emerging product categories, introduce new products and technologies, and
enhance existing products in order to remain competitive.





The success of our products depends on several factors, including our ability
to:





·
            identify
      new feature or product
opportunities;





·
            anticipate
      technology, market trends and consumer
demands;





·
            develop
      innovative and reliable new products and enhancements in a cost-effective
      and timely manner;  and





·
            distinguish
      our products from those of our
competitors.





If we do not execute on these factors successfully, products that we introduce
or technologies or standards that we adopt may not gain widespread commercial
acceptance, and our business and operating results could suffer. In addition, if
we do not continue to distinguish our products, particularly our retail
products, through distinctive, technologically advanced features, designs, and
services, as well as continue to build and strengthen our brand recognition and
our access to distribution channels, our business could be harmed.





We
may encounter difficulties with our acquisition of LifeSize Communications, and
may not realize the anticipated benefits of the acquisition.





In
December 2009, we acquired LifeSize Communications, Inc., a privately-held
company providing high definition video communication solutions. This
acquisition is part of the Company’s strategy to acquire, when appropriate,
companies that have products, personnel and technologies that complement our
strategic direction and roadmap.





Our
acquisition of LifeSize involves risks and uncertainties,
including:





·
            Difficulties
      in integrating the operations, systems, technologies, products, and
      personnel of LifeSize.





·
            Potential
      loss of key employees, customers, distributors or other business partners
      of LifeSize.





·
            Insufficient
      future revenues and profitability of LifeSize, which could negatively
      impact our consolidated results.





·
            Significant
      goodwill recorded in connection with the acquisition, which could require
      an impairment and resulting reduction in consolidated results if future
      revenues and profitability of LifeSize do not meet
      expectations.





·
            Diversion
      of management’s attention from normal daily operations of the business and
      the challenges of managing larger and more widespread operations resulting
      from the acquisition.





·
            Initial
      dependence on unfamiliar supply chains or relatively small supply
      partners.





·
            Exposure
      to potential product quality
issues.





In
addition, through our acquisition of LifeSize, we have entered the market for
enterprise video conferencing. Although we plan to maintain the LifeSize
enterprise sales organization, we have little experience with selling to
enterprise accounts, or in marketing to large enterprises. We will also be
exposed to additional competitors in the video conferencing market, some of
which may have greater resources, including technical and engineering resources,
than we do. Additionally, as customers complete video conferencing
installations, they may require greater levels of service and support than we
have provided in the past. Demand for these types of services and support may
increase in the future. There can be no assurance that we can provide products,
services and support to effectively compete for these market opportunities.
Further, provision of greater levels of services and support by us may result in
a delay in the timing of revenue recognition.





Any of
these and other factors, many of which are out of our control, could prevent us
from realizing the anticipated benefits of the acquisition and could adversely
affect our business, operating results or financial condition. If we fail to
manage and successfully integrate LifeSize it could materially harm our business
and operating results. There can be no assurance that LifeSize product
enhancements will be made in a timely fashion or that pre-acquisition due
diligence will have identified all possible issues that might arise with respect
to LifeSize products.





Acquisitions
are inherently risky, and no assurance can be given that our acquisition of
LifeSize or other future acquisitions will be successful and will not adversely
affect our business, operating results or financial condition.





35


Our
gross margins can vary significantly depending on multiple factors, which can
result in unanticipated fluctuations in our operating results.





Our gross
margins can vary due to consumer demand, competition, product life cycle, new
product introductions, unit volumes, commodity and supply chain costs,
geographic sales mix, foreign currency exchange rates, and the complexity and
functionality of new product innovations.  In particular, if we are
not able to introduce new products in a timely manner at the product cost we
expect, or if consumer demand for our products is less than we anticipate, or if
there are product pricing, marketing and other initiatives by our competitors to
which we need to react that lower our margins, then our overall gross margin
will be less than we project. For example, in the second half of fiscal year
2009 and the first half of fiscal year 2010, economic uncertainty caused our
customers to reduce purchases of our products below what we had forecasted, and
also led us to increase our customer incentives to stimulate demand, which
significantly lowered our overall gross margin.





In
addition, our gross margins may vary significantly by product line, sales
geography and customer type, as well as within product lines. When the mix of
products sold shifts from higher margin product lines to lower margin product
lines, to lower margin sales geographies, or to lower margin products within
product lines, our overall gross margins and our profitability may be adversely
affected.





The
impact of these factors on gross margins can create unanticipated fluctuations
in our operating results, which may cause volatility in the price of our
shares.




If we do not compete effectively, demand for our products could decline and our
business and operating results could be adversely affected.





Our industry is intensely competitive. It is characterized by short product life
cycles, continual performance enhancements, and rapid adoption of technological
and product advancements by competitors in our retail market, and price
sensitivity in the OEM market. We experience aggressive price competition and
other promotional activities from our primary competitors and from
less-established brands, including house brands, in response to declining
consumer demand in both the retail and OEM markets. In addition, our competitors
may offer customers terms and conditions which may be more favorable than our
terms and conditions and may require us to take actions to increase our customer
incentive programs, which could impact our revenues and operating
margins.





In recent years, we have expanded the categories of products we sell, and
entered new markets, such as the markets for enterprise video conferencing,
streaming media devices and video security systems. We remain alert to
opportunities in new categories and markets. As we do so, we are confronting new
competitors, many of which have more experience in the categories or markets and
have greater marketing resources and brand name recognition than we have. In
addition, because of the continuing convergence of the markets for computing
devices and consumer electronics, we expect greater competition in the future
from well-established consumer electronics companies in our developing
categories, as well as in future categories we might enter. Many of these
companies, such as Microsoft Corporation, Cisco Systems, Sony, Hewlett Packard
and others, have greater financial, technical, sales, marketing and other
resources than we have.





Microsoft
is a leading producer of operating systems and applications with which our mice,
keyboards and webcams are designed to operate. In addition, Microsoft has
significantly greater financial, technical, sales, marketing and other resources
than Logitech, as well as greater name recognition and a larger customer base.
As a result, Microsoft may be able to improve the functionality of its own
peripherals to correspond with ongoing enhancements to its operating systems and
software applications before we are able to make such improvements. This ability
could provide Microsoft with significant lead-time advantages. In addition,
Microsoft may be able to offer pricing advantages on bundled hardware and
software products that we may not be able to offer, and may be financially
positioned to exert significant downward pressure on product prices and upward
pressure on promotional incentives in order to gain market share.





Pointing Devices,
Keyboards and Desktops.Microsoft is our main competitor in the mice,
keyboard and desktop product lines. We also experience competition and pricing
pressure for corded and cordless mice and desktops from less-established brands,
including house brands, which has impacted our market share in some sales
geographies and which could potentially further impact our market share. The
notebook peripheral category is also an area where we face aggressive pricing
and promotions, as well as new competitors that have broader notebook product
offerings than we do.





Video. Our
competitors for PC Web cameras include Microsoft, Creative Labs, Philips and
Hewlett Packard. We are encountering aggressive pricing practices and promotions
on a worldwide basis, which have impacted our revenues and margins. The
worldwide market for PC webcams has been very competitive, and as a result,
pricing practices and promotions by our competitors have become more
aggressive.





Our primary competitors in the enterprise video conferencing market
are Tandberg and Polycom. These companies have longer experience and a
larger customer installed base than LifeSize. Cisco and Hewlett-Packard
also compete with us for sales of higher-end systems. Cisco is attempting to
purchase Tandberg, and if the purchase is completed, we expect it will further
intensify competition in the industry. Cisco and Hewlett Packard have
substantially greater financial, sales and marketing, and engineering resources
than we do.  In addition, there are a number of smaller competitors
which compete with LifeSize, along with Tandberg, Polycom, Cisco and
Hewlett-Packard, for new accounts, OEM relationships, and
installations.





Audio.
Competitors in audio devices vary by product line. In the PC, mobile
entertainment and communication platform speaker business, competitors include
Plantronics and its Altec Lansing subsidiary, Creative Labs, and Bose
Corporation. In the PC headset and microphone business, our main competitors
include Plantronics and its Altec Lansing subsidiary.  We have
expanded our audio product portfolio to include network-based audio systems for
digital music, an emerging market with several small competitors as well as
larger established consumer electronics companies, like Sony and
Philips.





Gaming.Competitors for our interactive entertainment products include Intec,
Pelican Accessories, Mad Catz and its Saitek subsidiary. Our controllers for
PlayStation also compete against controllers offered by Sony.





Remotes. Our competitors for
remotes include, among others, Philips, Universal Remote, Universal Electronics,
RCA and Sony. We expect that the growth in recent years in consumer demand for
personal peripheral devices for home entertainment systems will likely result in
increased competition.





If we do not compete effectively, demand for our products could decline, our
gross margin could decrease, we could lose market share and our revenues could
decline.





36


If we do not successfully innovate and market products for notebook PCs and
mobile devices, our business and results of operations may suffer.





We have historically targeted
peripherals for the PC platform, a market that is dynamically changing as a
result of the declining popularity of desktop PCs and the increasing popularity
of notebook PCs and mobile devices, such as netbooks, mobile phones and smaller
form factor devices with computing or web surfing capabilities. In our OEM
channel, this shift has adversely affected our sales of OEM mice, which are sold
with name-brand desktop PCs. Our OEM mice sales have historically made up the
bulk of our OEM sales, and our OEM sales accounted for 15% and 13% of total
revenues during fiscal years 2009 and 2008. If the desktop PC market continues
to experience slower growth or decline, and if we do not successfully diversify
our OEM business, our OEM revenues could be adversely affected.





In our retail channels, notebook PCs and mobile devices are sold by retailers
without peripherals.  We believe this creates opportunities to sell
products to consumers to help make their devices more productive and
comfortable. However, consumer acceptance and demand for peripherals for use
with smaller form factor computing devices such as notebook PCs and mobile
devices is still uncertain. The increasing popularity of notebook PCs and mobile
devices may result in a decreased demand by consumers for keyboards and
speakers, which could negatively affect our sales of these products. The
increasing popularity of mobile devices has coincided with a steadily decreasing
average sales price for computing devices, including for desktop and notebook
PCs. As a result, there is a risk that the demand for those of our products that
have a relatively high average sales price in relation to the price of a desktop
or notebook PC will decline. If we do not successfully innovate and market
products designed for notebook PCs and other mobile devices, or if general
consumer demand for peripherals for use with notebook PCs and mobile devices
does not increase, our business and results of operations could be significantly
harmed.




If
we do not accurately forecast product demand, our business and operating results
could be adversely affected.





We use
our forecasts of product demand to make decisions regarding investments of our
resources and production levels of our products. Although we receive forecasts
from our customers, many are not obligated to purchase the forecasted demand.
Also, actual sales volumes for individual products in our retail distribution
channel can be volatile due to changes in consumer preferences and other
reasons. In addition, our retail products have short product life cycles, so a
failure to accurately predict high demand for a product can result in lost sales
that we may not recover in subsequent periods, or higher product costs if we
meet demand by paying higher costs for materials, production and delivery. We
could also frustrate our customers and lose shelf space. Our failure to predict
low demand for a product can result in excess inventory, lower cash flows and
lower margins if we are required to reduce product prices in order to reduce
inventories.





Over the
past few years, we have expanded the number and types of products we sell, and
the geographic markets in which we sell them, and we will endeavor to further
expand our product portfolio and sales reach. The growth of our product
portfolio and our sales markets has increased the difficulty of accurately
forecasting product demand.





We have
experienced large differences between our forecasts and actual demand for our
products and expect differences to arise in the future. If we do not accurately
predict product demand, our business and operating results could be adversely
affected.





Our
business depends in part on access to third-party platforms or technologies, and
if the access is withdrawn, denied, or is not available on terms acceptable to
us, or if the platforms or technologies change without notice to us, our
business and operating results could be adversely affected.





Our product portfolio includes products designed for use with third-party
platforms, such as Apple iPod, Microsoft Xbox, Sony PlayStation, and Nintendo
Wii. Our business in these categories relies on our access to the platforms of
third parties, which can be withdrawn, denied or not be available on terms
acceptable to us.





Our
access to third-party platforms may require paying a royalty, which lowers our
product margins, or may otherwise be on terms that are not acceptable to us. In
addition, the third-party platforms or technologies used to interact with our
product portfolio can change without prior notice to us, which can result in our
having excess inventory or lower margins.





If we are
unable to access third-party platforms or technologies, or if our access is
withdrawn, denied, or is not available on terms acceptable to us, or if the
platforms or technologies change without notice to us, our business and
operating results could be adversely affected.





Our principal manufacturing operations and third-party contract manufacturers
are located in China, which exposes us to risks associated with doing business
in that country.





Our
principal manufacturing operations and third-party contract manufacturers are
located in China. Our manufacturing operations in Suzhou, China could be
severely impacted by changes in the interpretation and enforcement of legal
standards, by strains on China’s transportation, communications, trade, public
health and other infrastructures, by conflicts, embargoes, disagreements or
increased tensions between China and Taiwan, by labor unrest, and by other trade
customs and practices that are dissimilar to those in the United States and
Europe. Interpretation and enforcement of China’s laws and regulations continue
to evolve and we expect differences in interpretation and enforcement to
continue in the foreseeable future.





Further, we may be exposed to fluctuations in the value of the Chinese renminbi
(“CNY”), the local currency of China. Significant future appreciation of the CNY
could increase our component and other raw material costs, as well as our labor
costs, and could adversely affect our financial results.





We purchase key components and products from a limited number of sources, and
our business and operating results could be harmed if supply were delayed or
constrained or if there were shortages of required components.





We purchase certain products and key components from a limited number of
sources. If the supply of these products or key components, such as
micro-controllers and optical sensors, were to be delayed or constrained, or if
one or more of our single-source suppliers goes out of business as a result of
adverse global economic conditions, we might be unable to find a new supplier on
acceptable terms, or at all, and our product shipments to our customers could be
delayed, which could harm our business, financial condition and operating
results.





Lead times for materials, components and products ordered by us or by our
contract manufacturers can vary significantly and depend on factors such as
contract terms, demand for a component, and supplier capacity. From time to
time, we have experienced component shortages and extended lead times on
semiconductors, such as micro-controllers and optical sensors, and base metals
used in our products. Shortages or interruptions in the supply of components or
subcontracted products, or our inability to procure these components or products
from alternate sources at acceptable prices in a timely manner, could delay
shipment of our products or increase our production costs, which could adversely
affect our business and operating results.





If we do not successfully coordinate the worldwide manufacturing and
distribution of our products, we could lose sales.





Our business requires us to coordinate the manufacture and distribution of our
products over much of the world. We rely on third parties to manufacture many of
our products, manage centralized distribution centers, and transport our
products. If we do not successfully coordinate the timely manufacturing and
distribution of our products, we may have insufficient supply of products to
meet customer demand and we could lose sales, or we may experience a build-up in
inventory.





A significant portion of our quarterly retail orders and product deliveries
generally occur in the last weeks of the fiscal quarter. This places pressure on
our supply chain and could adversely impact our revenues and profitability if we
are unable to successfully fulfill customer orders in the quarter.


37





We conduct operations in a number of countries and the effect of business, legal
and political risks associated with international operations could significantly
harm us.





We conduct operations in a number of countries. There are risks inherent in
doing business in international markets, including:





·
            difficulties
      in staffing and managing international
  operations;





·
            compliance
      with laws and regulations, including environmental and tax laws, which
      vary from country to country and over time, increasing the costs of
      compliance and potential risks of
  non-compliance;





·
            exposure
      to political and financial instability, leading to currency exchange
      losses and collection difficulties or other
  losses;





·
            exposure
      to fluctuations in the value of local
  currencies;





·
            difficulties
      or increased costs in establishing sales and distribution channels in
      unfamiliar markets, with their own market characteristics and competition,
      particularly in Latin America, Eastern Europe and
  Asia;





·
            changes
      in value-added tax (“VAT”) or VAT
reimbursement;





·
            imposition
      of currency exchange controls; and





·
            delays
      from customs brokers or government
agencies.





Any of these risks could significantly harm our business, financial condition
and operating results.





We may be unable to protect our proprietary rights. Unauthorized use of our
technology may result in the development of products that compete with our
products.





Our future success depends in part on our proprietary technology, technical
know-how and other intellectual property. We rely on a combination of patent,
trade secret, copyright, trademark and other intellectual property laws, and
confidentiality procedures and contractual provisions such as nondisclosure
terms and licenses, to protect our intellectual property.





We hold various United States patents and pending applications, together with
corresponding patents and pending applications from other countries. It is
possible that any patent owned by us will be invalidated, deemed unenforceable,
circumvented or challenged, that the patent rights granted will not provide
competitive advantages to us, or that any of our pending or future patent
applications will not be granted. In addition, other intellectual property laws
or our confidentiality procedures and contractual provisions may not adequately
protect our intellectual property. Also, others may independently develop
similar technology, duplicate our products, or design around our patents or
other intellectual property rights. Unauthorized parties have copied and may in
the future attempt to copy aspects of our products or to obtain and use
information that we regard as proprietary. Any of these events could
significantly harm our business, financial condition and operating
results.





Product
quality issues could adversely affect our reputation and could impact our
operating results.





The
market for our products is characterized by rapidly changing technology and
evolving industry standards. To remain competitive, we must continually
introduce new products and technologies. The products that we sell could contain
defects in design or manufacture. Defects could also occur in the products or
components that are supplied to us. There can be no assurance we will be able to
detect and remedy all defects in the hardware and software we sell. Failure to
do so could result in product recalls, product redesign efforts, lost revenue,
loss of reputation, and significant warranty and other expenses to
remedy.





Our effective income tax rates may increase in the future, which could adversely
affect our net income.





We
operate in multiple jurisdictions and our profits are taxed pursuant to the tax
laws of these jurisdictions. Our effective income tax rate may be affected by
changes in or interpretations of tax laws in any given jurisdiction, utilization
of net operating loss and tax credit carryforwards, changes in geographical
allocation of income and expense, and changes in management’s assessment of
matters such as the realizability of deferred tax assets. In the past, we have
experienced fluctuations in our effective income tax rate. Our effective income
tax rate in a given fiscal year reflects a variety of factors that may not be
present in the succeeding fiscal year or years. There is no assurance that our
effective income tax rate will not change in future periods.  We are
currently subject to ongoing audits in various jurisdictions and a material
assessment by a governing tax authority could adversely affect our
profitability. If our effective income tax rate increases in future periods, our
net income could be adversely affected.





38





ITEM
2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS





On
December 11, 2009, in connection with our acquisition of LifeSize
Communications, Inc., we issued a total of 54,081 Logitech shares to 29 LifeSize
employees in exchange for their shares of LifeSize restricted stock, which were
cancelled upon consummation of the acquisition. The Logitech shares received by
the LifeSize employees are subject to vesting over time, on the same vesting
schedule as the LifeSize restricted stock sold by the employees. The issuance of
the Logitech shares described above was deemed to be exempt from registration
under the Securities Act of 1983, as amended (“the Act”), in reliance on Section
4(2) of the Act as a transaction by an issuer not including any public
offering.





Share
Repurchases





Logitech
did not make any purchases of its equity securities during the quarter ended
December 31, 2009. Approximately $25 million of Logitech shares may yet be
purchased under the share buyback program approved in June 2007, which is in
effect until the 2010 Annual General Meeting, unless concluded earlier or
discontinued. In
September 2008, our Board of Directors approved a newshare buyback program,
which authorizes the Company to invest up to $250 million to purchase its own
shares. The September 2008 program is subject to the approval of the Swiss
Takeover Board and the completion of our current share buyback program of $250
million.











39


ITEM
6.   EXHIBITS





Exhibit
Index








Exhibit
      No.
            
            Description2.1
            
            Agreement
      and Plan of Merger, dated as of November 10, 2009, as amended by the First
      Amendment to Agreement and Plan of Merger, entered into as of November 16,
      2009, both by and among Logitech, Inc., Agora Acquisition Corporation,
      LifeSize Communications, Inc., Shareholder Representative Services LLC, as
      Stockholder representative, and US Bank National Association, as escrow
      agent (1)3.1
            
            Articles
      of Incorporation of Logitech International S.A., as amended (2)3.2
            
            Organizational
      Regulations of Logitech International S.A., as amended (3)10.1
            
            LifeSize
      Communications, Inc. 2003 Stock Option Plan (4)31.1
            
            Rule
      13a-14(a)/15d-14(a) Certification of Chief Executive
    Officer31.2
            
            Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial
    Officer32.1
            
            Section
      1350 Certifications of Chief Executive Officer and Chief Financial
      Officer**








**
            This
      exhibit is furnished herewith, but not deemed “filed” for purposes of
      Section 18 of the Securities Exchange Act of 1934, as amended, or
      otherwise subject to liability under that section. Such certifications
      will not be deemed to be incorporated by reference in any filing under the
      Securities Act or the Exchange Act, except to the extent that we
      explicitly incorporate them by
reference.





(1)
            Incorporated
      by reference to the registrant’s current report on Form 8-K as filed on
      December 14, 2009


(2)
            Incorporated
      by reference to the registrant’s quarterly report on Form 10-Q as filed on
      November 4, 2009


(3)
            Incorporated
      by reference to the registrant’s annual report on Form 10-K as filed on
      June 1, 2009


(4)
            Incorporated
      by reference to the registrant’s registration statement of Form S-8 as
      filed on December 22, 2009





40


SIGNATURES





Pursuant
to the requirements the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.





LOGITECH
INTERNATIONAL S.A.





/s/
      Gerald P. QuindlenGerald
      P. Quindlen
              President
      and Chief Executive Officer








/s/
      Erik K. BardmanErik
      K. Bardman
              Senior
      Vice President of Finance
              and
      Chief Financial Officer











February
2, 2010


41