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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 25, 2011
Commission File Number 000-49602
SYNAPTICS INCORPORATED
(Exact name of registrant as specified in its charter)
 	 	 	
Delaware	 	77-0118518	
 	 	 	
(State or other jurisdiction of	 	(I.R.S. Employer	
incorporation or organization)	 	Identification No.)	
 	 	 	
3120 Scott Blvd.	 	 	
Santa Clara, California	 	95054	
 	 	 	
(Address of principal executive offices)	 	(Zip Code)	
(408) 454-5100

Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
 	 	 	
Title of each class	 	Name of each exchange on which registered	
 	 	 	
Common Stock, par value $.001 per share	 	The Nasdaq Global Select Market	
Preferred Stock Purchase Rights	 	The Nasdaq Global Select Market	
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  þ  No  o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  o  No  þ
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  þ  No  o
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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  þ  No  o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ
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. (Check one):
 	 	 	 	 	 	 	
Large accelerated filer þ	 	Accelerated filer o	 	Non-accelerated filer o	 	Smaller reporting company o	
 	 	 	 	(Do not check if a smaller reporting company)	 	 	
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
The aggregate market value of Common Stock held by nonaffiliates of the registrant (24,500,841 shares), based on the closing price of the registrant’s Common Stock as reported on the Nasdaq Global Select Market on December 24, 2010 of $29.52, was $723,264,826. For purposes of this computation, all officers, directors, and 10% beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed to be an admission that such officers, directors, or 10% beneficial owners are, in fact, affiliates of the registrant.
As of August 10, 2011, there were outstanding 32,919,759 shares of the registrant’s Common Stock, par value $.001 per share.
Documents Incorporated by Reference
Portions of the registrant’s definitive Proxy Statement for the 2011 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.

 

 
SYNAPTICS INCORPORATED
ANNUAL REPORT ON FORM 10-K
FISCAL 2011
TABLE OF CONTENTS
 	 	 	 	 	 	
PART I

ITEM 1. BUSINESS	 	 	1	 	 	
 	 	 	 	 	 	
ITEM 1A. RISK FACTORS	 	 	17	 	 	
 	 	 	 	 	 	
ITEM 1B. UNRESOLVED STAFF COMMENTS	 	 	33	 	 	
 	 	 	 	 	 	
ITEM 2. PROPERTIES	 	 	34	 	 	
 	 	 	 	 	 	
ITEM 3. LEGAL PROCEEDINGS	 	 	34	 	 	
 	 	 	 	 	 	
ITEM 4. REMOVED AND RESERVED	 	 	34	 	 	
 	 	 	 	 	 	
PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	 	 	34	 	 	
 	 	 	 	 	 	
ITEM 6. SELECTED FINANCIAL DATA	 	 	37	 	 	
 	 	 	 	 	 	
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	 	 	38	 	 	
 	 	 	 	 	 	
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	 	 	50	 	 	
 	 	 	 	 	 	
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	 	 	51	 	 	
 	 	 	 	 	 	
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	 	 	51	 	 	
 	 	 	 	 	 	
ITEM 9A. CONTROLS AND PROCEDURES	 	 	51	 	 	
 	 	 	 	 	 	
ITEM 9B. OTHER INFORMATION	 	 	52	 	 	
 	 	 	 	 	 	
PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	 	 	53	 	 	
 	 	 	 	 	 	
ITEM 11. EXECUTIVE COMPENSATION	 	 	53	 	 	
 	 	 	 	 	 	
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	 	 	53	 	 	
 	 	 	 	 	 	
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	 	 	53	 	 	
 	 	 	 	 	 	
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES	 	 	53	 	 	
 	 	 	 	 	 	
PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	 	 	54	 	 	
 	 	 	 	 	 	
SIGNATURES	 	 	56	 	 	
 	 	 	 	 	 	
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS	 	 	F-1	 	 	
 	 	 	 	 	 	
 Exhibit 21	
 Exhibit 23.1	
 Exhibit 31.1	
 Exhibit 31.2	
 Exhibit 32.1	
 Exhibit 32.2	
 Exhibit 99.1	
 EX-101 INSTANCE DOCUMENT	
 EX-101 SCHEMA DOCUMENT	
 EX-101 CALCULATION LINKBASE DOCUMENT	
 EX-101 LABELS LINKBASE DOCUMENT	
 EX-101 PRESENTATION LINKBASE DOCUMENT	
 EX-101 DEFINITION LINKBASE DOCUMENT	
Statement Regarding Forward-Looking Statements
The statements contained in this report on Form 10-K that are not purely historical are forward-looking statements within the meaning of applicable securities laws. Forward-looking statements include statements regarding our “expectations,” “anticipation,” “intentions,” “beliefs,” or “strategies” regarding the future, whether or not those words are used. Forward-looking statements also include statements regarding revenue, margins, expenses, and earnings analysis for fiscal 2012 and thereafter; our positioning in our target markets; our ability to continue to enhance our market position and increase our business through introducing market leading interface solutions; the strength of our intellectual property portfolio, engineering know-how, systems engineering experience, and technological expertise; the success of our product development strategies; the attractiveness of our product solutions, including their performance, cost, customer satisfaction, market position, and potential; continued success of our virtual manufacturing platform; the strength of our customer relationships; the amounts of revenue generated as a result of sales to significant customers; our competitive position and competitive factors; potential acquisitions or strategic alliances; the success of particular product or marketing programs; and liquidity and anticipated cash needs and availability. All forward-looking statements included in this report are based on information available to us as of the filing date of this report, and we assume no obligation to update any such forward-looking statements. Our actual results could differ materially from the forward-looking statements. Among the factors that could cause actual results to differ materially are the factors discussed in Item 1A. Risk Factors.

 

Table of Contents
PART I
 	 	 	
ITEM 1.	 	BUSINESS	
Overview
We are a leading worldwide developer and supplier of custom-designed human interface solutions that enable people to interact more easily and intuitively with a wide variety of mobile computing, communications, entertainment, and other electronic devices. We currently target the personal computer, or PC, market, primarily notebook computers, the markets for digital lifestyle products, including mobile smartphones and feature phones, the tablet market, and other select electronic device markets with our customized human interface solutions.
We are a market leader in providing human interface solutions to our target markets. Our original equipment manufacturer, or OEM, customers include most of the tier one PC OEMs and many of the world’s largest OEMs for mobile smartphones and feature phones. We generally supply our human interface solutions to our OEM customers through their contract manufacturers, which take delivery of our products and pay us directly for them.
Our website is www.synaptics.com. Through our website, we make available free of charge all of our Securities and Exchange Commission, or SEC, filings, including our annual reports on Form 10-K, our proxy statements, our quarterly reports on Form 10-Q, and our current reports on Form 8-K as well as Form 3, Form 4, and Form 5 Reports for our directors, officers, and principal stockholders, together with amendments to those reports filed or furnished pursuant to Sections 13(a), 15(d), or 16 under the Securities Exchange Act, as amended, or the Exchange Act. These reports are available immediately after their electronic filing with the SEC. Our website also includes corporate governance information, including our Code of Conduct, our Code of Ethics for the CEO and Senior Financial Officers, and our Board Committee Charters.
Our fiscal year is the 52- or 53-week period ending on the last Saturday in June. The fiscal years presented in this report were 52-week periods ended June 25, 2011, June 26, 2010, and June 27, 2009.
PC Market
We provide custom human interface solutions for navigation, cursor control, and multimedia controls for many of the world’s premier PC OEMs. In addition to notebook applications, other PC product applications for our technology include peripherals, such as keyboards, mice, and monitors, as well as remote control devices for desktops, PCs, and digital home applications. Our solutions for the PC market include the TouchPad™, a touch-sensitive pad that senses the position and movement of a person’s finger on its surface; the ClickPad™, a TouchPad application, which eliminates the need for physical buttons; the TouchStyk™, a self-contained, easily integrated pointing stick module; and dual pointing solutions, which combine both a TouchPad and a pointing stick into a single notebook computer, enabling users to use the interface of their choice.
The latest industry projections for notebook unit growth for the period 2011 through 2015 show a compound annual growth rate of 16% compared with an increase of 2% for desktop computers, reflecting the continued migration of desktops to notebooks fueled by users’ desire for mobile computing and on-the-go access to applications, information, and digital content. Based on the strength of our technology and engineering know-how, we believe we are well positioned to take advantage of the growth opportunity in the notebook computer market. We believe we are well positioned within the notebook computer market as our product lines of touch pads and pointing sticks allow us to address 100% of the notebook computer market.
Digital Lifestyle Product Markets
We believe our intellectual property portfolio, engineering know-how, systems engineering experience, technological expertise, experience in providing human interface solutions to major OEMs of electronic devices, and proven track record of growth in our expanding notebook computer interface business position us to be a key technological enabler for multiple consumer electronic devices targeted to meet the growing digital lifestyle trend. Based on these strengths, we are addressing the opportunities created by the growth of mobile computing communications and entertainment devices within the digital lifestyle product markets, particularly mobile smartphones and feature phones. Digital lifestyle products include mobile smartphones and feature phones, video and music players, and global positioning devices, as well as a variety of mobile, handheld, wireless, and entertainment devices. Our array of human interface solutions for digital lifestyle products are designed to enrich the interface on peripherals, mobile smartphones, and feature phones, allowing the user to more easily use or navigate complex menu systems on their devices. We believe our existing technologies, our range of product solutions, and our emphasis on ease of use, small size, low power consumption, advanced functionality, durability, and reliability enable us to serve multiple aspects of the markets for digital lifestyle products and other electronic devices.

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Our human interface solutions for the mobile smartphone and feature phone market constitutes an important percentage of our net revenue. Net revenue for our human interface solutions for mobile smartphones and feature phones accounted for approximately 51% and 35% of our net revenue in fiscal 2011 and 2010, respectively. Our ongoing success in serving this market will depend upon the continued growth of the mobile smartphone and feature phone portion of the overall mobile phone market; our ability to demonstrate to mobile phone OEMs the advantages of our human interface solutions in terms of performance, usability, size, durability, power consumption, integration, and industrial design possibilities; and the success of products utilizing our human interface solutions. In addition, our success will depend on our ability to demonstrate to mobile smartphone OEMs, the advantages of our flexible touchscreen fulfillment model and systems engineering expertise.
Industry projections for the mobile smartphone market for the period 2011 through 2015 show a compound annual growth rate of 20%, reflecting the trend towards greater functionality in mobile smartphone products to meet and address the expanded needs and expectations of the consumer oriented market. These products require a simple, durable, and intuitive human interface solution to enable the user to navigate efficiently through menus and scroll through information contained in the host device. We believe we are well positioned to take advantage of this growing market based on our technology, engineering know-how, systems engineering experience, and the acceptance of our human interface solutions by OEMs in this market.
Tablet Market
The tablet market represents a new opportunity for our touchscreen intellectual property portfolio, engineering know-how, and technological expertise. Our ClearPad Series 7 is specifically targeted for this market, and its features and functionality can be customized to OEM specifications. Tablet based capacitive touch interface devices are now offered by several leading PC and mobile phone OEMs and utilize various operating systems, including Android and others.
Our Strategy
Our objective is to continue to enhance our position as a leading supplier of human interface solutions for the PC market, for the markets for digital lifestyle products, including mobile smartphones and feature phones, and for the developing tablet market. Key aspects of our strategy to achieve this objective include those set forth below.
Extend Our Technological Leadership
We plan to utilize our extensive intellectual property portfolio, engineering know-how, and technological expertise to extend the functionality of our product solutions and offer innovative product solutions to customers across multiple markets. We intend to continue utilizing our technological expertise to reduce the overall size, weight, cost, and power consumption of our human interface solutions while increasing their applications, capabilities, and performance. We plan to continue enhancing the ease of use and functionality of our solutions. We also plan to expand our research and development efforts through increased investment in our engineering activities, the hiring of additional engineering personnel, and potential strategic acquisitions and alliances. We believe that these efforts will enable us to meet customer expectations and to achieve our goal of supplying on a timely and cost-effective basis the most advanced, easy-to-use, functional human interface solutions to our target markets.
Enhance Our Position in the PC and Mobile Smartphone and Feature Phone Markets
We intend to continue introducing market-leading human interface solutions in terms of performance, functionality, size, and ease of use for the PC and mobile smartphone and feature phone markets. We plan to continue enhancing our customers’ industrial design alternatives and device functionality through innovative product development based on our existing capabilities and technological advances.

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Capitalize on Growth of New Markets
We intend to capitalize on the growth of new markets, such as the tablet market, brought about by the convergence of computing, communications, and entertainment devices. We plan to offer innovative, intuitive human interface solutions that address the evolving portability, connectivity, and functionality requirements of these new markets. We plan to offer these solutions to existing and potential OEM customers to enable increased functionality, reduced size, lower cost; and enhanced industrial design features and to enhance the user experience of their products. We plan to utilize our existing technologies as well as aggressively pursue new technologies as new markets evolve that demand new solutions.
Emphasize and Expand Customer Relationships
We plan to emphasize and expand our strong and long-lasting customer relationships and to establish successful relationships with new customers. In each market we serve, we plan to provide the most advanced human interface solutions for our customers’ products. We believe that our human interface solutions enable our customers to deliver a positive user experience and to differentiate their products from those of their competitors. We continually strive to enhance the competitive position of our customers by providing them with innovative, distinctive, and high-quality human interface solutions in a timely and cost-effective basis. To do so, we work continually to improve our productivity, to reduce costs, and to speed the delivery of our human interface solutions. We endeavor to streamline the entire design and delivery process through our ongoing design, engineering, and production improvement efforts. We also focus on providing timely support to our customers after the purchase of our human interface solutions.
We plan to increase our business with existing customers and attract new customers by offering both custom designed solutions, as well as design tools, documentation, a family of capacitive sensing ASICs, and technical support to enable them to develop their own human interface designs in products such as mobile smartphones and feature phones, tablets, PC peripherals, and other digital entertainment devices. We offer our mobile smartphone and feature phone customers a choice of determining the most optimal way to meet their emerging and growing needs: our traditional custom module solutions or our chip or tail solutions, which enable customers to utilize our proprietary solutions together with third-party components and assembly.
Pursue Strategic Relationships and Acquisitions
We intend to develop and expand strategic relationships to enhance our ability to offer value-added human interface solutions to our customers, penetrate new markets, and strengthen the technological leadership of our product solutions. We also consider the potential acquisition of companies in order to expand our technological expertise and to establish or strengthen our presence in selected target markets.
Continue Virtual Manufacturing
We plan to expand and diversify our production capacity through third-party relationships, thereby strengthening our virtual manufacturing platform. This strategy results in a scalable business model; enables us to concentrate on our core competencies of research and development, technological advances, and product design and engineering; and reduces our capital expenditures and working capital requirements. Our virtual manufacturing strategy allows us to maintain a variable cost model, in which we do not incur most of our manufacturing costs until our product solutions have been shipped and billed to our customers.
Product Solutions
We develop and enhance interface technologies that enrich the user’s experience in interacting with the user’s mobile computing, communications, and entertainment devices. Our innovative and intuitive human interface solutions can be engineered to accommodate many diverse platforms, and our expertise in human factors and usability can be utilized to improve the features and functionality of our solutions. Our extensive array of technologies includes ASICs, firmware, software, mechanical and electrical designs, and pattern recognition and touch-sensing technologies.

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Our custom-designed human interface solutions are custom engineered, total solutions for our customers, and include sensor design, module layout, ASICs, firmware, and software features for which we provide manufacturing and design support, and device testing. This allows us to be a one-stop supplier for complete human interface design from the early design stage, to manufacturing, to testing and support. Through our engineering know-how and technological expertise, we seek to provide our customers with solutions that address their individual design issues and result in high-performance, feature-rich, and reliable interface solutions. We believe our interface solutions offer the following characteristics:
 	•	 	Ease of Use. Our interface solutions offer the ease of use and intuitive interaction that users demand.	

 	•	 	Small Size. The small, thin size of our interface solutions enables our customers to reduce the overall size and weight of their products in order to satisfy consumer demand for portability.	

 	•	 	Low Power Consumption. The low power consumption of our interface solutions enables our customers to offer products with longer battery life or smaller battery size.	

 	•	 	Advanced Functionality. Our interface solutions offer advanced features, such as virtual scrolling, customizable tap zones, edge motion, and tapping and dragging icons, to enhance the user experience.	

 	•	 	Reliability. The reliability of our interface solutions satisfies consumer requirements for dependability, which is a major component of consumer satisfaction.	

 	•	 	Durability. Our interface solutions withstand repeated use, harsh physical treatment, and temperature fluctuations while providing a superior level of performance.	
We believe these characteristics will enable us to maintain our leadership position in the PC market and to enhance our position as a technological enabler within the markets for digital lifestyle products, including mobile smartphones and feature phones, and tablets.
Our human interface solutions are intended to satisfy our customers’ specification needs, including features and functionality, industrial design, mechanical, and electrical requirements. Our products also offer unique integration options, including allowing our capacitive sensors to be placed underneath the plastic of the device, which allows for streamlined and stylized designs, and LED integration to indicate status or enhance industrial design.
Our emphasis on technological leadership and design capabilities positions us to provide unique human interface solutions that address specific customer requirements. Our long-term working relationships with large, global OEMs provide us with experience in satisfying their demanding design specifications and other requirements. Our custom product solutions provide OEMs with numerous benefits, including the following:
 	•	 	system integration;	

 	•	 	reduced product development costs;	

 	•	 	shorter product time to market;	

 	•	 	compact and efficient platforms;	

 	•	 	improved product functionality and utility; and	

 	•	 	product differentiation.	
We work with our customers in order to meet their technical and functional specifications, their industrial design requirements, and their desire to differentiate their products from those of their competitors. This collaborative effort reduces the duplication and overlap of investment and resources, enabling our OEM customers to devote more time and resources to the market development of their products.
We utilize capacitive technology rather than resistive or mechanical technology in our product solutions. Unlike resistive and mechanical technology, our solid-state capacitive technology has no moving parts and does not require activation force, thereby providing a durable, more reliable solution that can be integrated into both curved and flat surfaces. Capacitive technologies also allow for much thinner sensors than resistive or mechanical technology, providing for slimmer, more compact and unique industrial designs.

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Products
Our family of product solutions allows our customers to solve their interface needs and differentiate their products from those of their competitors.
TouchPad
Our TouchPad, which takes the place and exceeds the functionality of a mouse, is a small, touch-sensitive pad that senses the position and movement of one or more fingers on its surface through the measurement of capacitance. Our TouchPad provides an accurate, comfortable, and reliable method for screen navigation, cursor movement, and gestures and provides a platform for interactive input for both the consumer and corporate markets. Our TouchPad solutions allow our customers to provide stylish, simple, user-friendly, and intuitive human interface solutions. Our TouchPad solutions offer various advanced features, including the following:
 	•	 	Scrolling. Our TouchPad permits the user to customize the scrolling feature as One Finger Scrolling, Two-Finger Scrolling, or ChiralMotion™ Scrolling based on their preference.	

 	•	 	Customizable tap zones. These zones permit designated portions of the TouchPad to be used to simulate mouse clicks, launch applications, and perform other selected functions.	

 	•	 	Performance of entertainment, productivity, and media tasks. Our Scrybe™ enables the user to quickly perform common entertainment, productivity, and media tasks using simple, easy-to-remember gestures on the TouchPad. Scrybe can be downloaded free-of-charge and used with most of our modern TouchPad sensors.	

 	•	 	Tapping and dragging of icons. This feature allows the user to simply tap and hold on an icon in order to drag it, rather than being forced to hold a button down in order to drag an icon.	

 	•	 	Device Interaction. Our Gesture Suite™ provides users with a customizable way to address productivity and to interact with their notebook systems through the TouchPad. Some of these gestures include Pinch for Zoom, Rotate, Three-Finger Flick, and many others.	
Our TouchPad solutions are available in a variety of sizes, electrical interfaces, and thicknesses. Our TouchPad solutions are designed to meet the electrical and mechanical specifications of our customers. Customized firmware and driver software ensure the availability of specialized features. As a result of their solid state characteristics, our TouchPad solutions have no moving parts that wear out, resulting in a robust and reliable input solution that also allows for unique industrial designs.
ClickPad
Our ClickPad introduces a clickable mechanical design to the TouchPad application that eliminates the need for physical buttons. The buttonless design of our ClickPad allows for unique, intuitive industrial design and makes it an excellent alternative to conventional input and navigation devices. Our ClickPad is activated by pressing down on the internal tact switch to perform a left- or right-button click and provides tactile feedback similar to pressing a physical button. The latest version of ClickPad features ClickEQ, a mechanical solution that provides uniform click depth to maximize the surface area available for gestures and improve click performance over hinged designs.
Dual Pointing Solutions
Our dual pointing solutions offer a TouchPad with a pointing stick in a single notebook computer, enabling users to select their interface of choice. Our dual pointing solutions also provide the end user the ability to use both interfaces interchangeably. Our dual pointing solutions provide the following advantages:
 	•	 	cost-effective and simplified OEM integration;	

 	•	 	simplified OEM product line because one device contains both solutions;	
 	 	 	 	
 	•	 	single-source supplier, which eliminates compatibility issues; and	

 	•	 	end user flexibility because one notebook can address both user preferences.	

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We have developed two solutions for use in the dual pointing market. Our first solution integrates all the electronics for controlling a third-party resistive strain gauge pointing stick onto our TouchPad PCB. This solution simplifies OEM integration by eliminating the need to procure the pointing stick electronics from another party and physically integrate them into the notebook. Our second dual pointing solution uses our TouchStyk rather than a third-party pointing stick and offers the same simplified OEM integration. The second solution is a completely modular design, allowing OEMs to offer TouchPad-only, TouchStyk-only, or dual pointing solutions on a build-to-order basis.
TouchStyk
Our TouchStyk is a proprietary pointing stick interface solution for PC notebooks. TouchStyk is a self-contained, easily integrated module that uses capacitive technology similar to that of our TouchPad. TouchStyk is enabled with press-to-select and tap-to-click capabilities and can be easily integrated into multiple computing and communications devices. In addition, our design greatly reduces susceptibility to electromagnetic interference, thereby providing greater pointing accuracy and preventing the pointer from drifting when not in use. Our modular approach allows OEMs to include our TouchPad, our TouchStyk, or a combination of both interfaces (dual pointing) in their products.
NavPoint
Our NavPoint solution offers TouchPad functionality for small form factor devices for improved usability and versatility in accessing and managing content in handheld devices through unique navigation controls, including short- and long-distance scrolling features, tapping, and mouse-like cursor navigation.
ClearPad
Our ClearPad touchscreen solutions typically consist of a transparent, thin capacitive sensor, which is a traditional discrete sensor, that can be placed over any display, such as an LCD or OLED. Similar to our traditional TouchPad, our ClearPad has distinct advantages, including low-profile form factor; high reliability, durability, and accuracy; and low power consumption. ClearPad can be mounted beneath curved surfaces, providing for unique industrial designs. ClearPad enables the user to interact directly with the display on electronic devices, such as mobile phones and tablets.
Our ClearPad Series 3 can provide full-time tracking of ten or more fingers simultaneously and features stylus support and support for various sensor configurations, including traditional discrete sensors, sensor-on-lens, which includes sensor electrodes patterned on the bottom of the glass cover lens; on-cell, which includes sensor electrodes patterned on the display glass; and in-cell, which includes sensor electrodes patterned inside the LCD glass. Our ClearPad Series 1 and 2 product families provide a low-profile form factor, high reliability, durability, and accuracy, and low power consumption for feature-based and mass-market handsets.
Our ClearPad Series 4 products combine our proprietary capacitive multi-touch technology with a device’s display driver in a single-chip solution delivering advanced display noise management and improved capacitive sensing performance. Our display integration on-cell and in-cell solutions provide cost-effective, capacitive, multi-touch interfaces for mobile devices and enables thinner form factors.
Our ClearPad Series 7 products are designed to meet the requirements of the large touchscreen market for products more closely related to clamshell notebooks, slates, tablets, and similar devices. Our ClearPad Series 7 products include low-cost, single-chip touchscreen solutions and multi-chip touchscreen solutions designed for devices that have more demanding user input requirements, such as gaming applications.
FlexPad
This capacitive sensing interface is mounted beneath a mechanical keypad, and allows the keypad surface to be used for advanced scrolling and navigation features, character entry, and advanced gesture input on handheld devices. With navigation functionality similar to a touch pad, FlexPad offers interface and industrial design differentiation while improving device interaction.

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ClearButtons
Our ClearButtons product is an extension of our core capacitive sensing technology that has been used in TouchPad solutions for notebook PCs, mobile smartphones, and feature phones. ClearButtons is a clear sensor that can be mounted under plastic, providing OEMs with easy integration and attractive design options for scrolling and buttons.
TouchButtons
Our TouchButtons product provides capacitive button and scrolling controls for an easy-to-use and stylish interface solution designed to replace mechanical buttons. Button arrays and ScrollStrips can be programmed to perform various functions, such as controls for multimedia, display and device settings in notebook PCs, multimedia keyboards, MP3 players, digital photo frames, monitors, and other digital lifestyle products. TouchButton interfaces are designed for integration under the plastic face of a device, allowing for a sealed, durable, and thin design, which can be coupled with LED animation. OEMs can incorporate TouchButtons into their products by either designing their own button controls, scrolling controls, or a combination of button and scrolling controls using our OneTouch offering or through our custom designed interface module.
OneTouch
Our OneTouch offering is a configurable solution based on our capacitive sensing technology, which includes a capacitive sensing ASIC, easy-to-use design tools, documentation, and technical support, that enables customers to develop their own custom interface designs in-house for capacitive buttons and scrolling applications in various products, including mobile smartphones and feature phones, portable digital media players, and PC peripherals, such as monitors, keyboards, mice, and remote controls. OneTouch increases our reach from a customer standpoint by offering them an alternative and flexible way to leverage our engineering know-how, and technological expertise whether through our traditional custom module solution or through the OneTouch capability that allows them to implement capacitive sensing in-house when design integration or quick design turns are important.
Proximity Sensing
Our proximity sensing technology enables users to interact with consumer electronics without touch. With this technology, sensors in a device, such as a notebook PC, mobile phone, peripheral, or digital photo frame, sense the presence of a user’s hand to activate a function, such as illuminating LEDs for discoverable buttons or waking devices from power-saving mode.
Dual Mode
Our Dual Mode-enabled TouchPad interface allows a user to switch between cursor control and icon-based control on the TouchPad surface. In default mode, a Dual Mode-enabled TouchPad provides the same cursor control for on-screen navigation as a standard TouchPad. When the user taps on a launch icon located on the TouchPad surface, control icons illuminate on the TouchPad surface.
Capabilities
Our products are supported by a variety of feature capabilities allowing for further product differentiation and easy customer integration.
Synaptics Gesture Suite
Our Synaptics Gesture Suite, or SGSTM, provides users with an intuitive way to interact productively with their notebook computers. SGS was developed by analyzing the most common workflows from entertainment activities, such as viewing photos and listening to music, to productivity activities, such as accessing emails and presentations. The result is an intelligent usability model that makes it intuitive for consumers to understand and discover features easily, resulting in a better user experience. SGS represents a growing portfolio of gestures available on our interface solutions. These gestures are compatible with a wide range of Microsoft Windows and Linux applications to enhance the value and productivity of notebook PCs and peripheral devices that use our TouchPads. Gestures currently in the market include Pinch, Rotate, ChiralMotion Scrolling, Two-Finger Scrolling, Three-Finger Flick, Three-Finger Down, and Four-Finger Flick.

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Enhanced Gesture Recognition™
Our Enhanced Gesture Recognition is a suite of ClearPad gestures included in our firmware. Customers can easily enable SingleTouch gestures, such as Tap, Double Tap, Press, and Flick; DualTouch gestures, such as Pinch and Pivot Rotate; and multi-finger gestures for ClearPad directly from our touch module firmware. No additional recognition software is required on the host processor to implement these gestures. This approach lowers host processor resource requirements and ensures that gestures are implemented using our proven pattern-recognition technology.
Dual Mode for TouchPad
Our Dual Mode-enabled TouchPad interface allow a user to switch between cursor control and icon-based controls on the TouchPad surface. In default mode, a Dual Mode-enabled TouchPad provides the same cursor control for on-screen navigation as a standard TouchPad. When the user taps on a launch icon located on the TouchPad surface, control icons illuminate on the TouchPad surface.
Dual Mode functionality offers OEMs a variety of customization options, including tap zones for launching applications and multimedia controls, scrolling zones to adjust volume, and programmable buttons to enable end users to choose their application of choice to launch through our Dual Mode driver. To regain cursor control, the user simply taps the mode switch button and the illuminated icons disappear, allowing the user to control the cursor for on-screen navigation.
Proximity Sensing
Our proximity sensing technology enables users to interact with consumer electronics without touch. With this technology, sensors in a device, such as a notebook PC, mobile phone, peripheral, or digital photo frame, sense the presence of a user’s hand to activate a function. These sensors can illuminate LEDs for discoverable buttons, immediately wake devices from power-saving mode, or activate other functionality.
ChiralMotion Gesture
With our ChiralMotion Gesture technology, the user can apply one continuous circular motion to initiate precise and fine-tuned scrolling on any two-dimensional input surface, such as our TouchPad and ClearPad solutions.
ChiralMotion Gesture technology is well-suited for small handheld products, such as feature-rich mobile handsets, personal navigation systems, and personal media players that require easy access for entertainment, music, and other digital files. Scrolling through long documents or pages on a notebook PC becomes simple when using a TouchPad enhanced with ChiralMotion and reversing the direction of scrolling simply requires the user to reverse the circular motion of their finger.
InterTouch
Our InterTouch utilizes a high bandwidth internal subsystem to communicate commands between the touch pad and the host processor enabling Multi-Touch “Full-Time Finger Tracking,” for a better finger gesture-based user experience. InterTouch enhances the performance of our image sensing TouchPad products, which can provide full-time tracking of ten or more fingers simultaneously, and is not possible with a lower-speed legacy PS/2 interface. InterTouch uses existing industry standard, higher-speed subsystem interfaces, which will be available to any OEM and any touch pad provider. Additional InterTouch capabilities include the following:
 	•	 	Cross Platform & Brands. Our InterTouch will work with all of our TouchPads and ClickPads.	

 	•	 	Enhanced Gestures. This feature allows multi-finger gesture tracking and counting.	

 	•	 	Re-flash/Re-programmability. Our InterTouch substantially increases data throughput, which provides fast re-flash times.	
Our InterTouch is designed for full compatibility with current and future Windows platforms, and we anticipate it also will be supported on Linux-based platforms in future releases.

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Technologies
We have developed and own an extensive array of technologies, encompassing ASICs, firmware, software, mechanical and electrical designs, pattern recognition, and touch-sensing technologies. With 125 U.S. patents in force and 128 U.S. patents pending, as well as many non-U.S. counterparts, we continue to develop technology in these areas. We believe these technologies and the related intellectual property create barriers for competitors and allow us to provide human interface solutions in a variety of high-growth markets.
Our broad line of human interface solutions currently is based upon the following key technologies:
 	•	 	capacitive position sensing technology;	

 	•	 	capacitive force sensing technology;	

 	•	 	transparent capacitive position sensing technology;	

 	•	 	pattern recognition technology;	

 	•	 	mixed signal integrated circuit technology;	

 	•	 	multi-touch technology; and	

 	•	 	proprietary microcontroller technology.	
In addition to these technologies, we develop firmware and device driver software that we incorporate into our products, which provide unique features, such as virtual scrolling, customizable tap zones, PalmCheck, EdgeMotion, and tapping and dragging of icons. In addition, our ability to integrate all of our products to interface with major operating systems, including Windows, Android, Google Chrome, Symbian, Unix, and Linux, provides us with a competitive advantage.
Capacitive Position Sensing Technology. This technology provides a method for sensing the presence, position, and contact area of one or more fingers or a conductive stylus on a flat or curved surface, such as our TouchPad, TouchRing, and ScrollStrip. Our technology works with very light touch, supports full multi-touch capabilities, and provides highly responsive cursor navigation, scrolling, and selection. It uses no moving parts, can be implemented under plastic, and is extremely durable.
Capacitive Force Sensing Technology. This technology senses the direction and magnitude of a force applied to an object. The object can either move when force is applied, like a typical joystick used for gaming applications, or it can be isometric, with no perceptible motion during use, like our TouchStyk. The primary competition for this technology is resistive strain gauge technology. Resistive strain gauge technology requires electronics that can sense very small changes in resistance, presenting challenges to the design of that circuitry, including sensitivity to electrical noise and interference. Our electronic circuitry determines the magnitude and direction of an applied force, permits very accurate sensing of tiny changes in capacitance, and minimizes electrical interference from other sources.
Transparent Capacitive Position Sensing Technology. This technology allows us to build transparent sensors for use with our capacitive position sensing technology, such as in our ClearPad. It has all the advantages of our capacitive position sensing technology and allows for visual feedback when incorporated with a display device, such as an LCD. Our technology does not require calibration, does not produce undesirable internal reflections, and has reduced power requirements, allowing for longer battery life.
Pattern Recognition Technology. This technology is a set of software algorithms and techniques for converting real-world data, such as handwriting, into a digital form that can be recognized and manipulated within a computer and gesture decoding for our TouchPad products. Our technology provides reliable handwriting recognition and can be used in other applications such as signature verification and gesture recognition providing for a richer user experience.

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Mixed Signal Integrated Circuit Technology. This hybrid analog-digital integrated circuit technology combines the power of digital computation with the ability to interface with non-digital, real-world signals, such as the position of a finger or stylus on a surface. Our patented design techniques permit us to utilize this technology to optimize our core ASIC engine for all our products.
Proprietary Microcontroller Technology. This technology consists of a proprietary 16-bit microcontroller core embedded in the digital portion of our mixed signal ASIC, which allows us to optimize our ASIC for position sensing tasks. Our embedded microcontroller provides great flexibility in customizing our product solutions utilizing firmware, which eliminates the need to design new circuitry for each new application.
Competing Technology
Many human interface solutions currently utilize resistive sensing technology. Resistive sensing technology consists of a flexible membrane above a flat, rigid, electrically conductive surface. When finger or stylus pressure is applied to the membrane, it deforms until it makes contact with the rigid layer below, at which point attached electronics can determine the position of the finger or stylus. Since the flexible membrane is a moving part, it is susceptible to mechanical wear and will eventually suffer degraded performance. Due to the way that resistive position sensors work, it is not possible for them to detect more than a single finger or stylus at any given time. The positional accuracy of a resistive sensor is limited by the uniformity of the resistive coating as well as by the mechanics of the flexible membrane. Finally, implementations of resistive technology over display devices, such as an LCD, result in reduced transmissivity, or the amount of light that can pass through the display, requiring the use of backlighting and thereby reducing the battery life of the device.
Research and Development
We conduct ongoing research and development programs that focus on advancing our technologies, developing new products, improving design and manufacturing processes, and enhancing the quality and performance of our product solutions. Our goal is to provide our customers with innovative solutions that address their needs and improve their competitive positions. Our research and development focuses on advancing our existing interface technologies, improving our current product solutions, and expanding our technologies to serve new markets. Our vision is to offer human interface solutions, such as touch, handwriting, vision, and voice capabilities, that can be readily incorporated into varied electronic devices.
Our research and development programs focus on the development of accurate, easy to use, reliable, and intuitive human interfaces for electronic devices. We believe our innovative interface technologies can be applied to many diverse products. We believe the interface is a key factor in the differentiation of these products. We believe that our interface technologies enable us to provide customers with product solutions that have significant advantages over alternative technologies in terms of functionality, size, power consumption, durability, and reliability. We also intend to pursue strategic relationships and acquisitions to enhance our research and development capabilities, leverage our technology, and shorten our time to market with new technological applications.
Our research, design, and engineering teams frequently work directly with our customers to design custom solutions for specific applications. We focus on enabling our customers to overcome technical barriers and enhance the performance of their products. We believe our engineering know-how and electronic systems expertise provide significant benefits to our customers by enabling them to concentrate on their core competencies of production and marketing.
As of the end of fiscal 2011, we employed 446 people in our technology, engineering, and product design functions in the United States, Taiwan, Hong Kong, Korea, Japan and China. Our research and development expenses were approximately $105.0 million, $86.6 million, and $68.0 million in fiscal 2011, 2010, and 2009, respectively.
Intellectual Property Rights
Our success and ability to compete depend in part on our ability to maintain the proprietary aspects of our technologies and products. We rely on a combination of patents, copyrights, trade secrets, trademarks, confidentiality agreements, and other contractual provisions to protect our intellectual property, but these measures may provide only limited protection. Our research, design, and engineering teams frequently work directly with our OEM customers to design custom solutions for specific applications.

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We hold 125 U.S. patents in force and have 128 U.S. patents pending, as well as many non-U.S. counterparts to the U.S. patents and U.S. patents pending. Collectively, these patents and patents pending cover various aspects of our key technologies, including touch sensing, pen sensing, handwriting recognition, customizable tap zones, edge motion, and virtual scrolling technologies. Our proprietary software is protected by copyright laws and the source code for our proprietary software is protected under applicable trade secret laws.
Our extensive array of technologies includes ASICs, firmware, software, and pattern recognition and position sensing technologies. Our products rely on a combination of these technologies, making it difficult to use any single technology as the basis for replicating our products. Furthermore, the length and customization of the customer design cycle serve to protect our intellectual property rights.
Patent applications that we have filed or may file in the future may not result in a patent being issued. Our issued patents may be challenged, invalidated, or circumvented, and claims of our patents may not be of sufficient scope or strength, or issued in the proper geographic regions, to provide meaningful protection or any commercial advantage. We have not applied for, and do not have, any copyright registration on our technologies or products. We have applied to register certain of our trademarks in the United States and other countries. There can be no assurance that we will obtain registrations of trademarks in key markets. Failure to obtain registrations could compromise our ability to protect fully our trademarks and brands and could increase the risk of challenge from third parties to our use of our trademarks and brands. In addition, our failure to enforce and protect our intellectual property rights or obtain from third parties the right to use necessary technology could have a material adverse effect on our business, financial condition, and results of operations.
We do not consistently rely on written agreements with our customers, suppliers, manufacturers, and other recipients of our technologies and products, and therefore some trade secret protection may be lost and our ability to enforce our intellectual property rights may be limited. Furthermore, our customers, suppliers, manufacturers, and other recipients of our technologies and products may seek to use our technologies and products without appropriate limitations. In the past, we did not consistently require our employees and consultants to enter into confidentiality, employment, or proprietary information and invention agreements. Therefore, our former employees and consultants may try to claim some ownership interest in our technologies and products and may use our technologies and products competitively and without appropriate limitations.
Other companies, including our competitors, may develop technologies that are similar or superior to our technologies, duplicate our technologies, or design around our patents and may have or obtain patents or other proprietary rights that would prevent, limit, or interfere with our ability to make, use, or sell our products. Effective intellectual property protection may be unavailable or limited in some foreign countries in which we operate, such as China and Taiwan. Unauthorized parties may attempt to copy or otherwise use aspects of our technologies and products that we regard as proprietary. There can be no assurance that our means of protecting our proprietary rights in the United States or abroad will be adequate or that competitors will not independently develop similar technologies. If our intellectual property protection is insufficient to protect our intellectual property rights, we could face increased competition in the market for our technologies and products.
We may receive notices from third parties that claim our products infringe their rights. From time to time, we receive notice from third parties of the intellectual property rights such parties have obtained. We cannot be certain that our technologies and products do not and will not infringe issued patents or other proprietary rights of third parties. Any infringement claims, with or without merit, could result in significant litigation costs and diversion of resources, including the payment of damages, which could have a material adverse effect on our business, financial condition, and results of operations.
Customers
Our customers include many of the world’s largest PC OEMs, based on unit shipments, as well as a variety of consumer electronics manufacturers, including mobile smartphone and feature phone OEMs. Our demonstrated track record of technological leadership, design innovation, product performance, cost effectiveness, and on-time delivery have resulted in our leadership position in providing human interface solutions. We believe our strong relationship with our OEM customers, many of which are also currently developing tablets and digital lifestyle products, will continue to position us as a source of supply for their product offerings.

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Our industry leading OEM customers in fiscal 2011 included the following:
 	•	 	Acer	
 	 	 	 	
 	•	 	Asustek	
 	 	 	 	
 	•	 	Dell	
 	 	 	 	
 	•	 	Hewlett-Packard	
 	 	 	 	
 	•	 	HTC	
 	 	 	 	
 	•	 	Huawei	
 	 	 	 	
 	•	 	Lenovo	
 	 	 	 	
 	•	 	LG Electronics	
 	 	 	 	
 	•	 	Nokia	
 	 	 	 	
 	•	 	Samsung	
 	 	 	 	
 	•	 	Sharp	
 	 	 	 	
 	•	 	Sony Ericsson	
 	 	 	 	
 	•	 	Techmosa International	
 	 	 	 	
 	•	 	Toshiba	
We generally supply custom-designed products to our OEM customers through their contract manufacturers. We sell our custom-designed products directly to these contract manufacturers, some of which include BYD, Compal, Flextronics, Inventec, Kuroda, Nolato, Wintek, Wistron, TPK, and Zhan Yun Shanghai Electronics. No customer accounted for more than 10% of our net revenue for fiscal 2011. Sales to Zhan Yun Shanghai Electronics and Compal accounted for approximately 11% and 10%, respectively, of our net revenue for fiscal 2010. We supply our OneTouch solution to both OEM contract manufacturers and OEM customers.
We consider both the OEMs and their contract manufacturers to be our customers. Both the OEMs and their contract manufacturers may determine the design and pricing requirements and make the overall decision regarding the use of our human interface solutions in their products. The contract manufacturers place orders with us for the purchase of our products, take title to the products purchased upon shipment by us, and pay us directly for those purchases. These customers have no return privileges except for warranty provisions.
Strategic Relationships
We have used strategic relationships to enhance our ability to offer value-added customer solutions in the past. We intend to enter into additional strategic relationships with companies that may help us serve our target markets.
Sales and Marketing
We sell our product solutions for incorporation into the products of our OEM customers. We generate sales through direct sales employees as well as outside sales representatives and distributors. Our sales personnel receive substantial technical assistance and support from our internal engineering resources because of the highly technical nature of our product solutions. Sales frequently result from multi-level sales efforts that involve senior management, design engineers, and our sales personnel interacting with our customers’ decision makers throughout the product development and order process.
As of the end of fiscal 2011, we employed 134 sales and marketing professionals. We maintain nine customer support offices domestically and internationally, which are located in the United States, Taiwan, China, Korea, Japan, and Switzerland. In addition, we utilize sales representatives/sales distributors in China, Japan, and Taiwan.
International sales constituted approximately 99% of our revenue for each of fiscal 2011, 2010, and 2009. Approximately 80% of our sales were made to companies located in China and Taiwan that provide design and manufacturing services for major notebook computer and digital lifestyle product OEMs. All of our sales were denominated in U.S. dollars.
Manufacturing
We employ a virtual manufacturing platform through third-party relationships. We currently utilize three semiconductor wafer manufacturers to supply us with silicon wafers integrating our proprietary design specifications. The completed silicon wafers are forwarded to third-party package and test processors for further processing into die and packaged ASICs, as applicable, which are then utilized in our custom interface products or processed as our OneTouch products.

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After processing and testing, the die and ASICs are consigned to various contract manufacturers for assembly or are shipped directly to our customers. During the assembly process, our die or ASIC is combined with other components to complete the module for our custom human interface solution. The finished assembled product is subsequently shipped by our contract manufacturers directly to our customers for integration into their products.
We believe our virtual manufacturing strategy provides a scalable business model; enables us to concentrate on our core competencies of research and development, technological advances, and product design and engineering; and reduces our capital expenditures. In addition, this strategy significantly reduces our working capital requirements for inventory because we do not incur most of our manufacturing costs until we have actually shipped our interface products to our customers and billed those customers for those products.
Our third-party contract manufacturers are Asian-based organizations. We provide our contract manufacturers with six-month rolling forecasts of our production requirements. We do not, however, have long-term agreements with any of our contract manufacturers that guarantee production capacity, prices, lead times, or delivery schedules. Our reliance on those parties exposes us to vulnerability owing to our dependence on few sources of supply. We believe, however, that other sources of supply are available. In addition, we may establish relationships with other contract manufacturers in order to reduce our dependence on any one source of supply.
Periodically, we purchase inventory from our contract manufacturers when a customer delays its delivery schedule or cancels its order. In those circumstances in which our customer has cancelled its order and we purchase inventory from our contract manufacturers, we consider a write-down to reduce the carrying value of the inventory purchased to its net realizable value. We charge write-downs to reduce the carrying value of obsolete, slow moving, and non-usable inventory to net realizable value to cost of revenue.
Backlog
As of the end of fiscal 2011, we had a backlog of orders of $76.0 million, a decrease of $8.9 million compared with a backlog of orders as of the end of fiscal 2010 of $84.9 million. The mix of products ordered by customers at the end of fiscal 2011 had a lower average selling price than those ordered at the end of fiscal 2010, resulting in the decrease in backlog. Our backlog consists of product orders for which purchase orders have been received and which are scheduled for shipment in the subsequent quarter. Most orders are subject to rescheduling or cancellation with limited penalties. Because of the possibility of customer changes in product shipments, our backlog as of a particular date may not be indicative of net sales for any succeeding period.
Competition
Our principal competitors in the sale of notebook touch pads are Alps Electric, a Japanese conglomerate, and Elan Microelectronics, a Taiwanese company, and our principal competitor in the sale of notebook pointing sticks is Alps. In the markets for digital lifestyle products and other electronic devices, our competitors include Atmel, Cypress, Melfas, and various other companies involved in human interface solutions. In certain cases, large OEMs may develop alternative human interface solutions for their own products or provide key components for use in designing human interface solutions.
In the notebook human interface market, we plan to continue to compete primarily on the basis of our technological expertise, design innovation, customer service, and the long track record of performance of our human interface solutions, including their ease of use, reliability, and cost-effectiveness as well as their timely design, production, and delivery schedules. Our pointing stick solutions, including our proprietary TouchStyk, enable us to address the notebook computer market that uses dual pointing interfaces. Our ability to supply OEMs with TouchPads, TouchStyks, and dual pointing alternatives enhances our market position as we can provide OEMs with the following advantages:
 	•	 	single source supplier to eliminate compatibility issues;	

 	•	 	cost-effective and simplified integration;	

 	•	 	simplified product line to address both interface preferences;	

 	•	 	end user flexibility because one notebook can address both user preferences;	

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 	•	 	highly experienced engineering resources, particularly in the mechanical, industrial design, and electrical areas as the general notebook computer market embraces thinner and lighter designs; and	

 	•	 	modular approach allowing OEMs to utilize our TouchPad, our TouchStyk, or a combination of both interfaces.	
In the human interface markets for digital lifestyle products and other electronic devices, we compete primarily based on the advantages of our systems knowledge of capacitive sensing and pattern recognition technologies. We believe our solutions-based systems engineering experience coupled with our technologies offer benefits in terms of size, power consumption, durability, light transmissivity, resolution, ease of use, and reliability when compared to our competitors and other technologies. While these markets continue to evolve, we believe we are positioned to compete aggressively for this business based on our proven track record, our marquee global customer base, and our reputation for design innovation. New competitors, alliances among competitors, or alliances among competitors and OEMs also may emerge and allow competitors to rapidly acquire significant market share.
Furthermore, our competitors or our customers may develop technologies in the future that more effectively address the human interface needs of the notebook computer market and digital lifestyle product markets. Our sales, profitability, and success depend on our ability to compete with other suppliers of human interface solutions and components used in human interface solutions. Our competitive position could be adversely affected if one or more of our current OEMs reduce their orders or if we are unable to develop new customers for our human interface solutions.
Employees
As of the end of fiscal 2011, we employed a total of 676 persons, including 96 in operations, finance, and administration; 134 in sales and marketing; and 446 in research and development. Of these employees, 394 were located in North America, 275 in Asia/Pacific, and seven in Europe. We consider our relationship with our employees to be good, and none of our employees are represented by a union in collective bargaining with us.
Competition for qualified personnel in our industry is extremely intense, particularly for engineering and other technical personnel. Our success depends on our continued ability to attract, hire, and retain qualified personnel.
Executive Officers
The following table sets forth certain information regarding our executive officers as of July 31, 2011:
 	 	 	 	 	
Name	 	Age	 	Position	
 	 	 	 	 	
Russell J. Knittel	 	61	 	Interim President and Chief Executive Officer, and Director	
 	 	 	 	 	
Kathleen A. Bayless	 	55	 	Senior Vice President, Chief Financial Officer, Secretary, and Treasurer	
 	 	 	 	 	
Kevin D. Barber	 	51	 	Senior Vice President and General Manager, Handheld Division	
 	 	 	 	 	
David B. Long	 	50	 	Senior Vice President of World Wide Sales	
 	 	 	 	 	
Stanley A. Swearingen	 	51	 	Senior Vice President of Strategic Technology, Corporate Development, and the System Silicon Division	
 	 	 	 	 	
Alex Wong	 	56	 	Senior Vice President of World Wide Operations	
 	 	 	 	 	
Mark N. Vena	 	49	 	Senior Vice President and General Manager, PC Division	

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Russell J. Knittel has been interim President and Chief Executive Officer and a Director of our company since October 2010. Mr. Knittel served as Executive Vice President of our company from July 2007 to October 2010 and acting General Manager of our Handheld Division from July 2010 to October 2010. Mr. Knittel served as Chief Financial Officer, Chief Administrative Officer, Secretary, and Treasurer of our company from November 2001 until his retirement from those positions in September 2009. Mr. Knittel served as Senior Vice President of our company from November 2001 until July 2007. He served as Vice President of Administration and Finance, Chief Financial Officer, and Secretary of our company from April 2000 through October 2001. Mr. Knittel is a director of MarineMax, Inc. and OCZ Technology Group, Inc., which are both publicly held companies. Mr. Knittel also serves as a director of LitePoint Corporation, a privately held company. Mr. Knittel holds a Bachelor of Arts degree in accounting from California State University at Fullerton and a Masters of Business Administration from San Jose State University.
Kathleen A. Bayless has been Senior Vice President, Chief Financial Officer, Secretary, and Treasurer of our company since September 2009. Ms. Bayless served as the Senior Vice President — Finance of our company from March 2009 to September 2009. Ms. Bayless spent 13 years at Komag, a leading supplier of thin-film disks to the disk drive industry, where she served most recently as Executive Vice President, Secretary, and Chief Financial Officer beginning in September 2002. Komag filed a voluntary petition for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code on August 24, 2001, and emerged from bankruptcy in June 2002. Prior to joining Komag, Ms. Bayless held the position of Senior Audit Manager at the public accounting firm of Ernst & Young. Ms. Bayless holds a Bachelor of Science degree from California State University Fresno and is a certified public accountant.
Kevin D. Barber has been the Senior Vice President and General Manager of the Handheld Division of our company since January 2011. Prior to joining our company Mr. Barber was Chief Executive Officer of ACCO Semiconductor since 2008. From 2007 to 2008, Mr. Barber served as a Principal consultant at PRTM focused on the electronics industry. Mr. Barber was Senior Vice President, General Manager of the Mobile Solutions business at Skyworks Solutions from 2003 to 2006 where he was responsible for delivering innovative RF products to the mobile industry. Mr. Barber was Senior Vice President of Operations at Skyworks Solutions from 2002 to 2003 and Conexant Systems from 2001 to 2002. Previously, Mr. Barber held various senior operations positions at Conexant Systems and Rockwell Semiconductor. Mr. Barber holds a Bachelor of Science in Electrical Engineering from San Diego State University and Masters of Business Administration from Pepperdine University.
David B. Long has been Senior Vice President of World Wide Sales of our company since July 2010. Mr. Long served as Vice President of World Wide Sales of our company from January 2008 to July 2010. Prior to joining our company, Mr. Long served as Vice President of Worldwide Sales for Consumer Products at LSI Logic Corporation where he directed the management of sales and customer support for standard and custom silicon solutions. From 2003 to 2006, Mr. Long served as the Vice President of Asia Pacific Sales of LSI, focusing on the Consumer and Storage product segments. Mr. Long was the Director of North American-West Sales for LSI Operations from 2002 to 2003. Mr. Long also managed LSI’s worldwide account with Cisco Systems from 1998 until 2002, directing an extended team of sales, engineering, marketing, operations, and customer service representatives. Mr. Long holds a Bachelor’s degree in Business Administration/Marketing Management from California Polytechnic University, San Luis Obispo.
Stanley A. Swearingen has been Senior Vice President of Strategic Technology, Corporate Development, and the System Silicon Division of our company since July 2010. Prior to joining our company, Mr. Swearingen served as a member of the Office of the President at MiniCircuits from March 2009 to October 2009 where he was responsible for strategy and corporate development. From August 2004 to November 2008, Mr. Swearingen was the Vice President and General Manager of the Linear Product business unit at Skyworks Solutions, Inc., which designs, manufactures, sells, and supports a diverse portfolio of RF products and licensing of intellectual property. Mr. Swearingen was Vice President and General Manager of Agere Systems Computing Connectivity division, where he was responsible for the design and manufacturing of wired and wireless connectivity solutions from November 2000 to August 2004. From July 1999 to November 2000, Mr. Swearingen served as Chief Executive Officer of Quantex Microsystems, a direct provider of personal computers, servers, and Internet infrastructure products. Mr. Swearingen has also held senior management positions at National Semiconductor, Cyrix, and Digital Equipment Corp.
Alex Wong has been Senior Vice President of World Wide Operations of our company since July 2010. Mr. Wong served as Vice President of World Wide Operations of our company from September 2006 to July 2010. From 2003 to 2006, Mr. Wong served our company as Managing Director of Hong Kong and Director of Operations. Prior to joining our company, Mr. Wong held various management positions with National Semiconductor Corporation, including General Manager for National Joint Ventures in China and Hong Kong and Director of Corporate Business Development. Mr. Wong holds a Bachelor of Science degree in Computer Science from California State University at Northridge and a Masters in Business Administration from the University of East Asia, Macau.

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Mark N. Vena has been Senior Vice President and General Manager, PC Division of our company since July 2010. Mr. Vena served as Vice President, PC Business of our company from April 2007 to July 2010. Prior to joining our company, Mr. Vena served as Vice President of Worldwide Marketing of Alienware from October 2005 to March 2007. From 1982 to 2005, Mr. Vena held various business and product marketing leadership positions at Dell, Compaq, Epson, and IBM. Mr. Vena holds a Bachelor of Arts degree in History, cum laude, from Boston College.
There are no arrangements, understandings, or family relationships pursuant to which our executive officers were selected. There are no related party transactions between us and our executive officers. We have entered into indemnification agreements with our officers and directors.

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ITEM 1A.	 	RISK FACTORS	
You should carefully consider the following factors, together with all the other information included in this report, in evaluating our company and our business.
We currently depend on our human interface solutions for the notebook computer market and digital lifestyle product markets for substantially all of our revenue, and any downturn in sales of these products would adversely affect our business, revenue, operating results, and financial position.
We currently depend on our human interface solutions for the notebook computer market and digital lifestyle product markets for substantially all of our revenue, and any downturn in sales of these products would adversely affect our business, revenue, operating results, and financial position. Net revenue for our human interface solutions for our PC and digital lifestyle products, primarily mobile smartphones and feature phones, accounted for approximately 48% and 52%, respectively, of our net revenue for fiscal 2011 and 59% and 41%, respectively, of our net revenue for fiscal 2010. We did not generate any material revenue from our human interface solutions for mobile smartphones and feature phones until the fourth quarter of fiscal 2008.
A softening of demand in the notebook portion of the PC market, a reduced level of our participation in the notebook portion of the PC market, or a slowdown of growth in the notebook portion of the PC market because of consumer preferences, the emergence of tablet or slate devices not including our product solutions, or other factors would cause our business, results of operations, and financial position to suffer. Similarly, the lack of market acceptance of our product solutions compared with competitive products in the mobile smartphone and feature phone market or our inability to be a leading supplier of human interface solutions for mobile smartphone and feature phone products would have a negative effect on our business, results of operations, and financial position.
Net revenue from our human interface solutions for digital lifestyle products has been volatile in the past, and may not increase or be less volatile in the future.
Net revenue from our human interface solutions for digital lifestyle products, particularly mobile smartphones and feature phones and portable digital music players, has been volatile in the past. Our net revenue from our human interface solutions for digital lifestyle products may not increase or be less volatile in the future. Net revenue from our human interface solutions for digital lifestyle products was $309.1 million (which included $304.5 million for mobile smartphones and feature phones and $4.6 million for portable digital music players) in fiscal 2011 and $209.2 million (which included $177.4 million for mobile smartphones and feature phones and $31.7 million for portable digital music players) in fiscal 2010. Our interface business for digital lifestyle products faces many uncertainties, including our success in enhancing our market share in evolving markets dominated by a limited number of OEMs and market acceptance of our product solutions over competitive product solutions. Our inability to address these uncertainties successfully and to be a leading supplier of human interfaces for digital lifestyle products would negatively affect our business.
We are transitioning a significant portion of our product solutions for the mobile smartphone and feature phone market from full module solutions to chip or tail solutions, which may result in lower revenue.
We are transitioning a significant portion of our product solutions for the mobile smartphone and feature phone market from full module solutions to chip or tail solutions, which may result in lower revenue. Historically, we provided a significant portion of our mobile smartphone and feature phone customers with a complete touchscreen module, including our proprietary controller ASIC, associated electronics, firmware, software, and systems engineering and design as well as a third-party capacitive sensor and module assembly. During fiscal 2011, our full module solutions for the mobile smartphone and feature phone market declined from approximately 50% of quarterly mobile product revenue to 30% of quarterly mobile product revenue, and we anticipate it will further decline to no more than 10% of mobile product revenue in fiscal 2012. As a result of emerging industry factors, many of our customers are moving to either a chip solution in which we offer our proprietary controller ASIC, firmware, software, and systems engineering and design with the customer utilizing third-parties for the associated electronics, sensor, and module assembly or a tail solution in which we offer our proprietary controller ASIC, associated electronics, firmware, software, and systems engineering and design with the customer utilizing third-parties for the sensor and module assembly. Our chip or tail solutions for mobile smartphones and feature phones typically generate lower revenue, but higher gross margin, than our full module solutions.

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Our historical financial performance is based on net revenue generated from our human interface solutions for the notebook computer market and, more recently, our human interface solutions for digital lifestyle products, and may not be indicative of our future performance.
Our historical financial performance is based on net revenue generated from our human interface solutions for the notebook computer market and, more recently, our human interface solutions for digital lifestyle products, particularly mobile smartphones and feature phones. As recently as fiscal 2008, we derived a large majority of our net revenue from the sale of our TouchPad products for notebook computers. In fiscal 2011, net revenue from our human interface solutions for digital lifestyle products exceeded net revenue from our PC product solutions for the first time in our history. We expect a relatively even revenue mix between sales of our human interface solutions for notebook computers and our human interface solutions for mobile smartphones and feature phones. However, we have a more limited operating history in the markets for digital lifestyle products, including mobile smartphones and feature phones, and virtually no operating history for other products, such as tablets. In addition, we are transitioning a significant portion of our product solutions for the mobile smartphone and feature phone market from full module solutions to chip or tail solutions.
We cannot assure you that our human interface business for new markets will be successful or that we will be able to continue to generate significant revenue from these markets.
Our product solutions may not be successful in new markets despite the fact that these product solutions are capable of enabling people to interact more easily and intuitively with a wide variety of mobile computing, communication, entertainment, and electronic devices in addition to notebook computers and mobile smartphones and feature phones. We are currently targeting the rapidly developing tablet market. Our tablet products, including the ClearPad Series 7, face many uncertainties and have no established track record in this market. Our inability to address these uncertainties successfully and to become a leading supplier in the tablet market would result in a slower growth rate than we currently anticipate. We do not know whether our products for the tablet market will gain market acceptance or will ever result in a substantial portion of our revenue on a consistent basis. The failure to succeed in the tablet market would result in no return on the substantial investments we have made to date and plan to make in the future to penetrate the tablet market.
Various target markets for our interfaces, such as tablets, GPS devices, smart handheld devices, and interactive games and toys, may develop slower than anticipated or could utilize competing technologies. The markets for certain of these products depend in part upon the continued development and deployment of wireless and other technologies, which may or may not address the needs of users of these products.
Our ability to generate significant revenue from new markets will depend on various factors, including the following:
 	•	 	the development and growth of these markets;	

 	•	 	the ability of our technologies and product solutions to address the needs of these markets, the price and performance requirements of OEMs, and the preferences of end users; and	

 	•	 	our ability to provide OEMs with human interface solutions that provide advantages in terms of size, power consumption, reliability, durability, performance, and value-added features compared with alternative solutions.	
Many manufacturers of these products have well-established relationships with competitive suppliers. Our ongoing success in these markets will require us to offer better performance alternatives to other solutions at competitive costs. The failure of any of these target markets to develop as we expect, or our failure to serve these markets to a significant extent, will impede our sales growth and could result in substantially reduced earnings. We cannot predict the size or growth rate of these markets or the market share we will achieve in these markets in the future.

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Market acceptance of our customers’ existing or new products that utilize our human interface solution may decline or may not develop and, as a result, our sales may decline or may not increase.
We do not sell any products to end users. Instead, we design various human interface solutions that our OEM customers incorporate into their products. As a result, our success depends almost entirely upon the widespread market acceptance of our OEM customers’ products. We do not control or influence the manufacture, promotion, distribution, or pricing of the products that incorporate our human interface solutions. Instead, we depend on our customers to manufacture and distribute products incorporating our human interface solutions and to generate consumer demand through marketing and promotional activities. Even if our technologies successfully meet our customers’ price and performance goals, our sales would decline or fail to develop if our customers do not achieve commercial success in selling their products that incorporate our human interface solutions.
Competitive advances by OEMs in the PC or digital lifestyle product markets that do not utilize our human interface solutions broadly in their product offerings at the expense of our OEM customers could result in lost sales opportunities. Within the digital lifestyle product markets, the mobile smartphone market has become an important factor in our operating results. Any failure to expand our presence in this market, a significant slowdown in the use of our human interface solutions by our customers in this market, the reduced demand for our customers’ products, or a slowdown of growth in this market would adversely affect our sales.
If we fail to maintain and build relationships with our customers and do not continue to satisfy our customers, we may lose future sales and our revenue may stagnate or decline.
Because our success depends on the widespread market acceptance of our OEM customers’ products, we must continue to maintain our relationships with the leading notebook computer OEMs and expand our relationships with mobile smartphone and tablet OEMs. In addition, we must identify areas of significant growth potential in other markets, establish relationships with OEMs in those markets, and assist those OEMs in developing products that use our interface product solutions. Our failure to identify potential growth opportunities, particularly in the mobile smartphone and feature phone market and the tablet market, or establish and maintain relationships with OEMs in those markets, would prevent our business from growing in those markets.
Our ability to meet the expectations of our customers requires us to provide innovative human interface solutions for customers on a timely and cost-effective basis and to maintain customer satisfaction with our human interface solutions. We must match our design and production capacity with customer demand, maintain satisfactory delivery schedules, and meet performance goals. If we are unable to achieve these goals for any reason, our customers could reduce their purchases from us and our sales would decline or fail to develop.
Our customer relationships also can be affected by factors affecting our customers that are unrelated to our performance. These factors can include a myriad of situations, including business reversals of customers, determinations by customers to change their product mix or abandon business segments, or mergers, consolidations, or acquisitions involving our customers.
The loss of revenue from one or more large customers could harm our business, financial condition, and results of operations.
In fiscal 2011, no customer accounted for more than 10% of our net revenue. In fiscal 2010, two customers accounted for 21% of our net revenue. These customers were Zhan Yun Shanghai Electronics and Compal. Additionally, receivables from Compal consisted of 12% of accounts receivable at the end of fiscal 2011. There were no other customers who represented more than 10% of our accounts receivable.
BYD, Compal, Inventec, Kuroda, Nolato, Wistron, TPK, and Zhan Yun Shanghai Electronics are some of the contract manufacturers that serve our OEM customers. Any material delay, cancellation, or reduction of orders from any one or more of these contract manufacturers or the OEMs they serve could harm our business, financial condition, and results of operations. The adverse effect would be more substantial if our other customers do not increase their orders or if we are unsuccessful in generating orders for human interface solutions from new customers. Many of these contract manufacturers sell to the same OEMs, and therefore our concentration with certain OEMs may be higher than with any individual contract manufacturer. Concentration in our customer base may make fluctuations in revenue and earnings more severe and make business planning more difficult.

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We rely on others for our production and any interruptions of these arrangements could disrupt our ability to fill our customers’ orders.
We utilize contract manufacturers for all of our production requirements. The majority of our manufacturing is conducted in China, Taiwan, and Thailand by contract manufacturers that also perform services for numerous other companies. We do not have a guaranteed level of production capacity with any of our contract manufacturers. Qualifying new contract manufacturers, and specifically semiconductor foundries, is time consuming and might result in unforeseen manufacturing and operations problems. The loss of our relationships with our contract manufacturers or assemblers or their inability to conduct their manufacturing and assembly services for us as anticipated in terms of capacity, cost, quality, and timeliness could adversely affect our ability to fill customer orders in accordance with required delivery, quality, and performance requirements. If this were to occur, the resulting decline in revenue would harm our business.
We depend on third parties to maintain satisfactory manufacturing yields and delivery schedules, and their inability to do so could increase our costs, disrupt our supply chain, and result in our inability to deliver our products, which would adversely affect our results of operations.
We depend on our contract manufacturers to maintain high levels of productivity and satisfactory delivery schedules at manufacturing and assembly facilities located primarily in China, Taiwan, and Thailand. We provide our contract manufacturers with six-month rolling forecasts of our production requirements. We do not, however, have long-term agreements with any of our contract manufacturers that guarantee production capacity, prices, lead times, or delivery schedules. Our contract manufacturers serve other customers, a number of which have greater production requirements than we do. As a result, our contract manufacturers could determine to prioritize production capacity for other customers or reduce or eliminate deliveries to us on short notice. At times, we have experienced lower than anticipated manufacturing yields and lengthening of delivery schedules. Lower than expected manufacturing yields could increase our costs or disrupt our supplies. We may encounter lower manufacturing yields and longer delivery schedules in commencing volume production of new products that we introduce. Any of these problems could result in our inability to deliver our product solutions in a timely manner and adversely affect our operating results.
Shortages of components and materials may delay or reduce our sales and increase our costs, thereby harming our results of operations.
The inability to obtain sufficient quantities of components and other materials necessary for the production of our products could result in reduced or delayed sales or lost orders. Any delay in or loss of sales could adversely impact our operating results. Many of the materials used in the production of our products are available only from a limited number of foreign suppliers, particularly suppliers located in Asia. In most cases, neither we nor our contract manufacturers have long-term supply contracts with these suppliers. As a result, we are subject to economic instability in these Asian countries as well as to increased costs, supply interruptions, and difficulties in obtaining materials. Our customers also may encounter difficulties or increased costs in obtaining the materials necessary to produce their products into which our product solutions are incorporated.
From time to time, materials and components used in our product solutions or in other aspects of our customers’ products have been subject to allocation because of shortages of these materials and components. Future shortages of materials and components, including potential supply constraints of silicon, could cause delayed shipments, customer dissatisfaction, and lower revenue.
We are subject to lengthy development periods and product acceptance cycles, which can result in development and engineering costs without any future revenue.
We provide human interface solutions that are incorporated by OEMs into the products they sell. OEMs make the determination during their product development programs whether to incorporate our human interface solutions or pursue other alternatives. This process requires us to make significant investments of time and resources in the design of human interface solutions well before our customers introduce their products incorporating these interfaces and before we can be sure that we will generate any significant sales to our customers or even recover our investment. During a customer’s entire product development process, we face the risk that our interfaces will fail to meet our customer’s technical, performance, or cost requirements or that our products will be replaced by competitive products or alternative technological solutions. Even if we complete our design process in a manner satisfactory to our customer, the customer may delay or terminate its product development efforts. The occurrence of any of these events could cause sales to not materialize, to be deferred, or to be cancelled, which would adversely affect our operating results.

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We do not have long-term purchase commitments from our customers, and their ability to cancel, reduce, or delay orders could reduce our revenue and increase our costs.
Our customers do not provide us with firm, long-term volume purchase commitments, but instead issue purchase orders. As a result, customers can cancel purchase orders or reduce or delay orders at any time. The cancellation, delay, or reduction of customer purchase orders could result in reduced revenue, excess inventory, and unabsorbed overhead. We have an established presence in the notebook computer market and have only recently established a presence in the digital lifestyle product markets. Our success in the digital lifestyle product markets, including those for mobile smartphones and feature phones, and the tablet market, require us to establish the value added by our products to OEMs that have traditionally used other solutions. All of the markets we serve are subject to severe competitive pressures, rapid technological change, and product obsolescence, which increase our inventory and overhead risks, resulting in increased costs.
We face intense competition that could result in our losing or failing to gain market share and suffering reduced revenue.
We serve intensely competitive markets that are characterized by price erosion, rapid technological change, and competition from major domestic and international companies. This intense competition could result in pricing pressures, lower sales, reduced margins, and lower market share. Depressed economic conditions, a slowdown in the PC market, the emergence of netbooks, the emergence of new products such as tablet or slate devices, rapid changes in the mobile smartphone and feature phone market, and competitive pressures may result in lower demand for our product solutions, pricing pressures, and reduced unit margins.
Any movement away from high-quality, custom designed, feature-rich human interface solutions to lower priced alternatives would adversely affect our business. Some of our competitors, particularly in the markets for digital lifestyle products and other electronic devices, have greater market recognition, larger customer bases, and substantially greater financial, technical, marketing, distribution, and other resources than we possess and that afford them competitive advantages. As a result, they may be able to devote greater resources to the promotion and sale of products, to negotiate lower prices for raw materials and components, to deliver competitive products at lower prices, and to introduce new product solutions and respond to customer requirements more quickly than we can. Our competitive position could suffer if one or more of our customers determine not to utilize our custom engineered, total solutions approach and instead decide to design and manufacture their own interfaces, to contract with our competitors, or to use alternative technologies.
Our ability to compete successfully depends on a number of factors, both within and outside our control. These factors include the following:
 	•	 	our success in designing and introducing new human interface solutions, including those implementing new technologies;	

 	•	 	our ability to predict the evolving needs of our customers and to assist them in incorporating our technologies into their new products;	

 	•	 	our ability to meet our customers’ requirements for low power consumption, ease of use, reliability, durability, and small form factor;	

 	•	 	our ability to meet our customers’ price and performance requirements;	

 	•	 	the quality of our customer service and support;	

 	•	 	the rate at which customers incorporate our human interface solutions into their own products;	

 	•	 	product or technology introductions by our competitors; and	
 	 	 	 	
 	•	 	foreign currency fluctuations, which may cause a foreign competitor’s products to be priced significantly lower than our product solutions.	

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If we do not keep pace with technological innovations, our products may not be competitive and our revenue and operating results may suffer.
We operate in rapidly changing markets. Technological advances, the introduction of new products, and new design techniques could adversely affect our business unless we are able to adapt to the changing conditions. Technological advances could render our solutions less competitive or obsolete, and we may not be able to respond effectively to the technological requirements of evolving markets. As a result, we will be required to expend substantial funds for and commit significant resources to:
 	•	 	continue research and development activities on existing and potential human interface solutions,	

 	•	 	hire additional engineering and other technical personnel, and	

 	•	 	purchase advanced design tools and test equipment.	
Our business could be harmed if we are unable to develop and utilize new technologies that address the needs of our customers, or our competitors or customers do so more effectively than we do.
Our efforts to develop new technologies may not result in commercial success, which could cause a decline in our revenue and could harm our business.
Our research and development efforts with respect to new technologies may not result in customer or market acceptance. Some or all of those technologies may not successfully make the transition from the research and development lab to cost-effective production as a result of technology problems, competitive cost issues, yield problems, and other factors. Even when we successfully complete a research and development effort with respect to a particular technology, our customers may decide not to introduce or may terminate products utilizing the technology for a variety of reasons, including the following:
 	•	 	difficulties with other suppliers of components for the products,	

 	•	 	superior technologies developed by our competitors and unfavorable comparisons of our solutions with these technologies,	

 	•	 	price considerations, and	

 	•	 	lack of anticipated or actual market demand for the products.	
The nature of our business requires us to make continuing investments for new technologies. Significant expenses relating to one or more new technologies that ultimately prove to be unsuccessful for any reason could have a material adverse effect on us. In addition, any investments or acquisitions made to enhance our technologies may prove to be unsuccessful. If our efforts are unsuccessful, our business could be harmed.
We may not be able to enhance our existing product solutions and develop new product solutions in a timely manner.
Our future operating results will depend to a significant extent on our ability to continue to provide new human interface solutions that compare favorably with alternative solutions on the basis of time to introduction, cost, performance, and end user preferences. Our success in maintaining existing and attracting new customers and developing new business depends on various factors, including the following:
 	•	 	innovative development of new solutions for customer products,	

 	•	 	utilization of advances in technology,	
 	 	 	 	
 	•	 	maintenance of quality standards,	

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 	•	 	performance advantages,	

 	•	 	efficient and cost-effective solutions, and	

 	•	 	timely completion of the design and introduction of new human interface solutions.	
Our inability to enhance our existing product solutions and develop new product solutions on a timely basis could harm our operating results and impede our growth.
A technologically new human interface solution that achieves significant market share could harm our business.
Our human interface solutions are designed to integrate touch, handwriting, and vision capabilities. New computing and communications devices could be developed that call for a different interface solution. Existing devices also could be modified to allow for a different interface solution. Our business could be harmed if our products become noncompetitive as a result of a technological breakthrough that allows a new interface solution to displace our solutions and achieve significant market acceptance.
International sales and manufacturing risks could adversely affect our operating results.
Our manufacturing and assembly operations are primarily conducted in China, Taiwan, and Thailand by manufacturing contractors. We have sales and logistics operations in Hong Kong, and sales and engineering design support operations in China, Japan, Korea, Switzerland, and Taiwan. These international operations expose us to various economic, political, and other risks that could adversely affect our operations and operating results, including the following:
 	•	 	difficulties and costs of staffing and managing a multi-national organization,	

 	•	 	unexpected changes in regulatory requirements,	

 	•	 	differing labor regulations,	

 	•	 	potentially adverse tax consequences,	

 	•	 	tariffs and duties and other trade barrier restrictions,	

 	•	 	possible employee turnover or labor unrest,	

 	•	 	greater difficulty in collecting accounts receivable,	

 	•	 	the burdens and costs of compliance with a variety of foreign laws,	

 	•	 	the volatility of currency exchange rates,	

 	•	 	potentially reduced protection for intellectual property rights, and	

 	•	 	political or economic instability in certain parts of the world.	
The risks associated with international operations could negatively affect our operating results.
Our business may suffer if international trade is hindered, disrupted, or economically disadvantaged.
Political and economic conditions abroad may adversely affect the foreign production and sale of our products. Protectionist trade legislation in either the United States or foreign countries, such as a change in the current tariff structures, export or import compliance laws, or other trade policies, could adversely affect our ability to sell human interface solutions in foreign markets and to obtain materials or equipment from foreign suppliers.
Changes in policies by the U.S. or foreign governments resulting in, among other things, higher taxation, currency conversion limitations, restrictions on the transfer of funds, or the expropriation of private enterprises also could have a material adverse effect on us. Any actions by countries in which we conduct business to reverse policies that encourage foreign investment or foreign trade also could adversely affect our operating results. In addition, U.S. trade policies, such as “most favored nation” status and trade preferences for certain Asian nations, could affect the attractiveness of our services to our U.S. customers and adversely impact our operating results.

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Our operating results could be adversely affected by fluctuations in the value of the U.S. dollar against foreign currencies.
We transact business predominantly in U.S. dollars and bill and collect our sales in U.S. dollars. A weakening of the dollar could cause our overseas vendors to require renegotiation of either the prices or currency we pay for their goods and services. In the future, customers may negotiate pricing and make payments in non-U.S. currencies. For fiscal 2011, approximately 7% of our costs were denominated in non-U.S. currencies, including Canadian dollars, Hong Kong dollars, British pounds, Taiwan dollars, Japanese yen, Korean won, Chinese yuan, and Swiss francs.
If our overseas vendors or customers require us to transact business in non-U.S. currencies, fluctuations in foreign currency exchange rates could affect our cost of goods, operating expenses, and operating margins and could result in exchange losses. In addition, currency devaluation can result in a loss to us if we hold deposits of that currency. Hedging foreign currencies can be difficult, especially if the currency is not freely traded. We cannot predict the impact of future exchange rate fluctuations on our operating results. We currently do not hedge any foreign currencies.
A majority of our contract manufacturers are located in China, Taiwan, and Thailand, and most of our customers are located in Asia, increasing the risk that a natural disaster, labor strike, war, or political unrest in those countries or that region would disrupt our operations.
A majority of our contract manufacturers are located in China, Taiwan, and Thailand, and most of our customers are located in Asia. Events outside of our control, such as earthquakes, fires, floods, or other natural disasters, or political unrest, war, labor strikes, or work stoppages in these countries, would disrupt their operations, which would impact our business. The risk of earthquakes and tsunamis in the Pacific Rim, including Japan (such as the March 2011 earthquake and tsunamis) and Taiwan is significant because of the proximity to major earthquake fault lines. An earthquake or tsunami could cause significant delays in shipments of our product solutions until we are able to shift our outsourced operations. Further, a variety of political factors, such as political unrest in Thailand or political tension between North Korea and South Korea, could disrupt our operations and our ability to meet our customers’ production schedules. If any of these events occur, we may not be able to obtain alternative capacity. Failure to secure alternative capacity could cause a delay in the shipment of our product solutions, which would cause our revenue to fluctuate or decline.
Variability of customer requirements resulting in cancellations, reductions, or delays may adversely affect our operating results.
We must provide increasingly rapid product turnaround and respond to ever-shorter lead times. A variety of conditions, both specific to individual customers and generally affecting the demand for OEMs’ products, may cause customers to cancel, reduce, or delay orders. Cancellations, reductions, or delays by a significant customer or by a group of customers may adversely affect our revenue and could require us to repurchase inventory from our contract manufacturers, which could adversely affect our costs. On occasion, customers require rapid increases in production, which can strain our resources and reduce our margins. Although we have been able to obtain increased production capacity from our third-party manufacturers, we may be unable to do so at any given time to meet our customers’ demands if their demands exceed anticipated levels.
Our operating results may experience significant fluctuations that could result in a decline in the price of our stock.
In addition to the variability resulting from the short-term nature of our customers’ commitments, other factors contribute to significant periodic and seasonal quarterly fluctuations in our results of operations. These factors include the following:
 	•	 	the cyclicality of the markets we serve;	

 	•	 	the timing and size of orders;	

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 	•	 	order push-outs or cancellations;	

 	•	 	the volume of orders relative to our ability to deliver;	

 	•	 	product introductions and market acceptance of new products or new generations of products;	

 	•	 	the timing of product transitions;	

 	•	 	evolution in the life cycles of our customers’ products;	

 	•	 	timing of expenses in anticipation of future orders;	

 	•	 	changes in product mix;	

 	•	 	availability of manufacturing and assembly services;	

 	•	 	availability of necessary components and materials;	

 	•	 	changes in cost and availability of labor and components;	

 	•	 	the expanded use of high-cost, third-party components in the products we sell;	

 	•	 	timely delivery of product solutions to customers;	

 	•	 	pricing, performance, and availability of competitive products;	

 	•	 	introduction of new technologies into the markets we serve;	

 	•	 	emergence of new competitors;	

 	•	 	pressures on selling prices;	

 	•	 	the absolute and relative levels of corporate enterprise and consumer notebook purchases;	

 	•	 	our success in serving new markets; and	

 	•	 	changes in economic conditions.	
Accordingly, you should not rely on period-to-period comparisons as an indicator of our future performance. Negative or unanticipated fluctuations in our operating results may result in a decline in the price of our stock.
If we fail to manage our growth effectively, our infrastructure, management, and resources could be strained, our ability to effectively manage our business could be diminished, and our operating results could suffer.
The failure to manage our growth effectively could strain our resources, which would impede our ability to increase revenue. We have increased the number of our human interface solutions and plan to expand further the number and diversity of our solutions and their use in the future. Our ability to manage our planned diversification and growth effectively will require us to:
 	•	 	successfully hire, train, retain, and motivate additional employees, including employees outside the United States;	
 	 	 	 	
 	•	 	efficiently plan and expand our facilities to meet increased headcount requirements;	

 	•	 	enhance our global operational, financial, and management infrastructure; and	

 	•	 	expand our development and production capacity.	

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In connection with the expansion and diversification of our product and customer base, we are increasing our personnel and making other expenditures to meet demand for our expanding product offerings, including offerings in the notebook computer and digital lifestyle markets. Increases in the demand for our products will require further expansion of our traditional notebook computer business as well as an increasing presence in the digital lifestyle product markets, including mobile smartphones and feature phones, and the tablet market. To date, our sales of human interface solutions for mobile smartphones and feature phones have varied significantly from quarter to quarter. Risks are further increased because customers do not commit to firm production schedules for more than a short time in advance. Any increase in expenses or investments in infrastructure and facilities in anticipation of future orders that do not materialize would adversely affect our profitability. Our customers also may require rapid increases in design and production services that place an excessive short-term burden on our resources and the resources of our third-party manufacturers. If we cannot manage our growth effectively, our business and results of operations could suffer.
We depend on key personnel who would be difficult to replace, and our business will likely be harmed if we lose their services or cannot hire additional qualified personnel.
Our success depends substantially on the efforts and abilities of our senior management and other key personnel. The competition for qualified management and key personnel, especially engineers, is intense. Although we maintain noncompetition and nondisclosure covenants with most of our key personnel and one of our key personnel has a change of control severance agreement, we do not have employment agreements with any of them. The loss of services of one or more of our key employees or the inability to hire, train, and retain key personnel, especially engineers and technical support personnel, and capable sales and customer-support employees outside the United States, could delay the development and sale of our products, disrupt our business, and interfere with our ability to execute our business plan. We are currently conducting a search for a new chief executive officer. The transition to a new chief executive officer may be disruptive to our operations and create uncertainty about our business and future direction. Until a new chief executive officer is identified, it may be more difficult for us to hire and retain senior management and other key personnel.
In the future, if we are unable to obtain stockholder approval of additional shares for our share-based compensation award programs we could be at a competitive disadvantage in the marketplace for qualified personnel or may be required to increase the cash element of our compensation program.
Our compensation program, which includes cash and share-based compensation award components, has been instrumental in attracting, hiring, motivating, and retaining qualified personnel. As a Northern California-based high-growth technology company, competition for qualified personnel in our industry is extremely intense, particularly for engineering and other technical personnel. Our success depends on our continued ability to attract, hire, motivate, and retain qualified personnel and our share-based compensation award programs provide us with a competitive compensatory tool for this purpose. The continued use of our share-based compensation program is necessary for us to compete for engineering and other technical personnel and professional talent without significantly increasing cash compensation costs. In the future, if we are unable to obtain stockholder approval of additional shares for our share-based compensation award programs we could be at a competitive disadvantage in the marketplace for qualified personnel or may be required to increase the cash element of our compensation program.
Our inability to protect our intellectual property could impair our competitive advantage, reduce our revenue, and increase our costs.
Our success and ability to compete depend in part on our ability to maintain the proprietary aspects of our technologies and products. We rely on a combination of patents, copyrights, trade secrets, trademarks, confidentiality agreements, and other contractual provisions to protect our intellectual property, but these measures may provide only limited protection. We license from third parties certain technology used in and for our products. These third-party licenses are granted with restrictions, and there can be no assurances that such third-party technology will remain available to us on terms beneficial to us. Failure to enforce and protect our intellectual property rights or obtain from third parties the right to use necessary technology could have a material adverse effect on our business, financial condition, and results of operations. In addition, the laws of some foreign countries do not protect proprietary rights as fully as do the laws of the United States.

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Patents may not issue from the patent applications that we have filed or may file in the future. Our issued patents may be challenged, invalidated, or circumvented, and claims of our patents may not be of sufficient scope or strength, or issued in the proper geographic regions, to provide meaningful protection or any commercial advantage. In addition, certain of our patents will expire within several years.
We have not applied for, and do not have, any copyright registration on our technologies or products. We have applied to register certain of our trademarks in the United States and other countries. There can be no assurance that we will obtain registrations of principle or other trademarks in key markets. Failure to obtain registrations could compromise our ability to protect fully our trademarks and brands and could increase the risk of challenge from third parties to our use of our trademarks and brands.
We do not consistently rely on written agreements with our customers, suppliers, manufacturers, and other recipients of our technologies and products, and therefore some trade secret protection may be lost and our ability to enforce our intellectual property rights may be limited. Additionally, our customers, suppliers, manufacturers, and other recipients of our technologies and products may seek to use our technologies and products without appropriate limitations. In the past, we did not consistently require our employees and consultants to enter into confidentiality, employment, or proprietary information and invention assignment agreements. Therefore, our former employees and consultants may try to claim some ownership interest in our technologies and products and may use our technologies and products competitively and without appropriate limitations.
We may be required to incur substantial expenses and divert management attention and resources in defending intellectual property litigation against us.
We may receive notices from third parties that claim our products infringe their rights. From time to time, we receive notice from third parties of the intellectual property rights such parties have obtained. We cannot be certain that our technologies and products do not and will not infringe issued patents or other proprietary rights of others. Any future claims, with or without merit, could result in significant litigation costs and diversion of resources, including the attention of management, and could require us to enter into royalty and licensing agreements, any of which could have a material adverse effect on our business. There can be no assurance that such licenses could be obtained on commercially reasonable terms, if at all, or that the terms of any offered licenses would be acceptable to us. If forced to cease using such technology, there can be no assurance that we would be able to develop or obtain alternate technology. Accordingly, an adverse determination in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent us from manufacturing, using, or selling certain of our products, which could have a material adverse effect on our business, financial condition, and results of operations.
Furthermore, parties making such claims could secure a judgment awarding substantial damages, as well as injunctive or other equitable relief that could effectively block our ability to make, use, or sell our products in the United States or abroad. Such a judgment could have a material adverse effect on our business, financial condition, and results of operations. In addition, we are obligated under certain agreements to indemnify the other party in connection with infringement by us of the proprietary rights of third parties. In the event we are required to indemnify parties under these agreements, it could have a material adverse effect on our business, financial condition, and results of operations.
We may incur substantial expenses and divert management resources in prosecuting others for their unauthorized use of our intellectual property rights.
The markets in which we compete are characterized by frequent litigation regarding patents and other intellectual property rights. Other companies, including our competitors, may develop technologies that are similar or superior to our technologies, duplicate our technologies, or design around our patents and may have or obtain patents or other proprietary rights that would prevent, limit, or interfere with our ability to make, use, or sell our products. Effective intellectual property protection may be unavailable or limited in some foreign countries in which we operate, such as China and Taiwan. Unauthorized parties may attempt to copy or otherwise use aspects of our technologies and products that we regard as proprietary. There can be no assurance that our means of protecting our proprietary rights in the United States or abroad will be adequate or that competitors will not independently develop similar technologies. If our intellectual property protection is insufficient to protect our intellectual property rights, we could face increased competition in the market for our technologies and products.

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Should any of our competitors file patent applications or obtain patents that claim inventions also claimed by us, we may choose to participate in an interference proceeding to determine the right to a patent for these inventions because our business would be harmed if we fail to enforce and protect our intellectual property rights. Even if the outcome is favorable, this proceeding could result in substantial cost to us and disrupt our business.
In the future, we also may need to file lawsuits to enforce our intellectual property rights, to protect our trade secrets, or to determine the validity and scope of the proprietary rights of others. This litigation, whether successful or unsuccessful, could result in substantial costs and diversion of resources, which could have a material adverse effect on our business, financial condition, and results of operations.
If we become subject to product returns and product liability claims resulting from defects in our products, we may fail to achieve market acceptance of our products and our business could be harmed.
We develop complex products in an evolving marketplace and generally warrant our products for a period of 12 months from the date of sale. Despite testing by us and our customers, defects may be found in existing or new products. Manufacturing errors or product defects could result in a delay in recognition or loss of revenue, loss of market share, or failure to achieve market acceptance. Additionally, defects could result in financial or other damages to our customers; cause us to incur significant warranty, support, and repair costs; and divert the attention of our engineering personnel from key product development efforts. In such circumstances, our customers could also seek and obtain damages from us for their losses. A product liability claim brought against us, even if unsuccessful, would likely be time-consuming and costly to defend. The occurrence of such problems would likely harm our business.
Potential strategic alliances may not achieve their objectives, and the failure to do so could impede our growth.
We anticipate that we will enter into strategic alliances. Among other matters, we continually explore strategic alliances designed to enhance or complement our technology or to work in conjunction with our technology; to provide necessary know-how, components, or supplies; and to develop, introduce, and distribute products utilizing our technology. Any strategic alliances may not achieve their intended objectives, and parties to our strategic alliances may not perform as contemplated. The failure of these alliances may impede our ability to introduce new products and enter new markets.
Any acquisitions that we undertake could be difficult to integrate, disrupt our business, dilute stockholder value, and harm our operating results.
We expect to pursue opportunities to acquire other businesses and technologies in order to complement our current human interface solutions, expand the breadth of our markets, enhance our technical capabilities, or otherwise offer growth opportunities. While we have no current definitive agreements underway, we may acquire businesses, products, or technologies in the future. If we make any future acquisitions, we could issue stock that would dilute existing stockholders’ percentage ownership, incur substantial debt, assume contingent liabilities, or experience higher operating expenses. Our experience in acquiring other businesses and technologies is limited. Potential acquisitions also involve numerous risks, including the following:
 	•	 	the potential disruption of our core businesses;	

 	•	 	the potential strain on our financial and managerial controls and reporting systems and procedures;	

 	•	 	potential unknown liabilities associated with the acquired business;	

 	•	 	unanticipated costs associated with the acquisition;	

 	•	 	diversion of management’s attention from our core businesses;	

 	•	 	problems assimilating the purchased operations, technologies, or products;	
 	 	 	 	
 	•	 	risks associated with entering markets and businesses in which we have little or no prior experience;	

 	•	 	failure of acquired businesses to achieve expected results;	

 	•	 	adverse effects on existing business relationships with suppliers and customers;	

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 	•	 	failure to retain key customers, suppliers, or personnel of acquired businesses;	

 	•	 	the risk of impairment charges related to potential write-downs of acquired assets; and	

 	•	 	creating uniform standards, controls, procedures, policies, and information systems.	
We cannot assure you that we would be successful in overcoming problems encountered in connection with any acquisitions, and our inability to do so could disrupt our operations and adversely affect our business.
The valuation of our technology conducted in connection with our international operating structure may be challenged, which could result in additional taxes, interest, and penalties.
Under our international operating structure, one of our affiliates licensed from us certain rights to the pre-existing and in-process technology associated with our products for exploitation in all geographic markets except the U.S., Japanese, and Korean markets, which we refer to as “ROW markets.” Our affiliate also acquired ownership of all future economic rights to product sales in ROW markets by entering into an agreement to license certain intangibles and a cost-sharing agreement under which we and our affiliate share research and development costs in accordance with certain tax rules and regulations. We believe this structure appropriately reflects where our profits are generated and may result in future tax advantages to us, but there can be no assurances that this will be the case.
In fiscal 2011, we were notified by the Internal Revenue Service, or the IRS, that our fiscal 2003 through 2006 and fiscal 2008 through 2010 will be subject to an audit. The audit is ongoing, and no tax assessment has been proposed.
Repatriation of our foreign earnings to the United States or changes in tax laws may adversely affect our future reported tax rates and financial results or the way we conduct our business.
Changes in tax laws may adversely affect our future reported tax rates and financial results or the way we conduct our business. We consider the undistributed operating earnings of certain foreign subsidiaries of approximately $280.2 million as of the end of fiscal 2011, to be indefinitely invested outside the United States and have not provided for U.S. federal and state income taxes that may result from future remittances of those undistributed operating earnings. Proposals to reform U.S. tax laws, including proposals that could reduce or eliminate the deferral of U.S. income tax on our foreign subsidiaries’ undistributed earnings, could require those earnings to be taxed at the U.S. federal income tax rate.
Currently our investments in auction rate securities, or ARS investments, are not liquid, and we may lose some or all of our principal invested or may be required to further reduce the carrying value if the issuers are not able to meet their payment obligations or if we sell our ARS investments before they recover.
We ended fiscal 2011 with $37.5 million invested in ARS investments for which the auctions have failed and our investments are not liquid. The carrying value of these investments was $25.9 million, reflecting $15.9 million of other-than-temporary impairment, partially offset by $4.3 million of temporary recovery. If the issuers are not able to meet their payment obligations or if we sell our ARS investments before they recover, we may lose some or all of the principal invested or may be required to further reduce the carrying value. This would adversely affect our financial position, results of operations, and cash flows.
Legislation affecting the markets in which we participate could adversely affect our ability to implement our growth strategies.
Our ability to expand our business may be adversely impacted by future laws or regulations. Our customers’ products may be subject to laws relating to environmental regulations, communications, encryption technology, electronic commerce, e-signatures, governmental control over content, and privacy. Any of these laws could be expensive to comply with, and the marketability of our products could be adversely affected.

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We must finance the growth of our business and the development of new products, which could have an adverse effect on our operating results.
To remain competitive, we must continue to make significant investments in research and development, marketing, and business development. Our failure to increase sufficiently our net revenue to offset these increased costs would adversely affect our operating results.
From time to time, we may seek additional equity or debt financing to provide for funds required to expand our business. We cannot predict the timing or amount of any such requirements at this time. If such financing is not available on satisfactory terms, we may be unable to expand our business or to develop new business at the rate desired and our operating results may suffer. Debt financing increases expenses and must be repaid regardless of operating results. Equity financing could result in additional dilution to existing stockholders.
We consider the undistributed operating earnings of certain foreign subsidiaries to be indefinitely invested outside the United States. If we were to distribute a portion of those earnings to our U.S. parent company to finance our future growth, we would be required to pay U.S. federal and state taxes on the distribution and further may be required to accrue U.S. and state taxes on the remaining undistributed operating earnings, which would adversely affect our tax rate and financial results.
Our target markets are cyclical and may result in fluctuations in our operating results.
The PC and electronics industries have experienced significant economic downturns at various times. These downturns are characterized by diminished product demand, accelerated erosion of average selling prices, and production overcapacity. In addition, the PC and electronics industries are cyclical in nature. We seek to reduce our exposure to industry downturns and cyclicality by providing design and production services for leading companies in rapidly expanding industry segments. We may, however, experience substantial period-to-period fluctuations in future operating results because of general industry conditions or events occurring in the general economy.
Continuing uncertainty of the U.S. and global economy may have serious implications for the growth and stability of our business and may negatively affect our stock price.
The revenue growth and profitability of our business depends significantly on the overall demand in the notebook computer market and in the markets for digital lifestyle products and other electronic devices, including mobile smartphones and feature phones, and the tablet market. Softening demand in these markets caused by ongoing economic uncertainty may result in decreased revenue or earnings levels or growth rates. The U.S. and global economy has been historically cyclical, and market conditions continue to be challenging, which has resulted in individuals and companies delaying or reducing expenditures. Further delays or reductions in spending could have a material adverse effect on demand for our products, and consequently on our business, financial condition, results of operations, prospects, and stock price.
We expect to incur additional expenses in complying with corporate governance and public disclosure requirements.
Changing laws, regulations, and standards relating to corporate governance and public disclosure, including SEC regulations, and Nasdaq Global Select Market rules, create uncertainty and increased expenses for companies such as ours. New or changed laws, regulations, and standards are subject to varying interpretations in many cases due to their lack of specificity and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, our efforts to comply with evolving laws, regulations, and standards have resulted in, and are likely to continue to result in, increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. We expect these efforts to require the continued commitment of significant resources. In addition, it may become more difficult and more expensive for us to obtain director and officer liability insurance. As a result, we may have difficulty attracting and retaining qualified board members, which could harm our business. If our efforts to comply with new or changed laws, regulations, and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, our reputation may be harmed.

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The accounting requirements for income taxes on certain of our share-based awards will subject our future quarterly and annual effective tax rates to greater volatility and, consequently, our ability to estimate reasonably our future quarterly and annual effective tax rates is greatly diminished.
We recognize tax benefit upon expensing nonqualified stock options and deferred stock units, or DSUs, issued under our share-based compensation plans. However, under current accounting standards, we cannot recognize tax benefit concurrent with expensing incentive stock options and employee stock purchase plan shares (qualified stock options) issued under our share-based compensation plans. For qualified stock options that vested after our adoption of the applicable accounting standards, we recognize the tax benefit only in the period when disqualifying dispositions of the underlying stock occur and, for qualified stock options that vested prior to our adoption of the applicable accounting standards, the tax benefit is recorded directly to additional paid-in capital. Accordingly, because we cannot recognize the tax benefit for share-based compensation expense associated with qualified stock options until the occurrence of future disqualifying dispositions of the underlying stock and such disqualified dispositions may happen in periods when our stock price substantially increases, and because a portion of that tax benefit may be directly recorded to additional paid-in capital, our future quarterly and annual effective tax rates will be subject to greater volatility and, consequently, our ability to estimate reasonably our future quarterly and annual effective tax rates is greatly diminished.
Future changes in financial accounting standards or practices may cause adverse unexpected fluctuations and affect our reported results of operations.
A change in accounting standards or practices could have a significant effect on our reported results of operations. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred in the past and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business.
Further, the U.S.-based Financial Accounting Standards Board, or FASB, is currently working together with the International Accounting Standards Board, or IASB, on several projects to further align accounting principles and facilitate more comparable financial reporting between companies who are required to follow U.S. Generally Accepted Accounting Principles, or GAAP, under SEC regulations and those who are required to follow International Financial Reporting Standards, or IFRS, outside of the U.S. These efforts by the FASB and IASB may result in different accounting principles under GAAP that may result in materially different financial results for us in areas including, but not limited to principles for recognizing revenue and lease accounting.
It is not clear if or when these potential changes in accounting principles may become effective, whether we have the proper systems and controls in place to accommodate such changes and the impact that any such changes may have on our consolidated financial position, results of operations, and cash flows. In addition, as we evolve and change our business and sales models, we are currently unable to take into account how these potential changes may impact our new models, particularly in the area of revenue recognition.
Our charter documents and Delaware law could make it more difficult for a third party to acquire us, and discourage a takeover.
Our certificate of incorporation and the Delaware General Corporation Law contain provisions that may have the effect of making more difficult or delaying attempts by others to obtain control of our company, even when these attempts may be in the best interests of our stockholders. Our certificate of incorporation also authorizes our Board of Directors, without stockholder approval, to issue one or more series of preferred stock, which could have voting and conversion rights that adversely affect or dilute the voting power of the holders of common stock. Delaware law also imposes conditions on certain business combination transactions with “interested stockholders.” Our certificate of incorporation divides our Board of Directors into three classes, with one class to stand for election each year for a three-year term after the election. The classification of directors tends to discourage a third party from initiating a proxy solicitation or otherwise attempting to obtain control of our company and may maintain the incumbency of our Board of Directors, as this structure generally increases the difficulty of, or may delay, replacing a majority of directors. Our certificate of incorporation authorizes our Board of Directors to fill vacancies or newly created directorships. A majority of the directors then in office may elect a successor to fill any vacancies or newly created directorships.

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Our stockholders’ rights plan may adversely affect existing stockholders.
Our stockholders’ rights plan also may have the effect of deterring, delaying, or preventing a change in control that might otherwise be in the best interests of our stockholders. In general, stock purchase rights issued under the rights plan become exercisable when a person or group acquires 15% or more of our common stock or a tender offer or exchange offer of 15% or more of our common stock is announced or commenced. After any such event, our other stockholders may purchase additional shares of our common stock at 50% of the then-current market price. The rights will cause substantial dilution to a person or group that attempts to acquire us on terms not approved by our Board of Directors. The rights should not interfere with any merger or other business combination approved by our Board of Directors as the rights may be redeemed by us at $0.01 per stock purchase right at any time before any person or group acquires 15% or more of our outstanding common stock. The rights expire in August 2012.
Sales of large numbers of shares could adversely affect the price of our common stock.
As of the date of this Annual Report on Form 10-K, all of the outstanding shares of our common stock were eligible for resale in the public markets. Of these shares, approximately one-third were held by affiliates and were eligible for resale in the public markets subject to compliance with the volume and manner of sale rules of Rules 144 or 701 under the Securities Act of 1933, as amended, or the Securities Act, and the balance of the shares were eligible for resale in the public markets as unrestricted shares. In general, under Rule 144 as currently in effect, any person (or persons whose shares are aggregated for purposes of Rule 144) who is deemed an affiliate of our company and beneficially owns restricted securities with respect to which at least six months has elapsed since the later of the date the shares were acquired from us, or from an affiliate of ours, is entitled to sell within any three-month period a number of shares that does not exceed the greater of 1% of the then outstanding shares of our common stock or the average weekly trading volume in common stock during the four calendar weeks preceding such sale. Sales by affiliates under Rule 144 also are subject to certain manner-of-sale provisions and notice requirements and to the availability of current public information about us.
Rule 701, as currently in effect, permits our employees, officers, directors, and consultants who purchase shares pursuant to a written compensatory plan or contract to resell these shares in reliance upon Rule 144, but without compliance with specific restrictions. Rule 701 provides that affiliates may sell their Rule 701 shares under Rule 144 without complying with the holding period requirement and non-affiliates may sell their shares in reliance on Rule 144 without complying with the holding period, public information, volume limitation, or notice provisions of Rule 144. A person who is not an affiliate, who has not been an affiliate within three months prior to sale, and who beneficially owns restricted securities with respect to which at least one year has elapsed since the later of the date the shares were acquired from us, or from an affiliate of ours, is entitled to sell such shares under Rule 144 without regard to any of the volume limitations or other requirements described above. Sales of substantial amounts of common stock in the public market could adversely affect prevailing market prices.
We have registered an aggregate of $100.0 million of common stock and preferred stock for issuance in connection with acquisitions, which shares generally will be freely tradeable after their issuance under Rule 145 of the Securities Act, unless held by an affiliate of the acquired company, in which case such shares will be subject to the volume and manner of sale restrictions of Rule 144 discussed above. The issuance or subsequent sale of these shares in the public market could adversely affect prevailing market prices.
We have registered an aggregate of $250.0 million of common stock (including the associated rights), preferred stock, debt securities, depositary shares, warrants, purchase contracts, and units (collectively “securities”) for issuance to raise funds for general corporate purposes, which may include the repayment of indebtedness outstanding from time to time, working capital, capital expenditures, acquisitions, and repurchases of our common stock or other securities. Securities issued under the shelf registration generally will be freely tradeable after their issuance unless held by an affiliate of our company, in which case such shares will be subject to the volume and manner of sale restrictions of Rule 144.
We have registered for offer and sale the shares of common stock that are reserved for issuance pursuant to our outstanding share-based compensation plans. Shares issued in connection with our share-based compensation plans generally will be eligible for sale in the public market, except that affiliates will continue to be subject to volume limitations and other requirements of Rule 144. The issuance or subsequent sale of such shares could depress the market price of our common stock.

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The market price of our common stock has been and may continue to be volatile.
The trading price of our common stock has been and may continue to be subject to wide fluctuations in response to various factors, including the following:
 	•	 	variations in our quarterly results;	

 	•	 	the financial guidance we may provide to the public, any changes in such guidance, or our failure to meet such guidance;	

 	•	 	changes in financial estimates by industry or securities analysts or our failure to meet such estimates;	

 	•	 	various market factors or perceived market factors, including rumors, whether or not correct, involving us, our customers, our suppliers, or our competitors;	

 	•	 	announcements of technological innovations by us or by our competitors;	

 	•	 	introductions of new products or new pricing policies by us or by our competitors;	

 	•	 	acquisitions or strategic alliances by us or by our competitors;	

 	•	 	recruitment or departure of key personnel;	

 	•	 	the gain or loss of significant orders;	

 	•	 	the gain or loss of significant customers;	

 	•	 	market conditions in our industry, the industries of our customers, and the economy as a whole;	

 	•	 	hedging activities by investors holding positions in our convertible senior subordinated notes;	

 	•	 	short positions held by investors; and	

 	•	 	general financial market conditions or occurrences.	
In addition, stocks of technology companies have experienced extreme price and volume fluctuations that often have been unrelated or disproportionate to these companies’ operating performance. Public announcements by technology companies concerning, among other things, their performance, accounting practices, or legal problems could cause the market price of our common stock to decline regardless of our actual operating performance.
 	 	 	
ITEM 1B.	 	UNRESOLVED STAFF COMMENTS	
Not applicable.

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ITEM 2.	 	PROPERTIES	
Our principal executive offices as well as our principal research, development, sales, marketing, and administrative functions are located in our 70,000 square foot facility in Santa Clara, California and an adjacent 64,000 square foot facility. In New York, we lease approximately 15,000 square feet used for research and development. Our Asia/Pacific headquarters are located in Hong Kong where we lease approximately 23,000 square feet of space. We also maintain approximately 22,000 square feet of office space in Taiwan, approximately 14,000 square feet of office space in China, approximately 6,000 square feet of office space in Japan, approximately 10,000 square feet of office space in Korea, and less than 1,000 square feet of office space in Switzerland. We have satellite sales support offices in Finland, Singapore, Thailand, and Texas.
 	 	 	
ITEM 3.	 	LEGAL PROCEEDINGS	
None.
 	 	 	
ITEM 4.	 	REMOVED AND RESERVED	
PART II
 	 	 	
ITEM 5.	 	MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	
Market Information on Common Stock
Our common stock has been listed on the Nasdaq Global Select Market (formerly on the Nasdaq National Market) under the symbol “SYNA” since January 29, 2002. Prior to that time, there was no public market for our common stock. The following table sets forth for the periods indicated the high and low sales prices of our common stock as quoted on the Nasdaq Global Select Market.
 	 	 	 	 	 	 	 	 	
 	 	High	 	 	Low	 	
 	 	 	 	 	 	 	 	 	
Fiscal 2011:	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	
First quarter	 	$	33.00	 	 	$	25.17	 	
Second quarter	 	$	30.48	 	 	$	25.06	 	
Third quarter	 	$	32.05	 	 	$	26.61	 	
Fourth quarter	 	$	30.17	 	 	$	25.02	 	
 	 	 	 	 	 	 	 	 	
Fiscal 2010:	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	
First quarter	 	$	38.65	 	 	$	23.97	 	
Second quarter	 	$	29.64	 	 	$	20.97	 	
Third quarter	 	$	33.16	 	 	$	25.06	 	
Fourth quarter	 	$	33.35	 	 	$	26.31	 	
Stockholders
As of August 10, 2011, there were approximately 200 holders of record of our common stock.
Dividends
We have never declared or paid cash dividends on our common stock. We currently plan to retain any earnings to finance the growth of our business, or purchase shares under our common stock purchase program rather than to pay cash dividends. Payments of any cash dividends in the future will depend on our financial condition, results of operations, and capital requirements as well as other factors deemed relevant by our board of directors.
Our revolving line of credit also places restrictions on the payment of any dividends.

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Issuer Purchases of Equity Securities
From April 2005 through April 2010, our Board of Directors has cumulatively authorized $420.0 million for our common stock repurchase program, which expires in April 2012. The remaining amount authorized for the repurchase of our common stock is $67.9 million. Repurchases under the stock repurchase program during the three-month period ended June 25, 2011 were as follows:
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	Total	 	 	Maximum	 	
 	 	 	 	 	 	 	 	 	 	Number of	 	 	Dollar Value	 	
 	 	 	 	 	 	 	 	 	 	Shares	 	 	of Shares	 	
 	 	 	 	 	 	Average	 	 	Purchased	 	 	that May	 	
 	 	Total	 	 	Price	 	 	as Part of	 	 	Yet Be	 	
 	 	Number	 	 	Paid	 	 	Publicly	 	 	Purchased	 	
 	 	of Shares	 	 	per	 	 	Announced	 	 	Under the	 	
Period	 	Purchased	 	 	Share	 	 	Program	 	 	Program	 	
March 27, 2011 - April 23, 2011	 	 	—	 	 	$	—	 	 	 	—	 	 	$	97,858,000	 	
April 24, 2011 - May 21, 2011	 	 	974,405	 	 	 	28.76	 	 	 	974,405	 	 	 	69,834,000	 	
May 22, 2011 - June 25, 2011	 	 	69,578	 	 	 	28.39	 	 	 	69,578	 	 	 	67,858,000	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	 	1,043,983	 	 	 	28.74	 	 	 	 	 	 	 	 	 	

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Performance Graph
The following line graph compares cumulative total stockholder returns for the five years ended fiscal 2011 for (i) our common stock, (ii) the Nasdaq Composite Index, and (iii) the Nasdaq Computer Index. The graph assumes an investment of $100 on June 25, 2006. The calculations of cumulative stockholder return on the Nasdaq Composite Index and the Nasdaq Computer Index include reinvestment of dividends. The calculation of cumulative stockholder return on our common stock does not include reinvestment of dividends because we did not pay any dividends during the measurement period. The historical performance shown is not necessarily indicative of future performance.

The performance graph above shall not be deemed “filed” for purposes of Section 18 of the Securities Act or the Exchange Act, or otherwise subject to the liability of that section. The performance graph above will not be deemed incorporated by reference into any filing of our company under the Exchange Act or the Securities Act.

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ITEM 6.	 	SELECTED FINANCIAL DATA	
The following presents selected financial data for each fiscal year in the five-year period ended fiscal 2011. Our fiscal year is the 52- or 53-week period ending on the last Saturday in June. Fiscal 2007 was a 53-week period and the other fiscal years presented were 52-week periods. As our past operating results are not necessarily indicative of our future operating results, you should read the selected financial data below in conjunction with Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and related notes contained elsewhere in this report.
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	2011	 	 	2010	 	 	2009	 	 	2008	 	 	2007	 	
 	 	(in thousands, except per share amounts)	 	
Consolidated Statements of Income Data:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net revenue	 	$	598,538	 	 	$	514,890	 	 	$	473,302	 	 	$	361,057	 	 	$	266,787	 	
Cost of revenue	 	 	352,468	 	 	 	306,188	 	 	 	281,793	 	 	 	213,606	 	 	 	160,913	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Gross margin	 	 	246,070	 	 	 	208,702	 	 	 	191,509	 	 	 	147,451	 	 	 	105,874	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating expenses:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Research and development	 	 	105,003	 	 	 	86,552	 	 	 	68,026	 	 	 	50,093	 	 	 	39,386	 	
Selling, general, and administrative	 	 	68,549	 	 	 	60,027	 	 	 	54,014	 	 	 	48,126	 	 	 	36,247	 	
Restructuring	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	915	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total operating expenses	 	 	173,552	 	 	 	146,579	 	 	 	122,040	 	 	 	98,219	 	 	 	76,548	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating income	 	 	72,518	 	 	 	62,123	 	 	 	69,469	 	 	 	49,232	 	 	 	29,326	 	
Interest income, net	 	 	894	 	 	 	(1,423	)	 	 	(3,831	)	 	 	(110	)	 	 	1,809	 	
Other charges or expenses	 	 	59	 	 	 	(443	)	 	 	(10,296	)	 	 	(8,274	)	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income before provision for income taxes	 	 	73,471	 	 	 	60,257	 	 	 	55,342	 	 	 	40,848	 	 	 	31,135	 	
Provision for income taxes	 	 	9,675	 	 	 	7,292	 	 	 	7,263	 	 	 	14,485	 	 	 	8,953	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	$	63,796	 	 	$	52,965	 	 	$	48,079	 	 	$	26,363	 	 	$	22,182	 	

Net income per share:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Basic(1)	 	$	1.87	 	 	$	1.57	 	 	$	1.41	 	 	$	0.70	 	 	$	0.58	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Diluted(1)	 	$	1.80	 	 	$	1.50	 	 	$	1.35	 	 	$	0.67	 	 	$	0.55	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Shares used in computing net income per share:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Basic(1)	 	 	34,042	 	 	 	33,836	 	 	 	33,981	 	 	 	37,667	 	 	 	38,337	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Diluted(1)	 	 	35,454	 	 	 	35,423	 	 	 	35,577	 	 	 	39,365	 	 	 	40,536	 	

Consolidated Balance Sheet Data:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cash, cash equivalents, and short-term investments	 	$	247,153	 	 	$	209,858	 	 	$	191,970	 	 	$	146,516	 	 	$	265,017	 	
Working capital	 	 	281,423	 	 	 	228,534	 	 	 	159,693	 	 	 	189,851	 	 	 	299,921	 	
Total assets	 	 	456,201	 	 	 	414,679	 	 	 	376,150	 	 	 	305,249	 	 	 	372,425	 	
Current debt	 	 	—	 	 	 	—	 	 	 	63,234	 	 	 	—	 	 	 	1,500	 	
Long-term debt	 	 	2,305	 	 	 	2,305	 	 	 	—	 	 	 	112,089	 	 	 	103,867	 	
Treasury shares, at cost	 	 	352,142	 	 	 	281,932	 	 	 	237,387	 	 	 	237,387	 	 	 	72,345	 	
Total stockholders’ equity	 	 	339,993	 	 	 	286,511	 	 	 	222,606	 	 	 	121,214	 	 	 	220,261	 	

(1)	 	All share and per share amounts reflect the 3-for-2 stock split effected as a stock dividend and paid on August 29, 2008.	
Our basic net income per share amounts for each period presented have been computed using the weighted average number of shares of common stock outstanding. Our diluted net income per share amounts for each period presented include the weighted average effect of potentially dilutive shares. We used the “treasury stock” method to determine the dilutive effect of our stock options, DSUs, and convertible notes. Prior to fiscal 2008, we used the “if converted” method for our convertible notes and 3,062,000 diluted shares were included in the calculation of diluted net income per share in fiscal 2007.

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ITEM 7.	 	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	
Forward-Looking Statements and Factors That May Affect Results
You should read the following discussion and analysis in conjunction with our financial statements and related notes contained elsewhere in this report. This discussion contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of factors, including those set forth under Item 1A. Risk Factors.
Overview
We are a leading worldwide developer and supplier of custom-designed human interface solutions that enable people to interact more easily and intuitively with a wide variety of mobile computing, communications, entertainment, and other electronic devices. We believe our results to date reflect the combination of our customer focus, the strength of our intellectual property, and our engineering know-how, which allow us to develop or engineer products that meet the demanding design specifications of OEMs.
We recognize revenue from product sales when there is persuasive evidence that an arrangement exists, delivery has occurred or title has transferred, the price is fixed or determinable, and collection is reasonably assured. Our net revenue increased from $266.8 million for fiscal 2007 to $598.5 million for fiscal 2011, representing a compound annual growth rate of approximately 22%. For fiscal 2007, we derived 85% of our net revenue from the personal computer market and 15% of our net revenue from the digital lifestyle product markets. For fiscal 2011, revenue from the personal computer market accounted for 48% of our net revenue and revenue from the digital lifestyle product markets accounted for 52% of our net revenue.
Many of our customers have migrated their manufacturing operations from Taiwan to China, and many of our OEM customers have established design centers in that region. With our expanded global presence, including offices in China, Finland, Hong Kong, Japan, Korea, Switzerland, Taiwan, and the United States, we are well positioned to provide local sales, operational, and engineering support services to our existing customers, as well as potential new customers, on a global basis.
Our manufacturing operations are based on a variable cost model in which we outsource all of our production requirements and generally drop ship our products directly to our customers from our contract manufacturers’ facilities, eliminating the need for significant capital expenditures and allowing us to minimize our investment in inventories. This approach requires us to work closely with our contract manufacturers to ensure adequate production capacity to meet our forecasted volume requirements. We provide our contract manufacturers with six-month rolling forecasts and issue purchase orders based on our anticipated requirements for the next 90 days. However, we do not have any long-term supply contracts with any of our contract manufacturers. We use three third-party wafer manufacturers to supply wafers and two third-party packaging manufacturers to package our proprietary ASICs. In certain cases, we rely on a single source or a limited number of suppliers to provide other key components of our products. Our cost of revenue includes all costs associated with the production of our products, including materials, logistics, manufacturing, assembly, and test costs paid to third-party manufacturers and related overhead costs associated with our indirect manufacturing operations personnel. Additionally, we charge all warranty costs, yield losses, and any inventory provisions or write-downs to cost of revenue.
Our gross margin generally reflects the combination of the added value we bring to our OEM customers’ products in meeting their custom design requirements and the impact of our ongoing cost-improvement programs. These cost-improvement programs include reducing materials and component costs and implementing design and process improvements. Our newly introduced products may have lower margins than our more mature products, which have realized greater benefits associated with our ongoing cost-improvement programs. As a result, new product introductions may initially negatively impact our gross margin.
Our research and development expenses include costs for supplies and materials related to product development, as well as the engineering costs incurred to design human interface solutions for OEM customers prior to and after their commitment to incorporate those solutions into their products. These expenses have generally increased, reflecting our continuing commitment to the technological and design innovation required to maintain our position in our existing markets and to adapt our existing technologies or develop new technologies for new markets.

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Selling, general, and administrative expenses include expenses related to sales, marketing, and administrative personnel; internal sales and outside sales representatives’ commissions; market and usability research; outside legal, accounting, and consulting costs; and other marketing and sales activities. These expenses have generally increased, primarily reflecting incremental staffing and related support costs associated with our increased business levels, growth in our existing markets, and penetration into new markets.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in conformity with GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, allowance for doubtful accounts, cost of revenue, inventories, product warranty, share-based compensation costs, provision for income taxes, deferred income tax asset valuation allowances, uncertain tax positions, tax contingencies, goodwill, intangible assets, investments, and contingencies. We base our estimates on historical experience, applicable laws, and regulations, and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
The methods, estimates, interpretations, and judgments we use in applying our most critical accounting policies can have a significant impact on the results that we report in our consolidated financial statements. The SEC considers an entity’s most critical accounting policies to be those policies that are both most important to the portrayal of the entity’s financial condition and results of operations and those that require the entity’s most difficult, subjective, or complex judgments, often as a result of the need to make assumptions and estimates about matters that are inherently uncertain. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
We recognize revenue from product sales when there is persuasive evidence that an arrangement exists, delivery has occurred or title has transferred, the price is fixed or determinable, and collection is reasonably assured, which is generally upon shipment. We accrue for estimated sales returns and other allowances, based on historical experience, at the time we recognize revenue.
Investments
Accounting standards require us to record available-for-sale securities at fair value, with unrealized gains and losses being reported as a component of other comprehensive income. We follow the accounting standards to assess whether our investments with loss positions are other-than-temporarily impaired. We follow the hierarchal approach established under the accounting standards to determine fair value of our investments.
The accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Our fair value estimates consider, among other factors, the collateral underlying the security investments, creditworthiness of the counterparty, timing of expected future cash flows, and, in the case of ARS investments, the probability of a successful auction in a future period. We follow the guidance provided to estimate fair value when the volume and level of activity for an asset or liability have significantly decreased in relation to normal market activity for the asset or liability, and to determine circumstances that may indicate that a transaction is not orderly.
Further, we use judgment in evaluating whether a decline in fair value is temporary or other-than-temporary and consider the following indicators: changes in credit ratings or asset quality; changes in the economic environment; length of time and extent to which fair value has been below cost basis; changes in market conditions; and changes in expected cash flows. We do not intend to sell the investments and it is more likely than not that we will not be required to sell the investments before recovery of their amortized cost basis. Temporary declines in fair value are recorded as charges to accumulated other comprehensive income in the equity section of our balance sheet, while other-than-temporary declines in fair value are bifurcated between credit losses, which are charged to earnings, and noncredit losses, which depending on facts and circumstances may be charged to other comprehensive income or earnings.

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Inventory
We state our inventories at the lower of cost or market. We base our assessment of the ultimate realization of inventories on our projections of future demand and market conditions. Sudden declines in demand, rapid product improvements, or technological changes, or any combination of these factors can cause us to have excess or obsolete inventories. On an ongoing basis, we review for estimated obsolete or unmarketable inventories and write down our inventories to their net realizable value based upon our forecasts of future demand and market conditions. If actual market conditions are less favorable than our forecasts, additional inventory write-downs may be required. The following factors influence our estimates: changes to or cancellations of customer orders, unexpected decline in demand, rapid product improvements and technological advances, and termination or changes by our OEM customers of any product offerings incorporating our product solutions.
Periodically, we purchase inventory from our contract manufacturers when a customer delays its delivery schedule or cancels its order. In those circumstances in which our customer has cancelled its order and we purchase inventory from our contract manufacturers, we consider a write-down to reduce the carrying value of the inventory purchased to its net realizable value. We charge write-downs to reduce the carrying value of obsolete, slow moving, and non-usable inventory to net realizable value to cost of revenue. The effect of these write-downs is to establish a new cost basis in the related inventory, which we do not subsequently write up.
Share-Based Compensation Costs
We account for employee share-based compensation costs in accordance with relevant accounting standards. We utilize the Black-Scholes option pricing model to estimate the grant date fair value of employee share-based compensatory awards, which requires the input of highly subjective assumptions, including expected volatility and expected life. Historical and implied volatilities were used in estimating the fair value of our share-based awards. The expected life for our options was previously estimated based on historical trends since our initial public offering. In fiscal 2011, we began to grant options with a contractual life of seven years rather than ten years and now use the simplified method of establishing the expected life as we do not have any history of options with seven-year lives. Estimated forfeitures for share-based awards that are not expected to vest are estimated based on historical trends since our initial public offering. Changes in these inputs and assumptions can materially affect the measure of estimated fair value of our share-based compensation. We charge the estimated fair value less estimated forfeitures to earnings on a straight-line basis over the vesting period of the underlying awards, which is generally four years for our stock options and DSUs and up to two years for our employee stock purchase plan.
The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. As our stock option and our employee stock purchase plan awards have characteristics that differ significantly from traded options, and as changes in the subjective assumptions can materially affect the estimated value, our estimate of fair value may not accurately represent the value assigned by a third party in an arms-length transaction. There currently is no market-based mechanism to verify the reliability and accuracy of the estimates derived from the Black-Scholes option pricing model or other allowable valuation models, nor is there a means to compare and adjust the estimates to actual values. While our estimate of fair value and the associated charge to earnings materially affects our results of operations, it has no impact on our cash position.
There are significant variations among allowable valuation models, and there is a possibility that we may adopt a different valuation model or refine the inputs and assumptions under our current valuation model in the future, resulting in a lack of consistency in future periods. Our current or future valuation model and the inputs and assumptions we make may also lack comparability to other companies that use different models, inputs, or assumptions, and the resulting differences in comparability could be material.
Income Taxes
We recognize federal, foreign, and state current tax liabilities or assets based on our estimate of taxes payable or refundable in the then current fiscal year for each tax jurisdiction. We also recognize federal, foreign, and state deferred tax liabilities or assets for our estimate of future tax effects attributable to temporary differences and carryforwards and record a valuation allowance to reduce any deferred tax assets by the amount of any tax benefits that, based on available evidence and our judgment, are not expected to be realized. If our assumptions, and consequently our estimates, change in the future, the valuation allowance we have established for our deferred tax assets may be changed, which could impact income tax expense.

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We use a two-step approach to recognizing and measuring uncertain tax positions. The first step is to determine whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement with a taxing authority. The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of highly complex tax laws. Resolution of these uncertainties in a manner inconsistent with our expectations could have a material impact on our consolidated financial position, result of operations, or cash flows. We believe we have adequately provided for reasonably foreseeable outcomes in connection with the resolution of income tax uncertainties. However, our results have in the past, and could in the future, include favorable and unfavorable adjustments to our estimated tax liabilities in the period a determination of such estimated tax liability is made or resolved, upon the filing of an amended return, upon a change in facts, circumstances, or interpretation, or upon the expiration of a statute of limitation. Accordingly, our effective tax rate could fluctuate materially from period to period.
We consider the operating earnings of our foreign subsidiaries to be indefinitely invested outside the United States. Accordingly, no provision has been made for the U.S. federal, state, or foreign taxes that may result from future remittances of undistributed earnings of our foreign subsidiaries.
We recognize tax benefit upon expensing certain share-based awards associated with our share-based compensation plans, including nonqualified stock options and DSUs, but we cannot recognize tax benefit concurrent with the recognition of share-based compensation expenses associated with qualified stock options (incentive stock options and employee stock purchase plan shares). For qualified stock options that vested after we began to expense share-based compensation, we recognize tax benefit only in the period when disqualifying dispositions of the underlying stock occur, which historically has been up to several years after vesting and in a period when our stock price substantially increases. For qualified stock options that vested prior to when we began to expense share-based compensation, we record the tax benefit directly to additional paid-in capital. Accordingly, because we cannot recognize the tax benefit for share-based compensation expense associated with qualified stock options until the occurrence of future disqualifying dispositions of the underlying stock and such disqualified dispositions may happen in periods when our stock price substantially increases, and because a portion of that tax benefit may be directly recorded to additional paid-in capital, our future quarterly and annual effective tax rates will be subject to greater volatility and, consequently, our ability to estimate reasonably our future quarterly and annual effective tax rates is greatly diminished.

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Results of Operations
The following sets forth certain of our consolidated statements of income data for fiscal 2011, 2010, and 2009, along with comparative information regarding the absolute and percentage changes in these amounts (in thousands, except percentages):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	2011	 	 	2010	 	 	$ Change	 	 	% Change	 	 	2010	 	 	2009	 	 	$ Change	 	 	% Change	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Digital lifestyle product applications	 	$	309,166	 	 	$	209,153	 	 	$	100,013	 	 	 	47.8	%	 	$	209,153	 	 	$	203,707	 	 	$	5,446	 	 	 	2.7	%	
PC applications	 	 	289,372	 	 	 	305,737	 	 	 	(16,365	)	 	 	(5.4	%)	 	 	305,737	 	 	 	269,595	 	 	 	36,142	 	 	 	13.4	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net revenue	 	 	598,538	 	 	 	514,890	 	 	 	83,648	 	 	 	16.2	%	 	 	514,890	 	 	 	473,302	 	 	 	41,588	 	 	 	8.8	%	

Gross margin	 	 	246,070	 	 	 	208,702	 	 	 	37,368	 	 	 	17.9	%	 	 	208,702	 	 	 	191,509	 	 	 	17,193	 	 	 	9.0	%	

Operating expenses:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Research and development	 	 	105,003	 	 	 	86,552	 	 	 	18,451	 	 	 	21.3	%	 	 	86,552	 	 	 	68,026	 	 	 	18,526	 	 	 	27.2	%	
Selling, general, and administrative	 	 	68,549	 	 	 	60,027	 	 	 	8,522	 	 	 	14.2	%	 	 	60,027	 	 	 	54,014	 	 	 	6,013	 	 	 	11.1	%	

Operating income	 	 	72,518	 	 	 	62,123	 	 	 	10,395	 	 	 	16.7	%	 	 	62,123	 	 	 	69,469	 	 	 	(7,346	)	 	 	(10.6	%)	

Interest income	 	 	911	 	 	 	977	 	 	 	(66	)	 	 	(6.8	%)	 	 	977	 	 	 	3,222	 	 	 	(2,245	)	 	 	(69.7	%)	
Interest expense	 	 	(17	)	 	 	(2,400	)	 	 	2,383	 	 	 	(99.3	%)	 	 	(2,400	)	 	 	(7,053	)	 	 	4,653	 	 	 	(66.0	%)	
Loss on early retirement of debt	 	 	—	 	 	 	—	 	 	 	—	 	 	 	n/m	(1)	 	 	—	 	 	 	(1,053	)	 	 	1,053	 	 	 	n/m	(1)	
(Impairment)/recovery on investments, net	 	 	59	 	 	 	(443	)	 	 	502	 	 	 	(113.3	%)	 	 	(443	)	 	 	(9,243	)	 	 	8,800	 	 	 	(95.2	%)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income before provision for income taxes	 	 	73,471	 	 	 	60,257	 	 	 	13,214	 	 	 	21.9	%	 	 	60,257	 	 	 	55,342	 	 	 	4,915	 	 	 	8.9	%	
Provision for income taxes	 	 	9,675	 	 	 	7,292	 	 	 	2,383	 	 	 	32.7	%	 	 	7,292	 	 	 	7,263	 	 	 	29	 	 	 	0.4	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	$	63,796	 	 	$	52,965	 	 	$	10,831	 	 	 	20.4	%	 	$	52,965	 	 	$	48,079	 	 	$	4,886	 	 	 	10.2	%	

 	 	 	
(1)	 	not meaningful	
The following sets forth certain of our consolidated statements of income data as a percentage of revenues for fiscal 2011, 2010, and 2009:
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	Percentage	 	 	 	 	 	 	 	 	 	 	Percentage	 	
 	 	 	 	 	 	 	 	 	 	Point	 	 	 	 	 	 	 	 	 	 	Point	 	
 	 	 	 	 	 	 	 	 	 	Increase	 	 	 	 	 	 	 	 	 	 	Increase	 	
 	 	2011	 	 	2010	 	 	(Decrease)	 	 	2010	 	 	2009	 	 	(Decrease)	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Digital lifestyle product applications	 	 	51.7	%	 	 	40.6	%	 	 	11.1	%	 	 	40.6	%	 	 	43.0	%	 	 	(2.4	%)	
PC applications	 	 	48.3	%	 	 	59.4	%	 	 	(11.1	%)	 	 	59.4	%	 	 	57.0	%	 	 	2.4	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net revenue	 	 	100.0	%	 	 	100.0	%	 	 	 	 	 	 	100.0	%	 	 	100.0	%	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Gross margin	 	 	41.1	%	 	 	40.5	%	 	 	0.6	%	 	 	40.5	%	 	 	40.5	%	 	 	0.0	%	

Operating expenses:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Research and development	 	 	17.5	%	 	 	16.8	%	 	 	0.7	%	 	 	16.8	%	 	 	14.4	%	 	 	2.4	%	
Selling, general, and administrative	 	 	11.5	%	 	 	11.7	%	 	 	(0.2	%)	 	 	11.7	%	 	 	11.4	%	 	 	0.3	%	
Operating income	 	 	12.1	%	 	 	12.1	%	 	 	0.0	%	 	 	12.1	%	 	 	14.7	%	 	 	(2.6	%)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income before provision for income taxes	 	 	12.3	%	 	 	11.7	%	 	 	0.6	%	 	 	11.7	%	 	 	11.7	%	 	 	0.0	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Provision for income taxes	 	 	1.6	%	 	 	1.4	%	 	 	0.2	%	 	 	1.4	%	 	 	1.5	%	 	 	(0.1	%)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	 	10.7	%	 	 	10.3	%	 	 	0.4	%	 	 	10.3	%	 	 	10.2	%	 	 	0.1	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Fiscal 2011 compared with fiscal 2010
Net Revenue.
Net revenue was $598.5 million for fiscal 2011 compared with $514.9 million for fiscal 2010, an increase of $83.6 million, or 16.2%. Of our fiscal 2011 net revenue, $289.4 million, or 48.3%, of net revenue was from the personal computing market and $309.1 million, or 51.7%, of net revenue was from the digital lifestyle product markets, including $304.5 million from mobile smartphones and feature phones. The increase in net revenue for fiscal 2011 was attributable to a $100.0 million, or 47.8%, increase in net revenue from digital lifestyle product applications, partially offset by a decline of $16.4 million, or 5.4%, in net revenue from PC applications due to the weakness in the consumer notebook computer market. The overall increase in net revenue was primarily attributable to a 68.4% increase in unit shipments of digital lifestyle products reflecting higher market penetration of our products in these markets, partially offset by an 8.2% decline in unit shipments in the personal computing market as well as lower priced product mix in the digital lifestyle product markets, general competitive pricing pressure, and a $27.1 million decline in portable digital entertainment device revenue.

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Based on industry estimates of unit shipments, the notebook computer market is anticipated to increase approximately 7% and the mobile smartphone market is anticipated to increase approximately 55% from calendar 2010 to 2011.
Gross Margin.
Gross margin as a percentage of net revenue was 41.1%, or $246.1 million, for fiscal 2011 compared with 40.5%, or $208.7 million, for fiscal 2010. As each custom-designed module we sell utilizes our capacitive sensing technology in a design that is generally unique or specific to an OEM customer’s application, gross margin varies on a product-by-product basis, making our cumulative gross margin a blend of our product specific designs and independent of the vertical markets that our products serve. As a virtual manufacturer, our gross margin percentage is generally not impacted materially by our shipment volume. We charge write-downs to reduce the carrying value of obsolete, slow moving, and non-usable inventory to net realizable value, including warranty costs, to cost of revenue.
Operating Expenses.
Research and Development Expenses. Research and development expenses increased as a percentage of net revenue to 17.5% from 16.8%, and the cost of research and development activities increased $18.5 million, or 21.3%, to $105.0 million in fiscal 2011 compared with $86.6 million in fiscal 2010. The increase in research and development expenses primarily reflected a $9.3 million increase in employee compensation and employment related costs, resulting from a 19.8% increase in research and development staffing, annual compensation adjustments, a $4.1 million increase in infrastructure and support costs for the additional staffing, a $3.7 million increase in temporary services, and a $1.1 million increase in project specific costs.
Selling, General, and Administrative Expenses. Selling, general, and administrative expenses decreased slightly as a percentage of net revenue to 11.5% from 11.7%, and the cost of selling, general, and administrative activities increased $8.5 million, or 14.2%, to $68.5 million in fiscal 2011 compared with $60.0 million in fiscal 2010. The increase in selling, general, and administrative expenses primarily reflected a $3.5 million increase in employee compensation and employment related costs resulting from a 10.9% increase in selling, general, and administrative staffing and annual compensation adjustments; $2.7 million of non-recurring executive officer resignation costs; a $1.1 million increase in travel and entertainment costs; and a $728,000 increase in professional fees.
Operating Income.
We generated operating income of $72.5 million, or 12.1% of net revenue, for fiscal 2011, an increase of $10.4 million compared with $62.1 million, or 12.1% of net revenue, for fiscal 2010. As discussed in the preceding paragraphs, the increase in operating income was primarily attributable to an increase in net revenue and gross profit, partially offset by a $27.0 million increase in our operating expenses.
Non-Operating Income/(Loss).
Interest Income. Interest income was $911,000 for fiscal 2011 compared with $977,000 for fiscal 2010. The decrease in interest income resulted from lower average interest rates, partially offset by higher average invested cash balances.
Interest Expense. Interest expense was $17,000 and $2.4 million for fiscal 2011 and 2010, respectively. The reduction in interest expense resulted from the settlement of all but $2.3 million of our convertible notes in December 2009.
Impairment of Investments. In fiscal 2010, a portion of our ARS investments were converted to auction rate preferred stock. Accordingly, we wrote down the remaining value based on our fair value analysis and taking into account the period of time the fair value has been less than our cost. For fiscal 2011, we recognized a gain of $59,000 on the redemption of $3.2 million of our ARS investments and for fiscal 2010 we reduced the carrying value of our ARS investments by $443,000 through an other-than-temporary impairment charge to income.

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Provision for Income Taxes.
The provision for income taxes was $9.7 million and $7.3 million for fiscal 2011 and 2010, respectively. The income tax provision represented estimated federal, state, and foreign taxes for fiscal 2011 and 2010. The effective tax rate for fiscal 2011 was approximately 13.2% and diverged from the combined federal and state statutory rate, primarily as a result of an increase in profits in lower tax rate jurisdictions, the release of unrecognized tax benefits, and benefit of research tax credits, partially offset by the foreign withholding taxes and net unrecognized tax benefits associated with qualified stock options. The effective tax rate for fiscal 2010 was approximately 12.1% and diverged from the combined federal and state statutory rate, primarily as a result of an increase in profits in lower tax rate jurisdictions, the recognition of tax benefit on the carryback of a prior year net operating loss of $1.8 million, the release of unrecognized tax benefits, and the benefit of research tax credits, partially offset by foreign withholding taxes, a write-down of state deferred tax assets, and net unrecognized tax benefits associated with qualified stock options.
Tax benefit associated with total share-based compensation was approximately $9.7 million and $9.6 million for fiscal 2011 and 2010, respectively. Excluding the impact of share-based compensation and the related tax benefit, the effective tax rate for fiscal 2011 and 2010 would have been 18.1% and 17.7%, respectively.
In May 2011, we were notified by the IRS that our fiscal 2003 through 2006 and fiscal 2008 through 2010 will be subject to an audit. The early periods are being audited in connection with the mandatory Joint Committee Review for a refund in excess of $2.0 million when we carried back our fiscal 2008 net operating loss. The audit is ongoing, and no tax assessment has been proposed.
Fiscal 2010 compared with fiscal 2009
Net Revenue.
Net revenue was $514.9 million for fiscal 2010 compared with $473.3 million for fiscal 2009, an increase of $41.6 million, or 8.8%. Of our fiscal 2010 net revenue, $305.7 million, or 59.4%, of net revenue was from the personal computing market and $209.2 million, or 40.6%, of net revenue was from the digital lifestyle product markets, including $177.4 million from mobile smartphones and feature phones. The increase in net revenue for fiscal 2010 was attributable to a $36.2 million, or 13.4%, increase in net revenue from PC applications, and a $5.4 million, or 2.7%, increase in net revenue from digital lifestyle product applications. The overall increase in net revenue was primarily attributable to a 26.1% increase in unit shipments reflecting higher market penetration of our products in the personal computing and digital lifestyle markets, partially offset by lower priced product mix, general competitive pricing pressure, a decline in portable digital entertainment device revenue, and a reduced attach rate of our multimedia control solutions in notebook computers.
Gross Margin.
Gross margin as a percentage of net revenue was 40.5%, or $208.7 million, for fiscal 2010 compared with 40.5%, or $191.5 million, for fiscal 2009. As each custom-designed module we sell utilizes our capacitive sensing technology in a design that is generally unique or specific to an OEM customer’s application, gross margin varies on a product-by-product basis, making our cumulative gross margin a blend of our product specific designs and independent of the vertical markets that our products serve. As a virtual manufacturer, our gross margin percentage is generally not impacted materially by our shipment volume. We charge write-downs to reduce the carrying value of obsolete, slow moving, and non-usable inventory to net realizable value, including warranty costs, to cost of revenue.
Operating Expenses.
Research and Development Expenses. Research and development expenses increased as a percentage of net revenue to 16.8% from 14.4%, and the cost of research and development activities increased $18.5 million, or 27.2%, to $86.6 million in fiscal 2010 compared with $68.0 million in fiscal 2009. The increase in research and development expenses primarily reflected a $9.1 million increase in employee compensation and employment related costs, resulting from a 16.1% increase in research and development staffing, increased base compensation related to our annual performance review process, a $5.4 million increase in share-based compensation costs due to a $1.5 million cumulative correction to share-based compensation expense in research and development (see note 8 in the notes to consolidated financial statements) as well as grants made during the year, and a $2.1 million increase in facility related costs to support the increased headcount.

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Selling, General, and Administrative Expenses. Selling, general, and administrative expenses increased as a percentage of net revenue to 11.7% from 11.4%, and the cost of selling, general, and administrative activities increased $6.0 million, or 11.1%, to $60.0 million in fiscal 2010 compared with $54.0 million in fiscal 2009. The increase in selling, general, and administrative expenses primarily reflected a $4.9 million increase in share-based compensation costs due to a $2.7 million cumulative correction to share-based compensation expense in selling, general, and administrative expenses as well as grants made during the year, and a $2.4 million increase in employee compensation and employment related costs resulting from a 14.1% increase in selling, general, and administrative staffing and increased base compensation related to our annual performance review process, partially offset by a $1.5 million decrease in legal fees related to patent litigation settled in fiscal 2009.
Operating Income.
We generated operating income of $62.1 million, or 12.1% of net revenue, for fiscal 2010, a decrease of $7.4 million compared with $69.5 million, or 14.7% of net revenue, for fiscal 2009. As discussed in the preceding paragraphs, the decrease in operating income was primarily attributable to a $24.5 million increase in our operating expenses, partially offset by an increase operating leverage resulting from the 8.8% increase in net revenue.
Non-Operating Income/(Loss).
Interest Income. Interest income was $1.0 million for fiscal 2010 compared with $3.2 million for fiscal 2009. The $2.2 million decrease in interest income resulted from lower average interest rates, partially offset by higher average invested cash balances.
Interest Expense. Interest expense was $2.4 million and $7.1 million for fiscal 2010 and 2009, respectively, and consisted primarily of interest expense, and amortization of debt discount and debt issuance costs related to our convertible senior subordinated notes issued in December 2004. The decline in interest expense primarily reflected the retirement of $63.0 million in principal amount of our convertible notes in December 2009.
Impairment of Investments. A portion of our ARS investments were converted to auction rate preferred stock, and we have seen a decline in the credit ratings for certain of our ARS investments. Accordingly, based on our fair value analysis and taking into account the period of time the fair value has been less than our cost, we reduced the carrying value of our ARS investments by $443,000 and $9.2 million for fiscal 2010 and 2009, respectively, through an other-than-temporary impairment charge to income.
Provision for Income Taxes.
The provision for income taxes for each of fiscal 2010 and 2009 was approximately $7.3 million. The income tax provision represented estimated federal, state, and foreign taxes for fiscal 2010 and 2009. The effective tax rate for fiscal 2010 was approximately 12.1% and diverged from the combined federal and state statutory rate, primarily as a result of an increase in profits in lower tax rate jurisdictions, the recognition of tax benefit on the carryback of a prior year net operating loss of $1.8 million, the release of unrecognized tax benefits, and the benefit of research tax credits, partially offset by foreign withholding taxes, a write-down of state deferred tax assets, and net unrecognized tax benefits associated with qualified stock options. The effective tax rate for fiscal 2009 was approximately 13.1% and diverged from the combined federal and state statutory rate primarily as a result of an increase in profits in lower tax rate jurisdictions, the incremental research credits associated with stock option activity, the extension of the federal research credit, and tax-exempt interest income, partially offset by the impact of accounting for share-based compensation and foreign withholding taxes.
Tax benefit associated with total share-based compensation was approximately $9.6 million and $8.0 million for fiscal 2010 and 2009, respectively. Excluding the impact of share-based compensation and the related tax benefit, the effective tax rate for fiscal 2010 and 2009 would have been 17.7% and 19.1%, respectively.

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Quarterly Results of Operations
The following table sets forth our unaudited quarterly results of operations for the eight quarters in the two-year period ended fiscal 2011. You should read the following table in conjunction with the financial statements and related notes contained elsewhere in this report. We have prepared this unaudited information on the same basis as our audited financial statements. This table includes all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of our financial position and operating results for the quarters presented. Past operating results are not necessarily indicative of future operating performance; accordingly, you should not draw any conclusions about our future results from the results of operations for any quarter presented.
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended	 	
(in thousands, except per share amounts)	 	June	 	 	March	 	 	December	 	 	September	 	 	June	 	 	March	 	 	December	 	 	September	 	
(unaudited)	 	2011	 	 	2011	 	 	2010	 	 	2010	 	 	2010	 	 	2010	 	 	2009	 	 	2009	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net revenue	 	$	143,366	 	 	$	142,406	 	 	$	159,581	 	 	$	153,185	 	 	$	145,763	 	 	$	116,212	 	 	$	133,323	 	 	$	119,592	 	
Cost of revenue	 	 	82,778	 	 	 	84,790	 	 	 	94,543	 	 	 	90,357	 	 	 	86,516	 	 	 	68,910	 	 	 	79,492	 	 	 	71,270	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Gross margin	 	 	60,588	 	 	 	57,616	 	 	 	65,038	 	 	 	62,828	 	 	 	59,247	 	 	 	47,302	 	 	 	53,831	 	 	 	48,322	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating expenses:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Research and development	 	 	27,487	 	 	 	25,956	 	 	 	26,640	 	 	 	24,920	 	 	 	22,923	 	 	 	21,212	 	 	 	22,442	 	 	 	19,975	 	
Selling, general, and administrative	 	 	16,799	 	 	 	17,244	 	 	 	18,958	 	 	 	15,548	 	 	 	15,053	 	 	 	14,635	 	 	 	16,575	 	 	 	13,764	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total operating expenses	 	 	44,286	 	 	 	43,200	 	 	 	45,598	 	 	 	40,468	 	 	 	37,976	 	 	 	35,847	 	 	 	39,017	 	 	 	33,739	 	

Operating income	 	 	16,302	 	 	 	14,416	 	 	 	19,440	 	 	 	22,360	 	 	 	21,271	 	 	 	11,455	 	 	 	14,814	 	 	 	14,583	 	
Interest income	 	 	232	 	 	 	242	 	 	 	226	 	 	 	211	 	 	 	205	 	 	 	200	 	 	 	241	 	 	 	331	 	
Interest expense	 	 	(4	)	 	 	(4	)	 	 	(5	)	 	 	(4	)	 	 	(5	)	 	 	(4	)	 	 	(968	)	 	 	(1,423	)	
(Impairment)/recovery of investments	 	 	39	 	 	 	10	 	 	 	—	 	 	 	10	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(443	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income before income taxes	 	 	16,569	 	 	 	14,664	 	 	 	19,661	 	 	 	22,577	 	 	 	21,471	 	 	 	11,651	 	 	 	14,087	 	 	 	13,048	 	
Provision for income taxes	 	 	2,646	 	 	 	1,168	 	 	 	1,983	 	 	 	3,878	 	 	 	2,143	 	 	 	45	 	 	 	1,860	 	 	 	3,244	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	$	13,923	 	 	$	13,496	 	 	$	17,678	 	 	$	18,699	 	 	$	19,328	 	 	$	11,606	 	 	$	12,227	 	 	$	9,804	 	

Net income per share:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Basic	 	$	0.41	 	 	$	0.40	 	 	$	0.52	 	 	$	0.54	 	 	$	0.57	 	 	$	0.35	 	 	$	0.36	 	 	$	0.29	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Diluted	 	$	0.40	 	 	$	0.38	 	 	$	0.50	 	 	$	0.52	 	 	$	0.54	 	 	$	0.33	 	 	$	0.35	 	 	$	0.27	 	

Shares used in computing net income per share:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Basic	 	 	33,816	 	 	 	33,992	 	 	 	33,954	 	 	 	34,402	 	 	 	33,867	 	 	 	33,526	 	 	 	33,611	 	 	 	34,341	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Diluted	 	 	35,011	 	 	 	35,346	 	 	 	35,360	 	 	 	35,900	 	 	 	35,514	 	 	 	35,095	 	 	 	34,936	 	 	 	35,968	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Liquidity and Capital Resources
Our cash and cash equivalents, which exclude ARS investments, were $247.2 million as of the end of fiscal 2011 compared with $209.9 million as of the end of fiscal 2010, an increase of $37.3 million. This increase primarily reflected $89.7 million provided from operating cash flows, $26.4 million from the issuance of common stock under our share-based compensation plans, partially offset by $70.2 million used to repurchase shares of our common stock and $11.6 million used for purchase of capital assets. We consider earnings of our foreign subsidiaries indefinitely invested overseas and have made no provision for income or withholding taxes that may result from a future repatriation of those earnings. As of June 2011, $215.7 million of cash and cash equivalents was held by our foreign subsidiaries. If these funds are needed for our operations in the United States, we would be required to accrue and pay U.S. taxes to repatriate these funds.
Cash Flows from Operating Activities. For fiscal 2011, the net cash provided by operating activities of $89.7 million was primarily attributable to net income of $63.8 million plus adjustments for non-cash charges, including share-based compensation costs of $33.9 million, depreciation and deferred taxes aggregating $7.5 million, and a net decrease in operating assets and liabilities of $14.3 million. The net decrease in operating assets and liabilities related primarily to a decrease in accounts payable of $20.7 million and an increase in inventory of $10.2 million. Our days sales outstanding decreased slightly from 63 to 59 days from fiscal 2010 to fiscal 2011 and our inventory turns decreased from 19 to 11 days for the same period. For fiscal 2010, the net cash provided by operating activities of $114.0 million was primarily attributable to net income of $53.0 million plus adjustments for non-cash charges, including share-based compensation costs of $35.4 million and depreciation, deferred taxes, amortization of debt issuance costs and debt discount, and impairment of investments, aggregating $4.7 million, and a net increase in operating assets and liabilities of $20.9 million. The net increase in operating assets and liabilities related primarily to an increase in accounts payable of $33.4 million, partially offset by an increase in accounts receivable, net of $16.8 million. Our days sales outstanding decreased slightly from 66 to 63 days from fiscal 2009 to fiscal 2010 and our inventory turns increased from 18 to 19 days for the same period. For fiscal 2009, the net cash provided by operating activities of $81.6 million was primarily attributable to net income of $48.1 million plus adjustments for non-cash charges, including share-based compensation costs of $24.4 million and impairment of investments, depreciation, amortization of debt issuance costs and debt discount, deferred taxes and early retirement of debt aggregating $9.1 million. Our days sales outstanding increased slightly from 64 to 66 days from fiscal 2008 to fiscal 2009 and our inventory turns increased from 11 to 18 days for the same period .

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Cash Flows from Investing Activities. Our investing activities typically relate to purchases of government-backed securities and investment-grade fixed income instruments and purchases of capital assets. Investing activities used net cash of $8.4 million for fiscal 2011, generated net cash of $15.6 million for fiscal 2010, and generated net cash of $22.9 million for fiscal 2009. Net cash used in investing activities for fiscal 2011 consisted of $3.2 million in redemptions of ARS investments, partially offset by $11.6 million used for the purchase of capital assets. Net cash provided by investing activities for fiscal 2010 consisted of proceeds from sales and maturities of $28.9 million for short-term investments and $1.8 million in redemptions of ARS investments, partially offset by $9.1 million used for the purchase of capital assets and $6.0 million used for the purchase of short-term investments. Net cash provided by investing activities for fiscal 2009 consisted of proceeds from sales and maturities of $52.3 million for short-term investments and $4.9 million in redemptions of ARS investments, partially offset by $25.0 million used for the purchase of short-term investments and $9.3 million used for the purchase of capital assets.
Cash Flows from Financing Activities. Net cash used in financing activities for fiscal 2011, 2010, and 2009 was $44.0 million, $88.8 million, and $31.7 million, respectively. Our net cash used in financing activities for fiscal 2011 was primarily attributable to $70.2 million to repurchase shares of our common stock in the open market and $3.1 million used for the payment of payroll taxes for DSUs, partially offset by $26.4 million of proceeds from common stock issued under share-based compensation plans and $2.9 million excess tax benefit from share-based compensation. Our net cash used in financing activities for fiscal 2010 was primarily attributable to $63.0 million for the retirement of debt and $44.5 million for the purchase of our common stock in the open market and $2.4 million used for the payment of payroll taxes for DSUs, partially offset by $14.0 million of proceeds from common stock issued under share-based compensation plans and $7.1 million from excess tax benefit from share-based compensation. Our net cash used in financing activities for fiscal 2009 was primarily attributable to $55.7 million for the early retirement of debt and $1.8 million used for the payment of payroll taxes for DSUs, partially offset by $16.4 million in proceeds from common stock issued under our share-based compensation plans and $9.4 million of excess tax benefit from share-based compensation.
Common Stock Purchase Program. In April 2010, our Board of Directors approved an additional $100.0 million for the stock repurchase program, expiring in April 2012, bringing the cumulative authorization to $420.0 million. The program authorizes us to purchase our common stock in the open market or in privately negotiated transactions, depending upon market conditions and other factors. The number of shares purchased and the timing of purchases is based on the level of our cash balances, general business and market conditions, and other factors, including alternative investment opportunities. Common stock purchased under this program is held as treasury stock. From April 2005 through the end of fiscal 2011, we purchased 13,366,476 shares of our common stock in the open market for an aggregate cost of $352.1 million. Treasury shares purchased prior to August 28, 2008 were not subject to the stock split on that date, if adjusted for the stock split the average cost would be $19.66. As of the end of fiscal 2011, we had $67.9 million remaining under our common stock purchase program.
Bank Credit Facility. We currently maintain a $50.0 million working capital line of credit with Wells Fargo Bank. The Wells Fargo Bank revolving line of credit, which expires on September 1, 2012, provides for an interest rate equal to the prime lending rate or 250 basis points above LIBOR, depending on whether we choose a variable or fixed rate, respectively. We did not borrow any amounts under the line of credit during and subsequent to the fiscal year.
$250 Million Shelf Registration. We have registered an aggregate of $250.0 million of securities for issuance to raise funds for general corporate purposes, which may include the repayment of indebtedness outstanding from time to time, working capital, capital expenditures, acquisitions, and repurchases of our common stock or other securities. Securities issued under the shelf registration generally will be freely tradeable after their issuance unless held by an affiliate of our company, in which case such shares will be subject to the volume and manner of sale restrictions of Rule 144.

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$100 Million Shelf Registration. We have registered an aggregate of $100.0 million of common stock and preferred stock for issuance in connection with acquisitions, which shares generally will be freely tradeable after their issuance under Rule 145 of the Securities Act unless held by an affiliate of the acquired company, in which case such shares will be subject to the volume and manner of sale restrictions of Rule 144.
Liquidity and Capital Resources. We believe our existing cash and cash equivalents and anticipated cash flows from operating activities will be sufficient to meet our working capital and other cash requirements over the course of at least the next 12 months. Our future capital requirements will depend on many factors, including our revenue, the timing and extent of spending to support product development efforts, costs related to protecting our intellectual property, the expansion of sales and marketing activities, the timing of introductions of new products and enhancements to existing products, the costs to ensure access to adequate manufacturing capacity, our common stock purchase program, and the amount and timing of our investments in, or acquisitions of, other technologies or companies. Further equity or debt financing may not be available to us on acceptable terms or at all. If sufficient funds are not available or are not available on acceptable terms, our ability to take advantage of unexpected business opportunities or to respond to competitive pressures could be limited or severely constrained.
Our non-current investments consist of ARS investments, which have failed to settle in auctions. These failures generally resulted in the interest rates resetting from LIBOR plus 50 basis points to LIBOR plus 150 basis points on the regularly scheduled auction dates. These investments are not liquid, and in the event we need to access these funds, we will not be able to do so without a loss of principal, unless a future auction on these investments is successful.
Based on our ability to access our cash and cash equivalents, our expected operating cash flows, and our other sources of cash, we do not anticipate the lack of liquidity on these investments will affect our ability to operate our business as usual.
Contractual Obligations and Commercial Commitments
The following table sets forth a summary of our material contractual obligations and commercial commitments as of the end of fiscal 2011 (in millions):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Payments due by period	 	
 	 	 	 	 	 	Less than	 	 	1-3	 	 	3-5	 	 	More than	 	
Contractual Obligations	 	Total	 	 	1 year	 	 	Years	 	 	Years	 	 	5 Years	 	
Convertible senior subordinated notes (1)	 	$	3	 	 	$	—	 	 	$	—	 	 	$	—	 	 	$	3	 	
Leases	 	 	6	 	 	 	3	 	 	 	3	 	 	 	—	 	 	 	—	 	
Purchase obligations and other commitments (2)	 	 	17	 	 	 	8	 	 	 	9	 	 	 	—	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	26	 	 	$	11	 	 	$	12	 	 	$	—	 	 	$	3	 	

 	 	 	
(1)	 	Represents both principal and interest payable through the maturity date of the underlying contractual obligation.	
 	 	 	
(2)	 	Purchase obligations and other commitments include payments due under a long-term services agreement and inventory purchase obligations with contract manufacturers.	
The amounts in the table above exclude unrecognized tax benefits of $20.2 million. As of the end of fiscal 2011, we were unable to make a reasonably reliable estimate of when cash settlement with a taxing authority may occur in connection with our gross unrecognized tax benefits.
Off-Balance Sheet Arrangements
We do not have any transactions, arrangements, or other relationships with unconsolidated entities that are reasonably likely to materially affect our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, or capital resources. We have no special purpose or limited purpose entities that provide off-balance sheet financing, liquidity, or market or credit risk support; engage in leasing, hedging, or research and development services; or have other relationships that expose us to liability that is not reflected in the financial statements.

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Recently Issued Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board, or FASB, issued new guidance on the presentation of comprehensive income. This new guidance requires the components of net income and other comprehensive income to be either presented in one continuous statement, referred to as the statement of comprehensive income, or in two separate but consecutive statements. This new guidance eliminates the current option to report other comprehensive income and its components in the statement of stockholders’ equity. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. This new guidance is effective for our fiscal 2013. As this guidance only amends the presentation of the components of comprehensive income, the adoption will not have an impact on our consolidated financial position, results of operations, or cash flows.
In April 2011, the FASB issued new guidance to achieve common fair value measurement and disclosure requirements between U.S. GAAP and International Financial Reporting Standards. This new guidance, which is effective for our fiscal 2013, amends current U.S. GAAP fair value measurement and disclosure guidance to include increased transparency around valuation inputs and investment categorization. We do not expect that the adoption will have a material impact on our consolidated financial position, results of operations, or cash flows.

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ITEM 7A.	 	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	
Interest rate risk
Our exposure to market risk for changes in interest rates relates primarily to our cash and cash equivalents, and ARS investments. We do not use our investment portfolio for trading or other speculative purposes.
The table below presents principal amounts and related weighted average interest rates by year of maturity for our cash equivalents, investments, and debt obligations as of the end of fiscal 2011 (in thousands, except average interest rates):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	Fair	 	
Fiscal Year Ended June	 	2012	 	 	2013	 	 	2014	 	 	2015	 	 	2016	 	 	Thereafter	 	 	Total	 	 	Value	 	
Assets	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cash equivalents — variable rate	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Money market	 	$	243,966	 	 	$	—	 	 	$	—	 	 	$	—	 	 	$	—	 	 	$	—	 	 	$	243,966	 	 	$	243,966	 	
Average interest rate	 	 	0.17	%	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	0.17	%	 	 	 	 	
Total cash equivalents	 	$	243,966	 	 	$	—	 	 	$	—	 	 	$	—	 	 	$	—	 	 	$	—	 	 	$	243,966	 	 	$	243,966	 	
Average interest rate	 	 	0.17	%	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	0.17	%	 	 	 	 	
Non-current investments	 	$	—	 	 	$	—	 	 	$	—	 	 	$	—	 	 	$	—	 	 	$	37,500	 	 	$	37,500	 	 	$	25,876	 	
Average interest rate	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	1.29	%	 	 	1.29	%	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Liabilities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Convertible Senior Subordinated Notes	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Fixed rate amounts	 	$	—	 	 	$	—	 	 	$	—	 	 	$	—	 	 	$	—	 	 	$	2,305	 	 	$	2,305	 	 	$	2,305	 	
Average interest rate	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	0.75	%	 	 	0.75	%	 	 	 	 	
Our Convertible Senior Subordinated Notes bear a fixed coupon interest rate of 0.75% and mature in December 2024. The noteholders could require us to repurchase their notes on December 1, 2014, December 1, 2019, or in the event of a fundamental change as described in the indenture governing the notes. The early repayment of the notes is not reflected in the preceding schedule.
Our non-current investments, which consist of ARS investments, have a par value of $37.5 million and have failed to settle in auctions beginning in 2007. These investments are not liquid, and in the event we need to access these funds, we will not be able to do so without a loss of principal, unless redeemed by the issuers or a future auction on these investments is successful. During fiscal 2011, $3.2 million of our ARS investments were redeemed at par and we recognized a gain of $59,000 on the redemption of these investments, which is included in impairment of investments, net on the accompanying consolidated statements of income.
As there are currently no active markets for our various failed ARS investments, we have estimated the fair value of these investments as of the end of fiscal 2011 using a trinomial discounted cash flow analysis. The analysis considered, among other factors:
 	•	 	the collateral underlying the security investments;	

 	•	 	creditworthiness of the counterparty;	

 	•	 	timing of expected future cash flows;	

 	•	 	the probability of a successful auction in a future period;	

 	•	 	the underlying structure of each investment;	

 	•	 	the present value of future principal and interest payments discounted at rates considered to reflect current market conditions;	

 	•	 	consideration of the probabilities of default, passing a future auction, or redemption at par for each period; and	

 	•	 	estimates of the recovery rates in the event of default for each investment.	

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When possible, our failed ARS investments were compared to other observable market data or securities with similar characteristics. Our estimate of the fair value of our ARS investments could fluctuate materially from period to period depending on future market conditions.
Contractual maturities for our ARS investments are generally greater than five years, with fair value of $9.9 million maturing from fiscal 2016 to fiscal 2018, $8.7 million maturing from fiscal 2034 to fiscal 2045, and $7.3 million maturing thereafter or having no stated maturity. Of our ARS investments $19.0 million par value are investment grade; and the remaining $18.5 million par value is below investment grade.
Based on our ability to access our cash and cash equivalents, our expected operating cash flows, and our other sources of cash, we do not anticipate the lack of liquidity on these investments will affect our ability to operate our business as usual.
There have been no significant changes in the maturity dates and average interest rates for our cash equivalents and debt obligations subsequent to fiscal 2011.
Foreign currency exchange risk
All of our revenue and approximately 93% of our consolidated costs are denominated in U.S. dollars. As a result, we have relatively little exposure to foreign currency exchange risks and foreign exchange losses have been immaterial to date. We do not currently enter into forward-exchange contracts to hedge exposure denominated in foreign currencies or any other derivative financial instruments for trading or speculative purposes. In the future, if our operations change and we determine that our foreign exchange exposure has increased, we may consider entering into hedging transactions to mitigate such risk.
 	 	 	
ITEM 8.	 	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	
Reference is made to the financial statements, the report of our independent registered public accounting firm, and the notes thereto commencing at page F-1 of this report, which financial statements, report, and notes are incorporated herein by reference. Reference is also made to the quarterly results of operations on page 46 of this report, which quarterly results of operations are incorporated herein by reference.
 	 	 	
ITEM 9.	 	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	
Not applicable.
 	 	 	
ITEM 9A.	 	CONTROLS AND PROCEDURES	
Conclusions Regarding Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our interim Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on this evaluation, our interim Chief Executive Officer and Chief Financial Officer, as of June 25, 2011, concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are effective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and that such information is accumulated and communicated to our management, including our interim Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control Over Financial Reporting
We are responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Under the supervision and with the participation of our management, including our interim Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in  Internal Control—Integrated Framework  issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control—Integrated Framework , our management concluded that our internal control over financial reporting was effective as of June 25, 2011. The effectiveness of our internal control over financial reporting as of June 25, 2011 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in its report included herein on page F-2.

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Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our interim Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls over financial reporting will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, misstatements, errors, and instances of fraud, if any, within our company have been or will be prevented or detected. Further, internal controls may become inadequate as a result of changes in conditions, or through the deterioration of the degree of compliance with policies or procedures.
 	 	 	
ITEM 9B.	 	OTHER INFORMATION	
There were no items requiring reporting on Form 8-K that were not reported on Form 8-K during the fourth quarter of the year covered by this Form 10-K.

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PART III
 	 	 	
ITEM 10.	 	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	
The information required by this Item relating to directors of our company and corporate governance is incorporated herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2011 Annual Meeting of Stockholders. The information required by this Item relating to our executive officers is included in Item 1, “Business — Executive Officers.”
We have adopted a code of ethics that applies to our principal executive officer, principal financial officer, and other senior accounting personnel. The “Code of Ethics for the CEO and Senior Financial Officers” is located on our website at www.synaptics.com in the Investor Relations section under Corporate Governance.
We intend to satisfy the disclosure requirement under Item 10 of Form 8-K regarding any amendment to, or waiver from, a provision of this code of ethics by posting such information on our website, at the address and location specified above.
 	 	 	
ITEM 11.	 	EXECUTIVE COMPENSATION	
The information required by this Item is incorporated herein by reference to the definitive Proxy Statement (particularly under the caption “Executive Compensation”) to be filed pursuant to Regulation 14A of the Exchange Act for our 2011 Annual Meeting of Stockholders.
 	 	 	
ITEM 12.	 	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	
The information required by this Item is incorporated herein by reference to the definitive Proxy Statement (particularly under the caption “Security Ownership of Principal Stockholders, Directors, and Officers”) to be filed pursuant to Regulation 14A of the Exchange Act for our 2011 Annual Meeting of Stockholders.
 	 	 	
ITEM 13.	 	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	
The information required by this Item is incorporated herein by reference to the definitive Proxy Statement (particularly under the caption “Certain Relationships and Related Transactions”) to be filed pursuant to Regulation 14A of the Exchange Act for our 2011 Annual Meeting of Stockholders.
 	 	 	
ITEM 14.	 	PRINCIPAL ACCOUNTANT FEES AND SERVICES	
The information required by this Item is incorporated herein by reference to the definitive Proxy Statement (particularly under the caption “Ratification of Appointment of Independent Auditor”) to be filed pursuant to Regulation 14A of the Exchange Act for our 2011 Annual Meeting of Stockholders.

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PART IV
 	 	 	
ITEM 15.	 	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	
(a) Financial Statements and Financial Statement Schedules
 	(1)	 	Financial Statements are listed in the Index to Consolidated Financial Statements on page F-1 of this report.	
(b) Exhibits
 	 	 	 	 	
Exhibit	 	 	
Number	 	Exhibit	
 	 	 	 	 	
 	3.1	 	 	Certificate of Incorporation (1)	
 	3.1	(b)	 	Certificate of Designation of Series A Junior Participating Preferred Stock (2)	
 	3.2	 	 	Third Amended and Restated Bylaws (amended and restated as of July 27, 2010) (3)	
 	3.3	 	 	Certificate of Amendment of Certificate of Incorporation of the registrant (4)	
 	3.4	 	 	Certificate of Amendment of Certificate of Incorporation of the registrant (5)	
 	4	 	 	Form of Common Stock Certificate (6)	
 	4	(b)	 	Rights Agreement, dated as of August 15, 2002, between the registrant and American Stock Transfer & Trust Company, as Rights Agent (2)	
 	4	(c)	 	Amendment No. 1 to Rights Agreement (7)	
 	4.6	 	 	Form of Indenture (8)	
 	10.3	(a)*	 	1996 Stock Option Plan (9)	
 	10.3	(b)*	 	Form of grant agreements for 1996 Stock Option Plan (6)	
 	10.5	*	 	2000 Nonstatutory Stock Option Plan and form of grant agreement (9)	
 	10.6	(a)*	 	Amended and Restated 2001 Incentive Compensation Plan (as amended through January 23, 2007) (10)	
 	10.6	(b)*	 	Form of grant agreements for Amended and Restated 2001 Incentive Compensation Plan (11)	
 	10.6	(c)*	 	Form of deferred stock award agreement for Amended and Restated 2001 Incentive Compensation Plan (12)	
 	10.7	(a)*	 	Corrected Amended and Restated 2001 Employee Stock Purchase Plan (as amended through January 23, 2007) (10)	
 	10.8	*	 	401(k) Profit Sharing Plan (9)	
 	10.14	*	 	Form of Stock Option Grant and Stock Option Agreement between the registrant and Francis F. Lee (9)	
 	10.15	*	 	Form of Stock Option Grant and Stock Option Agreement between the registrant and Russell J. Knittel (9)	
 	10.17	*	 	Form of Indemnification Agreement entered into with the following directors and executive officers as of January 28, 2002 with Francis F. Lee, Russell J. Knittel, Keith B. Geeslin, and Richard L. Sanquini; as of June 26, 2004 with Jeffrey D. Buchanan; as of March 28, 2006 with Thomas J. Tiernan; as of September 25, 2006 with Hing Chung (Alex) Wong; as of February 20, 2007 with Nelson C. Chan; as of April 2, 2007 with Mark N. Vena; as of October 23, 2007 with James L. Whims; as of January 7, 2008 with David B. Long; as of March 2, 2009 with Kathleen A. Bayless; as of June 23, 2010 with Stanley A. Swearingen; and as of January 10, 2011 with Kevin D. Barber (1)	
 	10.18	*	 	Severance Policy for Principal Executive Officers (13)	
 	10.20	*	 	Form of Change of Control and Severance Agreement entered into by Russell J. Knittel as of April 22, 2003 (13)	
 	10.22	**	 	Settlement Agreement dated March 31, 2005 by and among the registrant, Alps Electric Co. Ltd., and Cirque Corporation (14)	
 	10.23	*	 	Change of Control Severance Agreement entered into by Thomas J. Tiernan as of April 3, 2006 (15)	
 	10.24	(a)*	 	2010 Incentive Compensation Plan (16)	
 	10.24	(b)*	 	Form of Non-Qualified Stock Option Agreement for 2010 Incentive Compensation Plan (17)	
 	10.24	(c)*	 	Form of Incentive Stock Option Agreement for 2010 Incentive Compensation Plan (17)	
 	10.24	(d)*	 	Form of Deferred Stock Award Agreement for 2010 Incentive Compensation Plan (17)	
 	10.25	*	 	2010 Employee Stock Purchase Plan (17)	
 	10.26	*	 	Separation Agreement and Release dated October 13, 2010 by and among the registrant and Thomas J. Tiernan (18)	

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Exhibit	 	 	
Number	 	Exhibit	
 	 	 	 	 	
 	21	 	 	List of Subsidiaries	
 	23.1	 	 	Consent of Independent Registered Public Accounting Firm	
 	31.1	 	 	Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a)	
 	31.2	 	 	Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a)	
 	32.1	 	 	Section 1350 Certification of Chief Executive Officer	
 	32.2	 	 	Section 1350 Certification of Chief Financial Officer	
 	99.1	 	 	Credit Agreement and Revolving Line of Credit Note entered into as of August 17, 2011, by and between the registrant and Wells Fargo Bank, National Association	
101.INS	†	 	XBRL Instance Document	
101.SCH	†	 	XBRL Taxonomy Extension Schema Document	
101.CAL	†	 	XBRL Taxonomy Extension Calculation Linkbase Document	
101.DEF	†	 	XBRL Taxonomy Extension Definition Linkbase Document	
101.LAB	†	 	XBRL Taxonomy Extension Label Linkbase Document	
101.PRE	†	 	XBRL Taxonomy Extension Presentation Linkbase Document	

(1)	 	Incorporated by reference to the registrant’s Form 10-Q for the quarter ended December 29, 2001, as filed with the SEC on February 21, 2002.	
 	 	 	
(2)	 	Incorporated by reference to the registrant’s Form 8-A as filed with the SEC on August 16, 2002.	
 	 	 	
(3)	 	Incorporated by reference to the registrant’s Current Report on Form 8-K as filed with the SEC on August 2, 2010.	
 	 	 	
(4)	 	Incorporated by reference to the registrant’s Current Report on Form 8-K as filed with the SEC on December 7, 2004.	
 	 	 	
(5)	 	Incorporation by reference to the registrant’s Current Report on Form 8-K as filed with the SEC on October 22, 2010.	
 	 	 	
(6)	 	Incorporated by reference to the registrant’s Form 10-K for fiscal 2002, as filed with the SEC on September 12, 2002.	
 	 	 	
(7)	 	Incorporated by reference to the registrant’s Current Report on Form 8-K as filed with the SEC on April 24, 2008.	
 	 	 	
(8)	 	Incorporated by reference to the registrant’s registration statement on Form S-3 (Registration No. 333-155582) as filed with the SEC November 21, 2008 and declared effective May 7, 2009.	
 	 	 	
(9)	 	Incorporated by reference to the registrant’s registration statement on Form S-1 (Registration No. 333-56026) as filed with the SEC on August 17, 2001 and declared effective January 28, 2002.	
 	 	 	
(10)	 	Incorporated by reference to the registrant’s Form 10-Q for the quarter ended September 29, 2007, as filed with the SEC on November 8, 2007.	
 	 	 	
(11)	 	Incorporated by reference to the registrant’s Form 10-Q for the quarter ended December 28, 2002, as filed with SEC on February 6, 2003.	
 	 	 	
(12)	 	Incorporated by reference to the registrant’s Form 10-K for the fiscal year ended June 24, 2006, as filed with the SEC on September 7, 2006.	
 	 	 	
(13)	 	Incorporated by reference to the registrant’s Form 10-K for fiscal 2003, as filed with the SEC on September 12, 2003.	
 	 	 	
(14)	 	Incorporated by reference to the registrant’s Current Report on Form 8-K as filed with the SEC on April 1, 2005.	
 	 	 	
(15)	 	Incorporated by reference to the registrant’s Current Report on Form 8-K as filed with the SEC on April 3, 2006.	
 	 	 	
(16)	 	Incorporated by reference to the registrant’s Form 10-Q as filed with the SEC on November 2, 2010.	
 	 	 	
(17)	 	Incorporated by reference to the registrant’s Current Report on Form 8-K as filed with the SEC on October 22, 2010.	
 	 	 	
(18)	 	Incorporated by reference to the registrant’s Current Report on Form 8-K as filed with the SEC on October 13, 2010.	
 	 	 	
*	 	Indicates a contract with management or compensatory plan or arrangement.	
 	 	 	
**	 	Portions of this exhibit have been omitted pursuant to a confidential treatment request that was granted by the Securities and Exchange Commission pursuant to Rule 24b-2 of the Exchange Act.	
 	 	 	
†	 	Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.	

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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of 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.
 	 	 	 	 	
 	SYNAPTICS INCORPORATED
 	 	
Date August 22, 2011 	By:  	/s/ Russell J. Knittel  	 	
 	 	Russell J. Knittel 	 	
 	 	Interim President and Chief Executive Officer 	 	
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 	 	 	 	 	
Signature	 	Title	 	Date	
 	 	 	 	 	
/s/ Russell J. Knittel
  Russell J. Knittel	 	Interim President and Chief Executive Officer, and Director	 	August 22, 2011	
 	 	 	 	 	
/s/ Kathleen A. Bayless
  Kathleen A. Bayless	 	Senior Vice President, Chief Financial Officer,
Secretary and Treasurer (Principal
Financial and Accounting Officer)	 	August 22, 2011	
 	 	 	 	 	
/s/ Francis F. Lee
  Francis F. Lee	 	Chairman of the Board 	 	August 22, 2011	
 	 	 	 	 	
/s/ Jeffrey D. Buchanan
  Jeffrey D. Buchanan	 	Director 	 	August 22, 2011	
 	 	 	 	 	
/s/ Nelson C. Chan
  Nelson C. Chan	 	Director 	 	August 22, 2011	
 	 	 	 	 	
/s/ Keith B. Geeslin
  Keith B. Geeslin	 	Director 	 	August 22, 2011	
 	 	 	 	 	
/s/ Richard L. Sanquini
  Richard L. Sanquini	 	Director 	 	August 22, 2011	
 	 	 	 	 	
/s/ James L. Whims
  James L. Whims	 	Director 	 	August 22, 2011	

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INDEX TO EXHIBITS
 	 	 	 	 	
Exhibit	 	 	
Number	 	Exhibit	
 	 	 	 	 	
 	3.1	 	 	Certificate of Incorporation (1)	
 	3.1	(b)	 	Certificate of Designation of Series A Junior Participating Preferred Stock (2)	
 	3.2	 	 	Third Amended and Restated Bylaws (amended and restated as of July 27, 2010) (3)	
 	3.3	 	 	Certificate of Amendment of Certificate of Incorporation of the registrant (4)	
 	3.4	 	 	Certificate of Amendment of Certificate of Incorporation of the registrant (5)	
 	4	 	 	Form of Common Stock Certificate (6)	
 	4	(b)	 	Rights Agreement, dated as of August 15, 2002, between the registrant and American Stock Transfer & Trust Company, as Rights Agent (2)	
 	4	(c)	 	Amendment No. 1 to Rights Agreement (7)	
 	4.6	 	 	Form of Indenture (8)	
 	10.3	(a)*	 	1996 Stock Option Plan (9)	
 	10.3	(b)*	 	Form of grant agreements for 1996 Stock Option Plan (6)	
 	10.5	*	 	2000 Nonstatutory Stock Option Plan and form of grant agreement (9)	
 	10.6	(a)*	 	Amended and Restated 2001 Incentive Compensation Plan (as amended through January 23, 2007) (10)	
 	10.6	(b)*	 	Form of grant agreements for Amended and Restated 2001 Incentive Compensation Plan (11)	
 	10.6	(c)*	 	Form of deferred stock award agreement for Amended and Restated 2001 Incentive Compensation Plan (12)	
 	10.7	(a)*	 	Corrected Amended and Restated 2001 Employee Stock Purchase Plan (as amended through January 23, 2007) (10)	
 	10.8	*	 	401(k) Profit Sharing Plan (9)	
 	10.14	*	 	Form of Stock Option Grant and Stock Option Agreement between the registrant and Francis F. Lee (9)	
 	10.15	*	 	Form of Stock Option Grant and Stock Option Agreement between the registrant and Russell J. Knittel (9)	
 	10.17	*	 	Form of Indemnification Agreement entered into with the following directors and executive officers as of January 28, 2002 with Francis F. Lee, Russell J. Knittel, Keith B. Geeslin, and Richard L. Sanquini; as of June 26, 2004 with Jeffrey D. Buchanan; as of March 28, 2006 with Thomas J. Tiernan; as of September 25, 2006 with Hing Chung (Alex) Wong; as of February 20, 2007 with Nelson C. Chan; as of April 2, 2007 with Mark N. Vena; as of October 23, 2007 with James L. Whims; as of January 7, 2008 with David B. Long; as of March 2, 2009 with Kathleen A. Bayless; as of June 23, 2010 with Stanley A. Swearingen; and as of January 10, 2011 with Kevin D. Barber (1)	
 	10.18	*	 	Severance Policy for Principal Executive Officers (13)	
 	10.20	*	 	Form of Change of Control and Severance Agreement entered into by Russell J. Knittel as of April 22, 2003 (13)	
 	10.22	**	 	Settlement Agreement dated March 31, 2005 by and among the registrant, Alps Electric Co. Ltd., and Cirque Corporation (14)	
 	10.23	*	 	Change of Control Severance Agreement entered into by Thomas J. Tiernan as of April 3, 2006 (15)	
 	10.24	(a)*	 	2010 Incentive Compensation Plan (16)	
 	10.24	(b)*	 	Form of Non-Qualified Stock Option Agreement for 2010 Incentive Compensation Plan (17)	
 	10.24	(c)*	 	Form of Incentive Stock Option Agreement for 2010 Incentive Compensation Plan (17)	
 	10.24	(d)*	 	Form of Deferred Stock Award Agreement for 2010 Incentive Compensation Plan (17)	
 	10.25	*	 	2010 Employee Stock Purchase Plan (17)	
 	10.26	*	 	Separation Agreement and Release dated October 13, 2010 by and among the registrant and Thomas J. Tiernan (18)	
 	21	 	 	List of Subsidiaries	
 	23.1	 	 	Consent of Independent Registered Public Accounting Firm	
 	31.1	 	 	Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a)	
 	31.2	 	 	Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a)	
 	32.1	 	 	Section 1350 Certification of Chief Executive Officer	
 	32.2	 	 	Section 1350 Certification of Chief Financial Officer	
 	99.1	 	 	Credit Agreement and Revolving Line of Credit Note entered into as of August 17, 2011, by and between the registrant and Wells Fargo Bank, National Association	

57

Table of Contents
 	 	 	 	 	
Exhibit	 	 	
Number	 	Exhibit	
 	 	 	 	 	
101.INS †	 	XBRL Instance Document	
101.SCH †	 	XBRL Taxonomy Extension Schema Document	
101.CAL †	 	XBRL Taxonomy Extension Calculation Linkbase Document	
101.DEF †	 	XBRL Taxonomy Extension Definition Linkbase Document	
101.LAB †	 	XBRL Taxonomy Extension Label Linkbase Document	
101.PRE †	 	XBRL Taxonomy Extension Presentation Linkbase Document	

(1)	 	Incorporated by reference to the registrant’s Form 10-Q for the quarter ended December 29, 2001, as filed with the SEC on February 21, 2002.	
 	 	 	
(2)	 	Incorporated by reference to the registrant’s Form 8-A as filed with the SEC on August 16, 2002.	
 	 	 	
(3)	 	Incorporated by reference to the registrant’s Current Report on Form 8-K as filed with the SEC on August 2, 2010.	
 	 	 	
(4)	 	Incorporated by reference to the registrant’s Current Report on Form 8-K as filed with the SEC on December 7, 2004.	
 	 	 	
(5)	 	Incorporation by reference to the registrant’s Current Report on Form 8-K as filed with the SEC on October 22, 2010.	
 	 	 	
(6)	 	Incorporated by reference to the registrant’s Form 10-K for fiscal 2002, as filed with the SEC on September 12, 2002.	
 	 	 	
(7)	 	Incorporated by reference to the registrant’s Current Report on Form 8-K as filed with the SEC on April 24, 2008.	
 	 	 	
(8)	 	Incorporated by reference to the registrant’s registration statement on Form S-3 (Registration No. 333-155582) as filed with the SEC November 21, 2008 and declared effective May 7, 2009.	
 	 	 	
(9)	 	Incorporated by reference to the registrant’s registration statement on Form S-1 (Registration No. 333-56026) as filed with the SEC on August 17, 2001 and declared effective January 28, 2002.	
 	 	 	
(10)	 	Incorporated by reference to the registrant’s Form 10-Q for the quarter ended September 29, 2007, as filed with the SEC on November 8, 2007.	
 	 	 	
(11)	 	Incorporated by reference to the registrant’s Form 10-Q for the quarter ended December 28, 2002, as filed with SEC on February 6, 2003.	
 	 	 	
(12)	 	Incorporated by reference to the registrant’s Form 10-K for the fiscal year ended June 24, 2006, as filed with the SEC on September 7, 2006.	
 	 	 	
(13)	 	Incorporated by reference to the registrant’s Form 10-K for fiscal 2003, as filed with the SEC on September 12, 2003.	
 	 	 	
(14)	 	Incorporated by reference to the registrant’s Current Report on Form 8-K as filed with the SEC on April 1, 2005.	
 	 	 	
(15)	 	Incorporated by reference to the registrant’s Current Report on Form 8-K as filed with the SEC on April 3, 2006.	
 	 	 	
(16)	 	Incorporated by reference to the registrant’s Form 10-Q as filed with the SEC on November 2, 2010.	
 	 	 	
(17)	 	Incorporated by reference to the registrant’s Current Report on Form 8-K as filed with the SEC on October 22, 2010.	
 	 	 	
(18)	 	Incorporated by reference to the registrant’s Current Report on Form 8-K as filed with the SEC on October 13, 2010.	
 	 	 	
*	 	Indicates a contract with management or compensatory plan or arrangement.	
 	 	 	
**	 	Portions of this exhibit have been omitted pursuant to a confidential treatment request that was granted by the Securities and Exchange Commission pursuant to Rule 24b-2 of the Exchange Act.	
 	 	 	
†	 	Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.	

58

 
INDEX TO FINANCIAL STATEMENTS

SYNAPTICS INCORPORATED AND SUBSIDIARIES
 	 	 	 	 	
Report of Independent Registered Public Accounting Firm	 	 	F-2	 	
 	 	 	 	 	
Consolidated Balance Sheets	 	 	F-3	 	
 	 	 	 	 	
Consolidated Statements of Income	 	 	F-4	 	
 	 	 	 	 	
Consolidated Statements of Stockholders’ Equity and Comprehensive Income	 	 	F-5	 	
 	 	 	 	 	
Consolidated Statements of Cash Flows	 	 	F-6	 	
 	 	 	 	 	
Notes to Consolidated Financial Statements	 	 	F-7	 	

F-1

Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Synaptics Incorporated:
We have audited the accompanying consolidated balance sheets of Synaptics Incorporated and subsidiaries (the Company) as of June 25, 2011 and June 26, 2010, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended June 25, 2011. We also have audited the Company’s internal control over financial reporting as of June 25, 2011, based on criteria established in Internal Control — Integrated Framework  issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Synaptics Incorporated and subsidiaries as of June 25, 2011 and June 26, 2010, and the results of their operations and their cash flows for each of the years in the three-year period ended June 25, 2011, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 25, 2011, based on criteria established in  Internal Control — Integrated Framework  issued by the COSO.
/s/ KPMG LLP
Mountain View, California
August 22, 2011

F-2

Table of Contents
SYNAPTICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value and share amounts)
 	 	 	 	 	 	 	 	 	
 	 	June	 	 	June	 	
 	 	2011	 	 	2010	 	
ASSETS	 	 	 	 	 	 	 	 	
Current Assets:	 	 	 	 	 	 	 	 	
Cash and cash equivalents	 	$	247,153	 	 	$	209,858	 	
Accounts receivable, net of allowances of $709 and $500 at June 2011 and 2010, respectively	 	 	93,808	 	 	 	101,509	 	
Inventories	 	 	28,850	 	 	 	18,667	 	
Prepaid expenses and other current assets	 	 	4,373	 	 	 	4,471	 	
 	 	 	 	 	 	 	
Total current assets	 	 	374,184	 	 	 	334,505	 	
Property and equipment, net	 	 	26,222	 	 	 	25,821	 	
Goodwill	 	 	1,927	 	 	 	1,927	 	
Non-current investments	 	 	25,876	 	 	 	28,012	 	
Other assets	 	 	27,992	 	 	 	24,414	 	
 	 	 	 	 	 	 	
 	 	$	456,201	 	 	$	414,679	 	

LIABILITIES AND STOCKHOLDERS’ EQUITY	 	 	 	 	 	 	 	 	
Current Liabilities:	 	 	 	 	 	 	 	 	
Accounts payable	 	$	44,930	 	 	$	65,618	 	
Accrued compensation	 	 	13,210	 	 	 	11,330	 	
Income taxes payable	 	 	11,808	 	 	 	10,061	 	
Other accrued liabilities	 	 	22,813	 	 	 	18,962	 	
 	 	 	 	 	 	 	
Total current liabilities	 	 	92,761	 	 	 	105,971	 	
 	 	 	 	 	 	 	
Notes payable	 	 	2,305	 	 	 	2,305	 	
Other liabilities	 	 	21,142	 	 	 	19,892	 	
 	 	 	 	 	 	 	 	 	
Commitments and contingencies	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	
Stockholders’ equity:	 	 	 	 	 	 	 	 	
Preferred stock;	 	 	 	 	 	 	 	 	
$0.001 par value; 10,000,000 shares authorized; no shares issued and outstanding	 	 	—	 	 	 	—	 	
Common stock:	 	 	 	 	 	 	 	 	
$0.001 par value; 120,000,000 and 60,000,000 shares authorized, 46,832,208 and 44,891,834 shares issued, and 33,465,732 and 34,020,521 shares outstanding, at June 2011 and 2010, respectively	 	 	47	 	 	 	45	 	
Additional paid-in capital	 	 	406,653	 	 	 	347,764	 	
Treasury stock: 13,366,476 and 10,871,313 common treasury shares at June 2011 and 2010, respectively, at cost	 	 	(352,142	)	 	 	(281,932	)	
Accumulated other comprehensive income	 	 	2,520	 	 	 	1,515	 	
Retained earnings	 	 	282,915	 	 	 	219,119	 	
 	 	 	 	 	 	 	
Total stockholders’ equity	 	 	339,993	 	 	 	286,511	 	
 	 	 	 	 	 	 	
 	 	$	456,201	 	 	$	414,679	 	
 	 	 	 	 	 	 	
See notes to consolidated financial statements.

F-3

Table of Contents
SYNAPTICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Fiscal	 	
 	 	2011	 	 	2010	 	 	2009	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Net revenue	 	$	598,538	 	 	$	514,890	 	 	$	473,302	 	
Cost of revenue	 	 	352,468	 	 	 	306,188	 	 	 	281,793	 	
 	 	 	 	 	 	 	 	 	 	
Gross margin	 	 	246,070	 	 	 	208,702	 	 	 	191,509	 	

Operating expenses:	 	 	 	 	 	 	 	 	 	 	 	 	
Research and development	 	 	105,003	 	 	 	86,552	 	 	 	68,026	 	
Selling, general, and administrative	 	 	68,549	 	 	 	60,027	 	 	 	54,014	 	
 	 	 	 	 	 	 	 	 	 	
Total operating expenses	 	 	173,552	 	 	 	146,579	 	 	 	122,040	 	

Operating income	 	 	72,518	 	 	 	62,123	 	 	 	69,469	 	
Interest income	 	 	911	 	 	 	977	 	 	 	3,222	 	
Interest expense	 	 	(17	)	 	 	(2,400	)	 	 	(7,053	)	
Loss on early retirement of debt	 	 	—	 	 	 	—	 	 	 	(1,053	)	
Impairment (loss)/recovery on investments, net	 	 	59	 	 	 	(443	)	 	 	(9,243	)	
 	 	 	 	 	 	 	 	 	 	
Income before provision for income taxes	 	 	73,471	 	 	 	60,257	 	 	 	55,342	 	
Provision for income taxes	 	 	9,675	 	 	 	7,292	 	 	 	7,263	 	
 	 	 	 	 	 	 	 	 	 	
Net income	 	$	63,796	 	 	$	52,965	 	 	$	48,079	 	

Net income per share:	 	 	 	 	 	 	 	 	 	 	 	 	
Basic	 	$	1.87	 	 	$	1.57	 	 	$	1.41	 	
 	 	 	 	 	 	 	 	 	 	
Diluted	 	$	1.80	 	 	$	1.50	 	 	$	1.35	 	

Shares used in computing net income per share:	 	 	 	 	 	 	 	 	 	 	 	 	
Basic	 	 	34,042	 	 	 	33,836	 	 	 	33,981	 	
 	 	 	 	 	 	 	 	 	 	
Diluted	 	 	35,454	 	 	 	35,423	 	 	 	35,577	 	
 	 	 	 	 	 	 	 	 	 	
See notes to consolidated financial statements.

F-4

Table of Contents
SYNAPTICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
(in thousands, except share amounts)
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	Accumulated	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	Additional	 	 	 	 	 	 	Other	 	 	 	 	 	 	Total	 	
 	 	Common Stock Issued	 	 	Paid-in	 	 	Treasury	 	 	Comprehensive	 	 	Retained	 	 	Stockholders’	 	
 	 	Shares(1)	 	 	Amount(1)	 	 	Capital(1)	 	 	Stock	 	 	Income/(Loss)	 	 	Earnings	 	 	Equity	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at June 2008	 	 	42,500,535	 	 	$	43	 	 	$	245,247	 	 	$	(237,387	)	 	$	(2,317	)	 	$	115,628	 	 	$	121,214	 	
Components of comprehensive income:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	48,079	 	 	 	48,079	 	
Net unrealized gain on available-for-sale investments	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	4,893	 	 	 	—	 	 	 	4,893	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total comprehensive income	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	52,972	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Issuance of common stock from option exercises and stock purchase plan	 	 	1,278,476	 	 	 	1	 	 	 	16,426	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	16,427	 	
Payroll taxes for deferred stock units	 	 	—	 	 	 	—	 	 	 	(1,801	)	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(1,801	)	
Tax benefit associated with share-based awards	 	 	—	 	 	 	—	 	 	 	9,374	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	9,374	 	
Share-based compensation	 	 	—	 	 	 	—	 	 	 	24,420	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	24,420	 	
Cumulative effect of accounting change	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(2,447	)	 	 	2,447	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at June 2009	 	 	43,779,011	 	 	 	44	 	 	 	293,666	 	 	 	(237,387	)	 	 	129	 	 	 	166,154	 	 	 	222,606	 	
Components of comprehensive income:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	52,965	 	 	 	52,965	 	
Net unrealized gain on available-for-sale investments	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	1,386	 	 	 	—	 	 	 	1,386	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total comprehensive income	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	54,351	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Issuance of common stock from option exercises and stock purchase plan	 	 	1,112,823	 	 	 	1	 	 	 	14,030	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	14,031	 	
Payroll taxes for deferred stock units	 	 	—	 	 	 	—	 	 	 	(2,374	)	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(2,374	)	
Purchase of treasury stock	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(44,545	)	 	 	—	 	 	 	—	 	 	 	(44,545	)	
Tax benefit associated with share-based awards	 	 	—	 	 	 	—	 	 	 	7,066	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	7,066	 	
Share-based compensation	 	 	—	 	 	 	—	 	 	 	35,376	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	35,376	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at June 2010	 	 	44,891,834	 	 	 	45	 	 	 	347,764	 	 	 	(281,932	)	 	 	1,515	 	 	 	219,119	 	 	 	286,511	 	
Components of comprehensive income:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	63,796	 	 	 	63,796	 	
Net unrealized gain on available-for-sale investments	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	1,005	 	 	 	—	 	 	 	1,005	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total comprehensive income	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	64,801	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Issuance of common stock from option exercises and stock purchase plan	 	 	1,940,374	 	 	 	2	 	 	 	26,421	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	26,423	 	
Payroll taxes for deferred stock units	 	 	—	 	 	 	—	 	 	 	(3,147	)	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(3,147	)	
Purchase of treasury stock	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(70,210	)	 	 	—	 	 	 	—	 	 	 	(70,210	)	
Tax benefit associated with share-based awards	 	 	—	 	 	 	—	 	 	 	1,690	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	1,690	 	
Share-based compensation	 	 	—	 	 	 	—	 	 	 	33,925	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	33,925	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at June 2011	 	 	46,832,208	 	 	$	47	 	 	$	406,653	 	 	$	(352,142	)	 	$	2,520	 	 	$	282,915	 	 	$	339,993	 	

 	 	 	
(1)	 	Amounts reflect the 3-for-2 stock split effected as a stock dividend and paid on August 29, 2008.	
See notes to consolidated financial statements.

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SYNAPTICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Fiscal	 	
 	 	2011	 	 	2010	 	 	2009	 	
Cash flows from operating activities	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	$	63,796	 	 	$	52,965	 	 	$	48,079	 	
Adjustments to reconcile net income to net cash provided by operating activities:	 	 	 	 	 	 	 	 	 	 	 	 	
Share-based compensation costs	 	 	33,925	 	 	 	35,376	 	 	 	24,420	 	
Depreciation and amortization	 	 	11,169	 	 	 	8,677	 	 	 	6,338	 	
Amortization of debt issuance costs	 	 	—	 	 	 	118	 	 	 	368	 	
Amortization of debt discount	 	 	—	 	 	 	2,069	 	 	 	6,024	 	
Tax benefit realized from share-based compensation	 	 	1,690	 	 	 	7,066	 	 	 	9,374	 	
Excess tax benefit from share-based compensation	 	 	(2,886	)	 	 	(7,066	)	 	 	(9,374	)	
Deferred taxes	 	 	(3,666	)	 	 	(6,534	)	 	 	(13,916	)	
Loss on retirement of debt	 	 	—	 	 	 	—	 	 	 	1,053	 	
Impairment/(recovery) of investments, net	 	 	(59	)	 	 	443	 	 	 	9,243	 	
Changes in operating assets and liabilities:	 	 	 	 	 	 	 	 	 	 	 	 	
Accounts receivable, net	 	 	7,701	 	 	 	(16,770	)	 	 	(15,377	)	
Inventories	 	 	(10,183	)	 	 	(3,717	)	 	 	6,115	 	
Prepaid expenses and other current assets	 	 	(146	)	 	 	(128	)	 	 	(354	)	
Other assets	 	 	332	 	 	 	(4,230	)	 	 	(6,246	)	
Accounts payable	 	 	(20,688	)	 	 	33,408	 	 	 	4,426	 	
Accrued compensation	 	 	1,880	 	 	 	2,880	 	 	 	1,940	 	
Income taxes	 	 	2,975	 	 	 	2,214	 	 	 	6,744	 	
Other accrued liabilities	 	 	3,873	 	 	 	7,237	 	 	 	2,734	 	
 	 	 	 	 	 	 	 	 	 	
Net cash provided by operating activities	 	 	89,713	 	 	 	114,008	 	 	 	81,591	 	

Cash flows from investing activities	 	 	 	 	 	 	 	 	 	 	 	 	
Purchases of short-term investments	 	 	—	 	 	 	(5,986	)	 	 	(25,007	)	
Proceeds from sales and maturities of short-term investments	 	 	—	 	 	 	28,912	 	 	 	52,300	 	
Proceeds from sales and maturities of non-current investments	 	 	3,200	 	 	 	1,775	 	 	 	4,900	 	
Purchases of property and equipment	 	 	(11,570	)	 	 	(9,067	)	 	 	(9,310	)	
 	 	 	 	 	 	 	 	 	 	
Net cash (used in) provided by investing activities	 	 	(8,370	)	 	 	15,634	 	 	 	22,883	 	

Cash flows from financing activities	 	 	 	 	 	 	 	 	 	 	 	 	
Purchases of treasury stock	 	 	(70,210	)	 	 	(44,545	)	 	 	—	 	
Proceeds from issuance of common stock upon exercise of options and stock purchase plan	 	 	26,423	 	 	 	14,031	 	 	 	16,427	 	
Retirement of debt, net of discount	 	 	—	 	 	 	(62,998	)	 	 	(55,656	)	
Excess tax benefit from share-based compensation	 	 	2,886	 	 	 	7,066	 	 	 	9,374	 	
Payroll taxes for deferred stock units	 	 	(3,147	)	 	 	(2,374	)	 	 	(1,801	)	
 	 	 	 	 	 	 	 	 	 	
Net cash used in financing activities	 	 	(44,048	)	 	 	(88,820	)	 	 	(31,656	)	

Net increase in cash and cash equivalents	 	 	37,295	 	 	 	40,822	 	 	 	72,818	 	
Cash and cash equivalents at beginning of period	 	 	209,858	 	 	 	169,036	 	 	 	96,218	 	
 	 	 	 	 	 	 	 	 	 	
Cash and cash equivalents at end of period	 	$	247,153	 	 	$	209,858	 	 	$	169,036	 	

Supplemental disclosures of cash flow information	 	 	 	 	 	 	 	 	 	 	 	 	
Cash paid for taxes	 	$	9,574	 	 	$	11,789	 	 	$	5,016	 	
 	 	 	 	 	 	 	 	 	 	
Cash paid for interest	 	$	17	 	 	$	254	 	 	$	692	 	
 	 	 	 	 	 	 	 	 	 	
See notes to consolidated financial statements.

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SYNAPTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Organization and Basis of Presentation
We are a leading worldwide developer and supplier of custom-designed user interface solutions that enable people to interact more easily and intuitively with a wide variety of mobile computing, communications, entertainment, and other electronic devices. We currently target the personal computer, or PC, market, primarily notebook computers, the markets for digital lifestyle products, including mobile smartphones and feature phones, the tablet market, and other select electronic device markets with our customized human interface solutions. Our original equipment manufacturer, or OEM, customers include most of the tier one PC OEMs and many of the world’s largest OEMs for mobile smartphones and feature phones.
The consolidated financial statements include our financial statements and those of our wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated upon consolidation.
Our fiscal year is the 52- or 53-week period ending on the last Saturday in June. The fiscal years presented in this report were 52-week periods ended June 25, 2011, June 26, 2010, and June 27, 2009.
Stock Split
On July 31, 2008, we announced a 3-for-2 stock split to be effected as a stock dividend. The stock dividend was effective for stockholders of record on August 15, 2008 and was paid on August 29, 2008. All share and per share amounts contained herein for each period presented prior to the stock dividend date have been retroactively adjusted to reflect the stock split, except for treasury shares.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles, or U.S. GAAP, requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, allowance for doubtful accounts, cost of revenue, inventories, product warranty, share-based compensation costs, provision for income taxes, deferred income tax asset valuation allowances, uncertain tax positions, tax contingencies, goodwill, intangible assets, investments, and contingencies. We base our estimates on historical experience, applicable laws, and regulations, and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Cash Equivalents and Investments
Cash equivalents consist of highly liquid investments with original maturities of three months or less. Our non-current investments are reported at fair value, with unrealized gains and losses excluded from earnings and shown separately as a component of accumulated other comprehensive income within stockholders’ equity. We charge other-than-temporary declines in the fair value of a debt security to earnings if the decline is due to a credit loss or if we intend to or need to sell at a loss. We charge other-than-temporary declines in the fair value of a debt security to other comprehensive income if the decline is due to a noncredit loss, resulting in the establishment of a new cost basis for the debt security. We charge other-than-temporary declines in the fair value of equity securities to earnings. We include interest earned on securities in interest income. We determine realized gains and losses on the sale of securities using the specific identification method.

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Investments in available-for-sale securities and cash equivalents as of the end of fiscal 2011 and 2010 were as follows (in thousands):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	2011	 	
 	 	 	 	 	 	Gross	 	 	Gross	 	 	Estimated	 	
 	 	Amortized	 	 	Unrealized	 	 	Unrealized	 	 	Fair	 	
 	 	Cost	 	 	Gains	 	 	Losses	 	 	Value	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Money market	 	$	243,966	 	 	$	—	 	 	$	—	 	 	$	243,966	 	
Auction rate securities	 	 	23,356	 	 	 	2,520	 	 	 	—	 	 	 	25,876	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Total available-for-sale securities	 	$	267,322	 	 	$	2,520	 	 	$	—	 	 	$	269,842	 	

 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	2010	 	
 	 	 	 	 	 	Gross	 	 	Gross	 	 	Estimated	 	
 	 	Amortized	 	 	Unrealized	 	 	Unrealized	 	 	Fair	 	
 	 	Cost	 	 	Gains	 	 	Losses	 	 	Value	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Money market	 	$	208,040	 	 	$	—	 	 	$	—	 	 	$	208,040	 	
Auction rate securities	 	 	26,497	 	 	 	1,515	 	 	 	—	 	 	 	28,012	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Total available-for-sale securities	 	$	234,537	 	 	$	1,515	 	 	$	—	 	 	$	236,052	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Weighted average interest rates, amortized costs, and estimated fair values of our money market investments as of the end of fiscal 2011 and 2010 were as follows (in thousands):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	2011	 	 	2010	 	
 	 	Weighted	 	 	 	 	 	 	 	 	 	 	Weighted	 	 	 	 	 	 	 	 	
 	 	Average	 	 	 	 	 	 	Estimated	 	 	Average	 	 	 	 	 	 	Estimated	 	
 	 	Interest	 	 	Amortized	 	 	Fair	 	 	Interest	 	 	Amortized	 	 	Fair	 	
 	 	Rate	 	 	Cost	 	 	Value	 	 	Rate	 	 	Cost	 	 	Value	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Less than one year	 	 	0.2	%	 	$	243,966	 	 	$	243,966	 	 	 	0.2	%	 	$	208,040	 	 	$	208,040	 	
Fair Values of Cash Equivalents and Investments
We measure financial assets at fair value. When we measure fair value on either a recurring or nonrecurring basis, inputs used in valuation techniques are assigned a hierarchical level as follows:
 	•	 	Level 1 inputs are observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.	

 	•	 	Level 2 inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.	

 	•	 	Level 3 inputs are unobservable inputs reflecting our assumptions, which are incorporated into valuation techniques and models used to determine fair value. The assumptions are consistent with market participant assumptions that are reasonably available. Our Level 3 assets consist of non-current auction rate securities, or ARS, investments. We estimated the fair value of our ARS investments based on, among other factors, the following: (i) the collateral underlying the security investments; (ii) creditworthiness of the counterparty; (iii) timing of expected future cash flows; (iv) the probability of a successful auction in a future period; (v) the underlying structure of each investment; (vi) the present value of future principal and interest payments discounted at rates considered to reflect current market conditions; (vii) consideration of the probabilities of default, passing a future auction, or repurchase at par for each period; and (viii) estimates of the recovery rates in the event of default for each investment. See Note 3 — Auction Rate Securities.	

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Financial assets measured at fair value on a recurring basis, by level within the fair value hierarchy, as of the end of fiscal 2011 and 2010 were as follows (in thousands):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	2011	 	 	2010	 	
 	 	Level 1	 	 	Level 3	 	 	Level 1	 	 	Level 3	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Money market	 	$	243,966	 	 	$	—	 	 	$	208,040	 	 	$	—	 	
Auction rate securities	 	 	—	 	 	 	25,876	 	 	 	—	 	 	 	28,012	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Total available-for-sale securities	 	$	243,966	 	 	$	25,876	 	 	$	208,040	 	 	$	28,012	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Money market balances are included in cash and cash equivalents as of the end of fiscal 2011 and 2010. ARS investments are included in non-current investments as of the end of fiscal 2011 and 2010. There were no Level 2 financial assets as of the end of fiscal 2011 or 2010.
Changes in fair value of our Level 3 financial assets for fiscal 2011 and 2010 were as follows (in thousands):
 	 	 	 	 	 	 	 	 	
 	 	2011	 	 	2010	 	
Beginning balance	 	$	28,012	 	 	$	28,767	 	
Net unrealized gain	 	 	1,005	 	 	 	1,463	 	
Impairment (loss)/recovery on investments, net	 	 	59	 	 	 	(443	)	
Redemptions	 	 	(3,200	)	 	 	(1,775	)	
 	 	 	 	 	 	 	
Ending balance	 	$	25,876	 	 	$	28,012	 	
 	 	 	 	 	 	 	
There were no transfers in or out of our Level 1, 2, or 3 assets during fiscal 2011 or 2010.
The fair values of our cash equivalents, accounts receivable, accounts payable, and accrued liabilities approximate their carrying values because of the short-term nature of those instruments. We base the fair value of our ARS investments on a discounted cash flow model.
Concentration of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash equivalents, investments, and trade accounts receivable. Our investment policy, which is predicated on capital preservation and liquidity, limits investments to U.S. government treasuries and agency issues, taxable securities, and municipal issued securities with a minimum rating of A1 (Moody’s) or P1 (Standard and Poor’s) or equivalent. Included within our investment portfolio are investments in ARS investments, which met our investment guidelines at the time of our investment. Our ARS investments are currently not liquid as a result of continued auction failures. If the issuers are not able to meet their payment obligations or if we sell our ARS investments before they recover, we may lose some or all of our principal invested or may be required to further reduce the carrying value. We do not intend to sell our ARS investments for less than par value.
We sell our products primarily to contract manufacturers that provide manufacturing services for OEMs. We extend credit based on an evaluation of a customer’s financial condition, and we generally do not require collateral. To date, credit losses on our accounts receivable have been insignificant, and we believe that an adequate allowance for doubtful accounts has been provided.
The following customers accounted for more than 10% of our accounts receivable balance as the end of fiscal 2011 and 2010:
 	 	 	 	 	 	 	 	 	
 	 	2011	 	 	2010	 	
 	 	 	 	 	 	 	 	 	
Customer A	 	 	12	%	 	 	15	%	
Customer B	 	 	*	 	 	 	15	%	

*	 	Less than 10%	

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Other Concentrations
Our products include certain components that are currently single sourced. We believe other vendors would be able to provide similar components; however, the qualification of such vendors may require start-up time. In order to mitigate any adverse impacts from a disruption of supply, we attempt to maintain an adequate supply of critical single-sourced components.
Revenue Recognition
We recognize revenue from product sales when there is persuasive evidence that an arrangement exists, delivery has occurred and title has transferred, the price is fixed or determinable, and collection is reasonably assured, which is generally upon shipment. We accrue for estimated sales returns and other allowances, based on historical experience, at the time we recognize revenue.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of customers to meet their financial obligations. On an ongoing basis, we evaluate the collectability of accounts receivable based on a combination of factors. In circumstances in which we are aware of a specific customer’s potential inability to meet its financial obligation, we record a specific reserve of the bad debt against amounts due. In addition, we make judgments and estimates on the collectability of accounts receivable based on our historical bad debt experience, customers’ creditworthiness, current economic trends, recent changes in customers’ payment trends, and deterioration in customers’ operating results or financial position. If circumstances change adversely, additional bad debt allowances may be required.
Cost of Revenue
Our cost of revenue includes the cost of products shipped to our customers, which primarily includes the cost of products built to our specifications by our contract manufacturers, the cost of silicon wafers supplied by independent wafer foundries, and the related assembly, package, and test costs of our die and packaged ASICs. Also included in our cost of revenue are personnel and related costs, including share-based compensation, for quality assurance, and manufacturing support; logistics costs; depreciation of equipment supporting manufacturing; license amortization; provisions for excess and obsolete inventories;and warranty costs.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or market (estimated net realizable value) as of the end of fiscal 2011 and 2010 and consisted of the following (in thousands):
 	 	 	 	 	 	 	 	 	
 	 	2011	 	 	2010	 	
Raw materials	 	$	22,607	 	 	$	12,251	 	
Finished goods	 	 	6,243	 	 	 	6,416	 	
 	 	 	 	 	 	 	
 	 	$	28,850	 	 	$	18,667	 	
 	 	 	 	 	 	 	
Periodically, we purchase inventory from our contract manufacturers when a customer delays its delivery schedule or cancels its order. In those circumstances in which our customer has cancelled its order and we purchase inventory from our contract manufacturers, we consider a write-down to reduce the carrying value of the inventory purchased to its net realizable value. We charge write-downs to reduce the carrying value of obsolete, slow moving, and non-usable inventory to net realizable value to cost of revenue. The effect of these write-downs is to establish a new cost basis in the related inventory, which we do not subsequently write up.

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Property and Equipment
We state property and equipment at cost less accumulated depreciation and amortization. We compute depreciation using the straight-line method over the estimated useful lives of the assets. We apply estimated useful lives of three to seven years to our computer equipment and software; estimated useful lives ranging from one to five years to our manufacturing equipment; estimated useful lives of three to five years to our furniture and fixtures; and an estimated useful life of 35 years to our building. We amortize leasehold improvements over the shorter of the lease term or the useful life of the asset. For fiscal 2011 and 2010, we retired fully depreciated equipment and furniture with an original cost of $1.9 million and zero, respectively.
Foreign Currency Translation
The U.S. dollar is our functional and reporting currency. We remeasure our monetary assets and liabilities not denominated in the functional currency into U.S. dollar equivalents at the rate of exchange in effect on the balance sheet date. We measure and record non-monetary balance sheet accounts at the historical rate in effect at the date of translation. All of our revenue and approximately 93% of our consolidated costs are denominated in U.S. dollars. We translate certain expenses at the weighted average exchange rate in the month that the transaction occurred. Remeasurement of monetary assets and liabilities that are not denominated in the functional currency are included currently in operating results. Translation losses included in operating results for fiscal 2011, 2010, and 2009 were not material. To date, we have not undertaken hedging transactions related to foreign currency exposure.
Goodwill
We review the carrying value of goodwill at least annually for impairment as of the fiscal year-end balance sheet date. The frequency of our review is dictated by events or changes in circumstances indicating that the carrying value may be impaired. Based on our latest review, we determined there was no impairment of the carrying value of goodwill.
Impairment of Long-Lived Assets
We evaluate long-lived assets, such as property and equipment and intangible assets subject to amortization, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. We measure recoverability of assets to be held and used by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated undiscounted future cash flows, we recognize an impairment charge in an amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the consolidated balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and would no longer be depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the consolidated balance sheet. There were no events during the fiscal year that would trigger an impairment of our long-lived assets.
Segment Information
We operate in one segment: the development, marketing, and sale of intuitive user interface solutions for electronic devices and products.
Share-Based Compensation Costs
We utilize the Black-Scholes option pricing model to estimate the grant date fair value of employee share-based compensatory awards, which requires the input of highly subjective assumptions, including expected volatility and expected life. Historical and implied volatilities were used in estimating the fair value of our share-based awards. The expected life for our options was previously estimated based on historical trends since our initial public offering. In fiscal 2011, we began to grant options with a contractual life of seven years rather than 10 years and now use the simplified method of establishing the expected life as we do not have any history of options with seven-year lives. Changes in these inputs and assumptions can materially affect the measure of estimated fair value of our share-based compensation. Further, we estimate forfeitures for share-based awards that are not expected to vest. We charge estimated fair value less estimated forfeitures to earnings on a straight-line basis over the vesting period of the underlying awards, which is generally four years for our stock option and deferred stock unit, or DSU, awards and up to two years for our employee stock purchase plan.

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Product Warranties
We generally warrant our products for a period of 12 months or more from the date of sale and estimate probable product warranty costs at the time we recognize revenue. Factors that affect our warranty liability include historical and anticipated rates of warranty claims, materials usage, rework, and delivery costs. However, we assess the adequacy of our warranty obligations periodically and adjust the accrued warranty liability on the basis of our estimates.
Changes in our warranty liability (included in other accrued liabilities)for fiscal 2011 and 2010 were as follows (in thousands):
 	 	 	 	 	 	 	 	 	
 	 	2011	 	 	2010	 	
Beginning accrued warranty	 	$	2,096	 	 	$	693	 	
Provision for product warranties	 	 	5,963	 	 	 	3,986	 	
Cost of warranty claims and settlements	 	 	(5,075	)	 	 	(2,583	)	
 	 	 	 	 	 	 	
Ending accrued warranty	 	$	2,984	 	 	$	2,096	 	
 	 	 	 	 	 	 	
Comprehensive Income
Our comprehensive income generally consists of net income plus the effect of unrealized gains and losses on our investments primarily due to changes in market value of certain of our ARS investments. In addition, we recognize the noncredit portion of other-than-temporary impairment on debt securities in comprehensive income.
Income Taxes
We account for income taxes under the asset and liability method. We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We recognize the effect on deferred tax assets and liabilities of a change in tax rates in income in the period that includes the enactment date. We establish valuation allowances when necessary to reduce deferred tax assets to the amounts expected to be realized. We consider the operating earnings of our foreign subsidiaries to be indefinitely invested outside the United States. Accordingly, no provision has been made for the U.S. federal, state, or foreign taxes that may result from future remittances of undistributed earnings of our foreign subsidiaries.
We use a two-step approach to recognizing and measuring uncertain tax positions. The first step is to determine whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement with a taxing authority. The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of highly complex tax laws. Resolution of these uncertainties in a manner inconsistent with our expectations could have a material impact on our consolidated financial position, results of operations, and cash flows. We believe we have adequately provided for reasonably foreseeable outcomes in connection with the resolution of income tax uncertainties. However, our results have in the past, and could in the future, include favorable and unfavorable adjustments to our estimated tax liabilities in the period a determination of such estimated tax liability is made or resolved, upon the filing of an amended return, upon a change in facts, circumstances, or interpretation, or upon the expiration of a statute of limitation. Accordingly, our effective tax rate could fluctuate materially from period to period.

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Research and Development
We expense costs to develop our products, which include the costs incurred to design interface solutions for customers prior to the customers incorporating those solutions into their products.
Net Income Per Share
Basic net income per share amounts for each period presented have been computed using the weighted average number of shares of common stock outstanding.
Diluted net income per share amounts for each period presented have been computed (1) using the weighted average number of potentially dilutive shares issuable in connection with our share-based compensation plans under the treasury stock method, and (2) using the weighted average number of potentially dilutive shares issuable in connection with our convertible debt under the treasury stock method, when dilutive.
2. Net Income Per Share
The computation of basic and diluted net income per share for fiscal 2011, 2010, and 2009 was as follows (in thousands, except per share amounts):
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	2011	 	 	2010	 	 	2009	 	
Numerator:	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	$	63,796	 	 	$	52,965	 	 	$	48,079	 	

Denominator:	 	 	 	 	 	 	 	 	 	 	 	 	
Shares, basic	 	 	34,042	 	 	 	33,836	 	 	 	33,981	 	
Effect of dilutive share-based awards	 	 	1,412	 	 	 	1,587	 	 	 	1,596	 	
 	 	 	 	 	 	 	 	 	 	
Shares, diluted	 	 	35,454	 	 	 	35,423	 	 	 	35,577	 	

Net income per share:	 	 	 	 	 	 	 	 	 	 	 	 	
Basic	 	$	1.87	 	 	$	1.57	 	 	$	1.41	 	
 	 	 	 	 	 	 	 	 	 	
Diluted	 	$	1.80	 	 	$	1.50	 	 	$	1.35	 	
 	 	 	 	 	 	 	 	 	 	
Diluted net income per share does not include the effect of share-based awards for fiscal 2011, 2010, and 2009 as follows (in thousands):
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	2011	 	 	2010	 	 	2009	 	
Share-based awards	 	 	3,584	 	 	 	3,468	 	 	 	2,556	 	
 	 	 	 	 	 	 	 	 	 	
These share-based awards were not included in the computation of diluted net income per share because the proceeds received, if any, from such share-based awards combined with the average unamortized compensation costs adjusted for the hypothetical tax benefit or deficiency creditable or chargeable, respectively, to additional paid-in capital, were greater than the average market price of our common stock, and therefore, their effect would have been antidilutive.
Our basic net income per share amounts for each period presented have been computed using the weighted average number of shares of common stock outstanding. Our diluted net income per share amounts for each period presented include the weighted average effect of potentially dilutive shares. We used the “treasury stock” method to determine the dilutive effect of our stock options, DSUs, and convertible notes. Under the treasury stock method, shares associated with our convertible notes are included in the calculation of diluted net income per share only if the weighted average price of our common stock exceeds $33.69 during the reporting period.

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3. Auction Rate Securities
Our ARS investments, which are included in non-current investments, have failed to settle in auctions beginning in 2007. These investments are not liquid, and in the event we need to access these funds, we will not be able to do so without a loss of principal, unless redeemed by the issuers or a future auction on these investments is successful. During fiscal 2011, 2010, and 2009, $3.2 million,$1.8 million, and $4.9 million, respectively, of our ARS investments were redeemed at par, and we recognized a gain of $59,000, $6,000, and $160,000, respectively, on the redemption of these investments, which is included in impairment of investments, net on the accompanying consolidated statements of income.
As there are currently no active markets for our various failed ARS investments, we have estimated the fair value of these investments as of the end of fiscal 2011 using a trinomial discounted cash flow analysis. The analysis considered, among others, the following factors:
 	•	 	the collateral underlying the security investments;	

 	•	 	creditworthiness of the counterparty;	

 	•	 	timing of expected future cash flows;	

 	•	 	the probability of a successful auction in a future period;	

 	•	 	the underlying structure of each investment;	
 	 	 	 	
 	•	 	the present value of future principal and interest payments discounted at rates considered to reflect current market conditions;	

 	•	 	consideration of the probabilities of default, passing a future auction, or redemption at par for each period; and	

 	•	 	estimates of the recovery rates in the event of default for each investment.	
When possible, our failed ARS investments were compared to other observable market data or securities with similar characteristics. Our estimate of the fair value of our ARS investments could fluctuate materially from period to period depending on future market conditions.
Contractual maturities for our ARS investments are generally greater than five years, with fair value of $9.9 million maturing from 2016 to 2018, $8.7 million maturing from 2034 to 2045, and $7.3 million maturing thereafter or having no stated maturity. Of our ARS investments, $19.0 million are investment grade and the remaining $18.5 million par value is below investment grade. In fiscal 2011, 2010, and 2009, we recorded $59,000, ($443,000), and ($9.2) million, respectively, related to other-than-temporary impairment (loss)/recovery on investments, net.
Upon our adoption of the recognition and presentation of other-than-temporary impairments accounting standard in fiscal 2009, we reclassified $2.4 million from retained earnings to accumulated other comprehensive income to reflect the cumulative effect adjustment as of the beginning of the period of adoption to reclassify the noncredit component of a previously recognized other-than-temporary impairment.
The various types of failed ARS investments we held as of the end of fiscal 2011, including the original cost basis, other-than-temporary impairment included in other comprehensive income, other-than-temporary impairment included in retained earnings, new cost basis, unrealized gain, and fair value consisted of the following (in thousands):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	Cumulative Other-than-	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	temporary Impairment	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	Included	 	 	Included	 	 	 	 	 	 	 	 	 	 	
 	 	Original	 	 	in Other	 	 	in	 	 	New	 	 	 	 	 	 	 	
 	 	Cost	 	 	Comprehensive	 	 	Retained	 	 	Cost	 	 	Unrealized	 	 	Fair	 	
 	 	Basis	 	 	Income	 	 	Earnings	 	 	Basis	 	 	Gain	 	 	Value	 	
Student loans	 	$	9,150	 	 	$	(593	)	 	$	(242	)	 	$	8,315	 	 	$	344	 	 	$	8,659	 	
Closed end municipal and corporate funds	 	 	7,850	 	 	 	(823	)	 	 	(54	)	 	 	6,973	 	 	 	356	 	 	 	7,329	 	
Credit linked notes	 	 	13,500	 	 	 	(156	)	 	 	(8,765	)	 	 	4,579	 	 	 	3,447	 	 	 	8,026	 	
Preferred stock	 	 	5,000	 	 	 	—	 	 	 	(5,000	)	 	 	—	 	 	 	—	 	 	 	—	 	
Municipals	 	 	2,000	 	 	 	(203	)	 	 	(83	)	 	 	1,714	 	 	 	148	 	 	 	1,862	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total ARS	 	$	37,500	 	 	$	(1,775	)	 	$	(14,144	)	 	$	21,581	 	 	$	4,295	 	 	$	25,876	 	

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The various types of failed ARS investments we held as of the end of fiscal 2010, including the original cost basis, other-than-temporary impairment included in other comprehensive income, other-than-temporary impairment included in retained earnings, new cost basis, unrealized gain, and fair value consisted of the following (in thousands):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	Cumulative Other-than-	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	temporary Impairment	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	Included	 	 	Included	 	 	 	 	 	 	 	 	 	 	
 	 	Original	 	 	in Other	 	 	in	 	 	New	 	 	 	 	 	 	 	
 	 	Cost	 	 	Comprehensive	 	 	Retained	 	 	Cost	 	 	Unrealized	 	 	Fair	 	
 	 	Basis	 	 	Income	 	 	Earnings	 	 	Basis	 	 	Gain	 	 	Value	 	
Student loans	 	$	9,550	 	 	$	(617	)	 	$	(262	)	 	$	8,671	 	 	$	251	 	 	$	8,922	 	
Closed end municipal and corporate funds	 	 	10,650	 	 	 	(1,112	)	 	 	(93	)	 	 	9,445	 	 	 	293	 	 	 	9,738	 	
Credit linked notes	 	 	13,500	 	 	 	(156	)	 	 	(8,765	)	 	 	4,579	 	 	 	2,952	 	 	 	7,531	 	
Preferred stock	 	 	5,000	 	 	 	—	 	 	 	(5,000	)	 	 	—	 	 	 	—	 	 	 	—	 	
Municipals	 	 	2,000	 	 	 	(203	)	 	 	(83	)	 	 	1,714	 	 	 	107	 	 	 	1,821	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total ARS	 	$	40,700	 	 	$	(2,088	)	 	$	(14,203	)	 	$	24,409	 	 	$	3,603	 	 	$	28,012	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
We have accounted for all of our ARS investments as non-current as we are not able to reasonably determine when the ARS markets will recover or be restructured. Based on our ability to access our cash and cash equivalents, our expected operating cash flows, and our other sources of cash, we have the intent and ability to hold these investments until the value recovers or the investments mature. We will continue to monitor our ARS investments and evaluate our accounting for these investments quarterly. Subsequent to recording other-than-temporary impairment charges, certain of our ARS investments have increased in value above their new cost bases, and this increase is included as unrealized gain above and in accumulated other comprehensive income in the accompanying consolidated balance sheet.
4. Property and Equipment
Property and equipment as of the end of fiscal 2011 and 2010 consisted of the following (in thousands):
 	 	 	 	 	 	 	 	 	 	 	
 	 	Life	 	2011	 	 	2010	 	
 	 	 	 	 	 	 	 	 	 	 	
Land	 	—	 	$	2,500	 	 	$	2,500	 	
Building and building improvements	 	35 years	 	 	11,144	 	 	 	10,835	 	
Equipment, tooling, and leasehold improvements	 	1 year to 5 years	 	 	30,113	 	 	 	22,668	 	
Furniture	 	3 years to 5 years	 	 	392	 	 	 	483	 	
Capitalized software	 	3 years to 7 years	 	 	11,516	 	 	 	9,591	 	
 	 	 	 	 	 	 	 	 	
 	 	 	 	 	55,665	 	 	 	46,077	 	
Accumulated depreciation and amortization	 	 	 	 	(29,443	)	 	 	(20,256	)	
 	 	 	 	 	 	 	 	 	
Property and equipment, net	 	 	 	$	26,222	 	 	$	25,821	 	
 	 	 	 	 	 	 	 	 	
5. Leases, Other Commitments, and Contingencies
Leases
We maintain office facilities in various locations under operating leases with expiration dates from fiscal 2012 to fiscal 2015, some of which have renewal options of two to three years. Our leased office facilities are located in China, Finland, Hong Kong, Japan, Korea, Switzerland, Taiwan, and the United States. We recognized rent expense on a straight-line basis of $4.0 million, $3.4 million, and $2.4 million for fiscal 2011, 2010, and 2009, respectively.

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The aggregate future minimum rental commitments as of the end of fiscal 2011 for noncancelable operating leases with initial or remaining terms in excess of one year were as follows (in thousands):
 	 	 	 	 	
 	 	Operating	 	
 	 	Lease	 	
Fiscal Year	 	Payments	 	
2012	 	$	2,905	 	
2013	 	 	2,047	 	
2014	 	 	541	 	
2015	 	 	8	 	
 	 	 	 	
Total minimum operating lease payments	 	$	5,501	 	
 	 	 	 	
Contingencies
We may receive notices from third parties that claim our products infringe their rights. From time to time, we receive notice from third parties alleging infringement of their intellectual property rights. We cannot be certain that our technologies and products do not and will not infringe issued patents or other proprietary rights of third parties.
Any infringement claims, with or without merit, could result in significant litigation costs and diversion of management and financial resources, including the payment of damages, which could have a material adverse effect on our business, financial condition, and results of operations.
Indemnifications
In connection with certain third-party agreements we have executed in the past, we are obligated to indemnify the third party in connection with any technology infringement by us. We have also entered into indemnification agreements with our officers and directors. Maximum potential future payments cannot be estimated because these agreements do not have a maximum stated liability. However, historical costs related to these indemnification provisions have not been significant. We have not recorded any liability in our consolidated financial statements for such indemnification obligations.
Line of Credit
We have an unsecured $50.0 million working capital line of credit with Wells Fargo Bank. The Wells Fargo Bank revolving line of credit, which expires on September 1, 2012, has an interest rate equal to the prime lending rate or 250 basis points above LIBOR, depending on whether we choose a variable or fixed rate, respectively. We did not borrow any amounts under the line of credit during fiscal 2011.
6. Convertible Senior Subordinated Notes
In December 2004, we issued an aggregate of $125.0 million of convertible notes in a private offering pursuant to Rule 144A under the Securities Act of 1933, as amended. In connection with issuing the convertible notes, we incurred issuance costs of $4.3 million, consisting primarily of the initial purchasers’ discount and costs related to legal, accounting, and printing. We used the net proceeds for working capital and general corporate purposes.
In fiscal 2009, we repurchased and retired $59.7 million of our outstanding notes at a discount of approximately 7%, which resulted in a $1.1 million net loss on retirement of debt after deducting the associated unamortized discount and issuance costs. In fiscal 2010, we repurchased and retired $63.0 million par value of our notes when investors exercised their rights to require us to repurchase their notes. As of the end of fiscal 2011, $2.3 million par value of our notes remained outstanding and have been classified as long-term as the next date noteholders can require us to repurchase all or a portion of their notes is in December 2014.
During the first quarter of fiscal 2010, we adopted the accounting standard on convertible debt that can be settled in cash. The adoption of this accounting standard, which must be applied on a retrospective basis, results in a non-cash interest charge for all periods presented in our financial statements during which the notes were outstanding. This standard requires issuers of convertible notes that can be settled in cash to separately account for the liability and equity components of such convertible notes in a manner that reflects the entity’s nonconvertible debt borrowing rate. Prior to the application of the standard, the liability of the notes was carried at their par value, and only the contractual interest and amortization of debt issuance costs were recognized in our condensed consolidated statements of income.

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Upon adoption of the new standard, and effective as of the issuance date of the notes, we recorded $39.4 million of the principal amount to equity, representing the debt discount for the difference between our estimated nonconvertible debt borrowing rate of 8.5% at the time of issuance and the 0.75% coupon rate of the notes using a five-year life, which coincides with the initial put rights of the noteholders. In addition, we allocated the $4.3 million of issuance costs pro-rata to the equity and debt components of the notes, or $1.4 million and $2.9 million, respectively. The discount and the issuance costs allocated to the debt component were amortized as interest expense using the effective interest method over five years and were fully amortized as of December 31, 2009.
The liability and equity components of the notes as of the end of fiscal 2011 and 2010 consisted of $2.3 million and $727,000, respectively.
The contractual interest expense and amortization of issuance costs and discount for the notes for fiscal 2011, 2010, and 2009 were as follows (in thousands):
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	2011	 	 	2010	 	 	2009	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest expense	 	$	17	 	 	$	213	 	 	$	661	 	
Amortization of issuance costs	 	 	—	 	 	 	118	 	 	 	368	 	
Amortization of discount	 	 	—	 	 	 	2,069	 	 	 	6,024	 	
 	 	 	 	 	 	 	 	 	 	
Total interest	 	$	17	 	 	$	2,400	 	 	$	7,053	 	
 	 	 	 	 	 	 	 	 	 	
7. Stockholders’ Equity
We have a Stockholders’ Rights Plan that may have the effect of deterring, delaying, or preventing a change in control that might otherwise be in the best interests of our stockholders. In general, stock purchase rights issued under the plan become exercisable when a person or group acquires 15% or more of our common stock or when a tender offer or exchange offer for 15% or more of our common stock is announced or commenced. After any such event, our other stockholders may purchase additional shares of our common stock at 50% of the then-current market price. The rights will cause substantial dilution to a person or group that attempts to acquire us on terms not approved by our board of directors. The rights should not interfere with any merger or other business combination approved by our board of directors. The rights expire in August 2012.
Preferred Stock
We are authorized, subject to limitations imposed by Delaware law, to issue up to a total of 10,000,000 shares of preferred stock in one or more series without stockholder approval. Our board of directors has the power to establish from time to time the number of shares to be included in each series and to fix the rights, preferences, and privileges of the shares of each wholly unissued series and any of its qualifications, limitations, or restrictions. Our board of directors can also increase or decrease the number of shares of a series, but not below the number of shares of that series then outstanding, without any further vote or action by the stockholders.
Our board of directors may authorize the issuance of preferred stock with voting or conversion rights that could harm the voting power or other rights of the holders of our common stock. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other things, have the effect of delaying, deferring, or preventing a change in control of our company and might harm the market price of our common stock and the voting power and other rights of the holders of common stock. As of the end of fiscal 2011, there were no shares of preferred stock outstanding and we have no current plans to issue any shares of preferred stock.

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Shares Reserved for Future Issuance
Shares of common stock reserved for future issuance as of the end of fiscal 2011 were as follows:
 	 	 	 	 	
Stock options outstanding	 	 	7,835,499	 	
Deferred stock units outstanding	 	 	871,362	 	
Awards available for grant under all share-based compensation plans	 	 	4,351,131	 	
 	 	 	 	
Reserved for future issuance	 	 	13,057,992	 	
 	 	 	 	
Treasury Stock
In April 2010, our board of directors approved an additional $100.0 million for the stock repurchase program, expiring in April 2012, bringing the cumulative authorization to $420.0 million. The program authorizes us to repurchase our common stock in the open market or in privately negotiated transactions depending upon market conditions and other factors. The number of shares repurchased and the timing of repurchases is based on the level of our cash balances, general business and market conditions, and other factors, including alternative investment opportunities. Common stock repurchased under this program is held as treasury stock. As of the end of fiscal 2011, we had $67.9 million remaining under our common stock repurchase program.
8. Share-Based Compensation
The purpose of our various share-based compensation plans is to attract, motivate, retain, and reward high-quality employees, directors, and consultants by enabling such persons to acquire or increase their proprietary interest in our common stock in order to strengthen the mutuality of interests between such persons and our stockholders and to provide such persons with annual and long-term performance incentives to focus their best efforts in the creation of stockholder value. Consequently, we determine share-based compensatory awards issued subsequent to the initial award to our employees and consultants primarily on individual performance. Our share-based compensation plans with outstanding awards consist of our 1996 Stock Option Plan, or our 1996 Plan, our 2001 Incentive Compensation Plan, as amended, or our 2001 Plan, our 2010 Incentive Compensation Plan, or our 2010 Plan, and our 2010 Employee Stock Purchase Plan, or our 2010 ESPP.
Share-based compensation awards available for grant or issuance for each plan as of the beginning of the fiscal year, including changes in the balance of awards available for grant for fiscal 2011, were as follows:
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Awards	 	 	 	 	 	 	 	 	 	 	2001	 	 	 	 	 	 	2010	 	
 	 	Available	 	 	2000	 	 	2001	 	 	Employee	 	 	2010	 	 	Employee	 	
 	 	Under All	 	 	Nonstatutory	 	 	Incentive	 	 	Stock	 	 	Incentive	 	 	Stock	 	
 	 	Share-Based	 	 	Stock Option	 	 	Compensation	 	 	Purchase	 	 	Compensation	 	 	Purchase	 	
 	 	Award Plans	 	 	Plan	 	 	Plan	 	 	Plan	 	 	Plan	 	 	Plan	 	
Balance at June 2010	 	 	5,761,516	 	 	 	56,376	 	 	 	4,849,225	 	 	 	855,915	 	 	 	—	 	 	 	—	 	
Additional shares authorized	 	 	1,368,667	 	 	 	—	 	 	 	1,028,462	 	 	 	340,205	 	 	 	—	 	 	 	—	 	
Transfer of shares	 	 	—	 	 	 	—	 	 	 	(5,499,415	)	 	 	(650,000	)	 	 	5,499,415	 	 	 	650,000	 	
Stock options granted	 	 	(1,941,631	)	 	 	—	 	 	 	(588,395	)	 	 	—	 	 	 	(1,353,236	)	 	 	—	 	
Deferred stock units granted	 	 	(518,630	)	 	 	—	 	 	 	(145,668	)	 	 	—	 	 	 	(372,962	)	 	 	—	 	
Purchases under employee stock purchase plan	 	 	(397,204	)	 	 	—	 	 	 	—	 	 	 	(320,745	)	 	 	—	 	 	 	(76,459	)	
Forfeited	 	 	674,476	 	 	 	—	 	 	 	670,103	 	 	 	—	 	 	 	4,373	 	 	 	—	 	
Plan shares expired	 	 	(596,063	)	 	 	(56,376	)	 	 	(314,312	)	 	 	(225,375	)	 	 	—	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at June 2011	 	 	4,351,131	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	3,777,590	 	 	 	573,541	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Our 1996 Plan expired in December 2006. Accordingly, no new grants can be issued under our 1996 Plan. Option awards that are currently outstanding under our 1996 Plan will remain outstanding until exercised, forfeited, or cancelled under the terms of the option grant agreements. Our 2001 Plan, which expired in March 2011, was replaced by our 2010 Plan. Option awards and DSUs that are currently outstanding under our 2001 Plan will remain outstanding until exercised, delivered, forfeited, or cancelled under the terms of the grant agreements. Our 2001 ESPP expired in December 2010, and was replaced by our 2010 ESPP.

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Share-based compensation and the related tax benefit recognized in our consolidated statement of income for fiscal 2011,2010, and 2009 were as follows (in thousands):
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	2011	 	 	2010	 	 	2009	 	
Cost of revenue	 	$	1,294	 	 	$	2,307	 	 	$	1,680	 	
Research and development	 	 	13,823	 	 	 	14,330	 	 	 	8,897	 	
Selling, general, and administrative	 	 	18,808	 	 	 	18,739	 	 	 	13,843	 	
 	 	 	 	 	 	 	 	 	 	
Total	 	$	33,925	 	 	$	35,376	 	 	$	24,420	 	

Income tax benefit on share-based compensation	 	$	9,745	 	 	$	9,642	 	 	$	7,972	 	
 	 	 	 	 	 	 	 	 	 	
We utilize the Black-Scholes option pricing model to estimate the grant date fair value of certain employee share-based compensatory awards, which requires the input of highly subjective assumptions, including expected volatility and expected life. Historical and implied volatilities were used in estimating the fair value of our share-based awards. The expected life for our options was previously estimated based on historical trends since our initial public offering. In fiscal 2011, we began to grant options with a contractual life of seven years rather than 10 years and now use the simplified method of establishing the expected life as we do not have any history of options with seven-year lives. Changes in these inputs and assumptions can materially affect the measure of estimated fair value of our share-based awards. Further, as required under accounting standards, we estimate forfeitures for share-based awards that are not expected to vest. We charge the estimated fair value less estimated forfeitures to earnings on a straight-line basis over the vesting period of the underlying awards, which is generally four years for our stock option and DSU awards and up to two years for our employee stock purchase plan. The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options having no vesting restrictions and being fully transferable. As our stock option and employee stock purchase plan awards have characteristics that differ significantly from traded options and, as changes in the subjective assumptions can materially affect the estimated value, our estimate of fair value may not accurately represent the value assigned by a third party in an arms’-length transaction. While our estimate of fair value and the associated charge to earnings materially affects our results of operations, it has no impact on our cash position.
We recognize tax benefit upon expensing certain share-based awards associated with our share-based compensation plans, including nonqualified stock options and DSU awards, but under current accounting standards we cannot recognize tax benefit concurrent with the recognition of share-based compensation expenses associated with incentive stock options and employee stock purchase plan shares (qualified stock options). For qualified stock options that vested after our adoption of the accounting standards, we recognize tax benefit only in the period when disqualifying dispositions of the underlying stock occur, which historically has been up to several years after vesting and in a period when our stock price substantially increases. For qualified stock options that vested prior to our adoption of the accounting standards, the tax benefit is recorded directly to additional paid-in capital.
We determine excess tax benefit using the long-haul method in which we compare the actual tax benefit associated with the tax deduction from share-based award activity to the hypothetical tax benefit on the grant date fair values of the corresponding share-based awards. Tax benefit associated with excess tax deduction creditable to additional paid-in capital is not recognized until the deduction reduces taxes payable. During fiscal 2011, 2010, and 2009, we recognized $1.7 million, $7.1 million, and $9.4 million, respectively, of net excess tax benefit as additional paid-in capital.
Historically, we have issued new shares in connection with our share-based compensation plans; however, treasury shares were also available for issuance as of the end of fiscal 2011. Any additional shares repurchased under our common stock repurchase program would be available for issuance under our share-based compensation plans.
Stock Options
Our share-based compensation plans with outstanding stock option awards include our 1996 Plan, our 2001 Plan, and our 2010 Plan. Under our 2010 Plan, we may grant employees, consultants, and directors incentive stock options or nonqualified stock options to purchase shares of our common stock at not less than 100% of the fair market value, or FMV, on the date of grant. Stock options granted to our employees generally are incentive stock options, or qualified options, under the Internal Revenue Code, subject to calendar year vesting limitations with any balance being nonqualified stock options.

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Options granted under the 2010 Plan generally vest over four years from the vesting commencement date and expire seven years after the date of grant if not exercised.
Certain stock option activity for fiscal 2011 and balances as of the end of fiscal 2011 were as follows:
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Stock	 	 	Weighted	 	 	 	 	
 	 	Option	 	 	Average	 	 	Intrinsic	 	
 	 	Awards	 	 	Exercise	 	 	Value	 	
 	 	Outstanding	 	 	Price	 	 	(In thousands)	 	
Balance at June 2010	 	 	7,748,570	 	 	$	22.43	 	 	 	 	 	
Granted	 	 	1,941,631	 	 	 	28.97	 	 	 	 	 	
Exercised	 	 	(1,267,751	)	 	 	15.34	 	 	 	 	 	
Forfeited	 	 	(586,951	)	 	 	28.97	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Balance at June 2011	 	 	7,835,499	 	 	 	24.71	 	 	$	21,814	 	
 	 	 	 	 	 	 	 	 	 	 	
Exercisable at June 2011	 	 	4,758,094	 	 	$	22.64	 	 	$	20,275	 	
 	 	 	 	 	 	 	 	 	 	 	
The aggregate intrinsic value was determined using the closing price of our common stock on the last trading day of fiscal 2011, or June 24, 2011, of $25.02 and excludes the impact of options that were not in-the-money.
At the end of fiscal 2011, we estimated fully vested options and options expected to vest to be 7.6 million with an aggregate intrinsic value of $21.8 million, having a weighted average exercise price of $24.67 and a weighted average remaining contractual term of seven years. The weighted average remaining contractual term for the options exercisable is approximately six years.
Cash received and the aggregate intrinsic value of stock options exercised for fiscal 2011, 2010, and 2009 were as follows (in thousands):
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	2011	 	 	2010	 	 	2009	 	
Cash received	 	$	19,445	 	 	$	9,469	 	 	$	13,305	 	
Aggregate intrinsic value	 	$	17,684	 	 	$	8,306	 	 	$	17,548	 	
The fair value of each award granted from our plans for fiscal 2011, 2010, and 2009 was estimated at the date of grant using the Black-Scholes option pricing model, assuming no expected dividends and the following range of assumptions:
 	 	 	 	 	 	 	
 	 	2011	 	2010	 	2009	
Expected volatility	 	42.7% – 47.0%	 	44.2% – 62.2%	 	56.9% – 65.4%	
Expected life in years	 	4.6 – 5.1	 	4.7 – 5.1	 	4.5 – 4.7	
Risk-free interest rate	 	1.2% – 2.1%	 	1.9% – 2.7%	 	1.7% – 3.2%	
Fair value per award	 	$10.00 – $12.58	 	$12.19 – $13.58	 	$10.06 – $17.32	
The unrecognized share-based compensation costs for stock options granted under our various plans were approximately $39.7 million as of the end of fiscal 2011 to be recognized over a weighted average period of approximately 2.3 years.
During fiscal 2011, we modified the vesting provisions of our former Chief Executive Officer’s share-based awards and recorded an additional $1.4 million of share-based compensation expense in connection with the modification of the awards.

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Deferred Stock Units
Our 2001 Plan, which expired in March 2011, provided for the grant of DSU awards to our employees, consultants, and directors. Currently, our 2010 Plan provides for the grant of DSU awards to our employees, consultants, and directors. A DSU is a promise to deliver shares of our common stock at a future date in accordance with the terms of the DSU grant agreement. We began granting DSUs in January 2006.
DSUs granted under our 2010 Plan generally vest 25% over four years from the vesting commencement date. Delivery of shares under the plan takes place on the quarterly vesting dates. At the delivery date, we withhold shares to cover statutory minimum tax withholding by delivering a net quantity of shares. Until delivery of shares, the grantee has no rights as a stockholder.
An election to defer delivery of the underlying shares for unvested DSUs can be made by the grantee provided the deferral election is made at least one year before vesting and the deferral period is at least five years from the scheduled delivery date.
DSU activity, including DSUs granted, delivered, and forfeited in fiscal 2011, and the balance and aggregate intrinsic value of DSUs as of the end of fiscal 2011 were as follows:
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	Aggregate	 	 	Weighted	 	
 	 	 	 	 	 	Intrinsic	 	 	Average	 	
 	 	DSU Awards	 	 	Value	 	 	Grant Date	 	
 	 	Outstanding	 	 	(in thousands)	 	 	Fair Value	 	
Balance at June 30, 2010	 	 	821,146	 	 	 	 	 	 	$	26.92	 	
Granted	 	 	518,630	 	 	 	 	 	 	 	28.83	 	
Delivered	 	 	(384,226	)	 	 	 	 	 	 	28.83	 	
Forfeited	 	 	(87,525	)	 	 	 	 	 	 	27.93	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Balance at June 30, 2011	 	 	868,025	 	 	$	21,718	 	 	 	27.74	 	
 	 	 	 	 	 	 	 	 	 	 	 	
Of the shares delivered, 108,807 shares valued at $3.2 million were withheld to meet statutory minimum tax withholding requirements. The aggregate intrinsic value was determined using the closing price of our common stock on the last trading day of fiscal 2011, or June 24, 2011, of $25.02.
The unrecognized share-based compensation cost for DSUs granted under the 2001 Plan and the 2010 Plan was approximately $24.6 million as of the end of fiscal 2011, which will be recognized over a weighted average period of approximately 2.6 years. The aggregate market value of DSUs delivered in fiscal 2011, 2010, and 2009 was $11.1 million, $7.7 million, and $6.1 million, respectively.
Employee Stock Purchase Plan
Our 2001 Employee Stock Purchase Plan, or our 2001 ESPP, became effective on January 29, 2002, the effective date of the registration statement for our initial public offering. Our 2010 ESPP became effective on January 1, 2011 and replaced our 2001 ESPP, which expired in December 2010. The 2010 ESPP allows employees to designate up to 15% of their base compensation, subject to legal restrictions and limitations, to purchase shares of common stock at 85% of the lesser of the FMV at the beginning of the offering period or the exercise date. The offering period extends for up to two years and includes four exercise dates occurring at six-month intervals. Under the terms of our 2010 ESPP, if the FMV at an exercise date is less than the FMV at the beginning of the offering period, the current offering period will terminate and a new two-year offering period will commence.

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Shares purchased, weighted average purchase price, cash received, and the aggregate intrinsic value for employee stock purchase plan purchases in fiscal 2011, 2010, and 2009 were as follows (in thousands, except shares purchased and weighted average purchase price):
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	2011	 	 	2010	 	 	2009	 	
Shares purchased	 	 	397,204	 	 	 	301,215	 	 	 	185,604	 	
Weighted average purchase price	 	$	17.57	 	 	$	15.15	 	 	$	16.84	 	
Cash received	 	$	6,978	 	 	$	4,562	 	 	$	3,122	 	
Aggregate intrinsic value	 	$	4,327	 	 	$	5,901	 	 	$	592	 	
In accordance with accounting standards related to the accounting for employee stock purchase plans with a look-back option, the early termination of an offering period followed by the commencement of a new offering period represents a modification to the terms of the related awards. Under the terms of our 2010 ESPP, the offering period that commenced on January 3, 2011 was terminated on May 13, 2011 and a new offering period commenced on May 16, 2011. The May 16, 2011 modification affected approximately 437 employees and resulted in incremental compensation costs, which are not material and which will be recognized on a straight-line basis over the two-year period ending May 15, 2013.
Under the terms of our 2001 ESPP, the offering period that commenced on July 1, 2007 was terminated on December 31, 2008 and a new offering period commenced on January 1, 2009. The December 31, 2008 modification affected approximately 275 employees and resulted in incremental compensation costs, which are not material and which were recognized on a straight-line basis over the two-year period ended December 31, 2010.
The fair value of each award granted under our 2001 ESPP and 2010 ESPP for fiscal 2011, 2010, and 2009 was estimated using the Black-Scholes option pricing model, assuming no expected dividends and the following range of assumptions:
 	 	 	 	 	 	 	
 	 	2011	 	2010	 	2009	
Expected volatility	 	32.5% – 48.6%	 	56.6% – 63.2%	 	53.3% – 73.0%	
Expected life in years	 	0.5 – 2.0	 	0.5 – 2.0	 	0.5 – 2.0	
Risk-free interest rate	 	0.1% – 0.6%	 	0.2% – 1.1%	 	0.3% – 2.4%	
Fair value per award	 	$6.77 – $11.56	 	$10.05 – $18.81	 	$6.01 – $10.44	
The expected volatility is based on either implied volatility or a weighting of implied and historical volatility; the expected life is based on each period that begins with the enrollment date until each purchase date remaining in the offering period at the date of enrollment in the plan; and the risk free interest rate is based on U.S. Treasury yields or yield curve in effect for each expected life.
Unrecognized share-based compensation costs for awards granted under our 2010 ESPP at the end of fiscal 2011 were approximately $4.8 million to be amortized over the next 22 months.
9. Employee Benefit Plans
401(k) Plan
We have a 401(k) Retirement Savings Plan for full-time employees. Under the plan, eligible employees may contribute a maximum of 30% of their net compensation or the annual limit of $16,500. The annual limit for employees who are 50 years or older is $22,000. In fiscal 2011, we provided matching funds of 25% of the employee’s contribution up to a maximum of $4,125 per employee. We made matching contributions of $1.0 million, $943,000, and $783,000 in fiscal 2011, 2010, and 2009, respectively.

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10. Income Taxes
Income (loss) before provision for income taxes for fiscal 2011, 2010, and 2009 consisted of the following (in thousands):
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	2011	 	 	2010	 	 	2009	 	
U.S	 	$	(915	)	 	$	(16,077	)	 	$	(13,469	)	
Foreign	 	 	74,386	 	 	 	76,334	 	 	 	68,811	 	
 	 	 	 	 	 	 	 	 	 	
Income before provision for income taxes	 	$	73,471	 	 	$	60,257	 	 	$	55,342	 	
 	 	 	 	 	 	 	 	 	 	
The provision for income taxes for fiscal 2011, 2010, and 2009 consisted of the following (in thousands):
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	2011	 	 	2010	 	 	2009	 	
Current tax expense	 	 	 	 	 	 	 	 	 	 	 	 	
Federal	 	$	2,573	 	 	$	4,101	 	 	$	13,170	 	
State	 	 	152	 	 	 	453	 	 	 	1,200	 	
Foreign	 	 	10,616	 	 	 	9,272	 	 	 	6,809	 	
 	 	 	 	 	 	 	 	 	 	
 	 	 	13,341	 	 	 	13,826	 	 	 	21,179	 	
 	 	 	 	 	 	 	 	 	 	
Deferred tax expense	 	 	 	 	 	 	 	 	 	 	 	 	
Federal	 	 	(3,579	)	 	 	(9,058	)	 	 	(11,927	)	
State	 	 	—	 	 	 	2,619	 	 	 	(1,980	)	
Foreign	 	 	(87	)	 	 	(95	)	 	 	(9	)	
 	 	 	 	 	 	 	 	 	 	
 	 	 	(3,666	)	 	 	(6,534	)	 	 	(13,916	)	

Provision for income taxes	 	$	9,675	 	 	$	7,292	 	 	$	7,263	 	
 	 	 	 	 	 	 	 	 	 	
The provision for income taxes differs from the federal statutory rate for fiscal 2011, 2010, and 2009 as follows (in thousands):
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	2011	 	 	2010	 	 	2009	 	
Provision at U.S. federal statutory rate	 	$	25,715	 	 	$	21,088	 	 	$	19,370	 	
State income taxes	 	 	390	 	 	 	2,650	 	 	 	550	 	
Qualified stock options	 	 	2,129	 	 	 	2,474	 	 	 	1,700	 	
Business credits	 	 	(2,910	)	 	 	(846	)	 	 	(2,749	)	
Foreign tax differential	 	 	(15,818	)	 	 	(16,994	)	 	 	(13,957	)	
Tax exempt interest	 	 	(18	)	 	 	(106	)	 	 	(479	)	
Change in valuation allowance	 	 	(21	)	 	 	155	 	 	 	3,237	 	
Tax benefit from NOL carryback	 	 	—	 	 	 	(1,804	)	 	 	—	 	
Other differences	 	 	208	 	 	 	675	 	 	 	(409	)	
 	 	 	 	 	 	 	 	 	 	
Provision for income taxes	 	$	9,675	 	 	$	7,292	 	 	$	7,263	 	
 	 	 	 	 	 	 	 	 	 	
Net deferred tax assets as of the end of fiscal 2011 and 2010 consisted of the following (in thousands):
 	 	 	 	 	 	 	 	 	
 	 	2011	 	 	2010	 	
Current deferred tax assets	 	$	1,143	 	 	$	1,387	 	
Non-current deferred tax assets	 	 	16,514	 	 	 	12,604	 	
 	 	 	 	 	 	 	
Net deferred tax assets	 	$	17,657	 	 	$	13,991	 	
 	 	 	 	 	 	 	
Current deferred tax assets and non-current deferred tax assets are included in prepaid expenses and other current assets, and other assets, respectively, in the accompanying consolidated balance sheets.

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Significant components of our deferred tax assets (liabilities) as of the end of fiscal 2011 and 2010 consisted of the following (in thousands):
 	 	 	 	 	 	 	 	 	
 	 	2011	 	 	2010	 	
Deferred tax assets:	 	 	 	 	 	 	 	 	
Investment writedowns	 	$	7,253	 	 	$	7,375	 	
Capital Loss carryforward	 	 	2,066	 	 	 	2,094	 	
Inventory writedowns	 	 	334	 	 	 	246	 	
Depreciation and amortization	 	 	651	 	 	 	1,433	 	
Accrued compensation	 	 	924	 	 	 	980	 	
Share-based compensation	 	 	15,996	 	 	 	14,146	 	
Business credit carryforward	 	 	13,958	 	 	 	9,990	 	
Other accruals	 	 	274	 	 	 	451	 	
 	 	 	 	 	 	 	
 	 	 	41,456	 	 	 	36,715	 	
Valuation allowance	 	 	(15,058	)	 	 	(14,058	)	
 	 	 	 	 	 	 	
 	 	 	26,398	 	 	 	22,657	 	
 	 	 	 	 	 	 	
Deferred tax liabilities:	 	 	 	 	 	 	 	 	
Interest deduction	 	 	(8,741	)	 	 	(8,666	)	
 	 	 	 	 	 	 	
 	 	 	(8,741	)	 	 	(8,666	)	
 	 	 	 	 	 	 	
Net deferred tax assets	 	$	17,657	 	 	$	13,991	 	
 	 	 	 	 	 	 	
Realization of deferred tax assets depends on our generating sufficient U.S. and certain foreign taxable income in future years to obtain benefit from the reversal of deferred tax assets. Accordingly, the amount of deferred tax assets considered realizable may increase or decrease when we reevaluate the underlying basis for our estimates of future U.S. and foreign taxable income. As of the end of fiscal 2011, a valuation allowance of $15.1 million had been established to reduce deferred tax assets to levels that we believe are more than likely than not to be realized through future taxable income.
Undistributed operating earnings of our foreign subsidiaries were approximately $280.2 million as of the end of fiscal 2011 and are all considered to be indefinitely reinvested overseas, and no U.S. income taxes have been provided for on these earnings. The potential deferred tax liability associated with undistributed operating earnings of our foreign subsidiaries was approximately $70.7 million.
As of the end of fiscal 2011, we had state net operating loss carryforwards of approximately $31.6 million. The state net operating loss carryforwards were attributable to share-based award deductions. The benefit of these net operating losses will be recorded directly to additional paid-in capital when realized. In addition, we had $7.7 million and $6.7 million of federal and state research tax credit carryforwards, respectively. The federal research tax credit carryforward begins to expire in 2027 and the state research tax credit can be carried forward indefinitely. We also had $1.7 million of federal alternative minimum tax credit carryforward available to offset future federal tax liabilities with no expiration.
Under the current tax law, net operating loss and tax credit carryforwards available to offset future income or income taxes may be limited by statute or upon the occurrence of certain events, including significant changes in ownership. The state net operating loss will begin to expire in fiscal 2017, if not utilized. The federal and state capital losses begin to expire in fiscal 2013.
The total liability for gross unrecognized tax benefits, included in other liabilities in our consolidated balance sheet, increased $1.2 million to $20.2 million in fiscal 2011 from $19.0 million in fiscal 2010. All of this amount would affect the effective tax rate on income from continuing operations, if recognized. A reconciliation of the beginning and ending balance of gross unrecognized tax benefits consisted of the following (in millions):
 	 	 	 	 	
Balance as of June 2010	 	$	19.0	 	
Increase in unrecognized tax benefits related to current year tax positions	 	 	2.8	 	
Decrease due to statue expiration	 	 	(1.6	)	
 	 	 	 	
Balance as of June 2011	 	$	20.2	 	

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Accrued interest and penalties increased by $438,000 to $1.6 million at the end of fiscal 2011 from $1.2 million at the end of fiscal 2010. Our policy to classify interest and penalties, if any, as components of income tax expense did not change.
In May 2011, we were notified by the Internal Revenue Service that our fiscal 2003 through 2006 and fiscal 2008 through 2010 will be subject to an audit. The early periods are being audited in connection with the mandatory Joint Committee Review for a refund in excess of $2.0 million when we carried back our fiscal 2008 net operating loss. The audit is ongoing, and no tax assessment has been proposed.
It is reasonably possible that the amount of the liability for unrecognized tax benefits may change within the next 12 months and an estimate of the range of possible changes cannot be made at this time due to the high uncertainty of the resolution of our tax positions with the tax authorities in various jurisdictions in which we operate.
Our major tax jurisdictions are the United States, California, and Hong Kong SAR and fiscal 2003 onward remain subject to examination by one or more of these jurisdictions.
On December 17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, or the Act. The Act in part retroactively reinstated the research credit to January 1, 2010. Accordingly, our current quarterly and year-to-date effective tax rates for fiscal 2011 include the benefit of the retroactive reinstatement.
11. Segment, Customers, and Geographic Information
We operate in one segment: the development, marketing, and sale of interactive user interface solutions for electronic devices and products. We generate our revenue from two broad product categories: the PC market and digital lifestyle product markets. The PC market accounted for 48%, 59%, and 57%of our net revenue for fiscal 2011, 2010, and 2009, respectively.
Net revenue within geographic areas based on our customers’ locations for fiscal 2011, 2010, and 2009 consisted of the following (in thousands):
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	2011	 	 	2010	 	 	2009	 	
China	 	$	399,798	 	 	$	389,499	 	 	$	307,813	 	
Taiwan	 	 	76,631	 	 	 	56,096	 	 	 	46,899	 	
Korea	 	 	24,523	 	 	 	32,496	 	 	 	70,661	 	
Japan	 	 	65,548	 	 	 	35,838	 	 	 	35,811	 	
United States	 	 	6,314	 	 	 	430	 	 	 	3,531	 	
Other	 	 	25,724	 	 	 	531	 	 	 	8,587	 	
 	 	 	 	 	 	 	 	 	 	
 	 	$	598,538	 	 	$	514,890	 	 	$	473,302	 	
 	 	 	 	 	 	 	 	 	 	
Long-lived assets within geographic areas as of the end of fiscal 2011 and 2010 consisted of the following (in thousands):
 	 	 	 	 	 	 	 	 	
 	 	2011	 	 	2010	 	
United States	 	$	19,730	 	 	$	19,887	 	
Asia/Pacific	 	 	6,492	 	 	 	5,934	 	
 	 	 	 	 	 	 	
 	 	$	26,222	 	 	$	25,821	 	

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Our goodwill of $1.9 million represents a corporate asset arising primarily from an acquisition of an Asian subsidiary in a prior year.
Major customers as a percentage of net revenue for fiscal 2011, 2010, and 2009 were as follows:
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	2011	 	 	2010	 	 	2009	 	
Customer A	 	 	*	 	 	 	11	%	 	 	*	 	
Customer B	 	 	*	 	 	 	10	%	 	 	*	 	
Customer C	 	 	*	 	 	 	*	 	 	 	14	%	
Customer D	 	 	*	 	 	 	*	 	 	 	11	%	

*	 	Less than 10%	

F-26

Exhibit 21
List of Subsidiaries
 	 	 	
 	 	STATE OR JURISDICTION	
NAME	 	OF ORGANIZATION	
 	 	 	
Synaptics International, Inc.	 	California	
 	 	 	
Synaptics (UK) Limited	 	United Kingdom	
 	 	 	
Synaptics Hong Kong Limited	 	Hong Kong	
 	 	 	
Synaptics Europe Sarl	 	Switzerland	
 	 	 	
Synaptics Holding GmbH	 	Switzerland	
 	 	 	
Synaptics LLC	 	Delaware	
 	 	 	
Synaptics Technology (Shanghai) Company Limited	 	China	
 	 	 	
Synaptics Japan (K.K.) Limited	 	Japan	
 	 	 	
Synaptics CanHK Limited	 	Hong Kong	

 

Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
The Board of Directors
Synaptics Incorporated:
We consent to the incorporation by reference in the registration statements (Nos. 333-81820, 333-82288, 333-82286, 333-82282, 333-99529, 333-99531, 333-146145, 333-146146, 333-170400, and 333-170401) on Form S-8, (No. 333-115274) on Form S-4, and (Nos. 333-122348 and 333-155582) on Form S-3 of Synaptics Incorporated of our report dated August 22, 2011, with respect to the consolidated balance sheets of Synaptics Incorporated as of June 25, 2011 and June 26, 2010, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended June 25, 2011, and the effectiveness of internal control over financial reporting as of June 25, 2011, which report appears in the June 25, 2011 annual report on Form 10-K of Synaptics Incorporated.
/s/ KPMG LLP
Mountain View, California
August 22, 2011

 

Exhibit 31.1
Certification of Chief Executive Officer Pursuant to
Rule 13a-14(a)/15d-14(a)
I, Russell J. Knittel, certify that:
1.	 	I have reviewed this annual report on Form 10-K of Synaptics Incorporated;	

2.	 	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;	

3.	 	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;	

4.	 	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:	
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.	 	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):	
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: August 22, 2011
 	 	 	 	 	
 	/s/ Russell J. Knittel  	 	
 	Russell J. Knittel 	 	
 	Interim Chief Executive Officer 	 	

 

Exhibit 31.2
Certification of Chief Financial Officer Pursuant to
Rule 13a-14(a)/15d-14(a)
I, Kathleen A. Bayless, certify that:
1.	 	I have reviewed this annual report on Form 10-K of Synaptics Incorporated;	

2.	 	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;	

3.	 	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;	

4.	 	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:	
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.	 	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):	
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: August 22, 2011
 	 	 	 	 	
 	/s/ Kathleen A. Bayless  	 	
 	Kathleen A. Bayless 	 	
 	Chief Financial Officer 	 	

 

Exhibit 32.1
Section 1350 Certification of Chief Executive Officer
In connection with the Annual Report on Form 10-K of Synaptics Incorporated (the “Company”) for the year ended June 25, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Russell J. Knittel, Interim President and Chief Executive Officer of the Company, certify, to the best of my knowledge and belief, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
 	(1)	 	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and	

 	(2)	 	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.	
 	 	 	 	 	
 	/s/ Russell J. Knittel  	 	
 	Russell J. Knittel 	 	
 	Interim Chief Executive Officer
August 22, 2011 	 	

 

Exhibit 32.2
Section 1350 Certification of Chief Financial Officer
In connection with the Annual Report on Form 10-K of Synaptics Incorporated (the “Company”) for the year ended June 25, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Kathleen A. Bayless, Chief Financial Officer, Secretary, and Treasurer of the Company, certify, to the best of my knowledge and belief, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
 	(1)	 	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and	

 	(2)	 	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.	
 	 	 	 	 	
 	/s/ Kathleen A. Bayless  	 	
 	Kathleen A. Bayless 	 	
 	Chief Financial Officer
August 22, 2011 	 	

 

Exhibit 99.1

CREDIT AGREEMENT
THIS CREDIT AGREEMENT (this “Agreement”) is entered into as of August 17, 2011, by and between SYNAPTICS INCORPORATED, a Delaware corporation (“Borrower”), and WELLS FARGO BANK, NATIONAL ASSOCIATION (“Bank”).
RECITALS
Borrower has requested that Bank extend or continue credit to Borrower as described below, and Bank has agreed to provide such credit to Borrower on the terms and conditions contained herein.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Bank and Borrower hereby agree as follows:
ARTICLE I
CREDIT TERMS
SECTION 1.1. LINE OF CREDIT.
(a) Line of Credit. Subject to the terms and conditions of this Agreement, Bank hereby agrees to make advances to Borrower from time to time up to and including September 1, 2012, not to exceed at any time the aggregate principal amount of Fifty Million Dollars ($50,000,000.00) (“Line of Credit”), the proceeds of which shall be used to finance Borrower’s working capital requirements. Borrower’s obligation to repay advances under the Line of Credit shall be evidenced by a promissory note dated as of August 17, 2011 (“Line of Credit Note”), all terms of which are incorporated herein by this reference.
(b) Letter of Credit Subfeature. As a subfeature under the Line of Credit, Bank agrees from time to time during the term thereof to issue or cause an affiliate to issue standby letters of credit for the account of Borrower (each, a “Letter of Credit” and collectively, “Letters of Credit”); provided however, that the aggregate undrawn amount of all outstanding Letters of Credit shall not at any time exceed Five Million Dollars ($5,000,000.00). The form and substance of each Letter of Credit shall be subject to approval by Bank, in its sole discretion. Each Letter of Credit shall be issued for a term not to exceed three hundred sixty-five (365) days, as designated by Borrower; provided, however, that in the event that the Line of Credit is not renewed or extended beyond its then applicable maturity date, Borrower shall deliver to Bank cash or cash equivalents in an amount equal to the amount available to be drawn under then outstanding Letters of Credit, which amount shall be maintained in an account with Bank as collateral for Borrower’s obligations under such Letters of Credit. The undrawn amount of all Letters of Credit shall be reserved under the Line of Credit and shall not be available for borrowings thereunder. Each Letter of Credit shall be subject to the additional terms and conditions of the Letter of Credit agreements, applications and any related documents required by Bank in connection with the issuance thereof. Each drawing paid under a Letter of Credit shall be deemed an advance under the Line of Credit and shall be repaid by Borrower in accordance with the terms and conditions of this Agreement applicable to such advances; provided however, that if advances under the Line of Credit are not available, for any reason, at the time any drawing is paid, then Borrower shall immediately pay to Bank the full amount drawn, together with interest thereon from the date such drawing is paid to the date such amount is fully repaid by Borrower, at the rate of interest applicable to advances under the Line of Credit. In such event Borrower agrees that Bank, in its sole discretion, may debit any account maintained by Borrower with Bank for the amount of any such drawing.

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(c) Borrowing and Repayment. Borrower may from time to time during the term of the Line of Credit borrow, partially or wholly repay its outstanding borrowings, and reborrow, subject to all of the limitations, terms and conditions contained herein or in the Line of Credit Note; provided however, that the total outstanding borrowings under the Line of Credit shall not at any time exceed the maximum principal amount available thereunder, as set forth above.
SECTION 1.2. INTEREST/FEES.
(a) Interest. The outstanding principal balance of each credit subject hereto shall bear interest, and the amount of each drawing paid under any Letter of Credit shall bear interest from the date such drawing is paid to the date such amount is fully repaid by Borrower, at the rate of interest set forth in each promissory note or other instrument or document executed in connection therewith.
(b) Computation and Payment. Interest shall be computed on the basis of a 360-day year, actual days elapsed. Interest shall be payable at the times and place set forth in each promissory note or other instrument or document required hereby.
(c) Letter of Credit Fees. Borrower shall pay to Bank fees upon the issuance of each Letter of Credit, upon the payment or negotiation of each drawing under any Letter of Credit and upon the occurrence of any other activity with respect to any Letter of Credit (including without limitation, the transfer, amendment or cancellation of any Letter of Credit) determined in accordance with Bank’s standard fees and charges then in effect for such activity.
SECTION 1.3. COLLECTION OF PAYMENTS. Borrower authorizes Bank to collect all principal, interest and fees due under each credit subject hereto by charging Borrower’s deposit account number 4121528574 with Bank, or any other deposit account maintained by Borrower with Bank, for the full amount thereof. Should there be insufficient funds in any such deposit account to pay all such sums when due, the full amount of such deficiency shall be immediately due and payable by Borrower.
SECTION 1.4. CERTAIN DEFINED TERMS.
“Loan Documents” means this Agreement and each promissory note, contract, instrument and other document required hereby or at any time hereafter delivered to Bank in connection herewith.
“Material Adverse Effect” means (a) a material adverse effect on the business, properties, operations or condition (financial or otherwise) of the Borrower and its Subsidiaries taken as a whole, (b) an material impairment of Borrower’s ability to repay its obligations to Bank, (c) a material adverse effect on the legality, validity or enforceability of this Agreement or the other Loan Documents.
“Other Assets” means all assets now owned or hereafter acquired by Borrower or any of its Subsidiaries, excluding Restricted Assets.

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“Permitted Liens” means such of the following as to which no enforcement, collection, execution, levy or foreclosure proceeding shall have been commenced: (a) liens described on  Schedule 1  attached hereto and incorporated herein by reference, (b) liens for taxes, assessments and governmental charges or levies not yet due and payable; (c) liens imposed by law, such as materialmen’s, mechanics, carriers, workmen’s and repairmen’s liens and other similar liens arising in the ordinary course of Borrower’s business securing obligations that are not overdue for a period of more than 30 days; (d) pledges or deposits to secure obligations under workers’ compensation laws or similar legislation or to secure public or statutory obligations; (e) easements, rights of way and other encumbrances on title to real property that do not render title to the property encumbered thereby unmarketable or materially adversely affect the use of such property for its present purposes, and (f) purchase money liens on Other Assets acquired by Borrower or any Subsidiary in the ordinary course of business provided that each such lien attaches to the acquired property concurrently with its acquisition and the principal amount of all indebtedness secured by such purchase money liens shall not exceed in the aggregate of $5,000,000.00.
“Permitted Acquisition” means the acquisition by Borrower or a Subsidiary of (a) all or substantially all the assets of another entity, of a division of another entity or of an identifiable line of business of another entity, or (b) more than 50% of the common stock of another corporation or of the equity interests of any other form of entity, provided that, in each case (i) such acquisition is approved by the Board of Directors (or other governing body) of the corporation or other entity whose assets or equity interests are being acquired, (ii) Borrower is in compliance with all terms and conditions of this Agreement prior to such acquisition and would remain in pro forma compliance therewith following such acquisition, as evidenced by a certificate of pro forma compliance delivered to Bank prior to such acquisition (which shall also demonstrate pro forma compliance with the Required Liquidity Level), (iii) the assets acquired are used in or the entity acquired is in generally the same line(s) of business as Borrower and its Subsidiaries as of the date of this Agreement, and (iv) immediately following such acquisition, the Required Liquidity Level would be and is maintained.
“Required Liquidity Level” means Borrower’s unrestricted and unencumbered cash, cash equivalents and marketable securities of not less than $125,000,000.00 plus an amount equal to the outstanding balance of the Line of Credit on the applicable date of determination.
“Restricted Assets” means all accounts receivable, inventory and intellectual property now owned or hereafter acquired by Borrower or any of its Subsidiaries.
“Subsidiary” means, in respect of Borrower, a corporation or other business entity the shares constituting a majority of the outstanding capital stock (or other form of ownership) or constituting a majority of the voting power in any election of directors (or shares constituting both majorities) of which are (or upon the exercise of any outstanding warrants, options or other rights would be) owned directly or indirectly at the time in question by such entity or another subsidiary of such entity or any combination of the foregoing. As of the date hereof, the entities named in  Schedule II  hereto are the only Subsidiaries of Borrower.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
Borrower makes the following representations and warranties to Bank, which representations and warranties shall survive the execution of this Agreement and shall continue in full force and effect until the full and final payment, and satisfaction and discharge, of all obligations of Borrower to Bank subject to this Agreement.

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SECTION 2.1. LEGAL STATUS. Borrower and each Subsidiary is duly organized and existing and in good standing under the laws of its respective jurisdiction of organization, and is qualified or licensed to do business (and is in good standing as a foreign corporation, if applicable) in all jurisdictions in which such qualification or licensing is required or in which the failure to so qualify or to be so licensed could have a Material Adverse Effect.
SECTION 2.2. AUTHORIZATION AND VALIDITY. The Loan Documents have been duly authorized, and upon their execution and delivery in accordance with the provisions hereof will constitute legal, valid and binding agreements and obligations of Borrower or the party which executes the same, enforceable in accordance with their respective terms.
SECTION 2.3. NO VIOLATION. The execution, delivery and performance by Borrower or its Subsidiaries, as applicable, of each of the Loan Documents executed by such party do not violate any provision of any law or regulation, or contravene any provision of the Articles of Incorporation or By-Laws or other operative formation or governing documents of Borrower or such Subsidiaries, or result in any breach of or default under any contract, obligation, indenture or other instrument to which Borrower or any Subsidiary is a party or by which Borrower or any Subsidiary may be bound.
SECTION 2.4. LITIGATION. There are no pending, or to the best of Borrower’s knowledge threatened, actions, claims, investigations, suits or proceedings by or before any governmental authority, arbitrator, court or administrative agency which could have a Material Adverse Effect, other than those disclosed by Borrower to Bank in writing prior to the date hereof.
SECTION 2.5. CORRECTNESS OF FINANCIAL STATEMENT. The annual consolidated financial statement of Borrower dated June 30, 2011, and all interim financial statements delivered to Bank since said date, true copies of which have been delivered by Borrower to Bank prior to the date hereof, (a) are complete and correct and present fairly the financial condition of Borrower and its Subsidiaries on a consolidated basis, (b) disclose all liabilities of Borrower that are required to be reflected or reserved against under generally accepted accounting principles, whether liquidated or unliquidated, fixed or contingent, and (c) have been prepared in accordance with generally accepted accounting principles consistently applied. Since the dates of such financial statements there has been no Material Adverse Effect, nor has Borrower or any Subsidiary mortgaged, pledged, granted a security interest in or otherwise encumbered any of its assets or properties except in favor of Bank or as otherwise permitted by Bank in writing.
SECTION 2.6. INCOME TAX RETURNS. Borrower has no knowledge of any pending assessments or adjustments of its or any Subsidiary’s income tax payable with respect to any year.
SECTION 2.7. NO SUBORDINATION. There is no agreement, indenture, contract or instrument to which Borrower or any Subsidiary is a party or by which Borrower or any Subsidiary may be bound that requires the subordination in right of payment of any of Borrower’s or any Subsidiary’s obligations subject to this Agreement or any other Loan Document to any other obligation of Borrower or any Subsidiary.

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SECTION 2.8. PERMITS, FRANCHISES. Borrower and each Subsidiary possesses, and will hereafter possess, all permits, consents, approvals, franchises and licenses required and rights to all trademarks, trade names, patents, and fictitious names, if any, necessary to enable it to conduct the business in which it is now engaged in compliance with applicable law.
SECTION 2.9. ERISA. Borrower is in compliance in all material respects with all applicable provisions of the Employee Retirement Income Security Act of 1974, as amended or recodified from time to time (“ERISA”); Borrower has not violated any provision of any defined employee pension benefit plan (as defined in ERISA) maintained or contributed to by Borrower (each, a “Plan”); no Reportable Event as defined in ERISA has occurred and is continuing with respect to any Plan initiated by Borrower; Borrower has met its minimum funding requirements under ERISA with respect to each Plan; and each Plan will be able to fulfill its benefit obligations as they come due in accordance with the Plan documents and under generally accepted accounting principles.
SECTION 2.10. OTHER OBLIGATIONS. Neither Borrower nor any Subsidiary is in default on any obligation for borrowed money, any purchase money obligation or any other material lease, commitment, contract, instrument or obligation.
SECTION 2.11. ENVIRONMENTAL MATTERS. Except as disclosed by Borrower to Bank in writing prior to the date hereof, Borrower and each domestic Subsidiary is in compliance in all material respects with all applicable federal or state environmental, hazardous waste, health and safety statutes, and any rules or regulations adopted pursuant thereto, which govern or affect any of Borrower’s or any Subsidiary’s operations and/or properties, including without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Superfund Amendments and Reauthorization Act of 1986, the Federal Resource Conservation and Recovery Act of 1976, and the Federal Toxic Substances Control Act, as any of the same may be amended, modified or supplemented from time to time. None of the operations of Borrower or any Subsidiary is the subject of any federal or state investigation evaluating whether any remedial action involving a material expenditure is needed to respond to a release of any toxic or hazardous waste or substance into the environment. Neither Borrower nor any Subsidiary has any material contingent liability in connection with any release of any toxic or hazardous waste or substance into the environment.
ARTICLE III
CONDITIONS
SECTION 3.1. CONDITIONS OF INITIAL EXTENSION OF CREDIT. The obligation of Bank to extend any credit contemplated by this Agreement is subject to the fulfillment to Bank’s satisfaction of all of the following conditions:
(a) Approval of Bank Counsel. All legal matters incidental to the extension of credit by Bank shall be satisfactory to Bank’s counsel.
(b) Documentation. Bank shall have received, in form and substance satisfactory to Bank, each of the following, duly executed:
 	(i)	 	This Agreement and each promissory note or other instrument or document required hereby.	
 	 	 	 	
 	(ii)	 	Certificate of Incumbency.	
 	 	 	 	
 	(iii)	 	Corporate Resolution: Borrowing.	

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 	(iv)	 	Disbursement Order.	
 	 	 	 	
 	(v)	 	Such other documents as Bank may require under any other Section of this Agreement.	
(c) Financial Condition. There shall have been no material adverse change, as determined by Bank, in the financial condition or business of Borrower or any guarantor hereunder, nor any material decline, as determined by Bank, in the market value of any collateral required hereunder or a substantial or material portion of the assets of Borrower or any such guarantor.
SECTION 3.2. CONDITIONS OF EACH EXTENSION OF CREDIT. The obligation of Bank to make each extension of credit requested by Borrower hereunder shall be subject to the fulfillment to Bank’s satisfaction of each of the following conditions:
(a) Compliance. The representations and warranties contained herein and in each of the other Loan Documents shall be true on and as of the date of the signing of this Agreement and on the date of each extension of credit by Bank pursuant hereto, with the same effect as though such representations and warranties had been made on and as of each such date, and on each such date, no Event of Default as defined herein, and no condition, event or act which with the giving of notice or the passage of time or both would constitute such an Event of Default, shall have occurred and be continuing or shall exist.
(b) Documentation. Bank shall have received all additional documents which may be required in connection with such extension of credit.
(c) Additional Letter of Credit Documentation. Prior to the issuance of each Letter of Credit, Bank shall have received a Letter of Credit Agreement, properly completed and duly executed by Borrower.
ARTICLE IV
AFFIRMATIVE COVENANTS
Borrower covenants that so long as Bank remains committed to extend credit to Borrower pursuant hereto, or any liabilities (whether direct or contingent, liquidated or unliquidated) of Borrower to Bank under any of the Loan Documents remain outstanding, and until payment in full of all obligations of Borrower subject hereto, Borrower shall, and shall cause each Subsidiary to, unless Bank otherwise consents in writing:
SECTION 4.1. PUNCTUAL PAYMENTS. Punctually pay all principal, interest, fees or other liabilities due under any of the Loan Documents at the times and place and in the manner specified therein.
SECTION 4.2. ACCOUNTING RECORDS. Maintain adequate books and records in accordance with generally accepted accounting principles consistently applied, and permit any representative of Bank, at any reasonable time, to inspect, audit and examine such books and records, to make copies of the same, and to inspect the properties of Borrower or any Subsidiary.

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SECTION 4.3. FINANCIAL STATEMENTS. Provide to Bank all of the following, in form and detail satisfactory to Bank:
(a) not later than 120 days after and as of the end of each fiscal year, a 10K report filed with the Security Exchange Commission;
(b) not later than 60 days after and as of the end of each fiscal quarter, a 10Q report filed with the Security Exchange Commission;
(c) from time to time such other information as Bank may reasonably request.
SECTION 4.4. COMPLIANCE. Preserve and maintain all licenses, permits, governmental approvals, rights, privileges and franchises necessary for the conduct of its business; and comply with the provisions of all documents pursuant to which Borrower or any Subsidiary is organized and/or which govern Borrower’s or such Subsidiaries’ continued existence and with the requirements of all laws, rules, regulations and orders of any governmental authority applicable to Borrower, Borrower’s Subsidiaries and/or their respective businesses.
SECTION 4.5. INSURANCE. Maintain and keep in force, for each business in which Borrower and each Subsidiary is engaged, insurance of the types and in amounts customarily carried in similar lines of business, including but not limited to fire, extended coverage, public liability, flood, property damage and workers’ compensation, with all such insurance carried with companies and in amounts satisfactory to Bank, and deliver to Bank from time to time at Bank’s request schedules setting forth all insurance then in effect.
SECTION 4.6. FACILITIES. Keep all properties useful or necessary to Borrower’s and each Subsidiary’s business in good repair and condition, and from time to time make necessary repairs, renewals and replacements thereto so that such properties shall be fully and efficiently preserved and maintained.
SECTION 4.7. TAXES AND OTHER LIABILITIES. Pay and discharge when due any and all indebtedness, obligations, assessments and taxes, both real or personal, including without limitation federal and state income taxes and state and local property taxes and assessments, except (a) such as Borrower or any Subsidiary may in good faith contest or as to which a bona fide dispute may arise, and (b) for which Borrower or any Subsidiary has made provision, to Bank’s satisfaction, for eventual payment thereof in the event Borrower or any Subsidiary is obligated to make such payment.
SECTION 4.8. LITIGATION. Promptly give notice in writing to Bank of any litigation pending or threatened against Borrower or any Subsidiary that could have a Material Adverse Effect.
SECTION 4.9. FINANCIAL CONDITION. Maintain Borrower’s consolidated financial condition as follows using generally accepted accounting principles consistently applied and used consistently with prior practices (except to the extent modified by the definitions herein), with compliance determined commencing with Borrower’s financial statements for the period ending September 30, 2011:
(a) Tangible Net Worth not less than ninety percent (90%) of actual Tangible Net Worth as of fiscal year ending June 30, 2011 (minus, on a cumulative basis, the amount paid by Borrower for stock repurchases since June 30, 2011, subject to, and as permitted under the terms of Section 5.8 below), plus one hundred percent (100%) of the net proceeds from any equity offerings after June 30, 2011, plus on a cumulative basis, ninety percent (90%) of current quarterly net income (excluding losses) measured quarterly, with “Tangible Net Worth” defined as the aggregate of total stockholders’ equity less any intangible assets.

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SECTION 4.10. NOTICE TO BANK. Promptly (but in no event more than five (5) days after the occurrence of each such event or matter) give written notice to Bank in reasonable detail of: (a) the occurrence of any Event of Default, or any condition, event or act which with the giving of notice or the passage of time or both would constitute an Event of Default; (b) any change in the name or the organizational structure of Borrower; (c) the occurrence and nature of any Reportable Event or Prohibited Transaction, each as defined in ERISA, or any funding deficiency with respect to any Plan; or (d) any termination or cancellation of any insurance policy which Borrower or any Subsidiary is required to maintain, or any uninsured or partially uninsured loss through liability or property damage, or through fire, theft or any other cause affecting Borrower’s or any Subsidiary’s property.
ARTICLE V
NEGATIVE COVENANTS
Borrower further covenants that so long as Bank remains committed to extend credit to Borrower pursuant hereto, or any liabilities (whether direct or contingent, liquidated or unliquidated) of Borrower to Bank under any of the Loan Documents remain outstanding, and until payment in full of all obligations of Borrower subject hereto, Borrower will not, and will not permit any Subsidiary to, without Bank’s prior written consent:
SECTION 5.1. USE OF FUNDS. Use any of the proceeds of any credit extended hereunder except for the purposes stated in Article I hereof.
SECTION 5.2. CAPITAL EXPENDITURES. Make any additional investment in fixed assets in any fiscal year in excess of an aggregate of $15,000,000.00, provided, however, that in addition to the foregoing, Borrower may make an additional expenditure in an amount not to exceed $15,000,000.00 in order to purchase real property, provided further that (a) prior to such additional expenditure Borrower shall deliver to Bank a compliance certificate which demonstrates pro forma compliance with the Required Liquidity Level, and (b) immediately following such expenditure, the Required Liquidity Level would be and is maintained.”
SECTION 5.3. OTHER INDEBTEDNESS. Create, incur, assume or permit to exist any indebtedness or liabilities resulting from borrowings, loans or advances, whether secured or unsecured, matured or unmatured, liquidated or unliquidated, joint or several, except (a) the liabilities of Borrower or any Subsidiary to Bank, (b) any other liabilities of Borrower or any Subsidiary existing as of, and disclosed to Bank prior to, the date hereof, (c) indebtedness which is subordinated to Borrower’s indebtedness to Bank on terms acceptable to Bank and which may not be prepaid except as set forth in the next sentence, and (d) purchase money indebtedness in an aggregate amount not to exceed $5,000,000.00 outstanding at any time. Borrower may prepay existing convertible subordinated debt in an amount not to exceed $2,305,000.00 as long as (a) prior to such prepayment Borrower shall deliver to Bank a compliance certificate which demonstrates pro forma compliance with the Required Liquidity Level, and (b) immediately following such prepayment, the Required Liquidity Level would be and is maintained.

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SECTION 5.4. MERGER, CONSOLIDATION, TRANSFER OF ASSETS. Merge into or consolidate with any other entity other than as part of a Permitted Acquisition, provided that in no event shall Borrower merge into or consolidate with another entity unless Borrower is the surviving entity; make any substantial change in the nature of Borrower’s or any Subsidiary’s business as conducted as of the date hereof; acquire all or substantially all of the assets (including intellectual property) of any other entity other than Permitted Acquisitions; nor sell, lease, transfer or otherwise dispose of all or a substantial or material portion of Borrower’s or any Subsidiary’s assets except in the ordinary course of such entities’ business.
SECTION 5.5. GUARANTIES. Guarantee or become liable in any way as surety, endorser (other than as endorser of negotiable instruments for deposit or collection in the ordinary course of business), accommodation endorser or otherwise for, nor pledge or hypothecate any assets of Borrower or any Subsidiary as security for, any liabilities or obligations of any other person or entity, except any of the foregoing in favor of Bank.
SECTION 5.6. LOANS, ADVANCES, INVESTMENTS. Make any loans or advances to or investments in any person or entity, except (a) any of the foregoing existing as of, and disclosed to Bank prior to, the date hereof, (B) investments consisting of Permitted Acquisitions, and (c) additional loans and advances to employees and officers and additional investments in an aggregate amount not to exceed $5,000,000 outstanding at any time.
SECTION 5.7. PLEDGE OF ASSETS. Mortgage, pledge, grant or permit to exist a security interest in, or lien upon, or permit the foregoing in respect of any Subsidiary, to all or any portion of Borrower’s or any Subsidiary’s assets now owned or hereafter acquired, except any of the foregoing in favor of Bank or which constitute Permitted Liens, nor agree or allow any Subsidiary to agree with any other creditor to prohibit, encumber or condition the granting of a security interest in any of Borrower’s or any Subsidiary’s assets now owned or hereafter acquired.
SECTION 5.8. DIVIDENDS, DISTRIBUTIONS. Declare or pay any dividend or distribution either in cash, stock or any other property on Borrower’s stock now or hereafter outstanding, nor redeem, retire, repurchase or otherwise acquire any shares of any class of Borrower’s stock now or hereafter outstanding, except stock repurchases by Borrower from and including June 30, 2011 up to September 1, 2012 that shall be permitted so long as (a) prior to such repurchase, Borrower shall deliver to Bank a compliance certificate which demonstrates pro forma compliance with the Required Liquidity Level, (b) immediately following such repurchase, the Required Liquidity Level would be and is maintained, and (c) total repurchase as permitted herein does not exceed an aggregate amount of $67,900,000.00.
ARTICLE VI
EVENTS OF DEFAULT
SECTION 6.1. The occurrence of any of the following shall constitute an “Event of Default” under this Agreement:
(a) Borrower or any Subsidiary shall fail to pay when due any principal, interest, fees or other amounts payable under any of the Loan Documents.
(b) Any financial statement or certificate furnished to Bank in connection with, or any representation or warranty made by Borrower or any other party under this Agreement or any other Loan Document shall prove to be incorrect, false or misleading in any material respect when furnished or made.

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(c) Any default in the performance of or compliance with any obligation, agreement or other provision contained herein or in any other Loan Document (other than those referred to in subsections (a) and (b) above), and with respect to any such default which by its nature can be cured, such default shall continue for a period of twenty (20) days from its occurrence.
(d) Any default in the payment or performance of any obligation, or any defined event of default, under the terms of any contract or instrument (other than any of the Loan Documents) pursuant to which Borrower, any Subsidiary or any guarantor hereunder has incurred any debt or other liability to any person or entity, including Bank.
(e) The filing of a notice of judgment lien against Borrower, any Subsidiary or any guarantor; or the recording of any abstract of judgment against Borrower, any Subsidiary or any guarantor in any county in which Borrower, any Subsidiary or any guarantor has an interest in real property; or the service of a notice of levy and/or of a writ of attachment or execution, or other like process, against the assets of Borrower, any Subsidiary or any guarantor; or the entry of a judgment against Borrower, any Subsidiary or any guarantor.
(f) Borrower, any Subsidiary or any guarantor shall become insolvent, or shall suffer or consent to or apply for the appointment of a receiver, trustee, custodian or liquidator of itself or any of its property, or shall generally fail to pay its debts as they become due, or shall make a general assignment for the benefit of creditors; Borrower, any Subsidiary or any guarantor shall file a voluntary petition in bankruptcy, or seeking reorganization, in order to effect a plan or other arrangement with creditors or any other relief under the Bankruptcy Reform Act, Title 11 of the United States Code, as amended or recodified from time to time (“Bankruptcy Code”), or under any state or federal law granting relief to debtors, whether now or hereafter in effect; or any involuntary petition or proceeding pursuant to the Bankruptcy Code or any other applicable state or federal law relating to bankruptcy, reorganization or other relief for debtors is filed or commenced against Borrower, any Subsidiary or any guarantor, or Borrower, any Subsidiary or any guarantor shall file an answer admitting the jurisdiction of the court and the material allegations of any involuntary petition; or Borrower, any Subsidiary or any guarantor shall be adjudicated a bankrupt, or an order for relief shall be entered against Borrower, any Subsidiary or any guarantor by any court of competent jurisdiction under the Bankruptcy Code or any other applicable state or federal law relating to bankruptcy, reorganization or other relief for debtors.
(g) There shall exist or occur any event or condition which Bank in good faith believes impairs, or is substantially likely to impair, the prospect of payment or performance by Borrower of its obligations under any of the Loan Documents.
(h) The dissolution or liquidation of Borrower, any Subsidiary or any guarantor; or Borrower, any Subsidiary or any guarantor, or any of its directors, stockholders or members, shall take action seeking to effect the dissolution or liquidation of Borrower, any Subsidiary or any guarantor.
(i) Any change in ownership of an aggregate of twenty-five percent (25%) or more of the common stock of Borrower in any single transaction or set of related transactions.

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SECTION 6.2. REMEDIES. Upon the occurrence of any Event of Default: (a) all indebtedness of Borrower under each of the Loan Documents, any term thereof to the contrary notwithstanding, shall at Bank’s option and without notice become immediately due and payable without presentment, demand, protest or notice of dishonor, all of which are hereby expressly waived by Borrower; (b) the obligation, if any, of Bank to extend any further credit under any of the Loan Documents shall immediately cease and terminate; and (c) Bank shall have all rights, powers and remedies available under each of the Loan Documents, or accorded by law, including without limitation the right to resort to any or all security for any credit subject hereto and to exercise any or all of the rights of a beneficiary or secured party pursuant to applicable law. All rights, powers and remedies of Bank may be exercised at any time by Bank and from time to time after the occurrence of an Event of Default, are cumulative and not exclusive, and shall be in addition to any other rights, powers or remedies provided by law or equity.
ARTICLE VII
MISCELLANEOUS
SECTION 7.1. NO WAIVER. No delay, failure or discontinuance of Bank in exercising any right, power or remedy under any of the Loan Documents shall affect or operate as a waiver of such right, power or remedy; nor shall any single or partial exercise of any such right, power or remedy preclude, waive or otherwise affect any other or further exercise thereof or the exercise of any other right, power or remedy. Any waiver, permit, consent or approval of any kind by Bank of any breach of or default under any of the Loan Documents must be in writing and shall be effective only to the extent set forth in such writing.
SECTION 7.2. NOTICES. All notices, requests and demands which any party is required or may desire to give to any other party under any provision of this Agreement must be in writing delivered to each party at the following address:
 	 	 	
BORROWER:	 	SYNAPTICS INCORPORATED
3120 Scott Blvd.
Santa Clara, CA 95054	
 	 	 	
BANK:	 	WELLS FARGO BANK, NATIONAL ASSOCIATION
Santa Clara Technology Regional Commercial Banking Office
121 S. Market Street, 2 nd  Floor
San Jose, CA 95113	
or to such other address as any party may designate by written notice to all other parties. Each such notice, request and demand shall be deemed given or made as follows: (a) if sent by hand delivery, upon delivery; (b) if sent by mail, upon the earlier of the date of receipt or three (3) days after deposit in the U.S. mail, first class and postage prepaid; and (c) if sent by telecopy, upon receipt.
SECTION 7.3. COSTS, EXPENSES AND ATTORNEYS’ FEES. Borrower shall pay to Bank immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys’ fees (to include outside counsel fees and all allocated costs of Bank’s in-house counsel), expended or incurred by Bank in connection with (a) the enforcement of Bank’s rights and/or the collection of any amounts which become due to Bank under any of the Loan Documents and (b) the prosecution or defense of any action in any way related to any of the Loan Documents, including without limitation, any action for declaratory relief, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by Bank or any other person) relating to Borrower or any other person or entity.

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SECTION 7.4. SUCCESSORS, ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the heirs, executors, administrators, legal representatives, successors and assigns of the parties; provided however, that Borrower may not assign or transfer its interests or rights hereunder without Bank’s prior written consent. Bank reserves the right to sell, assign, transfer, negotiate or grant participations in all or any part of, or any interest in, Bank’s rights and benefits under each of the Loan Documents. In connection therewith, Bank may disclose all documents and information which Bank now has or may hereafter acquire relating to any credit subject hereto, Borrower or its business, any guarantor hereunder or the business of such guarantor, or any collateral required hereunder.
SECTION 7.5. ENTIRE AGREEMENT; AMENDMENT. This Agreement and the other Loan Documents constitute the entire agreement between Borrower and Bank with respect to each credit subject hereto and supersede all prior negotiations, communications, discussions and correspondence concerning the subject matter hereof. This Agreement may be amended or modified only in writing signed by each party hereto.
SECTION 7.6. NO THIRD PARTY BENEFICIARIES. This Agreement is made and entered into for the sole protection and benefit of the parties hereto and their respective permitted successors and assigns, and no other person or entity shall be a third party beneficiary of, or have any direct or indirect cause of action or claim in connection with, this Agreement or any other of the Loan Documents to which it is not a party.
SECTION 7.7. TIME. Time is of the essence of each and every provision of this Agreement and each other of the Loan Documents.
SECTION 7.8. SEVERABILITY OF PROVISIONS. If any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity without invalidating the remainder of such provision or any remaining provisions of this Agreement.
SECTION 7.9. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which when executed and delivered shall be deemed to be an original, and all of which when taken together shall constitute one and the same Agreement.
SECTION 7.10. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of California.
SECTION 7.11. ARBITRATION.
(a) Arbitration. The parties hereto agree, upon demand by any party, to submit to binding arbitration all claims, disputes and controversies between or among them (and their respective employees, officers, directors, attorneys, and other agents), whether in tort, contract or otherwise in any way arising out of or relating to (i) any credit subject hereto, or any of the Loan Documents, and their negotiation, execution, collateralization, administration, repayment, modification, extension, substitution, formation, inducement, enforcement, default or termination; or (ii) requests for additional credit.

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(b) Governing Rules. Any arbitration proceeding will (i) proceed in a location in California selected by the American Arbitration Association (“AAA”); (ii) be governed by the Federal Arbitration Act (Title 9 of the United States Code), notwithstanding any conflicting choice of law provision in any of the documents between the parties; and (iii) be conducted by the AAA, or such other administrator as the parties shall mutually agree upon, in accordance with the AAA’s commercial dispute resolution procedures, unless the claim or counterclaim is at least $1,000,000.00 exclusive of claimed interest, arbitration fees and costs in which case the arbitration shall be conducted in accordance with the AAA’s optional procedures for large, complex commercial disputes (the commercial dispute resolution procedures or the optional procedures for large, complex commercial disputes to be referred to herein, as applicable, as the “Rules”). If there is any inconsistency between the terms hereof and the Rules, the terms and procedures set forth herein shall control. Any party who fails or refuses to submit to arbitration following a demand by any other party shall bear all costs and expenses incurred by such other party in compelling arbitration of any dispute. Nothing contained herein shall be deemed to be a waiver by any party that is a bank of the protections afforded to it under 12 U.S.C. §91 or any similar applicable state law.
(c) No Waiver of Provisional Remedies, Self-Help and Foreclosure. The arbitration requirement does not limit the right of any party to (i) foreclose against real or personal property collateral; (ii) exercise self-help remedies relating to collateral or proceeds of collateral such as setoff or repossession; or (iii) obtain provisional or ancillary remedies such as replevin, injunctive relief, attachment or the appointment of a receiver, before during or after the pendency of any arbitration proceeding. This exclusion does not constitute a waiver of the right or obligation of any party to submit any dispute to arbitration or reference hereunder, including those arising from the exercise of the actions detailed in sections (i), (ii) and (iii) of this paragraph.
(d) Arbitrator Qualifications and Powers. Any arbitration proceeding in which the amount in controversy is $5,000,000.00 or less will be decided by a single arbitrator selected according to the Rules, and who shall not render an award of greater than $5,000,000.00. Any dispute in which the amount in controversy exceeds $5,000,000.00 shall be decided by majority vote of a panel of three arbitrators; provided however, that all three arbitrators must actively participate in all hearings and deliberations. The arbitrator will be a neutral attorney licensed in the State of California or a neutral retired judge of the state or federal judiciary of California, in either case with a minimum of ten years experience in the substantive law applicable to the subject matter of the dispute to be arbitrated. The arbitrator will determine whether or not an issue is arbitratable and will give effect to the statutes of limitation in determining any claim. In any arbitration proceeding the arbitrator will decide (by documents only or with a hearing at the arbitrator’s discretion) any pre-hearing motions which are similar to motions to dismiss for failure to state a claim or motions for summary adjudication. The arbitrator shall resolve all disputes in accordance with the substantive law of California and may grant any remedy or relief that a court of such state could order or grant within the scope hereof and such ancillary relief as is necessary to make effective any award. The arbitrator shall also have the power to award recovery of all costs and fees, to impose sanctions and to take such other action as the arbitrator deems necessary to the same extent a judge could pursuant to the Federal Rules of Civil Procedure, the California Rules of Civil Procedure or other applicable law. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction. The institution and maintenance of an action for judicial relief or pursuit of a provisional or ancillary remedy shall not constitute a waiver of the right of any party, including the plaintiff, to submit the controversy or claim to arbitration if any other party contests such action for judicial relief.
(e) Discovery. In any arbitration proceeding, discovery will be permitted in accordance with the Rules. All discovery shall be expressly limited to matters directly relevant to the dispute being arbitrated and must be completed no later than 20 days before the hearing date. Any requests for an extension of the discovery periods, or any discovery disputes, will be subject to final determination by the arbitrator upon a showing that the request for discovery is essential for the party’s presentation and that no alternative means for obtaining information is available.

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(f) Class Proceedings and Consolidations. No party hereto shall be entitled to join or consolidate disputes by or against others in any arbitration, except parties who have executed any Loan Document, or to include in any arbitration any dispute as a representative or member of a class, or to act in any arbitration in the interest of the general public or in a private attorney general capacity.
(g) Payment Of Arbitration Costs And Fees. The arbitrator shall award all costs and expenses of the arbitration proceeding.
(h) Real Property Collateral; Judicial Reference. Notwithstanding anything herein to the contrary, no dispute shall be submitted to arbitration if the dispute concerns indebtedness secured directly or indirectly, in whole or in part, by any real property unless (i) the holder of the mortgage, lien or security interest specifically elects in writing to proceed with the arbitration, or (ii) all parties to the arbitration waive any rights or benefits that might accrue to them by virtue of the single action rule statute of California, thereby agreeing that all indebtedness and obligations of the parties, and all mortgages, liens and security interests securing such indebtedness and obligations, shall remain fully valid and enforceable. If any such dispute is not submitted to arbitration, the dispute shall be referred to a referee in accordance with California Code of Civil Procedure Section 638 et seq., and this general reference agreement is intended to be specifically enforceable in accordance with said Section 638. A referee with the qualifications required herein for arbitrators shall be selected pursuant to the AAA’s selection procedures. Judgment upon the decision rendered by a referee shall be entered in the court in which such proceeding was commenced in accordance with California Code of Civil Procedure Sections 644 and 645.
(i) Miscellaneous. To the maximum extent practicable, the AAA, the arbitrators and the parties shall take all action required to conclude any arbitration proceeding within 180 days of the filing of the dispute with the AAA. No arbitrator or other party to an arbitration proceeding may disclose the existence, content or results thereof, except for disclosures of information by a party required in the ordinary course of its business or by applicable law or regulation. If more than one agreement for arbitration by or between the parties potentially applies to a dispute, the arbitration provision most directly related to the Loan Documents or the subject matter of the dispute shall control. This arbitration provision shall survive termination, amendment or expiration of any of the Loan Documents or any relationship between the parties.
(j) Small Claims Court. Notwithstanding anything herein to the contrary, each party retains the right to pursue in Small Claims Court any dispute within that court’s jurisdiction. Further, this arbitration provision shall apply only to disputes in which either party seeks to recover an amount of money (excluding attorneys’ fees and costs) that exceeds the jurisdictional limit of the Small Claims Court.

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first written above.
 	 	 	 	 	 	 	 	 	 	 	
SYNAPTICS INCORPORATED	 	 	 	WELLS FARGO BANK,
NATIONAL ASSOCIATION	
 	 	 	 	 	 	 	 	 	 	 	
By:	 	/s/ Russell J. Knittel	 	 	 	By:	 	/s/ Karen Byler	 	 	
 	 	 	 	 	 	 	 	 	 	 	
 	 	Russell J. Knittel,	 	 	 	 	 	Karen Byler,	 	 	
 	 	Interim President and CEO	 	 	 	 	 	Vice President	 	 	
 	 	 	 	 	 	 	 	 	 	 	
By:	 	/s/ Kathleen Bayless	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	
 	 	Kathleen Bayless,	 	 	 	 	 	 	 	 	
 	 	Chief Financial Officer	 	 	 	 	 	 	 	 	

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WELLS FARGO	 	REVOLVING LINE OF CREDIT NOTE	
 
$50,000,000.00	 	San Jose, California	
 	 	August 17, 2011	
FOR VALUE RECEIVED, the undersigned SYNAPTICS INCORPORATED (“Borrower”) promises to pay to the order of WELLS FARGO BANK, NATIONAL ASSOCIATION (“Bank”) at its office at Santa Clara Technology RCBO, 121 S. Market St 2nd Floor, San Jose, CA 95113, or at such other place as the holder hereof may designate, in lawful money of the United States of America and in immediately available funds, the principal sum of $50,000,000.00, or so much thereof as may be advanced and be outstanding, with interest thereon, to be computed on each advance from the date of its disbursement as set forth herein.
1. DEFINITIONS:
As used herein, the following terms shall have the meanings set forth after each, and any other term defined in this Note shall have the meaning set forth at the place defined:
1.1 “Business Day” means any day except a Saturday, Sunday or any other day on which commercial banks in California are authorized or required by law to close.
1.2 “Fixed Rate Term” means a period commencing on a Business Day and continuing for 1, 2 or 3 months, as designated by Borrower, during which all or a portion of the outstanding principal balance of this Note bears interest determined in relation to LIBOR; provided however, that no Fixed Rate Term may be selected for a principal amount less than $100,000.00; and provided further, that no Fixed Rate Term shall extend beyond the scheduled maturity date hereof. If any Fixed Rate Term would end on a day which is not a Business Day, then such Fixed Rate Term shall be extended to the next succeeding Business Day.
1.3 “LIBOR” means the rate per annum (rounded upward, if necessary, to the nearest whole 1/8 of 1%) determined by dividing Base LIBOR by a percentage equal to 100% less any LIBOR Reserve Percentage.
(a) “Base LIBOR” means the rate per annum for United States dollar deposits quoted by Bank as the Inter-Bank Market Offered Rate, with the understanding that such rate is quoted by Bank for the purpose of calculating effective rates of interest for loans making reference thereto, on the first day of a Fixed Rate Term for delivery of funds on said date for a period of time approximately equal to the number of days in such Fixed Rate Term and in an amount approximately equal to the principal amount to which such Fixed Rate Term applies. Borrower understands and agrees that Bank may base its quotation of the Inter-Bank Market Offered Rate upon such offers or other market indicators of the Inter-Bank Market as Bank in its discretion deems appropriate including, but not limited to, the rate offered for U.S. dollar deposits on the London Inter-Bank Market.
(b) “LIBOR Reserve Percentage” means the reserve percentage prescribed by the Board of Governors of the Federal Reserve System (or any successor) for “Eurocurrency Liabilities” (as defined in Regulation D of the Federal Reserve Board, as amended), adjusted by Bank for expected changes in such reserve percentage during the applicable Fixed Rate Term.
1.4 “Prime Rate” means at any time the rate of interest most recently announced within Bank at its principal office as its Prime Rate, with the understanding that the Prime Rate is one of Bank’s base rates and serves as the basis upon which effective rates of interest are calculated for those loans making reference thereto, and is evidenced by the recording thereof after its announcement in such internal publication or publications as Bank may designate.

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2. INTEREST:
2.1 Interest. The outstanding principal balance of this Note shall bear interest (computed on the basis of a 360-day year, actual days elapsed) either (a) at a fluctuating rate per annum equal to the Prime Rate in effect from time to time, or (b) at a fixed rate per annum determined by Bank to be 2.50000% above LIBOR in effect on the first day of the applicable Fixed Rate Term. When interest is determined in relation to the Prime Rate, each change in the rate of interest hereunder shall become effective on the date each Prime Rate change is announced within Bank. With respect to each LIBOR selection option selected hereunder, Bank is hereby authorized to note the date, principal amount, interest rate and Fixed Rate Term applicable thereto and any payments made thereon on Bank’s books and records (either manually or by electronic entry) and/or on any schedule attached to this Note, which notations shall be prima facie evidence of the accuracy of the information noted.
2.2 Selection of Interest Rate Options. At any time any portion of this Note bears interest determined in relation to LIBOR, it may be continued by Borrower at the end of the Fixed Rate Term applicable thereto so that all or a portion thereof bears interest determined in relation to the Prime Rate or to LIBOR for a new Fixed Rate Term designated by Borrower. At any time any portion of this Note bears interest determined in relation to the Prime Rate, Borrower may convert all or a portion thereof so that it bears interest determined in relation to LIBOR for a Fixed Rate Term designated by Borrower. At such time as Borrower requests an advance hereunder or wishes to select a LIBOR option for all or a portion of the outstanding principal balance hereof, and at the end of each Fixed Rate Term, Borrower shall give Bank notice specifying: (a) the interest rate option selected by Borrower; (b) the principal amount subject thereto; and (c) for each LIBOR selection, the length of the applicable Fixed Rate Term. Any such notice may be given by telephone (or such other electronic method as Bank may permit) so long as, with respect to each LIBOR selection, (i) if requested by Bank, Borrower provides to Bank written confirmation thereof not later than 3 Business Days after such notice is given, and (ii) such notice is given to Bank prior to 10:00 a.m. on the first day of the Fixed Rate Term, or at a later time during any Business Day if Bank, at it’s sole option but without obligation to do so, accepts Borrower’s notice and quotes a fixed rate to Borrower. If Borrower does not immediately accept a fixed rate when quoted by Bank, the quoted rate shall expire and any subsequent LIBOR request from Borrower shall be subject to a redetermination by Bank of the applicable fixed rate. If no specific designation of interest is made at the time any advance is requested hereunder or at the end of any Fixed Rate Term, Borrower shall be deemed to have made a Prime Rate interest selection for such advance or the principal amount to which such Fixed Rate Term applied.
2.3 Taxes and Regulatory Costs. Borrower shall pay to Bank immediately upon demand, in addition to any other amounts due or to become due hereunder, any and all (a) withholdings, interest equalization taxes, stamp taxes or other taxes (except income and franchise taxes) imposed by any domestic or foreign governmental authority and related in any manner to LIBOR, and (b) future, supplemental, emergency or other changes in the LIBOR Reserve Percentage, assessment rates imposed by the Federal Deposit Insurance Corporation, or similar requirements or costs imposed by any domestic or foreign governmental authority or resulting from compliance by Bank with any request or directive (whether or not having the force of law) from any central bank or other governmental authority and related in any manner to LIBOR to the extent they are not included in the calculation of LIBOR. In determining which of the foregoing are attributable to any LIBOR option available to Borrower hereunder, any reasonable allocation made by Bank among its operations shall be conclusive and binding upon Borrower.
2.4 Payment of Interest. Interest accrued on this Note shall be payable on the 1st day of each month, commencing October 1, 2011.
2.5 Default Interest. From and after the maturity date of this Note, or such earlier date as all principal owing hereunder becomes due and payable by acceleration or otherwise, or at Bank’s option upon the occurrence, and during the continuance of an Event of Default, the outstanding principal balance of this Note shall bear interest at an increased rate per annum (computed on the basis of a 360-day year, actual days elapsed) equal to 4% above the rate of interest from time to time applicable to this Note.

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3. BORROWING AND REPAYMENT:
3.1 Borrowing and Repayment. Borrower may from time to time during the term of this Note borrow, partially or wholly repay its outstanding borrowings, and reborrow, subject to all of the limitations, terms and conditions of this Note and of the Credit Agreement between Borrower and Bank defined below; provided however, that the total outstanding borrowings under this Note shall not at any time exceed the principal amount stated above. The unpaid principal balance of this obligation at any time shall be the total amounts advanced hereunder by the holder hereof less the amount of principal payments made hereon by or for Borrower, which balance may be endorsed hereon from time to time by the holder. The outstanding principal balance of this Note shall be due and payable in full on September 1, 2012.
3.2 Advances. Advances hereunder, to the total amount of the principal sum available hereunder, may be made by the holder at the oral or written request of (a) Kathleen Bayless or Kermit Nolan, any one acting alone, who are authorized to request advances and direct the disposition of any advances until written notice of the revocation of such authority is received by the holder at the office designated above, or (b) any person, with respect to advances deposited to the credit of any deposit account of Borrower, which advances, when so deposited, shall be conclusively presumed to have been made to or for the benefit of Borrower regardless of the fact that persons other than those authorized to request advances may have authority to draw against such account. The holder shall have no obligation to determine whether any person requesting an advance is or has been authorized by Borrower.
3.3 Application of Payments. Each payment made on this Note shall be credited first, to any interest then due and second, to the outstanding principal balance hereof. All payments credited to principal shall be applied first, to the outstanding principal balance of this Note which bears interest determined in relation to the Prime Rate, if any, and second, to the outstanding principal balance of this Note which bears interest determined in relation to LIBOR, with such payments applied to the oldest Fixed Rate Term first.
4. PREPAYMENT:
4.1 Prime Rate. Borrower may prepay principal on any portion of this Note which bears interest determined in relation to the Prime Rate at any time, in any amount and without penalty.
4.2 LIBOR. Borrower may prepay principal on any portion of this Note which bears interest determined in relation to LIBOR at any time and in the minimum amount of $100,000.00; provided however, that if the outstanding principal balance of such portion of this Note is less than said amount, the minimum prepayment amount shall be the entire outstanding principal balance thereof. In consideration of Bank providing this prepayment option to Borrower, or if any such portion of this Note shall become due and payable at any time prior to the last day of the Fixed Rate Term applicable thereto by acceleration or otherwise, Borrower shall pay to Bank immediately upon demand a fee which is the sum of the discounted monthly differences for each month from the month of prepayment through the month in which such Fixed Rate Term matures, calculated as follows for each such month:
(a) Determine the amount of interest which would have accrued each month on the amount prepaid at the interest rate applicable to such amount had it remained outstanding until the last day of the Fixed Rate Term applicable thereto.
(b) Subtract from the amount determined in (a) above the amount of interest which would have accrued for the same month on the amount prepaid for the remaining term of such Fixed Rate Term at LIBOR in effect on the date of prepayment for new loans made for such term and in a principal amount equal to the amount prepaid.
(c) If the result obtained in (b) for any month is greater than zero, discount that difference by LIBOR used in (b) above.

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Borrower acknowledges that prepayment of such amount may result in Bank incurring additional costs, expenses and/or liabilities, and that it is difficult to ascertain the full extent of such costs, expenses and/or liabilities. Borrower, therefore, agrees to pay the above-described prepayment fee and agrees that said amount represents a reasonable estimate of the prepayment costs, expenses and/or liabilities of Bank. If Borrower fails to pay any prepayment fee when due, the amount of such prepayment fee shall thereafter bear interest until paid at a rate per annum 2.000% above the Prime Rate in effect from time to time (computed on the basis of a 360-day year, actual days elapsed).
5. EVENTS OF DEFAULT:
This Note is made pursuant to and is subject to the terms and conditions of that certain Credit Agreement between Borrower and Bank dated as of August 17, 2011, as amended from time to time (the “Credit Agreement”). Any default in the payment or performance of any obligation under this Note, or any defined event of default under the Credit Agreement, shall constitute an “Event of Default” under this Note.
6. MISCELLANEOUS:
6.1 Remedies. Upon the occurrence of any Event of Default, the holder of this Note, at the holder’s option, may declare all sums of principal and interest outstanding hereunder to be immediately due and payable without presentment, demand, notice of nonperformance, notice of protest, protest or notice of dishonor, all of which are expressly waived by Borrower, and the obligation, if any, of the holder to extend any further credit hereunder shall immediately cease and terminate. Borrower shall pay to the holder immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys’ fees (to include outside counsel fees and all allocated costs of the holder’s in-house counsel), expended or incurred by the holder in connection with the enforcement of the holder’s rights and/or the collection of any amounts which become due to the holder under this Note, and the prosecution or defense of any action in any way related to this Note, including without limitation, any action for declaratory relief, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by Bank or any other person) relating to Borrower or any other person or entity.
6.2 Obligations Joint and Several. Should more than one person or entity sign this Note as a Borrower, the obligations of each such Borrower shall be joint and several.
6.3 Governing Law. This Note shall be governed by and construed in accordance with the laws of the State of California.
IN WITNESS WHEREOF, the undersigned has executed this Note as of the date first written above.
 	 	 	 	 	
SYNAPTICS INCORPORATED	
 	 	 	 	 	
By:	 	/s/ Russell J. Knittel	 	 	
 	 	 	 	 	
 	 	Russell J. Knittel, Interim President and CEO	 	 	
 	 	 	 	 	
By:	 	/s/ Kathleen Bayless	 	 	
 	 	 	 	 	
 	 	Kathleen Bayless, Chief Financial Officer	 	 	

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