Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
 	 	 	
þ	 	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934	
For the quarterly period ended March 29, 2008
Commission file number 000-49602
SYNAPTICS INCORPORATED
(Exact name of registrant as specified in its charter)
 	 	 	
Delaware	 	77-0118518	
 	 	 	
(State or other jurisdiction
of incorporation or organization)	 	(I.R.S. Employer
Identification No.)	
3120 Scott Blvd., Suite 130
Santa Clara, California 95054

(Address of principal executive offices) (Zip code)
(408) 454-5100

(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  þ  No  o
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 Exchange Act). Yes o No þ
Number of shares of Common Stock outstanding at May 6, 2008: 22,663,651

 

 
SYNAPTICS INCORPORATED
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2008
TABLE OF CONTENTS
 	 	 	 	 	 	
 	 	Page	 	 	
PART I. FINANCIAL INFORMATION	 	 	 	 	 	
 	 	 	 	 	 	
Item 1. Financial Statements (Unaudited):	 	 	 	 	 	
 	 	 	 	 	 	
Condensed Consolidated Balance Sheets—March 31, 2008 and June 30, 2007	 	 	3	 	 	
 	 	 	 	 	 	
Condensed Consolidated Statements of Income—Three and Nine months Ended March 31, 2008 and 2007	 	 	4	 	 	
 	 	 	 	 	 	
Condensed Consolidated Statements of Cash Flows—Nine months Ended March 31, 2008 and 2007	 	 	5	 	 	
 	 	 	 	 	 	
Notes to Condensed Consolidated Financial Statements	 	 	6	 	 	
 	 	 	 	 	 	
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	 	 	18	 	 	
 	 	 	 	 	 	
Item 3. Quantitative and Qualitative Disclosures About Market Risk	 	 	31	 	 	
 	 	 	 	 	 	
Item 4. Controls and Procedures	 	 	31	 	 	
 	 	 	 	 	 	
PART II. OTHER INFORMATION	 	 	 	 	 	
 	 	 	 	 	 	
Item 1. Legal Proceedings	 	 	32	 	 	
 	 	 	 	 	 	
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	 	 	32	 	 	
 	 	 	 	 	 	
Item 6. Exhibits	 	 	33	 	 	
 	 	 	 	 	 	
Signatures	 	 	34	 	 	
 EX-31.1	
 EX-31.2	
 EX-32.1	
 EX-32.2	

Table of Contents
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
SYNAPTICS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
 	 	 	 	 	 	 	 	 	
 	 	March 31,	 	 	June 30,	 	
 	 	2008	 	 	2007	 	
ASSETS	 	 	 	 	 	 	 	 	
Current assets:	 	 	 	 	 	 	 	 	
Cash and cash equivalents	 	$	107,837	 	 	$	45,915	 	
Short-term investments	 	 	77,906	 	 	 	219,102	 	
Accounts receivable, net of allowances of $364 and $419, respectively	 	 	57,762	 	 	 	56,721	 	
Inventories	 	 	20,284	 	 	 	12,034	 	
Prepaid expenses and other current assets	 	 	14,250	 	 	 	4,245	 	
 	 	 	 	 	 	 	
Total current assets	 	 	278,039	 	 	 	338,017	 	
Property and equipment, net	 	 	22,367	 	 	 	19,400	 	
Goodwill	 	 	1,927	 	 	 	1,927	 	
Other assets	 	 	17,245	 	 	 	13,968	 	
 	 	 	 	 	 	 	
 	 	$	319,578	 	 	$	373,312	 	

LIABILITIES AND STOCKHOLDERS’ EQUITY	 	 	 	 	 	 	 	 	
Current liabilities:	 	 	 	 	 	 	 	 	
Accounts payable	 	$	19,229	 	 	$	21,552	 	
Accrued compensation	 	 	6,055	 	 	 	5,372	 	
Income taxes payable	 	 	5,969	 	 	 	3,400	 	
Other accrued liabilities	 	 	8,522	 	 	 	6,272	 	
Note payable	 	 	—	 	 	 	1,500	 	
 	 	 	 	 	 	 	
Total current liabilities	 	 	39,775	 	 	 	38,096	 	
Other liabilities	 	 	15,819	 	 	 	2,129	 	
Convertible senior subordinated notes	 	 	125,000	 	 	 	125,000	 	
Stockholders’ equity:	 	 	 	 	 	 	 	 	
Common stock:	 	 	 	 	 	 	 	 	
$0.001 par value; 60,000,000 shares authorized; 31,273,857 and 29,666,660 shares issued, respectively	 	 	31	 	 	 	30	 	
Additional paid-in capital	 	 	216,228	 	 	 	180,746	 	
Less: 8,088,100 and 3,588,100 common treasury shares, respectively, at cost	 	 	(200,745	)	 	 	(72,345	)	
Accumulated other comprehensive loss	 	 	(4,791	)	 	 	(139	)	
Retained earnings	 	 	128,261	 	 	 	99,795	 	
 	 	 	 	 	 	 	
Total stockholders’ equity	 	 	138,984	 	 	 	208,087	 	
 	 	 	 	 	 	 	
 	 	$	319,578	 	 	$	373,312	 	
 	 	 	 	 	 	 	
See notes to condensed consolidated financial statements (unaudited).
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SYNAPTICS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended	 	 	Nine Months Ended	 	
 	 	March 31,	 	 	March 31,	 	
 	 	2008	 	 	2007	 	 	2008	 	 	2007	 	
Net revenue	 	$	78,861	 	 	$	64,309	 	 	$	264,203	 	 	$	195,211	 	
Cost of revenue (1)	 	 	46,688	 	 	 	39,162	 	 	 	155,521	 	 	 	117,278	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Gross margin	 	 	32,173	 	 	 	25,147	 	 	 	108,682	 	 	 	77,933	 	

Operating expenses:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Research and development (1)	 	 	13,560	 	 	 	9,485	 	 	 	35,655	 	 	 	28,631	 	
Selling, general, and administrative (1)	 	 	12,181	 	 	 	9,339	 	 	 	34,346	 	 	 	26,067	 	
Restructuring	 	 	—	 	 	 	—	 	 	 	—	 	 	 	915	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Total operating expenses	 	 	25,741	 	 	 	18,824	 	 	 	70,001	 	 	 	55,613	 	

Income from operations	 	 	6,432	 	 	 	6,323	 	 	 	38,681	 	 	 	22,320	 	
Interest income	 	 	2,293	 	 	 	2,713	 	 	 	8,301	 	 	 	8,230	 	
Interest expense	 	 	(449	)	 	 	(488	)	 	 	(1,373	)	 	 	(1,463	)	
Gain on settlement of debt	 	 	—	 	 	 	—	 	 	 	2,689	 	 	 	—	 	
Impairment of investment	 	 	—	 	 	 	—	 	 	 	(4,000	)	 	 	—	 	
Impairment of auction rate securities investments	 	 	(2,237	)	 	 	—	 	 	 	(2,237	)	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Income before provision for income taxes	 	 	6,039	 	 	 	8,548	 	 	 	42,061	 	 	 	29,087	 	
Provision for income taxes	 	 	3,031	 	 	 	2,913	 	 	 	13,595	 	 	 	9,984	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	$	3,008	 	 	$	5,635	 	 	$	28,466	 	 	$	19,103	 	

Net income per share:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Basic	 	$	0.12	 	 	$	0.22	 	 	$	1.10	 	 	$	0.75	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Diluted	 	$	0.12	 	 	$	0.20	 	 	$	1.05	 	 	$	0.67	 	

Shares used in computing net income per share:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Basic	 	 	24,760	 	 	 	25,823	 	 	 	25,932	 	 	 	25,509	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Diluted	 	 	25,302	 	 	 	29,592	 	 	 	27,134	 	 	 	29,512	 	

 	 	 	
(1)	 	Amounts include share-based compensation costs as follows:	

Cost of revenue	 	$	377	 	 	$	160	 	 	$	966	 	 	$	492	 	
Research and development	 	$	1,797	 	 	$	1,262	 	 	$	4,556	 	 	$	3,736	 	
Selling, general, and administrative	 	$	2,680	 	 	$	1,966	 	 	$	7,146	 	 	$	6,169	 	
See notes to condensed consolidated financial statements (unaudited).
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SYNAPTICS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 	 	 	 	 	 	 	 	 	
 	 	Nine Months Ended	 	
 	 	March 31,	 	
 	 	2008	 	 	2007	 	
Cash flows from operating activities	 	 	 	 	 	 	 	 	
Net income	 	$	28,466	 	 	$	19,103	 	
Adjustments to reconcile net income to net cash provided by operating activities:	 	 	 	 	 	 	 	 	
Share-based compensation costs	 	 	12,668	 	 	 	10,397	 	
Deferred taxes from share-based compensation	 	 	308	 	 	 	(1,106	)	
Tax benefit realized from share-based compensation	 	 	—	 	 	 	7,843	 	
Excess tax benefit from share-based compensation	 	 	—	 	 	 	(7,246	)	
Depreciation of property and equipment	 	 	2,750	 	 	 	1,637	 	
Impairment of software, property, and equipment costs	 	 	210	 	 	 	102	 	
Amortization of debt issuance costs	 	 	645	 	 	 	645	 	
Gain on settlement of debt	 	 	(2,689	)	 	 	—	 	
Impairment of investment	 	 	4,000	 	 	 	—	 	
Impairment of auction rate securities investments	 	 	2,237	 	 	 	—	 	
Changes in operating assets and liabilities:	 	 	 	 	 	 	 	 	
Accounts receivable, net	 	 	(1,041	)	 	 	(15,069	)	
Inventories	 	 	(8,250	)	 	 	885	 	
Prepaid expenses and other current assets	 	 	524	 	 	 	(917	)	
Other assets	 	 	4,772	 	 	 	4,038	 	
Accounts payable	 	 	(2,323	)	 	 	1,644	 	
Accrued compensation	 	 	176	 	 	 	(553	)	
Income taxes	 	 	5,041	 	 	 	(8,661	)	
Other accrued liabilities	 	 	3,439	 	 	 	2,966	 	
Other liabilities	 	 	(67	)	 	 	(1,008	)	
 	 	 	 	 	 	 	
Net cash provided by operating activities	 	 	50,866	 	 	 	14,700	 	

Cash flows from investing activities	 	 	 	 	 	 	 	 	
Purchases of short-term investments	 	 	(165,994	)	 	 	(197,307	)	
Proceeds from sales and maturities of short-term investments	 	 	288,055	 	 	 	206,342	 	
Purchases of property and equipment	 	 	(5,927	)	 	 	(3,953	)	
 	 	 	 	 	 	 	
Net cash provided by investing activities	 	 	116,134	 	 	 	5,082	 	

Cash flows from financing activities	 	 	 	 	 	 	 	 	
Purchase of treasury stock	 	 	(128,400	)	 	 	(32,346	)	
Proceeds from issuance of common stock upon exercise of options and stock purchase plan	 	 	23,322	 	 	 	14,050	 	
Excess tax benefit from share-based compensation	 	 	—	 	 	 	7,246	 	
 	 	 	 	 	 	 	
Net cash used in financing activities	 	 	(105,078	)	 	 	(11,050	)	
 	 	 	 	 	 	 	
Net increase in cash and cash equivalents	 	 	61,922	 	 	 	8,732	 	
Cash and cash equivalents at beginning of period	 	 	45,915	 	 	 	38,724	 	
 	 	 	 	 	 	 	
Cash and cash equivalents at end of period	 	$	107,837	 	 	$	47,456	 	

Supplemental disclosures of cash flow information	 	 	 	 	 	 	 	 	
Cash paid for interest	 	$	469	 	 	$	469	 	
 	 	 	 	 	 	 	
Cash paid for income taxes	 	$	2,673	 	 	$	8,281	 	
 	 	 	 	 	 	 	
See notes to condensed consolidated financial statements (unaudited).
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SYNAPTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
     The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and U.S. generally accepted accounting principles. However, certain information or footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to such SEC rules and regulations. In our opinion, the financial statements include all adjustments, which are of a normal and recurring nature, necessary for the fair presentation of the results of the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the operating results for the full fiscal year or any future period. These financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our annual report on Form 10-K for the fiscal year ended June 30, 2007.
     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. Fiscal 2007 was a 53-week period ending on June 30, 2007 and fiscal 2008 will be a 52-week period ending on June 28, 2008. The quarterly periods presented in this report were 13-week periods for the three-month period ended March 29, 2008 and March 30, 2007 and 39-week and 40-week periods for the nine-month period ended March 29, 2008 and March 30, 2007, respectively. For ease of presentation, the accompanying consolidated financial statements have been shown as ending on March 31 and calendar quarter end dates for all annual, interim, and quarterly financial statement captions, unless otherwise indicated.
Use of Estimates
     The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, cost of revenue, expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to allowances for returns and doubtful accounts, cost of revenue, inventories, product warranty, share-based compensation costs, provision for income taxes, income taxes payable, 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.
2. 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. We accrue for estimated sales returns and other allowances, based on historical experience, at the time we recognize revenue. We record contract revenue for research and development as we provide the services under the terms of the contract. We recognize non-refundable contract fees for which no further performance obligations exist and for which there is no continuing involvement by us on the earlier of when the payments are received or when collection is assured.
3. Net Income Per Share
     We present basic and diluted net income per share amounts in conformity with Statement of Financial Accounting Standards (“SFAS”) 128, “Earnings Per Share,” for all periods presented.
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     The following table presents the computation of basic and diluted net income per share (in thousands, except per share amounts):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended	 	 	Nine Months Ended	 	
 	 	March 31,	 	 	March 31,	 	
 	 	2008	 	 	2007	 	 	2008	 	 	2007	 	
Numerator:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	$	3,008	 	 	$	5,635	 	 	$	28,466	 	 	$	19,103	 	
Interest expense and amortization of debt issuance costs on convertible notes (net of tax)	 	 	—	 	 	 	266	 	 	 	—	 	 	 	798	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income for diluted net income per share	 	$	3,008	 	 	$	5,901	 	 	$	28,466	 	 	$	19,901	 	

Denominator:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Shares, basic	 	 	24,760	 	 	 	25,823	 	 	 	25,932	 	 	 	25,509	 	
Effect of dilutive share-based awards	 	 	542	 	 	 	1,295	 	 	 	1,202	 	 	 	1,529	 	
Effect of convertible notes	 	 	—	 	 	 	2,474	 	 	 	—	 	 	 	2,474	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Shares, diluted	 	 	25,302	 	 	 	29,592	 	 	 	27,134	 	 	 	29,512	 	

Net income per share:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Basic	 	$	0.12	 	 	$	0.22	 	 	$	1.10	 	 	$	0.75	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Diluted	 	$	0.12	 	 	$	0.20	 	 	$	1.05	 	 	$	0.67	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
     Basic net income per share amounts for each period presented have been computed using the weighted average number of shares of common stock outstanding.
     The diluted net income per share amounts do not include the effect of 2,704,908, 2,300,946, 817,709, and 2,531,225 share-based awards that were outstanding during the three-month period ended March 31, 2008 and 2007 and the nine-month period ended March 31, 2008 and 2007, respectively. These share-based awards were not included in the computation of diluted net income per share because the proceeds to be 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.
     As a result of our irrevocable election in April 2007 to cash settle the principal amount of our convertible notes, no shares of common stock will be issued to settle the principal, and cash or common stock may be used to settle the value in excess of the principal. In our calculation of net income per share, we used the “if converted” method through the date of our election to cash settle the principal of our convertible notes upon conversion and we used the “treasury stock” method subsequent to the date of our election. We will include diluted shares underlying the notes in our diluted net income per share calculation only when the average closing stock price for the accounting period exceeds the conversion price of the notes, which is $50.53 per share. Accordingly, 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, (2) through April 2007 using the weighted average number of shares issuable in connection with our convertible debt under the if-converted method, and (3) from April 2007 using the weighted average number of potentially dilutive shares issuable in connection with our convertible debt under the treasury stock method, when dilutive.
4. Cash Equivalents, Short-Term Investments, and Auction Rate Securities Investments
     Cash equivalents consist of highly liquid investments with original maturities of three months or less. Short-term investments consist of marketable securities and are classified as securities “available for sale” under SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities.” Such securities are reported at fair value, with unrealized gains and losses, net of taxes, excluded from earnings and shown separately as a component of accumulated other comprehensive income or loss within stockholders’ equity. We may pay a premium or receive a discount upon the purchase of marketable securities. Interest earned on marketable securities and amortization of discounts received and accretion of premiums paid on the purchase of marketable securities are included in interest income. We determine realized gains and losses on the sale of marketable securities using the specific identification method.
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     Our investment portfolio includes $48.6 million cost basis of auction rate securities (“ARS”) of which $43.6 million have failed to settle in auctions. Our portfolio of ARS includes $43.6 million that are triple A rated and $5.0 million that are double A rated. Since August 2007, $18.5 million of these ARS investments have failed to settle in auctions and since February 2008, $25.1 million 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, which represents a premium interest rate over alternative short-term investments. However, these investments are not currently 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.
     As there are currently no active markets for our various failed ARS investments, we have estimated the fair value of these investments as of March 31, 2008 based on 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, and the probability of a successful auction in a future period. When possible, our failed ARS investments were compared to other observable market data or securities with similar characteristics. As a result, we have reduced the carrying value of these investments by $7.3 million; of which $2.2 million was accounted for as other-than-temporary impairment with a corresponding charge to income; and $5.1 million was accounted for as temporary impairment through other comprehensive income or loss.
     As of March 31, 2008, none of our ARS investments were in default and all of our ARS investments continue to pay interest. The following table sets forth the various types of failed ARS investments we hold, including the amount and type of impairment, the carrying value, our classification as short-term or non-current and the balance sheet account where the carrying value is included (in thousands).
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	Balance	
 	 	Cost	 	 	Impairment	 	Carrying	 	 	 	 	Sheet	
 	 	Basis	 	 	Amount	 	 	Type	 	Value	 	 	Classification	 	Account	
Student loans	 	$	10,000	 	 	$	334	 	 	Temporary	 	$	9,666	 	 	Short term	 	Short-term investments	
Closed end muni and corporate funds	 	 	15,125	 	 	 	719	 	 	Temporary	 	 	14,406	 	 	Short term	 	Short-term investments	
Credit linked notes	 	 	13,500	 	 	 	4,017	 	 	Temporary	 	 	9,483	 	 	Non-current	 	Other assets	
Contingent capital notes	 	 	5,000	 	 	 	2,237	 	 	Other-than-temporary	 	 	2,763	 	 	Non-current	 	Other assets	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total failed ARS	 	$	43,625	 	 	$	7,307	 	 	 	 	$	36,318	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
     At the present time, the primary issue affecting all of our ARS investments is that of liquidity. We have accounted for certain of our failed ARS investments as short-term as we anticipate those particular ARS markets will recover or be restructured without loss to us in the next 12 months. Recovery of the other ARS markets in which we maintain investments, will likely exceed 12 months. Accordingly, our ARS investments in those markets have been classified as non-current. Based on our ability to access our cash and other short-term investments, our expected operating cash flows, and our other sources of cash, we believe we have the ability to hold these investments until the value recovers or the investments mature. We will continue to evaluate our accounting for these investments quarterly.
5. Inventories
     Inventories are stated at the lower of cost (first-in, first-out method) or market (estimated net realizable value) and consisted of the following (in thousands):
 	 	 	 	 	 	 	 	 	
 	 	March 31,	 	 	June 30,	 	
 	 	2008	 	 	2007	 	
Raw materials	 	$	17,640	 	 	$	10,187	 	
Finished goods	 	 	2,644	 	 	 	1,847	 	
 	 	 	 	 	 	 	
 	 	$	20,284	 	 	$	12,034	 	
 	 	 	 	 	 	 	
     Periodically, we purchase inventory from our manufacturing subcontractors when a customer’s delivery schedule is delayed or a customer’s order is cancelled. In those circumstances in which our customer has cancelled its order and we purchase inventory from our manufacturing subcontractors, 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
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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 is not subsequently written up.
6. Product Warranties, Indemnifications, and Legal Proceedings
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, and service delivery costs. Warranty costs incurred have not been material in recent years. 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 accrued warranty liability (included in other accrued liabilities) for the nine-month period ended March 31, 2008 and 2007 were as follows (in thousands):
 	 	 	 	 	 	 	 	 	
 	 	Nine Months Ended	 	
 	 	March 31,	 	
 	 	2008	 	 	2007	 	
Beginning accrued warranty	 	$	325	 	 	$	357	 	
Provision for product warranties	 	 	424	 	 	 	539	 	
Cost of warranty claims and settlements	 	 	(385	)	 	 	(470	)	
 	 	 	 	 	 	 	
Ending accrued warranty	 	$	364	 	 	$	426	 	
 	 	 	 	 	 	 	
Indemnifications
     In connection with certain third-party agreements, 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.
Legal Proceedings
     In March 2006, Elantech Devices Corporation (“Elantech”) filed a Complaint for Patent Infringement against us claiming that we infringed one of its patents and seeking damages, attorneys’ fees, and a permanent injunction against us infringing or inducing others to infringe the patent. In April 2006, we filed our Answer to the Complaint and Counterclaims against Elantech, claiming that Elantech has infringed and induced infringement of four of our patents and seeking damages, attorneys’ fees, and a permanent injunction against infringing or inducing others to infringe.
     Elantech responded to our counterclaim denying liability and counterclaimed seeking an injunction and damages for alleged violations of California law. We subsequently filed a motion to dismiss the Elantech counterclaims that was granted in July 2006 with leave to amend the counterclaims after the adjudication of the patent infringement claims.
     The Elantech patent relates to recognizing and providing an indication of the presence of multiple fingers on a touchpad. We have previously developed additional ways to detect multiple fingers and have our own related patents. The Elantech infringement claims involve two versions of our software code (“Type 1 Code” and “Type 2 Code”) in certain products in which multiple finger detection is enabled.
     In October 2007, the Court heard oral arguments on our motion for summary judgment of noninfringement of the Elantech patent and Elantech’s cross-motion for summary judgment of infringement. The Court granted our motion for partial summary judgment of noninfringement as to products containing Type 1 Code and denied our motion for partial summary judgment of noninfringement as to products containing Type 2 Code. In addition, the Court denied Elantech’s motion for summary judgment that our Type 1 and Type 2 Codes infringe Elantech’s intellectual property. The Court indicated, however, that it would grant summary judgment of infringement for products implementing the Type 2 Code with enabled finger counting functionality.
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     In November 2007, Elantech moved for partial summary judgment that products implementing the Type 2 Code with enabled finger counting functionality infringe the Elantech patent. In December 2007, Elantech moved for entry of a preliminary injunction against us importing, using, selling, or offering to sell certain products implementing the Type 2 Code with enabled finger counting functionality.
     In December 2007, we filed a Complaint for Patent Infringement against Elantech claiming that Elantech infringed one of our patents relating to detecting the presence of multiple fingers on a touchpad and seeking damages, attorneys’ fees, and an injunction. In January 2008, we moved for entry of summary judgment for infringement of the four Synaptics patents.
     In March 2008, the Court, based on its infringement ruling, filed an order preliminarily enjoining us from making, using, selling, importing into or offering to sell within the United States touchpad products containing our Type 2 firmware code with enabled multiple finger counting functionality. We do not believe any aspect of the Court’s decision will have a material effect on our business. We are not shipping any products that utilize the contested code. As a result, the preliminary injunction will have no impact on us, our business, or our customers. Although the contested code is no longer used in our products, we do not believe the contested code infringes the Elantech patent and we have appealed the Court’s infringement ruling.
     In April, 2008, the Court granted our motion for partial summary judgment holding that use of the corner tap, scrolling, edge motion, and drag features of Elantech’s touchpad products infringe four of our patents.
     We intend to vigorously defend our patents and pursue our counterclaims. We have not recorded any liability associated with Elantech’s claims pursuant to SFAS No. 5 “Accounting for Contingencies,” and have expensed as incurred all legal fees associated with the legal proceedings.
7. Convertible Senior Subordinated Notes
     In December 2004, we issued an aggregate of $125 million of 0.75% Convertible Senior Subordinated Notes maturing December 1, 2024 (the “Notes”) in a private offering pursuant to Rule 144A under the Securities Act of 1933, as amended. In connection with issuing the Notes, we incurred debt issuance costs of $4.3 million, consisting primarily of the initial purchasers’ discount and costs related to legal, accounting, and printing, which are being amortized over five years. We expect to use the net proceeds for working capital and general corporate purposes and potentially for future acquisitions.
     The Notes bear interest at a rate of 0.75% per annum payable on December 1 and June 1 of each year. However, we will pay additional contingent interest on the Notes if the average trading price of the Notes is at or above 120% of the principal amount of the Notes for a specified period beginning with the six-month period commencing December 1, 2009. The amount of contingent interest payable on the Notes with respect to a six-month period, for which contingent interest applies, will equal 0.375% per annum of the average trading price of the Notes for a specified five-trading-day period preceding such six-month period.
     As a result of our irrevocable election in April 2007 to cash settle the principal amount of the Notes, no shares of common stock will be issued to settle the principal amount of the Notes, and cash or common stock may be used to settle the value of the Notes in excess of $125 million, if any. In our calculation of net income per share, we used the “if converted” method through the date of our election to cash settle the principal of our convertible notes upon conversion and we used the “treasury stock” method subsequent to the date of our election. We will include diluted shares underlying the Notes in our diluted net income per share calculation only when the average closing stock price for the accounting period exceeds the conversion price of the Notes, which is $50.53 per share.
     The Notes may be converted (1) if, during any calendar quarter commencing after December 31, 2004, the last reported sale price of our common stock for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the preceding calendar quarter is greater than or equal to 120% of the applicable conversion price on such last trading day; (2) on or after January 1, 2020; (3) if we have called the Notes for redemption; or (4) during prescribed periods, upon the occurrence of specified corporate transactions or fundamental changes. On or after December 1, 2009, we may redeem for cash all or a portion of the Notes at a redemption price of 100% of the principal amount of the Notes plus accrued and unpaid interest, including contingent interest and additional interest, if any. Noteholders have the right to require us to repurchase all or a portion of their Notes for cash on December 1, 2009, December 1, 2014, and December 1, 2019 at a price equal to 100% of the principal amount of the Notes to be
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purchased plus accrued and unpaid interest, including contingent interest and additional interest, if any. As of March 31, 2008, none of the conditions for conversion of the Notes had occurred.
     The Notes are unsecured senior subordinated obligations and rank junior in right of payment to all of our existing and future senior indebtedness, equal in right of payment with all of our existing and future indebtedness or other obligations that are not, by their terms, either senior or subordinated to the Notes, including trade debt and other general unsecured obligations that do not constitute senior or subordinated indebtedness, and senior in right of payment to all of our future indebtedness that, by its terms, is subordinated to the Notes. There are no financial covenants in the Notes.
     Interest expense includes the amortization of debt issuance costs. We recorded $449,000 of interest expense on the Notes during each of the three-month periods ended March 31, 2008 and 2007 and $1.3 million during each of the nine-month periods ended March 31, 2008 and 2007.
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, share-based compensatory awards issued subsequent to the initial award to our employees and consultants are determined primarily on individual performance. Our share-based compensation plans with outstanding awards consist of our 1996 Stock Option Plan, our 2000 Nonstatutory Stock Option Plan, our 2001 Incentive Compensation Plan, and our 2001 Employee Stock Purchase Plan.
     Share-based compensation and the related tax benefit recognized in our consolidated statements of income for the three- and nine-month periods ended March 31, 2008 and 2007 were as follows (in thousands):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended	 	 	Nine Months Ended	 	
 	 	March 31,	 	 	March 31,	 	
 	 	2008	 	 	2007	 	 	2008	 	 	2007	 	
Cost of revenue	 	$	377	 	 	$	160	 	 	$	966	 	 	$	492	 	
Research and development	 	 	1,797	 	 	 	1,262	 	 	 	4,556	 	 	 	3,736	 	
Selling, general, and administrative	 	 	2,680	 	 	 	1,966	 	 	 	7,146	 	 	 	6,169	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	4,854	 	 	$	3,388	 	 	$	12,668	 	 	$	10,397	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Income tax benefit recorded on share-based compensation	 	$	1,255	 	 	$	896	 	 	$	4,628	 	 	$	2,775	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
     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, while the expected life of our options was estimated to be five years 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. Further, as required under SFAS 123R, 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 deferred stock unit 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.
     In accordance with SFAS 123R, we recognize tax benefit upon expensing certain share-based awards associated with our share-based compensation plans, including nonqualified stock options and deferred stock unit 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 SFAS 123R, we recognize tax
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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 SFAS 123R, 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. Under paragraph A94, footnote 82, of SFAS 123R, tax benefit associated with excess tax deduction creditable to additional paid-in capital is not recognized until the deduction reduces taxes payable. No tax benefit related to excess tax deductions from qualified stock options has been recognized during the nine-month period ended March 31, 2008.
     Historically, we have issued new shares in connection with our share-based compensation plans; however, 8,088,100 treasury shares were also available for issuance as of March 31, 2008. Any additional shares repurchased under our 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 Stock Option Plan, our 2000 Nonstatutory Stock Option Plan, and our 2001 Incentive Compensation Plan (the “Plans”). Under the Plans, 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% or 85% of the fair market value, respectively, on the date of grant.
     Options issued under the Plans generally vest 25% at the end of 12 months from the vesting commencement date and approximately 2% each month thereafter until fully vested at the end of 48 months from the vesting commencement date. Options not exercised ten years after the date of grant are cancelled.
     The following table summarizes stock option activity and weighted average exercise prices for the nine-month period ended March 31, 2008, and for options outstanding and options exercisable, the weighted average exercise prices and the aggregate intrinsic value as of March 31, 2008. The aggregate intrinsic value is based on the closing price of our common stock on March 28, 2008 of $23.54 and excludes outstanding stock options that were not in-the-money.
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Stock	 	Weighted	 	Aggregate	
 	 	Option	 	Average	 	Intrinsic	
 	 	Awards	 	Exercise	 	Value	
 	 	Outstanding	 	Price	 	(thousands)	
Balance at June 30, 2007	 	 	4,640,115	 	 	$	19.18	 	 	 	 	 	
Granted	 	 	990,095	 	 	$	38.37	 	 	 	 	 	
Exercised	 	 	(1,533,785	)	 	$	14.41	 	 	 	 	 	
Forfeited and expired	 	 	(162,211	)	 	$	23.04	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at March 31, 2008	 	 	3,934,214	 	 	$	25.71	 	 	$	12,310	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Exercisable	 	 	1,559,360	 	 	$	18.34	 	 	$	10,702	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Deferred Stock Units
     Our 2001 Incentive Compensation Plan (“2001 Plan”) provides for the grant of deferred stock unit awards (“DSUs”) 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 DSU awards in January 2006.
     DSUs granted under the 2001 Plan generally vest 25% at the end of 12 months from the vesting commencement date and at a rate of approximately 6% each quarter thereafter until fully vested at the end of four years from the vesting commencement date. Delivery of shares under the plan takes place quarterly for all DSUs vested as of the scheduled delivery dates. Until delivery of shares, the grantee has no rights as a stockholder.
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     An election to defer delivery of the underlying shares for unvested DSU awards can be made 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.
     The following table summarizes DSU activity, including DSUs granted, delivered, and forfeited during the nine-month period ended March 31, 2008, and the balance and aggregate intrinsic value of DSUs as of March 31, 2008. The aggregate intrinsic value is based on the closing price of our common stock on March 28, 2008 of $23.54.
 	 	 	 	 	 	 	 	 	
 	 	Deferred	 	Aggregate	
 	 	Stock Unit	 	Intrinsic	
 	 	Awards	 	Value	
 	 	Outstanding	 	(thousands)	
Balance at June 30, 2007	 	 	257,225	 	 	 	 	 	
Granted	 	 	201,845	 	 	 	 	 	
Delivered	 	 	(49,151	)	 	 	 	 	
Forfeited	 	 	(30,708	)	 	 	 	 	
 	 	 	 	 	 	 	 	 	
Balance at March 31, 2008	 	 	379,211	 	 	$	8,927	 	
 	 	 	 	 	 	 	 	 	
Employee Stock Purchase Plan
     Our 2001 Employee Stock Purchase Plan (“ESPP”) became effective on January 29, 2002, the effective date of the registration statement for our initial public offering. The 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 fair market value (“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 on the last days of June and December within the offering period. Under the terms of the plan, 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 offering period of up to two years will commence.
     The following table summarizes the shares purchased, weighted average purchase price, cash received, and the aggregate intrinsic value for ESPP purchases during the nine-month period ended March 31, 2008 and 2007 (in thousands, except for shares purchased and weighted average purchase price):
 	 	 	 	 	 	 	 	 	
 	 	Nine Months Ended
March 31,	
 	 	2008	 	2007	
Shares purchased	 	 	38,898	 	 	 	105,004	 	
Weighted average purchase price	 	$	31.21	 	 	$	17.99	 	
Cash received	 	$	1,214	 	 	$	1,888	 	
Aggregate intrinsic value	 	$	387	 	 	$	794	 	
     As a result of our fiscal 2007 ending on June 30, 2007, the nine-month period ended March 31, 2008 includes only one purchase date and the nine-month period ended March 31, 2007 includes two purchase dates.
9. Gain from Settlement of Debt and Impairment of Investment
Gain from Settlement of Debt
     In fiscal 1998, we entered into agreements with National Semiconductor Corporation (“National”) with respect to the formation of a development-stage company, Foveonics, Inc. (now known as Foveon, Inc. and referred to herein as Foveon), which was formed to develop and produce digital imaging products. We contributed technology for which we had no accounting basis for a 30% interest in Foveon in the form of voting convertible preferred stock. Under the agreements, we had the right to acquire additional shares of convertible preferred stock at a specified price in exchange for a limited-recourse loan from National. National loaned us $1.5 million under a limited-recourse note, which we utilized to purchase 900,000 Series A preferred shares of Foveon, which increased our ownership interest in Foveon to 43%.
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     In fiscal 1998, we recorded our share of losses incurred by Foveon under the equity accounting method on the basis of our proportionate ownership of voting convertible preferred stock and reduced the carrying value of our equity investment to zero as our share of losses incurred by Foveon exceeded the carrying value of our investment. The $1.5 million note to National plus accrued interest of $1.2 million came due in August 2007, and, in accordance with the security agreement, we surrendered our 900,000 Series A preferred shares securing the note to National in full settlement of the principal and accrued interest. Consequently, we recognized a one-time non-operating gain upon settlement of debt in the amount of $2.7 million in the first quarter of fiscal 2008.
Impairment of Investment
     In fiscal 2005, we participated in an equity financing, receiving 3,943,217 shares of Foveon Series E preferred stock for a cash investment of $4.0 million. The Series E preferred shares are convertible into common shares on a one-for-one basis at any time at our option, upon a firm underwritten public offering of Foveon common stock of not less than $20 million at a price per share of not less than three times the original issue price, or upon the written agreement of the holders of at least 60% of the outstanding preferred shares voting as a single class. The Series E preferred shares are also entitled to a liquidation preference up to two times the original issue price over the earlier non-Series E preferred shares and common shares. We are not obligated to provide additional funding to Foveon. We accounted for our Series E preferred stock investment in Foveon under the cost method in accordance with APB Opinion No. 18 and EITF Issues No. 02-14 and No. 03-1 because the investment is not “in-substance common stock.”
     In fiscal 2007, Foveon completed a Series F preferred financing receiving net proceeds of $13.8 million. The Series F preferred shareholders are entitled to a liquidation preference over the earlier non-Series F preferred shares and common shares.
     In the first quarter of fiscal 2008, we determined there was an other-than-temporary impairment of the carrying value of our investment in Foveon, due to liquidity visibility and liquidation preferences for the most recent preferred equity round. Assuming book value equals fair value of certain of Foveon’s assets such as cash, accounts receivable, and accounts payable and no value for other tangible and intangible assets, a hypothetical liquidation of Foveon at September 30, 2007 would benefit only Series F preferred shareholders. Consequently, we recognized a $4.0 million other-than-temporary impairment charge.
10. Income Taxes
     We account for income taxes under the asset and liability method in accordance with SFAS No. 109 “Accounting for Income Taxes.” 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.
     The provision for income taxes of $3.0 million and $2.9 million for the three-month period ended March 31, 2008 and 2007, respectively, represented estimated federal, foreign, and state taxes. The effective tax rate for the three-month period ended March 31, 2008 was 50.2% and diverged from the combined federal and state statutory rate primarily due to the valuation allowance established against the deferred tax asset associated with the impairment of certain investments, partially offset by increased foreign income taxed at lower tax rates, accounting for share-based compensation, the benefit of research tax credits, and the impact of tax-exempt interest income. The effective tax rate for the three-month period ended March 31, 2007 was 34.1% and diverged from the combined federal and state statutory rate primarily due to the benefit of research tax credits generated from the retroactive extension of the federal research credit signed into law in December 2006, the net release of contingency reserves, and the impact of tax-exempt interest income, partially offset by the impact of accounting for share-based compensation and foreign withholding taxes.
     The income tax provision of $13.6 million and $10.0 million for the nine-month period ended March 31, 2008 and 2007, respectively, represented estimated federal, foreign, and state taxes. The effective tax rate for the nine-month period ended March 31, 2008 was 32.3% and diverged from the combined federal and state statutory rate primarily due to increased foreign income taxed at lower tax rates, accounting for share-based compensation, the benefit of research tax credits, and the impact of tax-exempt interest income, partially offset by foreign withholding taxes and the valuation allowance established against the deferred tax asset associated with the impairment of certain investments. The effective tax rate for the nine-month period ended March 31, 2007 was 34.3% and diverged from the combined federal and state statutory rate primarily due to the benefit of the research tax credits generated from the retroactive extension of the federal research credit signed into law in December 2006, the net release of contingency
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reserves, and the impact of tax-exempt interest income, partially offset by the impact of accounting for share-based compensation and foreign withholding taxes.
     The federal research tax credit expired effective December 31, 2007. Our estimated annual effective tax rate, which forms the basis for our quarterly and year-to-date effective tax rates includes the benefit of the federal research credit for that portion of our fiscal year in which the federal research credit was effective. If the federal research tax credit is retroactively extended from the expiration date, as has occurred in the past, our tax rate in the quarter in which the retroactive extension is effective will be favorably impacted.
Unrecognized Tax Benefits
     We adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109” (“FIN 48”) at the beginning of the first quarter of fiscal 2008. In connection with our adoption of FIN 48, we did not recognize a cumulative effect adjustment. Historically, we have classified unrecognized tax benefits as current income taxes payable; however, consistent with the provisions of FIN 48, as of March 31, 2008 our gross unrecognized tax benefits of $12.2 million, which includes $3.8 million of gross unrecognized tax benefits recognized during the nine-month period ended March 31, 2008, and accrued interest and penalties expense of $761,000 are classified as non-current income taxes payable and are included in other liabilities on our balance sheet all of which, if recognized, would reduce our effective tax rate. No unrecognized tax benefit is expected to be paid within one year, nor can we make a reliable estimate when cash settlement with a taxing authority may occur. Any prospective adjustments to our unrecognized tax benefits will be recorded as an increase or decrease to income tax expense and cause a corresponding change to our effective tax rate. Accordingly, our effective tax rate could fluctuate materially from period to period.
Classification of Interest and Penalties
     Under FIN 48, our policy to classify interest expense and penalties, if any, as components of income tax expense did not change. An additional $269,000 of interest and penalties has been accrued during the nine-month period ended March 31, 2008.
Tax Years and Examination
     Currently, we are required to file income tax returns in the United States, California, and the foreign tax jurisdictions in which we operate. The fiscal years that remain subject to examination by these jurisdictions are 2003 and onward. On September 10, 2007, we were notified by the California Franchise Tax Board that our fiscal year 2003 through 2005 returns were subject to audit. The audit is ongoing and no proposed assessment has been received.
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 products market. The PC market accounted for 82% and 83% of net revenue for the three-month period ended March 31, 2008 and 2007, respectively, and 79% and 83% of net revenue for the nine-month period ended March 31, 2008 and 2007, respectively.
     The following is a summary of net revenue from sales to unaffiliated customers within geographic areas based on the customer location (in thousands):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended	 	 	Nine Months Ended	 	
 	 	March 31,	 	 	March 31,	 	
 	 	2008	 	 	2007	 	 	2008	 	 	2007	 	
China	 	$	53,829	 	 	$	45,762	 	 	$	181,955	 	 	$	159,791	 	
Taiwan	 	 	10,710	 	 	 	13,511	 	 	 	44,592	 	 	 	19,727	 	
Korea	 	 	8,200	 	 	 	1,258	 	 	 	21,970	 	 	 	3,008	 	
Other	 	 	6,122	 	 	 	3,778	 	 	 	15,686	 	 	 	12,685	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	$	78,861	 	 	$	64,309	 	 	$	264,203	 	 	$	195,211	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
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Major customer net revenue data as a percentage of net revenue:
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended	 	Nine Months Ended	
 	 	March 31,	 	March 31,	
 	 	2008	 	2007	 	2008	 	2007	
Customer A	 	 	10	%	 	 	*	 	 	 	*	 	 	 	11	%	
Customer B	 	 	*	 	 	 	14	%	 	 	10	%	 	 	12	%	
Customer C	 	 	*	 	 	 	15	%	 	 	*	 	 	 	15	%	
Customer D	 	 	*	 	 	 	10	%	 	 	*	 	 	 	*	 	

*	 	Less than 10%	
Major customer accounts receivable as a percentage of accounts receivable:
 	 	 	 	 	 	 	 	 	
 	 	As of	 	As of	
 	 	March 31,	 	June 30,	
 	 	2008	 	2007	
Customer A	 	 	13	%	 	 	12	%	
Customer B	 	 	*	 	 	 	17	%	

*	 	Less than 10%	
12. Comprehensive Income
     Our comprehensive income consists of net income plus the effect of unrealized gains and losses on our short-term investments due to reductions in market value of certain of our auction rate securities and interest rate fluctuations on our fixed interest rate investments. We recognize remeasurement adjustments in our consolidated statement of income as the U.S. dollar is the functional currency of our foreign entities.
     The following is a reconciliation of our net income to our comprehensive income for the three- and nine-month periods ended March 31, 2008 and 2007 (in thousands):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended	 	 	Nine Months Ended	 	
 	 	March 31,	 	 	March 31,	 	
 	 	2008	 	 	2007	 	 	2008	 	 	2007	 	
Net Income	 	$	3,008	 	 	$	5,635	 	 	$	28,466	 	 	$	19,103	 	
Net unrealized gain (loss) on available-for-sale investments, net of tax	 	 	(834	)	 	 	57	 	 	 	(4,652	)	 	 	354	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Total comprehensive income	 	$	2,174	 	 	$	5,692	 	 	$	23,814	 	 	$	19,457	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
     Included in our net unrealized gain (loss) on certain available-for-sale investments we recorded a net pre-tax temporary impairment charge for investments in auction rate securities that failed to settle in auctions in the amounts of $1.1 million and $5.1 million during the three and nine–month periods ended March 31, 2008, respectively, which were partially offset by gains in certain fixed rate investments. When evaluating our investments for possible impairment, we review factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer, and our ability and intent to hold the investment for a period of time which may be sufficient for anticipated recovery in market value. At the present time, the primary issue affecting all of our ARS investments is that of liquidity. We have accounted for certain of our failed ARS investments as short-term as we anticipate those particular ARS markets will recover or be restructured without loss to us in the next 12 months. Based on our ability to access our cash and other short-term investments, our expected operating cash flows, and our other sources of cash, we believe we have the ability to hold these investments until the value recovers or the investments mature. We will continue to evaluate our accounting for these investments quarterly.
13. Restructuring Charge
     We incurred a restructuring charge of $915,000 during the second quarter of fiscal 2007 in connection with the closure of our United Kingdom office as part of our strategic efforts to realign our development capabilities to meet the needs of our Asia Pacific customer base. We accounted for our restructuring charge in accordance with SFAS
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No.146, “Accounting for Costs Associated with Exit or Disposal Activities.” Included in the restructuring charge were personnel costs, consisting of severance and relocation of $526,000, a lease reserve of $287,000, net of estimated sublease income, and a non-cash impairment of property and equipment of $102,000. All costs associated with the restructuring were settled in fiscal 2007.
14. Recent Accounting Pronouncements
     In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in U.S. generally accepted accounting principles, and expands disclosure about fair value measurements. SFAS 157 applies under other accounting standards that require or permit fair value measurements. Accordingly, SFAS 157 does not require any new fair value measurement. SFAS 157 is effective beginning in our first quarter of fiscal 2009. However, the effective date of SFAS 157 as it relates to fair value measurement requirements for nonfinancial assets and liabilities that are not remeasured at fair value on a recurring basis is expected to be deferred to our first quarter of fiscal 2010. We do not expect the adoption of SFAS 157 to have a material impact on our financial position, results of operations, or cash flows.
     In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115,” (“SFAS 159”). SFAS 159 expands the use of fair value accounting to many financial instruments and certain other items. The fair value option is irrevocable and generally made on an instrument-by-instrument basis, even if a company has similar instruments that it elects not to measure based on fair value. Subsequent unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. SFAS 159 is effective beginning in our first quarter of fiscal 2009. We do not expect the adoption of SFAS 159 to have a material impact on our financial position, results of operations, or cash flows.
15. Subsequent Events
     Subsequent to March 31, 2008 and through May 6, 2008, we repurchased 576,000 shares of our common stock at an aggregate cost of $20.6 million, or an average cost of $35.79 per share.
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Item 2. 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 condensed consolidated financial statements and notes in Item 1 and with our audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended June 30, 2007.
     In addition to the historical information contained in this report, this report contains forward-looking statements, including those related to market penetration and market leadership in the notebook and digital lifestyle products markets; competition in the notebook and digital lifestyle products markets; revenue from the notebook and digital lifestyle products markets; growth rates of these markets; average selling prices; product design mix; manufacturing costs; cost-improvement programs; gross margins; customer relationships; research and development expenses; selling, general, and administrative expenses; legal proceedings; ability to access our cash and short-term investments; expected operating cash flows; timing of the recovery or restructuring of the auction rate securities markets; and ability to hold our auction rate security investments to recovery or maturity. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially.
     We caution that these statements are qualified by various factors that may affect future results, including the following: changes in the market for our products and the success of our customers’ products; our success in moving products from the design phase into the manufacturing phase; changes in the competitive environment; changes in the general economic environment; infringement claims; warranty obligations related to product failures; the failure of key technologies to deliver commercially acceptable performance; our dependence on certain key markets; penetration into new markets; the absence of both long-term purchase and supply commitments; and our lengthy development and product acceptance cycles. This report should be read in conjunction with our Annual Report on Form 10-K for the year ended June 30, 2007, including particularly Item 1A Risk Factors.
Overview
     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, entertainment, communications, and other electronic devices. We believe we are the market leader in providing interface solutions for notebook computers. We believe our market leadership results from the combination of our customer focus, the strength of our intellectual property, and our engineering know-how, which allows us to design products that meet the demanding design specifications of original equipment manufacturers, or OEMs, and original design manufacturers, or ODMs.
     Our manufacturing operations are based on a virtual manufacturing model in which we outsource all of our production requirements, eliminating the need for significant capital expenditures for manufacturing facilities and equipment and allowing us to reduce our investment in inventories. This approach requires us to work closely with our manufacturing subcontractors to ensure adequate production capacity to meet our forecasted production requirements. We provide our manufacturing subcontractors with six-month rolling forecasts and generally 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 manufacturing subcontractors. Currently, we use two third-party manufacturers to provide our proprietary capacitive based ASICs, and 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 and delivery of our products, including materials, direct manufacturing, assembly, test and freight costs paid to our suppliers and manufacturing overhead costs related to our indirect manufacturing personnel. Additionally, all warranty costs and any inventory provisions or write-downs are charged to cost of revenue.
     Our gross margin generally reflects the combination of the added value we bring to our customers’ products in meeting their custom design requirements and our ongoing cost-improvement programs. These cost-improvement programs include reducing materials and component costs, assembly and test costs, and implementing design and process improvements. As each custom-designed module we sell utilizes our capacitive sensing technology in a design that is generally unique or specific to a customer’s application, gross margin varies on a product-by-product basis. Generally, our products that contain a higher percentage of third-party content may have lower gross margins. Our newly introduced products may have lower gross margins than our more mature products that have realized greater benefits associated with our ongoing cost-improvement programs. As a result, new product introductions may initially negatively impact our gross margins.
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     Our research and development expenses include costs for supplies and materials related to product development, as well as the engineering costs incurred to design interface solutions for customers prior to and after the customers’ commitment to incorporate those solutions into their products. These expenses have generally increased, reflecting our expanding business levels and our continuing commitment to the technological and design innovation required in our existing markets and to adapt our existing technologies or develop new technologies for new markets.
     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, anticipated growth in our existing markets, and penetration into new markets.
Critical Accounting Policies and Estimates
     The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, cost of revenue, expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to allowances for returns and doubtful accounts, cost of revenue, inventories, product warranty, share-based compensation costs, provision for income taxes, fair value of investments, income taxes payable, 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 a company’s financial condition and results of operations and those that require management’s most difficult, subjective, or complex judgments, often as a result of the need to make estimates about matters that are inherently uncertain when estimated. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
Investments
     We account for investment securities under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 115, Accounting for Certain Investments in Debt and Equity Securities (“SFAS 115”) and related interpretations and staff positions. SFAS 115 requires us to record available-for-sale securities at fair value, with unrealized gains and losses being reported as a component of other comprehensive income. When readily determinable fair values are not available, we use judgment to estimate the fair value of our investments based on observable market inputs or, if no observable market inputs are available, unobservable market inputs, or a combination thereof. 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 auction rate securities (“ARS”), the probability of a successful auction in a future period. 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; changes in expected cash flows; and our ability and intent to hold the investment for a period of time which may be sufficient for anticipated recovery in market value. Temporary declines in fair value are recorded as charges to accumulated other comprehensive income, while other-than-temporary declines in fair value are recorded to earnings.
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. We accrue for estimated sales returns and other allowances, based on historical experience, at the time we recognize revenue, which is typically upon shipment. We record contract revenue for research and development as we provide the services under the terms of the contract. We recognize non-refundable contract fees for which no further performance obligations exist and for which there is no continuing involvement by us on the earlier of when the payments are received or when collection is assured.
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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 estimates of future demand and market conditions. If actual market conditions are less favorable than our estimates, additional inventory reserves may be required. The following factors influence our estimates: changes to or cancellations of customer orders; unexpected declines 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 manufacturing subcontractors when a customer’s delivery schedule is delayed or a customer’s order is cancelled. In those circumstances in which our customer has cancelled its order and we purchase inventory from our manufacturing subcontractors, 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 is not subsequently written up.
Share-Based Compensation Costs
     We account for employee share-based compensation costs in accordance with SFAS No. 123R, “Share-Based Payment” and apply the provisions of Staff Accounting Bulletin No. 107, “Share-Based Payment” (“SAB 107”). 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, while the expected life for our options was estimated to be five years based on historical trends since our initial public offering. Further, as required under SFAS 123R, we estimate forfeitures for share-based awards that are not expected to vest. 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 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 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 that have no vesting restrictions and are 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. 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.
     The application of the principles under SFAS 123R and SAB 107 is subject to interpretation. 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 adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109” (“FIN 48”) at the beginning of the first quarter of fiscal 2008. FIN 48 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with FIN 48. The first step is to determine when 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 results of operations and financial condition. 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.
     In accordance with SFAS 123R, we recognize tax benefit upon expensing certain share-based awards associated with our share-based compensation plans, including nonqualified stock options and deferred stock unit 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 SFAS 123R, 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 SFAS 123R, 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.
Results of Operations
Three- month period ended March 31, 2008 compared with the three- month period ended March 31, 2007
Net Revenue.
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended March 31,	 	
(in thousands)	 	2008	 	 	2007	 	 	$ Change	 	 	% Change	 	
PC applications	 	$	64,235	 	 	$	53,446	 	 	$	10,789	 	 	 	20.2	%	
% of net revenue	 	 	81.5	%	 	 	83.1	%	 	 	 	 	 	 	 	 	
Digital lifestyle product applications	 	 	14,626	 	 	 	10,863	 	 	 	3,763	 	 	 	34.6	%	
% of net revenue	 	 	18.5	%	 	 	16.9	%	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net revenue	 	$	78,861	 	 	$	64,309	 	 	$	14,552	 	 	 	22.6	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
     For the quarter ended March 31, 2008, we generated $64.2 million, or 81.5%, of net revenue from the personal computing (“PC”) market, and we generated $14.6 million, or 18.5%, of net revenue from the digital lifestyle products market. Net revenue was $78.9 million for the quarter ended March 31, 2008 compared with $64.3 million for the quarter ended March 31, 2007, an increase of $14.6 million, or 22.6%. The increase in net revenue for the quarter ended March 31, 2008 was attributable to a $10.8 million, or 20.2%, increase in PC applications net revenue and a $3.8 million, or 34.6%, increase in digital lifestyle product applications net revenue. The increase in PC applications net revenue was primarily attributable to notebook industry growth, continuing adoption by notebook OEMs of our capacitive interface multimedia controls, and increased penetration in PC peripherals. Digital lifestyle product applications net revenue growth resulted from both industry growth and market share gains. The overall increase in net revenue was primarily attributable to a 33.9% increase in unit shipments, primarily reflecting industry growth and broader utilization and adoption of our capacitive sensing technology within the markets we serve. Based on industry estimates, notebook market growth is anticipated to be approximately 26% in 2008, while digital music player market growth is anticipated to be approximately 12% in 2008. The increase in unit shipments was partially offset by a lower-
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priced product mix, which included both our custom modules and OneTouch ASIC shipments, and general competitive pricing pressure and resulted in an overall 8% reduction in the unit price of our product mix when compared with the corresponding quarter.
Gross Margin.
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended March 31,	
(in thousands)	 	2008	 	2007	 	$ Change	 	% Change	
Gross Margin	 	$	32,173	 	 	$	25,147	 	 	$	7,026	 	 	 	27.9	%	
% of net revenue	 	 	40.8	%	 	 	39.1	%	 	 	 	 	 	 	 	 	
     Gross margin as a percentage of net revenue was 40.8%, or $32.2 million, for the quarter ended March 31, 2008 compared with 39.1%, or $25.1 million, for the quarter ended March 31, 2007. As each custom-designed module we sell utilizes our capacitive sensing technology in a design that is generally unique or specific to a 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 OneTouch offering, which are independent of the vertical markets that our products serve. The increase in gross margin as a percentage of net revenue primarily reflected a higher margin product mix and lower manufacturing costs resulting from our continuing design and process improvement programs and lower materials, assembly, and test costs, partially offset by lower selling prices resulting from general competitive pricing pressure.
Operating Expenses.
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended March 31,	 	
(in thousands)	 	2008	 	 	2007	 	 	$ Change	 	 	% Change	 	
Research and development expenses	 	$	13,560	 	 	$	9,485	 	 	$	4,075	 	 	 	43.0	%	
% of net revenue	 	 	17.2	%	 	 	14.8	%	 	 	 	 	 	 	 	 	
Selling, general, and administrative expenses	 	 	12,181	 	 	 	9,339	 	 	 	2,842	 	 	 	30.4	%	
% of net revenue	 	 	15.4	%	 	 	14.5	%	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating expenses	 	$	25,741	 	 	$	18,824	 	 	$	6,917	 	 	 	36.7	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
% of net revenue	 	 	32.6	%	 	 	29.3	%	 	 	 	 	 	 	 	 	
     Research and Development Expenses. Research and development expenses increased as a percentage of net revenue to 17.2% from 14.7%, while the cost of research and development activities increased $4.1 million, or 43.0%, to $13.6 million for the three-month period ended March 31, 2008 compared with $9.5 million for the three-month period ended March 31, 2007. The increase in research and development expenses primarily reflected a $2.3 million increase in employee related costs, resulting from additional staffing, employee benefits costs, share-based compensation costs, incentive compensation costs, and recruiting costs; a $807,000 increase in project expenses, including materials and related costs; a $381,000 increase in infrastructure and support costs; a $255,000 increase in outside consulting services; and a $259,000 increase in travel related costs. Non-cash share-based compensation costs included in research and development expenses were $1.8 million, or 2.3% of net revenue, and $1.3 million, or 2.0% of net revenue, for the three—month period ended March 31, 2008 and 2007, respectively.
     Selling, General, and Administrative Expenses. Selling, general, and administrative expenses increased as a percentage of net revenue to 15.4% from 14.5%, while the cost of selling, general, and administrative activities increased $2.8 million, or 30.4%, to $12.2 million for the three-month period ended March 31, 2008 compared with $9.3 million for the three-month period ended March 31, 2007. The increase in selling, general, and administrative expenses primarily reflected a $1.8 million increase in employee related costs, resulting from additional staffing, employee benefits costs, share-based compensation costs, incentive compensation costs, and recruiting costs; a $566,000 increase in outside consulting services and commission costs; a $283,000 increase in travel related costs; and a $221,000 increase in infrastructure and support costs. Non-cash share-based compensation costs included in selling, general, and administrative expenses were $2.7 million, or 3.4% of net revenue, and $2.0 million, or 3.1% of net revenue, for the three-month period ended March 31, 2008 and 2007, respectively.
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Income from Operations.
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended March 31,	 	
(in thousands)	 	2008	 	 	2007	 	 	$ Change	 	 	% Change	 	
Income from operations	 	$	6,432	 	 	$	6,323	 	 	$	109	 	 	 	1.7	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
% of net revenue	 	 	8.2	%	 	 	9.8	%	 	 	 	 	 	 	 	 	
     We generated operating income of $6.4 million, or 8.2% of net revenue, for the three—month period ended March 31, 2008 compared with $6.3 million, or 9.8% of net revenue, for the three-month period ended March 31, 2007. The increase in operating income primarily resulted from the 22.6% increase in net revenue and a 170 basis point increase in the gross margin percentage, partially offset by a 36.7% increase in operating expenses.
Non-Operating Income/(Loss).
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended March 31,	 	
(in thousands)	 	2008	 	 	2007	 	 	$ Change	 	 	% Change	 	
Interest income	 	$	2,293	 	 	$	2,713	 	 	$	(420	)	 	 	-15.5	%	
% of net revenue	 	 	2.9	%	 	 	4.2	%	 	 	 	 	 	 	 	 	
Interest expense	 	 	(449	)	 	 	(488	)	 	 	39	 	 	 	-8.0	%	
% of net revenue	 	 	-0.6	%	 	 	-0.8	%	 	 	 	 	 	 	 	 	
Impairment of auction rate securities investments	 	 	(2,237	)	 	 	—	 	 	 	(2,237	)	 	 	—	 	
% of net revenue	 	 	-2.8	%	 	 	0.0	%	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net non-operating income/ (loss)	 	$	(393	)	 	$	2,225	 	 	$	(2,618	)	 	 	-117.7	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
% of net revenue	 	 	-0.5	%	 	 	3.5	%	 	 	 	 	 	 	 	 	
     Interest Income. Interest income was $2.3 million for the three-month period ended March 31, 2008 compared with $2.7 million for the three-month period ended March 31, 2007. The $420,000 decrease in interest income resulted from a decrease in average invested cash balances as we used $109.4 million during the quarter to purchase 4.0 million treasury shares under our common stock repurchase program.
     Interest Expense. Interest expense was $449,000 for the three-month period ended March 31, 2008, slightly down compared with interest expense of $488,000 for the three-month period ended March 31, 2007. Interest expense primarily reflected the combination of interest expense and amortization of debt issuance costs related to our convertible senior subordinated notes issued in December 2004. The annual debt service cost on the notes is approximately $938,000, which excludes $860,000 of amortization of debt issuance costs.
     Impairment of auction rate securities investments. In the third quarter of fiscal 2008, we determined there was an other-than-temporary impairment of the carrying value of certain of our investments in ARS, which have continued to fail to clear at auction since August 2008. Accordingly, we reduced the carrying value of these ARS investments by $2.2 million through an other-than-temporary impairment charge to income, resulting in a new carrying value of $2.8 million.
Provision for Income Taxes.
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended March 31,	
(in thousands)	 	2008	 	2007	 	$ Change	 	% Change	
Income before provision for income taxes	 	$	6,039	 	 	$	8,548	 	 	$	(2,509	)	 	 	-29.4	%	
Provision for income taxes	 	 	3,031	 	 	 	2,913	 	 	 	118	 	 	 	4.1	%	
% of income before provision for income taxes	 	 	50.2	%	 	 	34.1	%	 	 	 	 	 	 	 	 	
     The provision for income taxes for the three-month period ended March 31, 2008 was $3.0 million compared with $2.9 million for the three-month period ended March 31, 2007, reflecting a higher effective tax rate partially offset by lower pre-tax profits. The provision for income taxes represents estimated federal, foreign, and state taxes for the
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three-month period ended March 31, 2008 and 2007. The effective tax rate for the three-month period ended March 31, 2008 was 50.2% and diverged from the combined federal and state statutory rate primarily as a result of the valuation allowance established against the deferred tax asset associated with the impairment of certain investments, partially offset by increased foreign income taxed at lower tax rates, the impact of accounting for share-based compensation, the benefit of research tax credits, and the impact of tax-exempt interest income. The effective tax rate for the three-month period ended March 31, 2007 was 34.1% and diverged from the combined federal and state statutory rate primarily because of the benefit of research tax credits generated from the retroactive extension of the federal research credit signed into law in December 2006, the net release of contingency reserves, and the impact of tax-exempt interest income, partially offset by foreign withholding taxes.
     In accordance with SFAS 123R, we recognize tax benefit upon expensing certain share-based awards associated with our share-based compensation plans, including nonqualified stock options and deferred stock unit 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 SFAS 123R, 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 SFAS 123R, the tax benefit is recorded directly to additional paid-in capital. Tax benefit associated with total share-based compensation was approximately $1.3 million and $0.9 million for the three-month period ended March 31, 2008 and 2007, respectively. Excluding the impact of share-based compensation and the related tax benefit, the effective tax rate for the three-month period ended March 31, 2008 and 2007 would have been 39.3% and 31.9%, respectively. 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 recorded directly to additional paid-in capital, our future quarterly and annual effective tax rates will be subject to greater volatility and, consequently, our ability to reasonably estimate our future quarterly and annual effective tax rates is greatly diminished.
Nine- month period ended March 31, 2008 compared with the nine- month period ended March 31, 2007
     As the nine-month period ended March 31, 2008 was a 39-week period and the nine-month period ended March 31, 2007 was a 40-week period, net revenue during the nine-month period ended March 31, 2007 reflected an additional week of revenue activity, operating expenses, and non-operating income/(loss) activity.
Net Revenue.
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Nine Months Ended March 31,	 	
(in thousands)	 	2008	 	 	2007	 	 	$ Change	 	 	% Change	 	
PC applications	 	$	207,304	 	 	$	162,722	 	 	$	44,582	 	 	 	27.4	%	
% of net revenue	 	 	78.5	%	 	 	83.4	%	 	 	 	 	 	 	 	 	
Digital lifestyle product applications	 	 	56,899	 	 	 	32,489	 	 	 	24,410	 	 	 	75.1	%	
% of net revenue	 	 	21.5	%	 	 	16.6	%	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net revenue	 	$	264,203	 	 	$	195,211	 	 	$	68,992	 	 	 	35.3	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
     For the nine-month period ended March 31, 2008, we generated $207.3 million, or 78.5%, of net revenue from the PC market, and we generated $56.9 million, or 21.5%, of net revenue from the digital lifestyle products market. Net revenue was $264.2 million for the nine-month period ended March 31, 2008 compared with $195.2 million for the nine-month period ended March 31, 2007, an increase of $69.0 million, or 35.3%. The increase in net revenue for the nine-month period ended March 31, 2008 was attributable to a $44.6 million, or 27.4%, increase in PC applications net revenue and a $24.4 million, or 75.1%, increase in digital lifestyle product applications net revenue. The increase in PC applications net revenue was primarily attributable to notebook industry growth, continuing adoption by notebook OEMs of our capacitive interface multimedia controls, and increased penetration in PC peripherals. Digital lifestyle product applications net revenue growth resulted from both industry growth and market share gains. The overall increase in net revenue was primarily attributable to a 50.7% increase in unit shipments, primarily reflecting industry growth and broader utilization and adoption of our capacitive sensing technology within the markets we serve. Based on industry estimates, notebook market growth is anticipated to be approximately 26% in 2008, while digital music player market growth is anticipated to be approximately 12% in 2008. The increase in unit shipments was partially
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offset by a lower-priced product mix, which included both our custom modules and OneTouch ASIC shipments, and general competitive pricing pressure and resulted in an overall 10% reduction in the unit price of our product mix when compared with the corresponding period.
Gross Margin.
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Nine Months Ended March 31,	
(in thousands)	 	2008	 	2007	 	$ Change	 	% Change	
Gross Margin	 	$	108,682	 	 	$	77,933	 	 	$	30,749	 	 	 	39.5	%	
% of net revenue	 	 	41.1	%	 	 	39.9	%	 	 	 	 	 	 	 	 	
     Gross margin as a percentage of net revenue was 41.1%, or $108.7 million, for the nine-month period ended March 31, 2008 compared with 39.9%, or $77.9 million, for the nine-month period ended March 31, 2007. As each custom-designed module we sell utilizes our capacitive sensing technology in a design that is generally unique or specific to a 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 OneTouch offering, which are independent of the vertical markets that our products serve. The increase in gross margin as a percentage of net revenue primarily reflected a higher margin product mix and lower manufacturing costs resulting from our continuing design and process improvement programs and lower materials, assembly, and test costs, partially offset by lower selling prices resulting from general competitive pricing pressure.
Operating Expenses.
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Nine Months Ended March 31,	 	
(in thousands)	 	2008	 	 	2007	 	 	$ Change	 	 	% Change	 	
Research and development expenses	 	$	35,655	 	 	$	28,631	 	 	$	7,024	 	 	 	24.5	%	
% of net revenue	 	 	13.5	%	 	 	14.7	%	 	 	 	 	 	 	 	 	
Selling, general, and administrative expenses	 	 	34,346	 	 	 	26,067	 	 	 	8,279	 	 	 	31.8	%	
% of net revenue	 	 	13.0	%	 	 	13.4	%	 	 	 	 	 	 	 	 	
Restructuring charge	 	 	—	 	 	 	915	 	 	 	(915	)	 	 	-100.0	%	
% of net revenue	 	 	0.0	%	 	 	0.5	%	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating expenses	 	$	70,001	 	 	$	55,613	 	 	$	14,388	 	 	 	25.9	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
% of net revenue	 	 	26.5	%	 	 	28.5	%	 	 	 	 	 	 	 	 	
     Research and Development Expenses. Research and development expenses decreased as a percentage of net revenue to 13.5% from 14.7%, while the cost of research and development activities increased $7.0 million, or 24.5%, to $35.7 million for the nine-month period ended March 31, 2008 compared with $28.6 million for the nine-month period ended March 31, 2007. The increase in research and development expenses primarily reflected a $4.0 million increase in employee related costs, resulting from additional staffing, increased base compensation related to our annual performance review process, employee benefits costs, share-based compensation costs, incentive compensation costs, and recruiting costs; a $1.4 million increase in project expenses, including materials and related costs; a $881,000 increase in infrastructure and support costs; a $352,000 increase in travel and related costs; and a $243,000 increase in outside consulting services costs. Non-cash share-based compensation costs included in research and development expenses were $4.6 million, or 1.7% of net revenue, and $3.7 million, or 1.9% of net revenue, for the nine-month period ended March 31, 2008 and 2007, respectively.
     Selling, General, and Administrative Expenses. Selling, general, and administrative expenses decreased as a percentage of net revenue to 13.0% from 13.4%, while the cost of selling, general, and administrative activities increased $8.3 million, or 31.8%, to $34.3 million for the nine-month period ended March 31, 2008 compared with $26.1 million for the nine-month period ended March 31, 2007. The increase in selling, general, and administrative expenses primarily reflected a $4.1 million increase in employee related costs, resulting from additional staffing, increased base compensation related to our annual performance review process, employee benefits costs, share-based compensation costs, incentive compensation costs, and recruiting costs; a $2.4 million increase in outside consulting services and commission costs; a $1.0 million increase in travel related costs; and a $356,000 increase in legal and accounting costs. Non-cash share-based compensation costs included in selling, general, and administrative expenses
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were $7.1 million, or 2.7% of net revenue, and $6.2 million, or 3.2% of net revenue, for the nine-month period ended March 31, 2008 and 2007, respectively.
     Restructuring Charge. During our second fiscal quarter ended December 31, 2006, we incurred a restructuring charge of $915,000 in connection with the closure of our United Kingdom office as part of our strategic efforts to realign our development capabilities to meet the needs of our Asia Pacific customer base. Included in the restructuring charge were personnel costs, consisting of severance and relocation of $526,000, a lease reserve of $287,000, net of estimated sublease income, and a non-cash impairment of property and equipment of $102,000. All costs associated with the restructuring were settled in fiscal 2007.
Income from Operations.
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Nine Months Ended March 31,	 	
(in thousands)	 	2008	 	 	2007	 	 	$ Change	 	 	% Change	 	
Income from operations	 	$	38,681	 	 	$	22,320	 	 	$	16,361	 	 	 	73.3	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
% of net revenue	 	 	14.6	%	 	 	11.4	%	 	 	 	 	 	 	 	 	
     We generated operating income of $38.7 million, or 14.6% of net revenue, for the nine-month period ended March 31, 2008 compared with $22.3 million, or 11.4% of net revenue, for the nine-month period ended March 31, 2007. The increase in operating income primarily reflected the impact of the increase in operating leverage resulting from the 35.3% increase in net revenue and a 120 basis point increase in the gross margin percentage, partially offset by a 25.9% increase in operating expenses.
Non-Operating Income/(Loss).
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Nine Months Ended March 31,	 	
(in thousands)	 	2008	 	 	2007	 	 	$ Change	 	 	% Change	 	
Interest income	 	$	8,301	 	 	$	8,230	 	 	$	71	 	 	 	0.9	%	
% of net revenue	 	 	3.1	%	 	 	4.2	%	 	 	 	 	 	 	 	 	
Interest expense	 	 	(1,373	)	 	 	(1,463	)	 	 	90	 	 	 	-6.2	%	
% of net revenue	 	 	-0.5	%	 	 	-0.7	%	 	 	 	 	 	 	 	 	
Gain on settlement of debt	 	 	2,689	 	 	 	—	 	 	 	2,689	 	 	 	—	 	
% of net revenue	 	 	1.0	%	 	 	0.0	%	 	 	 	 	 	 	 	 	
Impairment of investment	 	 	(4,000	)	 	 	—	 	 	 	(4,000	)	 	 	—	 	
% of net revenue	 	 	-1.5	%	 	 	0.0	%	 	 	 	 	 	 	 	 	
Impairment of auction rate securities investments	 	 	(2,237	)	 	 	—	 	 	 	(2,237	)	 	 	—	 	
% of net revenue	 	 	-0.8	%	 	 	0.0	%	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net non-operating income/ (loss)	 	$	3,380	 	 	$	6,767	 	 	$	(3,387	)	 	 	-50.1	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
% of net revenue	 	 	1.3	%	 	 	3.5	%	 	 	 	 	 	 	 	 	
     Interest Income. Interest income was $8.3 million for the nine-month period ended March 31, 2008, slightly up compared with $8.2 million for the nine-month period ended March 31, 2007.
     Interest Expense. Interest expense was $1.4 million for the nine-month period ended March 31, 2008, slightly down compared with interest expense of $1.5 million for the nine-month period ended March 31, 2007. Interest expense primarily reflected the combination of interest expense and amortization of debt issuance costs related to our convertible senior subordinated notes issued in December 2004. The annual debt service cost on the notes is approximately $938,000, which excludes $860,000 of amortization of debt issuance costs.
     Gain on Settlement of Debt. In fiscal 1998, National Semiconductor (“National”) loaned us $1.5 million under a limited-recourse note, which we utilized to purchase 900,000 Series A preferred shares of Foveon. In fiscal 1998, under the equity method of accounting, we recorded our share of losses incurred by Foveon and reduced the carrying value of our equity investment to zero. The note plus accrued interest of $1.2 million came due in August 2007, and, in accordance with the security agreement, we surrendered the 900,000 Series A preferred shares securing
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the note to National in full settlement of the principal and accrued interest. Consequently, we recognized a non-operating gain upon settlement of debt in the amount of $2.7 million in the first quarter of fiscal 2008.
     Impairment of Investment. In fiscal 2005, we participated in an equity financing, receiving 3.9 million Series E preferred shares of Foveon for a cash investment of $4.0 million and we are not obligated to provide additional funding to Foveon. We accounted for our Series E preferred shares of Foveon under the cost method in accordance with APB Opinion No. 18 and EITF Issues No. 02-14 and No. 03-1 because the investment is not “in-substance common stock.”
     In the first quarter of fiscal 2008, we determined there was an other-than-temporary impairment of the carrying value of our investment in Foveon, due to liquidity visibility and liquidation preferences for the most recent preferred equity round. Consequently, we recognized a $4.0 million other-than-temporary impairment charge.
     Impairment of auction rate securities investments. In the third quarter of fiscal 2008, we determined there was an other-than-temporary impairment of the carrying value of certain of our investments in auction rate securities (ARS), which have continued to fail to clear at auction since August 2008. Accordingly, we reduced the carrying value of these ARS investments by $2.2 million through an other-than-temporary impairment charge to income, resulting in a new carrying value of $2.8 million.
Provision for Income Taxes.
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Nine Months Ended March 31,	
(in thousands)	 	2008	 	2007	 	$ Change	 	% Change	
Income before provision for income taxes	 	$	42,061	 	 	$	29,087	 	 	$	12,974	 	 	 	44.6	%	
Provision for income taxes	 	 	13,595	 	 	 	9,984	 	 	 	3,611	 	 	 	36.2	%	
% of income before provision for income taxes	 	 	32.3	%	 	 	34.3	%	 	 	 	 	 	 	 	 	
     The provision for income taxes for the nine-month period ended March 31, 2008 was $13.6 million compared with $10.0 million for the nine-month period ended March 31, 2007, reflecting higher pre-tax profit levels, partially offset by a lower effective tax rate. The provision for income taxes represents estimated federal, foreign, and state taxes for the nine-month period ended March 31, 2008 and 2007. The effective tax rate for the nine-month period ended March 31, 2008 was 32.3% and diverged from the combined federal and state statutory rate primarily due to the valuation allowance established against the deferred tax asset associated with the impairment of certain investments, partially offset by increased foreign income taxed at lower tax rates, the impact of accounting for share-based compensation, the benefit of research tax credits, and the impact of tax-exempt interest income. The effective tax rate for the nine-month period ended March 31, 2007 was 34.3% and diverged from the combined federal and state statutory rate primarily because of the benefit of the research tax credits generated from the retroactive extension of the federal research credit signed into law in December 2006, the net release of contingency reserves, and the impact of tax-exempt interest income, partially offset by the impact of accounting for share-based compensation and foreign withholding taxes.
     In accordance with SFAS 123R, we recognize tax benefit upon expensing certain share-based awards associated with our share-based compensation plans, including nonqualified stock options and deferred stock unit 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 SFAS 123R, 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 SFAS 123R, the tax benefit is recorded directly to additional paid-in capital. Tax benefit associated with total share-based compensation was approximately $4.6 million and $2.8 million for the nine-month period ended March 31, 2008 and 2007, respectively. Excluding the impact of share-based compensation and the related tax benefit, the effective tax rate for the nine-month period ended March 31, 2008 and 2007 would have been 33.3% and 32.3%, respectively. 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 recorded directly to additional paid-in capital, our future quarterly and
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annual effective tax rates will be subject to greater volatility and, consequently, our ability to reasonably estimate our future quarterly and annual effective tax rates is greatly diminished.
Liquidity and Capital Resources
     Our cash, cash equivalents, and short-term investments were $185.7 million as of March 31, 2008 compared with $265.0 million as of June 30, 2007, a decrease of $79.3 million primarily reflecting $128 million of cash used for the repurchase of 4.5 million shares of our common stock
     Cash Flows from Operating Activities. Operating activities during the nine-month period ended March 31, 2008 generated cash of $50.9 million compared with $14.7 million of cash generated during the nine-month period ended March 31, 2007. For the nine-month period ended March 31, 2008, net cash provided by operating activities was primarily attributable to net income of $28.5 million plus adjustments for non-cash charges, including impairment of investment, impairment of auction rate securities investments, share-based compensation costs, depreciation, deferred taxes, and amortization of debt issuance costs aggregating $22.8 million, a net decrease in operating assets and liabilities of $2.3 million offset by a non-cash benefit of $2.7 million on the settlement of debt. For the nine-month period ended March 31, 2007, net cash provided by operating activities was primarily attributable to net income of $19.1 million plus adjustments for non-cash charges, including share-based compensation costs, depreciation, amortization of debt issuance costs, and the impairment of fixed assets aggregating $12.8 million, partially offset by a $16.7 million net increase in operating assets and liabilities. The increase in operating assets and liabilities was primarily attributable to a $15.1 million increase in accounts receivable, reflecting the substantial increase in our net revenue during the period.
     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 property and equipment. Investing activities during the nine-month period ended March 31, 2008 generated net cash of $116.1 million compared with $5.1 million of net cash generated during the nine-month period ended March 31, 2007. During the nine-month period ended March 31, 2008, net cash generated by investing activities consisted of $288.1 million in proceeds from sales and maturities of short-term investments, partially offset by $166.0 million used for the purchase of short-term investments and $5.9 million used for the purchase of property and equipment. During the nine-month period ended March 31, 2007, net cash generated by investing activities consisted of $206.3 million in proceeds from sales and maturities of short-term investments, partially offset by $197.3 million used for the purchase of short-term investments and $4.0 million used for the purchase of property and equipment.
     Cash Flows from Financing Activities. Net cash used in financing activities for the nine-month period ended March 31, 2008 was approximately $105.1 million compared with $11.1 million of net cash used in financing activities for the nine-month period ended March 31, 2007. Cash used in financing activities for the nine-month period ended March 31, 2008 consisted primarily of $128.4 million of cash used for the purchase of 4.5 million shares of treasury stock, partially offset by $23.3 million in proceeds from common stock issued under our stock option plans and employee stock purchase plan. Our financing activities for the nine-month period ended March 31, 2007 consisted primarily of $32.3 million of cash used for the purchase of 1.3 million shares of treasury stock, partially offset by $14.1million in proceeds from common stock issued under our stock option plans and employee stock purchase plan and $7.2 million of excess tax benefit from share-based compensation.
     Common Stock Repurchase Program. In February 2008, our board of directors authorized an additional $80 million for our stock repurchase program, raising the aggregate authorization level to $240 million. The program authorizes us to repurchase our common stock on 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 repurchased under this program is held as treasury stock and through March 31, 2008 purchases under this program totaled 8,088,100 shares for an aggregate cost of $200.7 million or an average cost of $24.82 per share. As of March 31, 2008, we had $39.3 million remaining under our stock repurchase program, which expires in February 2010.
     Convertible Senior Subordinated Notes. In December 2004, we issued an aggregate of $125 million of 0.75% Convertible Senior Subordinated Notes maturing December 1, 2024 (the “Notes”) in a private offering pursuant to Rule 144A under the Securities Act of 1933, as amended. In connection with issuing the Notes, we incurred debt issuance costs of $4.3 million, consisting primarily of the initial purchasers’ discount and costs related to legal, accounting, and
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printing, which are being amortized over five years. We expect to use the net proceeds for working capital and general corporate purposes and potentially for future acquisitions.
     The Notes bear interest at a rate of 0.75% per annum payable on December 1 and June 1 of each year. However, we will pay additional contingent interest on the Notes if the average trading price of the Notes is at or above 120% of the principal amount of the Notes for a specified period beginning with the nine-month period commencing December 1, 2009. The amount of contingent interest payable on the Notes with respect to a nine-month period, for which contingent interest applies, will equal 0.375% per annum of the average trading price of the Notes for a specified five trading-day period preceding such nine-month period.
     As a result of our irrevocable election in April 2007 to cash settle the principal amount of the Notes, no shares of common stock will be issued to settle the principal amount of the Notes, and cash or common stock may be used to settle the value of the Notes in excess of $125 million. In our calculation of net income per share, we used the “if converted” method through the date of our election to cash settle the principal of our convertible notes upon conversion and we used the “treasury stock” method subsequent to the date of our election. We will include diluted shares underlying the Notes in our diluted net income per share calculation only when the average closing stock price for the accounting period exceeds the conversion price of the Notes, which is $50.53 per share.
     The Notes may be converted (1) if, during any calendar quarter commencing after December 31, 2004, the last reported sale price of our common stock for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the preceding calendar quarter is greater than or equal to 120% of the applicable conversion price on such last trading day; (2) on or after January 1, 2020; (3) if we have called the Notes for redemption; or (4) during prescribed periods, upon the occurrence of specified corporate transactions or fundamental changes. On or after December 1, 2009, we may redeem for cash all or a portion of the Notes at a redemption price of 100% of the principal amount of the Notes plus accrued and unpaid interest, including contingent interest and additional interest, if any. Noteholders have the right to require us to repurchase all or a portion of their Notes for cash on December 1, 2009, December 1, 2014, and December 1, 2019 at a price equal to 100% of the principal amount of the Notes to be purchased plus accrued and unpaid interest, including contingent interest and additional interest, if any. As of March 31, 2008, none of the conditions for conversion of the Notes had occurred.
     The Notes are unsecured senior subordinated obligations and rank junior in right of payment to all of our existing and future senior indebtedness, equal in right of payment with all of our existing and future indebtedness or other obligations that are not, by their terms, either senior or subordinated to the Notes, including trade debt and other general unsecured obligations that do not constitute senior or subordinated indebtedness, and senior in right of payment to all of our future indebtedness that, by its terms, is subordinated to the Notes. There are no financial covenants in the Notes.
     $100 Million Shelf Registration. We have registered an aggregate of $100 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, cash equivalents, and short-term investment balances 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 business levels, 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, the continuing market acceptance of our product solutions, our common stock repurchase 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 fund operations, to take advantage of unexpected business opportunities, or to respond to competitive pressures could be limited or severely constrained.
     Our investment portfolio includes $48.6 million cost basis of ARS of which $43.6 million have failed to settle in auctions. Our portfolio of ARS includes $43.6 million that are triple A rated and $5.0 million that are double A rated. Since August 2007, $18.5 million of these ARS investments have failed to settle in auctions and since February 2008, $25.1 million have failed to settle in auctions. These failures generally resulted in the interest rates resetting from Libor plus 50 to Libor plus 150 basis points on the regularly scheduled auction dates, which represents a premium
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interest rate over alternative short-term investments. However, these investments are not currently 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.
     We have reduced the carrying value of our failed ARS investments by $7.3 million; of which $2.2 million was considered to be other-than-temporary impairment with a corresponding charge to income; and $5.1 million was considered temporary impairment accounted for through other comprehensive income or loss. Based on our ability to access our cash and other short-term investments, expected operating cash flows, and 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 March 31, 2008 (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) (2)	 	$	141	 	 	$	1	 	 	$	2	 	 	$	2	 	 	$	136	 	
Building leases	 	 	2	 	 	 	1	 	 	 	1	 	 	 	—	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	143	 	 	$	2	 	 	$	3	 	 	$	2	 	 	$	136	 	

 	 	 	
(1)	 	Represents both principal and interest payable through the maturity date of the underlying contractual obligation.	
 	 	 	
(2)	 	Our convertible senior subordinated notes include a provision allowing the noteholders to require us, at the noteholders’ discretion, to repurchase their notes at a redemption price of 100% of the principal amount of the notes plus accrued and unpaid interest (including contingent interest and additional interest, if any) on December 1, 2009, December 1, 2014, and December 1, 2019, and 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 above schedule, but if all the noteholders elected to exercise their rights to require us to repurchase their notes on December 1, 2009, then our contractual obligations for the one-to-three year period would be increased by $124 million and no amounts would be due in more than two years.	
     As of March 31, 2008, we were unable to make a reasonably reliable estimate of when cash settlement with a taxing authority may occur in connection with our unrecognized tax benefits.
Recent Accounting Pronouncements
     In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value under U.S. generally accepted accounting principles, and expands disclosure about fair value measurements. SFAS 157 applies under other accounting standards that require or permit fair value measurements. Accordingly, SFAS 157 does not require any new fair value measurement. SFAS 157 is effective beginning in our first quarter of fiscal 2009. However, the effective date of SFAS 157 as it relates to fair value measurement requirements for nonfinancial assets and liabilities that are not remeasured at fair value on a recurring basis is expected to be deferred to our first quarter of fiscal 2010. We do not expect the adoption of SFAS 157 to have a material impact on our financial position, results of operations, or cash flows.
     In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115,” (“SFAS 159”). SFAS 159 expands the use of fair value accounting to many financial instruments and certain other items. The fair value option is irrevocable and generally made on an instrument-by-instrument basis, even if a company has similar instruments that it elects not to measure based on fair value. Subsequent unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. SFAS 159 is effective beginning in our first quarter of fiscal 2009. We do not expect the adoption of SFAS 159 to have a material impact on our financial position, results of operations, or cash flows.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
     Our market risk has not changed significantly from the interest rate and foreign currency risks disclosed in Item 7A of our Annual Report on Form 10-K for the fiscal year ended June 30, 2007.
Item 4. Controls and Procedures
     As of the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of our disclosure controls and procedures, which included inquiries made to certain other of our employees. Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have each concluded that our disclosure controls and procedures are designed to ensure that information required to be disclosed is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure and are effective and sufficient to ensure that we record, process, summarize, and report information required to be disclosed by us in our periodic reports filed under the Securities Exchange Act within the time periods specified by the Securities and Exchange Commission’s rules and forms.
     During the fiscal quarter covered by this report, there have not been any changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II — OTHER INFORMATION
Item 1. Legal Proceedings
     In March 2006, Elantech Devices Corporation (“Elantech”) filed a Complaint for Patent Infringement against us claiming that we infringed one of its patents and seeking damages, attorneys’ fees, and a permanent injunction against us infringing or inducing others to infringe the patent. In April 2006, we filed our Answer to the Complaint and Counterclaims against Elantech claiming that Elantech has infringed and induced infringement of four of our patents and seeking damages, attorneys’ fees, and a permanent injunction against infringing or inducing others to infringe.
     Elantech responded to our counterclaim denying liability and counterclaimed seeking an injunction and damages for alleged violations of California law. We subsequently filed a motion to dismiss the Elantech counterclaims that was granted in July 2006 with leave to amend the counterclaims after the adjudication of the patent infringement claims.
     The Elantech patent relates to recognizing and providing an indication of the presence of multiple fingers on a touchpad. We have previously developed additional ways to detect multiple fingers and have our own related patents. The Elantech infringement claims involve two versions of our software code (“Type 1 Code” and “Type 2 Code”) in certain products in which multiple finger detection is enabled.
     In October 2007, the Court heard oral arguments on our motion for summary judgment of noninfringement of the Elantech patent and Elantech’s cross-motion for summary judgment of infringement. The Court granted our motion for partial summary judgment of noninfringement as to products containing Type 1 Code and denied our motion for partial summary judgment of noninfringement as to products containing Type 2 Code. In addition, the Court denied Elantech’s motion for summary judgment that our Type 1 and Type 2 Codes infringe Elantech’s intellectual property. The Court indicated, however, that it would grant summary judgment of infringement for products implementing the Type 2 Code with enabled finger counting functionality but Elantech did not move for partial summary judgment. We do not believe any aspect of the Court’s decision will have a material effect on our business.
     In November 2007, Elantech moved for partial summary judgment that products implementing the Type 2 Code with enabled finger counting functionality infringe the Elantech patent. In December 2007, Elantech moved for entry of a preliminary injunction against us importing, using, selling, or offering to sell certain products implementing the Type 2 Code with enabled finger counting functionality.
     In December 2007, we filed a Complaint for Patent Infringement against Elantech claiming that Elantech infringed one of our patents relating to detecting the presence of multiple fingers on a touchpad and seeking damages, attorneys’ fees, and an injunction. In January 2008, we moved for entry of summary judgment for infringement of the four Synaptics patents.
     In March 2008, the Court, based on its infringement ruling, filed an order preliminarily enjoining us from making, using, selling, importing into or offering to sell within the United States touchpad products containing our Type 2 firmware code with enabled multiple finger counting functionality. We do not believe any aspect of the Court’s decision will have a material effect on our business. We are not shipping any products that utilize the contested code. As a result, the preliminary injunction will have no impact on us, our business, or our customers. Although the contested code is no longer used in our products, we do not believe the contested code infringes the Elantech patent and we have appealed the Court’s infringement ruling.
     In April, 2008, the Court granted our motion for partial summary judgment holding that use of the corner tap, scrolling, edge motion, and drag features of Elantech’s touchpad products infringe four of our patents.
     We intend to vigorously defend our patents and pursue our counterclaims.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
     In February 2008, our board of directors authorized a further expansion of our stock repurchase program for up to an additional $80 million, raising the aggregate authorization level to $240 million and extending the period for
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repurchase through February 2010. Purchases under the stock repurchase program during the three-month period ended March 31, 2008 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	 	
December 30, 2007 - January 26, 2008	 	 	—	 	 	 	—	 	 	 	4,088,100	 	 	$	68,704,000	 	
January 27, 2008 - February 23, 2008	 	 	4,000,000	 	 	$	27.36	 	 	 	8,088,100	 	 	$	39,255,000	 	
February 24, 2008 - March 29, 2008	 	 	—	 	 	 	—	 	 	 	8,088,100	 	 	$	39,255,000	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	 	4,000,000	 	 	$	27.36	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Item 6. Exhibits
 	 	 	
31.1	 	Certification of Chief Executive Officer	
31.2	 	Certification of Chief Financial Officer	
32.1	 	Section 1350 Certification of Chief Executive Officer	
32.2	 	Section 1350 Certification of Chief Financial Officer	
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SIGNATURES
     Pursuant to the requirements 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: May 7, 2008 	By:  	/s/ Francis F. Lee  	 	
 	 	Name:  	Francis F. Lee 	 	
 	 	Title:  	President and Chief Executive Officer 	 	

 	 	 	
Date: May 7, 2008 	By:  	/s/ Russell J. Knittel  	 	
 	 	Name:  	Russell J. Knittel 	 	
 	 	Title:  	Executive Vice President, Chief Financial Officer, and Chief
Administrative Officer 	 	
 	
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EXHIBIT 31.1
Certification of Chief Executive Officer
     I, Francis F. Lee, certify that:
     1. I have reviewed this Quarterly Report on Form 10-Q 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: May 7, 2008

 	/s/ Francis F. Lee  	 	
 	Francis F. Lee 	 	
 	Chief Executive Officer 	 	

 
EXHIBIT 31.2
Certification of Chief Financial Officer
     I, Russell J. Knittel, certify that:
     1. I have reviewed this Quarterly Report on Form 10-Q 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: May 7, 2008

 	/s/ Russell J. Knittel  	 	
 	Russell J. Knittel 	 	
 	Chief Financial Officer 	 	

 
EXHIBIT 32.1
Section 1350 Certification of Chief Executive Officer
     In connection with the Quarterly Report on Form 10-Q of Synaptics Incorporated (the “Company”) for the quarterly period ended December 29, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Francis F. Lee, Chief Executive Officer of the Company, certify, 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/ Francis F. Lee
 	 	 	
Francis F. Lee	 	 	
Chief Executive Officer	 	 	
May 7, 2008	 	 	

 
EXHIBIT 32.1
Section 1350 Certification of Chief Financial Officer
     In connection with the Quarterly Report on Form 10-Q of Synaptics Incorporated (the “Company”) for the quarterly period ended December 29, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Russell J. Knittel, Chief Financial Officer of the Company, certify, 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	 	 	
Chief Financial Officer	 	 	
May 7, 2008