OVERVIEW

We are a leading worldwide designer, manufacturer, and marketer of lightweight communications headsets, telephone headset systems, and accessories for the business and consumer markets under the Plantronics brand. We are also a leading manufacturer and marketer of high quality docking audio products, computer and home entertainment sound systems, and a line of headphones for personal digital media under our Altec Lansing brand. In addition, we manufacture and market, under our Clarity brand, specialty telephone products, such as telephones for the hearing impaired, and other related products for people with special communication needs.

We ship a broad range of products to over 80 countries through a worldwide network of distributors, original equipment manufacturers ("OEMs"), wireless carriers, retailers, and telephony service providers. We have well-developed distribution channels in North America, Europe, Australia and New Zealand, where use of our products is widespread. Our distribution channels in other regions of the world are less mature, and, while we primarily serve the contact center markets in those regions, we are expanding into the office, mobile and entertainment, digital audio, and specialty telephone markets in additional international locations.

Consolidated net revenues in fiscal 2009 were $765.6 million, which is a decrease of 11% from fiscal 2008 net revenues which were $856.3 million. The year-over-year decrease was primarily attributable to the global recession, resulting in a decrease in demand for our products. We had an operating loss of $81.2 million in fiscal 2009 as compared to an operating income of $79.4 million in fiscal 2008, a decrease to $160.6 million, primarily due to a $117.5 million impairment charge in the third quarter of fiscal 2009 related to certain AEG goodwill and long-lived assets along with a decrease in gross margin which was the result of the decreased revenue due to the weakened global economy and restructuring and other related charges of $12.1 million related to various actions taken in efforts to reduce our cost structure and adapt to the current economic conditions.

In our ACG segment, the $73.3 million decrease in net revenues for fiscal 2009 was primarily due to lower OCC product revenues of $90.3 million driven by a weakened economy due to the global recession offset in part by an increase of $15.5 million in sales of mobile headsets. The mobile headset growth was driven by increased Bluetooth retail placements from an improved product portfolio and demand attributable to certain hands-free driving laws that went into effect in the U.S. in fiscal 2009.

Wireless products represent an opportunity for growth both in the office market and for mobile applications. The office wireless market, in particular, represents a strong opportunity for profitable growth over many years. However, due to weak economic conditions during fiscal 2009, office wireless net revenues decreased by $43.0 million or 17% in fiscal 2009 compared to fiscal 2008. In the Mobile market, particularly for consumer applications, margins are typically lower than for our enterprise applications due to the level of competition and pricing pressures. Our strategy for improving the profitability of mobile consumer products is to differentiate our products from our competitors and to provide compelling solutions under our brand with regard to features, design, ease of use, and performance. Also, to further improve Bluetooth profitability, we announced a restructuring plan in the March 2009 to close ACG's Suzhou, China manufacturing operations in fiscal 2010 in order to outsource manufacturing of our Bluetooth products to an existing supplier in China.

In our AEG segment, net revenues decreased from $108.4 million in fiscal 2008 to $91.0 million in fiscal 2009, and the operating loss increased from $35.8 million to $142.6 million for the corresponding period due to a $117.5 million non-cash impairment charge on goodwill and long-lived assets.

We focused on cost reductions in the AEG segment and completed the closure of AEG's manufacturing operations in Dongguan, China and relocated the research and development activities previously in Dongguan, China to Shenzhen, China as part of the 2008 restructuring plan. We have outsourced most of AEG manufacturing to a network of qualified contract manufacturers already in place and do a limited amount of manufacturing of AEG products in our plant in Suzhou, China. We also closed AEG's sales and procurement office in Hong Kong and consolidated the sales, procurement and research and development activities into our Shenzhen, China location. Additionally, we completed the consolidation of our selling, general and administrative functions for most of our Asia Pacific operations into our Suzhou, China facility. We implemented further restructuring plans in fiscal 2009 which included reductions in force in AEG's operations in Milford, Pennsylvania, Luxemburg and Shenzhen, China along with reductions in ACG's China and US locations.

Throughout fiscal 2009, we remained focused on our long-term strategy to capitalize on the opportunities in the office and mobile markets and be well-positioned for Unified Communications ("UC"). While staying focused on our long-term strategy, we also made decisions to broadly reduce spending in light of the global recession and its impact on our market and near-term revenue potential. We believe we now have the right balance between short and long-term considerations and that we will maintain, if not increase, our relative competitive position through the economic downturn and its eventual recovery.

Looking forward into fiscal 2010, we are focused on the following key corporate goals to maximize long-term shareholder value:

· Be profitable and cash flow positive. We announced and implemented several restructuring plans in fiscal 2009 along with other cost cutting measures, including management salary reductions, to significantly decrease our operating expenses and overall cost structure. We also began reducing inventory in the second half of fiscal 2009 and have plans for improved inventory management and lower capital expenditures and operating expenses in fiscal 2010 than in fiscal 2009. We believe our cost structure is now aligned with current market conditions and supports our plans to be profitable and cash flow positive in fiscal 2010; however, we will monitor and realign our cost structure as needed to match the actual economic conditions.

· Establish strong Unified Communications market position for future growth. We will continue to focus on Unified Communications technologies as we believe the implementation of UC by large corporations will be a significant long-term driver of office headset adoption, and as a result, a key long-term driver of revenue and profit growth.

· Improve return on invested capital. We are focused on increasing our profits and reducing our net assets with the goal of improving our return on invested capital. Initiatives designed to reduce capital include the transition to an outsourced original design manufacturer model for Bluetooth which will reduce inventory and ultimately enable us to sell our plant in China; a broad-based tightening of capital expenditures which we believe will yield a 50% reduction in capital expenditures globally in fiscal 2010 compared to fiscal 2009; and leveraging the investments we have made in supply chain management systems to reduce inventory and improve inventory turns.

We intend for the following discussion of our financial condition and results of operations to provide information that will assist in understanding our financial statements and therefore, this discussion should be read in conjunction with the financial statements and accompanying notes.

ANNUAL RESULTS OF OPERATIONS

The following tables set forth, for the periods indicated, the consolidated statements of operations data and data by segment. The financial information and the ensuing discussion should be read in conjunction with the accompanying consolidated financial statements and notes thereto.

Consolidated

(in thousands)                                    Fiscal Year Ended March 31,
                                 2007                         2008                        2009

Net revenues            $ 800,154         100.0 %    $ 856,286         100.0 %   $ 765,619         100.0 %
Cost of revenues          491,339          61.4 %      507,181          59.2 %     469,591          61.3 %
Gross profit              308,815          38.6 %      349,105          40.8 %     296,028          38.7 %

Operating expense:
Research, development
and engineering            71,895           9.0 %       76,982           9.0 %      72,061           9.4 %
Selling, general and
administrative            182,108          22.7 %      189,156          22.1 %     175,601          22.9 %
Restructuring and
other related charges           -           0.0 %        3,584           0.4 %      12,074           1.6 %
Impairment of
goodwill and
long-lived assets               -           0.0 %            -           0.0 %     117,464          15.4 %
Gain on sale of land       (2,637 )        (0.3 )%           -           0.0 %           -           0.0 %
Total operating
expenses                  251,366          31.4 %      269,722          31.5 %     377,200          49.3 %

Operating income
(loss)                     57,449           7.2 %       79,383           9.3 %     (81,172 )       (10.6 )%

Interest and other
income (expense), net       4,089           0.5 %        5,854           0.7 %      (3,544 )        (0.5 )%
Income (Loss) before
income taxes               61,538           7.7 %       85,237          10.0 %     (84,716 )       (11.1 )%
Income tax expense
(benefit)                  11,395           1.4 %       16,842           2.0 %     (19,817 )        (2.6 )%
Net income (loss)       $  50,143           6.3 %    $  68,395           8.0 %   $ (64,899 )        (8.5 )%



Audio Communications
Group

(in thousands)                                    Fiscal Year Ended March 31,
                                 2007                         2008                        2009

Net revenues            $ 676,514         100.0 %    $ 747,935         100.0 %   $ 674,590         100.0 %
Cost of revenues          381,034          56.3 %      403,863          54.0 %     382,659          56.7 %
Gross profit              295,480          43.7 %      344,072          46.0 %     291,931          43.3 %

Operating expense:
Research, development
and engineering            61,583           9.1 %       65,733           8.8 %      63,840           9.5 %
Selling, general and
administrative            151,857          22.5 %      163,173          21.8 %     155,678          23.1 %
Restructuring and
other related charges           -           0.0 %            -           0.0 %      10,952           1.6 %
Gain on sale of land       (2,637 )        (0.4 )%           -           0.0 %           -           0.0 %
Total operating
expenses                  210,803          31.2 %      228,906          30.6 %     230,470          34.2 %
Operating income        $  84,677          12.5 %    $ 115,166          15.4 %   $  61,461           9.1 %

Audio Entertainment Group

(in thousands)                                     Fiscal Year Ended March 31,
                                 2007                         2008                          2009

Net revenues            $ 123,640         100.0 %    $ 108,351         100.0 %    $   91,029         100.0 %
Cost of revenues          110,305          89.2 %      103,318          95.4 %        86,932          95.5 %
Gross profit               13,335          10.8 %        5,033           4.6 %         4,097           4.5 %

Operating expense:
Research, development
and engineering            10,312           8.3 %       11,249          10.4 %         8,221           9.0 %
Selling, general and
administrative             30,251          24.5 %       25,983          23.9 %        19,923          21.9 %
Restructuring and
other related charges           -           0.0 %        3,584           3.3 %         1,122           1.2 %
Impairment of
goodwill and
long-lived assets               -           0.0 %            -           0.0 %       117,464         129.0 %
Total operating
expenses                   40,563          32.8 %       40,816          37.6 %       146,730         161.1 %

Net Revenues

Audio Communications Group

                       Fiscal Year Ended                                      Fiscal Year Ended
                    March 31,     March 31,            Increase            March 31,     March 31,             Increase
(in thousands)        2007          2008              (Decrease)             2008          2009               (Decrease)

Net revenues
from
unaffiliated
customers:
Office and
Contact Center       $ 475,323     $ 519,958     $ 44,635          9.4 %    $ 519,958     $ 429,669     $ (90,289 )      (17.4 )%
Mobile                 146,859       171,880       25,021         17.0 %      171,880       187,419        15,539          9.0 %
Gaming and
Computer Audio          30,162        33,612        3,450         11.4 %       33,612        34,052           440          1.3 %
Clarity                 24,170        22,485       (1,685 )       (7.0 )%      22,485        23,450           965          4.3 %
Total segment
net revenues         $ 676,514     $ 747,935     $ 71,421         10.6 %    $ 747,935     $ 674,590     $ (73,345 )       (9.8 )%

Audio Entertainment Group

                        Fiscal Year Ended                                       Fiscal Year Ended
                     March 31,     March 31,             Increase            March 31,     March 31,             Increase
(in thousands)         2007          2008               (Decrease)             2008          2009               (Decrease)

Net revenues from
unaffiliated
customers:
Docking Audio         $  61,068     $  55,399     $  (5,669 )       (9.3 )%   $  55,399      $ 46,204     $  (9,195 )      (16.6 )%
PC Audio                 52,496        45,828        (6,668 )      (12.7 )%      45,828        38,884        (6,944 )      (15.2 )%
Other                    10,076         7,124        (2,952 )      (29.3 )%       7,124         5,941        (1,183 )      (16.6 )%
Total segment net
revenues              $ 123,640     $ 108,351     $ (15,289 )      (12.4 )%   $ 108,351      $ 91,029     $ (17,322 )      (16.0 )%

Our consolidated net revenues decreased in fiscal 2009 as compared to fiscal 2008 primarily due to the impact of global economic weakness due to the global recession. ACG, which accounted for 88% of the consolidated net revenues for fiscal 2009, primarily decreased due to lower OCC product revenues driven by a weakened economy offset in part by an increase in sales of Mobile headsets due to an improved product portfolio and demand attributable to certain hands-free driving laws going into effect in the U.S. in fiscal 2009. In the third quarter of fiscal 2009, we began shipping the next generation of AEG products with the goal of creating a competitive portfolio to increase revenues and improve profitability and market share. However, due to the weakened global economy in fiscal 2009, we did not benefit from these new products as we anticipated. We are evaluating various alternatives to achieve profitability for AEG and project the segment will generate relatively small losses in the first half of fiscal 2010 and should be profitable in the second half of fiscal 2010 based on new products with lower costs comprising most of the sales mix by the second half of the fiscal year. While we have experienced significant foreign exchange fluctuations on our net revenues during the first half of the fiscal year, the overall foreign exchange impact for the entire fiscal year was not material.

Our consolidated net revenues increased in fiscal 2008 as compared to fiscal 2007 entirely due to growth in ACG net revenues, which accounted for approximately 87% of consolidated net revenues in fiscal 2008. The increase in ACG net revenues is primarily due to increased sales of our office wireless headset systems and mobile Bluetooth headsets. ACG unit volumes increased from fiscal 2007 to 2008 primarily as a result of increased mobile Bluetooth sales. In fiscal 2008, we also benefited from the weaker U.S. dollar as a portion of our sales are denominated in Euros and Great Britain Pounds. AEG net revenues accounted for approximately 13% of consolidated net revenues in fiscal 2008. In comparison to fiscal 2007, AEG net revenues decreased as we were in a product transition phase and had not yet introduced our new product portfolio.

Net revenues may vary due to the timing of the introduction of new products, seasonality, discounts and other incentives and channel mix.

ACG

Our Office and Contact Center ("OCC") products represent our largest source of revenues while our Mobile products represent our largest unit volumes. There has been a growing trend toward wireless products and a corresponding shift away from our corded products. As a percentage of consolidated ACG net revenues, wireless products represented 51%, 55% and 58% for fiscal 2007, 2008 and 2009, respectively.

Primary fluctuations in the net revenues of ACG in fiscal 2009 compared to fiscal 2008 were as follows:

· OCC product net revenues decreased by $90.3 million as a result of weak economic conditions.

· Mobile product net revenues increased by $15.5 million primarily due to increased retail placements as a result of an improved product portfolio as well as demand attributable to hands-free driving legislation enacted in several states in the U.S. in fiscal year 2009. Within this category of products, Bluetooth product revenue grew $23.1 million partially offset by a decline of $7.6 million in corded product revenues.

. Gaming and Computer Audio increased by $0.4 million due to the strength of the product portfolio, primarily in the U.S. retail market.

. Clarity increased by $1.0 million primarily due to increased OEM sales in Europe.

Fluctuations in the net revenues of ACG in fiscal 2008 compared to fiscal 2007 were as follows:

· OCC product net revenues increased as a result of growth of $35.8 million in cordless products and $8.8 million from corded products. The increases are primarily due to the addition of the CS70N to our product line in fiscal 2008, corded product revenue growth internationally, mostly in Europe and Asia Pacific, and some benefit from foreign exchange rates.

· Mobile product net revenues increased as a result of market growth and greater acceptance of our product portfolio which contributed to a year-over-year increase of $29.8 million in our Bluetooth headsets net revenues, partially offset by a decline of $4.8 million in net revenues from corded mobile headsets.

· Gaming and Computer Audio product net revenues increased due to the transfer of the Altec Lansing branded PC headsets into this category in fiscal 2008.

. Clarity decreased by $1.7 million due to lower shipments to state government programs within the U.S. along with lower OEM sales in Europe.

AEG

Our Altec Lansing products are primarily consumer goods sold in the retail channel, and sales are highly seasonal. The strongest revenues typically occur in the December quarter due to the holiday period. Other trends that also impact our AEG revenues include growth of the MP3 player market, and our ability to successfully attach to new generations of MP3 players and to develop products which keep up with the rapidly-developing Docking Audio and PC Audio markets.

Primary fluctuations in the net revenues of AEG in fiscal 2009 compared to fiscal 2008 were as follows:

· Docking Audio product net revenues decreased by $9.2 million due to a decline in sales to warehouse clubs from the prior year along with reduced sales of surplus products.

· PC Audio product net revenues decreased by $6.9 million as a result of an older product portfolio which is currently being refreshed, weaker economic conditions in the U.S. and Europe along with a focus on selective product placement with higher margin customers.

· Other net revenues decreased by $1.2 million primarily due to a decrease of $1.7 million due to the transfer of responsibility for headset products to ACG in the second quarter of fiscal 2008 partially offset by increased revenue related to new product introductions.

Fluctuations in the net revenues of AEG in fiscal 2008 compared to fiscal 2007 were as follows:

· Docking Audio product net revenues decreased primarily as a result of intense competition in the MP3 accessories market, particularly in the U.S., our reduced share of the MP3 accessories market and price reductions.

· PC Audio product net revenues decreased primarily in Asia and the U.S. due to increased competition and price reductions.

· Other products net revenues decreased due to the transition of the Altec Lansing branded PC headsets from the AEG segment to the ACG segment resulting in a decrease of $7.0 million, partially offset by an increase in headphone and other net revenues of $3.4 million.

Geographical Information

                        Fiscal Year Ended                                       Fiscal Year Ended
                    March 31,      March 31,            Increase            March 31,      March 31,             Increase
(in thousands)         2007           2008             (Decrease)              2008           2009              (Decrease)

Net revenues from
unaffiliated
customers:
United States       $  490,551     $  521,148     $ 30,597          6.2 %   $  521,148     $  472,239     $ (48,909 )       (9.4 )%

Europe, Middle
East and Africa        195,090        214,621       19,531         10.0 %      214,621        185,023       (29,598 )      (13.8 )%
Asia Pacific            59,927         62,742        2,815          4.7 %       62,742         56,160        (6,582 )      (10.5 )%
Americas,
excluding United
States                  54,586         57,775        3,189          5.8 %       57,775         52,197        (5,578 )       (9.7 )%
Total
international net
revenues               309,603        335,138       25,535          8.2 %      335,138        293,380       (41,758 )      (12.5 )%

Total
consolidated net
revenues            $  800,154     $  856,286     $ 56,132          7.0 %   $  856,286     $  765,619     $ (90,667 )      (10.6 )%

Consolidated U.S. net revenue, as a percentage of total net revenues, increased 1% due to the strength of our Bluetooth product portfolio and demand attributable to hands-free driving legislation enacted in several states in the U.S. in fiscal year 2009. Consolidated international net revenues, as a percentage of total net revenues, decreased from 39% in fiscal 2008 to 38% in fiscal 2009.

In comparison to fiscal 2007, fiscal 2008 consolidated international net revenues as a percentage of total net revenues remained consistent at 39%. International net revenues for ACG, increased from 37% to 38% primarily due to the strength of our Europe, Middle East and Africa ("EMEA") business in ACG; however, this increase was offset in part by decreased international net revenue for AEG.

Cost of Revenues and Gross Profit

Cost of revenues consists primarily of direct manufacturing and contract
manufacturer costs, including material and direct labor, our operations
management team and indirect labor such as supervisors and warehouse workers,
freight expense, warranty expense, reserves for excess and obsolete inventory,
depreciation, royalties, and an allocation of overhead expenses, including
facilities and IT costs.

Consolidated

                       Fiscal Year Ended                                     Fiscal Year Ended
                    March 31,     March 31,            Increase           March 31,     March 31,             Increase
(in thousands)        2007          2008              (Decrease)            2008          2009               (Decrease)

Net revenues         $ 800,154     $ 856,286     $ 56,132          7.0 %   $ 856,286     $ 765,619     $ (90,667 )      (10.6 )%
Cost of revenues       491,339       507,181       15,842          3.2 %     507,181       469,591       (37,590 )       (7.4 )%
Consolidated
gross profit         $ 308,815     $ 349,105     $ 40,290         13.0 %   $ 349,105     $ 296,028     $ (53,077 )      (15.2 )%
Consolidated

 Audio Communications Group

Net revenues        $ 676,514     $ 747,935     $ 71,421        10.6 %   $ 747,935     $ 674,590     $ (73,345 )      (9.8 )%
Cost of
revenues              381,034       403,863       22,829         6.0 %     403,863       382,659       (21,204 )      (5.3 )%
Segment gross
profit              $ 295,480     $ 344,072     $ 48,592        16.4 %   $ 344,072     $ 291,931     $ (52,141 )     (15.2 )%
Segment gross
profit %                 43.7 %        46.0 %        2.3   ppt.               46.0 %        43.3 %        (2.7 ) ppt.

Audio Entertainment Group

Net revenues        $ 123,640     $ 108,351     $ (15,289 )      (12.4 )%   $ 108,351     $ 91,029     $ (17,322 )      (16.0 )%
Cost of
revenues              110,305       103,318        (6,987 )       (6.3 )%     103,318       86,932       (16,386 )      (15.9 )%
Segment gross
profit              $  13,335     $   5,033     $  (8,302 )      (62.3 )%   $   5,033     $  4,097     $    (936 )      (18.6 )%
Segment gross
profit %                 10.8 %         4.6 %        (6.2 ) ppt.                  4.6 %        4.5 %        (0.1 ) ppt.

The increase in 2008 and the decrease in 2009 in consolidated gross profit are both attributable to ACG, which accounted for approximately 99% of consolidated gross profit in both fiscal 2008 and 2009.

Fluctuations in the gross profit of ACG and AEG in fiscal 2009 compared to fiscal 2008 were as follows:

ACG

The decrease in gross profit was primarily due to lower net revenues. As a percentage of net revenues, gross profit decreased 2.7 percentage points primarily due to the following:

· a 2.9 percentage point detriment mostly due to a higher proportion of consumer products than commercial products in the overall revenue mix. While consumer products carry lower margins than commercial products, the level of product margin on our consumer products has increased significantly primarily due to cost reductions;

· a 0.7 percentage point detriment from higher freight expenses and other manufacturing costs; and

. . .