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

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

Overview of Our Company

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

For the PC, our products include mice, trackballs, keyboards, interactive gaming devices, multimedia speakers, headsets, webcams, 3D control devices and notebook stands. For digital music devices, our products include speakers, headphones, earphones, custom in-ear monitors and network music systems. For gaming consoles, we offer a range of gaming controllers, including racing wheels, wireless guitar and drum controllers, and microphones, as well as other accessories. In addition, we offer wireless music solutions for the home, advanced remote controls for home entertainment systems and PC-based video security systems for a home or small business.

We sell our products to a network of distributors and resellers ("retail") and to original equipment manufacturers ("OEMs"). Our worldwide retail network includes wholesale distributors, consumer electronics retailers, mass merchandisers, specialty electronics stores, computer and telecommunications stores, value-added resellers and online merchants. Our sales to our retail channels were 88% and 84% of our net sales for the six months ended September 30, 2009 and 2008. The large majority of our revenues are derived from sales of our products for use by consumers.

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

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

The broadening of our product lines has been primarily organic, but we have also grown as a result of a limited number of acquisitions that expanded our business into new product categories. We continually evaluate our product offerings and our strategic direction in light of the current global economic weakness, changing consumer trends, and the evolving nature of the interface between the consumer and the digital world.

Summary of Financial Results

Our total net sales (retail and OEM) for the three and six months ended September 30, 2009 decreased 25% and 30% compared with the three and six months ended September 30, 2008. Retail sales decreased 26% in the six months ended September 30, 2009 compared with the same period in the prior year, and were down 19% in the three months ended September 30, 2009. Although the global economic recession continues to affect our retail sales, the impact has lessened from the fiscal quarter ended June 30, 2009, when retail sales declined 35% compared with the same period in the prior fiscal year. Retail units sold in the three months and six months ended September 30, 2009 decreased 14% and 18% compared with the prior year.

OEM sales decreased 54% and 49% in the three and six months ended September 30, 2009 compared with the same periods in the prior fiscal year. OEM units sold decreased 40% and 37% in the same periods. The substantial decline in OEM sales was related to console microphones, which sold well in the prior fiscal year, but have reached the latter stages of the typical gaming sales cycle in the current fiscal year.

Retail sales in our Europe-Middle East-Africa ("EMEA"), Americas and Asia Pacific regions decreased 30%, 21% and 25% in the six months ended September 30, 2009, and 24%, 5% and 28% in the three months ended September 30, 2009, compared with the three and six months ended September 30, 2008.

Our gross margins for the three and six months ended September 30, 2009 were 30.5% and 27.9% compared with 34.3% and 34.2% in the same periods of the prior fiscal year. Net income for the three months ended September 30, 2009 was $20.7 million, and net loss for the six months ended September 30, 2009 was $16.6 million, compared with net income of $72.3 million and $101.6 million in the three and six months ended September 30, 2008. The return to profitability in the second quarter of fiscal year 2010 was primarily the result of the improvement in gross margin over the preceding fiscal quarter and our continuing cost reduction efforts.

Trends in Our Business

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

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

In our OEM channel, the shift away from desktop PCs has adversely affected our sales of OEM mice, which are sold with name-brand desktop PCs. Our OEM mice sales have historically made up the bulk of our OEM sales, and our OEM sales accounted for 12% and 16% of total revenues during the six months ended September 30, 2009 and 2008. We expect the trend of slowing OEM mice sales to continue. Our OEM sales were growing in fiscal year 2008 despite the decline in sales of mice due to our sales of microphones for use with particular game titles for gaming consoles. However, these sales have declined as the game titles have reached the latter stages of the typical gaming cycle. We believe future OEM sales growth depends on the development of new game titles or other products, consumers' purchase activity, and manufacturers' decisions to combine our products with theirs, none of which is assured to occur.

Most of our revenue comes from sales to our retail channels, which resell to consumers and other retailers. As a result, our customers' demand for our products depends in substantial part on trends in consumer confidence and consumer spending, as well as the levels of inventory which our customers choose to maintain. We use sell-through data, which represents the rate at which our products are sold through by our retailer customers to consumers and by our distributor customers to retailers, to indicate consumer demand for our products. However, sell-through data is subject to limitations due to collection methods and the third-party nature of the data, and thus may not be an entirely accurate indicator of actual consumer demand for our products. In addition, the customers supplying sell-through data vary by geographic region and from period to period, but typically represent a majority of our retail sales. In the last quarter of fiscal year 2009 and the first quarter of fiscal year 2010, our net sales declined faster than consumer demand as reflected in sell-through data, as our customers decreased their inventory levels by purchasing products from us at a lower rate than our products were sold through by our retailer customers to consumers and by our distributor customers to retailers. In the second quarter of fiscal year 2010, we believe most of our customers' inventory levels have been substantially aligned with current and expected consumer demand in the EMEA and Americas regions. We anticipate alignment in the Asia Pacific region to be completed in the next fiscal quarter.

Although our financial results are reported in U.S. dollars, approximately half of our sales are made in currencies other than the U.S. dollar, such as the euro, British pound, Chinese renminbi and Japanese yen. Our product costs are primarily in U.S. dollars and Chinese renminbi. Our operating expenses are incurred in U.S. dollars, euros, Swiss francs, Taiwanese dollars, Chinese renminbi and, to a lesser extent, 25 other currencies. To the extent that the U.S. dollar significantly increases or decreases in value relative to the currencies in which our sales and operating expenses are denominated, the reported dollar amounts of our sales and expenses may decrease or increase. In the six months ended September 30, 2009, the impact of foreign currency exchange rates on our results of operations was not material.

Our gross margins vary with the mix of products sold, competitive activity, product life cycle, new product introductions, unit volumes, commodity and supply chain costs, foreign currency exchange rate fluctuations, geographic sales mix, and the complexity and functionality of new product introductions. Changes in consumer demand affect the need for us to undertake promotional efforts, such as cooperative marketing arrangements, customer incentive programs or price protection, which alters our product gross margins. Gross margins declined in the six months ended September 30, 2009, compared with the same period in the prior fiscal year, due to product mix, increased promotional efforts in response to lower consumer demand and the effect on net sales of foreign currency rate fluctuations. Gross margin improved in the three months ended September 30, 2009 compared with the three months ended June 30, 2009, indicating decreasing promotional pressures.

Logitech is incorporated in Switzerland but operates in various countries with differing tax laws and rates. A portion of our income before taxes and the provision for income taxes are generated outside of Switzerland. Therefore, our effective tax rate depends on the amount of profits generated in each of the various tax jurisdictions in which we operate. For the six months ended September 30, 2009 and 2008, the income tax provision was $9.5 million and $13.5 million based on effective income tax rates of 131.9% of net loss and 11.7% of net income. The change in effective tax rate for the six months ended September 30, 2009 and 2008 is primarily due to the mix of income and losses in the various tax jurisdictions in which the Company operates. We expect future effective tax rates to fluctuate for similar reasons.

In the fiscal quarter ended March 31, 2009, we implemented a restructuring plan which included a reduction in Logitech's salaried workforce and other actions aimed at reducing operating expenses. We incurred $20.5 million in pre-tax restructuring charges in the fourth quarter of fiscal year 2009 and $1.5 million in the six months ended September 30, 2009 related to employee termination costs, contract termination costs and other associated costs. We expect to incur an additional $0.6 million or less related to contract termination and associated costs in the remaining quarters of fiscal year 2010. The restructuring plan is expected to generate annual personnel cost savings beginning in fiscal year 2010 of $50 million, and approximately $50 million additional variable cost savings through efforts to limit production costs and operating expenses. The size and timing of future restructuring charges and cost savings are estimates subject to significant future economic, competitive and other uncertainties, and there can be no assurance that we will fully realize the anticipated future results. In the event that the current economic conditions significantly worsen, additional restructuring measures may be required in the future.

Critical Accounting Estimates

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

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

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

There have been no significant changes during the six months ended September 30, 2009 to the nature of the critical accounting estimates disclosed in the Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended March 31, 2009.

Recent Accounting Pronouncements

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

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

Results of Operations

Net Sales

Net sales by channel for the three and six months ended September 30, 2009 and
2008 were as follows (in thousands):


                        Three months ended September
                                    30,                                     Six months ended September 30,
                           2009              2008        Change %            2009                  2008            Change %
Net sales by channel:
  Retail                $   442,702       $  544,216           (19 %)   $      726,468       $         983,384           (26 %)
  OEM                        55,391          120,491           (54 %)           97,735                 190,034           (49 %)
   Total net sales      $   498,093       $  664,707           (25 %)   $      824,203       $       1,173,418           (30 %)

The decline in retail sales for the three and six months ended September 30, 2009 compared with 2008 was primarily due to consumers' reluctance to spend, their buying preference for lower-price products and their strong response to promotions, as well as our customers' alignment of inventory levels with consumer demand, all factors which are attributable to the global economic downturn. Retail units sold declined 14% and 18% in the three and six months ended September 30, 2009, reflecting consumers' inclination towards Logitech's value-priced products.

The significant decline in OEM sales for the three and six months ended September 30, 2009 compared with 2008 was attributable to the popularity of our console microphones in 2008, which in 2009 have reached the latter stages of the typical gaming sales cycle. The quarter over prior year quarter OEM sales decline is expected to continue in the three months ended December 31, 2009.

Approximately 51% and 52% of the Company's total net sales were denominated in currencies other than the U.S. dollar in the three and six months ended September 30, 2009 compared with approximately 58% in both the three and six months ended September 30, 2008. If foreign currency exchange rates had been the same in the three and six months ended September 30, 2009 and 2008, our total sales decline would have been 24% and 28% instead of 25% and 30%.

Retail Sales by Region

The following table presents the change in retail sales by region for the three
and six months ended September 30, 2009 compared with the three and six months
ended September 30, 2008.


                                     Three months ended         Six months ended
                                     September 30, 2009        September 30, 2008
Change in retail sales by region:
  EMEA                                               (24 %)                    (30 %)
  Americas                                            (5 %)                    (21 %)
  Asia Pacific                                       (28 %)                    (25 %)
   Total net sales                                   (19 %)                    (26 %)

For the three and six months ended September 30, 2009 compared with 2008, the EMEA region experienced sales decreases in all product families, as the effects of the global economic downturn continued. Based on retail sell-through data for the three month period, we believe our EMEA channel partners were achieving improved alignment between their inventory levels and consumer demand. If foreign currency exchange rates had been the same in the three and six months ended September 30, 2009 and 2008, the EMEA region sales declines would have been 21% and 25%.

The Americas region had modest positive sales growth for the three months ended September 30, 2009 in the audio and remotes product families. For the six months ended September 30, 2009, retail sales in the Americas region declined over the prior year in all product families. Retail sell-through for the three month period in the Americas region reflected improved alignment of our channel partners' inventory levels with consumer demand. Foreign currency exchange rates had no significant effect on retail sales in the Americas region.

Retail sales in the Asia Pacific region declined in all product families except audio during the three and six months ended September 30, 2009 compared with the same period in the prior fiscal year. Sell-through data for the three month period in the Asia Pacific region indicated continued weakness in consumer demand and further efforts by our channel partners related to inventory management. If foreign currency exchange rates had been the same in the three and six months ended September 30, 2009 and 2008, the Asia Pacific region sales declines would have been 29% and 26%.

Net Sales by Product Family

Net sales by product family during the three and six months ended September 30,
2009 and 2008 were as follows (in thousands):


                            Three months ended
                               September 30,                                Six months ended September 30,
                           2009             2008         Change %            2009                  2008             Change %
Net sales by product
family:
  Retail - Pointing
Devices                 $  130,611       $  178,089            (27 %)   $      220,847       $         324,446            (32 %)
  Retail - Keyboards
& Desktops                  79,906          111,073            (28 %)          137,915                 206,029            (33 %)
  Retail - Audio           121,001          116,812              4 %           193,121                 200,030             (3 %)
  Retail - Video            58,263           70,288            (17 %)          101,077                 127,477            (21 %)
  Retail - Gaming           28,493           39,030            (27 %)           45,642                  69,539            (34 %)
  Retail - Remotes          24,428           28,924            (16 %)           27,866                  55,863            (50 %)
  OEM                       55,391          120,491            (54 %)           97,735                 190,034            (49 %)
   Total net sales      $  498,093       $  664,707            (25 %)   $      824,203       $       1,173,418            (30 %)

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

Retail-Pointing Devices

Retail units of our pointing devices decreased 17% and 24% in the three and six months ended September 30, 2009 compared with the same periods in 2008. Sales of cordless mice decreased 26% and 30%, and units decreased 8% and 14%. Sales of corded mice decreased 31% and 35%, and units decreased 21% and 29%.

Retail-Keyboards and Desktops

Retail unit sales of keyboards and desktops decreased 24% in the three months ended September 30, 2009 and 26% during the six months ended September 30, 2009 compared with the same periods in the prior fiscal year. Cordless keyboards and desktops sales declined 34% and 42%, with units decreasing 17% and 25%. Sales of corded keyboards and desktops decreased 23% and units decreased 29% in both the three months and six months ended September 30, 2009 compared with the prior year.

Retail Audio

Retail unit sales of our audio products increased 9% in the three months and 7% . . .