You should read the following discussion in conjunction with our unaudited condensed consolidated financial statements included elsewhere herein. The financial information set forth and discussed below is unaudited, but in the opinion of management, reflects all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of such information. The Company's results of operations for a particular quarter may not be indicative of results expected during the other quarters or for the entire year. The following discussion may contain predictions, estimates and other forward-looking statements that involve a number of risks and uncertainties, including those listed under the "Forward-Looking Statements" section above. These risks and uncertainties are described in more detail in our Annual Report on Form 10-K for the fiscal year ended July 1, 2011, as they may be updated by Quarterly Reports on Form 10-Q subsequently filed with the SEC, including Item 1A. Risk Factors of this Report, and could cause our actual results to differ materially from any future performance suggested below.

We operate on a fiscal calendar that results in a given fiscal year consisting of a 52-week or 53-week period ending on the Friday closest to June 30th of each year. For example, references to "fiscal year 2012" refer to the 52-week period ending on June 29, 2012. Fiscal year 2012 and fiscal year 2011 each consists of 52-week periods.

Overview

We develop and market industry-leading software, devices and content to assist people in overcoming their speech, language or learning disabilities. Our proprietary software is the result of decades of research and development. We believe our trademark- and copyright-protected symbol sets are more widely used than any other in our industry. These assets have positioned us as a leader in two areas within the broader market for assistive technologies-speech generating technologies and special education software.

Sales of our speech generating technologies is our largest source of revenue. In fiscal years 2011, 2010 and 2009, sales of speech generating technologies produced approximately 81%, 79% and 82%, respectively, of our net sales. Our revenue from sales of speech generating technologies has grown to $87.4 million in fiscal year 2011 from $75.0 million in fiscal year 2009. We believe a primary driver of our sales of speech generating technologies has been and will continue to be the scale and effectiveness of our sales and marketing infrastructure and other awareness-building activities. The pricing levels at which third party payors, including Medicare, Medicaid and private insurers, are willing to provide coverage for speech generating technology also significantly influences our sales of speech generating technologies because a significant portion of the speech generating devices that we sell are funded by such third-party payors.

Our other primary source of revenue is sales of special education software. In fiscal years 2011, 2010 and 2009, sales of special education software produced approximately 19%, 21% and 18%, respectively, of our net sales. Our software products are generally purchased by special education teachers and are generally funded by schools, which receive funding from federal, state and local sources. The level of funding available for special education and educational technology is an important driver of our software sales. Currently, revenue from sales of our software products is generated primarily from up-front fees that we collect on the initial sale of our authoring tools.

As previously disclosed, we experienced a softening of demand, as compared to our recent historical growth rates, for both our speech generating devices and software products beginning in fiscal year 2011. Although demand improved in the first quarter of fiscal year 2012 as net sales increased 21.4% compared to the first quarter of fiscal year 2011, we experienced less demand in the second and third quarters of fiscal year 2012 as net sales decreased 9.0% and 16.2%, respectively, compared to the second and third quarters of fiscal year 2011, respectively. We believe that reduced domestic government funding, and particularly more constrained state and local government funding of school budgets, has adversely affected our product sales in the United States during this time period. We also believe that constraints in government spending in the Company's key international markets, including Germany and the United Kingdom, had a similar effect on our product sales in those regions for the thirty-nine week period ended March 30, 2012 as compared to the thirty-nine week period ended April 1, 2011.

To address these shifts in market dynamics that began in fiscal year 2011, we altered certain sales strategies including reallocating sales and marketing resources primarily in the U.S. device market to increase our focus on the adult market and committing additional resources to our direct sales channel for our educational software products. In both devices and software, we have been focusing our efforts more on the U.S. market than the international markets where we operate.

Beginning in the second quarter of fiscal year 2012 we experienced a funding shift, as an alternative payor in a certain geographic region elected to discontinue its role as primary payor for speech generating devices and assumed the role of secondary payor behind other third party payors, such as Medicare, Medicaid and private insurance. For the thirty-nine weeks ended March 30, 2012 we recorded $2.8 million less in net device sales as a result of the funding shift as compared to the thirty-nine weeks ended April 1, 2011. Our expectation is that we will continue to supply patients impacted by the funding shift with devices in the future through other third party payors, which historically have averaged between three and six months for final authorization compared to approximately 30 days for this specific alternative payor.

We believe the strategic changes discussed above related to our U.S. device market helped offset the impact of the shift in funding by this alternative payor. Further, we believe the additional resources we committed to our direct sales channel for our educational software products were adversely impacted by ongoing school budget constraints during the thirteen week periods ended December 30, 2011 and March 30, 2012 as compared to the thirteen week periods ended December 31, 2010 and April 1, 2011, respectively.

Our cost of sales as a percentage of net sales is influenced by the mix of our net sales between speech generating technologies and special education software, with the gross margin on our special education software sales being moderately higher.

Our primary operating expenses are selling and marketing, research and development and general and administrative.

Significant Transactions

Incorporation of DynaVox Inc.

DynaVox Inc. was incorporated as a Delaware corporation on December 16, 2009 for the purposes of facilitating an initial public offering of common equity. Following the recapitalization and IPO transactions described below, DynaVox Inc.'s sole material asset is a controlling equity interest in DynaVox Systems Holdings LLC. As the sole managing member of DynaVox Systems Holdings LLC, DynaVox Inc. operates and controls all of the business and affairs of DynaVox Systems Holdings LLC and, through DynaVox Systems Holdings LLC and its subsidiaries, conducts our business. Prior to the initial public offering, DynaVox Inc. did not engage in any business or activities except in connection with its formation.

The certificate of incorporation of DynaVox Inc. authorizes two classes of common stock, Class A common stock and Class B common stock. On April 21, 2010, one or more shares of Class B common stock of DynaVox Inc. were distributed to each of our then-existing owners, each of which provides its owner with no economic rights but entitles the holder, without regard to the number of shares of Class B common stock held by such holder, to one vote on matters presented to stockholders of DynaVox Inc. for each Holdings Unit held by such holder. Holders of our Class A common stock and Class B common stock vote together as a single class on all matters presented to our stockholders for their vote or approval, except as otherwise required by applicable law.

Recapitalization Transactions

On April 21, 2010, the limited liability company agreement of DynaVox Systems Holdings LLC was amended and restated to, among other things, modify its capital structure by replacing the different classes of interests previously held by our then-existing owners with a single new class of units that we refer to as "Holdings Units." We and our then-existing owners also entered into an exchange agreement under which (subject to the terms of the exchange agreement) they have the right to exchange their Holdings Units for shares of our Class A common stock on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications. As of March 30, 2012 there were 18,982,859 Holdings Units held by parties other than DynaVox Inc. which upon exercise of the right to exchange would exchange for 18,982,859 shares of Class A common stock.

Initial Public Offering

On April 21, 2010, a registration statement relating to shares of Class A common stock was declared effective. The IPO closed on April 27, 2010. Pursuant to the IPO, DynaVox Inc. issued and sold 9,375,000 shares of Class A common stock and acquired an equivalent number of Holdings Units.

Subsequent to the IPO and related offering transactions DynaVox Inc. consolidates the financial results of DynaVox Systems Holdings LLC and its subsidiaries, and the ownership interest of the other members of DynaVox Systems Holdings LLC is reflected as a non-controlling interest in DynaVox Inc.'s consolidated financial statements beginning April 28, 2010.

Tax Receivable Agreement

DynaVox Systems Holdings LLC intends to make an election under Section 754 of the Internal Revenue Code (the "Code") effective for each taxable year in which an exchange of Holdings Units for shares of Class A common stock as described above occurs, which may result in an adjustment to the tax basis of the assets of DynaVox Systems Holdings LLC at the time of an exchange of Holdings Units. As a result of both the initial purchase of Holdings Units from our then-existing owners immediately prior to the IPO and these subsequent exchanges, DynaVox Inc. will become entitled to a proportionate share of the existing tax basis of the assets of DynaVox Systems Holdings LLC. In addition, the purchase of Holdings Units and subsequent exchanges are expected to result in increases in the tax basis of the assets of DynaVox Systems Holdings LLC that otherwise would not have been available. Both this proportionate share and these increases in tax basis may reduce the amount of tax that DynaVox Inc. would otherwise be required to pay in the future. These increases in tax basis may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets.

In connection with the IPO we entered into a tax receivable agreement with our then-existing owners that will provide for the payment from time to time by DynaVox Inc. to our then-existing owners of 85% of the amount of the benefits, if any, that the DynaVox Inc. is deemed to realize as a result of (i) the existing tax basis in the intangible assets of DynaVox Holdings on the date of the IPO, (ii) an increase in tax basis of the assets of DynaVox Holdings that otherwise would not have been available, and (iii) certain other tax benefits related to our entering into the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement. These payment obligations are obligations of DynaVox Inc. and not of DynaVox Holdings. For purposes of the tax receivable agreement, the benefit deemed realized by DynaVox Inc. will be computed by comparing the actual income tax liability of DynaVox Inc. (calculated with certain assumptions) to the amount of such taxes that DynaVox Inc. would have been required to pay had there been no increase to the tax basis of the assets of DynaVox Holdings as a result of the purchase or exchanges, had there been no tax benefit from the tax basis in the intangible assets of DynaVox Holdings on the date of the IPO and had DynaVox Inc. not entered into the tax receivable agreement. The term of the tax receivable agreement will continue until all such tax benefits have been utilized or expired, unless DynaVox Inc. exercises its right to terminate the tax receivable agreement for an amount based on the agreed payments remaining to be made under the agreement or DynaVox Inc. breaches any of its material obligations under the tax receivable agreement in which case all obligations will generally be accelerated and due as if DynaVox Inc. had exercised its right to terminate the agreement. As of March 30, 2012, the liability representing the expected payments due under the tax receivable agreement was $44.8 million. During the thirty-nine week period ended March 30, 2012, the Company recorded a $5.0 million increase to the tax receivable agreement liability related to the exchange of 1,426,836 units of DynaVox Holdings for 1,426,836 shares of the Company's Class A common stock. Of this increase, $3.8 million has been recorded as an increase to a long-term deferred tax asset and represents 85% of the estimated tax benefits related to an increase in tax basis and the estimated payments under the tax receivable agreement. The remaining $1.2 million is the difference between the recorded deferred tax asset and the computed TRA liability and is recorded as an adjustment to equity.

For a complete discussion of the tax receivable agreement see "Item 13. Certain Relationships and Related Transactions, and Director Independence" in our Annual Report on Form 10-K for the fiscal year ended July 1, 2011.

Components of Results of Operations

Net Sales

Our sales are recorded net of product returns and an allowance for discounts and adjustments at the time of the sale based upon contractual arrangements with insurance companies, Medicare allowable billing rates and state Medicaid rates. Our net sales are derived from the sales of speech generating devices and special education software and content. The following table summarizes our net sales by product categories for the periods indicated both in dollars and as a percentage of net sales:

                                 Thirteen weeks ended             Thirty-nine weeks ended
                               March 30,        April 1,        March 30,          April 1,
                                  2012            2011             2012              2011
                                (Amounts in thousands)            (Amounts in thousands)
 Net sales
 Speech generating devices    $     20,684      $  22,707      $     60,815        $  60,700
 Special education software          3,343          5,961            12,619           15,063

                              $     24,027      $  28,668      $     73,434        $  75,763

 Percentage of net sales
 Speech generating devices            86.1 %         79.2 %            82.8 %           80.1 %
 Special education software           13.9 %         20.8 %            17.2 %           19.9 %

                                     100.0 %        100.0 %           100.0 %          100.0 %

A majority of our net sales for devices are generated by our direct sales efforts for products that are shipped to clients and billed to Medicare (national), Medicaid (local) and private insurance companies as well as products that are shipped and directly billed to school districts, evaluation centers and Department of Veterans Affairs centers. Special education software sales for the thirty-nine weeks ended March 30, 2012 includes a large international order of approximately $1.4 million.

Our business is seasonal and historically has realized a higher portion of net sales, net income, and operating cash flows in the second half of the fiscal year and especially in the fourth fiscal quarter (second calendar quarter). Fourth quarter sales represented 30% and 29% of total annual sales for fiscal years 2011 and 2010, respectively. In our fiscal year ended July 1, 2011, 56% of our net sales occurred in the second half of our fiscal year compared to 54% of our net sales occurring in the second half of our fiscal year 2010. Sales of our speech generating technologies and of our special education software are highly seasonal as schools make a large percentage of their purchases of these products at the end of the school year, which is the second quarter of the calendar year and the fourth quarter of our fiscal year.

Cost of Sales

Cost of sales includes the direct labor and indirect costs of the final assembly operations performed at our facility in Pittsburgh, the cost of the component materials used in the final assembly, quality control testing, certain royalties, the distribution costs of our special education software center and other third-party costs. Our cost of sales is substantially higher in higher volume quarters, generally increasing as net sales increase. Changes in the mix of our products, such as changes in the proportion of synthesized to digitized devices, or the mix between devices and software, may also impact our overall cost of sales. We review our inventory levels on an ongoing basis in order to identify potentially obsolete products and record any adjustments to our reserve as a component of cost of sales.

Operating Expenses

Selling and Marketing. Selling and marketing expenses consist primarily of salaries, commissions, benefits and other personnel related expenses for employees engaged in field sales, front-end technical support to assist the sales process, sales operations (order authorization and processing), marketing and external advertising and promotion. While some of these expenses vary proportionally with net sales, such as commissions, the majority of these expenses do not. As a result, selling and marketing expense as a percentage of net sales is usually higher in lower volume quarters and lower in higher volume quarters.

Research and Development. Our research and development expenses consist primarily of compensation of employees associated with the development, design and testing of new products, product enhancements and new applications for our existing products. We expense all of our research and development costs as they are incurred. Certain patent technology costs are capitalized and amortized over the estimated useful life of the patent related asset.

General and Administrative. General and administrative expenses consist primarily of salaries, benefits and other personnel related expenses for employees engaged in finance, legal, human resources and executive management. Other costs include outside legal and accounting fees, investor relations, risk management (insurance) and other administrative costs.

Amortization of Certain Intangible Assets. We have finite-lived intangible assets composed of non-compete agreements, acquired software technology, acquired patents, internally developed patents, trade names, and acquired backlog which are typically amortized on a straight-line basis over their estimated useful lives. Non-competition agreements are amortized over six years, acquired software technology is amortized over three to 10 years, acquired patents are amortized over 10 years, internally developed patents are amortized when granted, trade names are amortized over three years, and acquired backlog was amortized over a six-month period. Amortization related to acquired software technology and trade names is included in cost of sales. Amortization of non-competition agreements, patents and acquired backlog is included in operating expenses.

Impairment Loss. Long-lived assets, which include fixed assets and finite-lived intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset or group of assets may not be recoverable. Goodwill and intangibles with indefinite-lives are reviewed at least annually, or when events or other changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Goodwill is tested by comparing the carrying value of the reporting unit to its fair value.

The Company uses the end of its fiscal year for the annual test and has one reporting unit. In accordance with its policy, the Company conducted its annual impairment test as of July 1, 2011 and concluded that the fair value of its goodwill and intangibles with indefinite lives, significantly exceeded their carrying value, and no impairment charge was necessary. During the third quarter of fiscal 2012 the Company determined there were indicators of potential impairment of goodwill and intangibles due to a combination of a significant decline in the Company's market capitalization during the period (market capitalization was approximately $91.8 million as of March 30, 2012 compared to approximately $223.6 million as of July 1, 2011) and a continued decline in net sales during the third quarter of fiscal year 2012 (net sales declined 16.2% as compared to the third quarter of fiscal year 2011).

The determination of whether any impairment of goodwill exists is based upon a two-step process. In step one of the analysis, the fair value of the reporting unit is compared to the unit's carrying value, including goodwill, to determine if there is a potential impairment. If the fair value exceeds the carrying amount, the goodwill of the reporting unit is considered not impaired and no further analysis or action is required. If the analysis in step one indicates that the carrying value exceeds the fair value, step two of the test is performed to determine the amount of goodwill impairment loss, if any.

In step two of the test, the implied fair value of a reporting unit's goodwill is compared to the carrying amount of that goodwill. The implied fair value of the goodwill is determined in the same manner as the amount of goodwill recognized in a business combination is determined. That is, the fair value of a reporting unit is allocated to all the assets and liabilities of that reporting unit, including unrecognized intangible assets as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the price paid to acquire the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of that goodwill.

The Company's estimate of the fair value of the reporting unit utilizes an average of the following income and market approaches.

(1) Income Approach: The income approach is based on the Company's projected future cash flows. The estimated cash flows are discounted to present value using a weighted-average cost of capital that considers the timing and risk of the future cash flows. The discounted cash flows are used to estimate the total fair value of the Company. The significant assumptions under this approach include revenue and cost projections to arrive at cash flows over a projection period, a terminal growth rate that is applied to cash flows beyond the projection period, and the weighted-average cost of capital used to discount the expected cash flows.

(2) Guideline Market Approach: This market approach examines the cash flows of comparable companies observed in the market. Cash flows are measured over various time periods (i.e. last twelve months or projected periods) and compared to the total market value of invested capital to arrive at multiples of cash flows. The multiples are then risk-adjusted to consider the Company's size relative to the comparable companies. The comparable company multiples are then applied to the Company's cash flows to estimate the fair value of the Company. The significant assumptions under this approach include the selection of comparable companies, the selection of time periods, and risk adjustment factors applied to the multiples.

In determining the estimated fair value of the reporting unit the Company used a weighting of 25% for the Income Approach, 25% for the Guideline Market Approach, and 50% for the Market Capitalization Approach. As a result, the Company determined that the carrying value of the reporting unit exceeded its fair value and conducted a step two analysis. As a result of our step two analysis, we recorded a full impairment loss on our goodwill of $60.8 million during the third quarter of fiscal year 2012. The loss was recorded as an impairment loss on the Company's statement of operations.

Key assumptions utilized by management have a significant effect on the determination of the impairment loss. Key assumptions used in the valuation of our goodwill included a weighted-average cost of capital of 12.0% and multiples applied to cash flows ranging from 6.0 to 7.0.

As a result of the impairment indicators, the Company also conducted interim impairment testing of the finite-lived and indefinite-lived intangible assets as of March 30, 2012. The test for recoverability of a definite-lived asset group to be held, and used, is performed by comparing the carrying amount of the assets to the sum of the estimated future net undiscounted cash flows expected to be generated by the assets. In estimating the future undiscounted cash flows, the Company used projections of cash flows directly associated with, and which are expected to arise as a direct result of, the use and eventual disposition of the assets. The significant assumptions under this method include revenue and cost projections to arrive at cash flows over a projection period. The Company performed a test for each asset grouping and determined that an impairment had occurred and an impairment loss of $1.3 million was recorded equal to the excess of the carrying value over the fair value. The finite-lived assets impaired related to commercial computer software and acquired patent technology. The loss was recorded as an impairment loss on the Company's statement of operations.

The test for recoverability of an indefinite-lived asset group to be held, and used, is performed by comparing the carrying amount of the asset to the fair value. The fair value of indefinite-lived intangibles, both trade names and symbols, was estimated by using a relief from royalty method (a discounted cash flow methodology). Significant assumptions under this method include royalty rates and the discount rate. Royalty rates ranging from 2% to 20% were utilized for trade names and a rate of 8% coupled with a fixed rate per device was utilized for symbols. The Company utilized a discount rate of 13.0% for both trade names and symbols. The Company determined that the fair value of the indefinite-lived intangibles exceeded its carrying value and no impairment charge was necessary.

Equity-Based Compensation

We estimate the grant date fair value of stock options for our Class A common . . .