The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements for the year ended April 1, 2012 and the Notes to those statements included elsewhere in this Annual Report on Form 10-K.

Business Overview

We are the pioneer and a global market leader in motion interface devices that detect and track an object's motion in three-dimensional space. Our MotionTracking devices combine micro-electro-mechanical system, or MEMS, based motion sensors, such as accelerometers and gyroscopes, with mixed-signal integrated circuits (ICs) and proprietary algorithms and firmware that intelligently calibrate, process and synthesize sensor output for use by software applications via an application programming interface (API). Our MotionTracking devices are differentiated by small form factor, high level of integration, performance, reliability and cost effectiveness. While our solutions have broad applicability, we currently target consumer electronics applications such as smartphones and tablets, console and portable video gaming devices, digital still and video cameras, smart TVs (including digital set-top boxes, televisions and multi-media HDDs), 3D mice, navigation devices, toys, and health and fitness accessories. We utilize a fabless model, leveraging current CMOS and MEMS foundries and semiconductor packaging supply chains.

Our current strategy is to continue targeting the consumer electronics market with integrated MotionTracking devices that meet or exceed the performance and cost requirements of consumer electronics manufacturers, are easy to integrate and set industry performance benchmarks. Our ability to secure new customers depends on winning competitive processes, known as design wins. These selection processes are typically lengthy, and, as a result, our sales cycles will vary based on the market served, whether the design win is with an existing or a new customer and whether our product being designed into our customer's device is a first generation or subsequent generation product. Because the sales cycle for our products is long, we can incur design and development support expenditures in circumstances where we do not ultimately recognize any net revenue. We do not receive long-term purchase commitments from any of our customers, all of whom purchase our products on a purchase order basis. While product life cycles in our target market vary by application, once one of our solutions is incorporated into a customer's design, we believe that our solution is likely to remain a component of the customer's product for its life cycle because of the time and expense associated with redesigning the product or substituting an alternative solution. The trend is also supported by the increased likelihood that once a customer introduces one of our products into one of their devices, we believe they are likely to introduce it into others. Additionally, once a customer introduces one of our lower functionality sensors into their platforms, we believe they are more likely to adopt our more advanced integrated MotionTracking devices.

The history of our product development and sales and marketing efforts is, on a calendar year basis, as follows:

• From our inception in 2003 through 2005, we were primarily engaged in the design and development of our analog gyroscopes. In this period, we also developed and refined our fabrication process, which we refer to as the Nasiri-Fabrication platform.

• In 2006, we began volume shipments of our IDG family of integrated X-Y dual-axis analog gyroscopes for the compact digital camera market, the first commercially available sensors of that type. Subsequently, through 2008, we developed and shipped successive generations of these gyroscopes with enhanced performance and reduced die sizes. We began high-volume shipments of our IDG-600 to Nintendo beginning in May 2008.

• In 2009, we began shipping enhanced and alternative versions of our single- and dual-axis analog gyroscopes as well as our ITG family of X-Y-Z three-axis digital output gyroscopes. We also significantly accelerated shipments of our products due to the broad market adoption of the Nintendo

• In 2010, we began volume shipments of our MPU-3000 family of motion processors with digital output, three-axis gyroscopes, and software development kits, designed to enable faster motion interface application development. In addition, we started shipping our ITG- and IMU-3000 family of products, which address a broader array of consumer applications than our analog products. We also started sampling our MPU-6000 family of integrated six-axis MotionProcessors that integrate a three-axis gyroscope and three-axis accelerometer on one chip with our MotionApps platform.

• In 2011, we began high-volume shipments of our ITG/IMU/MPU-3000 family of motion processors for the portable gaming, smart TV, smartphone and tablet markets. In addition, we began volume shipments of our MPU-6000 family of six-axis motion processors for the smartphone and tablet markets. We also introduced our IDG-2020 and IXZ-2020 families of dual-axis gyroscopes, which address the need for optical image stabilization (OIS) technology in camera phones and which are available for sampling to selected customers.

• In January 2012, we introduced our nine-axis MPU-9150 motion processor, which is available for sampling to selected customers and is targeted for the smartphone, tablet, gaming controller and wearable sensor markets.

Our net revenue increased to $153.0 million in fiscal year 2012 from $96.5 million in fiscal year 2011 and $79.6 million in fiscal year 2010, respectively. At April 1, 2012, we had $157.8 million in cash, cash equivalents and short-term investments. We achieved positive operating cash flow of $44.4 million for fiscal year 2012 compared to $7.9 million for fiscal year 2011. We achieved net income of $36.9 million, $9.3 million, and $15.1 million in fiscal years 2012, 2011 and 2010, respectively.

At April 2012, five customers accounted for 18%, 17%, 13%, 12% and 10% of total accounts receivable. At April 3, 2011, three customers accounted for 43%, 16% and 16% of total accounts receivable. No other customers accounted for more than 10% of total accounts receivable at April 2012 or April 2011.

For fiscal year 2012 three customers accounted for 31%, 15% and 12% of total net revenue. For fiscal years 2011and 2010, one customer accounted for 73% and 85% of total net revenue, respectively. No other customers accounted for more than 10% of total net revenue for fiscal years 2012, 2011 or 2010.

Basis of Presentation

Net Revenue

We derive our net revenue from sales of our MotionTracking devices. We primarily sell our products through our worldwide sales organization directly to manufacturers of consumer electronics devices. To date, a significant majority of our net revenue has been derived from these direct sales, and we expect this trend to continue for the foreseeable future. We also sell our products through an indirect channel of distributors that fulfill orders for our products from manufacturers of consumer electronics devices, original design manufacturers and contract manufacturers.

We primarily sell our products directly to customers and distributors in Asia, which constituted 92% of our net revenue in fiscal year 2012 compared with 98% of our net revenue in fiscal year 2011 and 99% of our net revenue for the fiscal year 2010. For fiscal years 2012, 2011 and 2010, we derived $141.0 million, $95.7 million and $79.1 million of net revenue, respectively, from customers in foreign countries and we derived $12.0 million, $0.8 million and $0.5 million, respectively, of net revenue from customers in the United States. For additional information about net revenue by geographic region, refer to Note 1 to our Consolidated Financial Statements included in this Annual Report on Form 10-K.

We believe that a substantial majority of our net revenue will continue to come from sales to customers located in Asia, where most of the manufacturers of consumer electronics devices that use and may in the future use our products are located. As a result of this regional customer concentration, we may be subject to economic and political events and other developments that impact our customers in Asia. For more information, see the section titled "Risk Factors-Our business, financial condition and results of operations could be adversely affected by the political and economic conditions of the countries in which we conduct business."

Gross Profit

Gross profit is the difference between net revenue and the cost of revenue. Cost of revenue primarily consists of manufacturing, packaging, assembly and testing costs for our products, shipping costs, costs of personnel, including stock-based compensation, warranty costs and write-downs for excess and obsolete inventory.

We price our products based on market and competitive conditions and periodically reduce the price of our products as market and competitive conditions change. Typically we experience price decreases over the life cycle of our products, which may vary by market and customer. As a result, if we are not able to decrease the cost of our products in line with the price decreases of our products, we may experience a reduction in our gross profit and gross margin. Gross margin has been and will continue to be affected by a variety of factors, including:

• demand for our products and services;

• product manufacturing yields;

• write-downs of inventory for excess quantity and technological obsolescence;

• product mix;

• erosion of average selling prices, as required by agreements entered into with our customers and in anticipation of competitive pricing pressures, new product introductions by us and our competitors, product end of life programs, and for other reasons;

• the proportion of our products that are sold through direct versus indirect channels;

• our ability to attain volume manufacturing pricing from our foundry partners and suppliers; and

• growth in our headcount and other related costs incurred in our organization.

Research and Development

Research and development expense primarily consists of personnel related expenses (including stock based compensation), intellectual property license costs, reference design development costs, development testing and evaluation costs, depreciation expense and allocated occupancy costs. Research and development activities include the design of new products, refinement of existing products and processes and design of test methodologies, including hardware and software to ensure compliance with required specifications. All research and development costs are expensed as incurred. We expect our research and development expenses to increase on an absolute basis as we continue to expand our product offerings and enhance existing products.

Selling, General and Administrative

Selling, general and administrative expense primarily consists of personnel related expenses (including stock based compensation), sales commissions, field application engineering support, travel costs, professional and consulting fees, legal fees, depreciation expense and allocated occupancy costs. We expect selling, general and administrative expenses to increase on an absolute basis in the future as we expand our sales, marketing, finance and administrative personnel, and we incur additional expenses associated with operating as a public company.

Change in Fair Value of Warrant Liabilities

Change in fair value of warrant liabilities includes the changes in the fair value of our warrants as required by ASC 815-40-15. See "Critical Accounting Policies and Estimates-Financial Instruments with Characteristics of Both Liabilities and Equity".

Income Tax Provision

The provision for income taxes consists of our estimated Federal, State and foreign income taxes based on our pre-tax income. Our provision differs from the federal statutory rate primarily due to expenses that are not deductible for income taxes such as the changes in fair value of our warrant liability and certain stock-based compensation, research and development credits, state income taxes, foreign tax rate differentials, in fiscal year 2010, the reversal of our deferred income tax valuation allowance and an expected lower effective tax rate subsequent to the implementation of our international structure in fiscal year 2011.

Results of Operations

The following table sets forth certain consolidated statement of income data as a percentage of net revenue for the periods indicated.

                                                              Fiscal Year
                                                  2012           2011           2010
  Net revenue                                         100 %          100 %          100 %
  Cost of revenue                                      44             45             45

  Gross profit                                         56             55             55


  Operating expenses:
  Research and development                             13             16             16
  Selling, general and administrative                  12             16             11

  Total operating expenses                             25             33             27


  Income from operations                               31             22             28
  Change in fair value of warrant liabilities           -             (4 )           (8 )
  Other income (expense), net                           -              -              -

  Income before income taxes                           31             18             20
  Income tax provision                                  7              8              1

  Net income                                           24 %           10 %           19 %

Comparison of Fiscal Years 2012, 2011 and 2010



                                                             Fiscal Year
                                 2012                           2011                            2010
                                                           (in thousands)
Net revenue           $         152,967              $         96,547                $         79,556

Net revenue for fiscal year 2012 increased by $56.4 million, or 58%, year-over-year, primarily due to higher volume shipments to an expanded customer base, including manufacturers of smartphones, tablet devices and digital television and set-top box remote controls. Total unit shipments for fiscal year 2012 increased by 83% year-over-year. Our overall average unit selling price for fiscal year 2012 decreased by approximately 13% year-over-year as a result of the change in our product mix and declines in average selling prices associated with products primarily introduced in prior years. We expect that average selling prices associated with new 6-axis MotionTracking products will be higher than current prices on mature products.

Net revenue for fiscal year 2011 increased by $17.0 million, or 21%, year-over-year, primarily due to a change in our product mix as we began to ship higher volumes of our more advanced products. Total unit shipments increased by 34% year-over-year, while the overall average unit selling price of our products declined

less than 10%. The percentage increase in revenues was primarily attributable to the expansion of our customer base to include manufacturers of smartphones, tablet devices and digital television and set-top box remote controls. Net revenue from our largest customer increased by 4% year-over-year, reflecting a change in the product mix sold to them in connection with their introduction of a new product.

Cost of Revenue and Gross Profit



                                                Fiscal Year
                           2012                     2011                     2010
                                               (in thousands)
Cost of revenue     $           67,571       $           43,647       $           36,073
% of net revenue                    44 %                     45 %                     45 %
Gross profit        $           85,396       $           52,900       $           43,483
% of net revenue                    56 %                     55 %                     55 %

Gross profit for the fiscal year 2012 increased by $32.5 million, or 61%, year-over-year, due to higher volume shipments of our products to an expanded customer base, including manufacturers of smartphones, tablet devices and digital television and set-top box remote controls, year-over-year improvements in our production yields and efficiency, and lower warranty costs in Fiscal year 2012. Gross profit as a percentage of sales, or gross margin, also increased due to improvements in our production yields and efficiency, partially offset by a write-down of inventory related to excess and obsolete material for fiscal year 2012 of $2.2 million. We expect gross margins to fluctuate in future periods due to changes in product mix, average unit selling prices, manufacturing costs and inventory write-downs.

Gross profit for fiscal year 2011 increased by $9.4 million, or 22%, year-over-year, due to the 34% increase in unit shipments of our products, primarily driven by increased sales to manufacturers of smartphones, tablet devices, and digital television and set-top box remote controls, continued improvements in our production yields and efficiency, and the release of our latest generation products.

Research and Development



                                                             Fiscal Year
                                      2012                       2011                       2010
                                                            (in thousands)
Research and development       $           19,672         $           15,826         $           13,085
% of net revenue                               13 %                       16 %                       16 %

Research and development expense for fiscal year 2012 increased by $3.8 million, or 24%, year-over-year. The increase was primarily attributable to increased personnel costs, mask and foundry expenses and outside service cost of $2.6 million, $0.9 million and $0.5 million respectively. Research and development headcount was 109 at the end of fiscal year 2012 and 83 at the end of fiscal year 2011.

Research and development expense for fiscal year 2011 increased by $2.7 million, or 21%, year-over-year. The increase was primarily attributable to the growth of our research and development organization to support expanding product development initiatives. Research and development headcount increased to 83 from 67 year-over-year, resulting in a year-over-year increase in personnel costs of $3.5 million. The majority of headcount growth in fiscal year 2010 occurred in the second half of that fiscal year, which resulted in a relatively higher expense in fiscal year 2011 because those new employees were employed for the entirety of fiscal year 2011. This increase in research and development expense was partially offset by lower costs related to engineering materials and outside services expenses.

Selling, General and Administrative



                                                               Fiscal Year
                                         2012                      2011                     2010
                                                             (in thousands)
Selling, general and
administrative                     $         18,710          $         15,596          $         8,427
% of net revenue                                 12 %                      16 %                     11 %

Selling, general and administrative expense for fiscal year 2012 increased by $3.1 million, or 20%, year-over-year. The increase was primarily attributable to increased personnel costs of $3.3 million and increased facilities and infrastructure cost of $0.5 million, partially offset by the write-off of deferred offering costs of $1.4 million in the third quarter of 2011. Selling, general and administrative headcount increased to 88 at the end of fiscal year 2012 from 71 year-over-year.

Selling, general and administrative expense for fiscal year 2011 increased $7.2 million, or 85%, year-over-year, primarily as a result of expenses associated with the need to support the increased demand for our products, including expansion of our global sales operations, and increased expenses related to establishing an organizational infrastructure to support a public reporting company. Selling, general and administrative headcount increased to 71 from 51 year-over-year, resulting in a year-over-year increase in personnel costs of $3.5 million. The majority of headcount growth in fiscal year 2010 occurred in the second half of that fiscal year, which resulted in a relatively higher expense in fiscal year 2011 because those new employees were employed for the entirety of fiscal year 2011. Additionally, in fiscal year 2011, we expensed $1.4 million in deferred offering costs.

Income From Operations



                                                   Fiscal Year
                                  2012                 2011                 2010
                                                  (in thousands)
   Income from operations    $       47,014       $       21,478       $       21,971
   % of net revenue                      31 %                 22 %                 28 %

Income from operations for fiscal year 2012 increased by $25.5 million, or 119%, year-over-year, primarily due to increased unit shipments, increased gross profit and lower operating expenses as a percentage of sales.

Income from operations for fiscal year 2011 decreased by $0.5 million, or 2%, year-over-year, primarily due to increased research and development expense due to increased headcount and increased selling, general and administrative expense associated with the need to support increased demand for our products as well as a write-off of $1.4 million of costs associated with our initial public offering.

Other Income (Expense), Net



                                                             Fiscal Year
                                    2012                      2011                         2010
                                                            (in thousands)
Change in fair value of
warrant liabilities              $          -           $          (4,025)           $          (6,363)
Other income (expense), net               138                           31                         (67)

Other income (expense), net       $       138             $        (3,994)             $        (6,430)


% of net revenue                           -%                           4%                           8%

Other income (expense), net decreased by $4.1 million, or 103%, for fiscal year 2012 compared to fiscal year 2011. The change in other income (expense) was primarily due to changes in fair value of warrant liabilities in fiscal year 2011. During fiscal year 2011, we recorded charges of $4.0 million resulting from the increase in fair value of warrants to purchase shares of our preferred stock, compared to $6.4 million recorded in fiscal year

2010. Effective June 25, 2010, we amended our certificate of incorporation to remove certain provisions from our preferred stock that had resulted in our warrants being previously classified as liabilities. On that date, the fair value of the warrants, $11.9 million, was reclassified to stockholders' equity. Accordingly, for periods after June 27, 2010, we were not required to reflect changes in fair value of warrant liabilities in our condensed consolidated statements of income.

Income Tax Provision



                                                                  Fiscal Year
                                            2012                     2011                     2010
                                                                (in thousands)
Income tax provision                    $      10,205            $       8,137            $         399
% of income before income taxes                    22 %                     47 %                      3 %

The increase in the provision for income taxes was primarily due to the increase in income before income taxes to $47.2 million for fiscal year 2012, compared to $17.5 million for fiscal year 2011, offset by a lower effective tax rate resulting from foreign rate differentials.

In fiscal year 2012, we recorded an income tax provision of $10.2 million, compared to an income tax provision of $8.1 million for fiscal year 2011. Our fiscal year 2012 effective tax rate differs from the U.S. statutory rate primarily due to profits earned in jurisdictions where the tax rate is lower than the U.S. tax rate and the benefit of the federal research and development income tax credit. The income tax provision was also unfavorably impacted by the effects of non-deductible stock-based compensation expense.

Our provision for income taxes was $8.1 million in fiscal year 2011, compared to $0.4 million in fiscal year 2010. The increase in the provision for income taxes in fiscal year 2011 was due primarily to a $7.2 million reduction of our tax valuation allowance in fiscal year 2010 to reflect the anticipated utilization of deferred tax assets and the increase in net income from the prior year.

At the end of fiscal year 2012, we had approximately $18.7 million of California state net operating loss carryforwards. The California state net operating loss carryforwards expire between 2017 and 2022. Additionally, at the end of fiscal year 2012, we had California state and foreign research tax credit carryforwards of approximately $1.7 million and $0.2 million, respectively. The California state credits are not subject to expiration under current California state tax law.

The provision for income tax differs from the amount computed by applying the federal statutory tax rate to income before income taxes as follows:

                                                      Fiscal            Fiscal           Fiscal
                                                       2012              2011             2010
Income tax provision at the federal statutory rate       35.0 %            35.0 %           35.0 %
State tax, net of federal benefit                           -                 -              1.9
Research and development credits                         (1.0 )            (2.0 )           (3.2 )
. . .