Note 3 — Net Income (Loss) per Share

The computations of basic and diluted net income (loss) per share for the Company were as follows (in thousands except per share amounts):

Employee equity share options, non-vested shares and similar share-based compensation awards granted by the Company are treated as potential shares in computing diluted net income or loss per share. Diluted shares outstanding include the dilutive effect of in-the-money share-based awards which is calculated based on the average share price for each fiscal period using the treasury stock method. Under the treasury stock method, the amount that the employee must pay for exercising share-based awards, the amount of compensation cost for future service that the Company has not yet recognized, and the amount of tax impact that would be recorded in additional paid-in capital when the award becomes deductible are assumed to be used to repurchase shares.

During the three months ended June 30, 2011 and 2010, 15,939,015 and 12,991,196 share equivalents attributable to outstanding stock options and RSUs (restricted stock units) were excluded from the calculation of diluted net income (loss) per share because the combined exercise price, average unamortized fair value and assumed tax benefits upon exercise of these options and vesting of RSUs were greater than the average market price of the Company's shares, and therefore their inclusion would have been anti-dilutive. For the three months ended June 30, 2011, potentially dilutive share equivalents were excluded from the computation of diluted net loss per share because their inclusion in calculating a net loss per share would have been anti-dilutive.

Note 4 — Employee Benefit Plans

Employee Share Purchase Plans and Stock Incentive Plans

As of June 30, 2011, the Company offers the 2006 ESPP (2006 Employee Share Purchase Plan (Non-U.S.)), the 1996 ESPP (1996 Employee Share Purchase Plan (U.S.)) and the 2006 Stock Incentive Plan. Shares issued to employees as a result of purchases or exercises under these plans are generally issued from shares held in treasury.

The following table summarizes the share-based compensation expense and related tax benefit recognized for the three months ended June 30, 2011 and 2010 (in thousands):

As of June 30, 2011 and 2010, $0.9 million and $0.8 million of share-based compensation cost was capitalized to inventory. The following table summarizes total share-based compensation cost not yet recognized and the number of months over which such cost is expected to be recognized, on a weighted-average basis by type of grant (in thousands, except number of months):

A summary of the Company's stock option activity for the three months ended June 30, 2011 and 2010 is as follows (in thousands, except per share data; exercise prices are weighted averages):

The total pretax intrinsic value of options exercised during the three months ended June 30, 2011 and 2010 was $0.3 million and $3.4 million and the tax benefit realized for the tax deduction from options exercised during those periods was $0.1 million and $0.8 million. The total fair value of options vested as of June 30, 2011 and 2010 was $74.9 million and $74.3 million.

The fair value of employee stock options granted and shares purchased under the Company's employee purchase plans was estimated using the Black-Scholes-Merton option-pricing valuation model applying the following assumptions and values. There were no stock options granted in the three months ended June 30, 2011.

The dividend yield assumption is based on the Company's history and future expectations of dividend payouts. The Company has not paid dividends since 1996. The expected option life represents the weighted-average period the stock options or purchase offerings are expected to remain outstanding. The expected life is based on historical settlement rates, which the Company believes are most representative of future exercise and post-vesting termination behaviors. Expected share price volatility is based on historical volatility using daily prices over the term of the options or purchase offerings. The Company considers historical share price volatility as most representative of future volatility. The risk-free interest rate assumptions are based upon the implied yield of U.S. Treasury zero-coupon issues appropriate for the term of the Company's stock options or purchase offerings.

The Company estimates option forfeitures at the time of grant and revises those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate pre-vesting option forfeitures and records share-based compensation expense only for those awards that are expected to vest.

The following table presents the weighted average grant-date fair values of options granted and the expected forfeiture rates. There were no stock options granted in the three months ended June 30, 2011.

A summary of the Company's time- and performance-based RSU activity for the three months ended June 30, 2011 and 2010 is as follows (in thousands, except per share values; grant-date fair values are weighted averages):

The total fair value of RSUs vested during the three months ended June 30, 2011 and 2010 was $0.7 million and $0.9 million and the tax benefit realized for the tax deduction from RSUs vested during these periods was$0.2 million and $0.2 million.

The Company estimates the fair value of time-based RSUs based on the share market price on the date of grant. The fair value of performance-based RSUs is estimated using the Monte-Carlo simulation method applying the following assumptions:

The dividend yield assumption is based on the Company's history and future expectations of dividend payouts. The expected life of the performance-based RSUs is the service period at the end of which the RSUs will vest if the performance conditions are satisfied. The volatility assumption is based on the actual volatility of Logitech's daily closing share price over a look-back period equal to the years of expected life. The risk free interest rate is derived from the yield on U.S. Treasury Bonds for a term of the same number of years as the expected life.

Defined Contribution Plans

Certain of the Company's subsidiaries have defined contribution employee benefit plans covering all or a portion of their employees. Contributions to these plans are discretionary for certain plans and are based on specified or statutory requirements for others. The charges to expense for these plans for the three months ended June 30, 2011 and 2010 were $3.1 million and $2.1 million.

Defined Benefit Plans

Certain of the Company's subsidiaries sponsor defined benefit pension plans or non-retirement post-employment benefits covering substantially all of their employees. Benefits are provided based on employees' years of service and earnings, or in accordance with applicable employee benefit regulations. The Company's practice is to fund amounts sufficient to meet the requirements set forth in the applicable employee benefit and tax regulations.

The net periodic benefit cost for defined benefit pension plans and non-retirement post-employment benefit obligations for the three months ended June 30, 2011 and 2010 was as follows (in thousands):

Note 5 — Income Taxes

The Company is incorporated in Switzerland but operates in various countries with differing tax laws and rates. Further, a portion of the Company's income before taxes and the provision for income taxes are generated outside of Switzerland.

The income tax benefit for the three months ended June 30, 2011 and 2010 was $9.5 million and $5.4 million based on effective income tax rates of 24.4% of pre-tax loss and 38.3% of pre-tax income. The change in the effective income tax rate for the three months ended June 30, 2011 compared with the three months ended June 30, 2010 is primarily due to the mix of income and losses in the various tax jurisdictions in which the Company operates, and a discrete tax benefit of $7.2 million in the three months ended June 30, 2010 from the closure of income tax audits in certain jurisdictions.

Current deferred tax assets increased from $27.0 million as of March 31, 2011 to $51.8 million as of June 30, 2011. Approximately $12.0 million of the increase relates to the reclassification of deferred tax assets from non-current to current, primarily due to the valuation adjustment to cost of goods sold for the planned price reduction on Logitech Revue and related peripherals. The remaining increase is primarily due to the tax benefit from operating losses generated in the three month period ended June 30, 2011.

As of June 30 and March 31, 2011, the total amount of unrecognized tax benefits and related accrued interest and penalties due to uncertain tax positions was $137.7 million and $138.1 million, of which $117.0 million and $118.2 million would affect the effective income tax rate if recognized. The decline in the income tax liability associated with uncertain tax benefits is primarily due to the expiration of statutes of limitations, offset by the impact of foreign currency exchange rates and the accrual of interest expense.

The Company continues to recognize interest and penalties related to unrecognized tax positions in income tax expense. As of June 30, 2011, accrued interest and penalties related to uncertain tax positions increased to $8.1 million from $8.0 million as of March 31, 2011.

The Company files Swiss and foreign tax returns. For all these tax returns, the Company is generally not subject to tax examinations for years prior to 1999. During the third quarter of fiscal year 2011, the U.S. Internal Revenue Service expanded its examination of the Company's U.S. subsidiary to include fiscal years 2008 and 2009 in addition to fiscal years 2006 and 2007. The Company is also under examination in other tax jurisdictions. At this time it is not possible to estimate the potential impact that these examinations may have on income tax expense. If the examinations are resolved unfavorably, there is a possibility they may have a material impact on our results of operations.

Although the Company has adequately provided for uncertain tax positions, the provisions on these positions may change as revised estimates are made or the underlying matters are settled or otherwise resolved. Although the timing of the resolution or closure on audits is highly uncertain, the Company does not believe it is reasonably possible that the unrecognized tax benefits would materially change in the next twelve months.

Note 6 — Balance Sheet Components

The following table provides the components of certain balance sheet asset amounts as of June 30 and March 31, 2011 (in thousands):

The following table provides the components of certain balance sheet liability amounts as of June 30 and March 31, 2011 (in thousands):

Inventories are stated at the lower of cost or market. Inventory as of June 30, 2011 includes a reserve of $22.2 million to reflect the lower of cost or market on our inventory of Logitech Revue and related peripherals on hand. Other accrued liabilities include $15.9 million to reflect the lower of cost or market on the inventory of Logitech Revue and related peripherals at our suppliers. In the three months ended June 30, 2011, $34.1 million of this valuation adjustment was charged to cost of goods sold, as the result of management's decision in early July 2011 to reduce the future retail price of Logitech Revue from $249 to $99. The goal of the reduction in retail price is to accelerate adoption of the Google TV platform, which has not met widespread U.S. consumer acceptance, resulting in sales of Logitech Revue and related products significantly below management's expectations from the launch date through June 30, 2011.

The following table presents the changes in the allowance for doubtful accounts during the three months ended June 30, 2011 and 2010 (in thousands):

Note 7 — Financial Instruments

Fair Value Measurements

The Company considers fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The Company utilizes the following three-level fair value hierarchy to establish the priorities of the inputs used to measure fair value:

The following table presents the Company's financial assets and liabilities that were accounted for at fair value, classified by the level within the fair value hierarchy (in thousands):

Cash and Cash Equivalents

Cash and cash equivalents consist of bank demand deposits and time deposits. The time deposits have original maturities of less than 31 days. Cash and cash equivalents are carried at cost, which is equivalent to fair value.

Investment Securities

The Company's investment securities portfolio consists of marketable securities related to a deferred compensation plan and auction rate securities collateralized by residential and commercial mortgages.

The marketable securities are classified as non-current trading investments and do not have maturity dates. These securities are recorded at a fair value of $13.8 million and $13.1 million at June 30 and March 31, 2011, based on quoted market prices. Quoted market prices are observable inputs that are classified as Level 1 within the fair value hierarchy. Earnings, gains and losses on trading investments are included in other income (expense), net, and primarily relate to trading securities held at June 30, 2011.

The auction rate securities are classified as non-current available-for-sale investments and have maturity dates in excess of 10 years. Interest rates on these securities were intended to reset through an auction every 28 days, however auctions for these securities have failed since August 2007. Four of the securities with par value of $32.2 million and estimated fair value of $0.9 million have experienced events of default and have declared acceleration. The Company does not expect to realize the proceeds, if any, from these securities until a future auction of these securities is successful or a buyer is found outside of the auction process. These securities have a par value and original cost of $47.5 million, and are recorded at an estimated fair value of $1.7 million at June 30 and March 31, 2011. The estimated fair value was determined by estimating future cash flows through time according to each security's terms, including periodic consideration of overcollateralization and interest coverage tests, and incorporating estimates of default rate, loss severity, prepayment, and delinquency assumptions when available, for the underlying assets in the securities based on representative indices and various research reports. The estimated coupon and principal payments were discounted at the rate of return required by investors, based on the characteristics of each security as calculated from the indices. Such valuation methods fall within Level 3 of the fair value hierarchy. Declines in fair value of the auction rate securities are deemed other-than-temporary and are included in other income (expense), net. Increases in fair value are considered temporary and are included in accumulated other comprehensive loss.

Derivative Financial Instruments

The following table presents the fair values of the Company's derivative instruments and their locations on the Balance Sheet as of June 30 and March 31, 2011 (in thousands):

The following table presents the amounts of gains and losses on the Company's derivative instruments for the three months ended June 30, 2011 and their locations on its Financial Statements (in thousands):