1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission, or the SEC, and U.S. generally accepted accounting principles, or U.S. GAAP. However, certain information or footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such SEC rules and regulations. In our opinion, the financial statements include all adjustments, which are of a normal and recurring nature, necessary for the fair presentation of the results of the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the operating results for the full fiscal year or any future period. These financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our annual report on Form 10-K for the fiscal year ended June 30, 2010.

The consolidated financial statements include our financial statements and those of our wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated upon consolidation.

Our fiscal year is the 52- or 53-week period ending on the last Saturday in June. Our fiscal 2011 will be a 52-week period ending on June 25, 2011. Our fiscal 2010 was a 52-week period ending on June 26, 2010. The fiscal periods presented in this report were 13-week periods for the three months ended September 25, 2010 and September 26, 2009. For ease of presentation, the accompanying consolidated financial statements have been shown as ending on September 30 and calendar quarter end dates for all annual, interim, and quarterly financial statement captions, unless otherwise indicated.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, allowance for doubtful accounts, cost of revenue, inventories, product warranty, share-based compensation costs, provision for income taxes, income taxes payable, investments, and contingencies. We base our estimates on historical experience, applicable laws and regulations, and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

2. Revenue Recognition

We recognize revenue from product sales when there is persuasive evidence that an arrangement exists, delivery has occurred and title has transferred, the price is fixed or determinable, and collection is reasonably assured. We accrue for estimated sales returns and other allowances, based on historical experience, at the time we recognize revenue.

3. Net Income Per Share

The computation of basic and diluted net income per share was as follows (in thousands, except per share data):

		Three Months Ended
		September 30,
		2010				2009
Numerator:
Net income		$	18,699			$	9,804
Denominator:
Shares, basic			34,402				34,341
Effect of dilutive share-based awards			1,498				1,627
Shares, diluted			35,900				35,968
Net income per share:
Basic		$	0.54			$	0.29
Diluted		$	0.52			$	0.27

Our basic net income per share amounts for each period presented have been computed using the weighted average number of shares of common stock outstanding. Our diluted net income per share amounts for each period presented include the weighted average effect of potentially dilutive shares. We use the “treasury stock” method to determine the dilutive effect of our share-based awards and Convertible Senior Subordinated Notes, or Notes. No shares associated with our Notes were included in dilutive shares for the periods presented as the weighted average share price during each period was less than the conversion price of $33.69.

Dilutive net income per share amounts do not include the weighted average effect of 3,756,296 and 2,899,824 share-based awards that were outstanding during the three months ended September 30, 2010 and 2009, respectively. These share-based awards were not included in the computation of diluted net income per share because the proceeds received, if any, from such share-based awards combined with the average unamortized compensation costs adjusted for the hypothetical tax benefit or deficiency creditable or chargeable, respectively, to additional paid-in capital were greater than the average market price of our common stock, and therefore, their effect would have been antidilutive.

4. Cash Equivalents and Auction Rate Securities Investments

Cash equivalents consist of highly liquid investments with original maturities of three months or less. Our non-current investments include auction rate securities, or ARS, which are reported at fair value, with unrealized gains and losses excluded from earnings and are shown separately as a component of accumulated other comprehensive income within stockholders’ equity. We charge any other-than-temporary declines in the fair value of a debt security to earnings (within impairment (loss)/recovery on investments, net) if the decline results from a credit loss or to other comprehensive income if the decline results from a noncredit loss. We charge any other-than-temporary declines in the fair value of equity securities to earnings (within impairment (loss)/recovery on investments, net). Other-than-temporary declines result in the establishment of a new cost basis for the security. We include interest earned on investments in interest income.

Our ARS investments, which have a par value of $40.5 million, have failed to settle in auctions beginning in September 2007. These investments are not liquid, and in the event we need to access these funds prior to their maturity, we will not be able to do so without a loss of principal, unless redeemed by the issuers or a future auction on these investments is successful. During the three months ended September 30, 2010, we recognized a gain of $10,000 on the redemption at par of $200,000 of our ARS investments, which is included in impairment (loss)/recovery on investments, net. During the three months ended September 30, 2009, $700,000 of our ARS investments were redeemed at par, and we recognized a gain of $6,000 on the redemption of these investments, which is included in impairment (loss)/recovery on investments, net.

As there are currently no active markets for our various failed ARS investments, we have estimated the fair value as of September 30, 2010 using a trinomial discounted cash flow analysis. The analysis considered, among other factors:

•

the collateral underlying the security investments;

•

creditworthiness of the counterparty;

•

timing of expected future cash flows;

•

the probability of a successful auction in a future period;

•

the underlying structure of each investment;

•

the present value of future principal and interest payments discounted at rates considered to reflect current market conditions;

•

consideration of the probabilities of default, passing a future auction, or redemption at par for each period; and

•

estimates of the recovery rates in the event of default for each investment.

When possible, our failed ARS investments were compared to other observable market data or securities with similar characteristics. Our estimate of the fair value of our ARS investments could change materially from period to period based on future market conditions.

Contractual maturities for our ARS investments are generally greater than five years, with fair value of $9.5 million maturing from 2015 to 2017, $8.9 million maturing from 2034 to 2045, and $10.0 million having no stated maturity. Of our ARS investments, $27.0 million par value are investment grade, and the remaining $13.5 million par value are below investment grade. For the three-month period ended September 30, 2010, we recorded a realized gain of $10,000 on the redemption of ARS investments. In connection with our fair value analysis for the three-month period ended September 30, 2009, we recognized a $443,000 other-than-temporary impairment charge on our ARS investments in preferred stock.

The various types of ARS investments we held as of September 30, 2010, including the original cost basis, other-than-temporary impairment included in other comprehensive income, other-than-temporary impairment included in retained earnings, new cost basis, unrealized gain, and fair value consisted of the following (in thousands):

						Cumulative Other-than-
						temporary Impairment
						Included				Included
		Original				in Other				in				New
		Cost				Comprehensive				Retained				Cost				Unrealized				Fair
		Basis				Income				Earnings				Basis				Gain				Value
Student loans		$	9,350			$	(606	)		$	(252	)		$	8,492			$	366			$	8,858
Closed end municipal and corporate funds			10,650				(1,112	)			(93	)			9,445				540				9,985
Credit linked notes			13,500				(156	)			(8,765	)			4,579				3,070				7,649
Preferred stock			5,000				—				(5,000	)			—				—				—
Municipals			2,000				(203	)			(83	)			1,714				153				1,867
Total ARS		$	40,500			$	(2,077	)		$	(14,193	)		$	24,230			$	4,129			$	28,359

The various types of ARS investments we held as of June 30, 2010, including the original cost basis, other-than-temporary impairment included in other comprehensive income, other-than-temporary impairment included in retained earnings, new cost basis, unrealized gain, and fair value consisted of the following (in thousands):

						Cumulative Other-than-
						temporary Impairment
						Included				Included
		Original				in Other				in				New
		Cost				Comprehensive				Retained				Cost				Unrealized				Fair
		Basis				Income				Earnings				Basis				Gain				Value
Student loans		$	9,550			$	(617	)		$	(262	)		$	8,671			$	251			$	8,922
Closed end municipal and corporate funds			10,650				(1,112	)			(93	)			9,445				293				9,738
Credit linked notes			13,500				(156	)			(8,765	)			4,579				2,952				7,531
Preferred stock			5,000				—				(5,000	)			—				—				—
Municipals			2,000				(203	)			(83	)			1,714				107				1,821
Total ARS		$	40,700			$	(2,088	)		$	(14,203	)		$	24,409			$	3,603			$	28,012

We have accounted for all of our ARS investments as non-current as we are not able to reasonably determine when the ARS markets will recover or be restructured. Based on our ability to access our cash, our expected operating cash flows, and our other sources of cash, we have the intent and ability to hold these investments until the value recovers or the investments mature. We will continue to monitor our ARS investments and evaluate our accounting for these investments quarterly. Subsequent to recording other-than-temporary impairment charges, certain of our ARS investments have increased in value above their new cost bases, and this increase is included as unrealized gain above and in accumulated other comprehensive income in the accompanying condensed consolidated balance sheets.

5. Fair Value of Cash Equivalents and Investments

Certain financial assets and liabilities have been recognized or disclosed at fair value on a recurring basis. For other financial assets and liabilities, we elected not to apply the fair value option.

Current accounting standards establish a consistent framework for measuring fair value on either a recurring or nonrecurring basis in which inputs, used in valuation techniques, are assigned a hierarchical level.

The following are the hierarchical levels of inputs to measure fair value:

•

Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

•

Level 2: Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

•

Level 3: Unobservable inputs reflecting our own assumptions incorporated in valuation techniques used to determine fair value. These assumptions must be consistent with market participant assumptions that are reasonably available. Our Level 3 assets consist of long-term ARS investments. We estimated the fair value of our ARS investments based on the following: (i) the underlying structure of each investment; (ii) the present value of future principal and interest payments discounted at rates considered to reflect current market conditions; (iii) consideration of the probabilities of default, passing a future auction, or repurchase at par for each period; and (iv) estimates of the recovery rates in the event of default for each investment.

Financial assets and liabilities measured at fair value on a recurring basis, by level within the fair value hierarchy consisted of the following (in thousands):

		September 30,								June 30,
		2010								2010
		Level 1				Level 3				Level 1				Level 3
Money market		$	228,217			$	—			$	208,040			$	—
Auction rate securities			—				28,359				—				28,012
Total available-for-sale securities		$	228,217			$	28,359			$	208,040			$	28,012

Money market balances are included in cash and cash equivalents as of September 30, 2010 and June 30, 2010. ARS are included in non-current investments as of September 30, 2010 and June 30, 2010.

Changes in fair value of our Level 3 financial assets as of September 30, 2010 were as follows (in thousands):

Balance as of June 30, 2010		$	28,012
Net change in other comprehensive income from Level 3 financial assets			537
Realized gain on redeemed securities			10
Redemptions			(200	)
Balance as of September 30, 2010		$	28,359

There were no transfers in or out of our Level 1 or 3 assets during the three months ended September 30, 2010.

The fair values of our cash equivalents, accounts receivable, accounts payable, and accrued liabilities approximate their carrying values because of the short-term nature of those instruments. We base the fair value of short-term investments on current trading values and the fair value of our ARS on a trinomial discounted cash flow model.

6. Inventories

Inventories are stated at the lower of cost (first-in, first-out method) or market (estimated net realizable value) and consisted of the following (in thousands):

		September 30,				June 30,
		2010				2010
Raw materials		$	8,993			$	12,251
Finished goods			6,121				6,416
		$	15,114			$	18,667

Periodically, we purchase inventory from our contract manufacturers when a customer delays its delivery schedule or cancels its order. In those circumstances in which our customer has cancelled its order and we purchase inventory from our contract manufacturers, we consider a write-down to reduce the carrying value of the inventory purchased to its net realizable value. We charge write-downs to reduce the carrying value of obsolete, slow moving, and non-usable inventory to net realizable value to cost of revenue. The effect of these write-downs is to establish a new cost basis in the related inventory, which we do not subsequently write up.

7. Product Warranties, Indemnifications, and Contingencies

Product Warranties

We generally warrant our products for a period of 12 months or more from the date of sale and estimate probable product warranty costs at the time we recognize revenue. Factors that affect our warranty liability include historical and anticipated rates of warranty claims, materials usage, and service delivery costs. Warranty costs incurred have not been material in recent years. However, we assess the adequacy of our warranty obligations periodically and adjust the accrued warranty liability on the basis of our estimates.

Indemnifications

In connection with certain third-party agreements, we are obligated to indemnify the third party in connection with any technology infringement by us. We have also entered into indemnification agreements with our officers and directors. Maximum potential future payments cannot be estimated because these agreements do not have a maximum stated liability. However, historical costs related to these indemnification provisions have not been significant. We have not recorded any liability in our consolidated financial statements for such indemnification obligations.

Contingencies

We may receive notices from third parties that claim our products infringe their rights. From time to time, we receive notice from third parties alleging infringement of their intellectual property rights. We cannot be certain that our technologies and products do not or will not infringe issued patents or other proprietary rights of third parties.

Any infringement claims, with or without merit, could result in significant litigation costs and diversion of management and financial resources, including the payment of damages, which could have a material adverse effect on our business, financial condition, and results of operations.

8. Convertible Senior Subordinated Notes

In December 2004, we issued an aggregate of $125 million of Notes maturing December 1, 2024 in a private offering pursuant to Rule 144A under the Securities Act of 1933, as amended, or the Securities Act. In connection with issuing the Notes, we incurred debt issuance costs of $4.3 million, consisting primarily of the initial purchasers’ discount and costs related to legal, accounting, and printing, which were amortized over five years. We used the net proceeds for working capital and general corporate purposes.

In fiscal 2009, we repurchased and retired $59.7 million of our outstanding Notes at a discount from par of approximately 7%, which resulted in a $1.1 million net loss on retirement of debt after deducting the associated unamortized debt discount and debt issuance costs. In fiscal 2010, we repurchased and retired $63.0 million par value of our Notes when investors exercised their rights to require us to repurchase their Notes. Accordingly, as of September 30, 2010, $2.3 million par value of our Notes remained outstanding and have been classified as long-term as the next date Noteholders can require us to repurchase all or a portion of their Notes is beyond one year.

Interest expense includes the amortization of debt discount and debt issuance costs. We recorded $4,000 and $1.4 million of interest expense on the Notes during the three-month periods ended September 30, 2010 and 2009, respectively. As of December 31, 2009, the amortization of the discount and debt issuance costs was complete, and the if-converted value of the Notes did not exceed the principal amount of the Notes.

9. Share-Based Compensation

The purpose of our various share-based compensation plans is to attract, motivate, retain, and reward high-quality employees, directors, and consultants by enabling such persons to acquire or increase their proprietary interest in our common stock in order to strengthen the mutuality of interests between such persons and our stockholders and to provide such persons with long-term performance incentives to focus their best efforts in the creation of stockholder value. Consequently, share-based compensatory awards issued subsequent to the initial award to our employees and consultants are determined primarily on individual performance. Our share-based compensation plans with outstanding awards consist of our 1996 Stock Option Plan, our 2000 Nonstatutory Stock Option Plan, our 2001 Incentive Compensation Plan, as amended, and our 2001 Employee Stock Purchase Plan, as amended.

Share-based compensation and the related tax benefit recognized in our consolidated statements of income for the three-month periods ended September 30, 2010 and 2009 were as follows (in thousands):

		Three Months Ended
		September 30,
		2010				2009
Cost of revenue		$	308			$	448
Research and development			3,427				2,798
Selling, general, and administrative			4,171				3,802
Total		$	7,906			$	7,048
Tax benefit recorded on share-based compensation		$	2,363			$	2,201

We utilize the Black-Scholes option pricing model to estimate the grant date fair value of certain employee share-based compensatory awards, which requires the input of highly subjective assumptions, including expected volatility and expected life. Historical and implied volatilities were used in estimating the fair value of our share-based awards, while the expected life of our options and estimated forfeitures for share-based awards that are not expected to vest were estimated based on historical trends since our initial public offering. Changes in these inputs and assumptions can materially affect the measure of estimated fair value of our share-based compensation. We charge the estimated fair value less estimated forfeitures to earnings on a straight-line basis over the vesting period of the underlying awards, which is generally four years for our stock options and deferred stock units and up to two years for our employee stock purchase plan. The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options having no vesting restrictions and being fully transferable. As our stock option and employee stock purchase plan awards have characteristics that differ significantly from traded options and, as changes in the subjective assumptions can materially affect the estimated value, our estimate of fair value may not accurately represent the value assigned by a third party in an arms’-length transaction. While our estimate of fair value and the associated charge to earnings materially affects our results of operations, it has no impact on our cash position.

We recognize tax benefit upon expensing certain share-based awards associated with our share-based compensation plans, including nonqualified stock options and deferred stock units, but we cannot recognize tax benefit concurrent with the recognition of share-based compensation expenses associated with incentive stock options (qualified stock options) and employee stock purchase plan shares. For qualified stock options that vested after we began expensing share-based compensation, we recognize tax benefit only in the period when disqualifying dispositions of the underlying stock occur, which historically has been up to several years after vesting and in a period when our stock price substantially increases. For qualified stock options that vested prior to when we began expensing share-based compensation, we record the tax benefit directly to additional paid-in capital.

We determine excess tax benefit using the long-haul method in which we compare the actual tax benefit associated with the tax deduction from share-based award activity to the hypothetical tax benefit on the grant date fair values of the corresponding share-based awards. Tax benefit associated with excess tax deduction creditable to additional paid-in capital is not recognized until the deduction reduces taxes payable. During the three-month periods ended September 30, 2010 and 2009, we did not recognize any tax benefit as additional paid-in capital.

Historically, we have issued new shares in connection with our share-based compensation plans; however, treasury shares were also available for issuance as of September 30, 2010. Any additional shares repurchased under our stock repurchase program would be available for issuance under our share-based compensation plans.

Stock Options

Our share-based compensation plans with outstanding stock option awards include our 1996 Stock Option Plan, 2000 Nonstatutory Stock Option Plan, and 2001 Incentive Compensation Plan, as amended (the “Plans”). Under the Plans, we may grant employees, consultants, and directors incentive stock options or nonqualified stock options to purchase shares of our common stock at not less than 100% or 85% of the fair market value, respectively, on the date of grant. Stock options granted to our employees generally are incentive stock options, or qualified options under the Internal Revenue Code, subject to calendar year vesting limitations with any balance being nonqualified stock options.

Stock option activity and weighted average exercise prices for the three months ended September 30, 2010, and for options outstanding and options exercisable, the weighted average exercise prices, and the aggregate intrinsic value as of September 30, 2010 were as follows:

		Stock				Weighted				Aggregate
		Option				Average				Intrinsic
		Awards				Exercise				Value
		Outstanding				Price				(thousands)
Balance at June 30, 2010			7,748,570			$	22.43
Granted			457,295				31.73
Exercised			(267,391	)			12.68
Forfeited			(96,905	)			29.00
Balance at September 30, 2010			7,841,569				23.22			$	45,424
Exercisable at September 30, 2010			4,440,167			$	20.18			$	37,445

The aggregate intrinsic value is based on the closing price of our common stock on September 24, 2010 and excludes stock options with exercise prices above the closing price of $27.74. Options issued under the Plans generally vest over four years from the vesting commencement date. Options not exercised ten years after the date of grant are cancelled.

Deferred Stock Units

Our 2001 Incentive Compensation Plan, as amended (“2001 Plan”), enables us to grant deferred stock units, or DSUs, to our employees, consultants, and directors. A DSU is a promise to deliver shares of our common stock at a future date in accordance with the terms of the DSU grant agreement.

DSU activity, including DSUs granted, delivered, and forfeited, during the three months ended September 30, 2010, and the balance and aggregate intrinsic value of DSUs as of September 30, 2010 were as follows:

		Deferred				Aggregate
		Stock Unit				Intrinsic
		Awards				Value
		Outstanding				(thousands)
Balance at June 30, 2010			821,146
Granted			145,668
Delivered			(109,083	)
Forfeited			(36,768	)
Balance at September 30, 2010			820,963			$	22,774

The aggregate intrinsic value is based on the closing price of our common stock on September 24, 2010 of $27.74.

DSUs granted under the 2001 Plan generally vest over four years from the vesting commencement date. Delivery of shares under the plan takes place on the quarterly vesting dates. At the delivery date, we withhold shares to cover statutory minimum tax withholding by delivering a net number of shares. Until delivery of shares, the grantee has no rights as a stockholder.

Of the shares delivered, 28,227 shares valued at $896,000 were withheld to meet statutory minimum tax withholding requirements.

Employee Stock Purchase Plan

Our 2001 Employee Stock Purchase Plan, as amended (“ESPP”), became effective on January 29, 2002, the effective date of the registration statement for our initial public offering. The ESPP allows employees to designate up to 15% of their base compensation, subject to legal restrictions and limitations, to purchase shares of common stock at 85% of the lesser of the fair market value, or FMV, at the beginning of the offering period or the exercise date. The offering period extends for up to two years and includes four exercise dates occurring at six month intervals. Under the terms of the plan, if the FMV at an exercise date is less than the FMV at the beginning of the offering period, the current offering period will terminate and a new two-year offering period will commence.

Shares purchased, weighted average purchase price, cash received, and the aggregate intrinsic value for ESPP purchases during the three-month period ended September 30, 2010 were as follows (in thousands, except for shares purchased and weighted average purchase price):

Shares purchased			174,817
Weighted average purchase price		$	15.75
Cash received		$	2,753
Aggregate intrinsic value		$	2,054

The early termination of an offering period followed by the commencement of a new offering period represents a modification to the terms of the underlying awards. Under the terms of our ESPP, the offering period that commenced on July 1, 2007 was terminated on December 31, 2008 and a new offering period commenced on January 1, 2009. The December 31, 2008 modification affected approximately 257 employees. The modification resulted in incremental compensation costs, which are not material and which will be recognized on a straight-line basis over the two-year period ending December 31, 2010.

10. Income Taxes

We account for income taxes under the asset and liability method. We consider the operating earnings of our foreign subsidiaries to be indefinitely invested outside the United States. Accordingly, no provision has been made for the U.S. federal or state or foreign taxes that may result from future remittances of undistributed earnings of our foreign subsidiaries.

The provision for income taxes of $3.9 million and $3.2 million for the three months ended September 30, 2010 and 2009, respectively, represented estimated federal, foreign, and state taxes. The effective tax rate for the three months ended September 30, 2010 was 17.2% and diverged from the combined federal and state statutory rate primarily because of foreign income taxed at lower tax rates and state research credits, partially offset by net unrecognized tax benefit associated with qualified stock options. The effective tax rate for the three months ended September 30, 2009 was 24.9% and diverged from the combined federal and state statutory rate primarily as a result of foreign income taxed at lower tax rates, the benefit of federal and state research tax credits, and the impact of tax-exempt interest income, partially offset by net unrecognized tax benefit associated with qualified stock options, the impairment of an investment for which a valuation allowance was established, and the establishment of a valuation allowance on certain deferred tax assets.

Unrecognized Tax Benefits

The total liability for gross unrecognized tax benefits increased $924,000 during the quarter ended September 30, 2010 to $19.9 million from $19.0 million at June 30, 2010. The liability for gross unrecognized tax benefit, if recognized, would reduce the effective tax rate on income from continuing operations. The increase consisted of an addition of $924,000 for a current year tax position. The total interest and penalties accrued related to unrecognized tax benefits as of the end of fiscal 2010 was $1.2 million. The liability for gross interest expense and penalties increased by $153,000 to $1.4 million for the quarter ended September 30, 2010. We classify interest and penalties, if any, as components of income tax expense.

No material unrecognized tax benefit is expected to be paid within one year, and we cannot make a reliable estimate when cash settlement with a taxing authority may occur. Any prospective adjustments to our unrecognized tax benefits will be recorded as an increase or decrease to income tax expense and cause a corresponding change to our effective tax rate. Accordingly, our effective tax rate could fluctuate materially from period to period.

It is reasonably possible that the amount of the liability for unrecognized tax benefits may change within the next twelve months. An estimate of the range of possible changes cannot be made at this time because of the high uncertainty of the resolution of our tax positions with the various tax jurisdictions in which we operate. Accordingly, the unrecognized tax benefits from prior year tax positions that may be necessary to accrue or reverse for the next twelve months cannot be reasonably estimated at this time.

Our major tax jurisdictions are the United States, California, and Hong Kong SAR and fiscal 2003 onward remain subject to examination by one or more of these jurisdictions.

The federal research tax credit expired December 31, 2009. In the past, the federal research credit has expired and has been retroactively reinstated. It is not clear if the research credit will be retroactively reinstated or reinstated at all. If the research credit is not reinstated, our tax rate in future periods will continue to be negatively impacted.

California Proposition 24 proposes to repeal certain tax laws scheduled to take effect in 2011. This proposition will be voted on by California residents on November 2, 2010. If passed, our effective tax rate for the quarter ending December 31, 2010 would benefit from a material one-time net credit, primarily to remove valuation allowances associated with certain California deferred tax assets.

11. Segment, Customers, and Geographic Information

We operate in one segment: the development, marketing, and sale of custom-designed capacitive interface solutions that enable people to interact more easily and intuitively with a wide variety of electronic devices and products. We generate our revenue from two broad product categories: the personal computing, or PC, market and digital lifestyle product markets. The PC market accounted for 51% and 62% of net revenue for the three months ended September 30, 2010 and 2009, respectively.

Net revenue within geographic areas based on our customers’ locations for the periods presented was as follows (in thousands):

		Three Months Ended
		September 30,
		2010				2009
China		$	101,147			$	95,733
Taiwan			25,139				6,011
Japan			17,221				8,061
Korea			5,429				9,632
Other			4,249				155
		$	153,185			$	119,592

Major customers as a percentage of net revenue for the periods presented were as follows:

		Three Months Ended
		September 30,
		2010				2009
Customer A			*				12	%
Customer B			*				11	%

We sell our products primarily to contract manufacturers that provide manufacturing services to Original Equipment Manufacturers, or OEMs. We extend credit based on an evaluation of a customer’s financial condition, and we generally do not require collateral. Major customer accounts receivable as a percentage of accounts receivable for the periods presented were as follows:

		As of				As of
		September 30,				June 30,
		2010				2010
Customer A			11	%			15	%
Customer B			*				12	%

12. Comprehensive Income

Our comprehensive income generally consists of net income plus the effect of unrealized gains and losses on our investments primarily due to changes in market value of certain of our ARS investments and interest rate fluctuations on our fixed interest rate investments. In addition, we recognize the noncredit portion of other-than-temporary impairment in comprehensive income. We recognize remeasurement adjustments in our consolidated statement of income as the U.S. dollar is the functional currency of our foreign entities.

Our comprehensive income for the three months ended September 30, 2010 and 2009 was as follows (in thousands):

		Three Months Ended
		September 30,
		2010				2009
Net income		$	18,699			$	9,804
Net unrealized gain on available-for-sale investments, net of tax			537				1,183
Total comprehensive income		$	19,236			$	10,987

We recorded an unrealized gain of $537,000 and $1.2 million for the three months ended September 30, 2010, and 2009, respectively, primarily related to the temporary recovery in fair value of certain ARS investments.

13. Subsequent Events

We have evaluated all events or transactions that occurred after September 30, 2010 through the date of filing this report and determined there were no material recognizable subsequent events.

At our annual meeting of stockholders held on October 19, 2010, our stockholders approved an amendment to our Certificate of Incorporation to increase the total number of our authorized shares of common stock from 60,000,000 to 120,000,000. In addition, our stockholders also approved both our 2010 Incentive Compensation Plan to replace our expiring 2001 Incentive Compensation Plan and our 2010 Employee Stock Purchase Plan to replace our expiring 2001 Employee Stock Purchase Plan.

Subsequent to quarter end, Thomas J. Tiernan resigned as President, Chief Executive Officer, and a director of our company. Mr. Tiernan also withdrew as a nominee for election to our Board of Directors. In accordance with Mr. Tiernan’s Separation Agreement and Release we will accrue approximately $1.0 million for salary continuation, bonus and benefits and $1.4 million for share based compensation costs in our quarter ending December 31, 2010. Following Mr. Tiernan’s resignation, Russell J. Knittel, a long-time executive of our company, was elected Interim President and Chief Executive Officer. The Board of Directors has launched an immediate search for a successor President and Chief Executive Officer.

Subsequent to quarter end, as of November 1, 2010, we purchased 732,940 shares of our common stock under our common stock purchase program, at an average cost of $26.98.