Good morning. And welcome to the Logitech Fourth Quarter and Fiscal Year 2006 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. If you would like to ask a question during this time simply press “*�? then the number “1�? on your telephone keypad. Thank you. I would now like to turn the conference over to Joe Greenhalgh, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Michelle. I would like to welcome you to the Logitech conference call to discuss the Company's results for the quarter ended December 31, 2006, the fourth quarter of Logitech's fiscal year 2006. The press release, a live webcast of this call, and the accompanying presentation slides are available online at Logitech.com. This conference call will include forward-looking statements that are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996 including forward-looking statements with respect to future operating results. The forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from that anticipated in the statements. Factors that could cause actual results to differ materially includes as set forth in Logitech's annual report on Form 20F dated May 18, 2005, the subsequent filings available online on the SEC EDGAR database, and in the final paragraph of the press-release reporting fourth quarter results issued by Logitech and available at Logitech.com. The press release also contains accompanying financial information for this call. The forward-looking statements made during this call represent the management outlook only as of today and the Company undertakes no obligation to update or revise any forward-looking statements as a result of new developments or otherwise. I would like to remind you that this call is being recorded, including the question-and-answer portion, and will be available for replay on the Logitech website. For those of you just joining us, let me repeat the presentation slides accompanying the call are also available on our website. Joining us today from Zurich is Guerrino De Luca, Logitech's President and Chief Executive Officer. Here in Fremont we have Kristen Onken, our retiring Chief Financial Officer and her successor Mark Hawkins. I would now like to turn the call over to Kris.

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Thank you, Joe, and thanks to all of you for joining us on our quarterly earnings teleconference. I joined Logitech at the end of fiscal 1999 and in the seven-plus years since then, our sales have grown from $448 million to $1.8 billion. And we generated over $830 million of cash flow from operations. I am proud and grateful that I had the opportunity to contribute to the Company's sustained profitable growth. I know I will miss the interaction with both the Logitech team and the financial community. But I am looking forward to starting my retirement at the end of this month. During the last three weeks, I have had the opportunity to work very closely with Mark both in closing the books as well as briefing him on the key aspects of our business and financial model. He has quickly earned my confidence. I am very comfortable with handing the reins over to him. So, it is my great pleasure to turn the call over to Mark Hawkins, Logitech's Senior Vice-President of Finance and Information Systems and Chief Financial Officer. Mark.

Thank you very much Kris. I am thrilled to be here, I want to say just to start out. Having spent my previous six years at Dell and then 18 years before with Hewlett-Packard, I am look forward to applying the best of what I've learned in both places here at Logitech. I will now discuss the performance for the fourth quarter of '06 and also the full fiscal 2006. I want to call out at the beginning that we are very pleased with our results in total. We delivered our best-ever full fiscal year and fourth quarter for sales, operating income, and net income combined with a strong balance sheet. And we also delivered on our increased fiscal 2006 targets for the important areas of sales and operating income. The growth percentages that I am going to talk about from here forward are in reference to the same period compared to fiscal 2005. When we look at Q4 of '06, our sales grew by 16%, or 63 million, to reach 466 million. Our retail business – let's talk about that for a minute – continued to deliver solid growth with sales increasing by 19% to 418 million driven by outstanding performance, I might add, in the audio, video and remote control area as well as, it's important to note, double-digit growth in the cordless mice. Turning to our OEM sales, they declined by 6% primarily due to lower mice sales. If I shift now into gross margin for Q4 '06, this was at 31.9% down as expected from last year's 33.6%. Important to call out here is that this year's gross margin includes the impact of roughly 60 basis points for a substantial reserve taken from one product in the audio category. It was a wireless headset for audio.…

Thank you Mark. Thanks again to all of you for joining us today. Before I begin my remarks, I would like to extend my sincere appreciation to Kris Onken for the tremendous contribution she made over the years at Logitech. We were looking for a truly world-class replacement to a world-class CFO. We have found him. And I am delighted that Mark has joined us in this key role. So on to my comments on the results and the outlook. As you can imagine, I am very pleased with the Company's performance in fiscal 2006 and with its record-breaking performance in each of the four quarters. Fiscal 2006 was Logitech's best year ever and our eighth consecutive year of double-digit growth. In spite of the decline in gross margin largely driven by the retail product mix, we managed our operating expenses in line with gross profit, increased our operating income by 16%, our net income by 21%, sustained our net margin of 10.1% of sales, and delivered again our increased full year targets both for sales and operating income. Let me talk about our gross margin in the fourth quarter, which was negatively impacted by reserves taken for one audio product, as you have heard, our wireless headphone for iPOD. This product was eagerly anticipated by our customers when we began shipments in the June quarter. The initial response from the channel and consumers was very positive and we ramped up production accordingly to meet demand. Apple's subsequent launch of the nano and consumers' favorable reaction to its small form factor negatively impacted the market for our headphones since they couldn't be used without the addition of a rather large adaptor. So during this quarter, it became clear that we needed to take action and we increased our reserves accordingly.…

Hi good morning. I just have a couple of questions. First, can you discuss in more detail regarding the desktop weakness. You mentioned that the penetration rate is still fairly low. Is there a specific trend towards mass market that could potentially help you grow the market further in terms of additional features and so forth?

Let me tell you what -- to try to explain what is happening -- or what we think is happening. We have dug into this category pretty substantially. There is clearly unit market growth substantially out there. And it takes place at the entry level because that is where newcomers to the categories tend to buy. And we have grown our units. We are doing well there. Prices are lower in that space. Fine, but we participate. What has not worked this year, which is what usually works for us and we believe will continue to work, is the fact that we were unsuccessful in stimulating enough of the newcomers to trade up to our midrange. So a lot of people stayed with the entry level, which is great. We keep share and we plant another seed for future repurchase. But of course, we suffered on the revenue side. So what we want to do is address the appeal of the midrange. And it will happen through the introduction of new products in the first half of fiscal of '07. We believe that on one side we'll continue to take advantage of the mass adoption of cordless, which is where all these entry level sales are taking place, and on the other will give us more revenue growth because of the trade-up. In addition, I mentioned Bluetooth as a promising higher-end extender of the category. You should read by that that our Bluetooth offering at the very high end will become more substantial.

Okay, just on the gross margin your guidance towards the low end of your target range. It seems to be conservative given the growth in your video categories than other categories. Can you explain more on that?

Well you know they said, our gross margin we said, and we repeat it -- and we'll never tire to repeat it -- will fall in the bracket. We'll continue to be in that bracket. We see -- we are very pleased with the growth of video. The growth of video for the year was 36%. We are now providing guidance for category-by-category next year when we believe video is going to be a good participant to the growth. And video is a great margin category. So that is great. But, once again it is the combination of categories and price points within the categories that makes the margin. We prefer to guide where we are today with some slight improvement because we see products coming at better margins than the products they replace. That we can say. And so that’s where we stand today.

And just finally, for your fiscal '07 tax rate, would you still expect 14%?

Yeah, let me address that Guerrino, if I may. 14% is the range that we're looking at Ted. Even with some of the stock option expensing and some of the other regulatory activities that are going on, we think that the 14% makes sense. We think it's sustainable. There will be some variation by quarter, it is important to note. In total we think that it's going to be within the range within 1% of the range. So 14 is our target.

And just one last question. Would you be breaking out the stock options impact by line item or?

Could you repeat that, Ted.

Are you planning to break out the stock option expense when you report your earnings or?

Yeah, we will in fact. That's correct. Going forward, what we will obviously comply with the requirements in terms of external reporting. But we will provide a pro forma that also shows with and without that. Okay?

Thank you.

You got that.

Your next question comes from Joel Wagonfeld with First Albany.

Thank you. Two quick questions. Number one, I apologize if I missed it. Could you comment on the supply constraints? Are those completely gone on the V400? And are there any constraints for any other products? And then, that's first question.

Well the answer is no, they are not entirely gone. We believe that they will be gone this quarter. But even though we were able to ship a substantial amount of V400 in the past quarter, we were not completely in a position to meet full demand. We believe that we will be out of that particular constraint in the current quarter. As far as general constraints, I can't say that there is anything major at this time.

Just on the stock option expense for fiscal '07 was a little bit higher than what we had been anticipating. Can you comment on your thoughts about trying to manage that down or why that would be up potentially year-over-year?

Let me speak to that a little bit. If you look at, just in terms of year-over-year Joel one, in FY '05, we pro-forma-ed it at 18.5 million or 12% of our net. Looking at it in FY '06, we anticipated it at a14.9 million impact on our FY '06 or around 8% net. Then in FY '07, I think we have projected a $16 million to $19 million range, again with a similar percent impact on our net. If you look at the bigger picture, it is actually coming down substantially from '05 to the projection in the business for '07, even though we have a bigger business and we've added 400 professionals in total for the year. So that’s, those are some of the dynamics Joel that are going on.

Is that just less use of options or restricted stock? Or any details on how you are doing that?

I think in total the bigger picture is looking on a multi-year period, yeah we are reducing the total number of options issued, consistent by the way with what’s happening in the broader marketplace. Obviously we view these as important. And we are doing the appropriate amount competitively but we’re bringing those down much like the rest of the marketplace.

Great. Thanks very much.

Your next question comes from John Bright with Avondale Partners.

Thank you. Good morning. Allow me to, hello Guerrino. Hello Kris and Mark. Allow me Kris to again extend my congratulations to you. It's been enjoyable working with you. Mark, welcome aboard.

Thank you.

Thank you very much John.

You're welcome. First question, in the press release I think you talk about you expect product and marketing initiatives – you related your cordless desktops and mice – trying to drive the cordless category to solid growth. Can you detail some of the expectations there?

We said that we would return to growth in the first half for desktops in the first half of fiscal '07. And I don't think we want to say more than that. And I profoundly believe that the market is there, that the dynamics haven't changed. There is massive option, which means consumers are entering the category at the lowest possible price points. Fortunately they are buying our products, which is good. It means that we have an appealing entry level. What we would like to see is a little more trade-up. And for example, in webcams, the situation is very similar. And yet we have been able to actually trade up a lot of the entry level customers to midrange. So the same dynamic has to be and can be recreated on desktops.

What action do you take to help encourage the consumers to trade up?

In this particular case it's a product issue. So that’s why we talk about the first half. We usually, as you know, introduce our main products in the September quarter. And that’s when we expect to address that particular element.

You mentioned significant innovation in your prepared remarks for cordless mice and looking to redefine the potential.

Yes. Did I whet your appetite?

Yes, you did. Do you have a timeframe that you want to talk about?

It is going to be before Christmas.

Before Christmas?

Yeah.

Okay, and video continues to be a very strong performer. Great publish that you had on YouTube.com, by the way, for the animation features associated with that. Is there anything in particular you are doing on your side of the equation to try and drive that awareness further?

You know, one of the most powerful elements of this kind of the vio marketing or consumer-driven marketing is that you just don't touch it. It took us weeks before some journalist convinced us to get in touch with us this young woman that who was posting those beautiful videos on YouTube and our mandate to our PR people that wanted to jump on it was to just don't touch it. It is happening so beautifully. And I believe that more of these things will happen, especially with the video sect, which was the driver of the excitement for that particular posting. So I believe at this point that the category had legs. The awareness is starting to happen, especially across a certain age group. And we will have to continue to deliver fun products for these people to use. And believe me, we have plans for that.

Okay, two other questions on the revenue side – or one on the margin side, you are talking about better margins expected for some of the audio speakers. What leads you to give that type of guidance?

Well as you know, we have pretty elaborate product development cycle and process that has targets and feature sets and cost targets. And from the way we see things developing at this stage, we are excited about what we will be capable of doing, particularly in the cordless and in the speakers categories. So it's projected cost of future products that replace existing products or complement existing products. And that’s what makes us make that statement.

Okay, on the Harmony remote sales, when did you introduce those initially into Europe?

We started actually very early with very, very occasional sales. The true sort of structured approach started maybe five months ago or so five to six months ago.

So we're thinking the December timeframe?

Yes. Well, actually slightly before that. On the ramp to Christmas in the October November timeframe.

Okay and then lastly, on the tax rate. Mark, I didn't understand. I didn't get that. I apologize. Why was the tax rate lower in this quarter?

A couple of things. One, John the geographic mix obviously has an impact on us. And then secondly, we had some actual favorable tax rulings that also went on a favorable side. So couple dynamics that provided a really nice quarter on the tax rate. I think the key thing that I would underscore with you that is important is it's a very – the fiscal year target. Okay we did again agree on variation by quarter. You are going to see that going forward as well. The fiscal year target of 14% plus or minus one is really sustainable. It's not dependent on net operating losses and whatnot. It is more of a structural strong tax rate.

Okay thank you.

You are welcome.

Your next question comes from Manny Recarey with Kaufman Brothers.

Good morning. Or good afternoon, I guess, wherever you are. A couple of questions. The gross margin, if you exclude the reserve, you said would be 32.5%, which would be a sequential increase as you pointed out. In historically, the margin goes down from December to March. Can you give a little more color on how you were able to achieve that. Was it just product mix? What was driving that?

It is as we said on the downside, it is product mix. And I believe that the tremendous growth of webcams had something to do with it.

Okay but on the audio side those margins continued to improve as well though.

Year-over-year they did, absolutely.

Okay then looking at the sales and marketing line, that only grew 2% while the top line grew 16% year-over-year. Can you give a little bit more color on how you were able to achieve that?

A couple things I'd say here. One is, when you step back – I am going to build the full points here. When you look at total OpEx as a percent revenue, really came in, in total, in line with what we see on an historical basis for Q4 – if you go back for several years in the 20.2% range, we made the overarching theme is we made the investments that we really feel we need to, to grow going forward. You can see that with some of the engineering investments and whatnot. We were able to spend where we needed to and not where we didn't, basically. So I think there is a lot of puts and takes to it. But I think that is the answer. Fundamentally we are within the range of where we want to be both in our business model that we've called out to you before. Historically in total OpEx, we made the essential investments that we needed to. And we were able to also make those puts and takes trade-offs that we feel just allow us to get a little bit of leverage being a bigger business. So I think that is some of the key thoughts that I would share with you.

Let me add something. Mark cannot yet take credit for this – this last quarter. But I think he will continue to take an aggressive view there. The important thing here is that A, we didn't sacrifice anything. B, this shows a tremendous adaptability of the business model. Let's face it. The Company can absorb a 200-basis-point decline in gross margin and basically show only a 50-point decline in operating margin, continuing to grow R&D dramatically – explosively, I would say in audio and remote controls. That’s kind a powerful, I believe. So very, very happy about that. I am sure that Mark will contribute that.

Guerrino I understand what you are saying. Looking at it on a quarterly basis going forward with the different line items on the operating expenses there will be some variability. Would it be a fair assumption to expect sales and marketing to increase more on a year-over-year basis than they did the March quarter?

I would say that 7% is quite tight. I would say that the overall envelop should increase, as we said, in line with the gross profit. What does that in line mean the same one point less? That's very hard to predict. That is the class of things that we're looking at.

Exactly. We still believe we support the model and the overall aggregate level of investment. You are going to see variation from quarter-to-quarter as you would expect as different product introduction cycles happen and whatnot.

Okay thank you.

You are welcome.

Your next question comes from Michael Felletz (phonetic) with LODH.

Yes. I have three questions actually. First one would be that one-off impact on the gross margin – 60 basis points for those reserves. Is that really one-off limited to Q4? Or do you feel that you will have to take more? Actually If I understand correctly, you produced too much and will have to discard these products?

Michael this is definitely one of these one-off events in this particular case. You always have certain kinds of adjustments and reserves and whatnot. But this is very specific to one particular product in the wireless audio category. It was significant. And really give transparency to all of you, we wanted you to understand the underlying gross margin rate with and without this event. So that is why we called it out. We really see this as a significant isolated event. Obviously we will continue to have the normal kinds of – what you would expect with excess and obsolete and things of that nature. But this was a specific one.

Okay thanks. Second question would be concerning the corded products. Actually last year, if I recollect correctly in your investor day you talked about a declining market for corded products, but you actually sold gross. Are you expecting still expecting this market to decline in 2007? Or is there more growth?

We won't apologize for growth. We will not apologize for growth. I think that we were underestimating the tremendous response to the G15 keyboard, which was a substantial driver of corded growth. We do not believe that, from a secular perspective, corded mice and keyboard have higher potential than any other category in the portfolio. We will take growth. And we'll continue to pursue it. Remember this distinction of cordless and corded equipment that was chosen for us many years ago and that has driven a lot of our kind of approach to the market may not be the only distinction. There are other distinctions, for example, like desktop and notebook that may be intriguing. In a way I might not be surprised to see a growth in corded, for example, driven by more product for the notebook. So we look at our categories with a very open mind. And as I mentioned, sure we don't believe that corded product mice and keyboard have the same potential as Harmony or webcams. But their debt may be proclaimed a little bit prematurely.

Okay thanks. And my final question would be on financials. Could you tell us what your net cash use for share transaction was? And I mean that is purchased shares and the proceeds from sale of shares net of tax. Do you have that number? I think last year it was 88 million.

Michael go ahead and explain that one more time in terms of the question. I can tell you a lot about the share repurchase.

The purchase of the dollar amount used for share purchases and the dollar proceeds from sale of shares upon exercise of options.

Okay so let me tell you yes. I think I can address some of that here. Certainly – let me just kind reorient a little bit. Let me reiterate a little bit about the share repurchase program. We will keep taking this one step at a time. We purchased for the year let's just start with that 6.138 million shares okay. And that was for spend of $241 million. Let's stop at that. Now you want to go down to a deeper level and understand the following. Go ahead and share with me what you are looking for.

Normally you show that in your filings the proceeds of sales from shares that you sell upon exercise of share options by your employees.

We actually don't have that at this point. So I am just going to have to tell you we don't have that at this point.

Alright, fine. That will be all from my side then. Do you plan any further share buyback programs given that one is nearly over?

Let me speak to that. First of all, we have – use the facts. We have remaining authority to repurchase shares within the program that has been approved by our board. Secondly I would call out the fact that our board has historically obviously encouraged us to do share buyback. Obviously it will be for the board to entertain that going forward. They are the ones to make that decision. Certainly we are a Company with a history of share buyback. And you can see what we did in Q4.

Thanks.

You are welcome.

Mike believe it or not, I have found the number that was being asked about. If I understand the question, it's how many shares did you use because of the exercise of options and employee stock purchase programs. Is that correct? Was that the question? I assume that was. Mark said that we purchased 6.1 million shares, roughly. And then we stopped upon exercise of option on the SPP something like 3.5 million. So the net in this case is roughly 2.6 million in favor of what we repurchased. Remember that we also used shares to cover the conversion of the convertible bond. And that was for about 5.4 million shares. So net, net we have – there was a negative net of 2.4 million between conversion of the convertible and covering the conversion of the convertible and covering stock options. The ratio of stock options that were purchased is roughly 50%. Next question.

Your next question comes from Yves Kissenpfennig with UBS.

I have two short questions actually. First, you continuously mention your product launch upcoming in the first half of fiscal '07. I was wondering will you be concentrating most of that in the second quarter? Or will you be staggering it a little more unlike you've done in the past?

Well we will have products this quarter. But the fundamental bulk will come in Q2.

Okay and then my second question was to the OEM business that seems to be neglected at the moment. I was wondering--

Not by us. Not by us. Not by us.

I know. By the analysts, it seems. But anyway you mentioned double-digit growth also in your OEM business. And I was wondering that include any potential sales to the PlayStation 3? Are you working with Sony together on something along those lines.

We may or may not we working with Sony along this line. The guidance does not include that.

Okay.

This guidance has to do with some major transition that is happening at a major customer that we cannot name, whose transition was responsible for the decline of OEM in this Q4. And this transition is basically replacing a mouse with a desktop at a major customer. So you will see moving forward at some point in time in fiscal '07, that the – we will have less mouse sales and significantly more desktop sales if this program is successful. And that is what fundamentally leads us to believe that OEM is going to grow in fiscal '07.

Great. Thank you.

You are welcome.

Your next question comes from Can Elbi with Cheuvreux.

Hi guys can you hear me? A: Yeah.

Kris, if you're still there, from my side as well, thanks for all the help during the last six, seven years. All the best in the future.

Thanks, Can. It's been a pleasure.

I just have two questions left, I guess. One, Guerrino I understand your comments with respect to cordless desktop and the fact that you have not been able to entice people to trade up. And I guess that's had an impact on your ASPs in cordless desktop, which I think was down 12% in fiscal '06. But that still doesn't answer, I think, our question with respect to unit growth. Because, if you look at cordless mice unit growth in fiscal '06, I think it was around 21% versus only 5% for desktop. So there must be something going on in terms of the unit growth area as well. So I’m just trying to understand where any there any structural issues there with respect to the emergence of notebooks. Or also, probably at the same time, the fact that maybe consumer penetration into the PC desktop space has already reached some mature levels. I have another question afterwards.

Yeah, I think it's a fair question. I believe from the data we have in and believe me Can we have analyzed this across all possible dimensions. We see a material growth at the entry level, particularly in Europe and the most of the average spread growth. So in Europe you see the market declining as a whole with a substantial growth of entry level. And then the United States you see the market growing. But the European market is larger than the US market for the time being. Okay, that is the dynamic we are facing. We are participating in the high-volume growth in Europe. And we believe that, that’s an indication of the contrary of what you may think which is, that penetration is not high. And therefore, they the lot of consumers that have never bought it and they just want the cheap one because if you had bought it in the past, why would you want the entry level one. There is no reason. Mostly these products continue to work for a long time. So that’s what makes us believe that there is an ongoing entry-level penetration. And I believe strongly to that what may be more tactical things that we are looking at channel-by-channel. But you know it's too detailed and to be discussed on a call like this. And then you get into competitive issues that I don't want to disclose. That the fundamental issue is trade-up. I believe now we have asked ourselves the question about notebooks big time. And what we notice is that A, if there is a unit growth in Europe pretty substantial in a market where notebook penetration is even higher than in the United States, that doesn't, doesn’t call for a substantial notebook impact on that even though there must be some. So I will, we will actually target certain keyboards and desktops next year specifically to the notebook market to prove what is in there. But we are, we believe, and without arrogance, that we are the experts in the category. And believe me, we are just dissecting this and I can tell you that our projection now before the category to return to growth.

Okay, just maybe the second question and this was asked. But I just want to maybe rephrase it a little bit because I was still not convinced by the answer, without being arrogant. But if I look at marketing and selling in fiscal Q4, as it was pointed out, it was up only 2% whereas retail sales were I think up to 19%. And obviously retail sales and the growth in retail sales somehow drive marketing and selling. So I am just trying to understand how much discretion you have in marketing and selling and whether you can really push it out at discretion if you need to. Guerrino on many occasions pointed out to the fact that gross profit growth and OpEx growth would be in line. They are certainly not in line in fiscal Q4. So I am just trying to understand how much discretion there is in marketing and selling and whether you can really push it out if you want to.

We have substantial discretion. As you said something which is interesting to remark. You said that the sales and marketing costs are driven by sales. It's true. The other way around is also true. That sales and marketing expenses drive sales. That’s what we would like to see, right? And if you look at our guidance for revenue for the year, we actually went slightly higher than what we had expected. So sales are there. And as Mark said, why do you spend money if you have sales? This is remember also that there is a component of expenses that you don't see in the operating expense, a component of the marketing expense that has to do with soft dollars and other promotional channel eternally incentives that you don't see you see it in gross to net and therefore you see it in margins. So we have ample margin of using the right tactic at the right time. So I continue to insist that this is not like we didn't cut anything. We didn't kill anybody. We didn't actually our payable are even unfortunately too low. So we were just doing what the model allows us to do and are actually very, very happy that that is the flexibility that the model shows.

Okay, maybe just one quick add-on and then I'll let you go. The retail ASPs, playing the devil's advocate again, I think retail ASPs and you have constantly told us that it's an obviously an issue of mix. But as retail ASPs, I think, were down 3% from Q3 and now down 8% in Q4. Is it still only a mix issue? Or were there some pricing initiatives because in your presentation there is a sentence saying there were no significant pricing actions. So I just want to understand what significant is.

Well, I don't think we can be more literal than that. Did we reduce some prices in some products in some geographies? Yes. Do we always do that? Yes. Were they significant? No.

Okay, thank you.

Your next question comes from Serge Rotzer with ZKB.

Yes, hi every body. You mentioned already that you want to launch a new desktop, kind of voice-over-IP video desktop. Is the customer able to use this desktop by if the PC is turned off?

Sorry, could you repeat the question. I am not sure I understand the question. Can you repeat it?

Can a customer use this new desktop, this IP desktop by switching or turning off the PC? Or can you replace a normal phone with this desktop?

That's interesting. You are asking a product feature question. That may be a great feature for, well you may look for a job in a phone marketing department. I can't answer this question, we don’t want to talk about feature of unannounced products.

Okay, we will see. The second question is, is there a certain reason, you are in such a hurry to buy back shares before Q4 – before…

I don't know. What do you think?

I think yes. That's just a guess. Because you are full of net financial and a lot of shares. Are you screening the market actively for acquisitions?

I think that we saw that the price at which level that we consider is a very, very attractive investment opportunity. Remember we buy back shares because it's a good investment. Let me tell you that the $160 million plus that we spent in Q3, in Q4 sorry, was a great investment. So yes, there is a reason. Of course, there is. We thought it was very attractive.

Okay, we will see how in the long-term, it is up for follow-up. Thank you very much.

Thank you very much. Operator, we'll take the last call if we have one.

Your final question comes from Jon Lopez with OTA Asset Management.

Thanks so much for taking the question. I appreciate it. I just wanted to revisit the gross margin topic. And I apologize because I know you have covered it several ways. But if I look on a year-on-year basis, excluding the inventory provision that you took, your gross margin is down on the order of about 100 basis points. And yet the retail video business was up about 61% year-on-year. And your OEM business, as you noted was down year-on-year. And my sense of those are both reasonably favorable from a gross margin perspective. Can you give a little more clarity on a year-on-year basis as to what caused that contraction?

The majority of the contraction is due to the substantial audio impact year-over-year – 61%, I would say 68%growth in Q4. That is what drove the majority of it. As as Mark said, I am sorry to steel the stage, as Mark said we a number of our product lines went to more typical margins. That’s why we give a range of 32 to 34. So it is fundamentally, if you want to look for one culprit – if you want to call it a culprit is audio.

Okay, great. The second question relates to your capital spending. You guys had initially guided to 40 million, I believe in CapEx. And then you had spent about 40 through the first three fiscal quarters. Then I think you talked about something like 50. And the actual looks like it is about 60. So your capital spending last year was up about 64% year-on-year and another 47% this year. So two questions. The first one is, what is the – what are you spending on? And do you have any initial plans for fiscal '07 from a CapEx perspective?

Let me take that Jon. A couple of things. One is just – actually we spent 54 million this year, just to kind of see that and that gives you a sense of where we're at. Secondly, when you look at that, I think you can see in FY '07, you can expect a range – it will be somewhere close to that also in FY '07. A couple of key things that have driven that historically – obviously computer and software activity; tooling; plant and building activity; certainly Oracle as well in this particular year; and some 10 million for the factory – the rest of the factory as far as in China. So I think the net message for you is 54 million is where we landed this year. Expect a similar range in FY '07.

Okay. And just a last question on that topic. And this may be my lack of understanding on specifically what you are spending on but. Your quarterly depreciation in fiscal Q1 was about 7 million. And that actually declined through the course of this year to 6.4 million in the most recent quarter, if I have the numbers right. And that comes obviously as your CapEx, as we've just discussed, is increased fairly meaningfully. So, what is the – why are you not – why is the quarterly depreciation not trending higher given the higher level of CapEx? Or is it going to in some future period?

Yeah, I think a couple things. One of the things we should look at is even the mix within asset lives I think is some of the key things. You think about tooling being like a year or whatnot. And then you look at things like factories more in the long-term in terms of 10 to 20 years. So I think you've got to look at the mix actually within asset lives. John I think it's a good question. But that’s the dynamic there. And by the way do want to underscore one point. We actually see capital investment is a good thing, as a good growing business where we going to, we are pleased to be able to generate the cash flow we're doing and at the same time make the investments in our future.

Absolutely. I am sorry, just the very last question on this topic. My assumption is that the majority of the depreciation is probably run through the COGS line. If I have that incorrect, please correct me. But as you contemplate the gross margin range you've laid out for next fiscal year, are you contemplating a higher level of depreciation commensurate with the increase in the CapEx? Or is that am I thinking about that incorrectly?

Yeah. A couple things I'd say. One is you are correct. I think the majority of the CapEx would show up in the COGS area. So I think that’s a sound assumption. And I want you to think about our gross margin in general comprehends all the integration of our capital expense plans. So that would be very safe to say.

Terrific. Thanks very much for the help. I appreciate it.

Thank you everybody. Thank you for participating. I want to close on a comment about the future. As you've seen, we've reached $1.8 billion in sales in fiscal '06. Our goal for fiscal '07 keeps us very well on track to reach our $3 billion goal. And our focus on profitability is designed to increase our operating margins on our way to that sales goal. So as we celebrate our 25th anniversary, you know it's our 25th anniversary this year -- the Company is stronger than ever, young and yet experienced with a blend of veteran employees and new experienced additions. Mark is one example. Over the last twelve months more than 400 new professionals joined Logitech's payroll in engineering, operations, marketing, and staff functions. We are prepared to capture the tremendous opportunity coming our way. Convergence is happening. And our interface devices will be at the center of the user experience. Our fiscal '07 portfolio, which you will begin to see unroll this summer – I am very happy that I have made you eager to do so – will demonstrate once again what innovation can do to our category. Thank you for your participation everybody.

Ladies and gentlemen, this concludes today's Logitech fourth quarter and fiscal year 2006 earnings conference call. You may now disconnect.

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