**UNITED
STATES SECURITIES AND EXCHANGE COMMISSION**
 **WASHINGTON,
DC 20549**
 
 **FORM
10-Q**
 (**X**)
    
    QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For the
quarterly period ended March 31, 2005
 
 OR
 (  )
    
    TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For the
transition period from
          to
 
 Commission
file number 000-50857
 
 **Volterra
Semiconductor Corporation**
 (Exact
name of registrant as specified in its charter)
 Delaware
    
    94-3251865*(State
      or other jurisdiction of*
    
    *(I.R.S.
      Employer**incorporation
      or organization)*
    
    *Identification
      No.)*
 
 3839
Spinnaker Court
 Fremont,
CA 94538
 (Address
of principal executive offices)
 
 Registrant’s
telephone number, including area code: (510) 743-1200
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past
90 days.   Yes   ( **X** )   No   ( **)**
 
 Indicate
by check mark whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange
Act).   Yes   (  )   No   ( **X)**
 
 As of
April 22, 2005, the registrant had 23,513,215 shares of common stock
outstanding.
 
  1
  
 **Cautionary
Note Regarding Forward-Looking Statements**
 
 This
quarterly report on Form 10-Q contains forward-looking statements that involve
many risks and uncertainties. These statements relate to future events and our
future performance and are based on current expectations, estimates, forecasts
and projections about the industries in which we operate and the beliefs and
assumptions of our management. In some cases, you can identify forward-looking
statements by terms such as “would,” “could,” “may,” “will,” “should,” “expect,”
“intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,”
“targets,” “seek,” or “continue,” the negative of these terms or other
variations of such terms. In addition, any statements that refer to projections
of our future financial performance, our anticipated growth and trends in our
business and other characterizations of future events or circumstances, are
forward-looking statements. These statements are only predictions based upon
assumptions made that are believed to be reasonable at the time, and are subject
to risk and uncertainties. Therefore, actual events or results may differ
materially and adversely from those expressed in any forward-looking statement.
In evaluating these statements, you should specifically consider the risks
described under the caption “Factors that May Affect Future Operating Results”
and elsewhere in this Form 10-Q. These factors may cause our actual results to
differ materially from any forward-looking statements. Except as required by
law, we undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
   2
  
  **Volterra
Semiconductor Corporation and Subsidiaries**
 
 INDEX
 
 **Page**PART
      I. FINANCIAL INFORMATIONItem 1.
      Financial Statements (unaudited)Consolidated
      Balance Sheetsas
      of March 31, 2005 and December 31, 2004
    
    
    4Consolidated
      Statements of Operationsfor the three months ended March 31, 2005 and 2004
    
    
    5Consolidated
      Statements of Cash Flowsfor the three months ended March 31, 2005 and 2004
    
    
    6Notes
      to Consolidated Financial Statements
    
    
    7Item 2.
      Management’s Discussion and Analysis of Financial Condition and Results of
      Operations
    
    
    11Item 3.
      Quantitative and Qualitative Disclosures About Market Risk
    
    
    26Item 4.
      Controls and Procedures
    
    
    26PART
      II. OTHER INFORMATIONItem
      1. Legal Proceedings
    
    
    27Item 2.
      Unregistered Sales of Equity Securities and Use of
Proceeds
    
    
    27Item 4.
      Submission of Matters to Vote of Security Holders
    
    
    27Item 6.
      Exhibits
    
    
    27SIGNATURES
    
    
    28
 
  3
   **PART
I. FINANCIAL INFORMATION**
 
 ITEM 1.
Financial Statements
 
 **VOLTERRA
SEMICONDUCTOR CORPORATION**
 **AND
SUBSIDIARIES**
 
 **CONSOLIDATED
BALANCE SHEETS**
 **(In
thousands, except share data)**
 
 ****
    
    
    **March
      31,**
    
    
    **December
      31,****2005**
    
    
    **2004******
    
    **(Unaudited)****Assets**Current
      assets:Cash
      and cash equivalents
    
    $
    22,614
    
    $
    24,895Short-term
      investments
    
    
    19,774
    
    
    19,838Accounts
      receivable, net of allowances of $1,258 and $1,102,
      respectively
    
    
    6,912
    
    
    2,097Inventory
    
    
    5,150
    
    
    5,134Prepaid
      expenses and other current assets
    
    
    693
    
    
    726Total
      current assets
    
    
    55,143
    
    
    52,690Property
      and equipment, net
    
    
    2,159
    
    
    1,414Other
      assets
    
    
    34
    
    
    34Total
      assets
    
    $
    57,336
    
    $
    54,138**Liabilities
      and Stockholders’ Equity**Current
      liabilities:Accounts
      payable
    
    $
    2,221
    
    $
    1,768Accrued
      liabilities
    
    
    2,118
    
    
    2,105Total
      current liabilities
    
    
    4,339
    
    
    3,873Commitments
      and contingencies (Note 4)Stockholders’
      equity:Preferred
      stock, $0.001 par value; 5,000,000 shares authorized;none
      issued and outstanding
    
    
    —
    
    
    —Common
      stock, $0.001 par value; 200,000,000 shares authorized;23,483,557
      and 23,336,165 shares issued and outstanding, respectively
    
    
    23
    
    
    23Additional
      paid-in capital
    
    
    94,720
    
    
    94,412Deferred
      stock-based compensation
    
    
    (347
    )
    
    (462
    )Accumulated
      deficit
    
    
    (41,399
    )
    
    (43,708
    )Total
      stockholders’ equity
    
    
    52,997
    
    
    50,265Total
      liabilities and stockholders’ equity
    
    $
    57,336
    
    $
    54,138
 
 The
accompanying notes are an integral part of these consolidated financial
statements
  4
  **VOLTERRA
SEMICONDUCTOR CORPORATION**
 **AND
SUBSIDIARIES**
 
 **CONSOLIDATED
STATEMENTS OF OPERATIONS**
 **(In
thousands, except per share amounts)**
 
 **Three
      Months****Ended
      March 31,****2005**
    
    
    **2004****(Unaudited)**Net
      revenue
    
    
    
    $
    14,631
    
    $
    7,615Cost
      of revenue
    
    
    
    
    6,398
    
    
    3,658Gross
      margin
    
    
    
    
    8,233
    
    
    3,957Operating
      expenses:Research and development
    
    
    
    
    3,577
    
    
    2,570Selling, general and administrative
    
    
    
    
    2,068
    
    
    1,042Stock-based compensation(*)
    
    
    
    
    119
    
    
    99Total
      operating expenses
    
    
    
    
    5,764
    
    
    3,711Income
      from operations
    
    
    
    
    2,469
    
    
    246Interest
      and other income
    
    
    
    
    252
    
    
    38Interest
      and other expense
    
    
    
    
    (5
    )
    
    (2
    )Income
      before income taxes
    
    
    
    
    2,716
    
    
    282Income
      tax expense
    
    
    
    
    407
    
    
    13Net
      income
    
    
    
    $
    2,309
    
    $
    269Basic
      net income per share
    
    
    
    $
    0.10
    
    $
    0.05Shares
      used in computing basic netincome
      per share
    
    
    
    
    23,403
    
    
    5,572Diluted
      net income per share
    
    
    
    $
    0.09
    
    $
    0.01Shares
      used in computing diluted netincome
      per share
    
    
    
    
    26,309
    
    
    20,627(*)Stock-based compensation consists of:Cost of revenue
    
    
    
    $
    7
    
    
    6Research and development
    
    
    
    
    48
    
    
    42Selling, general and administrative
    
    
    
    
    64
    
    
    51Total
    
    
    
    $
    119
    
    
    99
 
 The
accompanying notes are an integral part of these consolidated financial
statements
 
  5
  **VOLTERRA
SEMICONDUCTOR CORPORATION**
 **AND
SUBSIDIARIES**
 
 **CONSOLIDATED
STATEMENTS OF CASH FLOWS**
 **(In
thousands)**
 
 **Three
      Months****Ended
      March 31,****2005**
    
    
    **2004******
    
    **(Unaudited)****Cash
      flows from operating activities:**Net
      income
    
    $
    2,309
    
    $
    269Adjustments
      to reconcile net income to net cash(used
      in) provided by operating activities:Depreciation and amortization
    
    
    129
    
    
    123Provision for doubtful accounts
    
    
    —
    
    
    38Interest income on stockholders’ notes receivable
    
    
    —
    
    
    (23
    )Stock-based compensation
    
    
    119
    
    
    99Changes
      in operating assets and liabilities:Accounts receivable
    
    
    (4,815
    )
    
    (578
    )Inventory
    
    
    (16
    )
    
    (745
    )Prepaid expenses and other current assets
    
    
    33
    
    
    127Accounts payable
    
    
    453
    
    
    820Accrued liabilities
    
    
    13
    
    
    50Net
      cash (used in) provided by operating activities
    
    
    (1,775
    )
    
    180**Cash
      flows from investing activities:**Acquisitions
      of property and equipment
    
    
    (874
    )
    
    (516
    )Sales
      of short-term investments, net of purchases
    
    
    64
    
    
    —Net
      cash used in investing activities
    
    
    (810
    )
    
    (516
    )**Cash
      flows from financing activities:**Borrowings
      under line of credit
    
    
    —
    
    
    1,950Payments
      on line of credit
    
    
    —
    
    
    (1,800
    )Proceeds
      from issuance of common stock, net
    
    
    304
    
    
    210Net
      cash provided by financing activities
    
    
    304
    
    
    360Net
      increase in cash and cash equivalents
    
    
    (2,281
    )
    
    24Cash
      and cash equivalents, beginning of period
    
    
    24,895
    
    
    10,129Cash
      and cash equivalents, end of period
    
    $
    22,614
    
    $
    10,153**Supplemental
      disclosure of cash flow information:**Cash paid for interest
    
    $
    —
    
    
    2**Supplemental
      disclosure of non-cash investing and financing
      activities:**Deferred stock-based compensation
    
    $
    —
    
    $
    776Decrease in liability for early option exercises, net
    
    $
    —
    
    $
    (132
    )
 
 The
accompanying notes are an integral part of these consolidated financial
statements
 
  6
 
 **VOLTERRA
SEMICONDUCTOR CORPORATION**
 **AND
SUBSIDIARIES**
 
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(In
thousands, except share and per share data)**
 **(Unaudited)**
 
 
 **1.
Description of Business**
 
 Volterra
Semiconductor Corporation (the Company or Volterra) was incorporated in Delaware
in 1996, and its principal offices are located in Fremont, California. The
Company designs, develops and markets proprietary, high-performance analog and
mixed-signal power management semiconductors for the computing, storage,
networking and consumer markets. In August 2004, the Company completed its
initial public offering and received net proceeds of $31.9 million.
 
 ***Basis
of Presentation***
 
 The
accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant inter-company
balances and transactions have been eliminated in consolidation. The functional
currency of foreign subsidiaries is the U.S. dollar and foreign currency
transaction gains and losses are recorded in income. For all periods presented,
there have been no material foreign currency transaction gains or
losses.
 
 The
Company’s accompanying condensed consolidated financial statements have been
prepared without audit in accordance with the rules and regulations of the
Securities and Exchange Commission (the “SEC”). Certain information and
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States have been
condensed or omitted in accordance with these rules and regulations. The
information in this report should be read in conjunction with the Company’s
audited consolidated financial statements and notes thereto included in its Form
10-K filed with the SEC on March 1, 2005.
 
 In the
opinion of management, the accompanying unaudited condensed consolidated
financial statements reflect all adjustments (consisting only of normal
recurring adjustments) necessary to summarize fairly the Company’s financial
position, results of operations and cash flows for the interim periods
presented. The operating results for the three-month period ended March 31, 2005
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2005 or for any other future period. The consolidated
balance sheet as of December 31, 2004 is derived from the audited consolidated
financial statements as of and for the year then ended.
 
 ***Use
of Estimates***
 
 The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and the accompanying notes. Actual results could differ from those
estimates.
 
 ***Financial
Instruments and Concentrations of Credit Risk***
 
 Financial
instruments consist of cash equivalents, short-term investments, accounts
receivable and accounts payable. The carrying value of the Company’s cash
equivalents, short-term investments, accounts receivable and accounts payable
approximates their respective fair value due to the relatively short maturities
of these instruments. Financial instruments that potentially subject the Company
to concentrations of credit risk consist principally of investments and trade
accounts receivable.
 
 The
Company maintains cash, cash equivalents and short-term investments with high
credit quality financial institutions. Cash equivalents consist of highly liquid
investments with remaining contractual maturities on the date of purchase of 90
days or less. Short-term investments are comprised of government agency debt
securities with remaining contractual maturities on the date of purchase greater
than 90 days but less than one year. These investments are classified as
held-to-maturity and carried at amortized cost.
 
 The
Company sells its products to international distributors and original equipment
manufacturers (and their outsourced suppliers) in the computing, storage,
networking and consumer electronics industries. The Company performs continuing
credit evaluations of its customers’ financial condition and generally does not
require collateral from its customers. An allowance is provided for estimated
accounts receivable that may not be collected.


7
 
 ***Segment
Reporting and Significant Customers***
 
 The
Company is organized and operates as a single business segment: analog and
mixed-signal power management semiconductors. The Company’s chief operating
decision maker, the Chief Executive Officer, reviews financial information
presented on a consolidated basis for the purposes of making operating decisions
and assessing financial performance. Substantially all of the Company’s
long-lived assets are located in the United States.
 
 Significant
customers are those customers accounting for more than 10% of the Company’s
total net revenue or accounts receivable. For each significant customer, net
revenue as a percentage of total net revenue and accounts receivable as a
percentage of total accounts receivable are as follows:
 
 **Net
      Revenue**
    
    **Accounts
      Receivable****As of****Customer**
    **Three
      Months Ended**
      **March
      31, 2005**
    **Three
      Months Ended**
      **March
      31, 2004**
    
    **March
      31, 2005**
    **December
      31, 2004**A
    22%
    21%
    
    20%
    21%B
    13%
    26%
    
    18%
    *C
    13%
    *
    
    14%
    43%D
    11%
    28%
    
    10%
    *E
    *
    *
    
    12%
    *F
    *
    *
    
    *
    11%*
      Less than 10%
 
 The
Company reports its net revenue by geographic area according to the destination
to which the product was shipped. Net revenue by geographic area was as
follows:
 
 **Three
      Months Ended March 31,******
    **2005**
    
    **2004**Singapore
    46%
    
    62%Taiwan
    12%
    
    8%China
    10%
    
    *Hong
      Kong
    10%
    
    5%United
      States
    6%
    
    9%Japan
    6%
    
    8%Thailand
    6%
    
    *Other
    4%
    
    8%
 
 The
geographic area to which a product was shipped is not necessarily the same
location in which the product is ultimately used. In all periods, substantially
all of the Company’s net revenue was denominated in U.S.
dollars.
 
 ***Revenue
Recognition***
 
 Revenue
from the sale of semiconductor products is recognized upon shipment when title
transfers to the customer provided that persuasive evidence of an arrangement
exists, the price is fixed or determinable, and collection of the resulting
receivable is reasonably assured. An allowance is recorded at the time of sale
to provide for estimated future returns and allowances. The allowance is based
upon historical experience, current trends and the Company’s expectations
regarding future experience. Sales returns must be authorized by Volterra and
are generally limited to instances provided for under the Company’s standard
warranty.
 
 The
Company has made no sales to U.S. distributors. Volterra’s sales to
international distributors are made under agreements that do not provide for
price adjustments after purchase and provide limited return rights under the
Company’s standard warranty. Revenue on these sales is recognized upon shipment
when title passes to the distributor. Volterra estimates future international
distributor sales returns and allowances based on historical data and current
business expectations and reduces revenue for estimated future returns and
allowances through the allowance for sales returns. Sales returns from
distributors must be authorized by the Company and are generally limited to
instances of potential product failure under the same standard warranty
described above.
 
 Costs of
shipping and handling for delivery of the Company’s products that are reimbursed
by its customers are recorded as revenue in the statement of operations.
Shipping and handling costs are charged to cost of revenue as incurred.
  8
  ***Earnings
Per Share*** **
 
 Basic net
income per share is calculated by dividing net income by the weighted average
shares of common stock outstanding during the period. Diluted net income per
share is calculated by dividing the net income by the weighted average shares of
common stock outstanding and dilutive potential common shares outstanding during
the period. Dilutive potential common shares consist of dilutive shares issuable
upon the exercise of outstanding stock options and warrants, computed using the
treasury stock method, and conversion of convertible preferred
stock.
 
 The
following table sets forth for all periods presented the computation of basic
and diluted net income per share, including the reconciliation of the numerator
and denominator used in the calculation:
 
 ****
    
    **Three
      Months Ended****March
      31****,******
    
    
    **2005**
    
    
    **2004**Numerator:Net
      income
    
    $
    2,309
    
    $
    269Denominator:Weighted
      average common shares - Basic
    
    
    23,402,662
    
    
    5,571,656Effect
      of dilutive securities:Stock
      options
    
    
    2,906,032
    
    
    1,874,366Convertible
      preferred stock
    
    
    —
    
    
    13,038,133Convertible
      preferred warrants
    
    
    —
    
    
    142,407Weighted
      average common shares - Diluted
    
    
    26,308,694
    
    
    20,626,562Net
      income per share — Basic
    
    $
    0.10
    
    $
    0.05Net
      income per share — Diluted
    
    $
    0.09
    
    $
    0.01
 
 In the
three months ended March 31, 2005 and 2004, 56,800 and 0, respectively, stock
options outstanding were excluded from the calculation of diluted net income per
share as they had an antidilutive effect. The securities outstanding as of March
31, 2005 could dilute net income per share in the future.
 
 ***Accounting
for Stock-Based Compensation***
 
 The
Company applies the intrinsic value based method of accounting prescribed by
Accounting Principles Board (APB) Opinion No. 25, *Accounting
for Stock Issued to Employees* , and
related interpretations including Financial Accounting Standards Board (FASB)
Interpretation (FIN) No. 44, *Accounting
for Certain Transactions Involving Stock Compensation, an Interpretation of APB
Opinion No. 25* , to
account for the Company’s fixed plan stock options. Under this method, deferred
stock-based compensation has been recorded only if the deemed fair value of the
underlying common stock exceeded the exercise price of options granted to
employees on the date of grant. Deferred stock-based compensation expense is
amortized on an accelerated basis over the vesting period of each grant using
the method prescribed by FASB FIN 28, *Accounting
for Stock Appreciation Rights and Other Variable Stock Option or Awards
Plans* .
 
 Statement
of Financial Accounting Standards (SFAS) No. 123, *Accounting
for Stock-Based Compensation,* and SFAS
No. 148, *Accounting
for Stock-Based Compensation — Transition and Disclosure, an Amendment of FASB
Statement No. 123* ,
established accounting and disclosure requirements using a fair value based
method of accounting for stock-based employee compensation plans. As permitted
by existing accounting standards, the Company has elected to continue to apply
the intrinsic value based method of accounting described above, and has adopted
only the disclosure requirements of SFAS No. 123, as amended. The following
table illustrates the effect on net income (loss) if the fair value based method
had been used in each period:
  9
  
 ****
    
    **Three
      Months Ended**
      **March
      31****,******
    
    
    **2005**
    
    
    **2004**Net
      income as reported
    
    $
    2,309
    
    $
    269Add:
      stock-based compensation for employee awards included in the determination
      of net income, net of tax
    
    
    101
    
    
    97Less:
      stock-based compensation for employee awards determined under the
      fair-value method, net of tax
    
    
    (688
    )
    
    (182
    )Pro forma net
      income
    
    $
    1,722
    
    $
    184Basic
      net income per share:As
      reported
    
    $
    0.10
    
    $
    0.05Pro
      forma
    
    $
    0.07
    
    $
    0.03Diluted
      net income per share:As
      reported
    
    $
    0.09
    
    $
    0.01Pro
      forma
    
    $
    0.07
    
    $
    0.01
 
 
 **2.
Inventory**
 
 Inventory
as of March 31, 2005 and December 31, 2004 consisted of the
following:
 
 ****
    
    
    **March
      31,**
      **2005**
    
    
    **December
      31,**
      **2004**Work-in-process
    
    $
    2,325
    
    $
    3,430Finished
      goods
    
    
    2,825
    
    
    1,704$
    5,150
    
    $
    5,134
 
 
 **3.
Property and Equipment**
 
 Property
and equipment as of March 31, 2005 and December 31, 2004 consisted of the
following:
 
 ****
    
    
    **March
      31,**
      **2005**
    
    
    **December
      31,**
      **2004**Computer
      hardware
    
    $
    991
    
    $
    966Computer
      software
    
    
    2,799
    
    
    1,979Equipment
      and furniture
    
    
    2,136
    
    
    2,107Leasehold
      improvements
    
    
    626
    
    
    6266,552
    
    
    5,678Less
      accumulated depreciation and amortization
    
    
    (4,393
    )
    
    (4,264
    )$
    2,159
    
    $
    1,414
 
 
 **4.
Commitments**
 
 The
Company leases its facilities under operating lease agreements expiring between
2005 and 2007. Rent expense for the three months ended March 31, 2005 and 2004
was $120 and $120, respectively.
 
 The
following table sets forth the Company’s contractual obligations as of March 31,
2005 and the years in which such obligations are expected to be
settled:
 
 ****
    
    
    **2005**
    
    
    **2006**
    
    
    ****
      **2007**
    
    
    **2008**
      **and
      thereafter**
    
    
    **Total**Future
      minimum lease commitments
    
    $
    360
    
    $
    463
    
    $
    304
    
    $
    —
    
    $
    1,127Inventory
      purchase commitments
    
    
    1,063
    
    
    —
    
    
    —
    
    
    —
    
    
    1,063$
    1,423
    
    $
    463
    
    $
    304
    
    $
    —
    
    $
    2,190
 
 Inventory
purchase commitments are comprised of the estimated obligation for in-process
silicon wafers.
 
 
 10
 
 
 **Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations**
 
 The
following discussion should be read in conjunction with our consolidated
financial statements and the related notes contained elsewhere in this quarterly
report on Form 10-Q. All statements in the following discussion that are
not reports of historical information or descriptions of current accounting
policy are forward-looking statements. Please note the “Cautionary Note
Regarding Forward-Looking Statements” at the beginning of this quarterly report
and consider our forward-looking statements in light of the factors that may
affect operating results set forth herein.
  **Overview**
 
 We
design, develop and market proprietary, high-performance analog and mixed-signal
power management semiconductors. We sell integrated voltage regulator
semiconductors and scalable voltage regulator semiconductor chipsets in the
computing, storage, networking and consumer markets. For the first three months
of 2005, most of our revenue was derived from sales in the computing and storage
markets.
 
 We
commenced operations in 1996. From 1996 to 2000, we were primarily involved in
developing our technology, recruiting personnel and raising capital. We made our
first commercial shipments of products in 2000 and began to recognize revenue in
the first quarter of 2001. As of March 31, 2005, we had an accumulated deficit
of $41.4 million. We have been profitable for the past five quarters. We
generated net revenue of $14.6 million and net income of $2.3 million in the
three months ended March 31, 2005, compared to $7.6 million in net revenue and
net income of $0.3 million for the three months ended March 31, 2004.
 
 In
reviewing our performance, we focus on the following key non-financial factors:
customers and market penetration, product introductions and performance. We
evaluate our performance as to these non-financial factors against our operating
plans and internally developed goals. We also focus on the following key
financial factors: net revenue, and gross margin and income from operations as a
percentage of net revenue. The following table summarizes those key financial
factors over the last five quarters:
 
 ****
    
    **Three
      Months Ended******
    
    
    **Mar.
      31,**
      **2005**
    
    
    **Dec.
      31,**
      **2004**
    
    
    **Sept.
      30,**
      **2004**
    
    
    **June
      30,**
      **2004**
    
    
    **Mar.
      31,**
      **2004**Net
      revenue (in thousands)
    
    $
    14,631
    
    $
    14,614
    
    $
    12,562
    
    $
    9,144
    
    $
    7,615As
      a percent of net revenue:Gross
      margin
    
    
    56
    %
    
    58
    %
    
    56
    %
    
    54
    %
    
    52
    %Income
      from operations
    
    
    17
    %
    
    18
    %
    
    12
    %
    
    6
    %
    
    4
    %
 
 Our
business will be influenced by factors affecting the semiconductor industry
generally and by conditions in each of the markets we serve. However, because of
our small scale relative to our markets, we believe our business will be
influenced principally by company-specific factors such as our execution in
design engineering, sales and operations. We expect any future changes in net
revenue to be driven principally by our penetration of new customers and markets
and the expansion or contraction of our market share within existing customers
and markets.
 
 Our
lengthy sales cycles make forecasting the volume and timing of orders difficult.
The design phase of our sales cycle can take up to 12 months or longer to
complete. The commercial introduction of systems that use our products can take
an additional six to 12 months or longer to occur, if they are introduced at
all. Our revenue will depend on the timing, size, speed and success of
commercial introductions of systems that use our products, which are inherently
difficult to estimate.
 
 The sales
of our products are generally made pursuant to standard purchase orders rather
than long-term agreements. Purchase orders are frequently revised prior to
shipment to reflect changes in the customer’s requirements. Product deliveries
are scheduled upon our receipt of purchase orders. Generally, these orders allow
customers to reschedule delivery dates and cancel orders on relatively short
notice. In addition, in circumstances where we have achieved our objectives in a
period or when we have limited or insufficient inventory available, we may delay
shipment of orders.
 
 We have
experienced an increasing percentage of our net revenue coming from orders
received and shipped within the same quarter, which we refer to as
our “turns business”, which is inherently difficult to forecast. We
calculate turns business as a percent of net revenue as the ratio of net revenue
less beginning backlog to net revenue making adjustment for the effect of sales
return reserves or other adjustments to net revenue not included in backlog. We
believe that the amount of turns business tends to increase as the relative mix
of sales moves away from distribution, as the relative mix of customers and
markets to which we sell changes toward higher volume and consumer applications,
and as our customers launch new platforms. Turns business is also influenced by
changes in market conditions in the semiconductor and electronics industries
generally as well as other factors. Turns business grew to between 45% and 55%
of net revenue in the first quarter of 2005 from between 15% and 25% in the
first quarter of 2004. We expect our turns business in the second quarter to
continue to increase and may fluctuate in the future. As our turns business
increases, forecasting revenue becomes more difficult.
  11
  Our gross
margins have historically varied significantly, and are expected to continue to
vary, based on a variety of factors, including changes in the relative mix of
the products we sell, the markets and geographies in which we sell, the size and
nature of our customers in these markets, new product ramps, manufacturing
volumes and yields, and inventory and overhead costs. In addition, consistent
with the overall market for power management solutions, we expect to face price
pressure over time. In order to maintain or improve our gross margins, we need
to introduce new, lower cost products, increase volumes, reduce unit costs or
achieve a combination of these objectives.
 
 While in
any period there may be fluctuations in our operating results, we expect total
operating expenses generally to grow in absolute dollars. Our research and
development expenses can fluctuate as a result of long design cycles with
periods of relatively low expenses punctuated with increased expenditures for
prototypes and product development toward the end of the design cycle. Our
sales, general and administrative expenses are expected to grow in absolute
dollars reflecting among other factors the higher costs of a publicly-traded
company, including those related to Sarbanes-Oxley compliance.
 
 Our sales
are concentrated with a small group of customers. In the three months ended
March 31, 2005, four customers each accounted for 10% or more of our net
revenue, and collectively accounted for 59% of our net revenue. Of these
customers, two are original equipment manufacturers, or OEMs, and two are
distributors. In the three months ended March 31, 2004, three customers each
accounted for 10% or more of our net revenue, and collectively accounted for 75%
of our net revenue. Of these customers, two were distributors and one was an
OEM. If we were to lose or experience a significant reduction in sales to one or
more of our key customers, our operating results could be materially impacted.
Demand for our products is influenced by demand for our customers’ products and
our customers’ management of their own inventory. Our sales to distributors and
outsourced suppliers such as original design manufacturers, or ODMs, contract
equipment manufacturers, or CEMs, or merchant power supply companies, are
subject to higher risk because they service demand from other companies that
they may not forecast accurately.
 
 We
typically sell directly through our internal sales force to customers in North
America, and indirectly through distributors in other locations, though we do
sell directly to some of our customers in Asia and Europe. During the first
quarter of 2005, sales to international distributors represented 37% of net
revenue, a decrease from 62% in the first quarter of 2004. We expect the mix of
business between distribution and direct sales to fluctuate over time as our
product offerings and customers change. Our sales through distributors typically
result in lower gross margins, but also result in lower selling and collections
expenses than are associated with direct sales. As most of the systems that use
our products are manufactured outside of the United States, the percentage of
our net revenue generated outside the United States was 94% and 91% in the three
months ended March 31, 2005 and 2004, respectively. We report our net revenue by
geographic areas according to the destination to which we shipped our product.
To date, substantially all of our net revenue has been denominated in U.S.
dollars and we expect to continue this practice.
 
 Because
we use third-party subcontractors to manufacture, assemble and test our
products, our business has relatively low capital requirements. We purchase our
inventory pursuant to standard purchase orders. As lead-times at our
manufacturing partners can be up to three months or more, we typically build
inventory based on our sales forecasts rather than backlog, subjecting us to
potential inventory risk.
 
 ***Net
Revenue.*** Net
revenue consists primarily of sales of our power management semiconductor
products. We have made no sales to U.S. distributors. Our sales to international
distributors are made under agreements that do not provide for price adjustments
after purchase and provide limited return rights. We recognize revenue upon
shipment with a provision for estimated sales returns and
allowances.
 
 ***Cost
of Revenue.*** Cost of
revenue consists primarily of silicon wafers and related costs of assembly, test
and shipment of our products, and compensation and related costs of personnel
and equipment associated with production management and quality
assurance.
 
 ***Research
and Development.*** Research
and development expenses consist primarily of compensation and related costs for
employees involved in the design and development of our products, prototyping
and other development expense, and the depreciation costs related to equipment
being used for research and development. All research and development costs are
expensed as incurred.
 
 ***Selling,
General and Administrative.*** Selling,
general and administrative expenses consist primarily of compensation and
related costs for employees involved in general management, sales and marketing,
finance and information technology, as well as travel and entertainment
expenses, professional services expenses and insurance expenses.
 
 ***Stock-Based
Compensation.*** Stock-based compensation consists primarily of the amortization of deferred
stock-based compensation. As of March 31, 2005, we had an aggregate of $0.3
million of deferred stock-based compensation remaining to be amortized. We
report employee stock-based compensation separately, rather than including it in
each expense classification, as we believe this allows for more meaningful
comparison of operating expenses between periods and more consistent comparison
of our financial results with other companies.
  12
  ***Income
Taxes.*** Our
effective tax rate is based on our annual effective tax rate in accordance with
SFAS No. 109 *Accounting
for Income Taxes* . Our
annual effective tax rate is based on the mix of income between domestic and
international operations, as well as the utilization of available net operating
loss carry-forwards to offset taxable income in the U.S.
 
 **Critical
Accounting Policies**
 Management
believes there have been no significant changes to our critical accounting
policies during the quarter ended March 31, 2005 as compared to the previous
disclosures in Management’s Discussion and Analysis of Financial Condition and
Results of Operations included in our Annual Report on Form 10-K, filed with the
SEC on March 1, 2005.
 
 **Results
of Operations**
 
 The
following table sets forth our results of operations as a percentage of net
revenue for the periods indicated:
 
 ****
    
    **Three
      Months Ended March 31,****2005**
    
    
    **2004**Net
      revenue
    
    
    100
    %
    
    100
    %Cost
      of revenue
    
    
    44
    
    
    48Gross
      margin
    
    
    56
    
    
    52Operating
      expenses:Research
      and development
    
    
    24
    
    
    34Selling,
      general and administrative
    
    
    14
    
    
    14Stock-based
      compensation
    
    
    1
    
    
    1Total
      operating expenses
    
    
    39
    
    
    49Income
      from operations
    
    
    17
    
    
    3Interest
      and other income, net
    
    
    2
    
    
    1Income
      before income taxes
    
    
    19
    
    
    4Income
      tax expense
    
    
    3
    
    
    —Net
      income
    
    
    16
    %
    
    4
    %
 
 
 **Comparison
of Quarter Ended March 31, 2005 to Quarter Ended March 31,
2004**
 
 ***Net
Revenue.*** Net
revenue was $14.6 million in the three months ended March 31, 2005 and $7.6
million in the three months ended March 31, 2004, an increase of 92%. Unit
volume of shipments increased 106% in the first quarter of 2005 as compared to
the first quarter of 2004, primarily due to higher sales in the computing and
storage markets.
 
 ***Cost
of Revenue and Gross Margin.*** Cost of
revenue was $6.4 million for the three months ended March 31, 2005 and $3.7
million for the three months ended March 31, 2004. Cost of revenue increased
primarily due to the increased volume of shipments, partially offset by lower
average costs per unit. Gross margin was $8.2 million for the three months ended
March 31, 2005 as compared to $4.0 million for the three months ended March 31,
2004, an increase of 108%. Gross margin as a percent of net revenue increased to
56% for the three months ended March 31, 2005 as compared to 52% for the three
months ended March 31, 2004. The increase in gross margin was due primarily to
changing sales mix resulting from a lower proportion of our first generation
products, which had lower gross margin than our newer products.
 
 ***Research
and Development.*** Research
and development expenses were $3.6 million for the three months ended March 31,
2005 as compared to $2.6 million for the three months ended March 31, 2004, an
increase of 39%. The increase was primarily associated with an increase in
payroll expenses of $0.6 million due to additional headcount and an increase in
prototype expense of $0.4 million.
 
 ***Selling,
General and Administrative.*** Selling,
general and administrative expenses were $2.1 million for the three months ended
March 31, 2005 as compared to $1.0 million for the three months ended March 31,
2004, an increase of 98%. The increase was primarily associated with an increase
in professional services of $0.7 million, associated with being a publicly
traded company, and an increase in payroll expenses of $0.3 million due to
additional headcount and.
 
 ***Stock-based
Compensation.*** Stock-based compensation expense was $0.1 million for the three months ended
March 31, 2005 and 2004. In 2004, we granted options that were considered
compensatory because the fair market value of our stock determined for financial
reporting purposes was greater than the fair value determined by the board of
directors on the date of grant of the options.
  13
  ***Income
Tax Expense.*** Income
tax expense was $0.4 million for the three months ended March 31, 2005 and
$13,000 for the three months ended March 31, 2004. Income tax expense in 2005 is
based on our estimated annual effective tax rate of 15%. Our effective tax rate
is based on the mix of income between domestic and international operations, as
well as the utilization of available net operating loss and research and
development credit carryforwards for which no previous benefit had been taken.
In 2005 and 2004, our effective tax rate was significantly less than statutory
rates because we utilized net operating loss carryforwards, from which no
previous benefit had been recognized to offset taxable income in the U.S.
 
 **Liquidity
and Capital Resources**
 
 As of
March 31, 2005, we had working capital of $50.8 million, including cash and cash
equivalents of $22.6 million, compared to working capital of $48.8 million,
including cash and cash equivalents of $24.9 million, as of December 31, 2004.
Since our inception, we have financed our operations primarily through private
sales of equity securities totaling $60.8 million. We have also funded
operations with debt financing under our bank credit facility and with capital
leases. In August 2004, we received total proceeds of $31.9 million, net of
related issuance fees and estimated offering costs, from our initial public
offering. We believe that our current cash, cash equivalents and investments as
well as cash flows from operations will be sufficient to continue our operations
and meet our capital needs for the foreseeable future.
 
 Net cash
of $1.8 million was used in operating activities in the three months ended
March 31, 2005 compared to net cash provided by operating activities of $0.2
million in the three months ended March 31, 2004. The change is primarily due to
an increase in accounts receivable of $4.8 million due to non-linearity of
shipments in the first quarter of 2005 caused in part by the lunar new year
holidays, partially offset by net income of $2.3 million. We have extended
payment terms to certain customers and may offer extended terms to other
customers in the future and this may lead to incremental increases in our
accounts receivable balances.
 
 Our
investing activities used net cash in the amounts of $0.8 million and $0.5
million for the three months ended March 31, 2005 and 2004, respectively. In
both periods, these amounts consist of the acquisition of property and
equipment. In 2005, we expect to increase our capital expenditures as we upgrade
our information systems. We expect to expend less than $5 million on these
upgrades and to fund these increases from existing capital resources and
operating cash flows.
 
 Our
financing activities provided $0.3 million and $0.4 million, for the three
months ended March 31, 2005 and 2004, respectively. During the three months
ended March 31, 2005, we received net proceeds of $0.3 million from the issuance
of common stock in connection with employee exercises of stock options. During
the three months ended March 31, 2004, the net cash provided by financing
activities was primarily due to $0.2 million from the issuance of common stock
and net borrowings of $0.2 million under our line of credit.
 
 In the
first three months of 2004, we used our bank line of credit to generate an
additional $2.0 million of debt financing that was repaid in full in the
following period. Our bank line of credit allows us to borrow based on eligible
accounts receivable up to a maximum of $3.5 million, which can be increased to a
maximum of $5.0 million at our option. As of March 31, 2005, we had no
outstanding amounts under the bank line of credit, and $5.0 million remained
available based on eligible accounts receivable. Interest on borrowings under
this line of credit accrues at the prime rate plus 0.5%. This line of credit
expires on June 24, 2005.
 
 **Contractual
Obligations**
 
 We depend
entirely upon third party foundries to manufacture our silicon wafers. Due to
lengthy foundry lead times, we must order these materials well in advance of
required delivery dates, and we are obligated to pay for the materials in
accordance with their payment terms, which typically require payment within
three months.
 
 The
following table sets forth our contractual obligations as of March 31, 2005 (in
thousands):
 
 **2005**
    
    
    **2006**
    
    
    ****
      **2007**
    
    
    **2008**
      **and
      thereafter**
    
    
    **Total**Future
      minimum lease commitments
    
    $
    360
    
    $
    463
    
    $
    304
    
    $
    —
    
    $
    1,127Inventory
      purchase commitments
    
    
    1,063
    
    
    —
    
    
    —
    
    
    —
    
    
    1,063$
    1,423
    
    $
    463
    
    $
    304
    
    $
    —
    
    $
    2,190
 
 Inventory
purchase commitments are comprised of the estimated obligation for in-process
silicon wafers.
 
 14
 ****
 **Recent
Accounting Pronouncements**
 
 In
December 2004, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards 123R (SFAS No. 123R), *Share-Based
Payment* ,
effective beginning after June 15, 2005. SFAS No. 123R supersedes APB Opinion
No. 25, *Accounting
for Stock Issued to Employees* , and
will require companies to recognize compensation expense, using a fair-value
based method, for costs related to share-based payments including stock options
and stock issued under employee stock purchase plans. On April 14, 2005, SFAS
No. 123R was amended to allow companies to adopt the standard at the beginning
of the fiscal year that begins after June 15, 2005. We will be required to
implement SFAS No. 123R beginning January 1, 2006. Our adoption will be applied
on a modified prospective basis and measured and recognized on January 1, 2006.
We are currently evaluating option valuation methodologies and assumptions in
light of SFAS No. 123R, and therefore cannot estimate the impact of our adoption
at this time. These methodologies and assumptions may be different than those
currently employed by us in applying SFAS No. 123 as outlined in the “Accounting
for Stock-Based Compensation” section of our Notes to Consolidated Financial
Statements. We expect that our adoption of SFAS No. 123R will have a material
adverse impact on our financial statements and results of
operations.
  **Factors
that May Affect Future Operating Results**
 
 You
should carefully consider the risks described below and elsewhere in this
report, which could materially and adversely affect our business, results of
operations or financial condition. In those cases, the trading price of our
common stock could decline and you may lose all or part of your
investment.
 
 **We
are an early stage semiconductor company with a limited operating history, which
makes it difficult to evaluate our current business and future prospects and may
increase the risk of your investment.**
 
 We have a
limited operating history. While our commercial operations began in
August 1996, our first products were not shipped until the first quarter of
2000 and most of our current products have been sold in significant quantities
for only a short time. You should consider our business and prospects in light
of the risks and difficulties we encounter as an early stage company. These
risks and difficulties include the following:
 
 ·
    we
      have limited historical financial data from which to predict our future
      revenue and operating results;
 
 ·
    we
      are subject to the highly cyclical nature of, and downturns in, the
      semiconductor industry;
 
 ·
    we
      depend on a small number of customers for substantially all of our net
      revenue;
 
 ·
    we
      have a limited number of products; and
 
 ·
    we
      may face difficulties in managing growth in personnel and
      operations.
 
 We may
not be able to successfully address any of these risks or others, including the
other risks related to our business and industry described below. Failure to
adequately do so could seriously harm our business and cause our operating
results to suffer.
 
 **Our
operating results have fluctuated in the past, and we expect a number of factors
to cause our operating results to fluctuate in the future, making it difficult
for us to accurately forecast our operating results.**
 
 In the
past, our net revenue and operating results have fluctuated from quarter to
quarter and year to year, and we expect them to continue to do so in the future.
As a result, it is difficult to predict our future revenue and operating
results. A number of factors, many of which are beyond our control, are likely
to cause our net revenue and operating results to fluctuate. These factors
include:
 
 ·
    changes
      in orders received and shipped during the quarter, which we refer to as
      our “turns business”, which is difficult to estimate and represents an
      increasing percentage of our net revenue;
 
 ·
    changes
      in the level of our expenses, including the cost of materials used to
      manufacture our products;
 
 ·
    the
      cyclical nature of the semiconductor
industry;
 
 ·
    the
      loss of one or more key customers, or a significant reduction in sales to
      one or more key customers;
 
 ·
    the
      loss of one or more key distributors, or a significant reduction in orders
      from one or more key distributors;
 
 ·
    demand
      for our products or the electronic systems into which our products are
      incorporated;
 
 ·
    our
      ability to develop new products or new generations and versions of our
      existing products that achieve market acceptance in a timely
      manner;
  15
  ·
    the
      timing of introductions of competing products or
    technologies;
 
 ·
    our
      ability to adequately support our future
growth;
 
 ·
    disputes
      regarding intellectual property rights;
 
 ·
    litigation
      involving us or our products;
 
 ·
    our
      ability to obtain sufficient capacity from foundries and other third-party
      subcontractors to manufacture, assemble and test our products on a timely
      and cost-effective basis;
 
 ·
    the
      ability of our manufacturing subcontractors to obtain an adequate supply
      of the raw materials used in the manufacture of our products on a timely
      and cost-effective basis;
 
 ·
    changes
      in the prices of our products or the electronic systems into which our
      products are incorporated;
 
 ·
    our
      ability to fulfill orders for our products in a timely manner, or at
      all;
 
 ·
    customers’
      failure to pay us on a timely basis;
 
 ·
    varying
      order patterns in the markets in which we sell our
    products;
 
 ·
    changes
      in foreign currency rates; and
 
 ·
    changes
      in accounting principles or policies, including an election by us, or the
      requirement, to treat stock option grants as an operating
      expense.
 
 Due to
these and other factors discussed in this report, you should not rely upon the
results of any prior quarter or year as an indication of our future operating
performance.
 
 **We
have a history of losses, have only recently experienced revenue growth and
become profitable and may not maintain profitability on a quarterly or annual
basis.**
 
 We
experienced profitability for the first time in 2004. We incurred net losses of
approximately $9.2 million and $4.0 million in 2002 and 2003,
respectively, and as of March 31, 2005, we had an accumulated deficit of
$41.4 million. We have recently experienced revenue growth. Specifically,
our annual net revenue increased 60% from $15.7 million in 2002 to
$25.1 million in 2003. Revenue increased 75% from $25.1 million in
2003 to $43.9 million in 2004. Revenue increased 92% from $7.6 million for
the first three months of 2004 to $14.6 million for the first three months
of 2005. However, we do not expect to maintain similar revenue growth rates in
future periods. We may also incur losses in future periods. Accordingly, you
should not rely on the results of any prior quarterly or annual periods as an
indication of our future revenue growth or financial results. Our ability to
maintain profitability on a quarterly or annual basis depends in part on the
rate of growth of our target markets, the continued acceptance of our and our
customers’ products, the competitive position of our products, our ability to
develop new products, our ability to secure adequate manufacturing capacity and
our ability to manage expenses. We may not maintain profitability on a quarterly
or annual basis.
 
 **We
depend on a small number of customers for substantially all of our net revenue
and the loss of, or a significant reduction in orders from, any of them would
significantly reduce our net revenue and adversely affect our operating
results.**
 
 We sell
our products primarily to original equipment manufacturers, or OEMs, original
design manufacturers, or ODMs, contract equipment manufacturers, or CEMs, and
power supply manufacturers, either directly through our internal sales force or
indirectly through distributors and outsourced suppliers. In the three months
ended March 31, 2005, four customers each accounted for more than 10% of our net
revenue and collectively accounted for 59% of our net revenue. In the three
months ended March 31, 2004, three customers each accounted for more than 10% of
our net revenue and collectively accounted for 75% of our net revenue. We expect
sales to a small number of customers to continue to account for a substantial
portion of our net revenue for the foreseeable future. Consolidation among our
customers may increase our customer concentration. The loss of any of our major
customers would have a substantial negative impact on our business. In addition,
our operating results will be adversely affected if the electronic systems into
which our relatively few customers incorporate our products are not commercially
successful.
 
 **We
rely primarily on a small number of distributors to market and distribute our
products, and if we fail to maintain or expand these relationships, our net
revenue would likely decline.**
 
 While we
sell some of our products directly to certain of our customers, many purchases
of our products are made through a concentrated group of distributors. Sales to
these distributors account for a significant portion of our net revenue. Our
sales to distributors accounted for 34% of our net revenue for 2004 and 37% of
our net revenue for the three months ended March 31, 2005.
 
 16
 
 None of
our distributors are required to purchase a specified minimum level of products
from us. Our sales to distributors are made pursuant to standard purchase orders
rather than long-term contracts and their orders may be cancelled or changed
more readily than if
we had long-term purchase commitments. In the event of a cancellation, reduction
or delay of an order, we may not have enough time to reduce operating expenses
to minimize the effect of the lost revenue on our business. We also rely on our
distributors to accurately and timely report to us their sales of our products.
Our inability to obtain accurate and timely reports from our distributors would
limit our visibility into demand for our products. We also rely on our
distributors to provide certain engineering support and other customer service
to our customers. If they fail to provide appropriate levels of support and
service to our customers on a timely basis, our relationships with our customers
will suffer.
 
 We need
to maintain and expand our relationships with distributors, develop additional
channels for the distribution and sale of our products and effectively manage
these relationships. If we fail to do so, our distributors may decide not to
include our products among those that they sell or they may not make marketing
and selling our products a priority. In addition, our distributors may sell
product lines that are competitive with ours. If we fail to successfully manage
our relationships with distributors, our business would be harmed.
 
 **We
depend on a limited number of markets, and in these markets we have experienced
varying order patterns, and if demand for our products in these markets
declines, or if we are unable to adjust to the varying order patterns in these
markets or expand into new markets, our business would be
harmed.**
 
 In 2004
and the first three months of 2005, most of our net revenue was derived from the
sale of our products in the high-performance computing and storage markets. If
the demand for our products in these markets declines, we would need to attempt
to diversify our markets and our inability to do so in a timely and
cost-effective manner would harm our business.
 
 In
addition, we expect our business in these markets to be subject to varying order
patterns. In particular, our operating results have been negatively impacted
during the first quarter of each year due to the lunar New Year holidays in Asia
during late January or early February, during which time many of our customers,
manufacturers and subcontractors cease or significantly reduce their operations. In the
future, we may address higher-volume applications across multiple markets such
as desktop and notebook computers, digital cameras, digital televisions,
graphics cards, hard disk drives, home game stations, mobile phones, optical
drives, printers, set top boxes, wireless local area network cards and wireless
personal digital assistants. I n these
higher-volume markets, we expect a disproportionate amount of our net revenue to
be generated during the second half of the year as a result of the December
holiday season. If we are unable to adjust production of our products to address
changes in demand, our operating results would be harmed.
 
 **We
sell a limited number of products and a reduction in demand for these products
would harm our business and operating results.**
 
 We derive
substantially all of our net revenue from the sale of integrated voltage
regulator semiconductors and scalable voltage regulator semiconductor chipsets,
and we expect to continue to derive substantially all of our net revenue from
these products for the foreseeable future. If demand for these products declines
or does not grow, we may be forced to diversify our product offerings. Factors
that could cause the demand for our products to decline include downturns in the
semiconductor industry, the introduction of competing products, our pricing
strategies and the pricing strategies of our competitors, or a decline in demand
for the electronic systems into which our products are incorporated. Our
inability to diversify our products in a timely and cost-effective manner would
harm our business and operating results.
 
 **If
we are unable to timely develop new products or new generations and versions of
our existing products that achieve market acceptance, our operating results and
competitive position could be harmed.**
 
 Our
industry is characterized by intense competition, rapidly evolving technology
and continually changing requirements. These factors could render our existing
products obsolete. Accordingly, our ability to compete in the future will depend
in large part on our ability to identify and develop new products or new
generations and versions of our existing products that achieve market acceptance
on a timely and cost-effective basis, and to respond to changing requirements.
If we are unable to do so, our business, operating results and financial
condition could be negatively affected.
 
 The
successful development and market acceptance of our products depend on a number
of factors, including:
 
 ·
    our
      accurate prediction of changing customer
requirements;
 
 ·
    timely
      development of new designs;
 
 ·
    timely
      qualification and certification of our products for use in electronic
      systems;
  17
  ·
    commercial
      acceptance and production of the electronic systems into which our
      products are incorporated;
 
 ·
    availability,
      quality, price, performance and size of our products relative to competing
      products and technologies;
 
 ·
    our
      customer service and support capabilities and
    responsiveness;
 
 ·
    successful
      development of relationships with existing and potential new
      customers;
 
 ·
    successful
      development of relationships with key developers of advanced digital
      semiconductors; and
 
 ·
    changes
      in technology, industry standards or consumer
  preferences.
 
 Products
we have recently developed and which we are currently developing may not achieve
market acceptance. If these products fail to achieve market acceptance, or if we
fail to timely develop new products that achieve market acceptance, our
business, operating results and competitive position could be adversely
affected.
 
 **We
have experienced, and may in the future experience, delays in the development
and introduction of our products, which may harm our business and operating
results.**
 
 The
development of our products is highly complex, costly and inherently risky. We
have experienced, and may in the future experience, delays in the development
and introduction of new products or new generations and versions of our existing
products. While we have implemented procedures designed to minimize these
delays, we cannot assure you that these procedures will be effective or that
delays may not occur in the future. Any delay in the introduction of new
products or new generations or versions of our existing products could harm our
business and operating results.
 
 **The
nature of the design process requires us to incur expenses prior to earning
revenue associated with those expenses, and we will have difficulty selling our
products and generating profits if system designers do not design our products
into their electronic systems.**
 
 We devote
significant time and resources in working with system designers to get our
products designed into their systems. If the system designer chooses a
competitor’s product for its electronic system, it becomes significantly more
difficult for us to sell our products for use in that electronic system because
changing suppliers involves significant cost, time, effort and risk for system
designers. If system designers do not design our products into their electronic
systems, our business would be materially and adversely affected.
 
 We often
incur significant expenditures in the development of a new product without any
assurance that system designers will select our product for use in their
electronic systems. If we incur such expenditures and fail to be selected, our
operating results will be adversely affected. Furthermore, even if system
designers use our products in their electronic systems, we cannot be assured
that these systems will be commercially successful or that we will receive any
associated revenue.
 
 Even if
our products are selected for design into a particular electronic system, a
substantial period of time will elapse before we generate revenue related to the
significant expenses we have incurred. The reasons for this delay generally
include the following:
 
 ·
    it
      can take up to 12 months or longer from the time our products are
      selected to complete the design process;
 
 ·
    it
      can take an additional six to 12 months or longer to complete
      commercial introduction of the electronic systems that use our products,
      if they are introduced at all;
 
 ·
    our
      customers usually require a comprehensive technical evaluation of our
      products before they incorporate them into their electronic
      systems;
 
 ·
    OEMs
      typically limit the initial release of their electronic systems to
      evaluate performance and consumer demand;
and
 
 ·
    the
      development and commercial introduction of products incorporating new
      technology are frequently delayed.
 
 As a
result, we are unable to accurately forecast the volume and timing of our orders
and revenue. In addition, incurring expenses prior to generating revenue may
cause our operating results to fluctuate significantly from period to
period.
  18
  **Our
products are highly complex and may require modifications to resolve undetected
errors or failures and meet our customers’ specifications, which could lead to
an increase in our costs, a loss of customers, a delay in market acceptance of
our products or product liability claims.**
 
 Our power
management products are highly complex and may contain undetected errors or
failures when first introduced or as new revisions are released. If we deliver
products with errors or defects, we may incur additional development, repair or
replacement costs, and our credibility and the market acceptance of our products
could be harmed. In the past, we have incurred costs in connection with the
replacement of products due to a manufacturing defect in our products. Defects
could also lead to liability for defective products as a result of lawsuits
against our customers or us. We have agreed to indemnify our customers in some
circumstances against liability from defects in our products. Although we
maintain insurance coverage consistent with customary industry practice to
defray potential costs from lawsuits, including lawsuits arising from product
liability, if liabilities arise that are not effectively limited or covered by
such insurance, a successful product liability claim could require us to pay a
significant amount of damages, which could have a material adverse impact on our
financial results and financial position.
 
 Our
products comprise only part of the complex electronic systems in which they are
used. As a result, our products must operate according to specifications with
the other components in the electronic system. If other components of the
electronic system fail to operate properly with our products, we may be required
to incur additional development time and costs to enable interoperability of our
products with these other components.
 
 **We
face significant competition and many of our competitors have greater resources
than we have, and thus we may be unsuccessful in competing against current and
future competitors.**
 
 The
markets for semiconductors generally, and power management semiconductors in
particular, are intensely competitive, and we expect competition to increase and
intensify in the future. Increased competition may result in price pressure,
reduced profitability and loss of market share, any of which could seriously
harm our business, revenue and operating results. Our ability to compete
effectively and to expand our business will depend on a number of factors,
including:
 
 ·
    our
      ability to continue to recruit and retain engineering
    talent;
 
 ·
    our
      ability to introduce new products in a timely
manner;
 
 ·
    the
      pricing of components used in competing
solutions;
 
 ·
    the
      pace at which our customers incorporate our products into their
      systems;
 
 ·
    the
      availability of foundry, assembly and test capacity for our
      products;
 
 ·
    protection
      of our products by effective utilization of intellectual property laws;
      and
 
 ·
    general
      economic conditions.
 
 We
consider our primary competitors to include Analog Devices, International
Rectifier, Intersil, Linear Technology, Maxim Integrated Products, Semtech and
Texas Instruments. In addition, we compete with a number of other companies,
some of which may become significant competitors. We may also face competition
from new and emerging companies that may enter our existing or future
markets.
 
 Many of
our competitors and potential competitors have longer operating histories,
greater name recognition, complementary product offerings, a larger customer
base, longer relationships with customers and distributors, and significantly
greater financial, sales, marketing, manufacturing, distribution, technical and
other resources than we do. As a result, they may be able to respond more
quickly to customer requirements, to devote greater resources to the
development, promotion and sales of their products and to influence industry
acceptance of their products better than we can. These competitors may also be
able to adapt more quickly to new or emerging technologies or standards and may
be able to deliver products with performance comparable or superior to that of
our products at a lower cost. In addition, in the event of a manufacturing
capacity shortage, these competitors may have or be able to obtain silicon wafer
fabrication capacity when we are unable to.
 
 We expect
our competitors to continue to improve the performance of their current
products, reduce their prices and introduce new or enhanced technologies that
may offer greater performance and improved pricing, any of which could cause our
products to become obsolete or uncompetitive and harm our operating
results.
 
 **Our
dependence on third-party semiconductor manufacturers reduces our control over
the manufacture of our products, which could harm our
business.**
 
 We are a
fabless semiconductor company and, as such, we rely on third parties to
manufacture our products. Our principal third-party semiconductor manufacturers,
or foundries, are Chartered Semiconductor Corporation, Samsung Electronics,
Sharp Corporation, and Taiwan Semiconductor Manufacturing Corporation. The
ability of these foundries to provide silicon wafers to us is limited by their
available capacity. Moreover, the price of our silicon wafers has in the past
fluctuated and is expected to continue to fluctuate, based on changes in
available industry capacity. We do not have long-term supply contracts with any
of our foundries. Therefore, our manufacturers could
choose to prioritize capacity for other customers, particularly larger
customers, reduce or eliminate deliveries to us on short notice or increase the
prices they charge us. There are significant risks associated with our reliance
on these third-party manufacturers, including:
  19
  ·
    inability
      to increase production and achieve acceptable yields on a timely
      basis;
 
 ·
    reduced
      control over delivery schedules and product
quality;
  ·
    inability
      of our foundries to obtain an adequate supply of the raw materials used in
      the manufacturing of our products on a timely and cost-effective
      basis;
 ·
    increased
      exposure to potential misappropriation of our intellectual
      property;
 
 ·
    limited
      warranties on silicon wafers or products supplied to
us;
 
 ·
    labor
      shortages or labor strikes;
 
 ·
    natural
      disasters affecting countries in which we conduct our business or in which
      our products are manufactured; and
 
 ·
    political
      instability in countries where our products are
    manufactured.
 
 In
addition, because we work with foundries to make specified modifications to
their standard process technologies, transitioning the manufacturing of our
products to other foundries can require substantial lead time. Any such delay
resulting from such transition could negatively affect product performance,
delivery and yields or increase manufacturing costs. If we are not able to
obtain foundry capacity as required, our relationships with our customers would
be harmed and our net revenue would likely decline.
 
 **If
our foundries fail to achieve satisfactory yields or quality, our revenue and
operating results could decrease, and our relationships with our customers and
our reputation may be harmed.**
 
 The
manufacturing process of our products is technically challenging. Minor
deviations in the manufacturing process can cause substantial decreases in
yields, and in some cases, cause production to be suspended. When our products
are qualified with our foundries, minimum acceptable yields are established. If
actual yields are above the minimum, we incur the cost of the silicon wafers.
Manufacturing yields for our new products tend to be lower initially and
increase as we achieve full production. Poor yields from our foundries or
defects, integration issues or other performance problems in our products could
cause us significant customer relations and business reputation problems,
resulting in potential loss of revenue and lower profitability.
 
 **We
rely on third-party subcontractors to assemble and test our products and our
failure to successfully manage our relationships with these subcontractors could
damage our relationships with our customers, decrease our net revenue and limit
our growth.**
 
 We rely
on third-party subcontractors, such as Amkor Technology, Advanced Semiconductor
Engineering and STATSCHIPac, to assemble and test our products. None of these
third-party vendors are obligated to perform services or supply products to us
for any specific period, or in any specific quantities, except as may be
provided in a particular purchase order. Moreover, none of our assembly and test
subcontractors has provided contractual assurances to us that adequate capacity
will be available to us to meet future demand for our products. We are subject
to many of the same risks with these vendors as with our foundries. If we do not
successfully manage these relationships, the quality of products shipped to our
customers may decline, which would damage our relationships with customers,
decrease our net revenue and negatively impact our growth.
 
 **Our
ability to compete will be harmed if we are unable to adequately protect our
intellectual property.**
 
 We rely
primarily on a combination of patent, trademark, trade secret and copyright law
and contractual restrictions to protect our intellectual property. These afford
only limited protection. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to obtain, copy or use information that we
regard as proprietary, such as product design and manufacturing process
expertise. In particular, on February 27, 2005, a former employee was arrested
by federal agents on a criminal complaint filed in the United States District
Court in the Northern District of California. The complaint charges the former
employee with illegally emailing to a semiconductor company in Taiwan
proprietary data sheets containing product specifications and functionality
regarding several of the Company’s products. As of March 31, 2005, we had
31 issued patents and 13 patent applications pending in the United States. These
U.S. patents have expiration dates ranging from December 2017 to February
2025. Our pending patent applications and any future applications may not result
in issued patents or may not be sufficiently broad to protect our proprietary
technologies. Moreover, policing any unauthorized use of our products is
difficult and costly, and we cannot be certain that the measures we have
implemented will prevent misappropriation or unauthorized use of our
technologies, particularly in foreign jurisdictions where the laws may not
protect our proprietary rights as fully as the laws of the United States. The
enforcement of patents by others may harm our ability to conduct our business.
Others may independently develop substantially equivalent intellectual property
or otherwise gain access to our trade secrets or intellectual property. Our
failure to effectively protect our intellectual property could harm our
business.
  20
  **Assertions
by third parties of infringement by us of their intellectual property rights
could result in significant costs and cause our operating results to
suffer.**
 
 The
semiconductor industry is characterized by vigorous protection and pursuit of
intellectual property rights and positions, which has resulted in protracted and
expensive litigation for many companies. In the future we may receive
communications from various industry participants alleging infringement of
patents, trade secrets or other intellectual property rights. Any lawsuits
resulting from such allegations could subject us to significant liability for
damages and invalidate our proprietary rights. These lawsuits, regardless of
their success, would likely be time-consuming and expensive to resolve and would
divert management’s time and attention. Any potential intellectual property
litigation also could force us to do one or more of the following:
 
 ·
    stop
      selling products or using technology that contain the allegedly infringing
      intellectual property;
 
 ·
    pay
      damages to the party claiming infringement;
  ·
    attempt
      to obtain a license to the relevant intellectual property, which may not
      be available on reasonable terms or at all;
    and
 ·
    attempt
      to redesign those products that contain the allegedly infringing
      intellectual property.
 
 We may
also initiate claims or litigation against third parties for infringement of our
proprietary rights or to establish the validity of our proprietary rights. We
have agreed to indemnify customers for certain claims of infringement arising
out of the use of our products.
 
 **Any
potential dispute involving our patents or other intellectual property could
also include our customers, which could trigger our indemnification obligations
to them and result in substantial expense to us.**
 
 In any
potential dispute involving our patents or other intellectual property, our
customers could also become the target of litigation. Because we indemnify our
customers against claims made against them based on allegations that our
products infringe intellectual property rights, such litigation could result in
substantial expense for us. In addition to the time and expense required for us
to indemnify our customers, any such litigation could hurt our relations with
our customers and cause our operating results to be harmed.
 
 **Our
internal controls over financial reporting may not be effective and our
independent auditors may not be able to certify as to their effectiveness, which
could have a significant and adverse effect on our
business.**
 
 We are
evaluating our internal controls over financial reporting in order to allow
management to report on, and our independent auditors to audit our internal
controls over financial reporting, as required by Section 404 of the
Sarbanes-Oxley Act of 2002 and the rules and regulations of the SEC, which we
collectively refer to as Section 404. We are currently performing the system and
process evaluation and testing required in an effort to comply with the
management assessment and auditor certification requirements of Section 404,
which will initially apply to us as of December 31, 2005. In the course of our
ongoing Section 404 evaluation, we have identified areas of internal controls
that may need improvement and have instituted remediation efforts where
necessary. Currently, none of our identified areas that need improvement have
been categorized as material weaknesses or significant deficiencies. However, we
are still in the evaluation process, and we may identify conditions that may
result in significant deficiencies or material weaknesses in the
future.
 
 **We
are subject to the highly cyclical nature of the semiconductor industry and any
future downturns could significantly harm our business.**
 
 Our
business is heavily influenced by the cyclical nature of the semiconductor
industry. The semiconductor industry has experienced significant downturns,
often in connection with, or in anticipation of, maturing product cycles of both
semiconductor companies and their customers and declines in general economic
conditions. These downturns have been characterized by production overcapacity,
high inventory levels and accelerated erosion of average selling prices. Any
future downturns could significantly harm our business or reduce our revenue
from one period to the next or for a prolonged period of time. From time to
time, the semiconductor industry also has experienced periods of increased
demand and production capacity constraints. We may experience substantial
changes in future operating results due to factors that affect the semiconductor
industry generally.
 
 21
 ****
 **Any
disruption to our operations or the operations of our foundries or assembly and
test subcontractors resulting from earthquakes, droughts or other natural
disasters or public health issues could significantly delay the production or
shipment of our products.**
 
 Our
principal offices are located in California. In addition, we rely on foundries
in Japan, Singapore, South Korea and Taiwan, and assembly and test
subcontractors in Singapore, South Korea, the Philippines and Taiwan. The risk
of an earthquake in these Pacific Rim locations is significant. The occurrence
of an earthquake, drought or other natural disaster near our principal offices
or our subcontractors’ locations could result in damage, power outages and other
disruptions that impair our design, manufacturing and assembly capacity and
otherwise interfere with our ability to conduct our business. In addition,
public health issues could significantly delay the production or shipment of our
products. Any disruption resulting from such events could cause significant
delays in the shipment of our products until we are able to shift our
fabrication, assembling, testing or other operations from the affected
subcontractor to another third-party vendor.
 
 **The
average selling prices of our products could decrease rapidly, which may
negatively impact our net revenue and operating results.**
 
 The
average selling prices for power management solutions have historically declined
over time. Factors that we expect to cause downward pressure on the average
selling price for our products include competitive pricing pressures, the cost
sensitivity of our customers, particularly in the higher-volume markets, new
product introductions by us or our competitors and other factors. To maintain
acceptable operating results, we will need to offset any reduction in the
average selling prices of our products by developing and introducing new
products and developing new generations and versions of existing products on a
timely basis, increasing sales volume and reducing costs. If the average selling
prices for our products decline and we are unable to offset those reductions,
our operating results will suffer.
 
 **We
are subject to inventory risks and manufacturing costs that could negatively
impact our operating results.**
 
 To ensure
availability of our products for our customers, in some cases we start the
manufacturing of our products based on forecasts provided by these customers in
advance of receiving purchase orders. However, these forecasts do not represent
binding purchase commitments, and we do not recognize revenue from these
products until they are shipped to the customer. In addition, because we
primarily sell our products to distributors and not directly to system
designers, we have more limited visibility into ultimate product demand, which
makes forecasting more difficult for us. We incur inventory and manufacturing
costs in advance of anticipated revenue. Because demand for our products may not
materialize, manufacturing based on forecasts subjects us to risks of high
inventory carrying costs and obsolescence and may increase our costs. If we
overestimate customer demand for our products, if product changes occur or if
purchase orders are cancelled or shipments delayed, we may end up with excess
inventory that we cannot sell, which could result in the loss of anticipated
revenue without allowing us sufficient time to reduce our inventory and
operating expenses. Similarly, if we underestimate demand, we may not have
sufficient product inventory and may lose market share and damage customer
relationships, which also could harm our business.
 
 **We
have significant international activities and customers, and plan to continue
such efforts, which subjects us to additional business risks including increased
logistical complexity, political instability and currency
fluctuations.**
 
 In 2004
and the first three months of 2005, 92% and 94%, respectively, of our net
revenue was attributable to customers located outside of the United States,
primarily in Asia, and we anticipate that a significant portion of our future
revenue will be generated by sales to customers in Asia. We have engineering,
sales and operations personnel in Taiwan and Singapore. Our foundries, assembly
and test subcontractors and distributors are also primarily located in Asia. Our
international operations and sales are subject to a number of risks,
including:
 
 ·
    cultural
      and language barriers;
 
 ·
    increased
      complexity and costs of managing international
  operations;
 
 ·
    protectionist
      laws and business practices that favor local competition in some
      countries;
 
 ·
    multiple,
      conflicting and changing laws and regulatory and tax
      environments;
 
 ·
    potentially
      longer and more difficult collection
periods;
 
 ·
    political
      instability, international terrorism and anti-American sentiment,
      particularly in emerging markets;
 
 ·
    highly
      volatile economies in Asia;
 
 ·
    difficulty
      in hiring qualified management, technical sales and applications
      engineers; and
 
 ·
    less
      effective protection of intellectual property than is afforded to us in
      the United States.
  22
  Substantially
all sales to international customers and purchases of production materials and
manufacturing services from international suppliers in 2004 and the first three
months of 2005 were denominated in U.S. dollars. An increase in the value of the
U.S. dollar relative to foreign currencies could make our products more
expensive for our international customers to purchase, thus rendering the prices
of our products less competitive.
 
 Our
inability to overcome these risks could adversely affect our foreign operations,
and some of our customers and suppliers, and could harm our business and
operating results.
 
 **We
rely on the services of our key personnel, and if we are unable to retain our
current personnel and hire additional personnel, our ability to develop and
successfully market our products could be harmed.**
 
 We rely
upon the continued service and performance of a relatively small number of key
technical and senior management personnel. If we lose any of our key technical
or senior management personnel, such as Jeffrey Staszak, our President and Chief
Executive Officer, or are unable to fill key positions, our business could be
harmed. As a result, our future success depends on retaining our management team
and other key employees. We rely on these individuals for the management of our
company, development of our products and business strategy and management of our
strategic relationships. In addition, we rely on a relatively small number of
analog and mixed-signal design engineers who have the training and experience to
design our products. Any of these employees could leave our company with little
or no prior notice and would be free to work with a competitor. We do not have
“key person” life insurance policies covering any of our employees.
Additionally, there is a limited number of qualified technical personnel with
significant experience in the design, development, manufacture and sale of power
management semiconductors, and we may face challenges in hiring and retaining
these types of employees.
 
 **If
we do not effectively manage our growth, our resources, systems and controls may
be strained and our operating results may suffer.**
 
 In recent
periods, we have significantly increased the scope of our operations and the
size of our workforce. This growth has placed, and any future growth of our
operations will continue to place, a significant strain on our management
personnel, systems and resources. We anticipate that we will need to implement a
variety of new and upgraded operational and financial systems, procedures and
controls, including the improvement of our accounting and other internal
management systems. We also will need to continue to expand, train, manage and
motivate our workforce, and manage our customer and distributor relationships,
develop our internal sales force, and manage our foundry and assembly and test
subcontractors. All of these endeavors will require substantial management
effort and skill, and we anticipate that we will require additional personnel
and internal processes to manage these efforts. We plan to fund the costs of our
operational and financial systems, additional personnel and internal processes
from current cash balances and funds generated from operations. If we are unable
to effectively manage our expanding operations, our revenue and operating
results could be materially and adversely affected.
 
 **We
may need to raise additional capital, which might not be available or which, if
available, may be on terms that are not favorable to us.**
 
 We
believe our existing cash balances and cash expected to be generated from our
operating activities will be sufficient to meet our working capital, capital
expenditures and other cash needs for at least the next 12 months. In the
future, we may need to raise additional funds, and we cannot be certain that we
will be able to obtain additional financing on favorable terms, if at all. If we
issue equity securities to raise additional funds, the ownership percentage of
our stockholders would be reduced, and the new equity securities may have
rights, preferences or privileges senior to those of existing holders of our
common stock. If we borrow money, we may incur significant interest charges,
which could harm our profitability. Holders of debt would also have rights,
preferences or privileges senior to those of existing holders of our common
stock. If we cannot raise needed funds on acceptable terms, we may not be able
to develop or enhance our products, take advantage of future opportunities or
respond to competitive pressures or unanticipated requirements, which could
seriously harm our business, operating results and financial
condition.
 
 **We
may undertake acquisitions to expand our business that may pose risks to our
business and dilute the ownership of our existing
stockholders.**
 
 We will
evaluate opportunities to acquire other businesses, products or technologies
that would complement our current offerings, expand the breadth of markets we
can address or enhance our technical capabilities. Acquisitions that we may
potentially make in the future entail a number of risks that could materially
and adversely affect our business, operating and financial results,
including:
 
 ·
    our
      lack of experience acquiring other
businesses;
 
 ·
    problems
      integrating the acquired operations, technologies or products with our
      existing business and products;
  23
  ·
    diversion
      of management’s time and attention from our core
  business;
 
 ·
    the
      need for financial resources above our planned investment
      levels;
 
 ·
    overestimation
      of potential synergies or a delay in realizing those
      synergies;
 
 ·
    difficulties
      in retaining business relationships with suppliers and customers of the
      acquired company;
 
 ·
    risks
      associated with entering markets in which we lack prior experience;
      and
 
 ·
    the
      potential loss of key employees of the acquired
company.
 
 Future
acquisitions also could cause us to incur debt or contingent liabilities or
cause us to issue equity securities that would reduce the ownership percentages
of existing stockholders. Furthermore, acquisitions could result in adverse tax
consequences, substantial depreciation, deferred compensation charges,
in-process research and development charges, impairment of goodwill or the
amortization of amounts related to deferred compensation and to identifiable
purchased intangible assets, any of which would negatively affect our operating
results.
 
 **Our
stock price will fluctuate and may be volatile, which could result in
substantial losses for investors and significant costs related to
litigation.**
 
 Investors
may be unable to resell their shares at or above the purchase price and this
could result in substantial losses for those investors. The market price of our
common stock may fluctuate significantly in response to a number of factors,
some of which are beyond our control. These factors include:
 
 ·
    actual
      or anticipated fluctuations in our revenue, operating results or growth
      rate;
 
 ·
    failure
      to meet the expectations of securities analysts or investors with respect
      to our financial performance;
 
 ·
    actual
      or anticipated fluctuations in our competitors’ operating results or
      changes in their growth rates;
 
 ·
    sales
      of our common stock or other securities in the
future;
  ·
    stock
      market price and trading volume fluctuations of publicly-traded companies
      in general and semiconductor companies in
      particular;
 ·
    the
      trading volume of our common stock;
  ·
    changes
      in financial estimates and ratings by securities analysts for us, our
      competitors or companies in the semiconductor industry
      generally;
 ·
    changes
      in the condition of the financial markets, the economy as a whole, the
      semiconductor industry, our customers or our
      competitors;
 ·
    publicity
      about the semiconductor industry, our competitors or our customers;
      and
 
 ·
    additions
      or departures of key personnel.
 
 The stock
market in general, and the Nasdaq National Market in particular, have
experienced extreme price and volume fluctuations in recent years that have
often been unrelated or disproportionate to the operating performance of the
listed companies. Broad market and industry factors may materially harm the
market price of our common stock, regardless of our operating
performance.
 
 In the
past, securities class action litigation has often been brought against
companies following periods of volatility and decline in the market price of
their securities. Technology companies have experienced stock price volatility
that is greater than that experienced by many other industries in recent years
and as a result have been subject to a greater number of securities class action
claims. If our stock price is volatile or declines, we may be the target of
similar litigation in the future. Securities litigation could result in
significant costs and divert management’s attention and resources, which could
seriously harm our business and operating results.
  24
  **If
securities or industry analysts do not publish research or reports about our
business, or publish negative reports about our business, our stock price and
trading volume could decline.**
 
 The
trading market for our common stock will depend on the research and reports that
securities or industry analysts publish about us or our business. We do not have
any control over these analysts. If one or more of the analysts who cover us
downgrade our stock, our stock price would likely decline. If one or more of
these analysts cease coverage of our company or fail to regularly publish
reports on us, we could lose visibility in the financial markets, which could
cause our stock price or trading volume to decline.
 
 **Our
principal stockholders have significant voting power and may influence actions
that may not be in the best interests of our other
stockholders.**
 
 We
believe that our executive officers, directors and principal stockholders, in
the aggregate, beneficially own approximately 39% of our outstanding common
stock as of April 22, 2005. As a result, these stockholders, acting together,
may have the ability to exert substantial influence over matters requiring
approval of our stockholders, including the election and removal of directors
and the approval of mergers or other business combinations. This concentration
of beneficial ownership could be disadvantageous to other stockholders whose
interests are different from those of our executive officers, directors and
principal stockholders. For example, our executive officers, directors and
principal stockholders, acting together with stockholders owning a relatively
small percentage of our outstanding stock, could delay or prevent an acquisition
or merger even if the transaction would benefit other stockholders.
 
 **Being
a public company will increase our expenses and administrative
burden.**
 
 We
completed our initial public offering in August 2004. As a public company,
we will incur significant legal, accounting and other expenses that we did not
incur as a private company. In addition, our administrative staff will be
required to perform additional tasks. For example, in 2004, we created or
revised the roles and duties of our board committees, adopted additional
internal controls and disclosure controls and procedures, retained a transfer
agent and a financial printer and adopted an insider trading policy, and we will
have all of the internal and external costs of preparing and distributing
periodic public reports in compliance with our obligations under the securities
laws.
 
 In
addition, changing laws, regulations and standards relating to corporate
governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and
related regulations implemented by the Securities and Exchange Commission and
the National Association of Securities Dealers, are creating uncertainty for
public companies, increasing legal and financial compliance costs and making
some activities more time consuming. We are currently evaluating and monitoring
developments with respect to new and proposed rules and cannot predict or
estimate the amount of the additional costs we may incur or the timing of such
costs. These laws, regulations and standards are subject to varying
interpretations, in many cases due to their lack of specificity, and, as a
result, their application in practice may evolve over time as new guidance is
provided by regulatory and governing bodies. This could result in continuing
uncertainty regarding compliance matters and higher costs necessitated by
ongoing revisions to disclosure and governance practices. We intend to invest
resources to comply with evolving laws, regulations and standards, and this
investment may result in increased general and administrative expenses and a
diversion of management’s time and attention from revenue-generating activities
to compliance activities. If our efforts to comply with new laws, regulations
and standards differ from the activities intended by regulatory or governing
bodies due to ambiguities related to practice, regulatory authorities may
initiate legal proceedings against us and our business may be harmed. We also
expect that being a public company and these new rules and regulations will make
it more expensive for us to obtain director and officer liability insurance, and
we may be required to accept reduced coverage or incur substantially higher
costs to obtain coverage. These factors could also make it more difficult for us
to attract and retain qualified members of our board of directors, particularly
to serve on our audit committee, and qualified executive officers.
 
 **Anti-takeover
provisions of our charter documents and Delaware law could prevent or delay
transactions resulting in a change in control.**
 
 Our
certificate of incorporation and our bylaws may make more difficult or
discourage, delay or prevent a change in the ownership of our company or a
change in our management or our board of directors. The following are examples
of provisions that are included in our certificate of incorporation and bylaws
that might have those effects:
 
 ·
    our
      board of directors is classified so that not all members of our board may
      be elected at one time;
 
 ·
    directors
      may only be removed “for cause” and only with the approval of stockholders
      holding a majority of our outstanding voting
stock;
 
 ·
    the
      ability of our stockholders to call a special meeting of stockholders is
      prohibited;
 
 ·
    advance
      notice requirements for nominations for election to our board of directors
      or for proposing matters that can be acted upon at stockholder
      meetings;
 
 ·
    stockholder
      action by written consent is prohibited, thereby requiring all stockholder
      actions to be taken at a meeting of our stockholders;
  and
 
 ·
    our
      board of directors may designate the terms of and issue new series of
      preferred stock, commonly referred to as “blank check” preferred stock,
      with rights senior to those of common stock without stockholder
      approval.
  25
  In
addition, we are also subject to Section 203 of the Delaware General
Corporation Law, which provides, subject to enumerated exceptions, that if a
person acquires 15% or more of our voting stock, the person is an “interested
stockholder” and may not engage in “business combinations” with us for a period
of three years from the time the person acquired 15% or more of our voting
stock.
 
 These
provisions may have the effect of entrenching our management team and may
deprive you of the opportunity to sell your shares to potential acquirors at a
premium over prevailing prices. This potential inability to obtain a premium
could reduce the price of our common stock.
 
 **New
and potential new accounting pronouncements may impact our future financial
position and results of operations.**
 
 There may
be potential new accounting pronouncements or regulatory rulings, which may have
an impact on our future financial position and results of operations. In
particular, On April 14, 2005, the Securities and Exchange Commission announced
the adoption of a new rule that amends the compliance dates for Statement of
Financial Accounting Standards No. 123R (SFAS No. 123R), *Share
Based Payment* . Under
SFAS No. 123R, most public companies would have been required to adopt the
standard as of the beginning of the first interim or annual period that begins
after June 15, 2005. The Commission’s new rule allows companies to adopt SFAS
No. 123R at the beginning of the fiscal year that begins after June 15, 2005.
SFAS No. 123R will require companies to recognize compensation expense, using a
fair-value based method, for costs related to share-based payments including
stock options and employee stock purchase plans . We will be required to
implement the standard starting January 1, 2006. The cumulative effect of
adoption, if any, applied on a modified prospective basis, would be measured and
recognized on January 1, 2006. The adoption of SFAS No. 123R and other potential
changes may materially impact our results of operations.
 
 **Item 3.
Quantitative and Qualitative Disclosures About Market
Risk**
  The
primary objective of our investment activities is to preserve principal while
maximizing income without significantly increasing risk. Some of the securities
in which we invest may be subject to market risk. This means that a change in
prevailing interest rates may cause the market value of the investment to
fluctuate. To minimize this risk, we may maintain our portfolio of cash
equivalents and short-term investments in a variety of securities, including
commercial paper, money market funds, debt securities and certificates of
deposit. The risk associated with fluctuating interest rates is limited to our
investment portfolio and we do not believe that a 10% change in interest rates
would have a significant impact on our interest income. As of March 31, 2005,
all of our short-term investments were government agency securities and our cash
equivalents were held in checking accounts, money market accounts and government
agency securities.
  Our
exposure to market risk also relates to the increase or decrease in the amount
of interest expense we must pay on our outstanding debt instruments, primarily
certain borrowings under our bank line of credit. The advances under this line
of credit bear a variable rate of interest based on the prime rate. The risk
associated with fluctuating interest expense is limited to this debt instrument
and we do not believe that a 10% change in the prime rate would have a
significant impact on our interest expense. As of March 31, 2005, we had no
outstanding amounts under the bank line of credit, and $5.0 million remained
available based on eligible accounts receivable.
 
 **Item 4.
Controls and Procedures**
 
 As of the
end of the period covered by this report, an evaluation was performed under the
supervision and with the participation of our management, including our chief
executive officer and chief financial officer (collectively, our “certifying
officers”), of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on their evaluation, our certifying officers
concluded that these disclosure controls and procedures are effective in
providing reasonable assurance that the information required to be disclosed by
us in our periodic reports filed with the Securities and Exchange Commission
(“SEC”) is recorded, processed, summarized and reported within the time periods
specified by the SEC’s rules and SEC reports.
 
 We
believe that a controls system, no matter how well designed and operated, is
based in part upon certain assumptions about the likelihood of future events,
and therefore can only provide reasonable, not absolute, assurance that the
objectives of the controls system are met, and no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within a company have been detected.
 
 In
addition, we have reviewed our internal controls over financial reporting and
have made no changes during the quarter ended March 31, 2005, that our
certifying officers concluded materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
  26
  **PART
II. OTHER INFORMATION** ****
 
 **Item 1.** **Legal** **Proceedings**
 
 We are
not currently involved in any legal proceedings. However, from time to time we
may be subject to legal proceedings and claims in the ordinary course of
business.
 
 **Item 2.** **Unregistered
Sales of Equity Securities and Use of Proceeds** ****
 
 (b) On
July 28, 2004, our registration statement on Form S-1 (Registration No.
333-115614) was declared effective for our initial public offering. As of April
22, 2005, we had invested the $31.9 million in net proceeds from the offering in
government securities. We intend to use these proceeds for general corporate
purposes, including working capital, research and development, general and
administrative expenses and capital expenditures. We may also use a portion of
the net proceeds to fund possible investments in, or acquisitions of,
complementary businesses, products or technologies or in establishing joint
ventures, although none is currently contemplated.
 
 **Item 4.
Submission of Matters to a Vote of Security Holders**
 
 No
matters were submitted to a vote of our security holders during the quarter
ended March 31, 2005.
  **Item 6.
Exhibits**
  **Exhibit
      No.**
    **Description**3.1(1)
    Amended
      and Restated Certificate of Incorporation of Volterra Semiconductor
      Corporation.3.2(2)
    Amended
      and Restated Bylaws of Volterra Semiconductor Corporation.4.1
    Reference
      is made to Exhibits 3.1 and 3.2.4.2(3)
    Specimen
      stock certificate.31.1
    Certification
      of Chief Executive Officer required under Rule 13a-14(a) or
      Rule 15d-14(a) of the Securities Exchange Act of 1934, as
      amended.31.2
    Certification
      of Chief Financial Officer required under Rule 13a-14(a) or
      Rule 15d-14(a) of the Securities Exchange Act of 1934, as
      amended.32.1*
    Certification
      of Chief Executive Officer required under Rule 13a-14(b) or
      Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended,
      and 18 U.S.C. Section 1350.32.2*
    Certification
      of Chief Financial Officer required under Rule 13a-14(b) or
      Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended,
      and 18 U.S.C. Section 1350.
 
 (1) Previously
filed as Exhibit 3.1 to Volterra Semiconductor Corporation’s Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 2004, as filed with
the Securities and Exchange Commission on September 9, 2004, and incorporated by
reference herein.
  (2) Previously
filed as Exhibit 3.4 to Volterra Semiconductor Corporation’s Registration
Statement on Form S-1 (No. 333-115614), as filed with the Securities
and Exchange Commission on May 19, 2004, as amended, and incorporated by
reference herein.
 
 (3) Previously
filed as Exhibit 4.2 to Volterra Semiconductor Corporation’s Registration
Statement on Form S-1/A (No. 333-115614), as filed with the Securities
and Exchange Commission on July 9, 2004, as amended, and incorporated by
reference herein.
  *  The
certifications attached as Exhibits 32.1 and 32.2 accompany this Quarterly
Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 and shall not be deemed “filed” by Volterra Semiconductor Corporation
for purposes of Section 18 of the Securities Exchange Act of 1934, as
amended.
  27
   **Signatures**
  Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
 
 Dated: April 29,
    2005
    VOLTERRA SEMICONDUCTOR
      CORPORATIONBy:
    /s/ Greg
  HildebrandGreg HildebrandChief
      Financial Officer  (Principal
      Financial and Accounting and Duly Authorized
      Officer)
   28
   **EXHIBIT
INDEX**
  **Exhibit
      No.**
    **Description**3.1(1)
    Amended
      and Restated Certificate of Incorporation of Volterra Semiconductor
      Corporation.3.2(2)
    Amended
      and Restated Bylaws of Volterra Semiconductor Corporation.4.1
    Reference
      is made to Exhibits 3.1 and 3.2.4.2(3)
    Specimen
      stock certificate.31.1
    Certification
      of Chief Executive Officer required under Rule 13a-14(a) or
      Rule 15d-14(a) of the Securities Exchange Act of 1934, as
      amended.31.2
    Certification
      of Chief Financial Officer required under Rule 13a-14(a) or
      Rule 15d-14(a) of the Securities Exchange Act of 1934, as
      amended.32.1*
    Certification
      of Chief Executive Officer required under Rule 13a-14(b) or
      Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended,
      and 18 U.S.C. Section 1350.32.2*
    Certification
      of Chief Financial Officer required under Rule 13a-14(b) or
      Rule 15d-14(b) of the Securities Exchange Act of 1934, as amended,
      and 18 U.S.C. Section 1350.
 
 (1) Previously
filed as Exhibit 3.1 to Volterra Semiconductor Corporation’s Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 2004, as filed with
the Securities and Exchange Commission on September 9, 2004, and incorporated by
reference herein.
  (2)  Previously
filed as Exhibit 3.4 to Volterra Semiconductor Corporation’s Registration
Statement on Form S-1 (No. 333-115614), as filed with the Securities
and Exchange Commission on May 19, 2004, as amended, and incorporated by
reference herein.
 
 (3)  Previously
filed as Exhibit 4.2 to Volterra Semiconductor Corporation’s Registration
Statement on Form S-1/A (No. 333-115614), as filed with the Securities
and Exchange Commission on July 9, 2004, as amended, and incorporated by
reference herein.
 
 *  The
certifications attached as Exhibits 32.1 and 32.2 accompany this Quarterly
Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 and shall not be deemed “filed” by Volterra Semiconductor Corporation
for purposes of Section 18 of the Securities Exchange Act of 1934, as
amended.
  
 29