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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended September 30, 2006

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

Commission file number:

000-51349



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Advanced Analogic Technologies
Incorporated

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)



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|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Delaware                                                       |  | 77-0462930                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)



|                                           |  |           
|------------------------------------------ |  | ----------
|830 East Arques Ave, Sunnyvale, California |  | 94085     
|(Address of principal executive offices)   |  | (Zip Code)

Registrants telephone number, including area code:

(408) 737-4600



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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 a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of
the Exchange Act. (Check one):

Large accelerated filer ̈Accelerated filer ̈Non-accelerated
filer  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).    Yes ̈No  x

There were 43,976,987 shares of the Registrants common stock issued and outstanding as of October 15, 2006.



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##### Table of Contents

ADVANCED ANALOGIC TECHNOLOGIES, INCORPORATED

TABLE OF CONTENTS



|                              |  |          |  |                                                                                       |  |     
|----------------------------- |  | -------- |  | ------------------------------------------------------------------------------------- |  | ----
|                              |  |          |  |                                                                                       |  | PAGE
|PART I. FINANCIAL INFORMATION |  |         
|                              |  |          | 
|                              |  | ITEM 1.  |  | FINANCIAL STATEMENTS (UNAUDITED)                                                      |  | 3   
|                              |  |          | 
|                              |  |          |  | CONSOLIDATED BALANCE SHEETS                                                           |  | 3   
|                              |  |          | 
|                              |  |          |  | CONSOLIDATED STATEMENTS OF OPERATIONS                                                 |  | 4   
|                              |  |          | 
|                              |  |          |  | CONSOLIDATED STATEMENTS OF CASH FLOWS                                                 |  | 5   
|                              |  |          | 
|                              |  |          |  | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                            |  | 6   
|                              |  |          | 
|                              |  | ITEM 2.  |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |  | 12  
|                              |  |          | 
|                              |  | ITEM 3.  |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                            |  | 21  
|                              |  |          | 
|                              |  | ITEM 4.  |  | CONTROLS AND PROCEDURES                                                               |  | 21  
|                              | 
|PART II. OTHER INFORMATION    |  |         
|                              |  |          | 
|                              |  | ITEM 1.  |  | LEGAL PROCEEDINGS                                                                     |  | 22  
|                              |  |          | 
|                              |  | ITEM 1A. |  | RISK FACTORS                                                                          |  | 22  
|                              |  |          | 
|                              |  | ITEM 2.  |  | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                           |  | 31  
|                              |  |          | 
|                              |  | ITEM 3.  |  | DEFAULTS UPON SENIOR SECURITIES                                                       |  | 31  
|                              |  |          | 
|                              |  | ITEM 4.  |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                   |  | 31  
|                              |  |          | 
|                              |  | ITEM 5.  |  | OTHER INFORMATION                                                                     |  | 31  
|                              |  |          | 
|                              |  | ITEM 6.  |  | EXHIBITS                                                                              |  | 32  



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##### Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ADVANCED ANALOGIC TECHNOLOGIES INCORPORATED

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share and
par value)



|                                                                                                                                       |  |                    |         |   |                   |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------- | - | ----------------- | - | ------- | -
|                                                                                                                                       |  | September 30, 2006 |         |   | December 31, 2005 |  
|                                                                                                                                       | 
|ASSETS                                                                                                                                 |  |                    |         |   |                   |   |         |  
|CURRENT ASSETS                                                                                                                         |  |                    |         |   |                   |   |         |  
|Cash and cash equivalents                                                                                                              |  | $                  | 82,209  |   |                   | $ | 124,377 |  
|Short-term investments                                                                                                                 |  |                    | 43,523  |   |                   |   |        |  
|                                                                                                                                       |  |                    |         |   |                   |   |         |  
|Total cash, cash equivalents and short-term investments                                                                                |  |                    | 125,732 |   |                   |   | 124,377 |  
|Accounts receivable, net of allowances of $1,521 in 2006 and $1,031 in 2005                                                            |  |                    | 12,573  |   |                   |   | 10,496  |  
|Inventories, net                                                                                                                       |  |                    | 9,295   |   |                   |   | 6,561   |  
|Prepaid expenses and other current assets                                                                                              |  |                    | 1,838   |   |                   |   | 1,656   |  
|Deferred income tax assetscurrent                                                                                                     |  |                    | 5,369   |   |                   |   | 3,780   |  
|                                                                                                                                       |  |                    |         |   |                   |   |         |  
|Total current assets                                                                                                                   |  |                    | 154,807 |   |                   |   | 146,870 |  
|Property and equipment, net                                                                                                            |  |                    | 2,281   |   |                   |   | 2,257   |  
|Deferred income tax assetsnoncurrent                                                                                                  |  |                    | 1,812   |   |                   |   | 1,812   |  
|Other assets                                                                                                                           |  |                    | 1,804   |   |                   |   | 384     |  
|                                                                                                                                       |  |                    |         |   |                   |   |         |  
|TOTAL ASSETS                                                                                                                           |  | $                  | 160,704 |   |                   | $ | 151,323 |  
|                                                                                                                                       |  |                    |         |   |                   |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                   |  |                    |         |   |                   |   |         |  
|CURRENT LIABILITIES                                                                                                                    |  |                    |         |   |                   |   |         |  
|Accounts payable                                                                                                                       |  | $                  | 5,922   |   |                   | $ | 5,196   |  
|Accrued liabilities                                                                                                                    |  |                    | 5,969   |   |                   |   | 4,738   |  
|Income tax payable                                                                                                                     |  |                    | 663     |   |                   |   | 963     |  
|                                                                                                                                       |  |                    |         |   |                   |   |         |  
|Total current liabilities                                                                                                              |  |                    | 12,554  |   |                   |   | 10,897  |  
|Other long term liabilities                                                                                                            |  |                    | 8       |   |                   |   | 24      |  
|                                                                                                                                       |  |                    |         |   |                   |   |         |  
|Total liabilities                                                                                                                      |  |                    | 12,562  |   |                   |   | 10,921  |  
|                                                                                                                                       |  |                    |         |   |                   |   |         |  
|STOCKHOLDERS EQUITY:                                                                                                                  |  |                    |         |   |                   |   |         |  
|Preferred stock 5,000,000 shares authorized                                                                                            |  |                    |        |   |                   |   |        |  
|Common stock, $0.001 par value100,000,000 shares authorized; 43,974,710 and 43,165,933 shares issued and outstanding in 2006 and
2005 |  |                    | 44      |   |                   |   | 43      |  
|Additional paid-in capital                                                                                                             |  |                    | 160,367 |   |                   |   | 155,002 |  
|Deferred stock compensation                                                                                                            |  |                    | (3,603  | ) |                   |   | (5,444  | )
|Accumulated other comprehensive loss                                                                                                   |  |                    | (467    | ) |                   |   | (501    | )
|Accumulated deficit                                                                                                                    |  |                    | (8,199  | ) |                   |   | (8,698  | )
|                                                                                                                                       |  |                    |         |   |                   |   |         |  
|Total stockholders equity                                                                                                             |  |                    | 148,142 |   |                   |   | 140,402 |  
|                                                                                                                                       |  |                    |         |   |                   |   |         |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                             |  | $                  | 160,704 |   |                   | $ | 151,323 |  
|                                                                                                                                       |  |                    |         |   |                   |   |         |  

See accompanying notes to consolidated financial statements.



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ADVANCED ANALOGIC TECHNOLOGIES INCORPORATED

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share
amount)



|                                                                                                                                                                                                                  |      |                                  |        |                                 |  |      |        |  |      |        |   |  |   |       
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---- | -------------------------------- | ------ | ------------------------------- |  | ---- | ------ |  | ---- | ------ | - |  | - | ------
|                                                                                                                                                                                                                  |      | Three Months Ended September 30, |        | Nine Months Ended September 30,
|                                                                                                                                                                                                                  | 2006 |                                  |        | 2005                            |  | 2006 |        |  | 2005
|NET SALES                                                                                                                                                                                                         |      | $                                | 20,103 |                                 |  | $    | 17,964 |  | $    | 60,210 |   |  | $ | 46,711
|Cost of revenues (including stock-based compensation of $46 and $193 for the three and nine months ended September 30, 2006; $28 and $84
for the three and nine months ended September 30, 2005)                  |      |                                  | 9,100  |                                 |  |      | 7,152  |  |      | 24,986 |   |  |   | 18,804
|                                                                                                                                                                                                                  |      |                                  |        |                                 |  |      |        |  |      |        |   |  |   |       
|GROSS PROFIT                                                                                                                                                                                                      |      |                                  | 11,003 |                                 |  |      | 10,812 |  |      | 35,224 |   |  |   | 27,907
|                                                                                                                                                                                                                  |      |                                  |        |                                
|OPERATING EXPENSES:                                                                                                                                                                                               |      |                                  |        |                                 |  |      |        |  |      |        |   |  |   |       
|Research and development (including stock-based compensation of $618 and $1,799 for the three and nine months ended September 30, 2006;
$196 and $588 for the three and nine months ended September, 2005)        |      |                                  | 5,371  |                                 |  |      | 5,277  |  |      | 17,214 |   |  |   | 14,210
|Sales, general and adminstrative (including stock-based compensation of $825 and $2,391 for the three and nine months ended September, 2006;
$352 and $1,084 for the three and nine months ended september, 2005) |      |                                  | 5,187  |                                 |  |      | 4,906  |  |      | 16,200 |   |  |   | 12,749
|Patent litigation                                                                                                                                                                                                 |      |                                  | 3,490  |                                 |  |      | 8      |  |      | 5,247  |   |  |   | 13    
|                                                                                                                                                                                                                  |      |                                  |        |                                 |  |      |        |  |      |        |   |  |   |       
|Total operating expenses                                                                                                                                                                                          |      |                                  | 14,048 |                                 |  |      | 10,191 |  |      | 38,661 |   |  |   | 26,972
|                                                                                                                                                                                                                  |      |                                  |        |                                
|INCOME (LOSS) FROM OPERATIONS                                                                                                                                                                                     |      |                                  | (3,045 | )                               |  |      | 621    |  |      | (3,437 | ) |  |   | 935   
|                                                                                                                                                                                                                  |      |                                  |        |                                
|INTEREST AND INVESTMENT INCOME                                                                                                                                                                                    |      |                                  | 1,594  |                                 |  |      | 650    |  |      | 4,248  |   |  |   | 870   
|                                                                                                                                                                                                                  |      |                                  |        |                                 |  |      |        |  |      |        |   |  |   |       
|INCOME (LOSS) BEFORE INCOME TAXES                                                                                                                                                                                 |      |                                  | (1,451 | )                               |  |      | 1,271  |  |      | 811    |   |  |   | 1,805 
|PROVISION FOR INCOME TAXES                                                                                                                                                                                        |      |                                  |       |                                 |  |      | 1,029  |  |      | 312    |   |  |   | 1,462 
|                                                                                                                                                                                                                  |      |                                  |        |                                 |  |      |        |  |      |        |   |  |   |       
|NET INCOME (LOSS)                                                                                                                                                                                                 |      | $                                | (1,451 | )                               |  | $    | 242    |  | $    | 499    |   |  | $ | 343   
|                                                                                                                                                                                                                  |      |                                  |        |                                 |  |      |        |  |      |        |   |  |   |       
|NET INCOME (LOSS) PER SHARE:                                                                                                                                                                                      |      |                                  |        |                                 |  |      |        |  |      |        |   |  |   |       
|Basic                                                                                                                                                                                                             |      | $                                | (0.03  | )                               |  | $    | 0.01   |  | $    | 0.01   |   |  | $ | 0.03  
|Diluted                                                                                                                                                                                                           |      | $                                | (0.03  | )                               |  | $    | 0.01   |  | $    | 0.01   |   |  | $ | 0.01  
|                                                                                                                                                                                                                  |      |                                  |        |                                
|WEIGHTED AVERAGE SHARES USED IN NET INCOME (LOSS) PER SHARE CALCULATION:                                                                                                                                          |      |                                  |        |                                 |  |      |        |  |      |        |   |  |   |       
|Basic                                                                                                                                                                                                             |      |                                  | 43,624 |                                 |  |      | 27,683 |  |      | 43,330 |   |  |   | 13,650
|Diluted                                                                                                                                                                                                           |      |                                  | 43,624 |                                 |  |      | 42,242 |  |      | 46,819 |   |  |   | 37,868

See accompanying notes to consolidated financial statements.



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ADVANCED ANALOGIC TECHNOLOGIES INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)



|                                                                                            |  |                                |         |   |      |   |         |  
|------------------------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                                                                            |  | Nine Months EndedSeptember 30, |        
|                                                                                            |  | 2006                           |         |   | 2005 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                       |  |                                |         |   |      |   |         |  
|Net income                                                                                  |  | $                              | 499     |   |      | $ | 343     |  
|Adjustments to reconcile net income to net cash provided by (used in) operating activities: |  |                                |         |   |      |   |         |  
|Depreciation and amortization                                                               |  |                                | 1,222   |   |      |   | 1,229   |  
|Stock-based compensation                                                                    |  |                                | 4,383   |   |      |   | 1,756   |  
|Provision for doubtful accounts                                                             |  |                                | (306    | ) |      |   | 298     |  
|Tax benefit from employee equity incentive plans                                            |  |                                | 1,727   |   |      |   |        |  
|Excess tax benefit from employee equity incentive plans                                     |  |                                | (693    | ) |      |   |        |  
|Loss on sales of plant, property and equipment                                              |  |                                | 28      |   |      |   |        |  
|Changes in operating assets and liabilities:                                                |  |                                |         |   |      |   |         |  
|Accounts receivable                                                                         |  |                                | (1,771  | ) |      |   | (8,893  | )
|Inventory                                                                                   |  |                                | (2,708  | ) |      |   | 450     |  
|Prepaid expenses and other current assets                                                   |  |                                | (213    | ) |      |   | (1,140  | )
|Other assets                                                                                |  |                                | (514    | ) |      |   | 7       |  
|Deferred income taxescurrent                                                               |  |                                | (1,589  | ) |      |   | 756     |  
|Accounts payable                                                                            |  |                                | 721     |   |      |   | 2,792   |  
|Accrued expenses                                                                            |  |                                | 1,208   |   |      |   | 1,378   |  
|Other long term liabilities                                                                 |  |                                | (9      | ) |      |   |        |  
|Income taxes payable                                                                        |  |                                | (300    | ) |      |   | 622     |  
|                                                                                            |  |                                |         |   |      |   |         |  
|Net cash provided by (used in) operating activities                                         |  |                                | 1,685   |   |      |   | (402    | )
|                                                                                            |  |                                |         |   |      |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                       |  |                                |         |   |      |   |         |  
|Purchases of property and equipment                                                         |  |                                | (1,092  | ) |      |   | (969    | )
|Purchases of short-term investments                                                         |  |                                | (48,949 | ) |      |   |        |  
|Purchases of long-term investments                                                          |  |                                | (900    | ) |      |   |        |  
|Proceeds sales and maturities of short-term investments                                     |  |                                | 5,450   |   |      |   |        |  
|                                                                                            |  |                                |         |   |      |   |         |  
|Net cash used in investing activities                                                       |  |                                | (45,491 | ) |      |   | (969    | )
|                                                                                            |  |                                |         |   |      |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                       |  |                                |         |   |      |   |         |  
|Proceeds from intial public offering, net of commissions and offering expenses              |  |                                | (5      | ) |      |   | 96,669  |  
|Proceeds from exercise of common stock options and common stock warrants                    |  |                                | 942     |   |      |   | 315     |  
|Excess tax benefit from employee equity incentive plans                                     |  |                                | 693     |   |      |   |        |  
|Principal payments on capital lease obligations                                             |  |                                | (23     | ) |      |   | (26     | )
|                                                                                            |  |                                |         |   |      |   |         |  
|Net cash provided by financing activities                                                   |  |                                | 1,607   |   |      |   | 96,958  |  
|                                                                                            |  |                                |         |   |      |   |         |  
|EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS                                |  |                                | 31      |   |      |   | (82     | )
|                                                                                            |  |                                |         |   |      |   |         |  
|NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                        |  |                                | (42,168 | ) |      |   | 95,505  |  
|CASH AND CASH EQUIVALENTSBeginning of period                                               |  |                                | 124,377 |   |      |   | 21,705  |  
|                                                                                            |  |                                |         |   |      |   |         |  
|CASH AND CASH EQUIVALENTSEnd of period                                                     |  | $                              | 82,209  |   |      | $ | 117,210 |  
|                                                                                            |  |                                |         |   |      |   |         |  
|NONCASH INVESTING AND FINANCING ACTIVITIES:                                                 |  |                                |         |   |      |   |         |  
|Vesting of restricted common stock                                                          |  | $                              | 136     |   |      | $ | 138     |  
|                                                                                            |  |                               
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                           |  |                                |         |   |      |   |         |  
|Increases in accounts payable and accrued liabilities related to fixed asset purchases      |  | $                              | 166     |   |      | $ |        |  
|Fixed assets acquired under capital leases                                                  |  | $                              | 15      |   |      | $ |        |  
|Cash paid for interest                                                                      |  | $                              | 7       |   |      | $ | 4       |  
|Cash paid for income taxes                                                                  |  | $                              | 481     |   |      | $ | 118     |  

See accompanying notes to consolidated financial statements.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

Advanced Analogic
Technologies Incorporateds (the Companys) accompanying unaudited consolidated financial statements have been prepared 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 Annual Report on Form 10-K filed with the SEC on March 8, 2006.

In the opinion of management, the accompanying unaudited 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 and nine months ended September 30,
2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006 or for any other future period. The consolidated balance sheet as of December 31, 2005 is derived from the audited consolidated
financial statements as of and for the year then ended.

Cash Equivalents

Cash equivalents are highly liquid investments purchased with original maturities of 90 days or less at the time of purchase. Investments with maturities
of over 90 days at the time of purchase are classified as short-term investments.

Investments

The Company accounts for its investment instruments in accordance with Statement of Financial Accounting Standards No. 115 (SFAS 115),
Accounting for Certain Investments in Debt and Equity Securities. At September 30, 2006, the Company had investments in short-term debt instruments which were classified as available-for-sale under SFAS 115. Short-term investments
consist primarily of high grade debt securities with a maturity of greater than 90 days when purchased. The Company classifies investments with maturities greater than one year as short-term investment as it considers all investments as a potential
source of operating cash regardless of maturity date. The Companys debt securities are carried at fair market value with the related unrealized gains and losses included in accumulated other comprehensive income, which is a separate component
of stockholders equity. The cost of securities sold is based on specific identification method. Interest earned on securities is included in Interest and Investment Income in the Consolidated Statements of Operations. The fair
value of investments is determined using quoted market prices for those securities. The unrealized gains and losses attributable to these investments are related to market value fluctuations. If these investments are not sold, the Company will
receive the full value of the principle investment once the securities mature.

In addition to debt securities, a portion of the
Companys investment portfolio consists of a private equity investment in a non-publicly traded company. The Company has classified this investment as long-term other assets. This investment is carried at cost and evaluated for other than
temporary impairment at each reporting period.

2. STOCK BASED COMPENSATION

On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment,
(SFAS 123(R)), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options and employee stock purchases related to the
Employee Stock Purchase Plan (employee stock purchases) based on estimated fair values. SFAS 123(R) supersedes the Companys previous accounting under Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25) for periods beginning in fiscal 2006. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (SAB 107) relating to SFAS 123(R). The Company has
applied the provisions of SAB 107 in its adoption of SFAS 123(R).

The Company adopted SFAS 123(R) using the modified prospective
transition method, which requires the application of the accounting standard as of January 1, 2006, the first day of the Companys fiscal year 2006. The Companys Consolidated Financial Statements as of and for the three and nine
months ended September 30, 2006 reflect the impact of SFAS 123(R). In accordance with the modified prospective transition method, the Companys Consolidated Financial Statements for periods prior to January 1, 2006 have not been
restated to reflect, and do not include, the impact of SFAS 123(R). The Company accounts for stock-based awards to nonemployees in accordance with Emerging Issues Task Force (EITF) Issue No. 96-18. Stock-based compensation expense
recognized for the three and nine months ended September 30, 2006 was $1.5 million and $4.4 million, which consisted of pretax stock-based compensation expense related to employee and consultant stock options.

On November 10, 2005, the Financial Accounting Standards Board (FASB) issued FASB Staff Position No. FAS 123(R)-3 Transition
Election Related to Accounting for Tax Effects of Share-Based Payment Awards. The Company has elected to adopt the alternative transition



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method provided in the FASB Staff Position for calculating the tax effects of stock-based compensation pursuant to SFAS
123(R). The alternative transition method includes simplified methods for establishing the beginning balance of the additional paid-in capital pool (APIC pool) related to the tax effects of employee stock-based compensation, and to
determine the subsequent impact on the APIC pool and Consolidated Statements of Cash Flows of the tax effects of employee stock-based compensation awards that are outstanding upon adoption of SFAS 123(R).

SFAS 123(R) requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of
the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Companys Consolidated Statement of Operations. The portion of stock-based compensation expenses related to options
granted prior to April 4, 2005, (the date of our initial filing of a registration statement for our eventual initial public offering (IPO), which is the date we are considered a public company under SFAS 123(R)) which were
previously recorded under the provisions of APB 25, continue to be amortized over the respective vesting period and do not include an estimated forfeiture rate. The actual forfeitures of these options are recorded as they occur. These options
granted prior to April 4, 2005 have been valued using the intrinsic value method and as of September 30, 2006, the remaining unamortized portion of the deferred stock based compensation relating to these options is $3.6 million. Option
awards granted after April 4, 2005 and before January 1, 2006 were based on grant date fair value estimated in accordance with the pro forma provisions of SFAS 123. The fair value of these options was previously calculated using the
Black-Scholes option pricing model and, under SFAS 123(R), is adjusted for an estimated forfeiture rate and amortized over the vesting period. Option awards granted subsequent to our adoption of SFAS 123(R) on January 1, 2006 are recorded as
stock based compensation expense under the fair value method as prescribed by SFAS 123(R). The grant date fair value of these options was also calculated by using the Black-Scholes option pricing model.

Compensation expense for all share-based payment awards continues to be recognized using the straight-line single-option method. Stock-based compensation
expenses recognized in the Consolidated Statement of Operations for the three and nine months ended September 30, 2006, excluding amounts related to options granted prior to April 4, 2005, are based on awards that ultimately are expected
to vest and have been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. In the Companys
pro forma information required under SFAS 123 for the periods prior to fiscal 2006, the Company accounted for forfeitures as they occurred. The cumulative effect of a change in accounting principle as a result of our adoption of SFAS 123(R) was not
significant.

The following table summarizes stock-based compensation expense related to employee stock options under SFAS 123(R),
including the amortization of the intrinsic value under APB 25 for pre-April 4, 2005 options, for the three and nine months ended September 30, 2006, and stock-based compensation expense related to employee stock options under APB 25, for
the three and nine months ended September 30, 2005, which was allocated as follows:



|                                       |  |                                 |       |                                |      |     |      |   |       |      |  |   |      
|-------------------------------------- |  | ------------------------------- | ----- | ------------------------------ | ---- | --- | ---- | - | ----- | ---- |  | - | -----
|(in thousands)                         |  | Three Months EndedSeptember 30, |       | Nine Months EndedSeptember 30,
|                                       |  | 2006                            |       |                                | 2005 |     | 2006 |   |       | 2005
|Cost of sales                          |  | $                               | 46    |                                |      | 28  |      | $ | 193   |      |  | $ | 84   
|Research and development               |  |                                 | 618   |                                |      | 196 |      |   | 1,799 |      |  |   | 588  
|Sales, general and marketing           |  |                                 | 825   |                                |      | 352 |      |   | 2,391 |      |  |   | 1,084
|Related tax effect                     |  |                                 | (9    | )                              |      |    |      |   | (170  | )    |  |   |     
|                                       |  |                                 |       |                                |      |     |      |   |       |      |  |   |      
|Total stock-based compensation expense |  | $                               | 1,480 |                                |      | 576 |      | $ | 4,213 |      |  | $ | 1,756
|                                       |  |                                 |       |                                |      |     |      |   |       |      |  |   |      

For options granted subsequent to January 1, 2006, the Company used its historical stock
price after its IPO on August 8, 2006 and the historical stock prices of an industry peer group for periods prior to the Companys IPO for purposes of calculating volatility. The risk-free interest rate assumption is based upon observed
interest rates appropriate for the term of the Companys employee stock options. The dividend yield assumption is based on the Companys history and expectation of dividend payouts.The expected life of employee stock options was estimated
to be approximately 6.25 years, which is determined in accordance with SAB 107. The following table includes the weighted average assumptions utilized for purposes of calculating the valuation of the Companys stock option grants for the three
and nine months ended September 30, 2006.



|                        |  |                   |   |  |                  |  
|----------------------- |  | ----------------- | - |  | ---------------- | -
|September 30, 2006      |  | Three MonthsEnded |   |  | Nine MonthsEnded |  
|Volatility              |  | 55                | % |  | 57               | %
|Expected option term    |  | 6.25              |   |  | 6.25             |  
|Expected dividend yield |  | 0                 | % |  | 0                | %
|Risk free interest rate |  | 4.84              | % |  | 4.77             | %

Prior to the adoption of SFAS 123(R), the Company accounted for all stock-based awards to
employees and directors using the intrinsic value method in accordance with APB 25 as allowed under Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123). Under the
intrinsic value method, $0.5 million and $1.6 million in stock-based compensation expense



7



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had been recognized in the Companys Consolidated Statement of Operations for the three and nine months ended
September 30, 2005. Stock based compensation attributable to non-employee stock grants were none and $0.2 million for the three and nine months ended September 30, 2005.

3. NET INCOME (LOSS) PER SHARE

The Company calculates net income per share in accordance with
Statement of Financial Accounting Standards No. 128, Earnings Per Share (SFAS No. 128). Under SFAS No. 128, basic net income per common share is calculated by dividing net income by the weighted-average number
of common shares outstanding during the reporting period excluding shares subject to repurchase. Diluted net income per common share reflects the effects of potentially dilutive securities, which consist of convertible preferred stock and common
stock options and warrants, common stock subject to repurchase and preferred stock warrants. Basic and diluted net loss per share are the same for the three months ended September 30, 2006 due to the Companys net loss for that period. A
reconciliation of shares used in the calculation of basic and diluted net income (loss) per share is as follows:



|                                                              |  |                                  |   |  |                                 |   |  |        |   |  |        |  
|------------------------------------------------------------- |  | -------------------------------- | - |  | ------------------------------- | - |  | ------ | - |  | ------ | -
|(in thousands)                                                |  | Three Months Ended September 30, |   |  | Nine Months Ended September 30, |  
|                                                              |  | 2006                             |   |  | 2005                            |   |  | 2006   |   |  | 2005   |  
|Weighted average common shares outstanding                    |  | 43,940                           |   |  | 28,432                          |   |  | 43,708 |   |  | 14,494 |  
|Weighted average shares subject to repurchase                 |  | (316                             | ) |  | (749                            | ) |  | (378   | ) |  | (844   | )
|                                                              |  |                                  |   |  |                                 |   |  |        |   |  |        |  
|Shares used to calculate basic net income (loss) per share    |  | 43,624                           |   |  | 27,683                          |   |  | 43,330 |   |  | 13,650 |  
|                                                              |  |                                  |   |  |                                 |   |  |        |   |  |        |  
|Effect of dilutive securities:                                |  |                                  |   |  |                                 |   |  |        |   |  |        |  
|Common and preferred stock warrants                           |  |                                 |   |  | 31                              |   |  | 43     |   |  | 86     |  
|Convertible preferred stock                                   |  |                                 |   |  | 10,162                          |   |  |       |   |  | 19,756 |  
|Common stock options                                          |  |                                 |   |  | 3,615                           |   |  | 3,068  |   |  | 3,532  |  
|Weighted average shares subject to repurchase                 |  |                                 |   |  | 749                             |   |  | 378    |   |  | 844    |  
|Employee stock purchase plan                                  |  |                                 |   |  | 2                               |   |  |       |   |  |       |  
|                                                              |  |                                  |   |  |                                 |   |  |        |   |  |        |  
|Dilutive potential common stock                               |  |                                 |   |  | 14,559                          |   |  | 3,489  |   |  | 24,218 |  
|                                                              |  |                                  |   |  |                                 |   |  |        |   |  |        |  
|Weighted average common shares outstanding, assuming dilution |  | 43,624                           |   |  | 42,242                          |   |  | 46,819 |   |  | 37,868 |  
|                                                              |  |                                  |   |  |                                 |   |  |        |   |  |        |  

4. OTHER COMPREHENSIVE INCOME (LOSS)

Comprehensive income includes charges or credits to equity that are not the result of transactions with owners. The components of comprehensive income
(loss), net of tax, are as follows:



|                                           |  |                                  |        |   |                                 |   |     |      |  |      |     |  |   |     |  
|------------------------------------------ |  | -------------------------------- | ------ | - | ------------------------------- | - | --- | ---- |  | ---- | --- |  | - | --- | -
|                                           |  | Three Months Ended September 30, |        |   | Nine Months Ended September 30, |  
|(in thousands)                             |  | 2006                             |        |   | 2005                            |   |     | 2006 |  | 2005 |    
|Net income (loss)                          |  |                                  | (1,451 | ) |                                 |   | 242 |      |  |      | 499 |  |   | 343 |  
|Changes in unrealized gains on investments |  |                                  | 34     |   |                                 |   |    |      |  |      | 24  |  |   |    |  
|Foreign currency translation adjustment    |  |                                  | 2      |   |                                 |   | (43 | )    |  |      | 10  |  |   | (82 | )
|                                           |  |                                  |        |   |                                 |   |     |      |  |      |     |  |   |     |  
|Total                                      |  | $                                | (1,415 | ) |                                 | $ | 199 |      |  | $    | 533 |  | $ | 261 |  
|                                           |  |                                  |        |   |                                 |   |     |      |  |      |     |  |   |     |  



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5. DETAILS OF CERTAIN BALANCE SHEET COMPONENTS



|                                          |  |                   |        |   |                  |   |        |  
|----------------------------------------- |  | ----------------- | ------ | - | ---------------- | - | ------ | -
|(in thousands)                            |  | September 30,2006 |        |   | December 31,2005 |  
|Inventories, net                          |  |                   |        |   |                  |   |        |  
|Raw materials                             |  | $                 | 3,203  |   |                  | $ | 1,311  |  
|Work in process                           |  |                   | 1,776  |   |                  |   | 2,010  |  
|Finished goods                            |  |                   | 4,316  |   |                  |   | 3,240  |  
|                                          |  |                   |        |   |                  |   |        |  
|Total inventories                         |  | $                 | 9,295  |   |                  | $ | 6,561  |  
|                                          |  |                   |        |   |                  |   |        |  
|Property and equipment, net               |  |                   |        |   |                  |   |        |  
|Computers and software                    |  | $                 | 3,548  |   |                  | $ | 3,082  |  
|Office and test equipment                 |  |                   | 3,427  |   |                  |   | 2,886  |  
|Leasehold improvements                    |  |                   | 580    |   |                  |   | 529    |  
|                                          |  |                   |        |   |                  |   |        |  
|                                          |  |                   | 7,555  |   |                  |   | 6,497  |  
|Accumulated depreciation and amortization |  |                   | (5,274 | ) |                  |   | (4,240 | )
|                                          |  |                   |        |   |                  |   |        |  
|Total property and equipment, net         |  | $                 | 2,281  |   |                  | $ | 2,257  |  
|                                          |  |                   |        |   |                  |   |        |  
|Accrued liabilities                       |  |                   |        |   |                  |   |        |  
|Accrued payroll and benefits              |  | $                 | 2,182  |   |                  | $ | 3,119  |  
|Accrued legal expenses                    |  |                   | 1,272  |   |                  |   | 29     |  
|Accrued payables and other                |  |                   | 2,515  |   |                  |   | 1,590  |  
|                                          |  |                   |        |   |                  |   |        |  
|Total accrued liabilities                 |  | $                 | 5,969  |   |                  | $ | 4,738  |  
|                                          |  |                   |        |   |                  |   |        |  

6. SEGMENT INFORMATION

As defined by the requirements of SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, the Company operates in one reportable segment: the design, development, marketing
and sale of power management semiconductor products and solutions for the communications, computing and consumer portable and personal electronics marketplace. The Companys chief operating decision maker is its chief executive officer. The
following is a summary of revenues by geographic region based on the location to which the product is shipped:



|                                          |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|----------------------------------------- |  | -------------------------------- | ------ | ------------------------------- | - | ------ |  | ---- | ------ |  | - | ------
|                                          |  | Three Months Ended September 30, |        | Nine Months Ended September 30,
|(in thousands)                            |  | 2006                             |        | 2005                            |   | 2006   |  | 2005
|South Korea                               |  | $                                | 11,329 |                                 | $ | 11,380 |  | $    | 35,318 |  | $ | 28,380
|Taiwan                                    |  |                                  | 4,321  |                                 |   | 3,342  |  |      | 12,197 |  |   | 9,380 
|China                                     |  |                                  | 3,112  |                                 |   | 2,000  |  |      | 8,148  |  |   | 5,922 
|Europe                                    |  |                                  | 797    |                                 |   | 545    |  |      | 2,576  |  |   | 1,354 
|Japan                                     |  |                                  | 192    |                                 |   | 552    |  |      | 947    |  |   | 1,219 
|North America (principally United States) |  |                                  | 352    |                                 |   | 145    |  |      | 1,024  |  |   | 456   
|                                          |  |                                  |        |                                 |   |        |  |      |        |  |   |       
|Total                                     |  | $                                | 20,103 |                                 | $ | 17,964 |  | $    | 60,210 |  | $ | 46,711
|                                          |  |                                  |        |                                 |   |        |  |      |        |  |   |       



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The following is a summary of revenue by product type:



|                       |  |                                  |        |                     |                                 |   |        |      |                     |  |      |        |  |                     |        |  |        |   |                     |   |        |  |     |  
|---------------------- |  | -------------------------------- | ------ | ------------------- | ------------------------------- | - | ------ | ---- | ------------------- |  | ---- | ------ |  | ------------------- | ------ |  | ------ | - | ------------------- | - | ------ |  | --- | -
|                       |  | Three Months Ended September 30, |        |                     | Nine Months Ended September 30, |  
|                       |  | 2006                             |        |                     | 2005                            |   |        | 2006 |                     |  | 2005 |       
|(dollars in thousands) |  | Amount                           |        | Percent ofNet Sales |                                 |   | Amount |      | Percent ofNet Sales |  |      | Amount |  | Percent ofNet Sales |        |  | Amount |   | Percent ofNet Sales |  
|TPM IC *               |  | $                                | 16,429 |                     | 82                              | % |        | $    | 13,384              |  | 74   | %      |  | $                   | 48,315 |  | 80     | % |                     | $ | 34,633 |  | 74  | %
|ASPM **                |  |                                  | 3,628  |                     | 18                              |   |        |      | 4,460               |  | 25   |        |  |                     | 11,837 |  | 20     |   |                     |   | 11,704 |  | 25  |  
|Other ***              |  |                                  | 46     |                     | 0                               |   |        |      | 120                 |  | 1    |        |  |                     | 58     |  | 0      |   |                     |   | 374    |  | 1   |  
|                       |  |                                  |        |                     |                                 |   |        |      |                     |  |      |        |  |                     |        |  |        |   |                     |   |        |  |     |  
|Total                  |  | $                                | 20,103 |                     | 100                             | % |        | $    | 17,964              |  | 100  | %      |  | $                   | 60,210 |  | 100    | % |                     | $ | 46,711 |  | 100 | %
|                       |  |                                  |        |                     |                                 |   |        |      |                     |  |      |        |  |                     |        |  |        |   |                     |   |        |  |     |  

---

|* | Total Power Management Integrated Circuit
|- | -----------------------------------------

|** | Application Specific Power Metal Oxide Semiconductor Field Effect Transistor
|-- | ----------------------------------------------------------------------------

|*** | Other consists of primarily Discrete Metal Oxide Semiconductor Field Effect Transistor and non recurring engineering revenue
|--- | ----------------------------------------------------------------------------------------------------------------------------

The following is a summary of long-lived assets by geographic region:



|               |  |                   |       |                  |   |      
|-------------- |  | ----------------- | ----- | ---------------- | - | -----
|(in thousands) |  | September 30,2006 |       | December 31,2005
|Country        |  |                   |       |                  |   |      
|United States  |  | $                 | 3,111 |                  | $ | 1,617
|Taiwan         |  |                   | 391   |                  |   | 396  
|Hong Kong      |  |                   | 96    |                  |   | 107  
|South Korea    |  |                   | 166   |                  |   | 197  
|China          |  |                   | 193   |                  |   | 167  
|Japan          |  |                   | 90    |                  |   | 101  
|Macau          |  |                   | 29    |                  |   | 46   
|Sweden         |  |                   | 8     |                  |   | 8    
|United Kingdom |  |                   | 1     |                  |   | 2    
|               |  |                   |       |                  |   |      
|Total          |  | $                 | 4,085 |                  | $ | 2,641
|               |  |                   |       |                  |   |      

The following table summarizes net revenue and accounts receivable for customers which accounted
for 10% or more of accounts receivable or net revenue:



|         |  |                           |      |  |                                             |      |  |                                            |      |  |    |      |  |    |   |  |    |  
|-------- |  | ------------------------- | ---- |  | ------------------------------------------- | ---- |  | ------------------------------------------ | ---- |  | -- | ---- |  | -- | - |  | -- | -
|         |  | Accounts Receivable as of |      |  | Net
RevenueThree Months Ended September 30, |      |  | Net
RevenueNine Months Ended September 30, |     
|Customer |  | September 30,2006         |      |  | December 31, 2005                           |      |  |                                           
|         |  |                           | 2006 |  |                                             | 2005 |  |                                            | 2006 |  |    | 2005 | 
|A        |  | 24                        | %    |  | 32                                          | %    |  | 27                                         | %    |  | 42 | %    |  | 29 | % |  | 39 | %
|B        |  | 13                        |      |  | 15                                          |      |  |                                           |      |  |   |      |  |   |   |  | 11 |  
|C        |  |                          |      |  | 13                                          |      |  |                                           |      |  |   |      |  |   |   |  |   |  
|D        |  | 12                        |      |  |                                            |      |  | 11                                         |      |  |   |      |  | 12 |   |  |   |  
|E        |  | 12                        |      |  |                                            |      |  | 12                                         |      |  |   |      |  |   |   |  |   |  

7. RECENTLY ISSUED ACCOUNTING STANDARDS

In June 2006, the FASB issued FASB Interpretation (FIN) No. 48 Accounting for Uncertainty in Income Taxes  an interpretation of
FASB Statement 109. FIN 48 prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements tax positions taken or expected to be taken on a tax return, including a decision whether to file or not to
file in a particular jurisdiction. FIN 48 is effective for fiscal years beginning after December 15, 2006. If there are changes in net assets as a result of application of FIN 48 these will be accounted for as an adjustment to opening retained
earnings. The Company is currently assessing the impact of FIN 48 on its consolidated financial position and results of operations.

8. INCOME TAXES

The Company accounts for income taxes under the provisions of SFAS No. 109, Accounting for Income Taxes. Under this
method, the Company determines deferred tax assets and liabilities based upon the differences between the financial statement and tax bases of our assets and liabilities using tax rates in effect for the year in which the Company expects the
differences to affect taxable income. The Company expects the effective tax rate for 2006 to be higher than that estimated during the six months ended June 30, 2006 primarily due to the decrease



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in the estimate of net income for the fiscal year 2006. This increase was partially offset by tax benefits
realized through the adoption of SFAS No. 123(R). The Company adopted SFAS No. 123(R) as of January 1, 2006, and, as a result, incurred significant stock-based compensation expense, most of which related to incentive stock
options for which no corresponding tax benefit is recognized unless a disqualifying disposition occurs. Disqualifying dispositions result in a reduction of income tax expense in the quarter when the disqualifying disposition occurs in an amount
equal to the tax benefit relating to previously expensed stock compensation. Tax benefits related to tax deductions in excess of previously expensed stock compensation are recorded as an addition to paid-in-capital. During the three and
nine months ended September 30, 2006, tax expense was reduced by approximately $9,000 and $170,000 respectively, as a result of disqualifying dispositions.

The percentage tax rate reflected in our results of operations is based on an estimate of net income for the fiscal year 2006 that we make at the end of each quarter. At September 30, 2006, without tax benefits
realized through disqualifying dispositions during the nine months ended September 30, 2006, our full year estimate of the 2006 effective tax rate was approximately 59%. However, with tax benefits realized through disqualifying
dispositions for nine months ended September 30, 2006, the effective tax rate was approximately 38%.

9. LEGAL PROCEEDINGS

In May 2003, the Company received a letter from Linear Technology Corporation (Linear Technology) alleging that certain of
its charge pump products infringed United States Patent No. 6,411,531 owned by Linear Technology. In August 2004, the Company received a letter from Linear Technology alleging that certain of its switching regulator products infringed United
States Patent Nos. 5,481,178, 6,304,066 and 6,580,258. In response to these letters, the Company contacted Linear Technology to convey in good faith the belief that it does not infringe the patents in question. Subsequently, the Company became aware
of a marketing campaign conducted by Linear Technology in which they sought to disrupt the Companys business relationships and sales by suggesting to the Companys customers that its products infringe the same U.S. patents mentioned in
their two letters to the Company. As a result, in February 2006, the Company initiated a lawsuit against Linear Technology for unfair business practices, interference with existing and prospective customers and trade libel, as well as a declaration
of patent invalidity and non-infringement. This case is currently stayed pending the outcome of the United States International Trade Commission (USITC) investigation described in the following paragraph.

In March 2006, the USITC responded to a petition filed by Linear Technology by initiating an examination to determine if certain of the Companys
products infringe certain patents owned by Linear Technology pursuant to Section 337 of the Tariff Act. The accused products include charge pumps and switching regulators and are similar to the products involved in the Companys lawsuit
with Linear Technology. The Company believes that none of its products infringe the Linear Technology patents in question. However, whether or not the Company prevails in this investigation, the Company expects to incur significant legal expenses.
Because the subject matter of this action is similar to the subject matter involved in the Companys lawsuit with Linear Technology, the Company expects costs associated with these two matters to be substantially less than the costs that would
typically result from two unrelated matters. If the Company is unsuccessful in this case, its business and ability to compete in foreign markets could be harmed, and it could be enjoined from selling the accused products in the United States, either
directly or indirectly, which could have a material adverse impact on the Companys revenues, financial condition, results of operations and cash flows.

In July 2006, the Company and Siliconix settled the on-going patent litigation initiated by Siliconix against the Company concerning Siliconixs United States Patents. Under the terms of the settlement, the
Company and Siliconix agreed to dismiss all claims and counterclaims in the litigation. Both the Company and Siliconix will continue marketing their respective trench DMOS product lines. The settlement had no material impact on the Companys
financial statements.



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ITEM 2.

MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report
on Form 10-Q and our Form 10-K filed on March 8, 2006. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ
materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to, those set forth under Risk Factors and elsewhere in this Quarterly Report on Form 10-Q.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements. When used in this Quarterly Report on Form 10-Q the words anticipate, objective, may, might,
should, could, can, intend, expect, believe, estimate, predict, potential, plan, is designed to or the negative of
these and similar expressions identify forward-looking statements. Forward-looking statements include, but are not limited to, statements about:



| |  |  | our expectations regarding our expenses, sales and operations;
| | - |  | --------------------------------------------------------------



| |  |  | our gross margin expectations;
| | - |  | ------------------------------



| |  |  | our anticipated cash needs and our estimates regarding our capital requirements and our need for additional financing;
| | - |  | ----------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to anticipate the future needs of our customers;
| | - |  | ------------------------------------------------------------



| |  |  | our plans for future products and enhancements of existing products;
| | - |  | --------------------------------------------------------------------



| |  |  | our growth strategy elements;
| | - |  | -----------------------------



| |  |  | our increased headcount as we expand our operations;
| | - |  | ----------------------------------------------------



| |  |  | our intellectual property;
| | - |  | --------------------------



| |  |  | our anticipated trends and challenges in the markets in which we operate; and
| | - |  | -----------------------------------------------------------------------------



| |  |  | our ability to attract customers.
| | - |  | ---------------------------------

These statements
reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. While we believe our
plans, intentions and expectations reflected in those forward-looking statements are reasonable, we cannot assure you that these plans, intentions or expectations will be achieved. Our actual results, performance or achievements could differ
materially from those contemplated, expressed or implied by the forward-looking statements contained in this Quarterly Report on Form 10-Q, including those under the heading Risk Factors.

All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements
set forth in this Quarterly Report on Form 10-Q. Other than as required by applicable securities laws, we are under no obligation to update any forward-looking statement, whether as result of new information, future events or otherwise.

Overview

We are a supplier of power management
semiconductors for mobile consumer electronic devices, such as wireless handsets, notebook and tablet computers, smartphones, digital cameras and personal media players. We focus our design and marketing efforts on the application-specific power
management needs of consumer, communications and computing applications in these rapidly evolving devices. Through our Total Power Management approach, we offer a broad range of products that support multiple applications, features and services
across a diverse set of mobile consumer electronic devices. We sell directly to original equipment manufacturers, or OEMs, including LG Electronics, Inc., Samsung Electronics Co., Ltd., Motorola, Inc., Sagem SA, Innertech and Pantech &
Curitel Communications, Inc. We sell through distributors and original design manufacturers, or ODMs, to other system designers, including Hewlett-Packard Company, Dell Inc., Texas Instruments Incorporated, HTC Corporation and Compal Electronics,
Inc.

We were incorporated in 1997 and commenced operations in 1998. From 1998 to 2000, we were primarily
involved in developing our technology, recruiting personnel and raising capital. Since 2001, we have focused on delivering products for what we believe to be large and high-growth market opportunities. However, we operate in the semiconductor
industry, which is cyclical and has experienced significant fluctuations, and our revenues are impacted by these broad industry trends. We operate as a fabless semiconductor company, working with third parties to manufacture and assemble our
integrated circuits, or ICs, rather than manufacturing them ourselves. This business model has enabled us to reduce our capital expenditures and fixed costs, while focusing our engineering and design resources on our core strengths. We believe this
model also reduces the impact on our business of seasonality, cyclicality and fluctuations in demand.



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We have developed and introduced over 500 new products since 2000. We currently derive a majority of our
revenues from sales of our ChargePump product family, which is primarily used for driving white LED backlighting of color displays. In the future, we expect to derive an increasing percentage of our revenues from other product families, such as
switching regulator ICs, lithium-ion battery charger ICs and power system-on-chip integrated multifunction power products, or Power SOCs.

We are often required to anticipate what product designs will garner widespread customer demand, and we undertake significant product development efforts well in advance of a products release, usually in advance of any of our
customers expressly indicating demand for the product. Our product development efforts typically take from six months to two years until a production release, depending on the products complexity. We also develop new process technologies, such
as our proprietary ModularBCD process, that we believe will be critical in our development and production of certain new product families. Process technology development is subject to similar timing risks, which can in turn delay development of new
product families that rely on these new processes.

As a result of the length of our development and sales cycle, our revenues for any
period generally are weighted toward products introduced for sale in the prior one to two years. For example, in 2004, we generated a majority of our revenues from products introduced in 2003 and 2002. Accordingly, we expect that the majority of our
revenues in 2007 may be dependent on products that we have only recently introduced or that we may not yet have developed or introduced. In this regard, our present revenues are not necessarily representative of future sales because our future sales
are likely to be comprised of a different mix of products.

We sell our products through our direct sales and applications support
organization to original equipment manufacturers, or OEMs, original design manufacturers, or ODMs, and contract electronics manufacturers, as well as through arrangements with distributors that fulfill third-party orders for our products. Many of
our current distributors also serve as our sales representatives procuring orders for us to fill directly. We receive a substantial portion of our revenues from a small number of customers. We received an aggregate of approximately 84%, 80% and 80%
of our revenues from our ten largest customers in the three and nine months ended September 30, 2006 and for the year ended December 31, 2005, respectively. Our largest direct customer is LG Electronics Inc., or LG, which accounted for
27%, 29% and 37% of our revenues for the three and nine months ended September 30, 2006 and total fiscal year 2005, respectively.

It
is difficult for us to forecast the demand for our products, in part because of the highly complex supply chain between us and the consumer end users of the mobile consumer electronic devices that incorporate our products. We believe that our
customers buying patterns are more predictable over a six-month period versus a three-month period, as a result, our forecasting of quarterly results ais more difficult than our half-year outlook. Additionally, our design wins are usually
based on a half-yearly cycle, especially for the handset market. Consumer demand for new features changes rapidly. Parties such as wireless service providers directly respond to and influence these consumer preferences through device selection and
orders to the OEMs for these devices. Distributors, ODMs and contract electronics manufacturers often add an additional layer of complexity between us and consumer end users. As a result, we must forecast demand not only from our customers, but also
from other participants in this multi-level distribution channel. Our failure to accurately forecast demand can lead to product shortages that can impede production by our customers and harm our relationship with these customers. Conversely, our
failure to forecast declining demand or shifts in product mix can result in excess or obsolete inventory. For example, in 2004, we recorded an inventory write-down of $1.9 million because our forecast of demand in early 2004 proved to be optimistic
and a significant portion of these newly manufactured products ended up with no forecasted demand in the second half of 2004. For the three and nine months ended September 30, 2006, we recorded inventory write-downs of approximately $1.3
million and $2.6 million. In addition, if we do not incorporate the partially fabricated wafers held for us by our suppliers into our products in a timely fashion, we may still become obligated to purchase these materials, which may reduce our gross
margins.

In the future, we expect our sales to LG and our other large customers to continue to be susceptible to quarterly fluctuation as
our customers manage their inventories for seasonal variations and other reasons. For example, in the fourth quarter of 2004, we experienced a 33% sequential quarterly decline in revenues from LG as a result of LGs prior increase in inventory
of our products in the third quarter in anticipation of the peak fourth-quarter buying season for the mobile consumer electronic devices in which our products are used.

We derive substantially all of our revenues from sales to foreign customers, particularly in Asia. In the three months ended September 30, 2006, approximately 94%
of our revenues were from sales in Asia, including approximately 56% in South Korea, 21% in Taiwan, 16% in China and 1% in Japan. In the three months ended September 30, 2005, approximately 96% of our revenues were from sales in Asia, including
approximately 63% in South Korea, 19% in Taiwan, 11% in China and 3% in Japan. We believe that a substantial majority of our revenues will continue to come from customers located in Asia, where most of the mobile consumer electronic devices that use
our ICs are manufactured. As a result of this regional customer concentration, we have been and expect to continue to be particularly subject to economic and political events, health crises and other developments that impact our customers in Asia.
For example, our sales in late 2004 were harmed by the Chinese government reducing the availability of credit to domestic businesses. China, in particular, is an emerging market where forecasting by our distributors is not accurate, and there can be
rapid changes in the distribution system and market conditions. In 2004, in order to limit our exposure to bad debt and late payments from these distributors, we constrained sales to these customers by declining to fulfill orders, which reduced our
revenues in 2004. We continue to closely monitor payments owed to us by our customers who may continue to be affected by this reduced availability of credit in China.

In general, the average selling price, or ASP, of any specific product for a specific application will decline over time. However, the ASP decline is application-specific and may be mitigated by replacement with
related products in the same product family and new applications utilizing essentially the same product with higher margins. For example, we developed a low-dropout linear regulator for use in a particular wireless handset, which experienced a
decline in ASP as that type of device became a commodity in wireless handsets. However, we were able



13



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##### Table of Contents

to use the same base circuit architecture to design other products in the same family for newer wireless handsets and
other applications that could be sold at higher margins. We expect that our revenues will normally be characterized by seasonally lower sequential sales during the first quarter of a calendar year, and potentially late in the fourth quarter, because
of the peak fourth quarter consumer buying season for the devices in which our products are used.

Results of Operations

The following table sets forth our unaudited historical operating results, as a percentage of revenues for the periods indicated:



|                                  |  |                                 |    |  |                                 |   |  |       |   |  |       |  
|--------------------------------- |  | ------------------------------- | -- |  | ------------------------------- | - |  | ----- | - |  | ----- | -
|                                  |  | Three Months EndedSeptember 30, |    |  | Nine Months Ended September 30, |  
|(in thousands)                    |  | 2006                            |    |  | 2005                            |   |  | 2006  |   |  | 2005  |  
|NET SALES                         |  | 100.0                           | %  |  | 100.0                           | % |  | 100.0 | % |  | 100.0 | %
|Cost of revenues                  |  | 45.3                            |    |  | 39.8                            |   |  | 41.5  |   |  | 40.3  |  
|                                  |  |                                 |    |  |                                 |   |  |       |   |  |       |  
|GROSS PROFIT                      |  | 54.7                            |    |  | 60.2                            |   |  | 58.5  |   |  | 59.7  |  
|                                  |  |                                 |    | 
|OPERATING EXPENSES:               |  |                                 |    |  |                                 |   |  |       |   |  |       |  
|Research and development          |  | 26.7                            |    |  | 29.4                            |   |  | 28.6  |   |  | 30.6  |  
|Sales, general and adminstrative  |  | 25.8                            |    |  | 27.3                            |   |  | 26.9  |   |  | 27.3  |  
|Patent litigation                 |  | 17.4                            |    |  | 0.0                             |   |  | 8.7   |   |  | 0.0   |  
|                                  |  |                                 |    |  |                                 |   |  |       |   |  |       |  
|Total operating expenses          |  | 69.9                            |    |  | 56.7                            |   |  | 64.2  |   |  | 57.9  |  
|                                  |  |                                 |    |  |                                 |   |  |       |   |  |       |  
|INCOME (LOSS) FROM OPERATIONS     |  | (15.2                           | )  |  | 3.5                             |   |  | (5.7  | ) |  | 1.8   |  
|INTEREST AND INVESTMENT INCOME    |  | 7.9                             |    |  | 3.6                             |   |  | 7.1   |   |  | 1.9   |  
|                                  |  |                                 |    | 
|INCOME (LOSS) BEFORE INCOME TAXES |  | (7.3                            | )  |  | 7.1                             |   |  | 1.4   |   |  | 3.7   |  
|PROVISION FOR INCOME TAXES        |  |                                |    |  | 5.7                             |   |  | 0.6   |   |  | 3.1   |  
|                                  |  |                                 |    |  |                                 |   |  |       |   |  |       |  
|NET (LOSS) INCOME                 |  | (7.3                            | )% |  | 1.4                             | % |  | 0.8   | % |  | 0.6   | %
|                                  |  |                                 |    |  |                                 |   |  |       |   |  |       |  

Comparison of three and nine months ended September 30, 2006 and September 30, 2005

Revenues

The following
table illustrates our net sales by our principal product families:



|                       |  |                                  |        |                     |                                 |   |        |      |                     |  |      |        |  |                     |        |  |        |   |                     |   |        |  |     |  
|---------------------- |  | -------------------------------- | ------ | ------------------- | ------------------------------- | - | ------ | ---- | ------------------- |  | ---- | ------ |  | ------------------- | ------ |  | ------ | - | ------------------- | - | ------ |  | --- | -
|                       |  | Three Months Ended September 30, |        |                     | Nine Months Ended September 30, |  
|                       |  | 2006                             |        |                     | 2005                            |   |        | 2006 |                     |  | 2005 |       
|(dollars in thousands) |  | Amount                           |        | Percent ofNet Sales |                                 |   | Amount |      | Percent ofNet Sales |  |      | Amount |  | Percent ofNet Sales |        |  | Amount |   | Percent ofNet Sales |  
|TPM IC *               |  | $                                | 16,429 |                     | 82                              | % |        | $    | 13,384              |  | 74   | %      |  | $                   | 48,315 |  | 80     | % |                     | $ | 34,633 |  | 74  | %
|ASPM **                |  |                                  | 3,628  |                     | 18                              |   |        |      | 4,460               |  | 25   |        |  |                     | 11,837 |  | 20     |   |                     |   | 11,704 |  | 25  |  
|Other ***              |  |                                  | 46     |                     | 0                               |   |        |      | 120                 |  | 1    |        |  |                     | 58     |  | 0      |   |                     |   | 374    |  | 1   |  
|                       |  |                                  |        |                     |                                 |   |        |      |                     |  |      |        |  |                     |        |  |        |   |                     |   |        |  |     |  
|Total                  |  | $                                | 20,103 |                     | 100                             | % |        | $    | 17,964              |  | 100  | %      |  | $                   | 60,210 |  | 100    | % |                     | $ | 46,711 |  | 100 | %
|                       |  |                                  |        |                     |                                 |   |        |      |                     |  |      |        |  |                     |        |  |        |   |                     |   |        |  |     |  

---

|* | Total Power Management Integrated Circuit
|- | -----------------------------------------

|** | Application Specific Power Metal Oxide Semiconductor Field Effect Transistor
|-- | ----------------------------------------------------------------------------

|*** | Other consists of primarily Discrete Metal Oxide Semiconductor Field Effect Transistor and non recurring engineering revenue
|--- | ----------------------------------------------------------------------------------------------------------------------------



14



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##### Table of Contents

Our net sales for the three months ended September 30, 2006 as compared to 2005 increased $2.1
million. This growth was primarily attributable to our TPM IC product family, which grew 23% as compared to the three months ended September 30, 2005. Our ASPM product family decreased by 19% as compared to the three months ended
September 30, 2005. The increase in TPM IC net sales was primarily driven by increased sales of our ChargePump products for the three months ended September 30, 2006 as compared to 2005. The decrease in ASPM net sales for the three months
ended September 30, 2006 as compared to 2005 was primarily attributable to decreased sales of our SmartSwitch products.

Our sales to
LG in the three and nine months ended September 30, 2006 increased as compared to the three and nine months ended September 30, 2005. However, sales to LG represented a decreased portion of our net sales as we have continued to diversify
our customer base. LG accounted for approximately 27% and 29% of our revenues for the three and nine months ended September 30, 2006 as compared to 42% and 39% for the three and nine months ended September 30, 2005.

Gross Profit



|                    |  |                                 |          |   |      |   |          |                                |  |   |       |       |  |      |   |  |            |        |   |  |   |        |   |  |   |        |       |  |      |  
|------------------- |  | ------------------------------- | -------- | - | ---- | - | -------- | ------------------------------ |  | - | ----- | ----- |  | ---- | - |  | ---------- | ------ | - |  | - | ------ | - |  | - | ------ | ----- |  | ---- | -
|                    |  | Three Months EndedSeptember 30, |          |   |      |   |          | Nine Months EndedSeptember 30, |  |   |       |      
|                    |  |                                 | Increase |   |      |   | Increase |                               
|(in thousands)      |  | 2006                            |          |   | 2005 |   |          | (Decrease)                     |  |   | 2006  |       |  | 2005 |   |  | (Decrease) |       
|Net sales           |  | $                               | 20,103   |   |      | $ | 17,964   |                                |  | $ | 2,139 |       |  | 11.9 | % |  | $          | 60,210 |   |  | $ | 46,711 |   |  | $ | 13,499 |       |  | 28.9 | %
|Cost of sales       |  |                                 | 9,100    |   |      |   | 7,152    |                                |  |   | 1,948 |       |  | 27.2 | % |  |            | 24,986 |   |  |   | 18,804 |   |  |   | 6,182  |       |  | 32.9 | %
|                    |  |                                 |          |   |      |   |          |                                |  |   |       |       |  |      |   |  |            |        |   |  |   |        |   |  |   |        |       |  |      |  
|Gross profit        |  | $                               | 11,003   |   |      | $ | 10,812   |                                |  | $ | 191   |       |  | 1.8  | % |  | $          | 35,224 |   |  | $ | 27,907 |   |  | $ | 7,317  |       |  | 26.2 | %
|                    |  |                                 |          |   |      |   |          |                                |  |   |       |       |  |      |   |  |            |        |   |  |   |        |   |  |   |        |       |  |      |  
|Gross profit margin |  |                                 | 54.7     | % |      |   | 60.2     | %                              |  |   | (5.6  | )ppt. |  |      |   |  |            | 58.5   | % |  |   | 59.7   | % |  |   | (1.2   | )ppt. |  |      |  

Our gross margin was 54.7% for the three months ended September 30, 2006, compared to 60.2%
for the three months ended September 30, 2005. This decrease was due to a number of factors:



| |  |  | (4) percentage points of the decrease was due to unfavorable product yields attributable to increased product complexity and changes in product specifications;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | (2) percentage points of the decrease was attributable to increased sales incentive offers;
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | (2) percentage points of the decrease was attributable to increased write-down of excess and obsolete inventories totaling approximately $1.3 million for the three months ended
September 30, 2006;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | (1) percentage points of the decrease was due to unfavorable product mix and to a provision for uncollectible shipments from a customer in China; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | offset by 3 percentage points attributable to $2.1 million of product sales for which the inventory had been previously written off.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------

Our gross margin was 58.5% for the nine months ended September 30, 2006, compared to 59.7% for the nine months ended September 30, 2005. This
decrease was due to a number of factors:



| |  |  | (3) percentage points of the decrease was to unfavorable product yields attributed to increased product complexity and specification changes;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | (2) percentage points of the decrease was due to increased sales incentive offers;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | (1) percentage point was due to increase in warranty experience rates;
| | - |  | ----------------------------------------------------------------------

offset by



| |  |  | 2 percentage points attributable to $5.0 million of product sales for which the inventory had been previously written off;
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | 2 percentage points due to improved product mix and economies of scale; and
| | - |  | ---------------------------------------------------------------------------



| |  |  | 1 percentage point of the increase was attributable to a decrease write-down of excess and obsolete inventories totaling approximately $2.6 million for the nine months ended
September 30, 2006.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Research and Development



|                         |  |                                 |       |   |          |   |       |                                |  |   |          |    |  |      |   |  |            |        |   |  |   |        |   |  |   |       |    |  |      |  
|------------------------ |  | ------------------------------- | ----- | - | -------- | - | ----- | ------------------------------ |  | - | -------- | -- |  | ---- | - |  | ---------- | ------ | - |  | - | ------ | - |  | - | ----- | -- |  | ---- | -
|                         |  | Three Months EndedSeptember 30, |       |   | Increase |   |       | Nine Months EndedSeptember 30, |  |   | Increase |   
|(in thousands)           |  | 2006                            |       |   | 2005     |   |       | (Decrease)                     |  |   | 2006     |    |  | 2005 |   |  | (Decrease) |       
|Research and development |  | $                               | 5,371 |   |          | $ | 5,277 |                                |  | $ | 94       |    |  | 1.8  | % |  | $          | 17,214 |   |  | $ | 14,210 |   |  | $ | 3,004 |    |  | 21.1 | %
|% of net sales           |  |                                 | 26.7  | % |          |   | 29.4  | %                              |  |   | (2.7     | )% |  | ppt. |   |  |            | 28.6   | % |  |   | 30.6   | % |  |   | (2.0  | )% |  | ppt. |  



15



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##### Table of Contents

Research and development expenses for the three months ended September 30, 2006 as compared to 2005,
increased due to a number of factors:



| |  |  | $0.4 million of the increase was attributable to increased stock-based compensation expense attributable to the adoption of SFAS 123(R) on January 1, 2006;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------

offset by



| |  |  | $0.2 million due to lower NRE and product development related expenses; and
| | - |  | ---------------------------------------------------------------------------



| |  |  | $0.1 million due to lower employee compensation related expenses.
| | - |  | -----------------------------------------------------------------

Research and development expenses for the nine months ended September 30, 2006 as compared to 2005, increased due to a number of factors:



| |  | $1.2 million of the increase was attributable to increased stock-based compensation expense attributable to the adoption of SFAS 123(R) on January 1, 2006;
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | $0.9 million of the increase was attributable to increased payroll and other employee benefit expenses due to increased headcount;
|- |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  | $0.7 million increase in engineering related expenses;and
|- |  | ---------------------------------------------------------



| |  | $0.2 million in depreciation.
|- |  | -----------------------------

Sales, General and Administrative



|                                 |  |                                 |       |   |          |   |       |                                |  |   |          |    |  |      |   |  |            |        |   |  |   |        |   |  |   |       |    |  |      |  
|-------------------------------- |  | ------------------------------- | ----- | - | -------- | - | ----- | ------------------------------ |  | - | -------- | -- |  | ---- | - |  | ---------- | ------ | - |  | - | ------ | - |  | - | ----- | -- |  | ---- | -
|                                 |  | Three Months EndedSeptember 30, |       |   | Increase |   |       | Nine Months EndedSeptember 30, |  |   | Increase |   
|(in thousands)                   |  | 2006                            |       |   | 2005     |   |       | (Decrease)                     |  |   | 2006     |    |  | 2005 |   |  | (Decrease) |       
|Sales general and administrative |  | $                               | 5,187 |   |          | $ | 4,906 |                                |  | $ | 281      |    |  | 5.7  | % |  | $          | 16,200 |   |  | $ | 12,749 |   |  | $ | 3,451 |    |  | 27.1 | %
|% of net sales                   |  |                                 | 25.8  | % |          |   | 27.3  | %                              |  |   | (1.5     | )% |  | ppt. |   |  |            | 26.9   | % |  |   | 27.3   | % |  |   | (0.4  | )% |  | ppt. |  

Sales, general and administrative expenses for the three months ended September 30, 2006 as
compared to 2005, increased due to a number of factors:



| |  |  | $0.5 million of the increase was attributable to increased stock-based compensation expense attributable to the adoption of SFAS 123(R) on January 1, 2006;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $0.2 million of the increase was attributable to increased professional consulting expense attributable to our continued implementation of Section 404 of the Sarbanes Oxley Act
of 2002, other accounting and tax consulting services;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

offset by



| |  |  | $0.3 million of a reduction in bad debt expense; and
| | - |  | ----------------------------------------------------



| |  |  | $0.2 million in reductions of travel and other expenses.
| | - |  | --------------------------------------------------------

Sales, general and administrative expenses for the nine months ended September 30, 2006 as compared to 2005, increased due to a number of factors:



| |  |  | $1.3 million of the increase was attributable to increased stock-based compensation expense attributable to the adoption of SFAS 123(R) on January 1, 2006;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $1.7 million of the increase was attributable to increased professional consulting expense attributable to our continued implementation of Section 404 of the Sarbanes Oxley Act
of 2002, other accounting and tax consulting services;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $0.3 million of the increase was attributable to various public company expenses;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | $0.7 million of the increase was attributable to in payroll other and employee benefit expenses, due to increased headcount, which were
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------

offset by



| |  |  | $0.3 million in reductions in travel related expenses; and
| | - |  | ----------------------------------------------------------



| |  |  | $0.3 million in a reduction of bad debt related expenses.
| | - |  | ---------------------------------------------------------



16



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##### Table of Contents

Patent Litigation



|                  |  |                                 |       |   |          |   |     |                                |  |   |          |   |  |          |   |  |            |       |   |  |   |     |   |  |   |       |   |  |          |  
|----------------- |  | ------------------------------- | ----- | - | -------- | - | --- | ------------------------------ |  | - | -------- | - |  | -------- | - |  | ---------- | ----- | - |  | - | --- | - |  | - | ----- | - |  | -------- | -
|                  |  | Three Months EndedSeptember 30, |       |   | Increase |   |     | Nine Months EndedSeptember 30, |  |   | Increase |  
|(in thousands)    |  | 2006                            |       |   | 2005     |   |     | (Decrease)                     |  |   | 2006     |   |  | 2005     |   |  | (Decrease) |      
|Patent litigation |  | $                               | 3,490 |   |          | $ | 8   |                                |  | $ | 3,482    |   |  | 43,525.0 | % |  | $          | 5,247 |   |  | $ | 13  |   |  | $ | 5,234 |   |  | 40,261.5 | %
|% of net sales    |  |                                 | 17.4  | % |          |   | 0.0 | %                              |  |   | 17.4     | % |  | ppt.     |   |  |            | 8.7   | % |  |   | 0.0 | % |  |   | 8.7   | % |  | ppt.     |  

Patent litigation expenses for the three and nine months ended September 30, 2006 as compared
to 2005, increased due to increased legal expenses related to pre-trial activities with our ongoing litigation with Linear Technologies Corporation. For a description of litigation expenses please see Note 9 Legal Proceedings for further details.

Interest and Investment Income

Interest and investment income, net was $1.6 million and $4.2 million in the three and nine months ended September 30, 2006, and $0.7 million and $0.9 million in the three and nine months ended September 30, 2005. The increase in
interest and other income was primarily attributable to higher interest income earned on higher cash balances resulting from the proceeds of our initial public offering in August 2005.

Provision for Income Taxes

Our income tax provision was approximately $312,000 and $1,462,000
for the nine months ended September 30, 2006 and 2005, respectively. We expect the effective tax rate for 2006 to be higher than that estimated during the six months ended June 30, 2006 primarily due to the decrease in the estimate of
net income for the fiscal year 2006. This increase was partially offset by tax benefits realized through the adoption of SFAS No. 123(R). The Company adopted SFAS No. 123(R) as of January 1, 2006, and, as a result,
incurred significant stock-based compensation expense, most of which related to incentive stock options for which no corresponding tax benefit is recognized unless a disqualifying disposition occurs. Disqualifying dispositions result in a
reduction of income tax expense in the quarter when the disqualifying disposition occurs in an amount equal to the tax benefit relating to previously expensed stock compensation. Tax benefits related to tax deductions in excess of previously
expensed stock compensation are recorded as an addition to paid-in-capital. During the three and nine months ended September 30, 2006, tax expense was reduced by approximately $9,000 and $170,000 respectively as a result of disqualifying
dispositions.

The percentage tax rate reflected in our results of operations is based on an estimate of net income for the fiscal year
2006 that we make at the end of each quarter. At September 30, 2006, without tax benefits realized through disqualifying dispositions during the nine months ended September 30, 2006, our full year estimate of the 2006 effective tax rate
was approximately 59%. However, with tax benefits realized through disqualifying dispositions for nine months ended September 30, 2006, the effective tax rate was approximately 38%.

Liquidity and Capital Resources



|                                                             |  |                                |         |   |          |   |        |            |  |   |          |   |  |         |   
|------------------------------------------------------------ |  | ------------------------------ | ------- | - | -------- | - | ------ | ---------- |  | - | -------- | - |  | ------- | --
|                                                             |  | Nine Months EndedSeptember 30, |         |   | Increase |  
|(in thousands)                                               |  | 2006                           |         |   | 2005     |   |        | (Decrease) | 
|Net cash provided by (used in) operating activities          |  | $                              | 1,685   |   |          | $ | (402   | )          |  | $ | 2,087    |   |  | (519.2  | )%
|Net cash used in investing activities                        |  | $                              | (45,491 | ) |          | $ | (969   | )          |  | $ | (44,522  | ) |  | 4,594.6 | % 
|Net cash provided by financing activities                    |  | $                              | 1,607   |   |          | $ | 96,958 |            |  | $ | (95,351  | ) |  | (98.3   | )%
|Effect of exchange rate changes on cash and cash equivalents |  | $                              | 31      |   |          | $ | (82    | )          |  | $ | 113      |   |  | (137.8  | )%
|                                                             |  |                                |         |   |          |   |        |            |  |   |          |   |  |         |   
|Net increase (decrease) in cash and cash equivalents         |  | $                              | (42,168 | ) |          | $ | 95,505 |            |  | $ | (137,673 | ) |  | (144.2  | )%
|                                                             |  |                                |         |   |          |   |        |            |  |   |          |   |  |         |   

Our cash, cash equivalents and short term investments were $125.7 million as of September 30,
2006 and $124.3 million as of December 31, 2005.

Net Cash Used in Operating Activities

Net cash provided by operating activities was $1.7 million for the nine months ended September 30, 2006, which primarily consisted of:



| |  |  | $4.4 million of stock-based compensation expense;
| | - |  | -------------------------------------------------



| |  |  | $1.9 million from increases in accrued expenses and accounts payable;
| | - |  | ---------------------------------------------------------------------



| |  |  | $1.2 million of depreciation and amortization expense;
| | - |  | ------------------------------------------------------



| |  |  | $1.0 million attributable to net tax benefits from exercises of common stock options and warrants;
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | $0.5 million of net income;
| | - |  | ---------------------------

which were
offset in part by



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| |  |  | $2.7 million of increases in inventories;
| | - |  | -----------------------------------------



| |  |  | $1.8 million of increase in accounts receivable;
| | - |  | ------------------------------------------------



| |  |  | $1.6 million of increase in deferred tax assets; and
| | - |  | ----------------------------------------------------



| |  |  | $0.7 million from increases of other current and long term assets.
| | - |  | ------------------------------------------------------------------

Our
accounts payable and inventories have increased primarily as a result of increased purchases of materials and production to meet expected demand. Our accounts receivable balance increased due to increased sales during the period. Our stock-based
compensation expenses have risen as a result of our adoption of SFAS 123(R) and the increased number of options granted to employees and consultants. Depreciation and amortization expenses have also risen and we expect that this will continue to
rise as we invest in research and development and infrastructure.

Net cash used in our operating activities was $0.4 million in the nine
months ended September 30, 2005, which primarily consisted of:



| |  |  | $8.9 million of increase in accounts payable;
| | - |  | ---------------------------------------------



| |  |  | $1.1 million of increases in other current assets;
| | - |  | --------------------------------------------------

which were offset in part by:



| |  |  | $4.2 million increases in accruals and payables;
| | - |  | ------------------------------------------------



| |  |  | $1.8 million of stock-based compensation expense;
| | - |  | -------------------------------------------------



| |  |  | $1.2 million of depreciation and amortization expense;
| | - |  | ------------------------------------------------------



| |  |  | $0.5 million decrease in inventories; and
| | - |  | -----------------------------------------



| |  |  | $0.3 million in bad debt expense.
| | - |  | ---------------------------------

Our accounts receivable balance
increased due to timing of late quarter sales. Increases in our current assets are primarily attributable to increased prepaid insurance, which are amortized over the service period. The reduction in inventory was primarily due to increased
shipments at the end of the quarter. Our accrual and accounts payable have increased as a result of our increased overall business volume during the nine months ended September 30, 2005. Our stock-based compensation expenses have risen as a
result of increased number of options granted to employees and consultants. Depreciation and amortization expenses have also risen and we expect that this will continue to rise as we invest in research and development and infrastructure.

Net Cash Used in Investing Activities

Net cash
used in our investing activities was $45.5 million in the nine months ended September 30, 2006 and $1.0 million in the nine months ended September 30, 2005. The increase in cash usage from investing activities was primarily due to $43.5
million for net purchases and maturities of short term investments, $0.9 million for purchases of long-term private equity investments and $1.1 million for purchases of various engineering software and to support our internal infrastructure growth.

The cash usage from investing activities for the nine months ended September 30, 2005, was primarily from purchases of various
capital equipment and software to support our internal infrastructure growth.

Net Cash Provided by Financing Activities

Net cash provided by our financing activities was $1.6 million in the nine months ended September 30, 2006. Net cash provided by our financing
activities in the nine months ended September 30, 2006 primarily consisted of $0.9 million of net proceeds from exercises of common stock options and warrants and their related tax benefit of $0.7 million.

Net cash provided by our financing activities was $97.0 million in the nine months ended September 30, 2005 and $2.4 million in the nine months
ended September 30, 2004. Net cash provided by our financing activities in the nine months ended September 30, 2005 primarily consisted of $96.7 million of net proceeds from the initial public offering, which closed on August 15,
2005, $0.3 million of proceeds from exercises of common stock options and warrants, offset by $26,000 for payments of our capital lease obligations. Net cash provided by our financing activities in the nine months ended September 30, 2004
primarily consisted of proceeds of $2.0 million from the issuance of Series E preferred stock and $0.6 million from exercises of common stock options and warrants, offset by $81,000 for payments of our capital lease obligations.

Liquidity

We believe our existing cash and
short-term investment balances, as well as cash expected to be generated from operating activities, will be sufficient to meet our anticipated cash needs for at least the next 12 months.

Our long-term future capital requirements will depend on many factors, including our level of revenues, the timing and extent of spending to support our
product development efforts, the expansion of sales and marketing activities, the timing of our introductions of new products, the costs to ensure access to adequate manufacturing capacity, the continuing market acceptance of our products and the
amount and intensity of our litigation activity. We could be required, or could elect, to seek additional funding through public or private equity or debt financing and additional funds may not be available on terms acceptable to us or at all.



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Off Balance Sheet Arrangements

We have not entered into any transactions with unconsolidated entities whereby we have financial guarantees, subordinated retained interests, derivative instruments or other contingent arrangements that expose us to
material continuing risks, contingent liabilities, or any other obligation under a variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the Company.

Contractual Obligations

The following table
describes our commitments to settle contractual obligations in cash as of September 30, 2006:



|                     |  |                 |       |             |   |             |  |                  |   |       |   |   |  |   |      
|-------------------- |  | --------------- | ----- | ----------- | - | ----------- |  | ---------------- | - | ----- | - | - |  | - | -----
|(in thousands)       |  | Less Than1 Year |       | 1 to 3Years |   | 3 to 5Years |  | More than5 Years |   | Total
|Operating leases     |  | $               | 1,052 |             | $ | 262         |  | $                | 7 |       | $ |  |  | $ | 1,321
|Purchase commitments |  | $               | 7,316 |             | $ |            |  | $                |  |       | $ |  |  | $ | 7,316
|                     |  |                 |       |             |   |             |  |                  |   |       |   |   |  |   |      
|                     |  | $               | 8,368 |             | $ | 262         |  | $                | 7 |       | $ |  |  | $ | 8,637
|                     |  |                 |       |             |   |             |  |                  |   |       |   |   |  |   |      

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. We
evaluate our estimates on an on-going basis, including those related to uncollectible accounts receivable, inventories, income taxes, warranty obligations and contingencies and litigation. We base our estimates on historical experience and on
various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making the judgments we make about the carrying values of assets and liabilities that are not readily apparent from other
sources. Because these estimates can vary depending on the situation, actual results may differ from the estimates.

We believe the
following critical accounting policies affect our more significant judgments used in the preparation of our consolidated financial statements.



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Revenue Recognition

We recognize revenues in accordance with Staff Accounting Bulletin No. 104, Revenue Recognition (SAB 104). SAB 104 requires that four basic criteria must be met before revenues can be
recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the fee is fixed or determinable; and (4) collectibility is reasonably assured. Determination of criteria
(1) is based on when delivery has occurred, which also includes when title and risk of loss is transferred from us to our customer. Determination of criteria (3) and (4) is based on managements judgment regarding the
determinability of the fees charged for products delivered and the collectibility of those fees. If changes in conditions cause management to determine these criteria are not met for certain future transactions, revenues recognized for any reporting
period could decline.

A large portion of our sales is made through distribution arrangements with third parties. These arrangements
include stock rotation rights that generally permit the return of up to 5% and, in the case of one customer, 8% of the previous six months purchases. We generally accept these returns in the second and fourth quarter of each annual period. We
record estimated returns at the time of shipment. Our normal payment term with our distributors is 30 days from invoice date. Certain of our distributor arrangements include the possibility of sales price rebates on specified products. At the time
of shipment we recognize revenue, estimate the total sales price rebate and reserve for those pricing rebates. We have also deferred revenue related to two of our distributors for which we are unable to reasonably estimate returns and recognize
revenues from that distributor when shipment to the customer from these distributors has occurred. We deferred approximately $107,000 related to distributor sales at September 30, 2006 and $67,000 at December 31, 2005.

We make estimates of potential future returns and sales allowances related to current period product revenue. We analyze historical return rates and
changes in customer demand when evaluating the adequacy of returns and sales allowances. Estimates made by us may differ from actual returns and sales allowances. These differences may materially impact reported revenue and amounts ultimately
collected on accounts receivable.

Bad Debt Allowances

We monitor the collectibility of accounts receivable primarily through review of the accounts receivable aging. When facts and circumstances indicate the collection of specific amounts or balances from specific
customers is at risk, we assess the impact on amounts recorded for bad debts and, if necessary, will record a charge in the period such determination is made. In addition, we reserve a percentage of our accounts receivable to various customers
that are significantly aged. We wrote off approximately $0.3 million and $0.3 million for the three and nine months ended September 30, 2006, respectively.

Warranty

We provide a 12-month warranty against defects in materials and workmanship and will either
repair the goods, provide replacement products at no charge to the customer or refund amounts to the customer for defective products. We record estimated warranty costs, based on historical experience over the preceding 12 months by product, at the
time we recognize product revenues. As the complexity of our products increases, we could experience higher warranty claims relative to sales than we have previously experienced, and we may need to increase these estimated warranty reserves.

Inventory Valuation

We value our inventory at the lower of the actual cost of our inventory or its current estimated market value. We write down inventory for obsolescence or unmarketable inventories based upon assumptions about future demand and market
conditions. Because of the cyclicality of the market in which we operate, inventory levels, obsolescence of technology and product life cycles, we generally write down inventory for product that is over 12 months old. Additionally, we generally
write down excess inventory to net realizable value based on six months forecasted product demand. Actual demand and market conditions may be lower than those that we project and this difference could have a material adverse effect on our gross
margins should inventory write-downs beyond those initially recorded become necessary. Alternatively, should actual demand and market conditions be more favorable than those we estimated at the time of such a write-down, our gross margins could be
favorably impacted in future periods.

Stock-Based Compensation

On January 1, 2006, we adopted SFAS 123(R) which requires the measurement and recognition of compensation expense for all share-based payment awards
made to our employees and directors including employee stock options and employee stock purchases related to the Employee Stock Purchase Plan (employee stock purchases) based on estimated fair values. See Note 2 to the Consolidated
Financial Statements for additional information.

Upon adoption of SFAS 123(R), we began estimating the value of employee stock options on
the date of grant using a Black-Scholes stock option valuation model. Prior to the adoption of SFAS 123(R), the value of each employee stock option was estimated on the date of grant using the Black-Scholes model for the purpose of the pro forma
financial information in accordance with SFAS 123. The determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of highly
complex and subjective variables. These variables include, but are not limited to, the expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors.



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Accounting for Income Taxes

We account for income taxes under the provisions of SFAS No. 109, Accounting for Income Taxes. Under this method, we determine our
deferred tax assets and liabilities based upon the differences between the financial statement and tax bases of our assets and liabilities using tax rates in effect for the year in which we expect the differences to affect taxable income. We expect
the effective tax rate for 2006 to be higher than that estimated during the six months ended June 30, 2006 primarily due to the decrease in the estimate of net income for the fiscal year 2006. This increase was partially offset
by tax benefits realized through the adoption of SFAS No. 123(R). We adopted SFAS No. 123(R) as of January 1, 2006, and, as a result, incurred significant stock-based compensation expense, most of which related to incentive stock
options for which no corresponding tax benefit is recognized unless a disqualifying disposition occurs. Disqualifying dispositions result in a reduction of income tax expense in the quarter when the disqualifying disposition occurs in an amount
equal to the tax benefit relating to previously expensed stock compensation. Tax benefits related to tax deductions in excess of previously expensed stock compensation are recorded as an addition to paid-in-capital. During the three and
nine months ended September 30, 2006, tax expense was reduced by approximately $9,000 and $170,000 respectively, as a result of disqualifying dispositions. See Note 8 to the Consolidated Financial Statements for additional information.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

At September 30, 2006, we had cash
and cash equivalents totaling $82.2 million, compared to $124.4 million at December 31, 2005. At September 30, 2006, we had $43.5 million in short-term investments as compared to none at December 31, 2005. Cash equivalents have an
original or remaining maturity when purchased of 90 days or less; short-term investments generally have an original or remaining maturity when purchased of greater than 90 days. Included in short-term investments are auction rate securities whose
reset dates may be less than 90 days; however, the underlying securities maturities are greater than 90 days. The taxable equivalent interest rates for the nine months ended September 30, 2006, on those short-term investments average
approximately 5.3%. 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 principal amount 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.

A hypothetical increase in market interest rates of 100 basis
points from the market rates in effect at September 30, 2006 would cause the fair value of these investments to decrease by an immaterial amount, which would not have significantly impacted our financial position or results of operations.
Declines in interest rates over time will result in lower interest income. Based upon our analysis the fair values did not change materially as our investments are of short duration and have a weighted average maturity of 96 days.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure
controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. In connection with the audit of our consolidated financial statements for the year ended December 31, 2005, our independent registered public
accounting firm, Deloitte & Touche LLP, identified an error requiring adjustment to correct tax expenses and deferred tax assets. The material weakness identified related to an error requiring an adjustment to correct our tax expense and
deferred tax assets as a consequence of the intercompany transactions relating to the implementation of our international tax structure. As a consequence, our management reported to our audit committee the identification of a material
weakness (under the standards established by the Public Company Accounting Oversight Board) and significant deficiencies in our internal controls. Based on our managements, including our Chief Executive Officers and Chief Financial
Officers evaluation referred to above, we have taken remedial actions to mitigate the above referenced material weakness. These remedial efforts included hiring an additional tax professional and also enhancing internal procedures to provide
additional reviews of various tax accounts. As of September 30, 2006 our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, concluded that our disclosure controls and procedures as remediated were
effective to ensure that information that we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 were recorded, processed, summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms.

Our independent registered public accounting firm was not engaged to audit, nor has it audited, the
effectiveness of our internal control over financial reporting. Accordingly, our independent registered public accounting firm has not rendered an opinion on our internal control over financial reporting.

(b) Changes in Internal Controls Over Financial Reporting

Other than the changes instituted as noted above, there have been no other changes in our internal controls over financial reporting that occurred in the period covered by this Quarterly Report of Form 10-Q that have materially affected, or
are reasonably likely to materially affect, our internal controls over financial reporting.



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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In May 2003, we received a letter from Linear Technology Corporation alleging
that certain of our charge pump products infringed United States Patent No. 6,411,531 owned by Linear Technology. In August 2004, we received a letter from Linear Technology alleging that certain of our switching regulator products infringed
United States Patent Nos. 5,481,178, 6,304,066 and 6,580,258. In response to these letters, we contacted Linear Technology to convey our good faith belief that we do not infringe the patents in question. Subsequently, the Company became aware of a
marketing campaign conducted by Linear Technology in which they sought to disrupt our business relationships and sales by suggesting to our customers that our products infringe the same U.S. patents mentioned in their two letters to us. As a result,
in February 2006, we initiated a lawsuit against Linear Technology for unfair business practices, interference with existing and prospective customers and trade libel, as well as a declaration of patent invalidity and non-infringement. This case is
currently stayed pending the outcome of the United States International Trade Commission (USITC) investigation described in the following paragraph.

In March 2006, the USITC responded to a petition filed by Linear Technology by initiating an examination to determine if certain of the Companys products infringe certain patents owned by Linear Technology
pursuant to Section 337 of the Tariff Act. The patents involved in this action are a subset of the patents involved in the lawsuit that we filed against Linear Technology. The accused products include charge pumps and switching regulators and
are similar to the products involved in our lawsuit with Linear Technology. We believe that none of our products infringe the Linear Technology patents in question. However, whether or not we prevail in this lawsuit, we expect to incur significant
legal expenses. Because the subject matter of this action is similar to the subject matter involved in our lawsuit with Linear Technology, we expect the costs associated with these two matters to be substantially less than the costs that would
typically result from two unrelated matters. If we are unsuccessful in this case, our business and our ability to compete in foreign markets could be harmed, and we could be enjoined from selling the accused products in the United States, either
directly or indirectly, which could have a material adverse impact on our revenues, financial condition, results of operations and cash flows.

In July 2006, we settled our on-going patent litigation initiated by Siliconix against us concerning several United States Patents owned by Siliconix. Under the terms of the settlement, we and Siliconix agreed to dismiss all claims and
counterclaims in the litigation. Both we and Siliconix will continue marketing our respective trench DMOS product lines. The settlement had no material impact on our financial statements.

ITEM 1A. RISK FACTORS

Our customers may cancel their orders, change production quantities or delay
production, and if we fail to forecast demand for our products accurately, we may incur product shortages, delays in product shipments or excess or insufficient product inventory.

We generally do not obtain firm, long-term purchase commitments from our customers. Because production lead times often exceed the amount of time required
to fulfill orders, we often must build in advance of orders, relying on an imperfect demand forecast to project volumes and product mix. Our demand forecast accuracy can be adversely affected by a number of factors, including inaccurate forecasting
by our customers, changes in market conditions, new part introductions by our competitors that lead to our loss of previous design wins, adverse changes in our product order mix and demand for our customers products or models. China, in
particular, is an emerging market where forecasting by our distributors is not accurate, and there can be rapid changes in the distribution system and market conditions. Even after an order is received, our customers may cancel these orders or
request a decrease in production quantities. Any such cancellation or decrease subjects us to a number of risks, most notably that our projected sales will not materialize on schedule or at all, leading to unanticipated revenue shortfalls and excess
or obsolete inventory which we may be unable to sell to other customers. Alternatively, if we are unable to project customer requirements accurately, we may not build enough products, which could lead to delays in product shipments and lost sales
opportunities in the near term, as well as force our customers to identify alternative sources, which could affect our ongoing relationships with these customers. We have in the past had customers dramatically increase their requested production
quantities with little or no advance notice and after they had submitted their original order. We have on occasion been unable to fulfill these revised orders within the time period requested. Either underestimating or overestimating demand would
lead to excess, obsolete or insufficient inventory, which could harm our operating results, cash flow and financial condition, as well as our relationships with our customers. For example, we recorded inventory write-downs of $2.6 million, $3.3
million, and $1.9 million for the nine months ended September 30, 2006 and in the fiscal years ended 2005 and 2004, respectively.

We receive a substantial portion of our revenues from one customer and most of our revenues from a small number of customers, and the loss of, or a significant reduction in, orders from that customer or our other largest customers
would adversely affect our operations and financial condition.

We receive a substantial portion of our revenues from two of our
customers, LG Electronics Inc. of South Korea and Samsung of South Korea. We received an aggregate of approximately 29% of our revenues from LG for the nine months ended September 30, 2006 and 37% of our revenues from LG in fiscal year 2005. We
anticipate that we will continue to be dependent on LG for a significant portion of our revenues in the immediate future; however, we do not have long-term contractual purchase commitments from LG, and we cannot assure you that LG will continue to
be our customer. We received an aggregate of approximately 80% of our revenues from our ten largest customers for 2005. Any action by LG or any of our other largest customers that affects our orders, product pricing or vendor status could
significantly reduce our revenues and harm our financial results. For example, in the fourth quarter of 2004, we experienced a 33% sequential quarterly decline in



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revenues from LG as a result of LGs prior increase in inventory of our products in the third quarter in
anticipation of the peak fourth-quarter buying season for the wireless handsets in which our products are primarily used by LG. In the future, our sales to LG or our other large customers will continue to be susceptible to this type of quarterly
fluctuation as our customers manage their inventories, principally for seasonal variations. In particular, our customers increase in inventory of our products in advance of this peak buying season for wireless handsets often leads to
sequentially lower sales of our products in the first calendar quarter and, potentially, late in the fourth calendar quarter. In addition, while in the past the principal LG divisions that purchase our products have been separately responsible for
purchasing, inventory and other supply chain logistics, these functions of these divisions underwent a consolidation in 2005. This consolidation has reduced our ability to forecast orders from LG because we no longer receive orders directly from the
LG divisions using our products. In addition, we are required to supply inventory to a centralized location based on a forecast provided by LG for the ensuing 30 days on a consolidated basis, which requires us to incur the cost of producing
materials in advance of receiving a purchase commitment from LG. If LG does not purchase the inventory that was forecasted, we will be required to find alternative customers for the inventory and we may be unsuccessful in doing so at acceptable
prices or at all, which would require us to write down or write off the inventory supplied by us to LGs centralized location. LG implemented this consolidation and hub structure in 2005. We therefore have limited experience in understanding
and forecasting LGs ordering patterns under this structure. Because our largest customers account for such a significant part of our business, the loss of, or a decline in sales to, any of our major customers would negatively impact our
business.

Our combined sales to Samsung and its contract manufactures represented approximately 20% of our revenues for the nine months
ended September 30, 2006, which included direct sales to Samsung totaling 12% for the nine months ended September 30, 2006. We do not have long-term contractual purchase commitments from Samsung, and we cannot assure you that Samsung will
continue to be our customer.

Our operating results have fluctuated in the past and we expect our operating results to continue to
fluctuate.

Our revenues are difficult to predict and have varied significantly in the past from period to period. We expect our
revenues and expense levels to continue to vary in the future, making it difficult to predict our future operating results. In particular, we experience seasonality and variability in demand for our products as our customers manage their
inventories. Our customers tend to increase inventory of our products in anticipation of the peak fourth quarter buying season for the mobile consumer electronic devices in which our products are used, which often leads to sequentially lower sales
of our products in the first calendar quarter and, potentially, late in the fourth calendar quarter.

Additional factors that could cause
our results to fluctuate include:



| |  |  | the forecasting, scheduling, rescheduling or cancellation of orders by our customers, particularly in China and other emerging markets;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



| |  |  | costs associated with litigation, especially related to intellectual property;
| | - |  | ------------------------------------------------------------------------------



| |  |  | liquidity and cash flow of our distributors and end-market customers;
| | - |  | ---------------------------------------------------------------------



| |  |  | changes in manufacturing costs, including wafer, test and assembly costs, and manufacturing yields, product quality and reliability;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the timing and availability of adequate manufacturing capacity from our manufacturing suppliers;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | our ability to successfully define, design and release new products in a timely manner that meet our customers needs;
| | - |  | ----------------------------------------------------------------------------------------------------------------------



| |  |  | the timing, performance and pricing of new product introductions by us and by our competitors;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | general economic conditions in the countries where we operate or our products are used;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | changes in exchange rates, interest rates, tax rates and tax withholding;
| | - |  | -------------------------------------------------------------------------



| |  |  | geopolitical stability, especially affecting China, Taiwan and Asia in general; and
| | - |  | -----------------------------------------------------------------------------------



| |  |  | changes in domestic and international tax laws.
| | - |  | -----------------------------------------------

Unfavorable changes in any of the above factors, most of which are beyond our control, could significantly harm our business and results of operations.

We may be unsuccessful in developing and selling new products or in penetrating new markets.

We operate in a dynamic environment characterized by rapidly changing technologies and industry standards and technological obsolescence. Our competitiveness and future success depends on our ability to design, develop, manufacture,
assemble, test, market and support new products and enhancements on a timely and cost-effective basis. A fundamental shift in technologies in any of our product markets could harm our competitive position within these markets. Our failure to
anticipate these shifts, to develop new technologies or to react to changes in existing technologies could materially delay our development of new products, which could result in product obsolescence, decreased revenues and a loss of design wins to
our competitors. The success of a new product depends on accurate forecasts of long-term market demand and future technological developments, as well as on a variety of specific implementation factors, including:



| |  |  | effective marketing, sales and service;
| | - |  | ---------------------------------------



| |  |  | timely and efficient completion of process design and device structure improvements and implementation of manufacturing, assembly and test processes; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the quality, performance and reliability of the product.
| | - |  | --------------------------------------------------------



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If we fail to introduce new products or penetrate new markets, our revenues will likely decrease over
time and our financial condition could suffer.

Our products must meet exacting specifications, and defects and failures may occur,
which may cause customers to return or stop buying our products and may expose us to product liability claims.

Our customers
generally establish demanding specifications for quality, performance and reliability that our products must meet. Integrated circuits, or ICs, as complex as ours often encounter development delays and may contain undetected defects or failures when
first introduced or after commencement of commercial shipments, which might require product replacement or recall. For example, in 2003 one of our low-dropout linear regulator products that we had been shipping for two years developed unacceptably
high failure rates, which caused us to direct our engineering personnel from other priorities to redesign the product. If defects and failures occur in our products during the design phase or after, we could experience lost revenues, increased
costs, including warranty expense and costs associated with customer support, delays in or cancellations or rescheduling of orders or shipments, or product returns or discounts, any of which would harm our operating results. We cannot assure you
that we will have sufficient resources, including any available insurance, to satisfy any asserted claims.

The nature of the design
process requires us to incur expenses prior to earning revenues associated with those expenses, and we will have difficulty selling our products if system designers do not design our products into their electronic systems.

We devote significant time and resources in working with our customers system designers to understand their future needs and to provide products
that we believe will meet those needs. If a customers system designer initially chooses a competitors product for a particular electronic system, it becomes significantly more difficult for us to sell our products for use in that
electronic system because changing suppliers can involve significant cost, time, effort and risk for our customers.

We often incur
significant expenditures in the development of a new product without any assurance that our customers system designers will select our product for use in their electronic systems. We often are required to anticipate which product designs will
generate demand in advance of our customers expressly indicating a need for that particular design. In some cases, there is minimal or no demand for our products in our anticipated target applications. For example, in 2000, we created a USB hub
protection device that we believed would be used in flat panel monitors; however, our customers products have not evolved as we expected, and consequently we have not generated significant customer demand for this product to date. Even if our
products are selected by our customers system designers, a substantial period of time will elapse before we generate revenues related to the significant expenses we have incurred. The reasons for this delay generally include the following
elements of our product sales and development cycle timeline and related influences:



| |  |  | our customers usually require a comprehensive technical evaluation of our products before they incorporate them into their electronic systems;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | it can take up to 12 months from the time our products are selected to complete the design process;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | it can take an additional nine to 12 months or longer to complete commercial introduction of the electronic systems that use our products, if they are introduced at all;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | original equipment manufacturers 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.
| | - |  | ------------------------------------------------------------------------------------------------------------

We estimate that the overall sales and development cycle timeline of an average product is approximately 16 months.

Additionally, even if system designers use our products in their electronic systems, we cannot assure you that these systems will be commercially
successful. As a result, we are unable to accurately forecast the volume and timing of our orders and revenues associated with any new product introductions.



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Any increase in the manufacturing cost of our products could reduce our gross margins and operating
profit.

The semiconductor business exhibits ongoing competitive pricing pressure from customers and competitors. Accordingly, any
increase in the cost of our products, whether by adverse purchase price variances or adverse manufacturing cost variances, will reduce our gross margins and operating profit. For example, if we do not incorporate the partially fabricated wafers held
for us by our suppliers into our products in a timely fashion, we may still become obligated to purchase these materials, which may reduce our gross margins. We do not have many long-term supply agreements with our manufacturing suppliers and,
consequently, we may not be able to obtain price reductions or anticipate or prevent future price increases from our suppliers.

The
average selling price of our products may decline, or a change in the mix of product orders may occur, either of which could reduce our gross margins.

During a power management products life, its selling price tends to decrease for a particular application. As a result, to maintain gross margins on our products, we must continue to identify new applications
for our products, reduce manufacturing costs for our existing products and introduce new products. If we are unable to identify new, high gross margin applications for our existing products, reduce our production costs or sell new, high gross margin
products, our gross margins will suffer. A sustained reduction in our gross margins could harm our future operating results, cash flow and financial condition, which could lead to a significant drop in the price of our common stock.

Because we receive a substantial portion of our revenues through distributors, their financial viability and ability to access the capital markets
could impact our ability to continue to do business with them and could result in lower revenues, which could adversely affect our operating results and our customer relationships.

We obtain a portion of our revenues through sales to distributors located outside of North America who act as our fulfillment representatives. Sales to
distributors accounted for 40%, 42% and 40% of our revenues for the nine months ended September 30, 2006, for fiscal years 2005 and 2004, respectively. In the normal course of their operation as fulfillment representatives, these distributors
typically perform functions such as order scheduling, shipment coordination, inventory stocking, payment and collections and, when applicable, currency exchange between purchasers of our products and these distributors. Our distributors
compensation for these functions is reflected in the price of the products we sell to these distributors. Many of our current distributors also serve as our sales representatives procuring orders for us to fill directly. If these distributors are
unable to pay us in a timely manner or if we anticipate that they will not pay us, we may elect to withhold future shipments, which could adversely affect our operating results. For example, during the fourth quarter of 2004, a number of our
distributors in China delayed payments to us, generally due to an unanticipated regional increase in restrictions on credit. As a result of these liquidity concerns, we limited our sales to these distributors, which adversely affected our revenues
and operating results in the fourth quarter of 2004. If one of our distributors experiences severe financial difficulties, becomes insolvent or declares bankruptcy, we could lose product inventory held by that distributor and we could be required to
write off the value of any receivables owed to us by that distributor. We could also be required to record bad debt expense in excess of our reserves. For example, in the first quarter of 2005, we noticed a slowing in the payment pattern of our
largest distributor, EPCO Technology Co., Ltd. (EPCO), and it became apparent that EPCO had serious financial problems. As a result, we recorded a bad debt expense of $0.1 million in the fourth quarter of 2004. We have since ceased doing
business with EPCO, from which we received approximately 7% of our revenues in 2004, and have engaged replacement distributors. In the future, we may not be successful in recognizing these indications or in finding replacement distributors in a
timely manner, or at all, which could harm our operating results, cash flow and financial condition.

Our distributor arrangements
often require us to accept product returns and to provide price protection and if we fail to properly estimate our product returns and price protection reserves, this may adversely impact our reported financial information

A substantial portion of our sales are made through third-party distribution arrangements, which include stock rotation rights that generally permit the
return of up to 5%, and, in the case of one customer, 8% of the previous six months purchases. We generally accept these returns in the second and fourth quarter of each annual period. Our arrangements with our distributors typically also
include price protection provisions if we reduce our list prices. We record estimated returns at the time of shipment, and we record reserves for price protection at the time we decide to reduce our list prices. In the future, we could receive
returns or claims that are in excess of our estimates and reserves, which could harm our operating results.

Our distributor
arrangements often require us to accept returns of unsold products if contractual arrangements with a distributor are terminated, which could harm our operating results or, if we fail to take steps, could harm our relationship with these
distributors and lead to a loss of revenues

If our relationship with any of our distributors deteriorates or terminates, it could
lead to a temporary or permanent loss of revenues until a replacement sales channel can be established to service the affected end-user customers, as well as inventory write-offs or accounts receivable write-offs. We may not be successful in finding
suitable alternative distributors and this could adversely affect our ability to sell in certain locations or to certain end-user customers. We also may be obligated to repurchase unsold products from a distributor if we decide to terminate our
relationship with that distributor.



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We have a limited operating history, and we may have difficulty accurately predicting our future
revenues for the purpose of appropriately budgeting and adjusting our expenses.

We were incorporated in 1997, commenced operations
in 1998 and generated only nominal revenues prior to 2001. We did not become profitable until 2003. We therefore have only a short history from which to predict future revenues and an even shorter history of managing profitability. Our limited
operating experience, a dynamic and rapidly evolving market in which we sell our products, our dependence on a limited number of customers, as well as numerous other factors beyond our control, impede our ability to forecast quarterly and annual
revenues accurately. As a result, we could experience budgeting and cash flow management problems, unexpected fluctuations in our results of operations and other difficulties, any of which could make it difficult for us to maintain profitability and
could increase the volatility of the market price of our common stock.

As of December 31, 2005, we had a material weakness and
significant deficiencies in our internal controls over financial reporting. If we fail to maintain an effective system of internal controls, we may not be able to report our financial results accurately, which may cause investors to lose confidence
in our reported financial information and have an adverse effect on the trading price of our common stock.

In connection with the
annual audit of our consolidated financial statements for the year ended December 31, 2005, an error requiring an adjustment to correct our tax expense and deferred tax assets as a consequence of the intercompany transactions relating to the
implementation of our international structure was identified by our independent registered public accounting firm. This adjustment, which was for an amount that was material to our consolidated financial statements, is evidence that our controls
over the preparation and review of our income tax provision and related deferred tax accounts did not operate effectively as we transitioned to our current international structure. Due to the size of the adjustment, this constitutes a material
weakness in our internal control over financial reporting. In addition, our independent registered public accounting firm identified errors requiring adjustments relating to our expensing of stock options granted to certain consultants and our
valuation of our inventory held by our subcontractors, which constitute significant deficiencies in our internal control over financial reporting.

We have not completed our implementation of the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and as a result, our independent registered public accounting firm was not engaged to audit, nor has it audited, the
effectiveness of our internal control over financial reporting. Accordingly, our independent registered public accounting firm has not rendered an opinion on our internal control over financial reporting. We have taken measures, including hiring an
additional tax professional and also enhancing internal procedures to provide additional reviews of various tax accounts, that we believe will remediate these weaknesses in our internal controls. However, we cannot assure you that we have identified
all, or that we will not in the future have or identify additional material weaknesses or significant deficiencies, or that our remedial measures will be sufficient to resolve any material weakness or significant deficiency. Any failure to maintain
or implement required new or improved controls, or any difficulties we encounter in the implementation of improvements to our internal controls, could cause us to fail to meet our periodic reporting obligations or result in material misstatements in
our financial statements. Any such failure could also adversely affect the results of periodic management evaluations and annual auditor attestation reports regarding the effectiveness of our internal control over financial reporting that are
required under Section 404 of the Sarbanes-Oxley Act of 2002 for us beginning with our Annual Report on Form 10-K for the year ending December 31, 2006, which we will file in early 2007. The existence of a material weakness or a
significant deficiency could result in errors in our financial statements that could result in a restatement of financial statements, cause us to fail to meet our reporting obligations and cause investors to lose confidence in our reported financial
information, leading to a decline in our stock price.

Our current backlog may not be indicative of future sales.

Due to the nature of our business, in which order lead times may vary, and the fact that customers are generally allowed to reschedule or cancel orders
on short notice, we believe that our backlog is not necessarily a good indicator of our future sales. Our quarterly revenues also depend on orders booked and shipped in that quarter. Because our lead times for the manufacturing of our products
generally take six to ten weeks, we often must build in advance of orders. This exposes us to certain risks, most notably the possibility that expected sales will not occur, which may lead to excess inventory, and we may not be able to sell this
inventory to other customers. In addition, we supply LG, our largest customer, through its central hub and we do not record backlog with respect to the products we ship to the hub. Therefore, our backlog may not be a reliable indicator of future
sales.

If consumer demand for mobile consumer electronic devices declines, our revenues will decrease.

Our products are used primarily in the mobile consumer electronic devices market. For the foreseeable future, we expect to see the significant majority of
our revenues continue to come from this market, especially in wireless handsets. If consumer demand for these products declines, our revenues will decrease. If we are unsuccessful in identifying alternative markets for our products in a timely
manner, our operating results will suffer dramatically.



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Substantially all of our customers and operations are located in Asia, which subjects us to
additional risks, including regionalized economic influences, logistical complexity, political instability and currency fluctuations.

We conduct, and expect to continue to conduct, almost all of our business with companies that are located outside the United States. Based on ship-to locations, we derived approximately 99% of our revenues from customers outside of the
United States in the nine months ended September 30, 2006 and 99% for fiscal years 2005, 2004 and 2003. Approximately 96%, 95%, and 94% of our revenues came from customers in Asia, particularly South Korea, Taiwan, China and Japan, in fiscal
years 2005, 2004 and 2003, respectively. A vast majority of our contract manufacturing operations are located in South Korea, Taiwan, Malaysia and China. As a result of our international focus, we face several challenges, including:



| |  |  | increased complexity and costs of managing international operations;
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| |  |  | longer and more difficult collection of receivables;
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| |  |  | political and economic instability;
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| |  |  | limited protection of our intellectual property;
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| |  |  | unanticipated changes in local regulations, including tax regulations;
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| |  |  | timing and availability of import and export licenses; and
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| |  |  | foreign currency exchange fluctuations relating to our international operating activities.
| | - |  | ------------------------------------------------------------------------------------------

We are also more susceptible to the regionalized economic impact of health crises. For example, we believe that our second quarter 2003 results of
operations were significantly harmed by the Severe Acute Respiratory Syndrome, or SARS, epidemic experienced in Asia during that time, which reduced demand for our products by our customers in Asia. Because we anticipate that we will continue to
rely heavily on foreign companies or U.S. companies operating in Asia for our future growth, the above risks and issues that we do not currently anticipate could adversely affect our ability to conduct business and our results of operations.

We outsource our wafer fabrication, testing, packaging, warehousing and shipping operations to third parties, and rely on these
parties to produce and deliver our products according to requested demands in specification, quantity, cost and time.

We rely on
third parties for substantially all of our manufacturing operations, including wafer fabrication, wafer probe, wafer thinning, assembly, final test, warehousing and shipping. We depend on these parties to supply us with material of a requested
quantity in a timely manner that meets our standards for yield, cost and manufacturing quality. Any problems with our manufacturing supply chain could adversely impact our ability to ship our products to our customers on time and in the quantity
required, which in turn could cause an unanticipated decline in our sales and possibly damage our customer relationships.

Our products are
manufactured at a limited number of locations. If we experience manufacturing problems at a particular location, we would be required to transfer manufacturing to a backup supplier. Converting or transferring manufacturing from a primary supplier to
a backup fabrication facility could be expensive and could take as long as six to 12 months. During such a transition, we would be required to meet customer demand from our then-existing inventory, as well as any partially finished goods that can be
modified to the required product specifications. We do not seek to maintain sufficient inventory to address a lengthy transition period because we believe it is uneconomical to keep more than minimal inventory on hand. As a result, we may not be
able to meet customer needs during such a transition, which could delay shipments, cause a production delay or stoppage for our customers, result in a decline in our sales and damage our customer relationships.

In addition, a significant portion of our sales is to customers that practice just-in-time order management from their suppliers, which gives us a very
limited amount of time in which to process and complete these orders. As a result, delays in our production or shipping by the parties to whom we outsource these functions could reduce our sales, damage our customer relationships and damage our
reputation in the marketplace, any of which could harm our business, results of operations and financial condition.

The loss of any
of our key personnel could seriously harm our business, and our failure to attract or retain specialized technical and management talent could impair our ability to grow our business.

The loss of services of one or more of our key personnel could seriously harm our business. In particular, our ability to define and design new products,
gain new customers and grow our business depends on the continued contributions of Richard K. Williams, our President, Chief Executive Officer and Chief Technical Officer, as well as our senior level sales, operations, technology and engineering
personnel. Our future growth will also depend significantly on our ability to recruit and retain qualified and talented managers and engineers, along with key manufacturing, quality, sales and marketing staff members. There remains intense
competition for these individuals in our industry, especially those with power and analog semiconductor design and applications expertise. We cannot assure you we will be successful in finding, hiring and retaining these individuals. If we are
unable to recruit and retain such talent, our product and technology development, manufacturing, marketing and sales efforts could be impaired.



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We compete against companies with substantially greater financial and other resources, and our
market share or gross margins may be reduced if we are unable to respond to competitive challenges effectively.

The analog,
mixed-signal, or analog with digital, and power management semiconductor industry in which we operate is highly competitive and dynamic, and we expect it to remain so. Our ability to compete effectively depends on defining, designing and regularly
introducing new products that meet or anticipate the power management needs of our customers next-generation products and applications. We compete with numerous domestic and international semiconductor companies, many of which have greater
financial and other resources with which to pursue marketing, technology development, product design, manufacturing, quality, sales and distribution of their products.

We consider our primary competitors to be Maxim Integrated Products, Inc., Linear Technology Corporation, Texas Instruments Incorporated, Semtech Corporation and National Semiconductor Corporation. We expect continued
competition from existing suppliers as well as from new entrants into the power management semiconductor market. Our ability to compete depends on a number of factors, including:



| |  |  | our success in identifying new and emerging markets, applications and technologies, and developing power management solutions for these markets;
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| |  |  | our products performance and cost effectiveness relative to that of our competitors products;
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| |  |  | our ability to deliver products in large volume on a timely basis at a competitive price;
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| |  |  | our success in utilizing new and proprietary technologies to offer products and features previously not available in the marketplace;
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| |  |  | our ability to recruit application engineers and designers; and
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| |  |  | our ability to protect our intellectual property.
| | - |  | -------------------------------------------------

We
cannot assure you that our products will compete favorably or that we will be successful in the face of increasing competition from new products and enhancements introduced by our existing competitors or new companies entering this market.

Assertions by third parties of infringement by us of their intellectual property rights could result in significant costs, reduce
sales of our products 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. We have in the past received, and expect that in the future we may receive, communications from various industry
participants alleging our infringement of their 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.
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;
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| |  |  | incur significant legal expenses;
| | - |  | ---------------------------------



| |  |  | pay damages to the party claiming infringement;
| | - |  | -----------------------------------------------



| |  |  | redesign those products that contain the allegedly infringing intellectual property; and
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | attempt to obtain a license to the relevant intellectual property from third parties, which may not be available on reasonable terms or at all.
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We initiated a lawsuit against Linear Technology Corporation in February 2006 for unfair business practices, interference with existing and prospective
customers and trade libel, as well as a declaration of patent invalidity and non-infringement. In this case, we are seeking to prevent Linear Technology from continuing a marketing campaign designed to disrupt our business relationships and sales by
suggesting to our customers that our products infringe several U.S. patents owned by Linear Technology. As we informed Linear Technology in 2003 and 2004, and as discussed in our prior public filings, we believe that none of our products infringe
the patents in question. However, whether or not we prevail in this lawsuit, we expect to incur significant legal expenses related to this case. If we are unsuccessful in this case, our business and our ability to compete in foreign markets could be
harmed, and we could be enjoined from selling the accused products in the United States, either directly or indirectly, which could have a material adverse impact on our revenues, financial condition, results of operations and cash flows.

In February 2006, in a related action, Linear Technology petitioned the United States International Trade Commission (USITC) requesting
that the USITC initiate an examination to determine if certain of our products infringe certain patents owned by Linear Technology under Section 337 of the Tariff Act. The patents involved in this action are a subset of the patents involved in
the lawsuit that we filed against Linear Technology. The accused products include charge pumps and switching regulators and are similar to the products involved in our lawsuit with Linear Technology. As with any litigated matter, we expect to incur
expenses defending this action. Because the subject matter of this action is similar to the subject matter involved in our lawsuit with Linear Technology, we expect the costs associated with these two matters to be substantially less than the costs
that would typically result from two unrelated matters. If we are unsuccessful in this case, our business and our ability to compete in foreign markets could be harmed, and we could be enjoined from selling the accused products in the United States,
either directly or indirectly, which could have a material adverse impact on our revenues, financial condition, results of operations and cash flows.



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Uncertainty over the outcome of our litigation with Linear Technology may cause our customers or
potential customers to elect not to include our products that are the subject of this litigation into the design of their systems. Once a customers system designer initially chooses a competitors product for a particular electronic
system, it becomes significantly more difficult for us to sell our products for use in that electronic system, because changing suppliers can involve significant cost, time, effort and risk for our customers. As a result, our litigation with Linear
Technology or any similar future litigation may reduce both our current and future revenues.

Our failure to protect our intellectual
property rights adequately could impair our ability to compete effectively or to defend ourselves from litigation, which could harm our business, financial condition and results of operations.

We rely primarily on patent, copyright, trademark and trade secret laws, as well as confidentiality and non-disclosure agreements to protect our
proprietary technologies and know-how. While we have approximately 40 issued patents in the United States or foreign countries and a larger number of pending applications, the rights granted to us may not be meaningful or provide us with any
commercial advantage. For example, these patents could be challenged or circumvented by our competitors or be declared invalid or unenforceable in judicial or administrative proceedings. The failure of our patents to adequately protect our
technology might make it easier for our competitors to offer similar products or technologies. Our foreign patent protection is generally not as comprehensive as our U.S. patent protection and may not protect our intellectual property in some
countries where our products are sold or may be sold in the future. Even if foreign patents are granted, effective enforcement in foreign countries may not be available. Many U.S.-based companies have encountered substantial intellectual property
infringement in foreign countries, including countries where we sell products.

Monitoring unauthorized use of our intellectual property is
difficult and costly. It is possible that unauthorized use of our intellectual property may occur without our knowledge. We cannot assure you that the steps we have taken will prevent unauthorized use of our intellectual property. Our failure to
effectively protect our intellectual property could reduce the value of our technology in licensing arrangements or in cross-licensing negotiations, and could harm our business, results of operations and financial condition. We may in the future
need to initiate infringement claims or litigation. Litigation, whether we are a plaintiff or a defendant, can be expensive, time-consuming and may divert the efforts of our technical staff and managerial personnel, which could harm our business,
whether or not such litigation results in a determination favorable to us.

We do not expect to sustain our recent growth rate, and
we may not be able to manage any future growth effectively.

We have experienced significant growth in a short period of time. Our
revenues have increased from approximately $1.0 million in 2001 to $68.3 million in 2005. We do not expect to achieve similar growth rates in future periods. You should not rely on our operating results for any prior quarterly or annual periods as
an indication of our future operating performance. If we are unable to maintain adequate revenue growth, our financial results could suffer and our stock price could decline.

We have also grown from 110 employees on January 1, 2004 to 202 employees on September 30, 2006, with many located in regional and
international offices. Our international growth may subject us to income and transaction taxes in the United States and in multiple foreign locations. Our future effective tax rates could be affected by changes in our U.S. and foreign tax estimates
and liabilities, or changes in tax laws or the interpretation of such tax laws. If additional taxes are assessed against us, our operating results or financial condition could be materially affected.

Our expansion has placed a significant strain on our management, personnel, systems and resources. Any future expansion is likely to result in additional
strain on our managerial infrastructure. To manage our growth successfully and handle the responsibilities of being a public company, we believe we must effectively:



| |  |  | recruit, hire, train and manage additional qualified engineers for our research and development activities, especially in the positions of design engineering, product and test
engineering, and applications engineering;
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| |  |  | continue to implement and improve adequate administrative, financial and operational systems, procedures and controls; and
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| |  |  | enhance our information technology support for enterprise resource planning and design engineering by adapting and expanding our systems and tool capabilities, and properly training
new hires as to their use.
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If we are unable to manage our growth effectively, we may not be able to take advantage of market
opportunities or develop new products, our introduction of derivative products may be delayed and we may fail to satisfy customer requirements, maintain product quality, execute our business plan or respond to competitive pressures.



Any acquisitions we make could disrupt our business, result in
integration difficulties or fail to realize anticipated benefits, which could adversely affect our financial condition and operating results.

We may choose to acquire companies, technologies, assets and personnel that are complementary to our business, including for the purpose of expanding our new product design capacity, introducing new design, market or
application skills or enhancing and expanding our existing product lines. For example, we have entered into an agreement to acquire Analog Power Semiconductor Corporation and related assets and personnel, primarily located in Shanghai, China.
Acquisitions involve numerous risks, including the following:



| |  |  | difficulties in integrating the operations, systems, technologies, products and personnel of the acquired companies;
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| |  |  | diversion of managements attention from normal daily operations of the business and the challenges of managing larger and more widespread operations resulting from
acquisitions;
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| |  |  | difficulties in entering markets in which we may have no or limited direct prior experience and where competitors may have stronger market positions;
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| |  |  | the potential loss of key employees, customers, distributors, suppliers and other business partners of the companies we acquire following and continuing after announcement of
acquisition plans;
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| |  |  | improving and expanding our management information systems to accommodate expanded operations;
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| |  |  | insufficient revenue to offset increased expenses associated with acquisitions; and
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| |  |  | addressing unforeseen liabilities of acquired businesses.
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Acquisitions may also cause us to:



| |  |  | issue capital stock that would dilute our current stockholders percentage ownership;
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| |  |  | use a substantial portion of our cash resources or incur debt;
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| |  |  | assume liabilities;
| | - |  | -------------------



| |  |  | record goodwill or incur amortization expenses related to certain intangible assets; and
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| |  |  | incur large and immediate write-offs and other related expenses.
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Any of these factors could prevent us from realizing the anticipated benefits of an acquisition, and our failure to realize these benefits could adversely affect our business. In addition, we may not be successful in identifying future
acquisition opportunities or in consummating any acquisitions that we may pursue on favorable terms, if at all. Any transactions that we complete may impair stockholder value or otherwise adversely affect our business and the market price of our
stock. Failure to manage and successfully integrate acquisitions could materially harm our financial condition and operating results.



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The cyclical nature of the semiconductor industry, which has historically demonstrated significant
and prolonged downturns, could impact our operating results, financial condition and cash flows.

The semiconductor industry has
historically exhibited cyclical behavior which at various times has included significant downturns in customer demand. These conditions have caused significant variations in product orders and production capacity utilization, as well as price
erosion. Because a significant portion of our expenses is fixed in the near term or is incurred in advance of anticipated sales, we may not be able to decrease our expenses rapidly enough to offset any unanticipated shortfall in revenues. If this
situation were to occur, it could adversely affect our operating results, cash flow and financial condition.

Our business may be
adversely impacted if our end customers cannot obtain sufficient supplies of other components in their products to meet their production projections and target quantities.

Our power management products are used by our customers in conjunction with a number of other components such as digital integrated circuits, baseband
processors, microcontrollers and digital signal processors. If for any reason our customers incur a shortage of any component, their ability to produce the forecasted quantity of their end product or model may be adversely affected and our product
sales would decline until such shortage is remedied. Such a situation could harm our operating results, cash flow and financial condition.

We, our manufacturing suppliers and our end customers operate facilities located in regions subject to earthquakes and other natural disasters.

Our corporate headquarters in Sunnyvale, California, our operations office in Chupei, Taiwan, and the production facilities of one of our wafer fabrication suppliers and several of our assembly and test suppliers in
Hsinchu and across Taiwan are located near seismically active regions and are subject to periodic earthquakes. We do not maintain earthquake insurance and our business could be damaged in the event of a major earthquake or other natural disaster.

In addition to risks in our operations from natural disasters, our customers are also subject to these risks. Any disaster impacting our
customers could result in loss of orders, delay of business and temporary regional economic recessions. For example, we believe that our second quarter 2003 results of operations were significantly harmed by the SARS epidemic experienced in Asia
during that time, which reduced demand for our products by our customers in Asia. The occurrence of any of these or other disasters could harm our business, financial condition and results of operations.

A failure of our information systems would adversely impact our ability to process orders for and manufacture products.

We operate a multinational business enterprise with manufacturing, administration and sales groups located in Asia, Europe and the United States. These
disparate groups are connected by a virtual private network-based enterprise resource planning system, where daily manufacturing operations and order entry functions rely on maintaining a reliable network among locations. Any failure of our computer
network or our enterprise resource planning system would impede our ability to schedule orders, monitor production work in process and ship and bill our finished goods to our customers.

A failure to maintain our international structure may adversely affect our tax rate, financial condition and operating results.

During 2005, we realigned certain areas of our operations in connection with the implementation of an international structure. This realignment
required us to transfer certain functions previously handled in our Sunnyvale, California headquarters to offices in foreign jurisdictions, primarily Macau. If we fail to maintain our realigned operations, our operating results may be adversely
affected. Additionally, our international structure results in an increased volume of transactions and accounting for those transactions may require us to increase our headcount either domestically or internationally. A failure to process those
transactions in an accurate and timely manner could be indicative of a material weakness in our internal controls over financial reporting. Our international structure requires that we understand complex tax laws and regulations in various domestic
and international jurisdictions. If we are unable to comply with domestic and international tax laws, our tax rate and our financial condition may be adversely impacted. Further, the domestic and international tax laws governing our structure are
subject to change, which could adversely affect our operations and financial results.

The requirement that we expense employee stock
options will significantly reduce our net income in future periods.

In December 2004, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 123 (Revised 2004), Share-Based Payment, or SFAS 123(R), which requires the measurement of all share-based payments to employees, including grants of employee stock options,
using a fair-value-based method and the recording of such expense in our consolidated statements of operations. The accounting provisions of SFAS 123(R) became effective for our quarter beginning January 1, 2006. The pro forma disclosures
previously permitted under SFAS 123 are no longer an alternative to financial statement recognition. As a result of adopting SFAS 123(R), we will now have additional stock compensation expense associated with grants after April 4, 2005, the
date of our initial filing of our registration statement in connection with our initial public offering, based on the grant date fair value. The ultimate amount of future stock compensation expense will depend upon the number of grants, the
estimated grant date fair value, which depends upon significant assumptions including stock volatility



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and estimated term, the assumed forfeiture rate and the requisite service period for future grants. This expense has had
a significant impact on our fiscal quarter ended September 30, 2006. We have recorded approximately $1.5 million and $4.4 million of stock based compensation expense under SFAS 123(R) for the three and nine months ended September 30, 2006
and recorded $0.5 million and $1.6 million of stock based compensation expense under APB 25 for the three and nine months ended September 30, 2005. We believe that this will continue to have a significant impact on our future operating results.

We have incurred and will continue to incur increased costs as a result of being a public company.

As a public company, we have incurred and will continue to incur significant legal, accounting and other expenses that we did not incur as a private
company. In addition, the Sarbanes-Oxley Act of 2002, as well as new rules subsequently implemented by the Securities and Exchange Commission and the Nasdaq National Market, have imposed various new requirements on public companies, including
requiring changes in corporate governance practices. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly. Because we have only recently become a public
company and have a limited history with these types of expenses, we may not accurately estimate these expenses in our financial planning. In addition, our current and future financial results may be more difficult to compare to prior periods when we
did not incur these types of expenses.

Compliance with Section 404 of the Sarbanes-Oxley Act of 2002 is uncertain, and if we
fail to comply with these standards in a timely manner, our business could be harmed and our stock price could decline.

We will be
required to comply with the rules promulgated under Section 404 of the Sarbanes-Oxley Act of 2002 by December 31, 2006. We expect to incur additional expense as we implement policies and procedures and take other steps to comply with these
rules, which require management to report on, and our independent registered public accounting firm to attest to, our internal controls. In addition, the Nasdaq National Market, on which our common stock is listed, has adopted comprehensive rules
and regulations relating to corporate governance. These laws, rules and regulations have increased and will continue to increase the scope, complexity and cost of our corporate governance, reporting and disclosure practices. Our efforts to comply
with such laws, rules and regulations require a significant amount of management time and are costly. If we fail to comply in a timely manner with the requirements of Section 404 or other requirements, public perception of our internal controls
could be damaged, causing our financial results to suffer and our stock price to decline.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.



31



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##### Table of Contents

ITEM 6. EXHIBITS



|       |  |                                                                                                                                                                                  
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1(1) |  | Amended and Restated Certificate of Incorporation.                                                                                                                               
|       | 
|3.2(2) |  | Amended and Restated Bylaws.                                                                                                                                                     
|       | 
|31.1   |  | Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|       | 
|31.2   |  | Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|       | 
|32.1*  |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.   

---

|* | This exhibit shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section,
nor shall it be deemed incorporated by reference in any filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any
filings.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(1) | Incorporated by reference to Exhibit 3.2 of the Registrants Form S-1 Registration Statement (Registration No. 333-123798), declared effective by the Securities and
Exchange Commission on August 3, 2005.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Incorporated by reference to Exhibit 3.4 of the Registrants Form S-1 Registration Statement (Registration No. 333-123798), declared effective by the Securities and
Exchange Commission on August 3, 2005.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

ADVANCED ANALOGIC TECHNOLOGIES INCORPORATED

SIGNATURE

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.



|                        |  |                                             |  |                                      
|----------------------- |  | ------------------------------------------- |  | -------------------------------------
|                        |  | ADVANCED ANALOGIC TECHNOLOGIES INCORPORATED
|                        |  |                                            
|Dated: October 30, 2006 |  | By:                                         |  | /s/ Brian R. McDonald                
|                        |  |                                             |  | Brian R. McDonald                    
|                        |  |                                             |  | Chief Financial Officer and Secretary



33



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##### Table of Contents

EXHIBIT INDEX



|       |  |                                                                                                                                                                                  
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1(1) |  | Amended and Restated Certificate of Incorporation.                                                                                                                               
|       | 
|3.2(2) |  | Amended and Restated Bylaws.                                                                                                                                                     
|       | 
|31.1   |  | Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|       | 
|31.2   |  | Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|       | 
|32.1*  |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.   

---

|* | This exhibit shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section,
nor shall it be deemed incorporated by reference in any filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any
filings.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(1) | Incorporated by reference to Exhibit 3.2 of the Registrants Form S-1 Registration Statement (Registration No. 333-123798), declared effective by the Securities and
Exchange Commission on August 3, 2005.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Incorporated by reference to Exhibit 3.4 of the Registrants Form S-1 Registration Statement (Registration No. 333-123798), declared effective by the Securities and
Exchange Commission on August 3, 2005.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



34