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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, 2007

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)



|                                          |  |           
|----------------------------------------- |  | ----------
|3230 Scott Blvd., Santa Clara, California |  | 95054     
|(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  x    Non-accelerated filer ̈

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 44,990,321 shares of the Registrants common stock issued and outstanding as of October 26, 2007.



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##### Table of Contents

ADVANCED ANALOGIC TECHNOLOGIES, INCORPORATED

TABLE OF CONTENTS



|                              |  |                                                                                               |  |                                                                                                                               |  |     
|----------------------------- |  | --------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------- |  | ----
|                              |  |                                                                                               |  |                                                                                                                               |  | PAGE
|PART I. FINANCIAL INFORMATION |  | 3                                                                                            
|                              |  |                                                                                              
|                              |  | ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)                                                      |  | 3                                                                                                                            
|                              |  |                                                                                               | 
|                              |  |                                                                                               |  | CONDENSED CONSOLIDATED BALANCE SHEETS AT SEPTEMBER 30, 2007 AND DECEMBER 31, 2006                                             |  | 3   
|                              |  |                                                                                               | 
|                              |  |                                                                                               |  | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND SEPTEMBER 30, 2006 |  | 4   
|                              |  |                                                                                               | 
|                              |  |                                                                                               |  | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND SEPTEMBER 30, 2006           |  | 5   
|                              |  |                                                                                               | 
|                              |  |                                                                                               |  | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                                                          |  | 6   
|                              |  |                                                                                              
|                              |  | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |  | 13                                                                                                                           
|                              |  |                                                                                              
|                              |  | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                            |  | 20                                                                                                                           
|                              |  |                                                                                              
|                              |  | ITEM 4. CONTROLS AND PROCEDURES                                                               |  | 21                                                                                                                           
|                              | 
|PART II. OTHER INFORMATION    |  | 22                                                                                           
|                              |  |                                                                                              
|                              |  | ITEM 1. LEGAL PROCEEDINGS                                                                     |  | 22                                                                                                                           
|                              |  |                                                                                              
|                              |  | ITEM 1A. RISK FACTORS                                                                         |  | 22                                                                                                                           
|                              |  |                                                                                              
|                              |  | ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                           |  | 32                                                                                                                           
|                              |  |                                                                                              
|                              |  | ITEM 3. DEFAULTS UPON SENIOR SECURITIES                                                       |  | 32                                                                                                                           
|                              |  |                                                                                              
|                              |  | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                   |  | 32                                                                                                                           
|                              |  |                                                                                              
|                              |  | ITEM 5. OTHER INFORMATION                                                                     |  | 32                                                                                                                           
|                              |  |                                                                                              
|                              |  | ITEM 6. EXHIBITS                                                                              |  | 32                                                                                                                           



2



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##### Table of Contents

PART I. FINANCIAL INFORMATION



|ITEM 1. | FINANCIAL STATEMENTS
|------- | --------------------

ADVANCED ANALOGIC TECHNOLOGIES INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share
amounts and par value)



|                                                                                                                                                                                   |  |                   |         |   |                     |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ------------------- | - | ------- | -
|                                                                                                                                                                                   |  | September 30,2007 |         |   | December 31,2006(*) |  
|Assets                                                                                                                                                                             |  |                   |         |   |                     |   |         |  
|Current assets                                                                                                                                                                     |  |                   |         |   |                     |   |         |  
|Cash and cash equivalents                                                                                                                                                          |  | $                 | 47,819  |   |                     | $ | 58,121  |  
|Short-term investments                                                                                                                                                             |  |                   | 62,838  |   |                     |   | 49,566  |  
|                                                                                                                                                                                   |  |                   |         |   |                     |   |         |  
|Total cash, cash equivalents and short-term investments                                                                                                                            |  |                   | 110,657 |   |                     |   | 107,687 |  
|Accounts receivable, net                                                                                                                                                           |  |                   | 17,497  |   |                     |   | 11,037  |  
|Inventories                                                                                                                                                                        |  |                   | 10,745  |   |                     |   | 8,480   |  
|Prepaid expenses and other current assets                                                                                                                                          |  |                   | 2,423   |   |                     |   | 2,223   |  
|Restricted cash                                                                                                                                                                    |  |                   | 700     |   |                     |   | 700     |  
|Deferred tax assets                                                                                                                                                                |  |                   | 816     |   |                     |   | 857     |  
|                                                                                                                                                                                   |  |                   |         |   |                     |   |         |  
|Total current assets                                                                                                                                                               |  |                   | 142,838 |   |                     |   | 130,984 |  
|Property and equipment, net                                                                                                                                                        |  |                   | 4,216   |   |                     |   | 2,812   |  
|Other assets                                                                                                                                                                       |  |                   | 1,500   |   |                     |   | 1,375   |  
|Long-term deferred tax assets                                                                                                                                                      |  |                   | 8,333   |   |                     |   | 5,965   |  
|Intangible assets, net                                                                                                                                                             |  |                   | 2,417   |   |                     |   | 3,287   |  
|Goodwill                                                                                                                                                                           |  |                   | 16,792  |   |                     |   | 16,775  |  
|                                                                                                                                                                                   |  |                   |         |   |                     |   |         |  
|Total assets                                                                                                                                                                       |  | $                 | 176,096 |   |                     | $ | 161,198 |  
|                                                                                                                                                                                   |  |                   |         |   |                     |   |         |  
|Liabilities and stockholders equity                                                                                                                                               |  |                   |         |   |                     |   |         |  
|Current liabilities                                                                                                                                                                |  |                   |         |   |                     |   |         |  
|Accounts payable                                                                                                                                                                   |  | $                 | 11,623  |   |                     | $ | 6,968   |  
|Accrued liabilities                                                                                                                                                                |  |                   | 8,476   |   |                     |   | 6,714   |  
|Income tax payable                                                                                                                                                                 |  |                   | 1,360   |   |                     |   | 1,250   |  
|Current portion of capital lease obligations                                                                                                                                       |  |                   | 147     |   |                     |   | 138     |  
|                                                                                                                                                                                   |  |                   |         |   |                     |   |         |  
|Total current liabilities                                                                                                                                                          |  |                   | 21,606  |   |                     |   | 15,070  |  
|Long-term income tax payable                                                                                                                                                       |  |                   | 2,790   |   |                     |   |        |  
|Long-term capital lease obligations                                                                                                                                                |  |                   | 80      |   |                     |   | 191     |  
|Long-term other liabilities                                                                                                                                                        |  |                   | 135     |   |                     |   |        |  
|                                                                                                                                                                                   |  |                   |         |   |                     |   |         |  
|Total liabilities                                                                                                                                                                  |  |                   | 24,611  |   |                     |   | 15,261  |  
|                                                                                                                                                                                   |  |                   |         |   |                     |   |         |  
|Stockholders equity                                                                                                                                                               |  |                   |         |   |                     |   |         |  
|Common stock, $0.001 par value100,000,000 shares authorized; 44,985,321 and 44,064,729 shares issued and outstanding as of
September 30, 2007 and December 31, 2006, respectively |  |                   | 45      |   |                     |   | 44      |  
|Additional paid-in capital                                                                                                                                                         |  |                   | 164,414 |   |                     |   | 160,088 |  
|Deferred stock-based compensation                                                                                                                                                  |  |                   | (1,484  | ) |                     |   | (2,935  | )
|Accumulated other comprehensive loss                                                                                                                                               |  |                   | (189    | ) |                     |   | (480    | )
|Accumulated deficit                                                                                                                                                                |  |                   | (11,301 | ) |                     |   | (10,780 | )
|                                                                                                                                                                                   |  |                   |         |   |                     |   |         |  
|Total stockholders equity                                                                                                                                                         |  |                   | 151,485 |   |                     |   | 145,937 |  
|                                                                                                                                                                                   |  |                   |         |   |                     |   |         |  
|Total liabilities and stockholders equity                                                                                                                                         |  | $                 | 176,096 |   |                     | $ | 161,198 |  
|                                                                                                                                                                                   |  |                   |         |   |                     |   |         |  

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|* | Amounts as of December 31, 2006 were derived from the December 31, 2006 audited consolidated financial statements.
|- | ------------------------------------------------------------------------------------------------------------------

See accompanying notes to condensed consolidated financial statements.



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##### Table of Contents

ADVANCED ANALOGIC TECHNOLOGIES INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share
amounts)



|                                                                         |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|------------------------------------------------------------------------ |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                         |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                                                         |  | 2007                            |        |   | 2006                           |   |        | 2007 |  |   | 2006   |  
|Net revenue                                                              |  | $                               | 30,600 |   |                                | $ | 20,103 |      |  | $ | 77,545 |   |  | $ | 60,210 |  
|Cost of revenue                                                          |  |                                 | 14,204 |   |                                |   | 9,100  |      |  |   | 35,748 |   |  |   | 24,986 |  
|                                                                         |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Gross profit                                                             |  |                                 | 16,396 |   |                                |   | 11,003 |      |  |   | 41,797 |   |  |   | 35,224 |  
|                                                                         |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Research and development                                                 |  |                                 | 7,948  |   |                                |   | 5,371  |      |  |   | 22,623 |   |  |   | 17,214 |  
|Sales, general and administrative                                        |  |                                 | 6,373  |   |                                |   | 5,187  |      |  |   | 19,172 |   |  |   | 16,200 |  
|Patent litigation                                                        |  |                                 | 580    |   |                                |   | 3,490  |      |  |   | 3,657  |   |  |   | 5,247  |  
|                                                                         |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Total operating expenses                                                 |  |                                 | 14,901 |   |                                |   | 14,048 |      |  |   | 45,452 |   |  |   | 38,661 |  
|                                                                         |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Income (loss) from operations                                            |  |                                 | 1,495  |   |                                |   | (3,045 | )    |  |   | (3,655 | ) |  |   | (3,437 | )
|Interest and other income (expense):                                     |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Interest income                                                          |  |                                 | 1,408  |   |                                |   | 1,665  |      |  |   | 4,145  |   |  |   | 4,334  |  
|Interest expense and other income (expense), net                         |  |                                 | (10    | ) |                                |   | (71    | )    |  |   | (295   | ) |  |   | (86    | )
|                                                                         |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Total interest and other income (expense), net                           |  |                                 | 1,398  |   |                                |   | 1,594  |      |  |   | 3,850  |   |  |   | 4,248  |  
|                                                                         |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Income (loss) before income taxes                                        |  |                                 | 2,893  |   |                                |   | (1,451 | )    |  |   | 195    |   |  |   | 811    |  
|Provision for income taxes                                               |  |                                 | 316    |   |                                |   |       |      |  |   | 1,260  |   |  |   | 312    |  
|                                                                         |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Net income (loss)                                                        |  | $                               | 2,577  |   |                                | $ | (1,451 | )    |  | $ | (1,065 | ) |  | $ | 499    |  
|                                                                         |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Net income (loss) per share:                                             |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Basic                                                                    |  | $                               | 0.06   |   |                                | $ | (0.03  | )    |  | $ | (0.02  | ) |  | $ | 0.01   |  
|Diluted                                                                  |  | $                               | 0.05   |   |                                | $ | (0.03  | )    |  | $ | (0.02  | ) |  | $ | 0.01   |  
|                                                                         |  |                                 |        |  
|Weighted average shares used in net income (loss) per share calculation: |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Basic                                                                    |  |                                 | 44,827 |   |                                |   | 43,624 |      |  |   | 44,584 |   |  |   | 43,330 |  
|Diluted                                                                  |  |                                 | 47,170 |   |                                |   | 43,624 |      |  |   | 44,584 |   |  |   | 46,819 |  

See accompanying notes to condensed consolidated financial statements.



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ADVANCED ANALOGIC TECHNOLOGIES INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)



|                                                                                                              |  |                                 |         |   |      |   |         |  
|------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                                              |  | Nine Months Ended September 30, |        
|                                                                                                              |  | 2007                            |         |   | 2006 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                                         |  |                                 |         |   |      |   |         |  
|Net income (loss)                                                                                             |  | $                               | (1,065  | ) |      | $ | 499     |  
|Adjustments to reconcile net income (loss) to net cash provided by operating activities:                      |  |                                 |         |   |      |   |         |  
|Depreciation and amortization                                                                                 |  |                                 | 2,043   |   |      |   | 1,222   |  
|Stock-based compensation                                                                                      |  |                                 | 5,074   |   |      |   | 4,383   |  
|Change in prior year tax positions due to adoption of FIN No. 48                                              |  |                                 | 543     |   |      |   |        |  
|Provision for doubtful accounts                                                                               |  |                                 | (6      | ) |      |   | (306    | )
|Excess tax benefit from employee equity incentive plans                                                       |  |                                 |        |   |      |   | (693    | )
|Tax benefit from employee equity incentive plans                                                              |  |                                 |        |   |      |   | 1,727   |  
|Loss on disposal of plant, property and equipment                                                             |  |                                 | 9       |   |      |   | 28      |  
|Loss on liquidation of a foreign branch office                                                                |  |                                 | 266     |   |      |   |        |  
|Changes in operating assets and liabilities:                                                                  |  |                                 |         |   |      |   |         |  
|Accounts receivable                                                                                           |  |                                 | (6,454  | ) |      |   | (1,771  | )
|Inventory                                                                                                     |  |                                 | (2,268  | ) |      |   | (2,708  | )
|Prepaid expenses and other current assets                                                                     |  |                                 | (190    | ) |      |   | (213    | )
|Other assets                                                                                                  |  |                                 | (95     | ) |      |   | (514    | )
|Deferred tax assets                                                                                           |  |                                 | (2,360  | ) |      |   | (1,589  | )
|Accounts payable                                                                                              |  |                                 | 4,648   |   |      |   | 721     |  
|Accrued expenses and other liabilities                                                                        |  |                                 | 1,753   |   |      |   | 1,199   |  
|Income taxes payable                                                                                          |  |                                 | 2,900   |   |      |   | (300    | )
|                                                                                                              |  |                                 |         |   |      |   |         |  
|Net cash provided by operating activities                                                                     |  |                                 | 4,798   |   |      |   | 1,685   |  
|                                                                                                              |  |                                 |         |   |      |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                                         |  |                                 |         |   |      |   |         |  
|Purchases of property and equipment                                                                           |  |                                 | (2,420  | ) |      |   | (1,092  | )
|Purchases of short-term investments                                                                           |  |                                 | (66,791 | ) |      |   | (48,949 | )
|Purchases of long-term investments                                                                            |  |                                 |        |   |      |   | (900    | )
|Proceeds from sales and maturities of short-term investments                                                  |  |                                 | 53,607  |   |      |   | 5,450   |  
|                                                                                                              |  |                                 |         |   |      |   |         |  
|Net cash used in investing activities                                                                         |  |                                 | (15,604 | ) |      |   | (45,491 | )
|                                                                                                              |  |                                 |         |   |      |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                                         |  |                                 |         |   |      |   |         |  
|Proceeds from exercise of common stock options                                                                |  |                                 | 695     |   |      |   | 942     |  
|Excess tax benefit from employee equity incentive plans                                                       |  |                                 |        |   |      |   | 693     |  
|Other                                                                                                         |  |                                 |        |   |      |   | (5      | )
|Principal payments on capital lease obligations                                                               |  |                                 | (102    | ) |      |   | (23     | )
|                                                                                                              |  |                                 |         |   |      |   |         |  
|Net cash provided by financing activities                                                                     |  |                                 | 593     |   |      |   | 1,607   |  
|                                                                                                              |  |                                 |         |   |      |   |         |  
|EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS                                                  |  |                                 | (89     | ) |      |   | 31      |  
|                                                                                                              |  |                                 |         |   |      |   |         |  
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                                          |  |                                 | (10,302 | ) |      |   | (42,168 | )
|CASH AND CASH EQUIVALENTSBeginning of period                                                                 |  |                                 | 58,121  |   |      |   | 124,377 |  
|                                                                                                              |  |                                 |         |   |      |   |         |  
|CASH AND CASH EQUIVALENTSEnd of period                                                                       |  | $                               | 47,819  |   |      | $ | 82,209  |  
|                                                                                                              |  |                                 |         |   |      |   |         |  
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                                             |  |                                 |         |   |      |   |         |  
|Vesting of restricted common stock                                                                            |  | $                               | 11      |   |      | $ | 136     |  
|Increases (decreases) in accounts payable and accrued liabilities related to property and equipment purchases |  | $                               | 140     |   |      | $ | 166     |  
|Fixed assets acquired under capital leases                                                                    |  | $                               |        |   |      | $ | 15      |  
|Cash paid for interest                                                                                        |  | $                               | 22      |   |      | $ | 7       |  
|Cash paid for income taxes                                                                                    |  | $                               | 194     |   |      | $ | 481     |  

See accompanying notes to condensed consolidated financial statements.



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

The accompanying unaudited
condensed consolidated financial statements of Advanced Analogic Technologies Incorporated (the Company) have been prepared in accordance with the rules and regulations of the United States Securities and Exchange Commission (the
SEC). Certain information and disclosures normally included in consolidated 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, 2007.

In the opinion of management, the accompanying condensed 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, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007 or for any other future period. The consolidated balance sheet as of December 31, 2006 is derived
from the audited consolidated financial statements as of and for the year then ended.

Cash and 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
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 (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity Securities (SFAS No. 115). At September 30, 2007, the Company had investments in short-term debt instruments which were classified as available-for-sale under
SFAS No. 115. Short-term investments consist primarily of high grade debt securities with a maturity of greater than 90 days at the time of purchase. The Company classifies investments with maturities greater than one year as short-term
investments as it considers all investments 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 loss, which is a separate component of stockholders equity. As of September 30, 2007, none of the securities in which the Company invested was secured by real estate. The cost of securities sold is based on the
specific identification method. Interest earned on securities is included in Interest income in the Condensed Consolidated Statements of Operations. The fair value of investments is determined using quoted market prices for those
securities.

In addition to debt securities, a portion of the Companys investment portfolio consists of an equity investment in a
non-publicly traded company of $1.0 million. 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. As of
September 30, 2007, the Company did not recognize an impairment on this investment.

2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

FIN No. 48

On July 13, 2006, the Financial Accounting Standard Board (FASB) issued Interpretation No. 48, Accounting for Uncertainty in Income TaxesAn Interpretation of FASB Statement No. 109 (FIN
No. 48). FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an entitys financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes and prescribes a
recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Under FIN No. 48, the impact of an uncertain income tax position on the income tax return must
be recognized at the largest amount that is more likely than not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained.
Additionally, FIN No. 48 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN No. 48 is effective for fiscal years beginning after December 15,
2006.



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##### Table of Contents

The Company adopted the provisions of FIN No. 48 on January 1, 2007. The total amount of
unrecognized tax benefits as of the date of adoption was approximately $2,417,000. If such unrecognized tax benefits are recognized, the Companys effective tax rate would be affected. As a result of the implementation of FIN No. 48, the
Company recognized approximately $550,000 of a net decrease in the liability for unrecognized tax benefits which was accounted for as follows:



|                                                  |  |   |          |  
|------------------------------------------------- |  | - | -------- | -
|Increase in Retained Earnings (cumulative effect) |  | $ | 848,000  |  
|Decrease in Retained Earnings (cumulative effect) |  | $ | (305,000 | )
|Reduction in Deferred Tax Assets                  |  | $ | 7,000    |  
|                                                  |  |   |          |  
|Decrease in Liability                             |  | $ | 550,000  |  
|                                                  |  |   |          |  

As of September 30, 2007, the Company increased its total amount of unrecognized tax benefits
to approximately $3,268,000, including an accrual of interest and penalties of approximately $128,000. The Company recognizes interest and penalties accrued related to unrecognized tax benefits in its provision for income taxes. During the year
ended December 31, 2006, the Company recognized approximately $16,000 in penalties and interest. There had been no payment of interest and penalties accrued at December 31, 2006. Upon adoption of FIN No. 48 on January 1, 2007,
the Company increased its accrual for interest and penalties to approximately $95,000. The Company is subject to taxation in the United States and various states and foreign jurisdictions. With the exception of California, the Companys tax
years for 1997 through 2006 are subject to examination by the tax authorities. In August 2007, the Company closed an audit with the state of California for all tax years from inception through 2004, but the state left open the option to review the
Companys research and development tax credits in the future. The results of the audit are included in the Companys provision for income taxes. Currently, an estimate of the range of the reasonably possible change in unrecognized tax
benefits in the next 12 months cannot be made. The Company is no longer subject to foreign examinations by tax authorities for years before 2001.

SFAS No. 159

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities (SFAS No. 159), which permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by
providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 applies to all entities
and is effective for fiscal years beginning after November 15, 2007. The Company does not believe SFAS No. 159 will have a material impact on its consolidated financial statements.

3. STOCK-BASED COMPENSATION

On January 1, 2006,
the Company adopted SFAS No. 123 (revised 2004), Share-Based Payment, (SFAS No. 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 based on estimated fair values.

The following table summarizes stock-based compensation expense related to stock options, including the amortization of the intrinsic value under Accounting Principles Board Opinion 25, Accounting for Stock
Issued to Employees, for pre-April 4, 2005 options, for the three and nine months ended September 30, 2007 and September 30, 2006, which was allocated as follows:



|                                       |  |                                 |       |                                |   |       |  |      |       |  |   |      
|-------------------------------------- |  | ------------------------------- | ----- | ------------------------------ | - | ----- |  | ---- | ----- |  | - | -----
|                                       |  | Three Months EndedSeptember 30, |       | Nine Months EndedSeptember 30,
|Income statement classifications       |  | 2007                            |       | 2006                           |   | 2007  |  | 2006
|                                       |  | (in thousands)                 
|Cost of sales                          |  | $                               | 78    |                                | $ | 46    |  | $    | 209   |  | $ | 193  
|Research and development               |  |                                 | 758   |                                |   | 618   |  |      | 2,031 |  |   | 1,799
|Sales, general and marketing           |  |                                 | 781   |                                |   | 825   |  |      | 2,834 |  |   | 2,391
|                                       |  |                                 |       |                                |   |       |  |      |       |  |   |      
|Total stock-based compensation expense |  | $                               | 1,617 |                                | $ | 1,489 |  | $    | 5,074 |  | $ | 4,383
|                                       |  |                                 |       |                                |   |       |  |      |       |  |   |      



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The related tax effect for stock-based compensation expense for the three and nine months ended
September 30, 2007 was approximately $322,000 and $1,104,000, respectively, and approximately $9,000 and $170,000 for the three and nine months ended September 30, 2006, respectively. The related tax effect was determined using the
applicable tax rates in jurisdictions to which this expense relates.

On January 17, 2007, the Company accepted for exchange from
eligible employees (excluding directors and Section 16 officers), options to purchase an aggregate of approximately 1.3 million shares of the Companys common stock, pursuant to a stock option exchange program (the Exchange
Offer) under Section 16 of the Securities Exchange Act of 1934, giving them the right to tender outstanding stock options that were granted between August 4, 2005 and September 1, 2006 (the Old Options). The Old
Options were cancelled as of January 17, 2007. The Company granted new options to purchase an equal number of shares of its common stock with an exercise price at fair market value of $5.80 in exchange for the options cancelled in connection
with the offer. These new options vest at the rate of 25 percent after one year starting on January 17, 2007 and 6.25 percent every three months thereafter. The Company calculated incremental compensation costs related to the Exchange Offer as
required by SFAS No. 123(R), which together with the unamortized costs related to the Old Options, will be amortized over the vesting period of the new options.

For options granted subsequent to January 1, 2006, including the new options granted as a result of the Exchange Offer, the Company estimated expected volatility for options granted relying on a combination of
historical and market-based implied volatility in accordance with guidance in SFAS No. 123(R) and SEC Topic 14, Share-based payment (SAB 107). The Company determined that a combination of implied volatility and historical
volatility is more reflective of market conditions and a better indicator of expected volatility than using purely historical volatility. The expected term of employee stock options represents the weighted-average period that the stock options are
expected to remain outstanding. Starting from the fourth quarter of 2006, the Company derived the expected term assumption based on the Company and its peer groups weighted average vesting period combined with the post-vesting holding period.
Prior to the fourth quarter of 2006, the Company used the simplified method to calculate the expected term for its options, as allowed by SAB 107. The risk-free interest rate assumption is based upon observed interest rates appropriate for the
expected 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 Company has never declared or paid any cash dividends on common stock, and it
does not anticipate paying any cash dividends in the foreseeable future.

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, 2007 and September 30, 2006:



|                                |  |                                 |   |  |                                |   |  |      |   |  |      |  
|------------------------------- |  | ------------------------------- | - |  | ------------------------------ | - |  | ---- | - |  | ---- | -
|                                |  | Three Months EndedSeptember 30, |   |  | Nine Months EndedSeptember 30, |  
|                                |  | 2007                            |   |  | 2006                           |   |  | 2007 |   |  | 2006 |  
|Volatility                      |  | 50                              | % |  | 55                             | % |  | 49   | % |  | 57   | %
|Expected option term (in years) |  | 4.07                            |   |  | 6.25                           |   |  | 4.15 |   |  | 6.25 |  
|Expected annual dividend yield  |  | 0                               | % |  | 0                              | % |  | 0    | % |  | 0    | %
|Risk free interest rate         |  | 4.10                            | % |  | 4.84                           | % |  | 4.57 | % |  | 4.77 | %

4. NET INCOME (LOSS) PER SHARE

The Company calculates net income (loss) per share in accordance with SFAS No. 128, Earnings Per Share (SFAS No. 128).
Under SFAS No. 128, basic net income (loss) per common share is calculated by dividing net income (loss) 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 common stock options and warrants outstanding and restricted common stock subject to repurchase, using the treasury stock method. Basic and diluted net
loss per share are the same for the nine months ended September 30, 2007 and for the three months ended September 30, 2006 due to the Companys incurring losses in those periods. Approximately 2.1



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million and 2.7 million shares of dilutive potential common shares were excluded from the net loss per share calculation for the nine months ended
September 30, 2007 and the three months ended September 30, 2006, respectively, as their inclusion would have been antidilutive.

A reconciliation of shares used in the calculation of basic and diluted net income (loss) per share is as follows:



|                                                              |  |                                 |   |  |                                |   |  |        |   |  |        |  
|------------------------------------------------------------- |  | ------------------------------- | - |  | ------------------------------ | - |  | ------ | - |  | ------ | -
|                                                              |  | Three Months EndedSeptember 30, |   |  | Nine Months EndedSeptember 30, |  
|                                                              |  | 2007                            |   |  | 2006                           |   |  | 2007   |   |  | 2006   |  
|                                                              |  | (in thousands)                  |  
|Weighted average common shares outstanding                    |  | 44,899                          |   |  | 43,940                         |   |  | 44,659 |   |  | 43,708 |  
|Weighted average shares subject to repurchase                 |  | (72                             | ) |  | (316                           | ) |  | (75    | ) |  | (378   | )
|                                                              |  |                                 |   |  |                                |   |  |        |   |  |        |  
|Shares used to calculate basic net income (loss) per share    |  | 44,827                          |   |  | 43,624                         |   |  | 44,584 |   |  | 43,330 |  
|                                                              |  |                                 |   |  |                                |   |  |        |   |  |        |  
|Effect of dilutive securities:                                |  |                                 |   |  |                                |   |  |        |   |  |        |  
|Common stock warrants                                         |  | 8                               |   |  |                               |   |  |       |   |  | 43     |  
|Common stock options                                          |  | 2,263                           |   |  |                               |   |  |       |   |  | 3,068  |  
|Weighted average shares subject to repurchase                 |  | 72                              |   |  |                               |   |  |       |   |  | 378    |  
|                                                              |  |                                 |   |  |                                |   |  |        |   |  |        |  
|Dilutive potential common stock                               |  | 2,343                           |   |  |                               |   |  |       |   |  | 3,489  |  
|                                                              |  |                                 |   |  |                                |   |  |        |   |  |        |  
|Weighted average common shares outstanding, assuming dilution |  | 47,170                          |   |  | 43,624                         |   |  | 44,584 |   |  | 46,819 |  
|                                                              |  |                                 |   |  |                                |   |  |        |   |  |        |  

5. OTHER COMPREHENSIVE INCOME (LOSS)

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



|                                                                |  |                                 |       |      |                                |        |      |  |   |        |   |  |   |    
|--------------------------------------------------------------- |  | ------------------------------- | ----- | ---- | ------------------------------ | ------ | ---- |  | - | ------ | - |  | - | ---
|                                                                |  | Three Months EndedSeptember 30, |       |      | Nine Months EndedSeptember 30,
|                                                                |  | 2007                            |       | 2006 |                                |        | 2007 |  |   | 2006  
|                                                                |  | (in thousands)                 
|Net income (loss), as reported                                  |  | $                               | 2,577 |      | $                              | (1,451 | )    |  | $ | (1,065 | ) |  | $ | 499
|                                                                |  |                                 |       |     
|Changes in cumulative translation adjustment                    |  |                                 | 17    |      |                                | 2      |      |  |   | 235    |   |  |   | 10 
|Changes in unrealized gains/losses on investments, net of taxes |  |                                 | 71    |      |                                | 34     |      |  |   | 56     |   |  |   | 24 
|                                                                |  |                                 |       |      |                                |        |      |  |   |        |   |  |   |    
|Total other comprehensive income (loss), net of taxes           |  | $                               | 2,665 |      | $                              | (1,415 | )    |  | $ | (774   | ) |  | $ | 533
|                                                                |  |                                 |       |      |                                |        |      |  |   |        |   |  |   |    

The changes in cumulative translation adjustment during the nine months of 2007 included a
write-off of $0.3 million cumulative translation adjustment loss as a result of the liquidation of the Companys Sweden branch office.



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6. DETAILS OF CERTAIN BALANCE SHEET COMPONENTS



|                                          |  |                   |        |   |                  |   |        |  
|----------------------------------------- |  | ----------------- | ------ | - | ---------------- | - | ------ | -
|                                          |  | September 30,2007 |        |   | December 31,2006 |  
|                                          |  | (in thousands)    |       
|Work in process                           |  | $                 | 7,454  |   |                  | $ | 5,748  |  
|Finished goods                            |  |                   | 3,291  |   |                  |   | 2,732  |  
|                                          |  |                   |        |   |                  |   |        |  
|Total inventories                         |  | $                 | 10,745 |   |                  | $ | 8,480  |  
|                                          |  |                   |        |   |                  |   |        |  
|Computers and software                    |  | $                 | 4,689  |   |                  | $ | 4,183  |  
|Office and test equipment                 |  |                   | 5,032  |   |                  |   | 3,622  |  
|Leasehold improvements                    |  |                   | 1,055  |   |                  |   | 589    |  
|                                          |  |                   |        |   |                  |   |        |  
|                                          |  |                   | 10,776 |   |                  |   | 8,394  |  
|Accumulated depreciation and amortization |  |                   | (6,560 | ) |                  |   | (5,582 | )
|                                          |  |                   |        |   |                  |   |        |  
|Total property and equipment, net         |  | $                 | 4,216  |   |                  | $ | 2,812  |  
|                                          |  |                   |        |   |                  |   |        |  
|Accrued payroll and benefits              |  | $                 | 5,518  |   |                  | $ | 2,381  |  
|Deferred revenue                          |  |                   | 670    |   |                  |   | 1,063  |  
|Accrued legal and accounting services     |  |                   | 644    |   |                  |   | 818    |  
|Warranty reserve                          |  |                   | 93     |   |                  |   | 204    |  
|Accrued payables and other                |  |                   | 1,551  |   |                  |   | 2,248  |  
|                                          |  |                   |        |   |                  |   |        |  
|Total accrued liabilities                 |  | $                 | 8,476  |   |                  | $ | 6,714  |  
|                                          |  |                   |        |   |                  |   |        |  

7. GOODWILL AND INTANGIBLE ASSETS

In October 2006, the Company acquired Analog Power Semiconductor Corporation (AP Semi). The purchase consideration was allocated to the
tangible and identifiable intangible assets acquired and liabilities assumed on the basis of their estimated fair values on the acquisition date under SFAS No. 141, Business Combinations and SFAS No. 142, Goodwill and
Other Intangible Assets (SFAS No. 142). All of the Companys goodwill and intangible assets are as a result of the AP Semi acquisition.

The following table shows the changes in the carrying amount of goodwill for the nine months ended September 30, 2007, (in thousands):



|                              |  |   |       
|----------------------------- |  | - | ------
|Balance at December 31, 2006  |  | $ | 16,775
|Goodwill adjustment           |  |   | 17    
|                              |  |   |       
|Balance at September 30, 2007 |  | $ | 16,792
|                              |  |   |       

The Company performed a goodwill impairment analysis during the third quarter of 2007 pursuant to
the steps and requirements under SFAS No. 142 and determined that the goodwill is not impaired.

The following table shows the changes
in the intangible assets for the nine months ended September 30, 2007, (in thousands):



|                       |  |                          |       |                          |   |                   |                        |   |                  |   |  |                   |      |                  |  |   |       |  |   |      
|---------------------- |  | ------------------------ | ----- | ------------------------ | - | ----------------- | ---------------------- | - | ---------------- | - |  | ----------------- | ---- | ---------------- |  | - | ----- |  | - | -----
|                       |  | Intangible assets, gross |       | Accumulated amortization |   |                   | Intangible assets, net
|                       |  | September 30,2007        |       | December 31,2006         |   | September 30,2007 |                        |   | December 31,2006 |   |  | September 30,2007 |      | December 31,2006
|Core technology        |  | $                        | 2,900 |                          | $ | 2,900             |                        | $ | (887             | ) |  | $                 | (161 | )                |  | $ | 2,013 |  | $ | 2,739
|Customer relationships |  |                          | 580   |                          |   | 580               |                        |   | (176             | ) |  |                   | (32  | )                |  |   | 404   |  |   | 548  
|                       |  |                          |       |                          |   |                   |                        |   |                  |   |  |                   |      |                  |  |   |       |  |   |      
|Total                  |  | $                        | 3,480 |                          | $ | 3,480             |                        | $ | (1,063           | ) |  | $                 | (193 | )                |  | $ | 2,417 |  | $ | 3,287
|                       |  |                          |       |                          |   |                   |                        |   |                  |   |  |                   |      |                  |  |   |       |  |   |      

Amortization expense for the three and nine months ended September 30, 2007 was $290,000 and
$870,000, respectively. Estimated future amortization expense for the remainder of 2007, 2008 and 2009 is $290,000, $1,160,000 and $967,000, respectively. There was no amortization expense of intangible assets in the three and nine months ended
September 30, 2006.



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8. 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 net revenue by geographic region based on the location to which the product is shipped:



|                                          |  |                                 |        |                                |   |        |  |      |        |  |   |       
|----------------------------------------- |  | ------------------------------- | ------ | ------------------------------ | - | ------ |  | ---- | ------ |  | - | ------
|                                          |  | Three Months EndedSeptember 30, |        | Nine Months EndedSeptember 30,
|                                          |  | 2007                            |        | 2006                           |   | 2007   |  | 2006
|                                          |  | (in thousands)                 
|South Korea                               |  | $                               | 15,467 |                                | $ | 11,329 |  | $    | 39,854 |  | $ | 35,318
|China                                     |  |                                 | 8,571  |                                |   | 3,112  |  |      | 22,224 |  |   | 8,148 
|Taiwan                                    |  |                                 | 5,206  |                                |   | 4,321  |  |      | 11,745 |  |   | 12,197
|Europe                                    |  |                                 | 635    |                                |   | 797    |  |      | 1,665  |  |   | 2,576 
|North America (principally United States) |  |                                 | 607    |                                |   | 352    |  |      | 1,743  |  |   | 1,024 
|Japan                                     |  |                                 | 114    |                                |   | 192    |  |      | 314    |  |   | 947   
|                                          |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Total                                     |  | $                               | 30,600 |                                | $ | 20,103 |  | $    | 77,545 |  | $ | 60,210
|                                          |  |                                 |        |                                |   |        |  |      |        |  |   |       

The following is a summary of net revenue by product type:



|                                        |  |                                  |                                    |                      |                                 |   |        |      |                      |  |      |        |  |                      |        |  |        |   |                      |   |        |  |     |  
|--------------------------------------- |  | -------------------------------- | ---------------------------------- | -------------------- | ------------------------------- | - | ------ | ---- | -------------------- |  | ---- | ------ |  | -------------------- | ------ |  | ------ | - | -------------------- | - | ------ |  | --- | -
|                                        |  | Three Months Ended September 30, |                                    |                      | Nine Months Ended September 30, |  
|                                        |  | 2007                             |                                    |                      | 2006                            |   |        | 2007 |                      |  | 2006 |       
|                                        |  | Amount                           |                                    | Percentof netrevenue |                                 |   | Amount |      | Percentof netrevenue |  |      | Amount |  | Percentof netrevenue |        |  | Amount |   | Percentof netrevenue |  
|                                        |  |                                  | (in thousands, except percentages) |                     
|Display and Lighting Solutions          |  | $                                | 17,857                             |                      | 59                              | % |        | $    | 10,819               |  | 54   | %      |  | $                    | 45,035 |  | 58     | % |                      | $ | 33,515 |  | 56  | %
|Voltage Regulation and DC/DC Conversion |  |                                  | 7,068                              |                      | 23                              | % |        |      | 5,056                |  | 25   | %      |  |                      | 17,832 |  | 23     | % |                      |   | 13,476 |  | 22  | %
|Interface and Power Management          |  |                                  | 5,007                              |                      | 16                              | % |        |      | 3,977                |  | 20   | %      |  |                      | 13,215 |  | 17     | % |                      |   | 12,901 |  | 21  | %
|Battery Management                      |  |                                  | 668                                |                      | 2                               | % |        |      | 251                  |  | 1    | %      |  |                      | 1,463  |  | 2      | % |                      |   | 318    |  | 1   | %
|                                        |  |                                  |                                    |                      |                                 |   |        |      |                      |  |      |        |  |                      |        |  |        |   |                      |   |        |  |     |  
|Total                                   |  | $                                | 30,600                             |                      | 100                             | % |        | $    | 20,103               |  | 100  | %      |  | $                    | 77,545 |  | 100    | % |                      | $ | 60,210 |  | 100 | %
|                                        |  |                                  |                                    |                      |                                 |   |        |      |                      |  |      |        |  |                      |        |  |        |   |                      |   |        |  |     |  

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



|         |  |                           |   |  |                                            |   |  |                                           |   |  |      |   |  |      |   |  |      |  
|-------- |  | ------------------------- | - |  | ------------------------------------------ | - |  | ----------------------------------------- | - |  | ---- | - |  | ---- | - |  | ---- | -
|         |  | Accounts Receivable as of |   |  | Net RevenueThree Months EndedSeptember 30, |   |  | Net RevenueNine Months EndedSeptember 30, |  
|Customer |  | September 30, 2007        |   |  | December 31, 2006                          |   |  | 2007                                      |   |  | 2006 |   |  | 2007 |   |  | 2006 |  
|A        |  | 21                        | % |  | 24                                         | % |  | 22                                        | % |  | 27   | % |  | 22   | % |  | 29   | %
|B        |  | 18                        |   |  | 21                                         |   |  | 14                                        |   |  |     |   |  | 14   |   |  |     |  
|C        |  | 11                        |   |  |                                           |   |  |                                          |   |  | 11   |   |  | 11   |   |  | 12   |  
|D        |  |                          |   |  |                                           |   |  |                                          |   |  | 12   |   |  |     |   |  | 12   |  

9. INCOME TAXES

The Company recorded a tax provision of approximately $316,000 and $0 for the three months ended September 30, 2007 and 2006, respectively. For the nine months ended September 30, 2007 and 2006, the Company
recorded a tax provision of approximately $1,260,000 and $312,000, respectively. The Company



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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 the Companys assets and liabilities using tax rates in effect for the year in which the Company expects the differences to affect
taxable income. The Company adopted SFAS No. 123(R) as of January 1, 2006, and, as a result, incurred significant stock-based compensation expense, including amounts 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. During the three months ended September 30, 2007 and 2006, tax expense was reduced by approximately $28,000 and $9,000, respectively, as a result of disqualifying dispositions. During the nine months
ended September 30, 2007 and 2006, tax expense was reduced by approximately $64,000 and $170,000, respectively, as a result of disqualifying dispositions. As of September 30, 2007, the Company had not recorded tax benefits related to tax
deductions in excess of previously expensed stock-based compensation as the Company has a net operating loss carry forward. Due to the termination of certain non statutory options, tax benefits recognized in prior periods from such stock-based
compensation expense were reversed during the three and nine months ended September 30, 2006. During the three and nine months ended September 30, 2007, tax expense increased by approximately $65,000 and $275,000, respectively, as a result
of a reversal of tax benefits recognized under SFAS No. 123(R).

The percentage tax rate reflected in the results of operations is
based on the Companys estimate of net income for the fiscal year 2007 at the end of each quarter. At September 30, 2007, without tax benefits realized through disqualifying dispositions and reversal of tax benefit recognized under SFAS
No. 123(R), the full year estimate of the 2007 effective tax rate was approximately 546%. However, with tax benefits realized through disqualifying dispositions and reversal of tax benefit recognized under SFAS No. 123(R), the
effective tax rate was approximately 647%.

10. 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
(531 Patent) 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
(258 Patent). In response to these letters, the Company contacted Linear Technology to convey its good faith 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 it 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 its 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 complaint filed by Linear Technology by initiating an investigation under Section 337 of the Tariff Act to
determine if certain of the Companys products infringe certain patents owned by Linear Technology. The accused products include charge pumps and switching regulators and are similar to the products involved in the Companys lawsuit with
Linear Technology.

In a Final Determination issued September 22, 2007, the USITC left unchanged its earlier initial determination
that the Companys charge pumps do not violate Section 337 of the Tariff Act because they do not infringe any valid claim of 531 Patent owned by Linear Technology.

The Final Determination also found that a majority of the Companys switching regulator designs do not infringe Linear Technologys 258
Patent. The Commission also found that one family of switching regulator products infringes certain claims of the 258 Patent. Following normal USITC procedure, the Commission issued a limited exclusion order under Section 337 of the
Tariff Act prohibiting the direct importation by the Company of this particular product family. This exclusion order does not, however, prevent the Companys customers from importing their products into the United States. To date, the
Companys sales of this product family in the United States have been minimal. Linear Technologys request that downstream products be barred from importation was denied. Linear Technology has recently asked the USITC to reconsider
selected portions of the Final Determination.



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##### Table of Contents

|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 most recently filed Form 10-K. 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 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 laws, we are under no obligation to, and do not intend to, update any forward-looking statement, whether as a 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., Sagem SA, Pantech & Curitel
Communications, Inc., Motorola, Inc. and Sony Ericsson. We sell through distributors and original design manufacturers, or ODMs, to other system designers, including Hewlett-Packard Company, Dell Inc., Lenovo Group Ltd., Quanta Computers Inc., HTC
Corporation and Compal Electronics, Inc.



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##### Table of Contents

Our net revenue in the third quarter of 2007 increased 52 percent compared to the third quarter of 2006
primarily as a result of continued increase in revenue from sale of our Display, Lighting Solutions, Voltage Regulation and DC/DC Conversion product families and increased sales primarily in Korea and China. Gross profit in the third quarter of 2007
declined one percent compared to the third quarter of 2006 primarily due to an unfavorable change in the product mix sold, partially offset by a favorable impact on the gross margin from sale of previously written down inventory during the third
quarter of 2007.

Cash, cash equivalents and short term investments as of September 30, 2007 increased $3 million to $110.7 million
compared to December 31, 2006. We continue to be debt free as of September 30, 2007.

Critical Accounting Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts in our condensed
consolidated financial statements. We evaluate our estimates on an on-going basis, including those related to our revenues, inventories, asset impairments, and income taxes. 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 judgments about the carrying values of assets and liabilities. Although actual results have historically been reasonably consistent
with managements expectations, the actual results may differ from these estimates or our estimates may be affected by different assumptions or conditions.

Management believes that there have been no significant changes during the three and nine months ended September 30, 2007 to the items that we disclosed as our critical accounting policies and estimates in the
Managements Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K for the year ended December 31, 2006.

Results of Operations

The following table sets forth our unaudited historical operating results, in
dollar amounts and as a percentage of net revenue for the periods indicated:



|                                                 |  |                                    |        |   |                                 |       |   |      |   |        |      |  |       |    |  |   |        |   |  |       |    |  |   |        |   |  |       |  
|------------------------------------------------ |  | ---------------------------------- | ------ | - | ------------------------------- | ----- | - | ---- | - | ------ | ---- |  | ----- | -- |  | - | ------ | - |  | ----- | -- |  | - | ------ | - |  | ----- | -
|                                                 |  | Three Months Ended September 30,   |        |   | Nine Months Ended September 30, |      
|                                                 |  | 2007                               |        |   | 2006                            |       |   | 2007 |   |        | 2006 | 
|                                                 |  | (in thousands, except percentages) |       
|Net revenue                                      |  | $                                  | 30,600 |   |                                 | 100.0 | % |      | $ | 20,103 |      |  | 100.0 | %  |  | $ | 77,545 |   |  | 100.0 | %  |  | $ | 60,210 |   |  | 100.0 | %
|Cost of revenue                                  |  |                                    | 14,204 |   |                                 | 46.4  |   |      |   | 9,100  |      |  | 45.3  |    |  |   | 35,748 |   |  | 46.1  |    |  |   | 24,986 |   |  | 41.5  |  
|                                                 |  |                                    |        |   |                                 |       |   |      |   |        |      |  |       |    |  |   |        |   |  |       |    |  |   |        |   |  |       |  
|Gross profit                                     |  |                                    | 16,396 |   |                                 | 53.6  |   |      |   | 11,003 |      |  | 54.7  |    |  |   | 41,797 |   |  | 53.9  |    |  |   | 35,224 |   |  | 58.5  |  
|Operating expenses:                              |  |                                    |        |   |                                 |       |   |      |   |        |      |  |       |    |  |   |        |   |  |       |    |  |   |        |   |  |       |  
|Research and development                         |  |                                    | 7,948  |   |                                 | 26.0  |   |      |   | 5,371  |      |  | 26.7  |    |  |   | 22,623 |   |  | 29.2  |    |  |   | 17,214 |   |  | 28.6  |  
|Sales, general and administrative                |  |                                    | 6,373  |   |                                 | 20.8  |   |      |   | 5,187  |      |  | 25.8  |    |  |   | 19,172 |   |  | 24.7  |    |  |   | 16,200 |   |  | 26.9  |  
|Patent litigation                                |  |                                    | 580    |   |                                 | 1.9   |   |      |   | 3,490  |      |  | 17.4  |    |  |   | 3,657  |   |  | 4.7   |    |  |   | 5,247  |   |  | 8.7   |  
|                                                 |  |                                    |        |   |                                 |       |   |      |   |        |      |  |       |    |  |   |        |   |  |       |    |  |   |        |   |  |       |  
|Total operating expenses                         |  |                                    | 14,901 |   |                                 | 48.7  |   |      |   | 14,048 |      |  | 69.9  |    |  |   | 45,452 |   |  | 58.6  |    |  |   | 38,661 |   |  | 64.2  |  
|                                                 |  |                                    |        |   |                                 |       |   |      |   |        |      |  |       |    |  |   |        |   |  |       |    |  |   |        |   |  |       |  
|Income (loss) from operations                    |  |                                    | 1,495  |   |                                 | 4.9   |   |      |   | (3,045 | )    |  | (15.2 | )  |  |   | (3,655 | ) |  | (4.7  | )  |  |   | (3,437 | ) |  | (5.7  | )
|                                                 |  |                                    |        |   |                                 |       |   |     
|Interest and other income (expense), net:        |  |                                    |        |   |                                 |       |   |      |   |        |      |  |       |    |  |   |        |   |  |       |    |  |   |        |   |  |       |  
|Interest income                                  |  |                                    | 1,408  |   |                                 | 4.6   |   |      |   | 1,665  |      |  | 8.3   |    |  |   | 4,145  |   |  | 5.3   |    |  |   | 4,334  |   |  | 7.1   |  
|Interest expense and other income (expense), net |  |                                    | (10    | ) |                                 | (0.0  | ) |      |   | (71    | )    |  | (0.4  | )  |  |   | (295   | ) |  | (0.4  | )  |  |   | (86    | ) |  | (0.1  | )
|                                                 |  |                                    |        |   |                                 |       |   |      |   |        |      |  |       |    |  |   |        |   |  |       |    |  |   |        |   |  |       |  
|Total interest and other income, net             |  |                                    | 1,398  |   |                                 | 4.6   |   |      |   | 1,594  |      |  | 7.9   |    |  |   | 3,850  |   |  | 4.9   |    |  |   | 4,248  |   |  | 7.0   |  
|                                                 |  |                                    |        |   |                                 |       |   |      |   |        |      |  |       |    |  |   |        |   |  |       |    |  |   |        |   |  |       |  
|Income (loss) before income taxes                |  |                                    | 2,893  |   |                                 | 9.5   |   |      |   | (1,451 | )    |  | 7.3   |    |  |   | 195    |   |  | 0.2   |    |  |   | 811    |   |  | 1.3   |  
|Provision for income taxes                       |  |                                    | 316    |   |                                 | 1.0   |   |      |   |       |      |  |      |    |  |   | 1,260  |   |  | 1.6   |    |  |   | 312    |   |  | 0.5   |  
|                                                 |  |                                    |        |   |                                 |       |   |      |   |        |      |  |       |    |  |   |        |   |  |       |    |  |   |        |   |  |       |  
|Net income (loss)                                |  | $                                  | 2,577  |   |                                 | 8.5   | % |      | $ | (1,451 | )    |  | (7.3  | )% |  | $ | (1,065 | ) |  | (1.4  | )% |  | $ | 499    |   |  | 0.8   | %
|                                                 |  |                                    |        |   |                                 |       |   |      |   |        |      |  |       |    |  |   |        |   |  |       |    |  |   |        |   |  |       |  



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Comparison of Three and Nine Months ended September 30, 2007 and September 30, 2006

Revenues

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



|                                        |  |                                    |        |                      |                                 |   |        |      |                      |  |      |        |  |                      |        |  |        |   |                      |   |        |  |     |  
|--------------------------------------- |  | ---------------------------------- | ------ | -------------------- | ------------------------------- | - | ------ | ---- | -------------------- |  | ---- | ------ |  | -------------------- | ------ |  | ------ | - | -------------------- | - | ------ |  | --- | -
|                                        |  | Three Months Ended September 30,   |        |                      | Nine Months Ended September 30, |  
|                                        |  | 2007                               |        |                      | 2006                            |   |        | 2007 |                      |  | 2006 |       
|                                        |  | Amount                             |        | Percentof netrevenue |                                 |   | Amount |      | Percentof netrevenue |  |      | Amount |  | Percentof netrevenue |        |  | Amount |   | Percentof netrevenue |  
|                                        |  | (in thousands, except percentages) |       
|Display and Lighting Solutions          |  | $                                  | 17,857 |                      | 59                              | % |        | $    | 10,819               |  | 54   | %      |  | $                    | 45,035 |  | 58     | % |                      | $ | 33,515 |  | 56  | %
|Voltage Regulation and DC/DC Conversion |  |                                    | 7,068  |                      | 23                              | % |        |      | 5,056                |  | 25   | %      |  |                      | 17,832 |  | 23     | % |                      |   | 13,476 |  | 22  | %
|Interface and Power Management          |  |                                    | 5,007  |                      | 16                              | % |        |      | 3,977                |  | 20   | %      |  |                      | 13,215 |  | 17     | % |                      |   | 12,901 |  | 21  | %
|Battery Management                      |  |                                    | 668    |                      | 2                               | % |        |      | 251                  |  | 1    | %      |  |                      | 1,463  |  | 2      | % |                      |   | 318    |  | 1   | %
|                                        |  |                                    |        |                      |                                 |   |        |      |                      |  |      |        |  |                      |        |  |        |   |                      |   |        |  |     |  
|Total                                   |  | $                                  | 30,600 |                      | 100                             | % |        | $    | 20,103               |  | 100  | %      |  | $                    | 77,545 |  | 100    | % |                      | $ | 60,210 |  | 100 | %
|                                        |  |                                    |        |                      |                                 |   |        |      |                      |  |      |        |  |                      |        |  |        |   |                      |   |        |  |     |  

Our net revenue for the three months ended September 30, 2007 as compared to the three months
ended September 30, 2006 increased $10.5 million, or 52 percent. This growth reflected increased sales across all product lines, especially our Display, Lighting Solutions, Voltage Regulation and DC/DC Conversion product families, as a result
of increased demand.

Geographically, sales increased in all regions except for Europe and Japan, with most increases in Korea due to
higher demand from our OEMs and in China due to higher demand from several of our distributors.

Our net revenue for the nine months ended
September 30, 2007 as compared to the nine months ended September 30, 2006 increased $17 million, or 29 percent. This growth was primarily attributable to our Display, Lighting Solutions, Voltage Regulation and DC/DC Conversion product
families, as a result of increased demand.

Geographically, sales to China, Korea and North America increased while sales to Japan, Taiwan
and Europe decreased.

Gross Profit



|                               |  |                                    |        |   |      |   |        |                     |  |   |                                 |    |  |      |   |  |                     |        |   |  |   |        |   |  |   |        |    |  |      |  
|------------------------------ |  | ---------------------------------- | ------ | - | ---- | - | ------ | ------------------- |  | - | ------------------------------- | -- |  | ---- | - |  | ------------------- | ------ | - |  | - | ------ | - |  | - | ------ | -- |  | ---- | -
|                               |  | Three Months Ended September 30,   |        |   |      |   |        |                     |  |   | Nine Months Ended September 30, |    |  |      |   |  |                     |       
|                               |  | 2007                               |        |   | 2006 |   |        | Increase (Decrease) |  |   | 2007                            |    |  | 2006 |   |  | Increase (Decrease) |       
|                               |  | (in thousands, except percentages) |       
|Net revenue                    |  | $                                  | 30,600 |   |      | $ | 20,103 |                     |  | $ | 10,497                          |    |  | 52.2 | % |  | $                   | 77,545 |   |  | $ | 60,210 |   |  | $ | 17,335 |    |  | 28.8 | %
|Cost of revenue                |  |                                    | 14,204 |   |      |   | 9,100  |                     |  |   | 5,104                           |    |  | 56.1 | % |  |                     | 35,748 |   |  |   | 24,986 |   |  |   | 10,762 |    |  | 43.1 | %
|                               |  |                                    |        |   |      |   |        |                     |  |   |                                 |    |  |      |   |  |                     |        |   |  |   |        |   |  |   |        |    |  |      |  
|Gross profit                   |  | $                                  | 16,396 |   |      | $ | 11,003 |                     |  |   |                                 |    |  |      |   |  | $                   | 41,797 |   |  | $ | 35,224 |   |  |   |        |    |  |      |  
|                               |  |                                    |        |   |      |   |        |                     |  |   |                                 |    |  |      |   |  |                     |        |   |  |   |        |   |  |   |        |    |  |      |  
|Gross profit margin percentage |  |                                    | 53.6   | % |      |   | 54.7   | %                   |  |   | (1.1                            | )% |  |      |   |  |                     | 53.9   | % |  |   | 58.5   | % |  |   | (4.6   | )% |  |      |  

Our gross margin was 54 percent for the three months ended September 30, 2007, compared to 55
percent for the three months ended September 30, 2006. This decrease was primarily due to an unfavorable change in product mix in the third quarter of 2007 as we sold more lower-margin products, partially offset by a favorable impact on the
gross margin from the sale of previously written down inventory in the third quarter of 2007 as described below.

During the third quarter
of 2007, our gross inventory write-down was approximately $0.7 million, offset by the sale of $1.2 million of previously written down inventory. During the third quarter of 2006,



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##### Table of Contents

our gross inventory write-down was approximately $1.1 million, offset by the sale of $1.2 million of previously written down inventory. The net effect of
inventory write-down on our gross margin contributed to a favorable 1.6% to our gross margin during the third quarter of 2007.

Our gross
margin was 54 percent for the nine months ended September 30, 2007, compared to 59 percent for the nine months ended September 30, 2006. This decrease was primarily due to an unfavorable change in product mix in the first nine months of
2007 as we sold more lower-margin products and the amortization of acquired intangible assets during 2007, offset by improved product yields.

During the first nine months of 2007, our gross inventory write-down was approximately $3.3 million, offset by the sale of $3.1 million of previously written down inventory. During the first nine months of 2006, our gross inventory
write-down was approximately $2.3 million, offset by the sale of $2.4 million of previously written down inventory.

Research and Development



|                          |  |                                    |       |   |      |   |       |                     |  |   |                                 |     |  |      |   |  |                     |        |   |  |   |        |   |  |   |       |   |  |      |  
|------------------------- |  | ---------------------------------- | ----- | - | ---- | - | ----- | ------------------- |  | - | ------------------------------- | --- |  | ---- | - |  | ------------------- | ------ | - |  | - | ------ | - |  | - | ----- | - |  | ---- | -
|                          |  | Three Months Ended September 30,   |       |   |      |   |       |                     |  |   | Nine Months Ended September 30, |     |  |      |   |  |                     |       
|                          |  | 2007                               |       |   | 2006 |   |       | Increase (Decrease) |  |   | 2007                            |     |  | 2006 |   |  | Increase (Decrease) |       
|                          |  | (in thousands, except percentages) |      
|Research and development  |  | $                                  | 7,948 |   |      | $ | 5,371 |                     |  | $ | 2,577                           |     |  | 48.0 | % |  | $                   | 22,623 |   |  | $ | 17,214 |   |  | $ | 5,409 |   |  | 31.4 | %
|Percentage of net revenue |  |                                    | 26.0  | % |      |   | 26.7  | %                   |  |   | (0.7                            | ) % |  |      |   |  |                     | 29.2   | % |  |   | 28.6   | % |  |   | 0.6   | % |  |      |  

Research and development expenses for the three months ended September 30, 2007 increased as
compared to the three months ended September 30, 2006 primarily due to a $1.6 million increase in payroll and benefit related expenses as a result of higher headcount, a $0.5 million increase in information technology, occupancy and other
research and development operation support expenses, as well as a $0.5 million increase in engineering expenses and outside services as we continued to develop new products. Research and development expense as a percentage of net revenue decreased
slightly.

Research and development expenses for the nine months ended September 30, 2007 increased as compared to the nine months
ended September 30, 2006 primarily due to a $3.2 million increase in payroll and benefit related expenses as a result of higher headcount, a $1.1 million increase in information technology, occupancy and other research and development operation
support expenses, as well as a $0.9 million increase in engineering expenses and outside services as we continued to develop new products. Research and development expense as a percentage of net revenue increased slightly.

Sales, General and Administrative



|                                  |  |                                    |       |   |      |   |       |                     |  |   |                                 |    |  |      |   |  |                     |        |   |  |   |        |   |  |   |       |    |  |      |  
|--------------------------------- |  | ---------------------------------- | ----- | - | ---- | - | ----- | ------------------- |  | - | ------------------------------- | -- |  | ---- | - |  | ------------------- | ------ | - |  | - | ------ | - |  | - | ----- | -- |  | ---- | -
|                                  |  | Three Months Ended September 30,   |       |   |      |   |       |                     |  |   | Nine Months Ended September 30, |    |  |      |   |  |                     |       
|                                  |  | 2007                               |       |   | 2006 |   |       | Increase (Decrease) |  |   | 2007                            |    |  | 2006 |   |  | Increase (Decrease) |       
|                                  |  | (in thousands, except percentages) |      
|Sales, general and administrative |  | $                                  | 6,373 |   |      | $ | 5,187 |                     |  | $ | 1,186                           |    |  | 22.9 | % |  | $                   | 19,172 |   |  | $ | 16,200 |   |  | $ | 2,972 |    |  | 18.3 | %
|Percentage of net revenue         |  |                                    | 20.8  | % |      |   | 25.8  | %                   |  |   | (5.0                            | )% |  |      |   |  |                     | 24.7   | % |  |   | 26.9   | % |  |   | (2.2  | )% |  |      |  

Sales, general and administrative expenses for the three months ended September 30, 2007
increased as compared to the three months ended September 30, 2006 primarily due to a $1.1 million increase in payroll and benefit related expenses as a result of higher headcount. Sales, general and administrative expense as a percentage of
net revenue decreased five percent due to comparatively bigger increase in sales during the third quarter in 2007.

Sales, general and
administrative expenses for the nine months ended September 30, 2007 increased as compared to the nine months ended September 30, 2006 primarily due to a $1.7 million increase in payroll, bonus and benefit related expenses as a result of
higher headcount and a $0.5 million increase in stock compensation expenses offset by a $0.5 million decrease in professional services.



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Patent Litigation



|                          |  |                                    |     |   |      |   |       |                     |  |   |                                 |    |  |       |    |  |                     |       |   |  |   |       |   |  |   |        |    |  |       |   
|------------------------- |  | ---------------------------------- | --- | - | ---- | - | ----- | ------------------- |  | - | ------------------------------- | -- |  | ----- | -- |  | ------------------- | ----- | - |  | - | ----- | - |  | - | ------ | -- |  | ----- | --
|                          |  | Three Months Ended September 30,   |     |   |      |   |       |                     |  |   | Nine Months Ended September 30, |    |  |       |    |  |                     |      
|                          |  | 2007                               |     |   | 2006 |   |       | Increase (Decrease) |  |   | 2007                            |    |  | 2006  |    |  | Increase (Decrease) |      
|                          |  | (in thousands, except percentages) |    
|Patent litigation         |  | $                                  | 580 |   |      | $ | 3,490 |                     |  | $ | (2,910                          | )  |  | (83.4 | )% |  | $                   | 3,657 |   |  | $ | 5,247 |   |  | $ | (1,590 | )  |  | (30.3 | )%
|Percentage of net revenue |  |                                    | 1.9 | % |      |   | 17.4  | %                   |  |   | (15.5                           | )% |  |       |    |  |                     | 4.7   | % |  |   | 8.7   | % |  |   | (4.0   | )% |  |       |   

Patent litigation expenses for the three and nine months ended September 30, 2007 decreased
as compared to the same periods in 2006 as our legal proceedings related to the Linear Technology Corporation patent infringement ramped up during the third quarter of 2006 and we incurred significant expenses during that quarter. Litigation
expenses were significantly lower for the three months ended September 30, 2007 due to lower level of activity related to the patent infringement case. We believe that we will continue to incur significant litigation expenses for the remainder
of 2007. For a description of our litigation, please see Note 10 to the Condensed Consolidated Financial Statements - Legal Proceedings- for further details.

Interest Income

Interest income from investments of approximately $1.4 million in the third quarter of 2007
decreased $0.3 million compared to interest and investment income in the third quarter of 2006 due to lower average cash and short-term investment balances during the third quarter of 2007.

Interest income from investments of approximately $4.1 million in the first nine months of 2007 was slightly lower compared to interest and investment
income in the first nine months of 2006 due to lower average cash and short-term investment balances.

Interest and Other Income (Expense), Net

Other expense in the first nine months of 2007 was approximately $0.3 million, primarily consisting of a $0.3 million write-off of
cumulative translation adjustment loss as a result of the liquidation of our Sweden branch office during the first quarter of 2007.

Provision for
Income Taxes

We recorded a tax provision of approximately $316,000 and $0 for the three months ended September 30, 2007 and
2006, respectively. For the nine months ended September 30, 2007 and 2006, we recorded a tax provision of approximately $1,300,000 and $312,000, respectively. We account for income taxes under the provisions of SFAS No. 109,
Accounting for Income Taxes. Under this method, we determine 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 adopted SFAS No. 123(R) as of January 1, 2006, and, as a result, incurred significant stock-based compensation expense, including amounts 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. During the three months ended September 30, 2007 and 2006, tax expense was reduced by approximately $28,000 and $9,000, respectively, as a result of disqualifying
dispositions. During the nine months ended September 30, 2007 and 2006, tax expense was reduced by approximately $64,000 and $170,000, respectively, as a result of disqualifying dispositions. As of September 30, 2007, we had not recorded
tax benefits related to tax deductions in excess of previously expensed stock compensation because of our net operating loss carry forward. Due to the termination of certain non statutory options, tax benefits recognized in prior periods from
such stock compensation expense were reversed during the three and nine months ended September 30, 2006. During the three and nine months ended September 30, 2007, tax expense increased by approximately $65,000 and $275,000, respectively,
as a result of a reversal of tax benefits recognized under SFAS No. 123(R).



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The percentage tax rate reflected in the results of operations is based on our estimate of net income for
the fiscal year 2007 at the end of each quarter. At September 30, 2007, without tax benefits realized through disqualifying dispositions and reversal of tax benefit recognized under SFAS No. 123(R), the full year estimate of the 2007
effective tax rate was approximately 546%. However, with tax benefits realized through disqualifying dispositions and reversal of tax benefit recognized under SFAS No. 123(R), the effective tax rate was approximately 647%. The large
tax rates reflect the fact that we expect to be marginally profitable on a taxable income basis, and therefore the taxes on income charged in profitable jurisdictions have an unusually large effect on the overall effective tax rate.

Recently Issued Accounting Pronouncements

FIN
No. 48

On July 13, 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes
 An Interpretation of FASB Statement No. 109 (FIN No. 48). FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an entitys financial statements in accordance with FASB Statement
No. 109, Accounting for Income Taxes and prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Under FIN No. 48, the
impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more likely than not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be
recognized if it has less than a 50% likelihood of being sustained. Additionally, FIN No. 48 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN No. 48
is effective for fiscal years beginning after December 15, 2006.

We adopted the provisions of FIN No. 48 on January 1,
2007. The total amount of unrecognized tax benefits as of the date of adoption was approximately $2,417,000. If such unrecognized tax benefits are recognized, the effective tax rate would be affected. As a result of the implementation of FIN
No. 48, we recognized approximately $550,000 of a net decrease in the liability for unrecognized tax benefits which was accounted for as follows:



|                                                  |  |   |          |  
|------------------------------------------------- |  | - | -------- | -
|Increase in Retained Earnings (cumulative effect) |  | $ | 848,000  |  
|Decrease in Retained Earnings (cumulative effect) |  | $ | (305,000 | )
|Reduction in Deferred Tax Assets                  |  | $ | 7,000    |  
|                                                  |  |   |          |  
|Decrease in Liability                             |  | $ | 550,000  |  
|                                                  |  |   |          |  

As of September 30, 2007, we increased our total amount of unrecognized tax benefits to
approximately $3,268,000, including an accrual of interest and penalties of approximately $128,000. We recognize interest and penalties accrued related to unrecognized tax benefits in our provision for income taxes. During the year ended
December 31, 2006, we recognized approximately $16,000 in penalties and interest. There had been no payment of interest and penalties accrued at December 31, 2006. Upon adoption of FIN No. 48 on January 1, 2007, we increased our
accrual for interest and penalties to approximately $95,000.

We are subject to taxation in the United States and various states and
foreign jurisdictions. With the exception of California, our tax years for 1997 through 2006 are subject to examination by the tax authorities. In August 2007, we closed an audit with the state of California for all tax years from inception through
2004, but the state left open the option to review our research and development tax credits in the future. The results of the audit are included in our provision for income taxes. Currently, an estimate of the range of the reasonably possible change
in unrecognized tax benefits in the next 12 months cannot be made. We are no longer subject to foreign examinations by tax authorities for years before 2001.

SFAS No. 159

In February 2007, the FASB issued SFAS No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities (SFAS No. 159), which permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial
reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 applies to
all entities and is effective for fiscal years beginning after November 15, 2007. We do not believe SFAS No. 159 will have a material impact on our consolidated financial statements.



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Liquidity and Capital Resources



|                                                             |  |                                    |         |   |      |   |         |                    |  |   |        |   |  |      |  
|------------------------------------------------------------ |  | ---------------------------------- | ------- | - | ---- | - | ------- | ------------------ |  | - | ------ | - |  | ---- | -
|                                                             |  | Nine Months EndedSeptember 30,     |         |   |      |  
|                                                             |  | 2007                               |         |   | 2006 |   |         | Increase(Decrease) | 
|                                                             |  | (in thousands, except percentages) |        
|Net cash provided by operating activities                    |  | $                                  | 4,798   |   |      | $ | 1,685   |                    |  | $ | 3,113  |   |  | 185  | %
|Net cash used in investing activities                        |  |                                    | (15,604 | ) |      |   | (45,491 | )                  |  |   | 29,887 |   |  | -66  | %
|Net cash provided by financing activities                    |  |                                    | 593     |   |      |   | 1,607   |                    |  |   | (1,014 | ) |  | -63  | %
|Effect of exchange rate changes on cash and cash equivalents |  |                                    | (89     | ) |      |   | 31      |                    |  |   | (120   | ) |  | -387 | %
|                                                             |  |                                    |         |   |      |   |         |                    |  |   |        |   |  |      |  
|Net increase (decrease) on cash and cash equivalents         |  | $                                  | (10,302 | ) |      | $ | (42,168 | )                  |  | $ | 31,866 |   |  | -76  | %
|                                                             |  |                                    |         |   |      |   |         |                    |  |   |        |   |  |      |  

Our cash, cash equivalents and short term investments were $110.7 million as of September 30,
2007 and $107.7 million as of December 31, 2006.

Net Cash Provided by Operating Activities

Net cash provided by operating activities was $4.8 million for the nine months ended September 30, 2007. Net loss of $1.1 million was adjusted for
non-cash charges consisting primarily of $2.0 million of depreciation and amortization expense and $5.1 million of stock-based compensation expense. Amortization expense included $0.9 million related to the AP Semi acquisition. Accounts payable and
accrued liabilities balance increased $7.4 million due to increased purchases of materials and services to meet expected demand. Inventory increased $2 million as a result of anticipated sale during the remaining of 2007. Accounts receivable balance
increased $6.5 million due to higher revenue during the period.

Net cash provided by operating activities was $1.7 million for the nine
months ended September 30, 2006. Net income of $0.5 million was adjusted for non-cash charges consisting primarily of $4.4 million of stock-based compensation expense and $1.2 million of depreciation and amortization expense. 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 No. 123(R) and the increased number of options granted to employees and consultants. Depreciation and amortization expenses have also risen.

Net Cash Used in Investing Activities

Net cash used in investing activities was $15.6 million in the nine months ended September 30, 2007, primarily as a result of a net cash outflow of $13.2 million from purchases and maturities of our short-term investment and $2.4
million used to purchase testing and other equipment and to support our internal infrastructure growth.

Net cash used in our investing
activities was $45.5 million in the nine months ended September 30, 2006. 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.

Net Cash Provided by Financing Activities

Net cash provided by financing activities was $0.6
million in the nine months ended September 30, 2007, primarily as a result of $0.7 million net proceeds from exercises of common stock options.



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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.

Liquidity

We believe our existing cash, cash equivalents 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 revenue, 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, our level of acquisition
activity or other strategic transactions, 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.

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 us.

Contractual Obligations

The following table describes our principal contractual cash obligations as of September 30, 2007:



|                                 |  |                |        |               |   |       |  |      |       |      |   |       |  |                |       |  |   |     |  |   |      
|-------------------------------- |  | -------------- | ------ | ------------- | - | ----- |  | ---- | ----- | ---- | - | ----- |  | -------------- | ----- |  | - | --- |  | - | -----
|                                 |  | Total          |        | Remaining2007 |   | 2008  |  | 2009 |       | 2010 |   | 2011  |  | 2012and beyond
|                                 |  | (in thousands)
|Obligations under capital leases |  | $              | 227    |               | $ | 35    |  | $    | 151   |      | $ | 41    |  | $              |      |  | $ |    |  | $ |     
|Operating leases                 |  |                | 6,541  |               |   | 355   |  |      | 1,422 |      |   | 1,152 |  |                | 914   |  |   | 465 |  |   | 2,233
|Purchase commitments (1)         |  |                | 8,266  |               |   | 6,560 |  |      | 525   |      |   | 787   |  |                | 394   |  |   |    |  |   |     
|                                 |  |                |        |               |   |       |  |      |       |      |   |       |  |                |       |  |   |     |  |   |      
|Total contractual obligations    |  | $              | 15,034 |               | $ | 6,950 |  | $    | 2,098 |      | $ | 1,980 |  | $              | 1,308 |  | $ | 465 |  | $ | 2,233
|                                 |  |                |        |               |   |       |  |      |       |      |   |       |  |                |       |  |   |     |  |   |      

---

|(1) | Purchase commitments consist primarily of our commitment to purchase wafers and
technology licenses.
|--- | ----------------------------------------------------------------------------------------------------

In January 2007, we entered into a sublease for our new principal executive offices from
September 2007 through March 2016, occupying 42,174 square feet in Santa Clara, California. This facility will accommodate our principal engineering, technology, administrative and finance activities.

In September 2007, we entered into an office lease in Shanghai, China to accommodate our design team and sales personnel. The lease is effective from
October 2007 through December 2010.



|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

At September 30, 2007, we had cash and cash equivalents totaling $47.8 million, compared to $58.1 million at December 31, 2006. At September 30, 2007, we had $62.8 million in short-term investments as compared to $49.6
million at December 31, 2006. 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. The taxable
equivalent interest rates for the three and nine months ended September 30, 2007, on those cash equivalents and short-term investments average approximately 5.34% and 5.30%, respectively. The primary objective of our investment activities is to
preserve principal while maximizing income without significantly increasing risk. While none of the securities in which we invested is secured by real estate, these securities 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.



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A hypothetical increase in market interest rates of 100 basis points from the market rates in effect at
September 30, 2007 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.



|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. As of September 30, 2007 our management, with the participation of our Chief Executive Officer and our Chief
Financial Officer, concluded that our disclosure controls and procedures 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.

(b) Changes in Internal Controls Over
Financial Reporting

There was no change in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) during the third quarter of 2007 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 (Linear Technology) alleging that certain of our charge pump products infringed United States Patent No. 6,411,531 (531 Patent) 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 (258 Patent). In response to these letters, we contacted Linear Technology to
convey in good faith belief that we do not infringe the patents in question. Subsequently, we became aware of a marketing campaign conducted by Linear Technology in which it sought to disrupt our business relationships and sales by suggesting to our
customers that our products infringe the same U.S. patents mentioned in its 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 complaint filed by Linear Technology by initiating an investigation under
Section 337 of the Tariff Act to determine if certain of our products infringe certain patents owned by Linear Technology. The accused products include charge pumps and switching regulators and are similar to the products involved in our
lawsuit with Linear Technology.

In a Final Determination issued September 22, 2007, the USITC left unchanged its earlier initial
determination that our charge pumps do not violate Section 337 of the Tariff Act because they do not infringe any valid claim 531 Patent owned by Linear Technology.

The Final Determination also found that a majority of our switching regulator designs do not infringe Linear Technologys 258 Patent. The
Commission also found that one family of switching regulator products infringes certain claims of the 258 Patent. Following normal USITC procedure, the Commission issued a limited exclusion order under Section 337 of the Tariff Act
prohibiting the direct importation by us of this particular product family. This exclusion order does not, however, prevent our customers from importing their products into the United States. To date, our sales of this product family in the United
States have been minimal. Linear Technologys request that downstream products be barred from importation was denied. Linear Technology has recently asked the USITC to reconsider selected portions of the Final Determination.

We believe that none of our products infringe the Linear Technology patents in question. We presently plan to appeal any portions of the final
determination to the contrary. Whether or not we prevail in this investigation, we have incurred and expect to incur significant legal expenses.



|ITEM 1A. | RISK FACTORS
|-------- | ------------

Risks Related To Our Business

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



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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.

We receive a substantial portion of our revenues from a small number of OEM customers and distributors, and the loss of, or a
significant reduction in, orders from those customers 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 OEM customers, LG Electronics Inc. of South Korea and Samsung of South Korea, as well as from one of our distributors, ChiefTech Electronics Ltd. of
China. We received an aggregate of approximately 22%, 14%and 8% of our revenue from LG, ChiefTech and Samsung for the third quarter of 2007 and 27%, 8% and 11% in the third quarter of 2006, respectively. We anticipate that we will continue to be
dependent on these customers for a significant portion of our revenue in the immediate future; however, we do not have long-term contractual purchase commitments from them, and we cannot assure you that they will continue to be our customers.

We received an aggregate of approximately 86% of our revenues from our ten largest customers for the third quarter of 2007. Any action by
one of our largest customers that affects our orders, product pricing or vendor status could significantly reduce our revenues and harm our financial results. In the future, our sales to our 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. 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 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
| | - |  | -----------------------------------------------------------------------------------



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| |  |  | 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.
| | - |  | --------------------------------------------------------

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

Due to defects and failures that may occur, our products may not meet specifications, 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. In addition, our customers may not use our products in a way that is consistent with our published specifications. If defects and failures occur in our products during the design
phase or after, or our customers use our products in ways that are not consistent with their intended use, 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. 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;
| | - |  | ---------------------------------------------------------------------------------------------------



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| |  |  | 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.

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 in Asia who act as our fulfillment representatives. Sales to distributors accounted for 43% and 40% of our revenues for the third quarters of 2007 and 2006, 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. 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. In the future, we may not be successful in recognizing these indications or in finding replacement distributors in a timely manner, or at all, any of which could harm our
operating results, cash flow and financial condition.



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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% 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.

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, one of our
largest customers, 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.

Substantially all of our manufacturing suppliers, customers and operations
are located in Asia, which subjects us to additional risks, including regional economic influences, logistical complexity, political instability, natural disasters including earthquakes 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 98% of our revenues from customers outside of the United States in the third quarters of 2007 and 2006. Approximately 96% and 94% of our revenues came from customers in Asia, particularly South Korea, Taiwan,
China and Japan, in the third quarters of 2007 and 2006, respectively. A vast majority of our contract manufacturing operations are located in South Korea, Taiwan, Malaysia and China. In addition, we have a design center in Shanghai. As a result of
our international focus, we face several challenges, including:



| |  |  | increased complexity and costs of managing international operations;
| | - |  | --------------------------------------------------------------------



| |  |  | longer and more difficult collection of receivables;
| | - |  | ----------------------------------------------------



| |  |  | political and economic instability;
| | - |  | -----------------------------------



| |  |  | limited protection of our intellectual property;
| | - |  | ------------------------------------------------



| |  |  | unanticipated changes in local regulations, including tax regulations;
| | - |  | ----------------------------------------------------------------------



| |  |  | timing and availability of import and export licenses; and
| | - |  | ----------------------------------------------------------



| |  |  | foreign currency exchange fluctuations relating to our international operating activities.
| | - |  | ------------------------------------------------------------------------------------------

Our corporate headquarters in Santa Clara, 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.



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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.

We are also more susceptible to the regional economic impact of health crises. 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, finance, 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.

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 $81.2 million in
2006. 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.



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We have also grown from 110 employees on January 1, 2004 to 287 employees on September 30,
2007, 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;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | continue to implement and improve adequate administrative, financial and operational systems, procedures and controls; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | 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.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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.

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 Santa Clara, 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.

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;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | our success in utilizing new and proprietary technologies to offer products and features previously not available in the marketplace;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to recruit application engineers and designers; and
| | - |  | ---------------------------------------------------------------



| |  |  | 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;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | 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.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------

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 investigation 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. 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 a Final Determination issued September 22, 2007, the USITC left unchanged its earlier initial determination that our charge pumps do not violate
Section 337 of the Tariff Act because they do not infringe any valid claim of U.S. Patent No. 6,411,531 (531 Patent) owned by Linear Technology.

The Final Determination also found that a majority of our switching regulator designs do not infringe Linears Patent No. 6,580,258 (258 Patent). The Commission also found that one family of switching
regulator products infringes certain claims of the 258 Patent. Following normal ITC procedure, the Commission issued a limited exclusion order under Section 337 of the Tariff Act prohibiting the direct importation by us of this particular
product family. This exclusion order does not, however, prevent our



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customers from importing their products into the United States. Linear Technologys request that downstream products be barred from importation was
denied. Linear Technology has recently asked the ITC to reconsider selected portions of the Final Determination.

We believe that none of
our products infringe the Linear Technology patents in question. We presently plan to appeal any portions of the final determination to the contrary. Whether or not we prevail in this investigation, we have incurred and expect to incur significant
legal expenses.

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 55 patents issued or allowed 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.

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. In October 2006, we acquired 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;
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | 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;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | difficulties in entering markets in which we may have no or limited direct prior experience and where competitors may have stronger market positions;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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
| | - |  | -----------------------------------------------------------------------------------



| |  |  | addressing unforeseen liabilities of acquired businesses.
| | - |  | ---------------------------------------------------------

Acquisitions may also cause us to:



| |  |  | issue capital stock that would dilute our current stockholders percentage ownership;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | use a substantial portion of our cash resources or incur debt;
| | - |  | --------------------------------------------------------------



| |  |  | assume liabilities;
| | - |  | -------------------



| |  |  | record goodwill or incur amortization expenses related to certain intangible assets; and
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | incur large and immediate write-offs and other related expenses.
| | - |  | ----------------------------------------------------------------

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.

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.

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.

Changes in effective tax rates or adverse outcomes resulting from examination of our income tax returns could adversely affect our results.

Our future effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we have
lower statutory rates and higher than anticipated in countries where we have higher statutory rates, by changes in the valuation of our deferred tax assets and liabilities, or by changes in tax laws, regulations, accounting principles or
interpretations thereof. Further, as a result of certain ongoing employment and capital investment commitments made by us, our income in certain countries is subject to reduced tax rates, and in some cases is wholly exempt from tax. Our failure to
meet such commitments could adversely impact our effective tax rate. In addition, we are subject to the continuous examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of
adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from these continuous examinations will not have an adverse effect on our operating results
and financial condition.



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The requirement that we expense employee stock options has significantly reduced our net income and
will continue to do so in future periods.

We adopted SFAS 123(R) effective January 1, 2006, 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. As a result of adopting SFAS 123(R), we now have
additional stock-based 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-based compensation expense will depend upon the number of grants, the estimated grant date fair value, which depends upon significant assumptions including stock volatility and estimated term, the assumed forfeiture
rate and the requisite service period for future grants. This expense has had a significant impact on our results of operations since 2006. We have recorded approximately $1.6 million and $1.5 million of stock-based compensation expense under SFAS
123(R) for the quarters ended September 30, 2007 and 2006, respectively. We believe that this will continue to have a significant impact on our future operating results.



|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.



|ITEM 6. | EXHIBITS
|------- | --------



|      |  |                                                                                                                                                                                  
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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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, 2007 |  | By:                                         |  | /s/ Brian R. McDonald                                                     
|                        |  |                                             |  | Brian R. McDonald                                                         
|                        |  |                                             |  | Chief Financial Officer, Vice President of Worldwide Finance and Secretary



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EXHIBIT INDEX



|      |  |                                                                                                                                                                                  
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



34