Document:

POWI-EX10.2_X-FAB WAFER SUPPLY AGREEMENT

    
	
					
	 
	 
	 
	 
	Exhibit 10.2

WAFER SUPPLY AGREEMENT
This Wafer Supply Agreement (“AGREEMENT”) is made and entered into as of this 1st day of October, 2010 (the “EFFECTIVE DATE”), by and between:
		
	(1)
	Power Integrations International, Ltd., a Cayman Islands corporation having its principal place of business at 4th Floor, Century Yard, Cricket Square, Elgin Avenue, P.O. Box 32322, Grand Cayman  KY1-1209 (“POWER INTEGRATIONS”); and

		
	(1)
	X-FAB Semiconductor Foundries AG having its principal place of business at Haarbergstrasse 67, 99097 Erfurt, Germany (“COMPANY”).

There is a Wafer Supply Agreement dated the 23rd day of May, 2003 (the “2003 AGREEMENT”), by and between: 
		
	(1) 
	Power Integrations, Inc., a Delaware corporation having its principal place of business at 5245 Hellyer Ave., San Jose, CA U.S.A. 95138; and 

		
	(2)
	ZMD Analog Mixed Signal Services GmbH & CoKG, a German corporation having its principal place of business at Grenzstrasse 28, 01109 Dresden, Germany  (later X-FAB Dresden Gmbh & Co KG) [*].  

WITNESSETH:
WHEREAS, COMPANY is engaged in providing wafer foundry services for IC companies; and
WHEREAS , COMPANY wishes to qualify X-FAB [*], Inc. (“ X-FAB [*]”) to fabricate and fill wafer orders on behalf of the COMPANY; and
WHEREAS, POWER INTEGRATIONS is engaged in the design, development, marketing and sale of various IC products for use in power source applications; and
WHEREAS, POWER INTEGRATIONS desires to acquire from COMPANY fabrication and supply of wafers of certain IC products from COMPANY's X-FAB [*] and X-FAB [*] facilities, and COMPANY is willing to supply such wafers to POWER INTEGRATIONS within the limitation of available production capacity of SUPPLIER (as defined below).
NOW, THEREFORE, in consideration of the mutual covenants of the parties contained herein, POWER INTEGRATIONS and COMPANY hereby agree as follows:
Article 1.    (Definitions)
When used throughout this Agreement, each of the following terms shall have the meaning indicated below:

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[*] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

		
	1.1
	COMMON SPECIFICATION(S):  The specifications for the production, delivery and acceptance of the WAFERS including the PI PROCESS, PI specifications and production practices as defined by PI and, in addition, the specifications currently in use by SUPPLIER to produce and deliver WAFERS to PI during the Term of this Agreement.

		
	1.2
	CONFIDENTIAL INFORMATION:  Technical information, or other non-public information relating to PI or SUPPLIER, whether in a man-readable or machine-readable form and whether recorded on paper, tape, diskette or any other media, which is disclosed by the disclosing party to the receiving party, and subject to Section 1.3 (“CONFIDENTIAL MANUFACTURING INFORMATION”), (i) which is designated in writing, by appropriate legend, as confidential or, (ii) if disclosed orally is identified as confidential information at the time of disclosure and a summary of which is confirmed in writing within thirty (30) days after oral disclosure and designated, by appropriate legend, as confidential.  Notwithstanding the foregoing, all information generated by the activities and actions of SUPPLIER under this Agreement on PI's behalf and any information,  including all PI INTELLECTUAL PROPERTY received from PI by SUPPLIER, to effect the terms of this Agreement shall also be considered PI's CONFIDENTIAL INFORMATION.

		
	1.3
	CONFIDENTIAL MANUFACTURING INFORMATION:  PI's CONFIDENTIAL INFORMATION that is or relates to the PI PROCESS.  CONFIDENTIAL MANUFACTURING INFORMATION is CONFIDENTIAL MANUFACTURING INFORMATION in all cases, whether or not marked as or declared to be confidential.  Any unmarked or oral information relating to the PI PROCESS conveyed during a meeting between the parties will be CONFIDENTIAL MANUFACTURING INFORMATION by default whether or not declared or marked confidential and whether or not it is subsequently described in writing.  

		
	1.4
	ENGINEERING WAFERS:  WAFERS that are processed in accordance with the applicable special pricing in Exhibit B and any applicable special specifications provided by PI.

		
	1.5
	INDIVIDUAL SALES CONTRACTS:  Individual contracts of sale and purchase of the WAFERS that will be concluded between SUPPLIER and PI pursuant to this Agreement.

		
	1.6
	INTELLECTUAL PROPERTY RIGHTS:  Copyrights, patents, trade secrets, moral rights, know‐how and all other intellectual or proprietary rights of any kind, as applicable to either party.  

		
	1.7
	MASK SPECIFICATIONS:  The specifications for the production, delivery and acceptance of the MASK TOOLING SETS which are set forth in the COMMON SPECIFICATIONS.

		
	1.8
	MASK TOOLING SETS:  Those mask tooling sets made by or for SUPPLIER for use in making WAFERS pursuant to this Agreement.

		
	1.9
	PI:  POWER INTEGRATIONS and any of its SUBSIDIARIES.

		
	1.10
	PI IMPROVEMENTS:  Any modification or change, during the term of this Agreement, to the PI PROCESS, the COMMON SPECIFICATIONS, any PI provided information in the MASK TOOLING SETS, or the mask databases that are made solely by PI or made jointly by PI and SUPPLIER.

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[*] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

		
	1.11
	SUPPLIER IMPROVEMENTS:  Any modification or change, during the term of this Agreement, to the PI PROCESS, the COMMON SPECIFICATIONS, any PI provided information in the MASK TOOLING SETS, or the mask databases that (i) are made solely by SUPPLIER without use of PI CONFIDENTIAL INFORMATION, and (ii) for which SUPPLIER has a substantial use other than manufacturing or incorporation into PRODUCTS, and (iii) are based on the SUPPLIER PROCESS.  

		
	1.12
	PI INTELLECTUAL PROPERTY:  The PI PROCESS, the COMMON SPECIFICATIONS, any PI provided information in the MASK TOOLING SETS, the mask databases, the PI IMPROVEMENTS, and all INTELLECTUAL PROPERTY RIGHTS in the foregoing.

		
	1.13
	BACKGROUND TECHNOLOGY means any ideas, concepts, information, materials, processes, data, programs, know-how, improvements, discoveries, developments, designs, artwork, formulae, other copyrightable works, and technique: (a) created, acquired or otherwise developed prior to May 23, 2003 by a party, or (b) developed entirely outside the scope of this AGREEMENT and the 2003 AGREEMENT without reference to the CONFIDENTIAL INFORMATION of the other party; and all INTELLECTUAL PROPERTY RIGHTS related thereto. 

		
	1.14
	PI PROCESS:  PI's process technologies, which are implemented in the SUPPLIER wafer fabrication facility to produce the WAFERS, and of which the detailed specification is specified in the COMMON SPECIFICATIONS, plus all PI IMPROVEMENTS.

		
	1.15
	PILOT PRODUCTION:  The production by SUPPLIER of WAFERS for the purpose of evaluation by PI.

		
	1.16
	PRODUCTS:  Any and all IC products of PI which will be manufactured in accordance with the PI PROCESS.

		
	1.17
	SUBSIDIARY:  Any corporation, company or other entity in which COMPANY or POWER INTEGRATIONS, as the case may be, owns and/or controls, directly or indirectly, now or hereafter, more than fifty percent (50%) of the outstanding shares of stock entitled to vote for the election of directors or their equivalents regardless of the form thereof (other than any shares of stock whose voting rights are subject to restriction); provided, however, that any entity which would be a SUBSIDIARY by reason of the foregoing shall be considered a SUBSIDIARY only so long as such ownership or control exists.  COMPANY and POWER INTEGRATIONS shall each enter into separate written agreements (each a “SUBSIDIARY AGREEMENT”) with each of their respective SUBSIDIARIES who wish to exercise any rights under this Agreement, binding the SUBSIDIARY to the terms and conditions of this Agreement.  A SUBSIDIARY shall maintain its status as a SUBSIDIARY under this Agreement only for so long as such SUBSIDIARY has a SUBSIDIARY Agreement in force and effect.  COMPANY and POWER INTEGRATIONS each guarantee to the other the performance of their respective SUBSIDIARIES under this Agreement, and each will indemnify and hold harmless the other from any costs, damages, or liabilities incurred by the other arising out of a breach by a SUBSIDIARY of the terms and conditions of this Agreement. Notwithstanding anything to the contrary in this AGREEMENT, unless the parties expressly agree otherwise in writing, the only COMPANY SUBSIDIARIES authorized to exercise rights and perform obligations under this AGREEMENT are X-FAB [*] and X-FAB [*].

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[*] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

		
	1.18
	SUPPLIER:  COMPANY, X-FAB [*], and X-FAB [*].

		
	1.19
	SUPPLIER PROCESS:  SUPPLIER's standard process technology steps, from SUPPLIER owned technologies, developed exclusively by SUPPLIER and implemented in the SUPPLIER wafer fabrication facility to produce the WAFERS.

		
	1.20
	VOLUME PRODUCTION:  The production by SUPPLIER of WAFERS for the volume production of PRODUCTS.

		
	1.21
	WAFER(S): Non-probed silicon wafers produced during the PILOT PRODUCTION and VOLUME PRODUCTION which meet the COMMON SPECIFICATIONS and that may be identified by additional specifications in an exhibit that is added hereto by written agreement of the parties.

		
	1.22
	WAFER TYPE.  The different types of WAFERS (e.g., size, location of manufacture) as defined by the COMMON SPECIFICATIONS.  

		
	Article 2.
	(Foundry Capacity and Forecasts)    

		
	2.1
	SUPPLIER agrees using best efforts to provide to PI the foundry capacity (“FOUNDRY CAPACITY”) as set forth in Exhibit A.  Annually, PI will provide SUPPLIER with a twelve (12) month forecast of WAFER orders by WAFER TYPE (“PI ANNUAL FORECAST”). Annually during the Term of this Agreement and in advance of the beginning of SUPPLIER's fiscal year, SUPPLIER and PI will jointly review the PI ANNUAL FORECAST and SUPPLIER's FOUNDRY CAPACITY for the upcoming SUPPLIER fiscal year.  Annually, at the beginning of SUPPLIER's fiscal year during the Term of this Agreement, SUPPLIER will define a FOUNDRY CAPACITY for the current SUPPLIER fiscal year, at each of the SUPPLIER's plants making WAFERS for PI, in an amount no less than [*]%) of PI's total WAFER purchases by WAFER TYPE during the previous SUPPLIER fiscal year, provided the FOUNDRY CAPACITY does not exceed the MAXIMUM FOUNDRY CAPACITY for the PI PROCESS (cif Exhibit A)  based on weekly capacity break down.  During the SUPPLIER fiscal year, SUPPLIER shall consider up to a [*]%) upside request over the current FOUNDRY CAPACITY, by WAFER TYPE, upon a [*] month written advance notice from PI, unless the current FOUNDRY CAPACITY represents [*]%) of SUPPLIER's total capacity in which case such advance notice shall be a [*] month written notice.  Either party can request the other party to negotiate to reduce the FOUNDRY CAPACITY, by WAFER TYPE, for the then current SUPPLIER fiscal year, if SUPPLIER and PI determine that PI will not order at least [*]%) of the PI ANNUAL FORECAST by WAFER TYPE or SUPPLIER can not provide FOUNDRY CAPACITY for justifiable reasons.  Any negotiated reduction in FOUNDRY CAPACITY must be agreed to by PI and SUPPLIER in writing.

		
	2.2
	PI shall provide SUPPLIER, on or before a mutually agreed day of each calendar month, a written [*] month forecast for wafer starts (“PI MONTHLY FORECAST”) of the quantity of the WAFERS of each PRODUCT to be manufactured and delivered during [*]. 

		
	2.3
	PI must order at least the quantity of WAFERS by WAFER TYPE (a) forecasted in the first [*] months of the PI MONTHLY FORECAST and (b) confirmed by SUPPLIER in accordance with Section 2.4, unless SUPPLIER agrees to any change.  PI may revise the quantity of WAFERS for 

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[*] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

each of the upcoming last [*] months of each PI MONTHLY FORECAST but must meet at least [*]% of the previous forecast for month [*],[*] of month [*] and [*]% of months [*] if PI is greater than [*]% of XFAB's utilized capacity.  XFAB must submit monthly a report defining what percent of XFAB's capacity PI is utilizing (current and projected).  If PI is less than [*]% of utilized capacity then PI can make unlimited changes to months [*].
		
	2.4
	The PI MONTHLY FORECAST will be either [*] or [*] for each forecasted month so as to align with SUPPLIER's manufacturing calendar.

Within [*] days after receipt of each PI MONTHLY FORECAST, SUPPLIER will confirm in writing to PI whether it will increase the FOUNDRY CAPACITY to meet any amounts of the PI MONTHLY FORECAST above the Wafer Commitment.
Notwithstanding the foregoing, to the extent SUPPLIER is unable to fulfill any PO from PI because of quality or other SUPPLIER issues (“Unfulfilled Wafers”), then PI will have no obligation to purchase the Unfulfilled Wafers.
Article 3.    (Sale and Purchase of WAFERS; MASK TOOLING SETS)
		
	3.1
	As implementation of the foundry services provided in the preceding Article, PI shall purchase from SUPPLIER, and SUPPLIER shall sell to PI, those WAFERS ordered pursuant to the terms and conditions of this Agreement, which shall be non-probed WAFERS. 

		
	3.2
	Subject to the provisions of Section 3.1 above and 5.2 (“VOLUME PRODUCTION”) below, PI shall submit to SUPPLIER a purchase order (the “PO”) for the WAFERS, which PO shall be substantially in line with the provisions of Section 2.3 above.  All PO's shall be subject to acceptance by SUPPLIER through issuance of a written confirmation within five (5) business days of receipt of the PO.  Upon such written confirmation only, the PO terms of total quantity, delivery time and pricing shall constitute an INDIVIDUAL SALES CONTRACT which will be deemed to incorporate all of the terms and conditions of this Agreement.  The confirmed PO shall be irrevocable except as set forth in Section 2.3 above.  The mix of PRODUCTS and the quantity of WAFERS, by WAFER TYPE, allocated per each of the PRODUCTS in any INDIVIDUAL SALES CONTRACT can be modified at any time, prior to the week the WAFERS will be started, by PI with confirmation from SUPPLIER so long as the total quantity of all WAFERS, by WAFER TYPE, is not less than the total quantity set forth in the INDIVIDUAL SALES CONTRACT.

		
	3.3
	The mask databases for creating MASK TOOLING SETS for WAFERS of any PRODUCT shall be supplied by PI to SUPPLIER [*] before its commencement of the WAFERS' fabrication at no cost to SUPPLIER.  SUPPLIER will produce or procure the MASK TOOLING SETS for the WAFERS.  The cost of production or procurement of the MASK TOOLING SETS shall be paid by PI and the MASK TOOLING SETS shall be owned by SUPPLIER, subject to Section 4.1.  If, upon SUPPLIER's examination, the MASK TOOLING SETS are found to be defective or not in conformance with the MASK SPECIFICATIONS, SUPPLIER shall immediately notify PI in detail as to such defects or non-conformity, and PI shall either provide corrected mask databases and pay for corrected MASK TOOLING SETS or, notwithstanding any other provision of this Agreement, PI can cancel the INDIVIDUAL SALES CONTRACT for the affected WAFERS, upon written notice to SUPPLIER, without any liability except for affected WAFER work in progress (“WIP”) 

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[*] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

and inventory.  The price to PI for the MASK TOOLING SETS shall be SUPPLIER's cost to produce or procure them, and shall be commercially reasonable.  If PI determines that the price or quality of the MASK TOOLING SETS is not acceptable then, at PI's option, the SUPPLIER will procure the MASK TOOLING SETS from a vendor specified by PI.
		
	Article 4.
	(INTELLECTUAL PROPERTY RIGHTS)

		
	4.1
	PI is and shall remain the sole and exclusive owner of all right, title and interest in the PI INTELLECTUAL PROPERTY.  Subject to all of the terms and conditions of this Agreement, PI grants SUPPLIER a limited, non-exclusive license in the PI INTELLECTUAL PROPERTY for the sole purpose of using it internally to manufacture WAFERS for PI in accordance with the terms and conditions of this Agreement.  SUPPLIER may not use the PI INTELLECTUAL PROPERTY for any other purpose or license it to any third party, unless a separate written agreement for any such rights is executed by PI.

		
	4.2
	PI shall be the sole and exclusive owner of all right, title and interest in the PI IMPROVEMENTS.  SUPPLIER hereby does and will irrevocably and unconditionally transfer and assign to PI all of SUPPLIER's right, title and interest worldwide in the PI IMPROVEMENTS.  SUPPLIER will promptly disclose in writing all PI IMPROVEMENTS to PI promptly upon their creation.  SUPPLIER shall take all reasonable actions, at PI's expense, to assist PI in perfecting and enforcing its rights in the PI IMPROVEMENTS.  Such actions shall include but not be limited to execution of assignments, patent applications and other documents.  Subject to all of the terms and conditions of this Agreement, PI hereby grants to SUPPLIER a non-exclusive, irrevocable, perpetual, royalty-free, non-transferable, worldwide, right and license, under all of its INTELLECTUAL PROPERTY RIGHTS to use, modify, reproduce, (but sub-license only to a SUPPLIER SUBSIDIARY) the PI IMPROVEMENTS for SUPPLIER's internal use only except that no license is granted to the PI IMPROVEMENTS for the purpose of SUPPLIER provided foundry service or other benefit to a third party.

		
	4.3
	In the event that any portion of Section 4.2 is declared invalid or illegal according to any applicable law, SUPPLIER hereby waives and agrees never to assert such rights, including any moral rights or similar rights, against PI or its licensees.

		
	4.4
	In the event that any portion of Section 4.2 is declared invalid or illegal according to any applicable law, the parties hereby modify such portion, effective upon such declaration, in such manner as shall secure for PI, and SUPPLIER hereby grants and agrees to grant to PI, an exclusive, irrevocable, perpetual, worldwide, fully paid and royalty-free license under all INTELLECTUAL PROPERTY RIGHTS, with rights to sublicense through one or more level(s) of sublicensee(s), to use, modify, reproduce, create derivative works of, distribute, publicly perform and publicly display by all means now known or later developed, and otherwise exploit in any manner such rights in the PI IMPROVEMENTS,  to the maximum extent permitted by applicable law.

		
	4.5
	SUPPLIER shall be the sole and exclusive owner of all right, title and interest in the SUPPLIER IMPROVEMENTS.  SUPPLIER hereby grants to PI a non-exclusive, irrevocable, perpetual, royalty-free, non-transferable, worldwide, right and license, under all of its INTELLECTUAL PROPERTY RIGHTS in the SUPPLIER IMPROVEMENTS to exploit such SUPPLIER 

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[*] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

IMPROVEMENTS in any manner, but solely to the extent they are used as part of the PI PROCESS and any modifications thereto.  Without any consent of SUPPLIER, PI may sublicense the foregoing license for the SUPPLIER IMPROVEMENTS to PI's SUBSIDIARY so long as the sublicense provides for the protection of SUPPLIER's CONFIDENTIAL INFORMATION on terms not less protective of SUPPLIER's rights than those set forth in this Agreement.   SUPPLIER will promptly disclose in writing all SUPPLIER IMPROVEMENTS to PI upon PI's request.  
		
	4.6
	SUPPLIER agrees not to use the PI INTELLECTUAL PROPERTY or any license  under this Agreement in whole or in part, or any knowledge gained by SUPPLIER through producing WAFERS for PI to develop an equivalent or competing process or other product or service that would compete with PI.  Subject to the previous sentence, SUPPLIER may produce any type or variety of product, technology or service whatsoever in order to conduct business with its other customers.  

		
	4.7
	In the case of a jointly developed PI IMPROVEMENT, SUPPLIER may request that a license be granted for use in non-PI PRODUCTS that do not directly compete with PI PRODUCTS, such license shall not be unreasonably withheld. 

		
	4.8
	As between the parties, each party shall own and hold all right, title and interest in and to all such party's BACKGROUND TECHNOLOGY.  No right or license in such party's BACKGROUND TECHNOLOGY is granted to the other party, except as necessary to perform the other party's obligations under this Agreement or as specifically granted in this Agreement.

		
	Article 5.
	(PILOT PRODUCTION and Minimum Order Quantity)

		
	5.1
	PILOT PRODUCTION

		
	5.1.1
	For the PILOT PRODUCTION, PI shall, if PI desires to, place a PO with SUPPLIER for a minimum of [*] WAFER starts (one (1) pilot lot) or multiples thereof per each PRODUCT.

		
	5.1.2
	The output of the PILOT PRODUCTION will be shipped to PI if the WAFERS output is at least [*]%) of the ordered quantity.  If the WAFERS output is less than [*]%) of the ordered quantity, SUPPLIER will inform PI of the output quantity of the WAFERS, and if PI requires to have the shortage covered, SUPPLIER will re-input the WAFERS to cover the shortage of quantity at no additional cost to PI. 

		
	5.2
	VOLUME PRODUCTION

		
	5.2.1
	For the VOLUME PRODUCTION, PI shall place a PO with SUPPLIER for a minimum of [*] WAFER starts (one (1) lot) or multiples thereof per each PRODUCT and SUPPLIER will ship monthly orders in quantities not less than [*]%) of the quantities ordered of each PRODUCT.

		
	5.2.2
	The orders of PI for the VOLUME PRODUCTION shall be subject to the provisions of Section 3.2 above.

Article 6.    (Delivery)

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[*] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

		
	6.1
	The terms of delivery of the WAFERS from X-FAB [*] shall be DAP (destination specified in POWER INTEGRATIONS PO) Incoterms 2010.  The terms of delivery of the WAFERS from X-FAB [*] shall be DAP (destination specified in POWER INTEGRATIONS PO) Incoterms 2010.

		
	6.2
	The risk of loss relating to the WAFERS delivered by SUPPLIER to PI shall transfer from SUPPLIER to PI at such time and point as provided in Incoterms 2010 relating to such DAP term.  Title to the WAFERS delivered by SUPPLIER to PI shall transfer from SUPPLIER to PI upon arrival at the destination specified in POWER INTEGRATIONS PO.  PI shall have the right to designate a freight forwarder, subject to SUPPLIER's reasonable approval.  PI will pay freight.

		
	6.3
	SUPPLIER will deliver the WAFERS within the number of calendar days specified in the INDIVIDUAL SALES CONTRACT.  In the event that SUPPLIER foresees a delay in the delivery schedule of the WAFERS, SUPPLIER shall make a best effort to correct any delay and SUPPLIER shall promptly notify PI of such delay and submit to PI the new delivery schedule.  PI will have the right to cancel, without liability, the INDIVIDUAL SALES CONTRACT for the delayed WAFERS if the delay is greater than [*] days.

		
	6.4
	SUPPLIER shall pack the WAFERS in accordance with the packing standards defined in the COMMON SPECIFICATIONS.

		
	6.5
	SUPPLIER shall collect PCM data (“PCM DATA”), as defined in the COMMON SPECIFICATIONS, on the manufactured WAFERS.  SUPPLIER will send the PCM DATA electronically to PI before the WAFERS are received by PI.  The PCM DATA will be accurate and complete for all WAFERS and sent in a mutually agreed upon format.

		
	6.6
	In the case that PI determines, in consultation with SUPPLIER, that the WAFERS currently being manufactured will not meet the PRODUCTS requirements, PI can, notwithstanding any other provision of this Agreement, cancel the INDIVIDUAL SALES CONTRACT for the affected WAFERS without any liability except for the affected WAFER WIP and inventory, upon written notice to SUPPLIER.

Article 7.    (Test and Inspection)
		
	7.1
	PI shall conduct incoming inspection of the WAFERS, by WAFER TYPE, to determine the WAFERS' conformance to the COMMON SPECIFICATIONS.  The PCM DATA specified in Section 6.5 is required for the incoming inspection of the WAFERS and the omission, inaccuracy or other defect in the PCM DATA will in itself be sufficient cause to reject the WAFERS.  This inspection shall be regarded as final in terms of quality, quantity and other conditions of the WAFERS supplied to PI subject to SUPPLIER's warranty as defined in Section 11.1.  All WAFERS passing the incoming inspection will be accepted by PI.

		
	7.2
	PI shall notify SUPPLIER which of the WAFERS have been accepted by PI within [*] business days after receipt of the WAFERS by PI.  Should PI fail to notify SUPPLIER within the said [*] business days, the WAFERS shall be deemed to have been accepted by PI.  PI will owe SUPPLIER payment only for the quantity of WAFERS that have been accepted by PI.

		
	7.3
	SUPPLIER shall not be held responsible for the defects and failures of the WAFERS which are attributable to the design, test and assembly by PI of the PRODUCTS.  

8

[*] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

		
	7.4
	SUPPLIER shall not be held responsible for the defects, failures and yield problems of the WAFERS if the WAFERS meet the specifications set forth in the COMMON SPECIFICATIONS.  

		
	7.5
	SUPPLIER may make a written special waiver request to PI to ship WAFERS that do not comply with the COMMON SPECIFICATIONS.  If PI approves such special waiver request in writing, which approval may include special terms and conditions, SUPPLIER may ship such non-complying WAFERS under such terms and conditions.

Article 8.    (Process and Specification Changes)
		
	8.1
	SUPPLIER shall notify PI in writing as soon as possible, in advance and in accordance with the COMMON SPECIFICATIONS, of process changes which require PI's change in database or which would affect the quality, reliability, form, fit or function of the PRODUCTS.  Each such process change shall be subject to PI's prior written approval.  If PI does not approve and the process change is implemented, PI will have the right to cancel, without liability, any INDIVIDUAL SALES CONTRACT affected by the process change.

		
	8.2
	PI shall have sole responsibility for the control, maintenance, distribution and modification of the COMMON SPECIFICATIONS including but not limited to the addition and maintenance of applicable process, inspection, quality and procurement specifications.  PI will notify SUPPLIER of any changes to the COMMON SPECIFICATIONS.  SUPPLIER will acknowledge acceptance of the COMMON SPECIFICATIONS in writing and SUPPLIER's acceptance of the COMMON SPECIFICATIONS will not be unreasonably withheld.  In the case of any issue with the COMMON SPECIFICATIONS, SUPPLIER agrees that PI is the ultimate authority on the COMMON SPECIFICATIONS.

Article 9.    (Price and Charge)
		
	9.1
	The prices of the WAFERS, which are produced both in the PILOT PRODUCTION and the VOLUME PRODUCTION are set forth in Exhibit B attached hereto.  Any modifications thereto must be agreed upon by SUPPLIER and PI in writing, either as an amendment to EXHIBIT B or as part of an INDIVIDUAL SALES CONTRACT.  SUPPLIER and PI may jointly review and revise the WAFERS' price, by WAFER TYPE, within [*] days of the close of SUPPLIER's fiscal year or upon a material change to the COMMON SPECIFICATIONS.

Article 10.    (Payments)
		
	10.1
	Payment for the WAFERS shall be by telephonic transfer [*] days after receipt of invoice and secured by a standby letter of credit to be opened at a first class bank acceptable to SUPPLIER.  SUPPLIER agrees to negotiate terms or alternate forms of payment as proposed by PI.

		
	10.2
	For the [*] costs, PI has paid to SUPPLIER [*] (“[*] Cost”) (i.e., [*] for the [*] and [*] for installation and fitting).  SUPPLIER will pay PI back for the [*] Cost in the form of [*] discounts per wafer after the Rebate Milestone Date until SUPPLIER delivers and PI accepts [*] WAFERS (“Rebate Number of Wafers”) (i.e., [*] = [*]).  The “Rebate Milestone Date” means the date on which the [*] is qualified for production by PI. 

		
	10.3
	If this Agreement is terminated in accordance with Article 13 (“Term and Termination”) before 

9

[*] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

SUPPLIER delivers and PI accepts the Rebate Number of Wafers the SUPPLIER shall immediately pay PI the following amount: 
(a) [*].  For example, but without limitation, if PI has accepted [*] WAFERS between the Rebate Milestone Date and the termination date, then SUPPLIER shall pay PI [*] = [*].
If this Agreement expires before SUPPLIER delivers and PI accepts the Rebate Number of Wafers, SUPPLIER will have no obligation to pay PI any funds under this Section 10.3, provided the quantity of WAFERS delivered by SUPPLIER was not materially adversely affected by SUPPLIER's quality, production, or delivery problems.
Article 11.    (Warranty, Indemnification and Improvements)
		
	11.1
	SUPPLIER warrants that the WAFERS sold to PI will conform to their COMMON SPECIFICATIONS.  PI shall notify SUPPLIER in writing of any non-conformity or defect of said WAFERS within [*] months after notification of acceptance per Section 7.2 above.  SUPPLIER's sole obligations under this warranty are limited to, at PI's option, (i) replacing or reworking any said WAFERS which shall be returned to SUPPLIER's manufacturing facility with transportation charges prepaid, or (ii) SUPPLIER crediting an amount equal to the purchase price of said WAFERS.

		
	11.2
	SUPPLIER shall defend, indemnify and hold harmless PI, its officers, directors, employees and representatives from and against any claim, demand, cause of action, debt, or liability, including reasonable attorneys' fees, relating to or arising from allegations that the SUPPLIER PROCESS or SUPPLIER IMPROVEMENTS used to produce WAFERS or the resulting WAFERS infringes any patent, copyright, trade secret or other right of any kind of a third party; provided that SUPPLIER is promptly (within [*] days after initial legal notice to PI) notified in writing of the action and is allowed to assume and control the defense.  SUPPLIER shall pay all damages and costs awarded therein, but shall not be responsible for any compromise or settlement made without SUPPLIER's consent.

		
	11.3
	EXCEPT AS EXPRESSLY STATED HEREIN, NO EXPRESS OR IMPLIED WARRANTIES ARE MADE BY SUPPLIER RELATING TO THE WAFERS, INCLUDING BUT NOT LIMITED TO WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.  PI MAKES NO REPRESENTATION OR WARRANTY OF ANY KIND WITH REGARD TO ANY OF THE PI INTELLECTUAL PROPERTY.

		
	11.4
	PI shall defend, indemnify and hold harmless SUPPLIER, its officers, directors, employees and representatives from and against any claim, demand, cause of action, debt, or liability, including reasonable attorneys' fees, relating to or arising from allegations that the PI PROCESS and any PI contributions to the PI IMPROVEMENTS used to produce WAFERS infringes any patent, copyright, trade secret or other right of any kind of a third party; provided that PI is promptly (within [*] days after initial legal notice to COMPANY) notified in writing of the action and is allowed to assume and control the defense.  PI shall pay all damages and costs awarded therein, but shall not be responsible for any compromise or settlement made without PI's consent.

		
	11.5
	Notwithstanding Section 13.7, SUPPLIER shall keep records for [*] years, notwithstanding the 

10

[*] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

termination of this Agreement, of the WAFERS manufactured and summaries of their process monitors.  SUPPLIER agrees to permit such records to be examined and copied by PI or PI's authorized representative, upon reasonable prior written notice to SUPPLIER, during normal business hours at SUPPLIER's offices.  Such records shall be deemed PI's CONFIDENTIAL INFORMATION.
Article 12.    (Confidentiality)
		
	12.1
	The receiving party shall use any CONFIDENTIAL INFORMATION acquired from the disclosing party in connection with this Agreement solely for the purposes of this Agreement.

		
	12.2
	Subject to Sections 12.7 and 12.8, for a period of [*] years after the receipt or creation of the CONFIDENTIAL INFORMATION, or during the Term of this Agreement, whichever is longer, the receiving party shall use a reasonable standard of care not to publish or disseminate the CONFIDENTIAL INFORMATION to any third party, except as otherwise provided herein. The receiving party shall have no obligation with respect to any CONFIDENTIAL INFORMATION received by it which the receiving party shall prove is:

		
	(a)
	Published or otherwise available to the public other than by a breach of this Agreement or any other agreement by the receiving party

		
	(b)
	Rightfully received by the receiving party hereunder from a third party not obligated under this Agreement or any other agreement, and without confidential limitation;

		
	(c)
	Known to the receiving party prior to its first receipt of the same from the disclosing party;

		
	(d)
	Independently developed by the receiving party without access to the CONFIDENTIAL INFORMATION of the other party;

		
	(e)
	Furnished to a third party by the disclosing party without restrictions on the third party's right of disclosure similar to those of this Agreement; or

		
	(f)
	Stated in writing by the disclosing party no longer to be CONFIDENTIAL INFORMATION.

In the case that the receiving party intends to disclose publicly or to a third party any CONFIDENTIAL INFORMATION under the previously defined exceptions above, the receiving party must first give the disclosing party written notice [*] days prior to any such disclosure.
		
	12.3
	If any CONFIDENTIAL INFORMATION is disclosed pursuant to the requirement or request of a governmental or judicial agency or disclosure is required by operation of law, such disclosure will not constitute a breach of this Agreement, provided that the receiving party shall give prior written notice to the disclosing party and seek a protective order with respect thereto reasonably satisfactory to the disclosing party to the extent available under applicable law.

		
	12.4
	The receiving party shall limit access to the CONFIDENTIAL INFORMATION only to such officers and employees of the receiving party who are reasonably necessary to implement this Agreement and only to such extent as may be necessary for such officers and employees to 

11

[*] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

perform their duties. The receiving party shall be liable to cause all of such officers and employees to sign a secrecy agreement to abide by the secrecy obligations provided in this Agreement.  The receiving party shall maintain records of such officers and employees.
		
	12.5
	CONFIDENTIAL INFORMATION and all materials including, without limitation, documents, drawings, masks, specifications, models, apparatus, sketches, designs and lists furnished to the receiving party by and which are themselves identified to be or designated in writing to be the property of the disclosing party are and shall remain the property of the disclosing party and shall be returned to the disclosing party promptly at its request, including any copies.

		
	12.6
	PI may disclose information with respect to any SUPPLIER IMPROVEMENTS to the PI PROCESS to one or more third parties as PI CONFIDENTIAL INFORMATION and covered by a non-disclosure agreement with protection equivalent to this Agreement for the sole purpose of having such third parties provide PI with design, layout, foundry, assembly and testing services.

		
	12.7
	CONFIDENTIAL MANUFACTURING INFORMATION will be confidential for a period of [*] years after the Term of this Agreement and SUPPLIER agrees to use its best efforts to never make public the CONFIDENTIAL MANUFACTURING INFORMATION.  Notwithstanding any other provision of this Agreement, SUPPLIER shall treat the CONFIDENTIAL MANUFACTURING INFORMATION in accordance with the confidentiality obligations and use restrictions of this Agreement during that [*] year period.

		
	12.8
	SUPPLIER's obligations with respect to any portion of PI's CONFIDENTIAL MANUFACTURING INFORMATION shall terminate when SUPPLIER can document and with PI's written concurrence that such CONFIDENTIAL MANUFACTURING INFORMATION:

		
	(a)
	Was rightfully in the public domain at the time it was communicated to SUPPLIER by PI; or

		
	(b)
	Rightfully entered the public domain through no fault of SUPPLIER subsequent to the time it was communicated to SUPPLIER by PI; or

		
	(c)
	Was rightfully in SUPPLIER's possession free of any obligation of confidence at the time it was communicated to SUPPLIER by PI; or

		
	(d)
	Was rightfully communicated to SUPPLIER by a third party free of any obligation of confidence subsequent to the time it was communicated to SUPPLIER by PI; or

		
	(e)
	Was independently developed by SUPPLIER and upon specific request of PI, SUPPLIER documents that the information was independently developed by the SUPPLIER. 

For any CONFIDENTIAL MANUFACTURING INFORMATION to be subject to an exception above, any document containing such CONFIDENTIAL MANUFACTURING INFORMATION, and the information related thereto, must in their entirety qualify for the exception.  This explicitly excludes any right to apply the exception by redacting CONFIDENTIAL MANUFACTURING INFORMATION or any part thereof from a document.
In the case that SUPPLIER intends to disclose to an unauthorized party PI's CONFIDENTIAL 

12

[*] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

MANUFACTURING INFORMATION under the exceptions above, the SUPPLIER must first receive PI's prior written approval and such approval will be in PI's sole discretion.
		
	12.9
	PI may request the confidential release of SUPPLIER's CONFIDENTIAL INFORMATION to a customer of the PRODUCTS for purposes of such customer's evaluation or audit.  SUPPLIER shall not unreasonably withhold approval of the release.

		
	12.10
	Obligation to Notify and Remedy.  SUPPLIER will immediately give written notice to PI of any suspected unauthorized use or disclosure of PI's CONFIDENTIAL MANUFACTURING INFORMATION and SUPPLIER will be responsible for remedying such unauthorized use or disclosure.  In the event that SUPPLIER or (to the knowledge of SUPPLIER) any of its representatives is requested or required (by oral questions, interrogatories, requests for information or documents in legal proceedings, subpoenas, civil investigative demands or other similar processes) to disclose any of PI's CONFIDENTIAL MANUFACTURING INFORMATION, SUPPLIER shall provide PI with prompt written notice of any such request or requirement sufficiently timely to allow PI adequate time to seek a protective order or other appropriate remedy and/or waive compliance with the provisions of this Agreement.

		
	12.11
	Notwithstanding Section 18.1 (“Entire Agreement”), the parties agree that the CMI Agreement previously entered into between Power Integrations, Inc. and X-FAB [*], the 2003 AGREEMENT, and the CMI Agreement previously entered into between Power Integrations, Inc. and X-FAB [*] (collectively the “PRIOR AGREEMENTS”) shall remain in full force and effect and govern POs and information exchanged prior to the EFFECTIVE DATE of this AGREEMENT.  The PRIOR AGREEMENTS shall not govern POs and information exchanged after the EFFECTIVE DATE.  All POs and information exchanged after the EFFECTIVE DATE will be governed by the terms and conditions of this AGREEMENT. 

		
	12.12
	Notwithstanding anything to the contrary in this AGREEMENT, any activity performed by or information provided by any affiliate of POWER INTEGRATIONS in connection with this AGREEMENT will be deemed performed by or provided by POWER INTEGRATIONS.

Article 13.    (Term and Termination)
		
	13.1
	This Agreement shall continue in full force and effect from the Effective Date until [*], unless earlier terminated as provided herein (“Term”). 

		
	13.2
	Notwithstanding anything to the contrary in Section 18.11 (“Force Majeure”), if any governmental agency, entity or authority requires (including through administrative guidance) any changes to this Agreement, PI may terminate this Agreement immediately if the changes are, in PI's sole discretion, detrimental to PI's interests or otherwise not reasonably acceptable to PI, without liability of any kind, except for affected WAFER work in progress (“WIP”) and inventory.

		
	13.3
	In the event that either party has committed a material breach of this Agreement, the other party shall promptly give written notice thereof to the breaching party, specifying any alleged material breach or breaches.  The breaching party shall have sixty (60) days after the effective date of such written notice to have all material breaches specified either remedied or waived (“cured”).  If such breaches are not so cured, the other party shall have the right to terminate this Agreement effective 

13

[*] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

upon written notice.
		
	13.4
	Either party shall also have the right to terminate this Agreement with immediate effect by giving written notice of termination to the other party at any time upon or after the occurrence of any of the following events with respect to such other party:

		
	(a)
	Insolvency, bankruptcy, reorganization or liquidation or filing of any application therefor, or other commitment of an affirmative act of insolvency, which is not promptly removed or stayed, if (1) the first party does not receive prompt, satisfactory, written assurance from the other party that it can meet its obligations under this Agreement, or (2) after such assurance such other party does not continue to meet such obligations;

		
	(b)
	Attachment, execution or seizure of substantially all of the assets or filing of any application therefor which is not promptly released or stayed;

		
	(c)
	Assignment or transfer of that portion of the business to which this Agreement pertains to a trustee for the benefit of creditors;

		
	(d)
	Termination of its business or dissolution.

		
	13.5
	[*]

		
	13.6
	No failure or delay on the part of either party in exercising its right of termination hereunder for any one or more causes shall be construed to prejudice its rights of termination for such cause or any other or subsequent cause.

		
	13.7
	In the event of expiration or termination of this Agreement, within [*] days after expiration or termination of this Agreement, the receiving party shall return to the disclosing party all media and documentation containing the CONFIDENTIAL INFORMATION and render unusable all said CONFIDENTIAL INFORMATION placed in any storage apparatus under the receiving party's control.  SUPPLIER will promptly produce for PI all documents in any form containing CONFIDENTIAL MANUFACTURING INFORMATION, whether made by PI or by SUPPLIER (including notes made by SUPPLIER), and whether such documents be in hard copy, electronic (including email), optical or other form.

		
	13.8
	The termination or expiration of this Agreement shall not release either party from any liability which at said date of termination or expiration has already accrued to the other party.  

		
	13.9
	Notwithstanding any termination or expiration of this Agreement, the provisions of Articles 1 (“Definitions”), 4 (“INTELLECTUAL PROPERTY RIGHTS”), 11 (“Warranty, Indemnification and Improvements”), and 12 (“Confidentiality”), Sections 13.7, 13.8, 13.9, and Articles 14 (“Government Regulations”), 15 (“Non-Disclosure”), and 18 (“Miscellaneous Provisions”) shall survive this Agreement.

Article 14.    (Government Regulations)
		
	14.1
	Unless prior approval is obtained from the competent governmental agency, each party shall not knowingly export or re-export, directly or indirectly, any WAFERS to any country or countries to 

14

[*] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

which export or re-export will violate any laws or regulations of the United States of America.
		
	14.2
	SUPPLIER is responsible for all taxes in respect of this Agreement except for taxes on PI's income.

Article 15.    (Non-Disclosure)
		
	15.1
	SUPPLIER shall keep the terms and existence of this Agreement confidential and shall not make disclosure thereof to any third party without the prior written consent of PI, which will be at PI's sole discretion and, if given, shall be conditioned upon all CONFIDENTIAL MANUFACTURING INFORMATION being redacted from such disclosure.

Article 16.    (Third Party Service Providers)
		
	16.1
	SUPPLIER shall have no right to have WAFERS manufactured, in whole or in part, by a third party unless PI gives its written approval therefor in advance, which approval shall be at PI's sole discretion.  If PI does give such written approval, then SUPPLIER may disclose PI CONFIDENTIAL INFORMATION for the sole purpose of, and only to the extent reasonably necessary for, having such third party provide such services solely for the benefit if PI and not for the benefit of any other party.  Such approval shall be conditioned upon:

		
	(i)
	PI's prior review and written approval of the contract between SUPPLIER and such third party performing such manufacture; and

		
	(ii)
	the third party agreeing in writing to all applicable terms and conditions of this Agreement, and;

		
	(iii)
	SUPPLIER being the insurer and guarantor of such third party's full observance of such terms and conditions; and

		
	(iv)
	SUPPLIER's disclosure of CONFIDENTIAL MANUFACTURING INFORMATION to such third party being subject to PI's prior written approval, which shall be at PI's sole discretion.

Article 17.    (Manufacturing Equipment)
		
	17.1
	SUPPLIER shall keep the Varian Model Kestrel II 750 MeV implanter located in X-FAB [*]'s facility in operating condition and available for VOLUME PRODUCTION during the Term of this Agreement as long as wafers are produced for PI at the X-FAB [*] facility in [*].  SUPPLIER shall be responsible for the maintenance and operation of this implanter.  SUPPLIER will pay for all repairs of this implanter.  Any repairs should be completed in reasonable time provided, however, that if a repair cannot be completed within ten (10) calendar days from discovery of the need for such repair, then SUPPLIER shall give immediate written notice to PI describing (1) the problem preventing repair in such ten (10) day period, and (2) a firm schedule for completing the repair.

		
	17.2
	SUPPLIER has purchased (1) the following manufacturing equipment, which is an [*] machine (“[*]”): [*] Machine / Model: [*]; (2) installation of the [*]; and (3) fitting for [*] & [*].

15

[*] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

		
	17.3
	SUPPLIER will own the [*] and, except as set forth above, will be responsible for full installation, connection to existing equipment, testing and qualification of the [*] at SUPPLIER's facility.  Qualification will be in accordance with a qualification plan mutually agreed upon in writing between SUPPLIER and PI.  Qualification shall not be complete until the date PI reasonably agrees in writing that the foregoing qualification plan has been met.

		
	17.4
	SUPPLIER shall keep the [*] in operating condition and available for VOLUME PRODUCTION during the Term of this Agreement.  SUPPLIER shall be responsible for the maintenance and operation of the [*] as long as wafers are produced for PI at X‐FAB [*]'s facility in [*].  SUPPLIER will pay for all repairs of the [*].  Any repairs should be completed in reasonable time provided, however, that if a repair cannot be completed within [*] calendar days from discovery of the need for such repair, then SUPPLIER shall give immediate written notice to PI describing (1) the problem preventing repair in such [*] day period, and (2) a firm schedule for completing the repair.

		
	17.5
	SUPPLIER shall not modify the [*] without the prior written approval of PI.  SUPPLIER will pay for any modifications of the [*].  PI shall determine whether the approved modification requires re-qualification of the [*].  SUPPLIER agrees to re-qualify the [*] if so determined in accordance with a mutually agreed-to, written qualification plan.  Such re-qualification will be at SUPPLIER's expense.

		
	17.6
	Without PI's prior written consent, SUPPLIER shall not (a) move or relocate the [*], (b) lend or transfer it to any third party, or (c) encumber the [*] with any lien or other security interest, except for the terms and conditions of any grant by the [*] government.

		
	17.7
	The [*] will be used for manufacturing WAFERS for PI, and for PI research and development activities.  The [*] will not be used for the benefit of competitors of PI.  SUPPLIER will obtain prior written consent of PI for the use of the [*] for third parties.  Such consent will not unreasonably be withheld.  The operation of the [*] for any other use is permitted as long as delivery and FOUNDRY CAPACITY commitments by SUPPLIER to PI are met.

		
	17.8
	SUPPLIER will maintain, at its sole cost and expense, the same types and amounts of insurance for the [*] as SUPPLIER maintains for its other similar equipment at SUPPLIER's facility.  A Certificate of Insurance indicating such coverage shall be delivered to PI upon request. The Certificate shall indicate that the policy will not be changed or terminated without at least thirty (30) days' prior notice to PI, shall name PI as an additional named insured and shall also indicate that the insurer has waived its subrogation rights against PI.

		
	17.9
	SUPPLIER hereby grants a security interest in the [*] furnished hereunder and the proceeds therefrom, to secure full re-payment of the [*] COST to PI in accordance with this Agreement.  SUPPLIER agrees to execute any financing statements or other documents PI requests to protect its security interest.

		
	17.10
	The requirements of Sections 17.3 - 17.7 will expire upon the earlier of the date that SUPPLIER delivers and PI accepts the Rebate Number of Wafers or upon the date that PI is paid the total amount set forth in Section 10.3.

16

[*] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

Article 18.    (Miscellaneous Provisions)
		
	18.1
	Entire Agreement.  This Agreement embodies the entire understanding of the parties as it relates to the subject matter hereof commencing as of the EFFECTIVE DATE and this Agreement supersedes any prior agreements or understandings between the parties with respect to such subject matter.   For the avoidance of doubt, (1) this AGREEMENT does not supersede or replace the PRIOR AGREEMENTS and (2) all POs and information exchanged after the EFFECTIVE DATE will be governed by the terms and conditions of this AGREEMENT, and not the PRIOR AGREEMENTS.

		
	18.2
	Article Headings.  The article and section headings herein are for convenience only and shall not affect the construction hereof.

		
	18.3
	Waiver.  Should either PI or SUPPLIER fail to enforce any provision of this Agreement or to exercise any right in respect thereto, such failure shall not be construed as constituting a waiver or a continuing waiver of its rights to enforce such provision or right or any other provision or right.

		
	18.4
	No License.  Nothing contained in this Agreement shall be construed as conferring by implication, estoppel or otherwise upon either party hereunder any license or other right except as expressly set forth in Article 4 (“INTELLECTUAL PROPERTY RIGHTS”).

		
	18.5
	English Language.  This Agreement is in the English language only, which language shall be controlling in all respects, and all versions hereof in any other language shall be for accommodation only and shall not be binding upon the parties.  All communications between SUPPLIER and PI to effect the terms of this Agreement shall be in the English language only.

		
	18.6
	No Agency.  The parties to this Agreement are independent contractors.  There is no relationship of agency, partnership, joint venture, employment or franchise between the parties.  Neither party has, nor will either party represent that it has, the authority to bind the other or to incur any obligation on its behalf.  

		
	18.7
	Notices.  Any notice required or permitted to be given by either party to the other party under this Agreement shall be in writing and delivered by overnight courier, signature of receipt required, and shall be deemed delivered upon written confirmation of delivery by the courier, if sent to the following respective addresses or such new addresses as may from time to time be supplied hereunder.  

To:    X-FAB Semiconductor Foundries AG 
Haarbergstrasse 67
99097 Erfurt / Germany
Attention:  Chief Operating Officer
To:    Power Integrations, Singapore Pte Ltd 
51 Newton Road,

17

[*] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

#15-08/10 Goldhill Plaza
 Singapore, 308900
Attention:  Managing Director
		
	18.8
	Invalidity.  If any provision of this Agreement, or the application thereof to any situation or circumstance, shall be invalid or unenforceable, the remainder of this Agreement or the application of such provision to situations or circumstances other than those as to which it is invalid or unenforceable, shall not be affected; and each remaining provision of this Agreement shall be valid and enforceable to the fullest extent permitted by applicable law.  In the event of such partial invalidity, the parties shall seek in good faith to agree on replacing any such legally invalid provisions with provisions which, in effect, will most nearly and fairly approach the effect of the invalid provision.

		
	18.9
	Assignment.  This Agreement and any rights or licenses granted herein shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns.  SUPPLIER shall not assign any of its rights or privileges hereunder without the prior written consent of PI except as set forth in Section 13.5.  Such consent shall not be unreasonably withheld.

		
	18.10
	Amendment.  This Agreement may not be extended, supplemented or amended in any manner except by an instrument in writing expressly referring to this Agreement and duly executed by authorized officers of both parties.

		
	18.11
	Force Majeure.  Either party shall be excused for failures and delays in performance caused by war, declared or not, any laws, proclamations, ordinances or regulations of the government of any country or of any political subdivision of any country, or strikes, lockouts, floods, fires, explosions, acts of terrorism or such other catastrophes as are beyond the control or without the material fault of such party (“Causes”).  Any party claiming any such excuse for failure or delay in performance due to such Causes shall give prompt notice thereof to the other party, and neither party shall be required to perform hereunder during the period of such excused failure or delay in performance except as otherwise provided herein.  This provision shall not, however, release such party from using its best efforts to avoid or remove all such Causes and such party shall continue performance hereunder with the utmost dispatch whenever such Causes are removed.  In the event that the period of excused performance continues for ninety (90) days, this Agreement may be terminated by the party not excused under this Section 18.11 (“Force Majeure”), by written notice to the other party, subject to the provisions of Article 13 (“Term and Termination”) relating to the effect of termination.

		
	18.12
	Equitable Relief.  Because SUPPLIER will have access to and become acquainted with the CONFIDENTIAL INFORMATION of PI, the unauthorized use or disclosure of which would cause irreparable harm and significant injury which would be difficult to ascertain and which would not be compensable by damages alone, the parties agree that PI will have the right to obtain an injunction, specific performance, or other equitable relief without prejudice to any other rights and remedies that it may have for such breach of this Agreement.

		
	18.13
	[*]

18

[*] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

		
	18.14
	Governing Law.  This Agreement and matters connected with the performance hereof shall be construed, interpreted, applied and governed in all respects in accordance with the laws of California and the United States without regard to conflict of laws principles.  SUPPLIER hereby submits to the jurisdiction of, and waives any venue objection against, the Superior Court of the State of California in Santa Clara County, or the Municipal Court of the State of California, County of Santa Clara, or the United States District Court for the Northern District of California, in any litigation arising out of this Agreement. To the extent permissible under applicable law, each party to the contract hereby irrevocably waives its right to apply for a jury trial.

		
	18.15
	[*] Inch Wafers.  This Agreement covers PI's acquisition of wafer fabrication and supply services from SUPPLIER  based on [*]”) WAFERS.  It is recognized by the parties that this Agreement shall not apply to the development and manufacture of [*]”) WAFERS.  After the technical feasibility of the [*]”) WAFER process has been verified at PI's other supplier, the parties agree to negotiate in good faith regarding PI's potential acquisition of additional WAFER fabrication and supply services for [*]”) WAFERS from SUPPLIER's X-FAB [*] facility.

18.16.  X-FAB [*].  SUPPLIER shall use its best efforts to qualify PI's process and supply [*] inch [*], [*] and [*] WAFERS from SUPPLIER's X-FAB [*] facility as soon as practicable after the Effective Date.  PI will pay SUPPLIER a fee of U.S. [*] for SUPPLIER's research and development efforts to transfer and qualify [*], [*] and [*] WAFERS processes at X-FAB [*].  Provided SUPPLIER continues to use its best efforts to transfer and qualify such processes, PI will make such payment in accordance with the following schedule at the beginning of each year:  [*].  
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed in their respective corporate names by their duly authorized representatives on the date written below.
	
					
	X-FAB Semiconductor Foundries AG
	 
	 
	Power Integrations International, Ltd.

	Signature:
	/s/ Charles Hage
	 
	Signature:
	/s/ John L. Tomlin

	Name:
	Charles Hage
	 
	Name:
	John L. Tomlin

	Title:
	Vice President of Sales
	 
	Title:
	President and Director

	Date:
	February 10, 2012
	 
	Date:
	3/5/2012

19

[*] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.

Exhibit A

SUPPLIER FOUNDRY CAPACITY AND PI ANNUAL FORECAST

1.    PI's projected PI ANNUAL FORECAST of WAFER orders 

The table below summarizes the PI ANNUAL FORECAST for the next five years.  

	
						
	Calendar Year
	2011
	2012
	2013
	2014
	2015 and beyond

	X-FAB [*] WAFERS
	[*]
	[*]
	[*]
	[*]
	[*]

	X-FAB [*] WAFERS 
	[*]
	[*]
	[*]
	[*]
	[*]

2.    X-FABs projected MAXIMUM FOUNDRY CAPACITY of wafers for the PI PROCESS 

	
						
	Calendar Year
	2011
	2012
	2013
	2014
	2015 and beyond

	X-FAB [*] WAFERS
	[*]
	[*]
	[*]
	[*]
	[*]

	X-FAB [*] WAFERS (projected  capacity)
	[*]
	[*]
	[*]
	[*]
	[*]

The weekly MAXIMUM FOUNDRY CAPACITY can be derived from the above table which defines the annual MAXIMUM FOUNDRY CAPACITY

[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

Exhibit B
PRICES for X-FAB [*] WAFERS

[*] Inch [*] PROCESS WAFER
Price:                   [*] layers              less than [*]                   $[*]/WAFER
[*]                $[*]/WAFER
[*]                $[*]/WAFER
[*]                $[*]/WAFER
[*]+                $[*]/WAFER

Pricing is commensurate with monthly WAFER volume and can be adjusted if average monthly WAFER volume changes.

Any increase or decrease to raw material costs may result in an adjustment of the pricing which will be renegotiated in good faith upon the parties.
    
Delivery times:                [*] days / layer            
[*] PROCESS ENGINEERING WAFER
Price:                        Std. and non-std. run               $[*] / wafer    
[*] Wafer lot incl. [*] split   $[*]
[*] Wafer lot incl. [*] splits $[*]
[*] Wafer lot incl. [*] splits $[*]
[*] Wafer lot incl. [*] splits $[*]

Hot run            $[*] / wafer
Minimum wafer lot size    [*] wafers
Delivery times:
Standard run            [*]days / layer
Hot run            [*] days / layer   
Non-Standard run        Mutually agreed upon order

MASK TOOLING SET 
Price:                        [*] mask set 
    ([*] [*]x masks)
               ([*] [*]x masks)    $[*]
Individual masks
[*]x mask $[*] / mask
[*]x mask $[*] / mask
Vendors:                      Photronics Photo Masks [*], [*]
 [*], [*]
THE ABOVE PRICES ARE FOR ALL POs SUBMITTED AFTER THE EFFECTIVE DATE. ALL 

[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

PRICES ABOVE FOR EACH SUBSEQUENT YEAR WILL BE NEGOTIATED IN THE FOURTH QUARTER OF THE THEN-CURRENT CALENDAR YEAR BEGINNING IN 2011 AND PAID IN US DOLLARS.  IF THE PARTIES ARE UNABLE TO AGREE ON PRICING FOR A SUBSEQUENT YEAR PRIOR TO THE END OF THE FOURTH QUARTER OF THE THEN-CURRENT CALENDAR YEAR, THEN THE PRICING FROM THE THEN-CURRENT CALENDAR YEAR WILL APPLY FOR SUCH SUBSEQUENT YEAR. 

[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

  
PRICES for X-FAB [*] WAFERS

[*] Inch [*] PROCESS WAFERS

The following table contains the production pricing and volume for [*] WAFERS.  [*] WAFER pricing is [*]%) higher.  [*] WAFER pricing will be mutually agreed upon by the parties.  The following pricing assumes any shipping, insurance and customs charges are to be borne by PI.

Year        wspm        Price
2011        [*]        $[*]
2012        [*]        $[*]
2013        [*]        $[*]
2014        [*]        $[*]
2015        [*]        $[*]
2016        [*]        $[*]
2017        [*]        $[*]
2018        [*]        $[*]
2019        [*]        $[*]
2020        [*]        $[*]

Any increase or decrease to raw material costs may result in an adjustment of the pricing which will be renegotiated in good faith upon the parties.

Delivery times:                [*] days / layer
[*] PROCESS ENGINEERING WAFER
Price:                        Std. and non-std. run        $[*]/wafer    
Hot run            $[*]/wafer
Minimum wafer lot size    [*] wafers
Delivery times:
Standard run        [*] days / layer
Hot run        [*] days / layer
Non-Standard run    Mutually agreed upon order

MASK TOOLING SET 
Price:                        [*] mask set [*]x masks)    $[*]
Individual [*]x masks     $[*] / mask
Vendors:                      TBD

[*] and [*] Engineering WAFER pricing will be mutually

[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.POWI-EX10.3_CREDIT AGREEMENT

Exhibit 10.3

CREDIT AGREEMENT

THIS CREDIT AGREEMENT (this "Agreement") is entered into as of February 22, 2011, by and between POWER INTEGRATIONS, INC., a Delaware corporation ("Borrower"), and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank").

RECITALS

Borrower has requested that Bank extend or continue credit to Borrower as described below, and Bank has agreed to provide such credit to Borrower on the terms and conditions contained herein.

NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Bank and Borrower hereby agree as follows:

ARTICLE I
CREDIT TERMS

SECTION 1.1.    LINE OF CREDIT.

(a)    Line of Credit.  Subject to the terms and conditions of this Agreement, Bank hereby agrees to make advances to Borrower from time to time up to and including February 1, 2013, not to exceed at any time the aggregate principal amount of Fifty Million Dollars ($50,000,000.00) ("Line of Credit"), the proceeds of which shall be used for Borrower's general corporate purposes.  Borrower's obligation to repay advances under the Line of Credit shall be evidenced by a promissory note dated as of February 22, 2011 ("Line of Credit Note"), all terms of which are incorporated herein by this reference.

(b)    Letter of Credit Subfeature.  As a subfeature under the Line of Credit, Bank agrees from time to time during the term thereof to issue or cause an affiliate to issue commercial and standby letters of credit for the account of Borrower to back performance (each, a "Letter of Credit" and collectively, "Letters of Credit"); provided however, that the aggregate undrawn amount of all outstanding Letters of Credit shall not at any time exceed Five Million Dollars ($5,000,000.00).  Unless cash secured to Bank's satisfaction, no Letter of Credit shall have an expiration date subsequent to the maturity date of the Line of Credit.  The undrawn amount of all Letters of Credit shall be reserved under the Line of Credit and shall not be available for borrowings thereunder.  Each Letter of Credit shall be subject to the additional terms and conditions of the Letter of Credit agreements, applications and any related documents required by Bank in connection with the issuance thereof.  Each drawing paid under a Letter of Credit shall be deemed an advance under the Line of Credit and shall be repaid by Borrower in accordance with the terms and conditions of this Agreement applicable to such advances; provided however, that if advances under the Line of Credit are not available, for any reason, at the time any drawing is paid, then Borrower shall immediately pay to Bank the full amount drawn, together with interest thereon from the date such drawing is paid to the date such amount is fully repaid by Borrower, at the rate of interest applicable to advances under the Line of Credit.  In such event Borrower agrees that Bank, in its sole discretion, may debit any account maintained by Borrower with Bank for the amount of any such drawing.

(c)    Borrowing and Repayment.  Borrower may from time to time during the term of the Line of Credit borrow, partially or wholly repay its outstanding borrowings, and reborrow, subject to all of the limitations, terms and conditions contained herein or in the Line of Credit Note; provided however, that the total outstanding borrowings under the Line of Credit shall not at any time exceed the maximum principal amount available thereunder, as set forth above.  Borrower may terminate this Agreement at any time upon notice to Bank and payment in full of all amounts owing by Borrower to Bank under this 

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Agreement, and cash collateralization to Bank's satisfaction of any Letters of Credit issued pursuant to this Agreement.  

SECTION 1.2.    INTEREST/FEES.

(a)    Interest.  The outstanding principal balance of each credit subject hereto shall bear interest, and the amount of each drawing paid under the Standby Letter of Credit shall bear interest from the date such drawing is paid to the date such amount is fully repaid by Borrower, at the rate of interest set forth in each promissory note or other instrument or document executed in connection therewith.

(b)    Computation and Payment.  Interest shall be computed on the basis of a 360-day year, actual days elapsed.  Interest shall be payable at the times and place set forth in each promissory note or other instrument or document required hereby.

(c)    Standby and Commercial Letter of Credit Fees.  Borrower shall pay to Bank (i) fees upon the issuance of each Standby and Commercial Letter of Credit equal to one and one-half percent (1.50%) per annum (computed on the basis of a 360-day year, actual days elapsed) of the face amount thereof, and (ii) fees upon the payment or negotiation of each drawing under any Standby and Commercial Letter of Credit and fees upon the occurrence of any other activity with respect to any Standby and Commercial Letter of Credit (including without limitation, the transfer, amendment or cancellation of any Standby and Commercial Letter of Credit) determined in accordance with Bank's standard fees and charges then in effect for such activity.

(d)    Commitment Termination.  At any time (i) there is no outstanding principal balance or unpaid interest under the Line of Credit or the Letter of Credit subfeature described in Section 1.1(b) above, (ii) there are no issued and outstanding Letter(s) of Credit under the Letter of Credit subfeature, and (iii) there are no other payment obligations of Borrower to Bank outstanding hereunder or under any other Loan Document, then Borrower, upon written notice (a “Commitment Termination Notice”) to Bank, may request that the Line of Credit be terminated with no prepayment fees.

SECTION 1.3.    DEPOSIT BALANCES ARRANGEMENT.  Borrower shall maintain with Bank deposit balances, calculated on a quarterly basis, equal to $25,000,000.00 (“Deposit Balances Arrangement”).  To the extent such Deposit Balances Arrangement is not maintained, Borrower shall pay to Bank a fee equal to the product of the balance deficiency multiplied by a rate per annum of 0.35%, which fee shall be calculated on a quarterly basis by Bank and shall be due and payable by Borrower in arrears within ten (10) days after each billing is sent by Bank.

SECTION 1.4.    GUARANTIES.  The payment and performance of all indebtedness and other obligations of Borrower to Bank shall be guaranteed jointly and severally by any current or hereafter created domestic subsidiaries of Borrower, as evidenced by and subject to the terms of guaranties in form and substance satisfactory to Bank. 

ARTICLE II
REPRESENTATIONS AND WARRANTIES

Borrower makes the following representations and warranties to Bank:

SECTION 2.1.    LEGAL STATUS.  Borrower is a corporation, duly organized and existing and in good standing under the laws of Delaware, and is qualified or licensed to do business (and is in good standing as a foreign corporation, if applicable) in all jurisdictions in which such qualification or licensing is required, except in those states in which the failure to so qualify or to be so licensed could not reasonably be expected to have a material adverse effect on Borrower.

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SECTION 2.2.    AUTHORIZATION AND VALIDITY.  This Agreement and each promissory note, contract, instrument and other document required hereby or at any time hereafter delivered to Bank in connection herewith (collectively, the "Loan Documents") have been duly authorized, and upon their execution and delivery in accordance with the provisions hereof will constitute legal, valid and binding agreements and obligations of Borrower or the party which executes the same, as applicable, enforceable in accordance with their respective terms.

SECTION 2.3.    NO VIOLATION.  The execution, delivery and performance by Borrower of each of the Loan Documents do not violate any provision of any law or regulation, or contravene any provision of the Certificate of Incorporation or By-Laws of Borrower, or result in any breach of or default under any contract, obligation, indenture or other instrument to which Borrower is a party or by which Borrower may be bound, except where such violation, contravention, breach or default would not reasonably be expected to have a material adverse effect on Borrower.

SECTION 2.4.    LITIGATION.  There are no pending, or to Borrower's knowledge threatened in writing, actions, claims, investigations, suits or proceedings by or before any governmental authority, arbitrator, court or administrative agency involving more than $1,000,000 individually, or $10,000,000 in the aggregate, or which would reasonably be expected to have a material adverse effect on the financial condition or operation of Borrower other than those disclosed by Borrower to Bank in writing or in Borrower's periodic and other reports, proxy statements and other materials filed with the SEC or distributed to its stockholders (the “SEC Filings”) prior to the date hereof.  As used in this Agreement, “SEC” shall mean the Securities and Exchange Commission, any entity succeeding to any or all of the functions of the Securities and Exchange Commission or any national securities exchange or analogous agency, authority, instrumentality, regulatory body, court or other entity.  

SECTION 2.5.    CORRECTNESS OF FINANCIAL STATEMENT.  The annual financial statement of Borrower dated December 31, 2009, and all interim financial statements delivered to Bank since said date, true copies of which have been delivered by Borrower to Bank prior to the date hereof, (a) are complete and correct in all material aspects and present fairly the financial condition of Borrower, (b) disclose all liabilities of Borrower that are required to be reflected or reserved against under generally accepted accounting principles, whether liquidated or unliquidated, fixed or contingent, and (c) have been prepared in accordance with generally accepted accounting principles consistently applied.  Other than for Permitted Liens, Borrower has not mortgaged, pledged, granted a security interest in or otherwise encumbered any of its assets or properties except in favor of Bank or as otherwise permitted by Bank in writing.  As used in this Agreement, “Permitted Liens” shall mean (i) Liens for taxes or other governmental or regulatory assessments which are not delinquent, or which are contested in good faith by the appropriate proceedings, and for which appropriate reserves are maintained in accordance with GAAP; (ii) Liens on any property held or acquired by Borrower securing indebtedness not to exceed the amounts set forth in Section 5.2(c) below incurred or assumed for the purpose of financing all or any part of the cost of acquiring such property or existing on such property when acquired; (iii) liens arising from judgments, decrees or attachments in circumstances not constituting an Event of Default (iv) liens and setoff rights in favor of other financial institutions arising in connection with Borrower's deposit accounts held at such institutions, provided the existence of such accounts does not conflict with the provisions of Section 4.9(c) hereof, (v) liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security, (vi) liens incurred or deposits made in the ordinary course of business with utility companies, (vii) liens incurred or deposits or pledges made to secure the performance of bids, tenders, contracts (other than contracts for the payment of money), public or statutory or regulatory obligations, surety, stay, appeal, indemnity, performance or other similar bonds, leases, government contracts, trade contracts, performance and return-of-money bonds and other similar obligations arising in the ordinary course of 

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business (viii) materialmen's, landlord's, mechanics', repairmen's, workmen's, employees' or other like liens arising in the ordinary course of business, (ix) non-exclusive license of intellectual property granted to third parties in the ordinary course of business, and licenses of intellectual property that could not result in a legal transfer of title of the licensed property that may be exclusive in respects other than territory and that may be exclusive as to territory only as to discrete geographical areas outside of the United States, (x) liens on insurance proceeds in favor of insurance companies granted solely as security for financed premiums, (xi) easements, reservations, rights-of-way, minor defects or irregularities in title and other similar charges or encumbrances affecting real property, and (xii) any interest or title of a lessor or sub-lessor under any lease of real property in the ordinary course of business.

SECTION 2.6.    INCOME TAX RETURNS.  Borrower has no knowledge of any pending assessments or adjustments of its income tax payable with respect to any year as disclosed in SEC reporting.

SECTION 2.7.    NO SUBORDINATION.  There is no agreement, indenture, contract or instrument to which Borrower is a party or by which Borrower may be bound that requires the subordination in right of payment of any of Borrower's obligations subject to this Agreement to any other obligation of Borrower.

SECTION 2.8.    PERMITS, FRANCHISES.  Borrower possesses, and will hereafter possess, all permits, consents, approvals, franchises and licenses required and rights to all trademarks, trade names, patents, and fictitious names, if any, necessary to enable it to conduct the business in which it is now engaged in compliance with applicable law.

SECTION 2.9.    ERISA.  Borrower is in compliance in all material respects with all applicable provisions of the Employee Retirement Income Security Act of 1974, as amended or recodified from time to time ("ERISA"); Borrower has not violated any provision of any defined employee pension benefit plan (as defined in ERISA) maintained or contributed to by Borrower (each, a "Plan"); no Reportable Event as defined in ERISA has occurred and is continuing with respect to any Plan initiated by Borrower; Borrower has met its minimum funding requirements under ERISA with respect to each Plan; and each Plan will be able to fulfill its benefit obligations as they come due in accordance with the Plan documents and under generally accepted accounting principles.

SECTION 2.10. OTHER OBLIGATIONS.  Borrower is not in default on any obligation for borrowed money, any purchase money obligation or any other material lease, commitment, contract, instrument or obligation, in each case under any agreements involving monetary liability, which default or defaults result in a right by such third party or parties, whether or not exercised, to accelerate the maturity of any indebtedness in excess of Five Million Dollars ($5,000,000).  

SECTION 2.11. ENVIRONMENTAL MATTERS.  Except as disclosed by Borrower to Bank in writing prior to the date hereof, Borrower is in compliance in all material respects with all applicable federal or state environmental, hazardous waste, health and safety statutes, and any rules or regulations adopted pursuant thereto, which govern or affect any of Borrower's operations and/or properties, including without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Superfund Amendments and Reauthorization Act of 1986, the Federal Resource Conservation and Recovery Act of 1976, and the Federal Toxic Substances Control Act, as any of the same may be amended, modified or supplemented from time to time.  None of the operations of Borrower is the subject of any federal or state investigation evaluating whether any remedial action involving a material expenditure is needed to respond to a release of any toxic or hazardous waste or substance into the environment.  Borrower has no material contingent liability in connection with any release of any toxic or hazardous waste or substance into the environment.

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ARTICLE III
CONDITIONS

SECTION 3.1.    CONDITIONS OF INITIAL EXTENSION OF CREDIT.  The obligation of Bank to extend any credit contemplated by this Agreement is subject to the fulfillment to Bank's satisfaction of all of the following conditions:

(a)    Approval of Bank Counsel.  All legal matters incidental to the extension of credit by Bank shall be satisfactory to Bank's counsel.

(b)    Documentation.  Bank shall have received, in form and substance satisfactory to Bank, each of the following, duly executed:

(i)    This Agreement and each promissory note or other instrument or document required hereby.
(ii)    Corporate Resolution: Borrowing.
(iii)    Certificate of Incumbency.
(iv)    Disbursement Order.
(v)    Such other documents as Bank may require under any other Section of this Agreement.

(c)    Financial Condition.  There shall have been no material adverse change, as determined by Bank, in the financial condition or business of Borrower or any guarantor hereunder, nor any material decline, as determined by Bank, in the market value of any collateral required hereunder or a substantial or material portion of the assets of Borrower or any such guarantor.

(d)    Insurance.  Borrower shall have delivered to Bank evidence of insurance coverage on all Borrower's property, in form, substance, amounts, covering risks and issued by companies satisfactory to Bank, and where required by Bank, with loss payable endorsements in favor of Bank.

SECTION 3.2.    CONDITIONS OF EACH EXTENSION OF CREDIT.  The obligation of Bank to make each extension of credit requested by Borrower hereunder shall be subject to the fulfillment to Bank's satisfaction of each of the following conditions:

(a)    Compliance.  The representations and warranties contained herein and in each of the other Loan Documents shall be true on and as of the date of the signing of this Agreement and, except as disclosed to Bank or in the SEC Filings, on the date of each extension of credit by Bank pursuant hereto, with the same effect as though such representations and warranties had been made on and as of each such date, and on each such date, no Event of Default as defined herein, and no condition, event or act which with the giving of notice or the passage of time or both would constitute such an Event of Default, shall have occurred and be continuing or shall exist.

(b)    Documentation.  Bank shall have received all additional documents which may be required in connection with such extension of credit.

(c)    Additional Letter of Credit Documentation.  Prior to the issuance of each Letter of Credit, Bank shall have received a Letter of Credit Agreement on Bank's standard form, properly completed and duly executed by Borrower.

(d)    No Material Adverse Change.  There shall not exist or have occurred any event or condition that impairs, or is substantially to impair, the prospect of payment or performance by Borrower 

5

of its obligations under any of the Loan Documents.  

ARTICLE IV
AFFIRMATIVE COVENANTS

Borrower covenants that so long as Bank remains committed to extend credit to Borrower pursuant hereto, or any liabilities (whether direct or contingent, liquidated or unliquidated) of Borrower to Bank under any of the Loan Documents remain outstanding, and until payment in full of all obligations of Borrower subject hereto, Borrower shall, unless Bank otherwise consents in writing:

SECTION 4.1.    PUNCTUAL PAYMENTS.  Within seven (7) days after such obligations are due and payable, pay all principal, interest, fees or other liabilities due under any of the Loan Documents at the times and place and in the manner specified therein.  

SECTION 4.2.    ACCOUNTING RECORDS.  Maintain adequate books and records in accordance with generally accepted accounting principles consistently applied, and permit any representative of Bank, at any reasonable time, to inspect, audit and examine such books and records, to make copies of the same, and to inspect the properties of Borrower.

SECTION 4.3.    FINANCIAL STATEMENTS.  Provide to Bank all of the following, in form and detail satisfactory to Bank:

(a)    not later than 120 days after and as of the end of each fiscal year, an audited financial statement of Borrower, prepared by a certified public accountant acceptable to Bank, to include balance sheet, income statement, and statement of cash flow;

(b)    not later than 45 days after and as of the end of each fiscal quarter, a financial statement of Borrower, prepared by Borrower, to include balance sheet, income statement, and statement of cash flow;

(c)    not later than 90 days after the end of each fiscal year, an annual budget and projection report, prepared by Borrower;

(d)    contemporaneously with each fiscal quarter financial statement of Borrower required hereby, and concurrently with the submission of each advance request under the Line of Credit, a certificate of the president or chief financial officer of Borrower that said financial statements are accurate and that there exists no Event of Default nor any condition, act or event which with the giving of notice or the passage of time or both would constitute an Event of Default;

(e)    from time to time such other information as Bank may reasonably request.

SECTION 4.4.    COMPLIANCE.  Preserve and maintain all licenses, permits, governmental approvals, rights, privileges and franchises necessary for the conduct of its business; and comply with the provisions of all documents pursuant to which Borrower is organized and/or which govern Borrower's continued existence and with the requirements of all laws, rules, regulations and orders of any governmental authority applicable to Borrower and/or its business, the noncompliance with or violation of which could reasonably be expected to have a material adverse effect on Borrower's business.  

SECTION 4.5.    INSURANCE.  Maintain and keep in force, for each business in which Borrower is engaged, insurance of the types and in amounts customarily carried in similar lines of business, including but not limited to fire, extended coverage, public liability, flood, property damage and workers' compensation, with all such insurance carried with companies and in amounts satisfactory to Bank, and 

6

deliver to Bank from time to time at Bank's request schedules setting forth all insurance then in effect. 

SECTION 4.6.    FACILITIES.  Keep all properties necessary to Borrower's business in good repair and condition, and from time to time make necessary repairs, renewals and replacements thereto so that such properties shall be fully and efficiently preserved and maintained.

SECTION 4.7.    TAXES AND OTHER LIABILITIES.  Pay and discharge when due any and all indebtedness, obligations, assessments and taxes, both real or personal, including without limitation federal and state income taxes and state and local property taxes and assessments, except (a) such as Borrower may in good faith contest or as to which a bona fide dispute may arise, and (b) for which Borrower has made provision with adequate reserves under GAAP for eventual payment thereof in the event Borrower is obligated to make such payment.  

SECTION 4.8.    LITIGATION.  Except as disclosed in Borrower's SEC Filings, promptly give notice in writing to Bank of any litigation pending or threatened in writing against Borrower involving more than $1,000,000 individually, or $10,000,000 in the aggregate.  

SECTION 4.9.    FINANCIAL CONDITION.  Maintain Borrower's financial condition as follows using generally accepted accounting principles consistently applied and used consistently with prior practices (except to the extent modified by the definitions herein):

(a)    Modified Quick Ratio not less than 1.50 to 1.0 at all times, measured on a consolidated basis at each fiscal quarter end, with "Modified Quick Ratio" defined as the aggregate of unrestricted cash, unrestricted marketable securities, net accounts receivable, and long term investments divided by total current liabilities and borrowings under the Line of Credit.

(b)    Tangible Net Worth measured on a consolidated basis at each fiscal quarter end, not less than $200,000,000 less than Borrower's actual Tangible Net Worth at Borrower's fiscal year ending 2010, with "Tangible Net Worth" defined as the aggregate of total stockholders' equity [plus subordinated debt] less any intangible assets [and less any loans or advances to, or investments in, any related entities or individuals].

(c)    Maintain Borrower's primary collection and disbursement deposit account(s) with Bank or any banking affiliate of Bank.  The transition will begin within 30 days of closing and will be completed by June 30, 2011.

SECTION 4.10. NOTICE TO BANK.  Promptly (but in no event more than five (5) days after the occurrence of each such event or matter) give written notice to Bank in reasonable detail of:  (a) the occurrence of any Event of Default, or any condition, event or act which with the giving of notice or the passage of time or both would constitute an Event of Default; (b) any change in the name or the organizational structure of Borrower; (c) the occurrence and nature of any Reportable Event or Prohibited Transaction, each as defined in ERISA, or any funding deficiency with respect to any Plan; or (d) any termination or cancellation of any insurance policy which Borrower is required to maintain, or any uninsured or partially uninsured loss through liability or property damage, or through fire, theft or any other cause affecting Borrower's property.

ARTICLE V
NEGATIVE COVENANTS

Borrower further covenants that so long as Bank remains committed to extend credit to Borrower pursuant hereto, or any liabilities (whether direct or contingent, liquidated or unliquidated, but excluding inchoate indemnity obligations) of Borrower to Bank under any of the Loan Documents remain 

7

outstanding, and until payment in full of all obligations (other than inchoate indemnity obligations) of Borrower subject hereto, Borrower will not without Bank's prior written consent:

SECTION 5.1.    USE OF FUNDS.  Use any of the proceeds of any credit extended hereunder except for the purposes stated in Article I hereof.

SECTION 5.2.    OTHER INDEBTEDNESS.  Create, incur, assume or permit to exist any indebtedness or liabilities resulting from borrowings, loans or advances, whether secured or unsecured, matured or unmatured, liquidated or unliquidated, joint or several, except (a) the liabilities of Borrower to Bank, (b) any other liabilities of Borrower existing as of, and disclosed to Bank prior to, the date hereof, (c) new purchase money debt and other debt in amounts not to exceed an aggregate of $5,000,000.00 during each fiscal year, (d) the issuance of unsecured, subordinated convertible debt, provided, however, that such debt is subordinated in writing on terms reasonably acceptable to Bank and that Borrower is in proforma compliance with financial covenants both pre and post issuance of debt, (e) indebtedness to trade creditors incurred in the ordinary course of business, (f) indebtedness incurred as a result of endorsing negotiable instruments received in the ordinary course of business, (g) indebtedness secured by Permitted Liens, (h) indebtedness between Borrower and its subsidiaries in the ordinary course of business, and (h) extensions, refinancings, modifications and restatements of the foregoing provided that the principal amount thereof is not increased or the terms thereof are not modified to impose more burdensome terms. 

SECTION 5.3.    MERGER, CONSOLIDATION, TRANSFER OF ASSETS.  Borrower may enter into mergers or acquisitions with, and make loans or advances to and equity investments in, and sell, lease or transfer assets to third party entities so long as Borrower is the surviving entity (as applicable) and Borrower is in pro forma compliance with financial covenants both before and after each such merger, consolidation, acquisition, loan, advance, equity investment, sale, lease or transfer of assets.  

SECTION 5.4.    GUARANTIES.  Guarantee or become liable in any way as surety, endorser (other than as endorser of negotiable instruments for deposit or collection in the ordinary course of business), accommodation endorser or otherwise for, nor pledge or hypothecate any assets of Borrower as security for, any liabilities or obligations of any other person or entity, except (i) any of the foregoing in favor of Bank, and (ii) in the ordinary course of Borrower's business.  

SECTION 5.5.    LOANS, ADVANCES, INVESTMENTS.  Make any loans or advances to or investments in any person or entity, except (a) any of the foregoing existing as of, and disclosed to Bank prior to, the date hereof, (b) any of the foregoing in accordance with the provisions of Section 5.3 above, (c) additional loans, advances or investments in or to Borrower's subsidiaries in the ordinary course of business, or (d) investments made pursuant to a Board-approved investment policy.  

SECTION 5.6.    PLEDGE OF ASSETS.  Other than for Permitted Liens, mortgage, pledge, grant or permit to exist a security interest in, or lien upon, all or any portion of Borrower's assets now owned or hereafter acquired, except any of the foregoing in favor of Bank or which is existing as of, and disclosed to Bank in writing prior to, the date hereof.

    
ARTICLE VI
EVENTS OF DEFAULT

SECTION 6.1.    The occurrence of any of the following shall constitute an "Event of Default" under this Agreement:

(a)    Borrower shall fail to pay, within seven (7) days of when due, any principal, interest, fees 

8

or other amounts payable under any of the Loan Documents (provided that such seven (7) day cure period shall not apply to payments due upon stated maturity of the Line of Credit Note and that during the cure period, the failure to make or pay any payment specified under this subclause (a) is not an Event of Default, but no credit extension will be made during the cure period). 

(b)    Any financial statement or certificate furnished to Bank in connection with, or any representation or warranty made by Borrower or any other party under this Agreement or any other Loan Document shall prove to be incorrect, false or misleading in any material respect when furnished or made. 

(c)    Any default in the performance of or compliance with any obligation, agreement or other provision contained herein or in any other Loan Document (other than those specifically described as an “Event of Default” in this Section 6.1), and with respect to any such default that by its nature can be cured, such default shall continue for a period of thirty (30) days from its occurrence. 

(d)    Any default in the payment or performance of any monetary obligation in excess of $5,000,000, or any defined event of default, under the terms of any contract, instrument or document (other than any of the Loan Documents) pursuant to which Borrower or any guarantor hereunder (with each such guarantor referred to herein as a "Third Party Obligor") has incurred any debt for borrowed money in an amount greater than $5,000,000. 

(e)    Borrower or any Third Party Obligor shall become insolvent, or shall suffer or consent to or apply for the appointment of a receiver, trustee, custodian or liquidator of itself or any of its property, or shall generally fail to pay its debts as they become due, or shall make a general assignment for the benefit of creditors; Borrower or any Third Party Obligor shall file a voluntary petition in bankruptcy, or seeking reorganization, in order to effect a plan or other arrangement with creditors or any other relief under the Bankruptcy Reform Act, Title 11 of the United States Code, as amended or recodified from time to time ("Bankruptcy Code"), or under any state or federal law granting relief to debtors, whether now or hereafter in effect; or Borrower or any Third Party Obligor shall file an answer admitting the jurisdiction of the court and the material allegations of any involuntary petition; or Borrower or any Third Party Obligor shall be adjudicated a bankrupt, or an order for relief shall be entered against Borrower or any Third Party Obligor by any court of competent jurisdiction under the Bankruptcy Code or any other applicable state or federal law relating to bankruptcy, reorganization or other relief for debtors.

(f)    The filing of a notice of judgment lien against Borrower in an amount of at least $5,000,000 (not covered by independent third-party insurance as to which liability has been accepted by such insurance carrier) shall remain unsatisfied for thirty (30) days and is not discharged or stayed (whether through the posting of a bond or otherwise) within thirty (30) days; or the recording of any abstract of judgment against Borrower in an amount of at least $5,000,000 (not covered by independent third-party insurance as to which liability has been accepted by such insurance carrier) and the same is not, within thirty (30) days after the occurrence thereof, discharged or stayed (whether through the posting of a bond or otherwise) in any county in which Borrower has an interest in real property; or the service of a notice of levy and/or of a writ of attachment or execution, or other like process, against the assets of Borrower and the same is not, within thirty (30) days after the occurrence thereof, discharged or stayed (whether through the posting of a bond or otherwise); or the entry of one or more final judgments, orders, or decrees for the payment of money in an amount, individually or in the aggregate, of at least $5,000,000 (not covered by independent third-party insurance as to which liability has been accepted by such insurance carrier) shall be rendered against Borrower and the same are not, within thirty (30) days after the entry thereof, discharged or execution thereof stayed or bonded pending appeal, or such judgments are not discharged prior to the expiration of any such stay; or any involuntary petition or proceeding pursuant to the Bankruptcy Code or any other applicable state or federal law relating to 

9

bankruptcy, reorganization or other relief for debtors is filed or commenced against Borrower or any Third Party Obligor. 

(g)    [Intentionally Omitted]. 

(h)    The dissolution or liquidation of Borrower or any Third Party Obligor if a corporation, partnership, joint venture or other type of entity; or Borrower or any such Third Party Obligor, or any of its directors, stockholders or members, shall take action seeking to effect the dissolution or liquidation of Borrower or such Third Party Obligor. 

(i)    60 days after the occurrence of any Change in Control of Borrower, coupled with removal or departure of Balu Balakrishnan as Chief Executive Officer.  All defined terms as used in this Section 6.1 are defined below.  

A “Change in Control” means the occurrence, in a single transaction or in a series of related transactions, of any one or more of the following events:

(i)  any Exchange Act Person becomes the Owner, directly or indirectly, of securities of the Borrower representing more than fifty percent (50%) of the combined voting power of the Borrower's then outstanding securities other than by virtue of a merger, consolidation or similar transaction.  Notwithstanding the foregoing, a Change in Control shall not be deemed to occur (A) on account of the acquisition of securities of the Borrower directly from the Borrower, (B) on account of the acquisition of securities of the Borrower by an investor, any affiliate thereof or any other Exchange Act Person that acquires the Borrower's securities in a transaction or series of related transactions the primary purpose of which is to obtain financing for the Borrower through the issuance of equity securities, or (C) solely because the level of Ownership held by any Exchange Act Person (the “Subject Person”) exceeds the designated percentage threshold of the outstanding voting securities as a result of a repurchase or other acquisition of voting securities by the Borrower reducing the number of shares outstanding, provided that if a Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of voting securities by the Borrower, and after such share acquisition, the Subject Person becomes the Owner of any additional voting securities that, assuming the repurchase or other acquisition had not occurred, increases the percentage of the then outstanding voting securities Owned by the Subject Person over the designated percentage threshold, then a Change in Control shall be deemed to occur; or

(ii) there is consummated a merger, consolidation or similar transaction involving (directly or indirectly) the Borrower and, immediately after the consummation of such merger, consolidation or similar transaction, the stockholders of the Borrower immediately prior thereto do not Own, directly or indirectly, either (A) outstanding voting securities representing more than fifty percent (50%) of the combined outstanding voting power of the surviving corporation, partnership, limited liability company or other entity in such merger, consolidation or similar transaction or (B) more than fifty percent (50%) of the combined outstanding voting power of the parent of the surviving corporation, partnership, limited liability company or other entity in such merger, consolidation or similar transaction, in each case in substantially the same proportions as their Ownership of the outstanding voting securities of the Borrower immediately prior to such transaction.

“Exchange Act Person” means any natural person, corporation, partnership, limited liability company or other entity, or “group” (within the meaning of Section 13(d) or 14(d) of the Securities Exchange Act of 1934 (the “Exchange Act”)), except that “Exchange Act Person” shall not include (i) the Borrower or any subsidiary of the Borrower, (ii) any employee benefit plan of the Borrower or any subsidiary of the Borrower or any trustee or other fiduciary holding securities under an employee benefit plan of the Borrower or any subsidiary of the Borrower, (iii) an underwriter temporarily holding securities 

10

pursuant to a registered public offering of such securities, (iv) a corporation, partnership, limited liability company or other entity Owned, directly or indirectly, by the stockholders of the Borrower in substantially the same proportions as their Ownership of stock of the Borrower; or (v) any natural person, corporation, partnership, limited liability company or other entity or “group” (within the meaning of Section 13(d) or 14(d) of the Exchange Act) that, as of the date hereof, is the Owner, directly or indirectly, of securities of the Borrower representing more than fifty percent (50%) of the combined voting power of the Borrower's then outstanding securities.
A person or corporation, partnership, limited liability company or other entity shall be deemed to “Own,” to have “Owned,” to be the “Owner” of, or to have acquired “Ownership” of securities if such person or corporation, partnership, limited liability company, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has or shares voting power, which includes the power to vote or to direct the voting, with respect to such securities.

SECTION 6.2.    REMEDIES.  Upon the occurrence of any Event of Default:  (a) all indebtedness of Borrower under each of the Loan Documents, any term thereof to the contrary notwithstanding, shall at Bank's option and without notice become immediately due and payable without presentment, demand, protest or notice of dishonor, all of which are hereby expressly waived by Borrower; (b) the obligation, if any, of Bank to extend any further credit under any of the Loan Documents shall immediately cease and terminate; and (c) Bank shall have all rights, powers and remedies available under each of the Loan Documents, or accorded by law, including without limitation the right to resort to any or all security for any credit subject hereto and to exercise any or all of the rights of a beneficiary or secured party pursuant to applicable law.  All rights, powers and remedies of Bank may be exercised at any time by Bank and from time to time after the occurrence of an Event of Default, are cumulative and not exclusive, and shall be in addition to any other rights, powers or remedies provided by law or equity.  

ARTICLE VII
MISCELLANEOUS

SECTION 7.1.    NO WAIVER.  No delay, failure or discontinuance of Bank in exercising any right, power or remedy under any of the Loan Documents shall affect or operate as a waiver of such right, power or remedy; nor shall any single or partial exercise of any such right, power or remedy preclude, waive or otherwise affect any other or further exercise thereof or the exercise of any other right, power or remedy.  Any waiver, permit, consent or approval of any kind by Bank of any breach of or default under any of the Loan Documents must be in writing and shall be effective only to the extent set forth in such writing.

11

SECTION 7.2.    NOTICES.  All notices, requests and demands which any party is required or may desire to give to any other party under any provision of this Agreement must be in writing delivered to each party at the following address:

	
			
	BORROWER:
	POWER INTEGRATIONS, INC.
	 

	 
	5245 Hellyer Avenue
	 

	 
	San Jose, CA 95138
	 

	 
	 
	 

	 
	 
	 

	BANK:
	WELLS FARGO BANK, NATIONAL ASSOCIATION
	 

	 
	Santa Clara Technology Regional Commercial Banking Office
	 

	 
	121 S. Market Street, 2nd Floor
	 

	 
	San Jose, CA 95113
	 

or to such other address as any party may designate by written notice to all other parties.  Each such notice, request and demand shall be deemed given or made as follows:  (a) if sent by hand delivery, upon delivery; (b) if sent by mail, upon the earlier of the date of receipt or three (3) days after deposit in the U.S. mail, first class and postage prepaid; and (c) if sent by telecopy, upon receipt.

SECTION 7.3. COSTS, EXPENSES AND ATTORNEYS' FEES.  Borrower shall pay to Bank immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of Bank's in-house counsel), expended or incurred by Bank in connection with (a) the negotiation and preparation of this Agreement and the other Loan Documents, Bank's continued administration hereof and thereof, and the preparation of any amendments and waivers hereto and thereto, (b) the enforcement of Bank's rights and/or the collection of any amounts which become due to Bank under any of the Loan Documents, and (c) the prosecution or defense of any action in any way related to any of the Loan Documents, including without limitation, any action for declaratory relief, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by Bank or any other person) relating to Borrower or any other person or entity.

SECTION 7.4.    SUCCESSORS, ASSIGNMENT.  This Agreement shall be binding upon and inure to the benefit of the heirs, executors, administrators, legal representatives, successors and assigns of the parties; provided however, that Borrower may not assign or transfer its interests or rights hereunder without Bank's prior written consent.  Bank reserves the right to sell, assign, transfer, negotiate or grant participations in all or any part of, or any interest in, Bank's rights and benefits under each of the Loan Documents.  In connection therewith, Bank may disclose all documents and information which Bank now has or may hereafter acquire relating to any credit subject hereto, Borrower or its business, any guarantor hereunder or the business of such guarantor, or any collateral required hereunder.

SECTION 7.5.    ENTIRE AGREEMENT; AMENDMENT.  This Agreement and the other Loan Documents constitute the entire agreement between Borrower and Bank with respect to each credit subject hereto and supersede all prior negotiations, communications, discussions and correspondence concerning the subject matter hereof.  This Agreement may be amended or modified only in writing signed by each party hereto.

SECTION 7.6.    NO THIRD PARTY BENEFICIARIES.  This Agreement is made and entered into for the sole protection and benefit of the parties hereto and their respective permitted successors and assigns, and no other person or entity shall be a third party beneficiary of, or have any direct or indirect 

12

cause of action or claim in connection with, this Agreement or any other of the Loan Documents to which it is not a party.

SECTION 7.7.    TIME. Time is of the essence of each and every provision of this Agreement and each other of the Loan Documents.

SECTION 7.8. SEVERABILITY OF PROVISIONS. If any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity without invalidating the remainder of such provision or any remaining provisions of this Agreement.

SECTION 7.9.    COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which when executed and delivered shall be deemed to be an original, and all of which when taken together shall constitute one and the same Agreement.

SECTION 7.10. GOVERNING LAW.  This Agreement shall be governed by and construed in accordance with the laws of the State of California.

SECTION 7.11. ARBITRATION.

(a)    Arbitration.  The parties hereto agree, upon demand by any party, to submit to binding arbitration all claims, disputes and controversies between or among them (and their respective employees, officers, directors, attorneys, and other agents), whether in tort, contract or otherwise in any way arising out of or relating to (i) any credit subject hereto, or any of the Loan Documents, and their negotiation, execution, collateralization, administration, repayment, modification, extension, substitution, formation, inducement, enforcement, default or termination; or (ii) requests for additional credit.

(b)    Governing Rules.  Any arbitration proceeding will (i) proceed in a location in California selected by the American Arbitration Association (“AAA”); (ii) be governed by the Federal Arbitration Act (Title 9 of the United States Code), notwithstanding any conflicting choice of law provision in any of the documents between the parties; and (iii) be conducted by the AAA, or such other administrator as the parties shall mutually agree upon, in accordance with the AAA's commercial dispute resolution procedures, unless the claim or counterclaim is at least $1,000,000.00 exclusive of claimed interest, arbitration fees and costs in which case the arbitration shall be conducted in accordance with the AAA's optional procedures for large, complex commercial disputes (the commercial dispute resolution procedures or the optional procedures for large, complex commercial disputes to be referred to herein, as applicable, as the “Rules”).  If there is any inconsistency between the terms hereof and the Rules, the terms and procedures set forth herein shall control.  Any party who fails or refuses to submit to arbitration following a demand by any other party shall bear all costs and expenses incurred by such other party in compelling arbitration of any dispute.  Nothing contained herein shall be deemed to be a waiver by any party that is a bank of the protections afforded to it under 12 U.S.C. §91 or any similar applicable state law.

(c)    No Waiver of Provisional Remedies, Self-Help and Foreclosure.  The arbitration requirement does not limit the right of any party to (i) foreclose against real or personal property collateral; (ii) exercise self-help remedies relating to collateral or proceeds of collateral such as setoff or repossession; or (iii) obtain provisional or ancillary remedies such as replevin, injunctive relief, attachment or the appointment of a receiver, before during or after the pendency of any arbitration proceeding.  This exclusion does not constitute a waiver of the right or obligation of any party to submit any dispute to arbitration or reference hereunder, including those arising from the exercise of the actions detailed in sections (i), (ii) and (iii) of this paragraph.

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(d)    Arbitrator Qualifications and Powers.  Any arbitration proceeding in which the amount in controversy is $5,000,000.00 or less will be decided by a single arbitrator selected according to the Rules, and who shall not render an award of greater than $5,000,000.00.  Any dispute in which the amount in controversy exceeds $5,000,000.00 shall be decided by majority vote of a panel of three arbitrators; provided however, that all three arbitrators must actively participate in all hearings and deliberations.  The arbitrator will be a neutral attorney licensed in the State of California or a neutral retired judge of the state or federal judiciary of California, in either case with a minimum of ten years experience in the substantive law applicable to the subject matter of the dispute to be arbitrated.  The arbitrator will determine whether or not an issue is arbitratable and will give effect to the statutes of limitation in determining any claim.  In any arbitration proceeding the arbitrator will decide (by documents only or with a hearing at the arbitrator's discretion) any pre-hearing motions which are similar to motions to dismiss for failure to state a claim or motions for summary adjudication.  The arbitrator shall resolve all disputes in accordance with the substantive law of California and may grant any remedy or relief that a court of such state could order or grant within the scope hereof and such ancillary relief as is necessary to make effective any award.  The arbitrator shall also have the power to award recovery of all costs and fees, to impose sanctions and to take such other action as the arbitrator deems necessary to the same extent a judge could pursuant to the Federal Rules of Civil Procedure, the California Rules of Civil Procedure or other applicable law.  Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction.  The institution and maintenance of an action for judicial relief or pursuit of a provisional or ancillary remedy shall not constitute a waiver of the right of any party, including the plaintiff, to submit the controversy or claim to arbitration if any other party contests such action for judicial relief.

(e)    Discovery.  In any arbitration proceeding, discovery will be permitted in accordance with the Rules.  All discovery shall be expressly limited to matters directly relevant to the dispute being arbitrated and must be completed no later than 20 days before the hearing date.  Any requests for an extension of the discovery periods, or any discovery disputes, will be subject to final determination by the arbitrator upon a showing that the request for discovery is essential for the party's presentation and that no alternative means for obtaining information is available.

(f)    Class Proceedings and Consolidations.  No party hereto shall be entitled to join or consolidate disputes by or against others in any arbitration, except parties who have executed any Loan Document, or to include in any arbitration any dispute as a representative or member of a class, or to act in any arbitration in the interest of the general public or in a private attorney general capacity. 

(g)    Payment Of Arbitration Costs And Fees.  The arbitrator shall award all costs and expenses of the arbitration proceeding.

(h)    Real Property Collateral; Judicial Reference.  Notwithstanding anything herein to the contrary, no dispute shall be submitted to arbitration if the dispute concerns indebtedness secured directly or indirectly, in whole or in part, by any real property unless (i) the holder of the mortgage, lien or security interest specifically elects in writing to proceed with the arbitration, or (ii) all parties to the arbitration waive any rights or benefits that might accrue to them by virtue of the single action rule statute of California, thereby agreeing that all indebtedness and obligations of the parties, and all mortgages, liens and security interests securing such indebtedness and obligations, shall remain fully valid and enforceable.  If any such dispute is not submitted to arbitration, the dispute shall be referred to a referee in accordance with California Code of Civil Procedure Section 638 et seq., and this general reference agreement is intended to be specifically enforceable in accordance with said Section 638.  A referee with the qualifications required herein for arbitrators shall be selected pursuant to the AAA's selection procedures.  Judgment upon the decision rendered by a referee shall be entered in the court in which such proceeding was commenced in accordance with California Code of Civil Procedure Sections 644 

14

and 645.

(i)    Miscellaneous.  To the maximum extent practicable, the AAA, the arbitrators and the parties shall take all action required to conclude any arbitration proceeding within 180 days of the filing of the dispute with the AAA.  No arbitrator or other party to an arbitration proceeding may disclose the existence, content or results thereof, except for disclosures of information by a party required in the ordinary course of its business or by applicable law or regulation.  If more than one agreement for arbitration by or between the parties potentially applies to a dispute, the arbitration provision most directly related to the Loan Documents or the subject matter of the dispute shall control.  This arbitration provision shall survive termination, amendment or expiration of any of the Loan Documents or any relationship between the parties.

(j)    Small Claims Court.  Notwithstanding anything herein to the contrary, each party retains the right to pursue in Small Claims Court any dispute within that court's jurisdiction.  Further, this arbitration provision shall apply only to disputes in which either party seeks to recover an amount of money (excluding attorneys' fees and costs) that exceeds the jurisdictional limit of the Small Claims Court.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first written above.
	
					
	POWER INTEGRATIONS, INC.
	 
	WELLS FARGO BANK,

	 
	 
	 
	NATIONAL ASSOCIATION

	By:
	/s/ Balu Balakrishnan
	 
	By:
	/s/ Greg P. Cohn

	 
	Balu Balakrishnan,
	 
	 
	Greg P. Cohn,

	 
	President & CEO
	 
	 
	Vice President

15

REVOLVING LINE OF CREDIT NOTE

	
					
	$50,000,000.00
	 
	 
	 
	San Jose, California

	 
	 
	 
	 
	February 22, 2011

FOR VALUE RECEIVED, the undersigned POWER INTEGRATIONS, INC. ("Borrower") promises to pay to the order of WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank") at its office at 121 S. Market Street, 2nd Floor, San Jose, California 95113, or at such other place as the holder hereof may designate, in lawful money of the United States of America and in immediately available funds, the principal sum of Fifty Million Dollars ($50,000,000.00), or so much thereof as may be advanced and be outstanding, with interest thereon, to be computed on each advance from the date of its disbursement as set forth herein.

DEFINITIONS:

As used herein, the following terms shall have the meanings set forth after each, and any other term defined in this Note shall have the meaning set forth at the place defined:

(a)    "Business Day" means any day except a Saturday, Sunday or any other day on which commercial banks in California are authorized or required by law to close.

(b)    "Fixed Rate Term" means a period commencing on a Business Day and continuing for one (1), three (3), or six (6) months, as designated by Borrower, during which all or a portion of the outstanding principal balance of this Note bears interest determined in relation to LIBOR; provided however, that no Fixed Rate Term may be selected for a principal amount less than One Hundred Thousand Dollars ($100,000.00); and provided further, that no Fixed Rate Term shall extend beyond the scheduled maturity date hereof.  If any Fixed Rate Term would end on a day which is not a Business Day, then such Fixed Rate Term shall be extended to the next succeeding Business Day.

(c)    "LIBOR" means the rate per annum (rounded upward, if necessary, to the nearest whole 1/8 of 1%) and determined pursuant to the following formula:

	
			
	LIBOR =
	Base LIBOR
	 

	 
	100% - LIBOR Reserve Percentage
	 

(i)    "Base LIBOR" means the rate per annum for United States dollar deposits quoted by Bank as the Inter-Bank Market Offered Rate, with the understanding that such rate is quoted by Bank for the purpose of calculating effective rates of interest for loans making reference thereto, on the first day of a Fixed Rate Term for delivery of funds on said date for a period of time approximately equal to the number of days in such Fixed Rate Term and in an amount approximately equal to the principal amount to which such Fixed Rate Term applies.  Borrower understands and agrees that Bank may base its quotation of the Inter-Bank Market Offered Rate upon such offers or other market indicators of the Inter-Bank Market as Bank in its discretion deems appropriate including, but not limited to, the rate offered for U.S. dollar deposits on the London Inter-Bank Market.

(ii)    "LIBOR Reserve Percentage" means the reserve percentage prescribed by the Board of Governors of the Federal Reserve System (or any successor) for "Eurocurrency Liabilities" (as defined in Regulation D of the Federal Reserve Board, as amended), adjusted by Bank for expected 

1

changes in such reserve percentage during the applicable Fixed Rate Term.

(d)    "Prime Rate" means at any time the rate of interest most recently announced within Bank at its principal office as its Prime Rate, with the understanding that the Prime Rate is one of Bank's base rates and serves as the basis upon which effective rates of interest are calculated for those loans making reference thereto, and is evidenced by the recording thereof after its announcement in such internal publication or publications as Bank may designate.

INTEREST:

(a)    Interest.  The outstanding principal balance of this Note shall bear interest (computed on the basis of a 360-day year, actual days elapsed) either, as designated by Borrower at Borrower's option, (i) at a fluctuating rate per annum equal to the Prime Rate in effect from time to time, or (ii) at a fixed rate per annum determined by Bank to be one and one-half percent (1.50%) above LIBOR in effect on the first day of the applicable Fixed Rate Term.  When interest is determined in relation to the Prime Rate, each change in the rate of interest hereunder shall become effective on the date each Prime Rate change is announced within Bank.  With respect to each LIBOR selection hereunder, Bank is hereby authorized to note the date, principal amount, interest rate and Fixed Rate Term applicable thereto and any payments made thereon on Bank's books and records (either manually or by electronic entry) and/or on any schedule attached to this Note, which notations shall be prima facie evidence of the accuracy of the information noted.

(b)    Selection of Interest Rate Options.  At any time any portion of this Note bears interest determined in relation to LIBOR, it may be continued by Borrower at the end of the Fixed Rate Term applicable thereto so that all or a portion thereof bears interest determined in relation to the Prime Rate or to LIBOR for a new Fixed Rate Term designated by Borrower.  At any time any portion of this Note bears interest determined in relation to the Prime Rate, Borrower may convert all or a portion thereof so that it bears interest determined in relation to LIBOR for a Fixed Rate Term designated by Borrower.  At such time as Borrower requests an advance hereunder or wishes to select a LIBOR option for all or a portion of the outstanding principal balance hereof, and at the end of each Fixed Rate Term, Borrower shall give Bank notice specifying: (i) the interest rate option selected by Borrower; (ii) the principal amount subject thereto; and (iii) for each LIBOR selection, the length of the applicable Fixed Rate Term. Any such notice may be given by telephone (or such other electronic method as Bank may permit) so long as, with respect to each LIBOR selection, (A) if requested by Bank, Borrower provides to Bank written confirmation thereof not later than three (3) Business Days after such notice is given, and (B) such notice is given to Bank prior to 10:00 a.m. on the first day of the Fixed Rate Term, or at a later time during any Business Day if Bank, at its sole option but without obligation to do so, accepts Borrower's notice and quotes a fixed rate to Borrower.  If Borrower does not immediately accept a fixed rate when quoted by Bank, the quoted rate shall expire and any subsequent LIBOR request from Borrower shall be subject to a redetermination by Bank of the applicable fixed rate.  If no specific designation of interest is made at the time any advance is requested hereunder or at the end of any Fixed Rate Term, Borrower shall be deemed to have made a Prime Rate interest selection for such advance or the principal amount to which such Fixed Rate Term applied.

(c)    Taxes and Regulatory Costs.  Borrower shall pay to Bank immediately upon demand, in addition to any other amounts due or to become due hereunder, any and all (i) withholdings, interest equalization taxes, stamp taxes or other taxes (except income and franchise taxes) imposed by any domestic or foreign governmental authority and related in any manner to LIBOR, and (ii) future, supplemental, emergency or other changes in the LIBOR Reserve Percentage, assessment rates imposed by the Federal Deposit Insurance Corporation, or similar requirements or costs imposed by any domestic or foreign governmental authority or resulting from compliance by Bank with any request or 

2

directive (whether or not having the force of law) from any central bank or other governmental authority and related in any manner to LIBOR to the extent they are not included in the calculation of LIBOR.  In determining which of the foregoing are attributable to any LIBOR option available to Borrower hereunder, any reasonable allocation made by Bank among its operations shall be conclusive and binding upon Borrower.

(d)    Payment of Interest.  Interest accrued on this Note shall be payable on the 1st day of each month, commencing March 1, 2011.

(e)    Default Interest.  From and after the maturity date of this Note, or such earlier date as all principal owing hereunder becomes due and payable by acceleration or otherwise, or at Bank's option upon the occurrence, and during the continuance of an Event of Default, the outstanding principal balance of this Note shall bear interest at an increased rate per annum (computed on the basis of a 360-day year, actual days elapsed) equal to four percent (4%) above the rate of interest from time to time applicable to this Note.

BORROWING AND REPAYMENT:

(a)    Borrowing and Repayment.  Borrower may from time to time during the term of this Note borrow, partially or wholly repay its outstanding borrowings, and reborrow, subject to all of the limitations, terms and conditions of this Note and of any document executed in connection with or governing this Note; provided however, that the total outstanding borrowings under this Note shall not at any time exceed the principal amount stated above.  The unpaid principal balance of this obligation at any time shall be the total amounts advanced hereunder by the holder hereof less the amount of principal payments made hereon by or for Borrower, which balance may be endorsed hereon from time to time by the holder.  The outstanding principal balance of this Note shall be due and payable in full on February 1, 2013.

(b)    Advances.  Advances hereunder, to the total amount of the principal sum stated above, may be made by the holder at the oral or written request of (i) Balu Balakrishnan or Eric Verity, or Sandeep Nayyar, any one acting alone, who are authorized to request advances and direct the disposition of any advances until written notice of the revocation of such authority is received by the holder at the office designated above, or (ii) any person, with respect to advances deposited to the credit of any deposit account of Borrower, which advances, when so deposited, shall be conclusively presumed to have been made to or for the benefit of Borrower regardless of the fact that persons other than those authorized to request advances may have authority to draw against such account.  The holder shall have no obligation to determine whether any person requesting an advance is or has been authorized by Borrower.

(c)    Application of Payments.  Each payment made on this Note shall be credited first, to any interest then due and second, to the outstanding principal balance hereof.  All payments credited to principal shall be applied first, to the outstanding principal balance of this Note which bears interest determined in relation to the Prime Rate, if any, and second, to the outstanding principal balance of this Note which bears interest determined in relation to LIBOR, with such payments applied to the oldest Fixed Rate Term first.

PREPAYMENT:

(a)    Prime Rate.  Borrower may prepay principal on any portion of this Note which bears interest determined in relation to the Prime Rate at any time, in any amount and without penalty.

3

(b)    LIBOR.  Borrower may prepay principal on any portion of this Note which bears interest determined in relation to LIBOR at any time and in the minimum amount of One Hundred Thousand Dollars ($100,000.00); provided however, that if the outstanding principal balance of such portion of this Note is less than said amount, the minimum prepayment amount shall be the entire outstanding principal balance thereof.  In consideration of Bank providing this prepayment option to Borrower, or if any such portion of this Note shall become due and payable at any time prior to the last day of the Fixed Rate Term applicable thereto by acceleration or otherwise, Borrower shall pay to Bank immediately upon demand a fee which is the sum of the discounted monthly differences for each month from the month of prepayment through the month in which such Fixed Rate Term matures, calculated as follows for each such month:

(i)    Determine the amount of interest which would have accrued each month on the amount prepaid at the interest rate applicable to such amount had it remained outstanding until the last day of the Fixed Rate Term applicable thereto.

(ii)    Subtract from the amount determined in (i) above the amount of interest which would have accrued for the same month on the amount prepaid for the remaining term of such Fixed Rate Term at LIBOR in effect on the date of prepayment for new loans made for such term and in a principal amount equal to the amount prepaid.

(iii)    If the result obtained in (ii) for any month is greater than zero, discount that difference by LIBOR used in (ii) above.

Borrower acknowledges that prepayment of such amount may result in Bank incurring additional costs, expenses and/or liabilities, and that it is difficult to ascertain the full extent of such costs, expenses and/or liabilities.  Borrower, therefore, agrees to pay the above-described prepayment fee and agrees that said amount represents a reasonable estimate of the prepayment costs, expenses and/or liabilities of Bank.  If Borrower fails to pay any prepayment fee when due, the amount of such prepayment fee shall thereafter bear interest until paid at a rate per annum two percent (2.00%) above the Prime Rate in effect from time to time (computed on the basis of a 360-day year, actual days elapsed).  Please refer to the LIBOR early termination prepayment example attached hereto as Exhibit A for illustrative purposes only.  

EVENTS OF DEFAULT:

This Note is made pursuant to and is subject to the terms and conditions of that certain Credit Agreement between Borrower and Bank dated as of February 22, 2011, as amended from time to time (the "Credit Agreement").  Any default in the payment or performance of any obligation under this Note, or any defined event of default under the Credit Agreement, shall constitute an "Event of Default" under this Note.

MISCELLANEOUS:

(a)    Remedies.  Upon the occurrence of any Event of Default, the holder of this Note, at the holder's option, may declare all sums of principal and interest outstanding hereunder to be immediately due and payable without presentment, demand, notice of nonperformance, notice of protest, protest or notice of dishonor, all of which are expressly waived by Borrower, and the obligation, if any, of the holder to extend any further credit hereunder shall immediately cease and terminate.  Borrower shall pay to the holder immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of the holder's in-house counsel), expended or incurred by the holder in connection with the enforcement of 

4

the holder's rights and/or the collection of any amounts which become due to the holder under this Note, and the prosecution or defense of any action in any way related to this Note, including without limitation, any action for declaratory relief, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by Bank or any other person) relating to Borrower or any other person or entity.

(b)    Obligations Joint and Several.  Should more than one person or entity sign this Note as a Borrower, the obligations of each such Borrower shall be joint and several.

(c)    Governing Law.  This Note shall be governed by and construed in accordance with the laws of the State of California.

IN WITNESS WHEREOF, the undersigned has executed this Note as of the date first written above.
	
					
	POWER INTEGRATIONS, INC.
	 
	 
	 

	 
	 
	 
	 
	 

	By:
	/s/ Balu Balakrishnan
	 
	 
	 

	 
	Balu Balakrishnan,
	 
	 
	 

	 
	President & CEO
	 
	 
	 

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Exhibit A to Revolving Line of Credit Note

	
			
	LIBOR EARLY TERMINATION PREPAYMENT EXAMPLE

	 
	 
	 

	Loan Amount advance under LIBOR rate
	$1,000,000
	 

	 
	 
	 

	Initial Date
	2/1/2011
	 

	Initial Term
	90-days
	to 5/1/2011

	Initial Rate (hypothetical rate for illustrative purposes only)
	0.45%
	 

	 
	 
	 

	Termination Date
	4/1/2011
	4/1/2011

	Days Remaining
	30-days
	30-days

	LIBOR at date of Termination for Days Remaining (30-day LIBOR)
	0.3%
	0.5%

	 
	 
	 

	Two examples - one rate higher and one lower at time of termination.

	 

	90-day LIBOR at initial term compared to Remaining days, 30-day LIBOR rate at Termination Date

	 
	 
	 

	Prepayment Calculation
	 
	 

	 
	Rate Lower
	Rate Higher

	Interest over Remaining 30-Days if no termination (0.45%, 30days remaining)
	375
	375

	Interest over Remaining 30-Days at new LIBOR Rate at Termination date:  (example  0.30% and 0.50% with 30-days remaining)
	250
	417

	Difference in Interest over Remaining Days in term
	125
	(42)

	 
	 
	 

	Prepayment that would apply:
	125
	none

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