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

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

• our expectations regarding our expenses, sales and operations;

• our anticipated cash needs and our estimates regarding our capital requirements and our need for additional financing;

• our ability to anticipate the future needs of our customers;

• our plans for future products and enhancements of existing products;

• our growth strategy elements;

• our intellectual property;

• our anticipated trends and challenges in the markets in which we operate; and

• our ability to attract customers.

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

All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth in this Quarterly Report on Form 10-Q. Other than as required by applicable laws, we are under no obligation to, and do not intend to, update any forward-looking statement, whether as a result of new information, future events or otherwise.

Overview

We are a supplier of power management semiconductors for consumer, communications and computing electronic devices, such as wireless handsets, notebook and tablet computers, smartphones, camera phones, digital cameras, personal media players, Bluetooth headphones and accessories, notebook computers, digital TVs, set top boxes and displays. We focus our design and marketing efforts on the application-specific power management needs in these rapidly-evolving devices. We currently offer a portfolio of over 600 power management products comprising Power Management application-specific standard products, or ASSPs, and selected general-purpose analog integrated circuits, or ICs, in single-chip and multi-chip packages. We sell directly to original equipment manufacturers, or OEMs, including LG Electronics, Inc., Samsung Electronics Co., Ltd. and Sony Ericsson. We sell through distributors and original design manufacturers, or ODMs, and to other system designers, including Hewlett-Packard Company, Lenovo Group Ltd., Quanta Computers Inc. and Toshiba Corporation.

Our net revenue in the second quarter of 2008 decreased 18 percent compared to the second quarter of 2007 primarily as a result of a decrease in market demand primarily in China and Taiwan. Gross margin in the second quarter of 2008 decreased to 47% compared to 55% in the second quarter of 2007 primarily due to an unfavorable change in product mix and the impact of a higher than normal excess inventory charge in the second quarter of 2008.

Cash, cash equivalents and short term investments as of June 30, 2008 decreased by $4 million to $110 million compared to December 31, 2007, due to reclassification of approximately $3 million of auction rate securities from short-term investments to long-term other assets and approximately $1 million used to purchase Elite Micro Devices, Inc. ("Elite"). We continue to be debt free as of June 30, 2008.

Critical Accounting Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts in our condensed consolidated financial statements. We evaluate our estimates on an on-going basis, including those related to our revenues, inventories, share-based compensation, income taxes, goodwill, investments and long-lived assets. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Although actual results have historically been reasonably consistent with management's expectations, the actual results may differ from these estimates or our estimates may be affected by different assumptions or conditions.

Management believes that there have been no significant changes during the three and six months ended June 30, 2008 to the items that we disclosed as our critical accounting policies and estimates in the Management's Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K for the year ended December 31, 2007.

Results of Operations

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



                                                          Three Months Ended June 30,                      Six Months Ended June 30,
                                                          2008                    2007                    2008                    2007
                                                                               (in thousands, except percentages)
Net revenue                                        $ 21,173     100.0 %    $ 25,837     100.0 %    $ 46,274     100.0 %    $ 46,945     100.0 %
Cost of revenue                                      11,149      52.7        11,612      44.9        22,517      48.7        21,544      45.9

Gross profit                                         10,024      47.3        14,225      55.1        23,757      51.3        25,401      54.1
Operating expenses:
Research and development                              7,790      36.8         7,572      29.3        15,449      33.4        14,675      31.3
Sales, general and administrative                     6,201      29.3         6,597      25.5        12,646      27.3        12,799      27.3
Patent litigation                                       482       2.3         1,488       5.8           744       1.6         3,077       6.6

Total operating expenses                             14,473      68.4        15,657      60.6        28,839      62.3        30,551      65.2

Loss from operations                                 (4,449 )   (21.0 )      (1,432 )    (5.5 )      (5,082 )   (11.0 )      (5,150 )   (11.1 )
Interest and other income (expense):
Interest income                                         749       3.5         1,368       5.3         1,878       4.1         2,737       5.8
Interest expense and other income (expense), net         17       0.1           (14 )    (0.1 )          32        -           (285 )    (0.6 )

Total interest and other income (expense), net          766       3.6         1,354       5.2         1,910       4.1         2,452       5.2

Loss before income taxes                             (3,683 )   (17.4 )         (78 )    (0.3 )      (3,172 )    (6.9 )      (2,698 )    (5.9 )
Provision for income taxes                              147       0.7           813       3.1           211       0.5           944       2.0

Net loss                                           $ (3,830 )   (18.1 )%   $   (891 )    (3.4 )%   $ (3,383 )    (7.3 )%   $ (3,642 )    (7.9 )%

Comparison of Three and Six Months ended June 30, 2008 and June 30, 2007

Revenues

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



                                        Three Months Ended June 30,                    Six Months Ended June 30,
                                        2008                   2007                   2008                   2007
                                            Percent                Percent                Percent                Percent
                                            of net                 of net                 of net                 of net
                                  Amount    revenue      Amount    revenue      Amount    revenue      Amount    revenue
                                                              (dollar amounts in thousands)
Display and Lighting Solutions   $ 12,610        60 %   $ 15,277        59 %   $ 27,420        59 %   $ 27,178        58 %
Voltage Regulation and DC/DC
Conversion                          4,075        19 %      5,709        22 %     10,822        23 %     10,764        23 %
Interface and Power Management      3,885        18 %      4,446        17 %      7,084        15 %      8,208        17 %
Battery Management                    603         3 %        405         2 %        948         2 %        795         2 %

Total                            $ 21,173       100 %   $ 25,837       100 %   $ 46,274       100 %   $ 46,945       100 %

Our net revenue for the second quarter of 2008 as compared to the second quarter of 2007 decreased by $4.7 million, or 18%. This decrease reflected decreased sales of all our product families except for Battery Management, as a result of decreased demand. Total unit shipments in the second quarter of 2008 decreased 16% compared to the second quarter of 2007 while the average selling prices were relatively flat.

Our net revenue for the first six months of 2008 as compared to the first six months of 2007 decreased by $0.7 million, or 1%. This decrease reflected a $1.1 million decrease in sales of our Interface and Power Management product family, partially offset by slight increases in other product families. Average selling prices decreased 3% during the first six months of 2008 compared to the first six months of 2007 while total unit shipments increased 2%.

Geographically, sales in Korea, Japan and Europe for the second quarter of 2008 increased slightly compared to the second quarter of 2007 due to higher demand from our OEMs and sales in China and Taiwan decreased primarily due to lower shipments to our major distributors as a result of lower demand. Sales in Korea, Japan, Taiwan and Europe for first six months of 2008 increased slightly compared to the first six months of 2007 and sales in China decreased due to lower shipments to our distributors as a result of lower demand.

Gross Profit



                                                     Three Months Ended June 30,                                          Six Months Ended June 30,
                                                      2008                 2007            Increase (Decrease)            2008                2007            Increase (Decrease)
                                                                                                 (in thousands, except percentages)
Net revenue                                      $       21,173       $       25,837     $     (4,664 )      (18 %)   $      46,274       $      46,945     $      (671 )         (1 %)
Cost of revenue                                          11,149               11,612             (463 )       (4 %)          22,517              21,544             973            5 %

Gross profit                                     $       10,024       $       14,225                                  $      23,757       $      25,401

Gross profit margin percentage                             47.3 %               55.1 %           (7.8 %)                       51.3 %              54.1 %          (2.8 %)

Our gross margin was 47% for the second quarter of 2008, compared to 55% for the second quarter of 2007. This decrease was primarily due to approximately 5% unfavorable impact from change in product mix and an unfavorable 2% due to a higher excess inventory charge associated with lower than anticipated net revenue in the second quarter of 2008, as described below.

Our gross margin was 51% for the first six months of 2008, compared to 54% for the first six months of 2007. This decrease was primarily due to approximately 1% unfavorable impact from change in product mix and approximately 2% unfavorable impact due to a higher excess inventory charge associated with lower than anticipated net revenue in the first six of 2008, as described below.

During the second quarter of 2008, our gross inventory write-down was approximately $1.3 million, offset by the sale of $0.4 million of previously written down inventory. During the first six months of 2008, our gross inventory write-down was approximately $2.1 million, offset by the sale of $0.7 million of previously written down inventory. During the second quarter of 2007, our gross inventory write-down was approximately $1.5 million, offset by the sale of $1.0 million of previously written down inventory. During the first six months of 2007, our gross inventory write-down was approximately $2.6 million, offset by the sale of $2.0 million of previously written down inventory. The net effect of inventory write-down on our gross margin contributed to an unfavorable 2% decrease to our gross margin during the second quarter of 2008 relative to the second quarter of 2007 and an unfavorable 2% decrease to our gross margin during the first six months of 2008 relative to the first six months of 2007.

Research and Development



                                                 Three Months Ended June 30,                                        Six Months Ended June 30,
                                                  2008                2007            Increase (Decrease)           2008                2007            Increase (Decrease)
                                                                                            (in thousands, except percentages)
Research and development                      $       7,790       $       7,572     $         218         3 %   $      15,449       $      14,675     $         774         5 %
Percentage of net revenue                              36.8 %              29.3 %             7.5 %                      33.4 %              31.3 %             2.1 %

Research and development expenses for the second quarter of 2008 increased by $0.2 million as compared to the second quarter of 2007 primarily due to a $0.3 million charge of in-process research and development associated with our acquisition of Elite during the second quarter of 2008, partially offset by lower supply material and other expense of $0.1 million.

Research and development expenses for the first six months of 2008 increased by $0.8 million as compared to the first six months of 2007 primarily due to a $0.6 million increase in payroll and benefit related expenses as a result of higher headcount, a $0.4 million increase in information technology, occupancy and rent expense and a $0.3 million charge of in-process research and development associated with our acquisition of Elite during the second quarter of 2008, partially offset by lower NRE and engineering related expenses as well as supply material and other expense of $0.4 million.

Sales, General and Administrative



                                                    Three Months Ended June 30,                                          Six Months Ended June 30,
                                                     2008                2007            Increase (Decrease)             2008                2007            Increase (Decrease)
                                                                                                 (in thousands, except percentages)
Sales, general and administrative                $       6,201       $       6,597     $        (396 )       (6 %)   $      12,646       $      12,799     $        (153 )       (1 %)
Percentage of net revenue                                 29.3 %              25.5 %             3.8 %                        27.3 %              27.3 %             0.0 %

Sales, general and administrative expenses for the second quarter of 2008 decreased by $0.4 million as compared to the second quarter of 2007 primarily due to a $0.6 million decrease in payroll and benefit related expenses partially offset by a $0.2 million increase in travel and professional service expenses.

Sales, general and administrative expenses for the first six months of 2008 decreased by $0.2 million as compared to the first six months of 2007 primarily due to a $0.6 million decrease in payroll and benefit related expenses and a $0.1 million decrease in external sales commission expense as a result of lower net sales, partially offset by a $0.3 million increase in information technology, occupancy and rent expense and a $0.2 million increase in travel expenses.

Patent Litigation

Litigation expenses were significantly lower for the second quarter of 2008 and the first six months of 2008 as compared to the second quarter of 2007 and the first six months of 2007, respectively, due to lower level of activity related to the patent infringement case. We believe that we will continue to incur significant litigation expenses for the remainder of 2008. For a description of our litigation, please see Part II, Item 1 - Legal Proceedings- for further details.

Interest Income

Interest income from investments of approximately $0.7 million in the second quarter of 2008 decreased $0.7 million compared to the second quarter of 2007 due to significantly lower average interest rates.

Interest income from investments of approximately $1.9 million in the first six months of 2008 decreased $0.8 million compared to the first six months of 2007 due to significantly lower average interest rates.

Interest and Other Income (Expense), Net

Interest and other income (expense), net was approximately zero in the second quarter of 2008, the second quarter of 2007 and the first six months of 2008.

Interest and other expense was approximately $0.3 million in the first six months of 2007 primarily as a result a $0.3 million write-off of cumulative translation adjustment loss as a result of the liquidation of our Sweden branch office during the first quarter of 2007.

Provision for Income Taxes

We recorded a tax provision of approximately $147,000 and $211,000 for the three and six months ended June 30, 2008, respectively. We recorded a tax provision of approximately $813,000 and $944,000 for the three and six months ended June 30, 2007, respectively. The income tax provision is primarily related to the geographical mix of income taxed at different rates and nondeductible stock-based compensation. The decrease in our tax provision from prior year is primarily due to a decrease in projected pre-tax income for this year.

We account for income taxes under the provisions of SFAS No. 109, "Accounting for Income Taxes." Under this method, we determine deferred tax assets and liabilities based upon the differences between the financial statement and tax bases of the our assets and liabilities using tax rates in effect for the year in which we expect the differences to affect taxable income. We adopted SFAS No. 123(R) as of January 1, 2006, and, as a result, incurred significant stock-based compensation expense. Our stock-based compensation expense also includes amounts related to incentive stock options for which no corresponding tax benefit is recognized unless a disqualifying disposition occurs. Disqualifying dispositions result in a reduction of the provision for income taxes in the quarter when the disqualifying disposition occurs in an amount equal to the tax benefit relating to previously expensed stock compensation. During the three months ended June 30, 2008 and 2007, the provision for income taxes was reduced by approximately $6,000 and $16,000, respectively, as a result of disqualifying dispositions.

During the three months ended June 30, 2008, we increased our total amount of unrecognized tax benefits as calculated under FASB Interpretation No. 48 ("FIN No. 48"), "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109" by approximately $419,000, including an accrual of interest and penalties of approximately $29,000. We recognize interest and penalties accrued related to unrecognized tax benefits in income tax expense.

We are subject to taxation in the United States and various states and foreign jurisdictions. We are currently under examination by the Internal Revenue Service for the 2005 and 2006 tax year. As of June 30, 2008, no audit adjustments have been made. Currently, we cannot estimate the range of reasonably possible change in unrecognized tax benefits in the next 12 months.

Recent Accounting Pronouncements

In May 2008, the FASB issued SFAS No. 162 ("SFAS No. 162"), "The Hierarchy of Generally Accepted Accounting Principles." This statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP. While this statement formalizes the sources and hierarchy of GAAP within the authoritative accounting literature, it does not change the accounting principles that are already in place. This statement will be effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board amendments to AU Section 411, "The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles." SFAS No. 162 is not expected to have a material impact on our consolidated financial statements.

Liquidity and Capital Resources



                                                   Six Months Ended June 30,
                                                   2008                2007            Increase (Decrease)
                                                            (in thousands, except percentages)
Net cash (used in) provided by operating
activities                                     $       (130 )     $        3,311     $     (3,441 )     (104 %)
Net cash provided by (used in) investing
activities                                           31,573              (10,316 )         41,889       (406 %)
Net cash provided by financing activities             1,583                  380            1,203        317 %
Effect of exchange rate changes on cash and
cash equivalents                                         29                  (72 )            101       (140 %)

Net increase (decrease) in cash and cash
equivalents                                    $     33,055       $       (6,697 )   $     39,752

Our cash, cash equivalents and short term investments were $110.0 million as of June 30, 2008 and $114.2 million as of December 31, 2007.

Net Cash (Used in) Provided by Operating Activities

Net cash used in operating activities was $0.1 million for the six months ended June 30, 2008. Net loss of $3.4 million was adjusted for non-cash charges consisting primarily of $1.5 million of depreciation and amortization expense and $3.6 million of stock-based compensation expense. We wrote off $0.3 million in-process research and development as a result of the acquisition of Elite. Accounts receivable decreased by $3.2 million due to lower revenue during the first six months of 2008. Accrued liabilities balance decreased by $4.0 million as we paid out 2007 bonuses during the first quarter of 2008. Inventory increased by $1.5 million in anticipation of sales during the remainder of 2008.

Net cash provided by operating activities was $3.3 million for the six months ended June 30, 2007. Net loss of $3.6 million was adjusted for non-cash charges consisting primarily of $1.4 million of depreciation and amortization expense and $3.5 million of stock-based compensation expense. Accounts payable and accrued liabilities balance increased $4.6 million due to increased purchases of materials and services to meet expected demand. Inventory increased $3.0 million as a result of anticipated sales during the second half of 2007. Accounts receivable balance increased $0.8 million due to higher revenue during the period.

Net Cash Provided by (Used in) Investing Activities

Net cash provided by investing activities was $31.6 million in the six months ended June 30, 2008, primarily as a result of a net cash inflow of $34.0 million from sales, maturities and purchases of our short-term investments. In the first quarter of 2008, we modified our investment policy to place greater emphasis on more liquid securities. The net cash increase provided by investing activities reflects that policy change. The net cash inflow from investments was offset by $1.6 million used to purchase testing and other equipment and to invest in office leasehold improvements as well as $0.6 million, net of cash acquired, used to acquire Elite during the first six months of 2008.

In June 2008, we acquired Elite, a privately held, Shanghai, China-based audio . . .