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 third quarter of 2008 decreased 17 percent compared to the third quarter of 2007 primarily as a result of a decrease in market demand primarily in China and Taiwan. Gross margin in the third quarter of 2008 decreased to 50% compared to 54% in the third quarter of 2007 primarily due to the impact of a higher excess inventory charge in the third quarter of 2008.

Cash, cash equivalents and short term investments as of September 30, 2008 decreased by $3 million to $111 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 September 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 nine months ended September 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                             Nine Months Ended
                                                 September 30,                                  September 30,
                                          2008                    2007                   2008                    2007
                                                              (in thousands, except percentages)
Net revenue                        $ 25,436     100.0 %    $ 30,600     100.0 %   $ 71,711     100.0 %    $ 77,545     100.0 %
Cost of revenue                      12,713      50.0        14,204      46.4       35,231      49.1        35,748      46.1

Gross profit                         12,723      50.0        16,396      53.6       36,480      50.9        41,797      53.9
Operating expenses:
Research and development              7,462      29.3         7,948      26.0       22,910      31.9        22,623      29.2
Sales, general and
administrative                        6,112      24.0         6,373      20.8       18,760      26.2        19,172      24.7
Patent litigation                       243       1.0           580       1.9          987       1.4         3,657       4.7

Total operating expenses             13,817      54.3        14,901      48.7       42,657      59.5        45,452      58.6

Income (loss) from operations        (1,094 )    (4.3 )       1,495       4.9       (6,177 )    (8.6 )      (3,655 )    (4.7 )
Interest and other income
(expense):
Interest income                         700       2.8         1,408       4.6        2,578       3.6         4,145       5.3
Interest expense and other
income (expense), net                    23       0.1           (10 )    (0.0 )         55       0.1          (295 )    (0.4 )

Total interest and other income
(expense), net                          723       2.9         1,398       4.6        2,633       3.7         3,850       4.9

Income (loss) before income
taxes                                  (371 )    (1.5 )       2,893       9.5       (3,544 )    (4.9 )         195       0.2
Provision for income taxes              266       1.0           316       1.0          477       0.7         1,260       1.6

Net income (loss)                  $   (637 )    (2.5 )%   $  2,577       8.5 %   $ (4,021 )    (5.6 )%   $ (1,065 )    (1.4 )%

Comparison of Three and Nine Months ended September 30, 2008 and September 30, 2007

Revenues

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



                                     Three Months Ended September 30,               Nine Months Ended September 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   $ 15,498        61 %   $ 17,857        58 %   $ 42,975        60 %   $ 45,035        58 %
Voltage Regulation and DC/DC
Conversion                          4,386        17 %      5,847        19 %     13,600        19 %     13,850        18 %
Interface and Power Management      4,492        18 %      6,228        21 %     13,127        18 %     17,082        22 %
Battery Management                  1,060         4 %        668         2 %      2,009         3 %      1,578         2 %

Total                            $ 25,436       100 %   $ 30,600       100 %   $ 71,711       100 %   $ 77,545       100 %

Our net revenue for the third quarter of 2008 as compared to the third quarter of 2007 decreased by $5.2 million, or 17%. This decrease reflected lower sales of all our product families except for Battery Management, as a result of decreased demand. Total unit shipments in the third quarter of 2008 decreased 20% compared to the third quarter of 2007 while the average selling prices increased by approximately 4%.

Our net revenue for the first nine months of 2008 as compared to the first nine months of 2007 decreased by $5.8 million, or 8%. This decrease reflected a $4.0 million decrease in sales of our Interface and Power Management product family and a $2.1 million decrease in sales of our Display and Lighting Solutions product family, partially offset by an increase in sales of our Battery Management product family. Total unit shipments in the first nine months of 2008 decreased 7% compared to the first nine months of 2007, while average selling prices remained relatively unchanged.

Geographically, sales in China and Taiwan decreased primarily due to lower shipments to our major distributors as a result of lower demand. Sales in Korea for first nine months of 2008 increased compared to the first nine months of 2007 due to higher sales to two major customers and sales in China decreased due to lower shipments to our distributors as a result of lower demand.

Gross Profit



                                       Three Months Ended                                       Nine Months Ended
                                          September 30,                                           September 30,
                                        2008          2007         Increase (Decrease)          2008          2007         Increase (Decrease)
                                                                         (in thousands, except percentages)
Net revenue                          $   25,436     $ 30,600     $     (5,164 )      (17 %)   $  71,711     $ 77,545     $      (5,834 )      (8 %)
Cost of revenue                          12,713       14,204           (1,491 )      (10 %)      35,231       35,748              (517 )      (1 %)

Gross profit                         $   12,723     $ 16,396                                  $  36,480     $ 41,797

Gross profit margin percentage             50.0 %       53.6 %           (3.6 %)                   50.9 %       53.9 %            (3.0 %)

Our gross margin was 50% for the third quarter of 2008, compared to 54% for the third quarter of 2007. This decrease was primarily due to a 3% unfavorable impact from higher excess inventory charges resulting from lower demand for our products than anticipated, as described below.

Our gross margin was 51% for the first nine months of 2008, compared to 54% for the first nine months of 2007. This decrease was primarily due to an approximate 2% unfavorable impact due to higher excess inventory charges resulting from lower demand for our products than anticipated, as described below, and an approximate 1% unfavorable impact from a change in product mix.

During the third quarter of 2008, our gross inventory write-down was approximately $1.0 million, partially offset by the sale of $0.5 million of previously written down inventory. During the first nine months of 2008, our gross inventory write-down was approximately $3.0 million, partially offset by the sale of $1.2 million of previously written down inventory. During the third quarter of 2007, our gross inventory write-down was approximately $0.7 million, offset by the sale of $1.2 million of previously written down inventory. During the first nine months of 2007, our gross inventory write-down was approximately $3.3 million, offset by the sale of $3.1 million of previously written down inventory. The net effect of inventory write-down on our gross margin contributed to an unfavorable 3% decrease to our gross margin during the third quarter of 2008 relative to the third quarter of 2007 and an unfavorable 2% decrease to our gross margin during the first nine months of 2008 relative to the first nine months of 2007.

Research and Development

Research and development expenses for the third quarter of 2008 decreased by $0.5 million as compared to the third quarter of 2007 primarily due to a $0.4 million reduction in payroll and benefit related expenses.

Research and development expenses for the first nine months of 2008 increased by $0.3 million as compared to the first nine months of 2007 primarily due a $0.4 million increase in stock-based compensation expense.

Sales, General and Administrative



                                             Three Months Ended                                        Nine Months Ended
                                                September 30,                                            September 30,
                                              2008          2007         Increase (Decrease)           2008          2007         Increase (Decrease)
                                                                                (in thousands, except percentages)
Sales, general and administrative          $    6,112      $ 6,373     $        (261 )       (4 %)   $  18,760     $ 19,172     $        (412 )       (2 %)
Percentage of net revenue                        24.0 %       20.8 %             3.2 %                    26.2 %       24.7 %             1.5 %

Sales, general and administrative expenses for the third quarter of 2008 decreased by $0.3 million as compared to the third quarter of 2007 primarily due to a $0.6 million decrease in payroll and benefit related expenses, partially offset by a $0.3 million increase in professional service expenses.

Sales, general and administrative expenses for the first nine months of 2008 decreased by $0.4 million as compared to the first nine months of 2007 primarily due to a $0.6 million decrease in payroll and benefit related expenses and a $0.3 million decrease in stock-based compensation expense, partially offset by a $0.3 million increase in office supplies expense and a $0.2 million increase in travel expense.

Patent Litigation

Litigation expenses were significantly lower for the third quarter of 2008 and the first nine months of 2008 as compared to the third quarter of 2007 and the first nine 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 and future years. 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 third quarter of 2008 decreased $0.7 million compared to the third quarter of 2007 due to significantly lower average interest rates.

Interest income from investments of approximately $2.6 million in the first nine months of 2008 decreased $1.5 million compared to the first nine 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 third quarter of 2008, the third quarter of 2007 and the first nine months of 2008.

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

Provision for Income Taxes

We recorded a tax provision of approximately $0.3 million and $0.5 million for the three and nine months ended September 30, 2008, respectively. We recorded a tax provision of approximately $0.3 million and $1.3 million for the three and nine months ended September 30, 2007, respectively. The decrease in our tax provision from prior year is primarily due to a decrease in projected pre-tax income and nondeductible stock-based compensation.

We account for income taxes under the provisions of SFAS No. 109, "Accounting for Income Taxes." Under this method, we determine deferred tax assets and liabilities based upon the differences between the financial statement and tax bases of our assets and liabilities using tax rates in effect for the year in which we expect the differences to affect taxable income. We adopted SFAS No. 123(R) as of January 1, 2006, and, as a result, incurred significant stock-based compensation expense. 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 September 30, 2008 and 2007, the provision for income taxes was reduced by less than $0.1 million, as a result of disqualifying dispositions. During the nine months ended September 30, 2008 and 2007, the provision for income taxes was reduced by less than $0.1 million and $0.1 million, respectively, as a result of disqualifying dispositions.

During the nine months ended September 30, 2008, we increased the 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 $0.8 million, including an accrual of interest and penalties of less than $0.1 million. 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 foreign jurisdictions. We are currently under examination by the Internal Revenue Service for the 2005 and 2006 tax years. As of September 30, 2008, no audit adjustments have been made. Currently, we cannot estimate the range of reasonably possible changes in unrecognized tax benefits in the next 12 months.

Subsequent Events

On October 9, 2008, we accepted for exchange from eligible employees (excluding directors, consultants, and all executives), options to purchase an aggregate of approximately 1.8 million shares of our common stock, pursuant to a stock option exchange program (the "Exchange Offer"), giving them the right to tender outstanding stock options that were granted between February 1, 2007 and July 1, 2008 (the "Old Options"). The Old Options were cancelled as of October 9, 2008. We granted new options to purchase an equal number of shares of our common stock with an exercise price equal to the fair market value of our common stock on October 9, 2008, which was $3.08 per share, in exchange for the options cancelled in connection with the offer. These new options vest over four years at the rate of 25 percent after one year starting on October 9, 2008 and 6.25 percent every three months thereafter. We calculated incremental compensation costs related to the Exchange Offer as required by SFAS No. 123(R), which together with the unamortized costs related to the Old Options, will be amortized over the vesting period of the new options.

We performed our annual goodwill impairment analysis as of September 30, 2008 pursuant to the steps and requirements of SFAS No. 142 and determined that our $16.1 million goodwill balance was not impaired. SFAS No. 142 requires us to perform a goodwill impairment test whenever events or circumstances indicate the carrying value may not be recoverable. Due to the current economic environment, our operating results, and because we have experienced a sustained decline in our market valuation subsequent to September 30, 2008, if such market declines continue or worsen, we will perform an interim goodwill impairment test during the fourth quarter ended December 31, 2008. As a result of the interim goodwill impairment test, we may determine that a non-cash impairment charge is required. A goodwill impairment charge, if any, may have a significant negative impact on our results for the fourth quarter ended December 31, 2008.

On October 3, 2008, the Emergency Economic Stabilization Act of 2008 was signed into law. A provision in this legislation provided for the extension of the research and development tax credit for qualifying expenditures paid or incurred from January 1, 2008 through December 31, 2009. As a result of this new legislation, we expect to generate federal research and development tax credits for the year ended December 31, 2008 resulting in additional tax credit carryovers. For the quarter and year ended December 31, 2008, we expect to record the full year tax benefit of this credit, which will be approximately $460,000 of tax credit.

On October 29, 2008, our board of directors authorized a program to repurchase shares of our outstanding common stock. Under the stock repurchase program, we are authorized to use up to $30 million to repurchase its outstanding common stock. We may repurchase shares in the open market or through privately negotiated transactions. The timing and actual number of shares repurchased will depend upon market conditions and other factors, in accordance with Securities and Exchange Commission requirements.

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



                                                     Nine Months Ended
                                                       September 30,
                                                     2008         2007          Increase (Decrease)
                                                           (in thousands, except percentages)
Net cash (used in) provided by operating
activities                                         $   (447 )   $   4,798     $     (5,245 )     (109 %)
Net cash provided by (used in) investing
activities                                           26,028       (15,604 )         41,632       (267 %)
Net cash provided by financing activities             1,588           593              995        168 %
Effect of exchange rate changes on cash and cash
equivalents                                              (8 )         (89 )             81        (91 %)

Net increase (decrease) in cash and cash
equivalents                                        $ 27,161     $ (10,302 )   $     37,463

Net Cash (Used in) Provided by Operating Activities

. . .