POWER INTEGRATIONS INC
10-Q, 2000-08-07
SEMICONDUCTORS & RELATED DEVICES
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<PAGE>

================================================================================

                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                             Washington, DC 20549
                             ____________________
                                   FORM 10-Q

(Mark One)
[X]   Quarterly report pursuant to Section 13 or 15(d) of the Securities
      Exchange Act of 1934 for the quarterly period ended June 30, 2000

or
[_]   Transition report pursuant to Section 13 or 15(d) of the Securities
      Exchange Act of 1934 for the transition period from ________ to ________

                        Commission File Number 0-23441

                             ____________________

                           POWER INTEGRATIONS, INC.
            (Exact name of registrant as specified in its charter)


                    DELAWARE                                94-3065014
         (State or other jurisdiction of                 (I.R.S. Employer
          Incorporation or organization)                Identification No.)

              477 N. Mathilda Avenue, Sunnyvale, California 94086
             (Address of principal executive offices)   (Zip code)
                                (408) 523-9200
             (Registrant's telephone number, including area code)


                             ____________________

   Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X]  NO [_]

   Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.


                    Class                       Outstanding at July 31, 2000
        -----------------------------           ----------------------------
        Common Stock, $.001 par value                 27,321,338 shares

================================================================================
<PAGE>

                            POWER INTEGRATIONS, INC.

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>


PART I.   FINANCIAL INFORMATION                                                                Page
<S>                                                                                            <C>


       Item 1.  Financial Statements.

                Condensed Consolidated Balance Sheets                                           3

                Condensed Consolidated Statements of Operations                                 4

                Condensed Consolidated Statements of Cash Flows                                 5

                Notes To Condensed Consolidated Financial Statements                            6

       Item 2.  Management's Discussion and Analysis of Financial Condition and
                Results of Operations                                                          10

       Item 3.  Quantitative and Qualitative Disclosures About Market Risk                     19

PART II.    OTHER INFORMATION

       Item 1.  Legal Proceedings                                                              20

       Item 2.  Changes in Securities and Use of Proceeds                                      20

       Item 3.  Defaults upon Senior Securities                                                20

       Item 4.  Submission of Matters to Vote of Security Holders                              20

       Item 5.  Other Information                                                              21

       Item 6.  Exhibits and Reports on Form 8-K                                               21

SIGNATURES                                                                                     22
</TABLE>
TOPSwitch, TinySwitch and EcoSmart are trademarks of Power Integrations, Inc.

                                       2
<PAGE>

                         PART I. FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

                           POWER INTEGRATIONS, INC.

                     CONDENSED CONSOLIDATED BALANCE SHEETS

                                (In thousands)

<TABLE>
<CAPTION>
                                                                                          June 30        December 31,
                                                                                            2000             1999
                                                                                        -------------   -------------
                                                                                         (unaudited)
<S>                                                                                    <C>              <C>
ASSETS
CURRENT ASSETS:
   Cash and cash equivalents........................................................        $ 43,072         $ 27,883
   Short-term investments...........................................................          22,615           33,789
   Accounts receivable..............................................................           9,447            9,682
   Inventories......................................................................          18,989           11,406
   Prepaid expenses and other current assets........................................           5,870            5,339
                                                                                            --------         --------
        Total current assets........................................................          99,993           88,099
                                                                                            --------         --------

PROPERTY AND EQUIPMENT, net.........................................................          12,993           10,472
                                                                                            --------         --------
                                                                                            $112,986         $ 98,571
                                                                                            ========         ========

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
   Current portion of capitalized lease obligations.................................        $    918         $  1,228
   Accounts payable.................................................................           5,737            6,524
   Accrued payroll and related expenses.............................................           3,297            3,994
   Taxes payable and other accrued liabilities......................................           2,748            1,818
   Deferred income on sales to distributors.........................................           3,266            3,366
                                                                                            --------         --------
        Total current liabilities...................................................          15,966           16,930
                                                                                            --------         --------

CAPITALIZED LEASE OBLIGATIONS, net of current portion...............................           1,026            1,393
                                                                                            --------         --------

STOCKHOLDERS' EQUITY:
   Common stock.....................................................................              27               26
   Additional paid-in capital.......................................................          71,001           65,553
   Stockholder notes receivable.....................................................             (76)            (201)
   Deferred compensation............................................................            (111)            (181)
   Cumulative translation adjustment................................................            (115)            (129)
   Retained earnings................................................................          25,268           15,180
                                                                                            --------         --------
        Total stockholders' equity..................................................          95,994           80,248
                                                                                            --------         --------
                                                                                            $112,986         $ 98,571
                                                                                            ========         ========
</TABLE>

The accompanying notes are an integral part of these condensed consolidated
balance sheets.

                                       3
<PAGE>

                            POWER INTEGRATIONS, INC.

                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (unaudited)
                    (In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                              Three Months Ended June 30,      Six Months Ended June 30,
                                                              ----------------------------    ----------------------------
                                                                   2000           1999            2000           1999
                                                              -------------  -------------    -------------  -------------
<S>                                                          <C>             <C>             <C>             <C>
NET REVENUES:
  Product sales...........................................         $28,637         $22,655         $56,224         $43,101
  License fees and royalties..............................             375             324             798             699
                                                                   -------         -------         -------         -------
     Total net revenues...................................          29,012          22,979          57,022          43,800

COST OF REVENUES..........................................          13,867          10,482          27,309          19,949
                                                                   -------         -------         -------         -------

GROSS PROFIT..............................................          15,145          12,497          29,713          23,851
                                                                   -------         -------         -------         -------

OPERATING EXPENSES:
  Research and development................................           3,431           2,535           6,486           4,871
  Sales and marketing.....................................           3,438           2,729           6,846           5,204
  General and administrative..............................           1,505           1,427           3,422           2,796
                                                                   -------         -------         -------         -------
     Total operating expenses.............................           8,374           6,691          16,754          12,871
                                                                   -------         -------         -------         -------

INCOME FROM OPERATIONS....................................           6,771           5,806          12,959          10,980

OTHER INCOME, net.........................................             696             433           1,451           1,017
                                                                   -------         -------         -------         -------

INCOME BEFORE PROVISION FOR
 INCOME TAXES.............................................           7,467           6,239          14,410          11,997

PROVISION FOR INCOME TAXES................................           2,240             939           4,322           1,803
                                                                   -------         -------         -------         -------

NET INCOME................................................         $ 5,227         $ 5,300         $10,088         $10,194
                                                                   =======         =======         =======         =======

EARNINGS PER SHARE:
  Basic...................................................           $0.19           $0.21           $0.37           $0.40
                                                                   =======         =======         =======         =======
  Diluted.................................................           $0.18           $0.19           $0.35           $0.37
                                                                   =======         =======         =======         =======

SHARES USED IN PER SHARE CALCULATION:
  Basic...................................................          27,210          25,814          27,088          25,553
                                                                   =======         =======         =======         =======
  Diluted.................................................          28,702          28,183          29,021          27,836
                                                                   =======         =======         =======         =======
</TABLE>

The accompanying notes are an integral part of these condensed consolidated
financial statements.

                                       4
<PAGE>

                            POWER INTEGRATIONS, INC.

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (unaudited)

                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                          Six Months Ended June 30,
                                                                                      ---------------------------------
                                                                                           2000              1999
                                                                                      --------------     --------------

<S>                                                                                   <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.........................................................................         $ 10,088          $ 10,194
Adjustments to reconcile net income to net cash provided by
 operating activities:
  Depreciation and amortization....................................................            1,855             1,559
  Deferred compensation expense....................................................               70                70
  Deferred income taxes............................................................               --            (2,957)
  Reduction in accounts receivable and other allowances............................               (1)             (138)
  Change in operating assets and liabilities:
     Accounts receivable...........................................................              235            (2,922)
     Inventories...................................................................           (7,583)              561
     Prepaid expenses and other current assets.....................................             (530)             (184)
     Accounts payable..............................................................             (784)            1,379
     Accrued liabilities...........................................................            2,372             1,846
     Deferred income on sales to distributors......................................             (100)               --
                                                                                            --------          --------
        Net cash provided by operating activities..................................            5,622             9,408
                                                                                            --------          --------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of property and equipment..............................................           (4,376)           (2,513)
  Purchases of short-term investments..............................................          (16,925)          (40,072)
  Proceeds from sales and maturities of short-term investments.....................           28,098            16,682
                                                                                            --------          --------
        Net cash provided by (used in) investing activities........................            6,797           (25,903)
                                                                                            --------          --------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Net proceeds from issuance of common stock.......................................            3,322             1,233
  Proceeds from stockholder note repayment.........................................              125                10
  Principal payments under capitalized lease obligations...........................             (677)           (1,042)
                                                                                            --------          --------
        Net cash provided by financing activities..................................            2,770               201
                                                                                            --------          --------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...............................           15,189           (16,294)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD...................................           27,883            24,176
                                                                                            --------          --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.........................................         $ 43,072          $  7,882
                                                                                            ========          ========

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
   FINANCING ACTIVITIES:

  Capitalized lease obligations incurred for property and equipment................         $    --           $    772
                                                                                            ========          ========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Cash paid for interest...........................................................         $     92          $    173
                                                                                            ========          ========
  Cash paid for income taxes.......................................................         $  1,263          $  3,161
                                                                                            ========          ========
</TABLE>

The accompanying notes are an integral part of these condensed consolidated
financial statements.

                                       5
<PAGE>

                           POWER INTEGRATIONS, INC.

             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                  (Unaudited)

1. BASIS OF PRESENTATION:

   The condensed consolidated financial statements include the accounts of Power
Integrations, Inc. (the Company), a Delaware corporation, and its wholly-owned
subsidiaries. Significant inter-company accounts and transactions have been
eliminated.

   While the financial information furnished is unaudited, the condensed
consolidated financial statements included in this report reflect all
adjustments (consisting only of normal recurring adjustments) which the Company
considers necessary for the fair presentation of the results of operations for
the interim periods covered and of the financial condition of the Company at the
date of the interim balance sheet. The results for interim periods are not
necessarily indicative of the results for the entire year. The condensed
consolidated financial statements should be read in conjunction with the Power
Integrations, Inc. consolidated financial statements for the year ended December
31, 1999 included in its Form 10-K.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

  Cash and Cash Equivalents and Short-Term Investments

   The Company considers cash invested in highly liquid financial instruments
with an original maturity of three months or less to be cash equivalents. Cash
investments in highly liquid financial instruments with original maturities
greater than three months but not longer than fifteen months are classified as
short-term investments. As of June 30, 2000, the Company's short-term
investments consisted of U.S. government backed securities, corporate commercial
paper and other high quality commercial and municipal securities, which were
classified as held to maturity and were valued using the amortized cost method
which approximates market.

  Revenue Recognition

   Product revenues consist of sales to original equipment manufacturers, or
OEMs, merchant power supply manufacturers and distributors. Revenues from
product sales to OEMs and merchant power supply manufacturers are recognized
upon shipment. Sales to distributors are made under terms allowing certain
rights of return and protection against subsequent price declines on the
Company's products held by the distributors. As a result of the Company's
distributor agreements, the Company defers recognition of revenue and the
proportionate costs of revenues derived from sales to distributors until the
distributors resell the Company's products to their customers. The margin
deferred as a result of this policy is reflected as "deferred income on sales to
distributors" in the accompanying condensed consolidated balance sheets.

  Estimates

   The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

  Segment Reporting

   During 1998, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 131, "Disclosures About Segments of an Enterprise and Related
Information." SFAS No.131 requires a new basis of determining reportable
business segments, i.e., the management approach. This approach requires that
business segment information used by management to assess performance and manage
company resources be the source for information disclosure. On this basis, the
Company is organized and operates as one business segment, that being the
design, development, manufacture and marketing of proprietary, high-voltage,
analog circuits for use in the AC to DC power conversion market.

                                       6
<PAGE>

                            POWER INTEGRATIONS, INC.

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

  New Accounting Standards

   In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
hedging activities, and exposure definition. SFAS No. 133 requires companies to
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The Company does not expect the adoption of SFAS No. 133 to have a material
impact on its consolidated results of operations and financial position.

   In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance on applying generally accepted accounting
principles to revenue recognition issues in financial statements. The Company
will adopt SAB 101 as required in the fourth quarter of 2000 and does not expect
such adoption to have a material impact on its consolidated results of
operations and financial position.

3. INVENTORIES:

   Inventories are stated at the lower of cost (first-in, first-out) or market.
Inventories consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                                      June 30,     December 31,
                                                                                        2000            1999
                                                                                    --------------------------
<S>                                                                              <C>             <C>
   Raw materials..............................................................         $ 3,205         $ 4,039
   Work-in-process............................................................           8,565           4,059
   Finished goods.............................................................           7,219           3,308
                                                                                       -------         -------
                                                                                       $18,989         $11,406
                                                                                       =======         =======
</TABLE>

4. SIGNIFICANT CUSTOMERS AND EXPORT SALES:
  Customer Concentration

   The Company's end user base is highly concentrated and a relatively small
number of OEMs and distributors accounted for a significant portion of the
Company's net revenues. Ten customers accounted for approximately 72.7% and
70.8% of total net revenues for the three months ended June 30, 2000 and 1999,
respectively, and approximately 70.7% and 70.2% of total net revenues for the
six months ended June 30, 2000 and 1999, respectively.

   The following customers accounted for more than 10% of total net revenues:

<TABLE>
<CAPTION>
                                                                 Three Months Ended               Six Months Ended
                                                                      June 30,                        June 30,
           Customer                                             2000             1999             2000             1999
           -------                                           ----------------------------------------------------------
         <S>                                                 <C>              <C>              <C>              <C>
           A.......................................            22.4%            13.1%            21.0%            17.6%
           B.......................................            10.4%            15.3%              *              11.3%
           C.......................................              *              10.9%              *              11.4%
</TABLE>

------------------
   *   less than 10% or no sales

                                       7
<PAGE>

                            POWER INTEGRATIONS, INC.

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

  Export Sales

   The Company markets its products in North America and in foreign countries
through its sales personnel and a worldwide network of independent sales
representatives and distributors. As a percentage of total net revenues, export
sales, which consist of domestic sales to customers in foreign countries, are
comprised of the following:

<TABLE>
<CAPTION>
                                                               Three Months Ended                 Six Months Ended
                                                                     June 30,                          June 30,
                                                               2000             1999             2000             1999
                                                            ------------------------------------------------------------
<S>                                                   <C>              <C>              <C>              <C>
   Taiwan..........................................            23.6%            23.4%            21.8%            17.7%
   Hong Kong/China.................................            23.0%            17.1%            21.7%            20.8%
   Western Europe..................................            16.6%            16.3%            18.8%            15.9%
   Korea...........................................            12.0%             9.9%            12.0%            13.3%
   Thailand........................................             3.6%             0.4%             3.1%             0.8%
   Japan...........................................             2.5%             2.7%             2.2%             3.0%
   Other...........................................             3.3%             7.3%             3.4%             7.2%
                                                               ----             ----             ----             ----
            Total foreign..........................            84.6%            77.1%            83.0%            78.7%
                                                               ====             ====             ====             ====
</TABLE>

  Product Sales


   Sales of our TOPSwitch products accounted for 98.0% and 96.0% of net revenues
from product sales for the three months ended June 30, 2000 and 1999,
respectively, and 97.8% and 95.9% of net revenues from product sales for the six
months ended June 30, 2000 and 1999, respectively. TOPSwitch products include
TOPSwitch, TOPSwitch II, TOPSwitch FX and TinySwitch.

                                       8
<PAGE>

                            POWER INTEGRATIONS, INC.

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


5. EARNINGS PER SHARE:

   Earnings per share are calculated in accordance with SFAS No. 128 "Earnings
per Share." SFAS No. 128 requires companies to compute earnings per share under
two different methods (basic and diluted). Basic earnings per share are
calculated by dividing net income by the weighted average shares of common stock
outstanding during the period. Diluted earnings per share are calculated by
dividing net income by the weighted average shares of outstanding common stock
and common stock equivalents during the period. Common stock equivalents
included in the diluted calculation consist of dilutive shares issuable upon the
exercise of outstanding common stock options and warrants computed using the
treasury stock method.

   The following table sets forth the calculation of basic and diluted earnings
per share (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                                       Three Months Ended             Six Months Ended
                                                                             June 30,                      June 30,
                                                                      ----------------------------------------------------
                                                                         2000         1999           2000           1999
                                                                      -------------------------  -------------------------
<S>                                                               <C>            <C>            <C>            <C>
Basic earnings per share:
  Net income...................................................        $ 5,227        $ 5,300        $10,088        $10,194
                                                                       -------        -------        -------        -------
  Weighted average common shares...............................         27,210         25,814         27,088         25,553
                                                                       -------        -------        -------        -------
     Basic earnings per share..................................        $  0.19        $  0.21        $  0.37        $  0.40
                                                                       =======        =======        =======        =======

Diluted earnings per share:
  Net income...................................................        $ 5,227        $ 5,300        $10,088        $10,194
                                                                       -------        -------        -------        -------
  Weighted average common shares...............................         27,210         25,814         27,088         25,553
  Weighted average common share equivalents:
     Options...................................................          1,475          2,132          1,899          1,983
     Warrants..................................................             --            154             --            231
     Employee stock purchase plan..............................             17             83             34             69
                                                                       -------        -------        -------        -------
  Diluted weighted average common shares.......................         28,702         28,183         29,021         27,836
                                                                       -------        -------        -------        -------
        Diluted earnings per share.............................        $  0.18        $  0.19        $  0.35        $  0.37
                                                                       =======        =======        =======        =======
</TABLE>


6. PROVISION FOR INCOME TAXES:

   Income tax expense for the six-month periods ended June 30, 2000 and 1999
includes a provision for Federal, state and foreign taxes based on the annual
estimated effective tax rate applicable to the Company and its subsidiaries for
the year. The difference between the statutory rate and the Company's effective
tax rate for the six months ended June 30, 2000 is primarily due to the
beneficial impact of international sales, research and development credits and
Federal tax exempt investments.

                                       9
<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS.

   This Management's Discussion and Analysis of Financial Condition and Results
of Operations includes a number of forward-looking statements which reflect our
current views with respect to future events and financial performance. In this
report, the words "anticipates," "believes," "expects," "future," "intends," and
similar expressions identify forward-looking statements. These forward-looking
statements are subject to certain risks and uncertainties, including those
discussed in the "Factors That May Affect Future Results of Operations" and
elsewhere in this report, that could cause actual results to differ materially
from historical or anticipated results. We caution you not to place undue
reliance on these forward-looking statements, which speak only as of the date of
this report.

   The following management's discussion and analysis of financial condition and
results of operations should be read in conjunction with management's discussion
and analysis of financial condition and results of operations included in our
Form 10-K for the year ended December 31, 1999.

Overview

   We design, develop, manufacture and market proprietary, high-voltage, analog
integrated circuits, or ICs, for use primarily in AC to DC power conversion
markets. We have targeted high-volume power supply markets, including the
cellular telephone, personal computer, cable and direct broadcast satellite and
various consumer and industrial electronics markets. Our initial focus is on
those markets that are sensitive to size, portability, energy efficiency and
time-to-market. We believe our patented TOPSwitch ICs, introduced in 1994, are
the first highly integrated power conversion ICs to achieve widespread market
acceptance. We introduced an enhanced family of ICs, TOPSwitch-II, in April
1997. In September 1998, we announced the TinySwitch family of integrated
circuits for power supplies used in a broad range of electronic products.
TinySwitch ICs - designed to reduce energy leakage by incorporating our new
EcoSmart technology - enable a new class of light, compact, energy-efficient
power supplies. In March 2000, we introduced the TOPSwitch-FX family of
products, which also incorporates our EcoSmart technology to help engineers meet
the growing need for environmentally friendly power solutions.  We believe this
new family of ICs gives power supply design engineers the ability to cost-
effectively integrate additional functionality into the power supplies they
design.

                                       10
<PAGE>

Results of Operations

   The following table sets forth certain operating data as a percentage of
total net revenues for the periods indicated.

<TABLE>
<CAPTION>
                                                                   Percentage of                     Percentage of
                                                              Total Net Revenues for            Total Net Revenues for
                                                                Three Months Ended                 Six Months Ended
                                                                     June 30,                          June 30,
                                                              ---------------------------       --------------------------
                                                                   2000           1999             2000             1999
                                                              -------------    -----------      -----------    -----------
<S>                                                          <C>              <C>              <C>              <C>
Net revenues:
  Product sales........................................            98.7%            98.6%            98.6%            98.4%
  Royalties............................................             1.3              1.4              1.4              1.6
                                                                -------          -------          -------          -------
     Total net revenues................................           100.0            100.0            100.0            100.0
Cost of revenues.......................................            47.8             45.6             47.9             45.5
                                                                -------          -------          -------          -------
Gross profit...........................................            52.2             54.4             52.1             54.5
                                                                -------          -------          -------          -------
Operating expenses:
  Research and development.............................            11.8             11.0             11.4             11.1
  Sales and marketing..................................            11.9             11.9             12.0             11.9
  General and administrative...........................             5.2              6.2              6.0              6.4
                                                                -------          -------          -------          -------
     Total operating expenses..........................            28.9             29.1             29.4             29.4
                                                                -------          -------          -------          -------
Income from operations.................................            23.3             25.3             22.7             25.1
Other income, net......................................             2.4              1.9              2.6              2.3
                                                                -------          -------          -------          -------
Income before provision for income taxes...............            25.7             27.2             25.3             27.4
                                                                -------          -------          -------          -------
Provision for income taxes.............................             7.7              4.1              7.6              4.1
                                                                -------          -------          -------          -------
Net income.............................................            18.0%            23.1%            17.7%            23.3%
                                                                =======          =======          =======          =======
</TABLE>


Comparison of the Three and Six Months Ended June 30, 2000 and 1999


   Net revenues.   Net revenues consist of revenues from product sales, which
are calculated net of returns and allowances, plus license fees and royalties
paid by licensees of our technology. Net revenues for the quarter ended June 30,
2000 were $29.0 million compared to $23.0 million for the second quarter of
1999, an increase of $6.0 million, or 26.3%. Net revenues for the six months
ended June 30, 2000 were $57.0 million compared to $43.8 million for the
comparable period of 1999, an increase of $13.2 million, or 30.2%

   Net revenues from product sales represented $28.6 million and $22.7 million
in the second quarter of 2000 and 1999, respectively. Net revenues from product
sales represented $56.2 million and $43.1 million in the six months ended June
30, 2000 and 1999, respectively. The increase in net revenues from product sales
for the three months and six months ended June 30, 2000 was attributable less to
increased demand in our two major markets, cellular phone and PC stand-by, and
more to a strong increase in demand for our products across a variety of "other
markets", including the set top decoder box market. Sales in the "other markets"
category increased approximately 50% for the quarter and approximately 58% for
the six months ended June 30, 2000 compared to the same periods of the prior
year. In total, sales of our TOPSwitch and TinySwitch products accounted for
98.0% and 96.0% of net revenues from product sales for the three months ended
June 30, 2000 and 1999, respectively, and 97.8% and 95.9% for the six months
ended June 30, 2000 and 1999, respectively.

   International sales were $24.5 million in the second quarter of 2000 compared
to $17.7 million for the same period in 1999, an increase of $6.8 million, or
38.4%, which represented 84.6% of net revenues compared to 77.1% in the
comparable period of 1999. International sales were $47.3 million for the six
months ended June 30, 2000 compared to $34.5 million for the same period in
1999, an increase of $12.8 million, or 37.1%, and represented 83.0% of net
revenues compared to 78.7% in the comparable period of 1999. Although the power
supplies using our products are designed and distributed worldwide, most of
these power supplies are manufactured in Asia. As a

                                       11
<PAGE>

result, sales to this region were 67.6% and 59.6% of our product sales for the
three months ended June 30, 2000 and 1999, respectively, and 63.9% and 61.6% of
our product sales for the six months ended June 30, 2000 and 1999, respectively.
We expect international sales to continue to account for a large portion of our
net revenues.

   Direct sales for the second quarter of 2000 were divided 49.4% to
distributors and 50.6% to original equipment manufacturers, or OEMs, and power
supply merchants, compared to 43.0% to distributors and 57.0% to OEMs and power
supply merchants for the same quarter in 1999. For the six months ended June 30,
2000, direct sales were divided 49.3% to distributors and 50.7% to OEMs and
power supply merchants, compared to 44.1% to distributors and 55.9% to OEMs and
power supply merchants for the same period in 1999. For the quarter ended June
30, 2000, sales to two customers accounted for 22.4% and 10.4% of net revenues,
and for the quarter ended June 30, 1999, those same two customers accounted for
13.1% and 15.3% of net revenues, while a third customer, in the quarter ended
June 30, 1999, accounted for 10.9% of net revenues. For the six months ended
June 30, 2000, sales to one customer accounted for 21.0% of net revenues, and
for the six months ended June 30, 1999, that same customer accounted for 17.6%
of net revenues, with two other customers accounting for 11.3% and 11.4% of net
revenues, respectively.

   The exact dollar amounts and percentages of sales to end customers are
difficult to ascertain because most of those sales occur through distributors or
indirectly through sales to merchant power supply manufacturers, which in turn
sell power supplies to OEMs. However, we estimate that direct and indirect sales
to Motorola, who is our largest end user, accounted for approximately 11.4% and
23.8% of net revenues for the quarters ended June 30, 2000 and 1999,
respectively, and approximately 13.3% and 20.7% of net revenues for the six
months ended June 30, 2000 and 1999, respectively. Direct sales to Motorola were
approximately 5.9% and 11.5% of net revenues for the quarters ended June 30,
2000 and 1999, respectively, and approximately 6.9% and 11.7% of net revenues
for the six months ended June 30, 2000 and 1999, respectively.

   Cost of revenues; Gross profit.   Gross profit is equal to net revenues less
cost of revenues. Our cost of revenues consists primarily of costs associated
with the purchase of wafers, the assembly and packaging of our products, and
internal labor and overhead associated with the testing of both wafers and
packaged components. Gross profit for the second quarter of 2000 was $15.1
million, or 52.2% of net revenues, compared to $12.5 million, or 54.4% of net
revenues for the same period in 1999. Gross profit for the six months ended June
30, 2000 was $29.7 million, or 52.1% of net revenues, compared to $23.9 million,
or 54.5% of net revenues for the same period in 1999. The decrease in gross
profit percentage for the three months and six months ended June 30, 2000 was
primarily due to the adverse impact of increased customer pricing pressure and
the increase in wafer costs from a stronger yen, partially offset by improved
manufacturing productivity, reduced material pricing and better manufacturing
yields due to improved test equipment. We cannot assure you that these or other
factors will have a favorable impact on our gross profit in future periods.

   Research and development expenses.   Research and development expenses
consist primarily of employee-related expenses, expensed material and facility
costs associated with the development of new processes and new products. We also
expense prototype wafers and mask sets related to new products as research and
development costs until new products are released to production. Research and
development expenses for the second quarter of 2000 were $3.4 million compared
to $2.5 million for the same period in 1999, an increase of $896,000, or 35.3%,
which represented 11.8% and 11.0% of our net revenues in each period,
respectively. Research and development expenses for the first six months of 2000
were $6.5 million compared to $4.9 million for the same period in 1999, an
increase of $1.6 million, or 33.2%, which represented 11.4% and 11.1% of net
revenues in each period, respectively. The increase for the three months and six
months ended June 30, 2000 was primarily due to increased salaries and other
costs related to the hiring of additional engineering personnel, outside
consulting fees and expensed prototype materials caused by the transition of
foundry manufacturing processes, and bringing newly developed products into
manufacturing. We expect research and development expenses to continue to
increase in absolute dollars but to fluctuate as a percentage of our net
revenues.

   Sales and marketing expenses.   Sales and marketing expenses consist
primarily of employee-related expenses, commissions to sales representatives and
facilities expenses, including expenses associated with our regional sales and
support offices. Sales and marketing expenses for the second quarter of 2000
were $3.4 million compared to $2.7 million for the same period in 1999, an
increase of $709,000, or 26.0%, which represented 11.9% of our net revenues in
both periods. Sales and marketing expenses for the first six months of 2000 were
$6.8 million compared

                                       12
<PAGE>

to $5.2 million for the same period in 1999, an increase of $1.6 million, or
31.6%, which represented 12.0% and 11.9% of our net revenues in each period,
respectively. The increase for the three months and six months ended June 30,
2000 primarily resulted from the addition of personnel to support increased
sales and increase the availability of field application engineers. There was
also an increase in sales commissions as a result of increased sales. We expect
sales and marketing expenses to continue to increase in absolute dollars but to
fluctuate as a percentage of our net revenues.

   General and administrative expenses.   General and administrative expenses
consist primarily of employee-related expenses for administration, finance,
human resources and general management, as well as consulting, outside services,
legal and auditing expenses. For the quarters ended June 30, 2000 and 1999,
general and administrative expenses were $1.5 million and $1.4 million,
respectively, which represented 5.2% and 6.2% of our net revenues in each
period. For the six months ended June 30, 2000 and 1999, general and
administrative expenses were $3.4 million and $2.8 million, respectively, which
represented 6.0% and 6.4% of our net revenues in each period. This increase in
spending in absolute dollars was primarily due to the addition of personnel to
support our overall growth, and additional facility costs. We expect general and
administrative expenses to continue to increase in absolute dollars, but to
fluctuate as a percentage of our net revenues.

   Other income, net.   Other income, net, for the second quarter of 2000
increased by $263,000 over the same period in 1999, and for the six months ended
June 30, 2000, increased by $434,000 over the same period in 1999. The increase
for the three and six month periods ended June 30, 2000 was due primarily to
additional interest income from an increase in cash equivalents and short-term
investments in 2000.

   Provision for income taxes.   Provision for income taxes represents Federal,
state and foreign taxes. The provision for income taxes was $2.2 million for the
second quarter of 2000 compared to $939,000 for the same period in 1999. The
provision for income taxes was $4.3 million for the first six months of 2000
compared to $1.8 million for the same period in 1999. Our estimated effective
tax rate for 2000 is 30% compared to 15% used in the same periods for 1999. The
difference between the statutory rate and our effective tax rate for 2000 is
primarily due to the beneficial impact of international sales, research and
development credits and Federal tax exempt investments.

Liquidity and Capital Resources

   At June 30, 2000, we had approximately $65.7 million in cash, cash
equivalents and short-term investments. In addition, under a revolving line of
credit agreement with Union Bank of California, we can borrow up to $10 million.
A portion of the credit line is used to cover advances for commercial letters of
credit and standby letters of credit, which we provide to Matsushita and OKI
prior to the shipment of wafers by the foundries to us. The balance of this
credit line is unused and available. The line of credit agreement contains
financial covenants and requires that we maintain profitability on a quarterly
basis and not pay or declare dividends without the bank's prior consent. In
previous years we have financed a significant portion of our machinery and
equipment through capital equipment leases. There was no additional equipment
financing during the six months ended June 30, 2000.

   As of June 30, 2000, we had working capital, defined as current assets less
current liabilities, of approximately $84.0 million, which was an increase of
approximately $12.9 million over December 31, 1999. Our operating activities
generated cash of $5.6 million and $9.4 million in the six months ended June 30,
2000 and 1999, respectively. Cash generated in the first six months of 2000 was
principally the result of net income in the amount of $10.1 million,
depreciation and amortization, and an increase in accrued liabilities, partially
offset by an increase in inventory. Cash generated in the first six months of
1999 was principally the result of net income of $10.2 million and an increase
in accounts payable and accrued liabilities, offset by increases in accounts
receivable and deferred taxes.

   Our investing activities were a net transfer from short-term investments to
cash and cash equivalents of $11.2 million in the six months ended June 30, 2000
and a net transfer from cash and cash equivalents to short-term investments of
$23.4 million in the six months ended June 30, 1999. Purchases of property and
equipment were $4.4 million and $2.5 million in the six months ended June 30,
2000 and 1999, respectively.

   We believe that cash generated from operations, together with existing
sources of liquidity, will satisfy our projected working capital and other cash
requirements for at least the next 12 months.

                                       13
<PAGE>

New Accounting Standards

   In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
hedging activities, and exposure definition. SFAS No. 133 requires companies to
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
We do not expect that the adoption of SFAS No. 133 will have a material impact
on our consolidated results of operations and financial position.

   In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance on applying generally accepted accounting
principles to revenue recognition issues in financial statements. We will adopt
SAB 101 as required in the fourth quarter of 2000 and do not expect such
adoption to have a material impact on our consolidated results of operations and
financial position.

Factors That May Affect Future Results of Operations

  In addition to the other information in this report, the following factors
should be considered carefully in evaluating our business before purchasing
shares of our stock.

   Our quarterly operating results are volatile and difficult to predict.  If we
fail to meet the expectations of public market analysts or investors, the market
price of our common stock may decrease significantly.  Our net revenues and
operating results have varied significantly in the past, are difficult to
forecast, are subject to numerous factors both within and outside of our
control, and may fluctuate significantly in the future. As a result, our
quarterly operating results will likely fall below the expectations of public
market analysts or investors. If that occurs, the price of our stock may
decline.

   Some of the factors that could affect our operating results include the
following:

     .  the volume and timing of orders received from customers;

     .  the volume and timing of orders placed by us with our foundries;

     .  changes in product mix including the impact of new product introduction
        on existing products;

     .  our ability to develop and bring to market new products and technologies
        on a timely basis;

     .  the timing of investments in research and development and sales and
        marketing;

     .  cyclical semiconductor industry conditions; and

     .  fluctuations in exchange rates, particularly the exchange rates between
        the U.S. dollar and the Japanese yen.

   Our quarterly results may be subject to seasonality. Historically, our
revenues have been strongest in our third and fourth quarters, due to what we
believe are seasonal factors attributed to the high volume consumer markets for
the end products into which our ICs are sold. Our revenues have then followed a
pattern of being sequentially linear or somewhat down in the first and second
quarters of the next year.

  We do not have long-term contracts with any of our customers and if they fail
to place, or if they cancel or reschedule orders for our products, our operating
results and business may suffer.  Our business is characterized by short-term
customer orders and shipment schedules. The ordering patterns of some of our
existing large customers have been unpredictable in the past and we expect that
customer-ordering patterns will continue to be unpredictable in the future. Not
only does the volume of units ordered by particular customers vary substantially
from period to period, but also purchase orders received from particular
customers often vary substantially from early oral estimates provided by those
customers for planning purposes. In addition, customer orders can be canceled or

                                       14
<PAGE>

rescheduled without penalty to them. In the past we have experienced customer
cancellations of substantial orders for reasons beyond our control, and
significant cancellations could occur again at any time.

   We depend on Motorola for a significant portion of our net revenues and if we
lose Motorola as a customer, our operating results will suffer.  For the six
months ended June 30, 2000, direct sales to Motorola accounted for approximately
7% of our net revenues. Indirect sales, through power supply merchants, which
incorporate our ICs into the products they produce for Motorola, accounted for
another approximately 6% of our net revenues. For the six months ended June 30,
1999, direct sales and indirect sales to Motorola accounted for approximately
12% and 9% of our net revenues, respectively. We expect that our operating
results will depend, in part, on our direct and indirect sales to Motorola for
the foreseeable future. In addition, if Motorola continues to shift from higher
end to lower end cellular phones that incorporate older technology chargers
which do not use our ICs, our direct and indirect sales to Motorola may decline,
which may hurt our operating results.

   Intense competition in the high-voltage power supply industry may lead to a
decrease in the average selling price and reduced sales volume of our products,
which may harm our business.  The high-voltage power supply industry is
intensely competitive and characterized by significant price erosion. Our
products face competition from alternative technologies, including traditional
linear transformers and discrete switcher power supplies. If the price of
competing products decreases significantly, the cost effectiveness of our
products will be adversely affected. If power requirements for applications in
which our products are currently utilized, including battery chargers for
cellular telephones, drop below current power levels, these older alternative
technologies can be used more cost effectively than our TOPSwitch-based
switchers.

   We cannot assure you that our products will continue to compete favorably or
that we will be successful in the face of increasing competition from new
products and enhancements introduced by existing competitors or new companies
entering this market. We believe our failure to compete successfully in the
high-voltage power supply business, including our ability to introduce new
products with higher average selling prices, would materially harm our operating
results.

   If demand for our products declines in the cellular phone battery charger and
desktop personal computer stand-by markets, our net revenues will decrease.
Applications of our products in the cellular phone battery chargers and desktop
personal computer, or PC, stand-by markets have and should continue to account
for a significant portion of our net revenues. We expect that our net revenues
and operating results will continue to be substantially dependent upon these
markets for the foreseeable future. The cellular phone and desktop PC markets
can be highly cyclical and have been subject to significant economic downturns
at various times. Any significant downturn in these markets could cause our net
revenues to decline and the price of our stock to fall. In addition,
technological advances in these markets may reduce demand for our products.

   Because the sales cycle for our products can be lengthy, we may incur
substantial expenses before we generate significant revenues, if any.  Our
products are generally incorporated into a customer's products at the design
stage. However, customer decisions to use our products, commonly referred to as
design wins, which can often require us to expend significant research and
development and sales and marketing resources without any assurance of success,
often precede volume sales, if any, by a year or more. The value of any design
win will largely depend upon the commercial success of the customer's product.
We cannot assure you that we will continue to achieve design wins or that any
design win will result in future revenues. If a customer decides at the design
stage not to incorporate our products into its product, we may not have another
opportunity for a design win with respect to that product for many months or
years.

   Our products must meet exacting specifications, and undetected defects and
failures may occur which could cause customers to return or stop buying our
products.  Our customers generally establish demanding specifications for
quality, performance and reliability that our products must meet. ICs as complex
as those we sell often encounter development delays and may contain undetected
defects or failures when first introduced or after commencement of commercial
shipments. We have from time to time in the past experienced product quality,
performance or reliability problems. If defects and failures occur in our
products, we could experience lost revenue, increased costs,

                                       15
<PAGE>

including warranty expense and costs associated with customer support, delays in
or cancellations or rescheduling of orders or shipments and product returns or
discounts, any of which would harm our operating results.

   We depend on third-party suppliers to provide us with wafers for our products
and if they fail to provide us sufficient wafers, our business will suffer.  We
have supply arrangements for the production of wafers with Matsushita and OKI.
Although certain aspects of our relationships with Matsushita and OKI are
contractual, many important aspects of these relationships depend on their
continued cooperation and, in many instances, their course of conduct deviates
from the literal provisions of the contracts. We cannot assure you that we will
continue to work successfully with Matsushita or OKI in the future, that they
will continue to provide us with sufficient capacity at their foundries to meet
our needs, or that either of them will not seek an early termination of its
wafer supply agreement with us. We estimate that it would take 9 to 12 months
from the time we identified an alternate manufacturing source before that source
could produce wafers with acceptable manufacturing yields in sufficient
quantities to meet our needs.

   Although we provide Matsushita and OKI with rolling forecasts of our
production requirements, their ability to produce wafers for us is limited by
the available capacities of the foundries in which these wafers are
manufactured. An increased need for capacity to meet internal demands or demands
of other customers could cause Matsushita and OKI to reduce capacity available
to us. Matsushita and OKI may also require us to pay amounts in excess of
contracted or anticipated amounts for wafer deliveries or require us to make
other concessions in order to acquire the wafer supply necessary to meet our
customers' requirements. Any of these concessions could harm our business.

   If our third-party suppliers and independent subcontractors do not produce
our wafers and assemble our finished products at acceptable yields, our net
revenues may decline.  We depend on Matsushita and OKI to produce wafers, and
independent subcontractors to assemble finished products, at acceptable yields
and to deliver them to us in a timely manner. The failure of Matsushita or OKI
to supply us wafers at acceptable yields could prevent us from selling our
products to our customers and would likely cause a decline in our net revenues.
In addition, our IC assembly process requires our manufacturers to use a high-
voltage molding compound available from only one vendor, which is difficult to
process. This compound and its required processes, together with the other non-
standard materials and processes needed to assemble our products, require a more
exacting level of process control than normally required for standard packages.
Unavailability of the sole source compound or problems with the assembly process
can materially adversely affect yields and cost to manufacture. We cannot assure
you that acceptable yields will be maintainable in the future.

   Matsushita has licenses to our technology, which it may use to our detriment.
Our ability to take advantage of the potentially large Japanese market for our
products is largely dependent on Matsushita and its ability to promote and
deliver our products. Pursuant to our agreement with Matsushita, Matsushita has
the right to manufacture and sell products using our technology to Japanese
companies worldwide and to subsidiaries of Japanese companies located in Asia.
Although we receive royalties on Matsushita's sales, these royalties are
substantially lower than the gross profit we would receive on direct sales. We
cannot assure you that Matsushita will not use the technology rights we have
granted it to develop or market competing products following any termination of
its relationship with us or after termination of Matsushita's royalty obligation
to us.

   Our international sales activities subject us to substantial risks.  Sales to
customers outside of the United States account for a large portion of our net
revenues. These sales involve a number of risks to us, including:

     .  potential insolvency of international distributors and representatives;

     .  reduced protection for intellectual property rights in some countries;

     .  the impact of recessionary environments in economies outside the United
        States;

     .  tariffs and other trade barriers and restrictions; and

                                       16
<PAGE>

     .  the burdens of complying with a variety of foreign laws.

   Our failure to adequately address these risks could reduce our international
sales, which would materially adversely affect our operating results.
Furthermore, because substantially all of our foreign sales are denominated in
U.S. dollars, increases in the value of the dollar increase the price in local
currencies of our products in foreign markets and make our products relatively
more expensive and less price competitive than competitors' products that are
priced in local currencies.

  If our efforts to enhance existing products and introduce new products are not
successful, we may not be able to generate demand for our products.  Our success
depends in significant part upon our ability to develop new ICs for high-voltage
power conversion for existing and new markets, to introduce these products in a
timely manner and to have these products selected for design into products of
leading manufacturers. If we fail to develop and sell new products in a timely
manner, our net revenues could decline.

   We cannot be sure that we will be able to adjust to changing market demands
as quickly and cost-effectively as necessary to compete successfully.
Furthermore, we cannot assure you that we will be able to introduce new products
in a timely and cost-effective manner or in sufficient quantities to meet
customer demand or that these products will achieve market acceptance. Our, or
our customers' failure to develop and introduce new products successfully and in
a timely manner would harm our business and may cause the price of our common
stock to fall. In addition, customers may defer or return orders for existing
products in response to the introduction of new products. Although we maintain
reserves against returns, we cannot assure you that these reserves will be
adequate.

   If our products do not penetrate additional markets, our business will not
grow as we predict.  We believe that our future success depends in part upon our
ability to penetrate additional markets for our products. We cannot assure you
that we will be able to overcome the marketing or technological challenges
necessary to do so. To the extent that a competitor penetrates additional
markets before we do, or takes market share from us in our existing markets, our
net revenues and financial condition could be materially adversely affected.

   If we are unable to adequately protect or enforce our intellectual property
rights, we could lose market share, incur costly litigation expenses or lose
valuable assets.  Our success depends upon our ability to protect our
intellectual property, including patents, trade secrets, and know-how, and to
continue our technological innovation. We cannot assure you that the steps we
have taken to protect our intellectual property will be adequate to prevent
misappropriation or that others will not develop competitive technologies or
products. From time to time we have received, and we may receive in the future,
communications alleging possible infringement of patents or other intellectual
property rights of others. Litigation, which could result in substantial cost to
us, may be necessary to enforce our patents or other intellectual property
rights or to defend us against claimed infringement of the rights of others. The
failure to obtain necessary licenses or other rights or litigation arising out
of infringement claims could cause us to lose market share and harm our
business.

   Moreover, the laws of some foreign countries in which our technology is or
may in the future be licensed may not protect our intellectual property rights
to the same extent as the laws of the United States, thus increasing the
possibility of infringement of our intellectual property.

   We must attract and retain qualified personnel to be successful and
competition for qualified personnel is intense in our market.  Our success
depends to a significant extent upon the continued service of our executive
officers and other key management and technical personnel. The competition for
these employees is intense, particularly in Silicon Valley. The loss of the
services of one or more of our engineers, executive officers or other key
personnel or our inability to recruit replacements for these individuals or to
otherwise attract, retain and motivate qualified personnel could harm our
business. We have neither long-term employment contracts with, nor key person
life insurance policies on, any of our employees.

   Our recent growth has strained our resources and if we fail to successfully
manage this growth, we may lose customers.  We have experienced a period of
rapid growth and expansion, which has placed, and continues to place,

                                       17
<PAGE>

a significant strain on our resources. Relationships with our customers
generally require significant engineering support. A significant increase in the
number of customers using our technology will increase the strain on our
resources, particularly our engineers. These strains may result in delays or
difficulties in our research and development process, which could impede our
ability to develop future generations of our products and to remain competitive.
In addition, any future periods of rapid growth or expansion could be expected
to place a significant strain on our limited managerial, financial and
engineering resources.

   We have adopted anti-takeover measures, which may make it more difficult for
a third party to acquire us.   We have adopted a preferred stock purchase rights
plan that is intended to guard against hostile takeover tactics. The adoption of
this plan was not in response to any proposal to acquire us, and the board is
not aware of any such effort. Our board of directors has the authority to issue
up to 3,000,000 shares of preferred stock and to determine the price, rights,
preferences and privileges of those shares without any further vote or action by
the stockholders. The rights of the holders of common stock will be subject to,
and may be adversely affected by, the rights of the holders of any preferred
stock that may be issued in the future. The issuance of shares of preferred
stock, while potentially providing flexibility in connection with possible
acquisitions and for other corporate purposes, could have the effect of making
it more difficult for a third party to acquire a majority of our outstanding
voting stock. We have no present intention to issue shares of preferred stock.

   The future trading price of our common stock could be subject to wide
fluctuations in response to a variety of factors.  The price of our common stock
has been, and is likely to be, volatile. Factors including future announcements
concerning us or our competitors, quarterly variations in operating results,
announcements of technological innovations, the introduction of new products or
changes in our product pricing policies or those of our competitors, proprietary
rights or other litigation, changes in earnings estimates by analysts and other
factors could cause the market price of our common stock to fluctuate
substantially. In addition, stock prices for many technology companies fluctuate
widely for reasons, which may be unrelated to operating results. These
fluctuations, as well as general economic, market and political conditions, may
harm the market price of our common stock.

                                       18
<PAGE>

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS.

   There has not been a material change in our exposure to interest rate and
foreign currency risks since the date of our 1999 Form 10-K.

   Interest Rate Risk. Our exposure to market risk for changes in interest rates
relate primarily to our investment portfolio. We do not use derivative financial
instruments in our investment portfolio. We invest in high-credit quality
issuers and, by policy, limit the amount of credit exposure to any one issuer.
As stated in our policy, we ensure the safety and preservation of our invested
principal funds by limiting default risk, market risk and reinvestment risk. We
mitigate default risk by investing in safe and high-credit quality securities
and by constantly positioning our portfolio to respond appropriately to a
significant reduction in a credit rating of any investment issuer, guarantor or
depository. The portfolio includes only marketable securities with active
secondary or resale markets to ensure portfolio liquidity.

   The table below presents principal amounts and related weighted average
interest rates for our investment portfolio at June 30, 2000. All investments
mature, by policy, in 15 months or less.

(in thousands, except average interest rates)

<TABLE>
<CAPTION>
                                                                                                       Average
                                                                                        Carrying       Interest
                                                                                         Amount          Rate
                                                                                        --------       --------
<S>                                                                                    <C>           <C>
Cash Equivalents:
  Tax-exempt securities.............................................................       $33,100          4.40%
                                                                                           -------        -------
       Total cash equivalents.......................................................        33,100          4.40%
                                                                                           -------        -------

Short-term Investments:
  U.S. corporate securities.........................................................         2,051          5.20%
  Tax-exempt securities.............................................................        19,525          4.09%
                                                                                           -------        -------

       Total short-term investments.................................................        21,576          4.19%
                                                                                           -------        -------

       Total investment securities..................................................       $54,676          4.32%
                                                                                           =======        =======
</TABLE>

   Foreign Currency Exchange Risk. We transact business in various foreign
countries. Our primary foreign currency cash flows are in Asia and Western
Europe. Currently, we do not employ a foreign currency hedge program utilizing
foreign currency forward exchange contracts as the foreign currency transactions
and risks to date have not been significant.

                                       19
<PAGE>

PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

         None.

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

         None.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

         None.

ITEM 4.  SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders of Power Integrations, Inc. held on June
6, 2000, the following proposals were adopted by the margins indicated.

Proposal I - To elect the following persons as a Class III director to hold
office for a three-year term and until his successor is elected and qualified:

<TABLE>
<CAPTION>
                                         Voted For                Withheld
                                     ----------------         ----------------
<S>                                   <C>                      <C>
Howard F. Earhart                       24,761,666                   64,126
Alan D. Bickell                         24,756,978                   68,814
</TABLE>

Proposal II - To approve an amendment to our Restated Certificate of
Incorporation to increase the number of shares of common stock authorized for
issuance by 100,000,000 shares, to a total of 140,000,000 shares.

<TABLE>
<CAPTION>
                                    Voted                 Voted
                                     For                 Against               Abstain
                               --------------        --------------        --------------
<S>                              <C>                  <C>                   <C>
                                 20,887,807            3,916,925                21,060
</TABLE>

Proposal III - To approve an amendment to our 1997 Stock Option Plan which
provides that effective January 1, 2001, 662,000 shares which would otherwise
only be available for grant under such plan pursuant to nonstatutory stock
options may instead be granted pursuant to incentive stock options:


<TABLE>
<CAPTION>
                                     Voted                 Voted
                                      For                 Against               Abstain
                               --------------        --------------        --------------
<S>                               <C>                   <C>                   <C>
                                 16,653,909             8,134,398              37,485
</TABLE>

Proposal IV - To approve an amendment to our 1997 Employee Stock Purchase Plan
which increases the number of shares reserved for issuance under such plan by
500,000 shares of common stock to a total of 1,500,000 shares:


<TABLE>
<CAPTION>
                                     Voted                 Voted
                                      For                 Against               Abstain
                               --------------        --------------        --------------
<S>                               <C>                   <C>                   <C>
                                 22,483,838             2,306,282                35,672
</TABLE>

Proposal V - To approve an amendment to our 1997 Outside Directors Plan which
increases the number of shares reserved for issuance under such plan by 400,000
shares of common stock to a total of 800,000 shares:

                                       20
<PAGE>

<TABLE>
<CAPTION>
                                     Voted                 Voted
                                      For                 Against               Abstain
                               --------------        --------------        --------------
<S>                               <C>                   <C>                   <C>
                                 18,522,359             6,262,081                41,352
</TABLE>

Proposal VI - To ratify the appointment of Arthur Andersen LLP as our
independent auditors for the fiscal year ending December 31, 2000:


<TABLE>
<CAPTION>
                                     Voted                 Voted
                                      For                 Against               Abstain
                               --------------        --------------        --------------
<S>                               <C>                   <C>                   <C>
                                24,767,583                49,474                 8,735
</TABLE>


ITEM 5.  OTHER INFORMATION

         None.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

      a. Exhibits.

            The following exhibits are attached hereto and filed herewith:

            27.1  Financial Data Schedule.

      b. Reports on Form 8-K.

         None.

                                       21
<PAGE>

SIGNATURES

   Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.



                                  POWER INTEGRATIONS, INC.


Dated:   August 7, 2000           By:   /s/   Robert G. Staples
                                     -----------------------------------
                                     Robert G. Staples
                                     Chief Financial Officer

                                       22


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