The following discussion should be read in conjunction with our condensed consolidated financial statements and the related notes contained elsewhere in this quarterly report on Form 10-Q. All statements in the following discussion that are not reports of historical information or descriptions of current accounting policy are forward-looking statements. Please see the "Cautionary Note Regarding Forward-Looking Statements" at the beginning of this quarterly report and consider our forward-looking statements in light of the factors that may affect operating results set forth herein.

Overview

We design, develop, and market proprietary, high-performance analog and mixed-signal power management semiconductors. We sell integrated voltage regulator semiconductors and scalable voltage regulator semiconductor chipsets in the computing, storage, networking, and consumer markets, primarily to original equipment manufacturers, or OEMs, original design manufacturers, or ODMs, contract equipment manufacturers, or CEMs, or merchant power supply manufacturers.

Our net revenue was $74.7 million, $104.2 million and $70.8 million in 2007, 2008 and the nine months ending September 30, 2009, respectively. We generated net income of $0.3 million, $14.3 million and $4.0 million in 2007, 2008 and the nine months ending September 30, 2009, respectively.

Our net revenue consists primarily of sales of our power management semiconductor products. When evaluating our net revenue, we categorize our sales into four major market segments: servers and storage; desktop and workstation; networking and communications; and consumer and portable. The electronics manufacturing industry is complex and disaggregated, and electronic system designers typically rely upon distributors and outsourced suppliers to provide procurement, manufacturing, design, and other supply chain related services within the industry. We attempt to quantify the amount of sales within the major markets identified above, but such quantified amounts are approximations only, as we must rely upon estimates and assumptions regarding the incorporation of our products sold to distributors or other outsourced suppliers into the systems of the OEMs, ODMs, CEMs, or merchant power supply manufacturers for each particular market. In the third quarter of 2009, we estimate that 62% of our net revenue was derived from sales in the server and storage market, 19% from the desktop and workstation market, 10% from the consumer and portable market; and 9% from the networking and communications market. We believe that a significant portion of our revenues for the remainder of the current fiscal year will continue to be derived from sales in the server and storage market.

Our operations and performance depend significantly on worldwide economic conditions and their impact on purchases of our products by our customers. In the past year, these economic conditions had deteriorated significantly in many countries and regions, which impacted our financial results. Future economic turmoil could have a significant effect on our operations and financial results on a period to period basis. Customers in any of our target market segments could experience unexpected fluctuations in demand for their products, as consumers may alter purchasing activities in response to this economic uncertainty. We would have limited visibility in the revenues we anticipated in any given period, and may not be able to accurately plan the appropriate spending and inventory necessary to satisfy the more volatile demand for our products. Our customers could change or scale back product development efforts, product purchases or other sales activities that affect purchases of our products, and this could affect the amount and timing of revenue for the long term future. These economic conditions may also affect our third party manufacturers, and if they are unable to obtain the necessary capital to operate their business, this may also impact their ability to provide us with the foundry capacity we need, or may adversely affect their ability to provide timely services or to make timely deliveries of products to us.

Our sales and accounts receivable are currently concentrated with a small group of customers, and we expect this to continue in the future. Certain of these customers in turn sell more broadly to multiple companies that directly address consumer demand. In the third quarter of 2009, three customers each accounted for 10% or more of our net revenue, and collectively accounted for 70% of our net revenue. In the third quarter of 2008, four customers each accounted for 10% or more of our net revenue, and

collectively accounted for 84% of our net revenue. While we report revenue for direct sales to particular customers, our sales data may not accurately reflect the additional "indirect" demand from distributors and outsourced suppliers who purchase our products pursuant to their business relationships with such significant customers. Because we have less visibility into and are not able to quantify this "indirect" demand, we are unable to determine how much additional revenue these significant customers may generate. In addition, our sales data also may not identify customers who do not directly account for 10% of our net revenue, but may be significant in that such customers also generate substantial "indirect" demand from distributors and outsourced suppliers. If any such significant customer were to stop incorporating our products or third party products containing our components into its designs, we would not only lose the direct revenue we receive from the significant customer, but we could also lose a portion of the indirect revenue from third parties who do business with such significant customer. If we were to lose or experience a significant reduction in demand from one or more of our key customers either to which we sell directly or which generates demand at an intermediary or if we were to fail to collect our accounts receivable from one or more of our key customers, our operating results and financial position would be materially adversely impacted.

Because demand for our products is impacted by demand for our customers' products, our revenue depends on the timing, size, and speed of commercial introductions of systems that use our products, and our customers' ability to manage their inventory in relationship to such demand. We continue to expect a significant amount of our revenue to come from the commercial introduction of new systems, which is often more difficult to forecast than ongoing demand for previously introduced systems. A number of our customers' applications, particularly in the desktop and workstation market and consumer and portable market, are subject to short product cycles and prone to delays in development and commercial introduction or significant changes in demand, making it inherently difficult to accurately forecast demand for such applications in any period. A number of our customers, such as ODMs, CEMs, and merchant power supply manufacturers, also are dependent upon the demand of other companies, which makes sales to such parties more difficult to forecast accurately. These fluctuations in demand could materially affect our operating results on a period by period basis.

We recognize revenue on our sales upon shipment with a provision for estimated sales returns and allowances. A portion of our revenues come from customer orders that are both received and shipped against within the same quarter, or "turns business," which is inherently difficult to forecast. We estimate turns business as a percent of net revenue as the ratio of net revenue less beginning backlog to net revenue making adjustments for the effect of sales return reserves or other adjustments to net revenue not included in backlog. Turns business was approximately 15% to 25% of our revenue in each of the second and third quarters of 2009, as well as in the third quarter of 2008. If our turns business increases, forecasting revenue becomes more difficult. Generally, our current sales practice allows customers to, and customers routinely do, revise and cancel orders and reschedule delivery dates on relatively short notice pursuant to changes in the customer's requirements. In addition, in circumstances when we have limited or insufficient inventory available or have achieved our objectives in a period and have fulfilled our customers' requirements, we may delay shipment of orders. For these reasons, backlog has limited value as a predictor of future revenues.

We typically sell directly through our internal sales force to customers in North America. We sell both directly and indirectly through distributors internationally. We have made no sales to U.S. distributors. During the third quarter of 2009, sales to international distributors represented 29% of net revenue, compared to 51% in the second quarter of 2009 and 53% in the third quarter of 2008. We expect the sales channels we use and the mix of business between distribution and direct sales to change over time as our product offerings and customers evolve. Our sales to international distributors are made under agreements that do not provide for price adjustments after purchase and provide limited return rights in the event of product failure. Our sales through distributors are typically at lower gross margins, but also typically have lower associated selling expenses than direct sales.

At the end of March 2009, in settlement of a $2.7 million outstanding receivable from one of our distributors, we received $1.0 million in cash and accepted the return of $1.7 million in inventory. This transaction was recorded in the first quarter of 2009 as a reduction in revenue of $1.7 million, which was

partially offset by the reversal of $0.3 million of deferred revenue previously recorded for products shipped in the fourth quarter of 2008 to this distributor. The returned parts were included in our finished goods inventory at the end of the first quarter of 2009 at their original cost of $0.6 million. During the third quarter of 2009, we sold approximately $0.2 million of the returned parts included in our finished goods inventory at the end of March 2009. We continue to expect to sell all of the returned parts through our existing sales channel either through direct sales or through our distributors.

Our cost of revenue consists primarily of purchases of silicon wafers and related costs of assembly, test and shipment of our products, and compensation and related costs of personnel and equipment associated with production management and quality assurance. Our gross margins have historically varied significantly, and may continue to vary, based on a variety of factors, including changes in the relative mix of the products we sell, the markets and geographies where we sell, the size and nature of our customers in these markets, the levels of sales to distributors, manufacturing volumes and yields, discounts or other financial incentives to customers and inventory and overhead costs. Generally, as we introduce new products, we initially incur higher unit production costs, and as the product ramp progresses, our overall unit production costs decrease as manufacturing efficiency improves. In addition, because our power management products are highly complex and the manufacturing process for our products is technically challenging, previously undetected design defects and minor deviations in the manufacturing process can cause substantial decreases in yields or quality. Such decreases in yields or quality can impact our gross margins due to a reduction in our revenue as a result of significant product returns, may cause us to incur product replacement costs, and may cause us to rework or scrap inventory that had been manufactured with the defect. If we are unable to manage these risks, our revenue and gross margins and financial position may be materially adversely impacted. Finally, consistent with the overall market for power management solutions, we expect to face price pressure over time. In order to maintain or improve our gross margins, we will need to introduce new, lower cost products, increase volumes, reduce unit costs or achieve a combination of these objectives.

We purchase our inventory pursuant to standard purchase orders. As lead times at our manufacturing vendors can be up to three months or more, we typically build inventory based on our sales forecasts rather than customers' orders, subjecting us to inventory risk. If, after initial orders are placed, we change certain features of our product to accommodate customer requirements, we may create additional inventory that we may not be able to sell. In the event of an inventory write-down either because the inventory exceeds demand, becomes obsolete, or contains previously undetected defects and must be reworked or scrapped, our gross margins could be materially adversely impacted. On the other hand, because our manufacturing lead times tend to be longer than our order lead times and capacity at our manufacturing vendors may be constrained, our net revenue and relationship with our customers could be adversely impacted if we do not have adequate inventory available to meet customer demand. Our inventory levels were $8.5 million at the end of the third quarter of 2009, and inventory turns, calculated as our cost of revenue for the quarter annualized divided by our inventory as of the end of such quarter, increased to 5.7 turns in the third quarter of 2009 compared to 3.9 turns in the second quarter of 2009 and 4.6 turns in third quarter of 2008. If the amount of inventory we are holding increases or our inventory turns decrease, the risk of a potential inventory write-down and adverse impact on our gross margins increases.

Our research and development expense consists primarily of compensation and related costs for employees involved in the design and development of our products, prototyping and other development expense, and the depreciation costs related to equipment used for research and development. All research and development costs are expensed as incurred. Research and development expenses can fluctuate as a result of long design cycles with periods of relatively low expenses punctuated with increased expenditures for prototypes and product development toward the end of the design cycle.

Selling, general and administrative expense consists primarily of compensation and related costs for employees involved in sales and marketing, general management, finance, human resources and information technology, as well as legal expenses, including expenses related to our intellectual property litigation, and expenses related to travel and entertainment, professional services, and insurance. In connection with our pending litigation referenced under "Legal Proceedings" in Item 1 of Part II of this quarterly report on Form 10-Q, our legal expenses related to this litigation were approximately $1.7 million

in the third quarter of 2009 and $3.6 million for the nine months ended September 30, 2009. At this time, we cannot predict the duration of the litigation but our legal expenditures in future periods will be dependent on the legal developments, hearings, motion practices and other activities in such periods. Any such expenses could be material in amount.

Our income tax provision is dependent on our estimated annual effective tax rate. Our annual effective tax rate has fluctuated and is dependent on the mix of income and losses between domestic and international operations, as well as the utilization of available net operating loss carryforwards to offset taxable income and tax credit carryforwards that offsets income tax in the United States and changing assessments of statutory income tax rates. Our domestic deferred tax assets are fully offset by a valuation allowance because, dependent on the available objective evidence, we believe it is more likely than not that the net deferred tax assets will not be realizable. If we later determine that it is more likely than not that the deferred tax assets would be realized, we may revise this assessment, which could result in a favorable adjustment to the reported income tax provision in the period of re-assessment followed by higher reported tax rates in subsequent periods. Our foreign income is typically subject to lower statutory rates than our domestic income. We expect that both our geographical mix of taxable income and losses as well as the statutory rates we are subject to internationally may change over time, resulting in changes to our effective tax rate and reported income tax provision.

Critical Accounting Policies

There have been no significant changes to our critical accounting policies during the nine months ended September 30, 2009 as compared to the previous disclosures in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our annual report on Form 10-K for the fiscal year ended December 31, 2008, as filed with the SEC on March 4, 2009.

Results of Operations

The following table sets forth our results of operations as a percentage of net
revenue for the periods indicated:



                                         Three Months Ended          Nine Months Ended
                                            September 30,              September 30,
                                        2009            2008         2009           2008
 Net revenue                               100 %           100 %        100 %        100 %
 Cost of revenue                            41              42           42           43

 Gross margin                               59              58           58           57


 Operating expenses:
 Research and development                   23              23           27           24
 Selling, general and administrative        24              17           25           17

 Total operating expenses                   47              40           52           41

 Income from operations                     12              18            6           16
 Interest and other income, net              0               1           -             1

 Income before income taxes                 12              19            6           17
 Income tax expense                          1               1           -             1

 Net Income                                 11 %            18 %          6 %         16 %

Comparison of Three Months Ended September 30, 2009 to Three Months Ended September 30, 2008

Net Revenue. Net revenue was $29.7 million in the three months ended September 30, 2009 and $30.6 million in the three months ended September 30, 2008, a decrease of 3%. The decrease in net revenue was primarily due to decreases of $1.1 million in the desktop and workstation market and $1.1 million in the consumer and portable market, partially offset by an increase of $1.5 million in the server and storage market.

Cost of Revenue and Gross Margin. Cost of revenue was $12.1 million for the three months ended September 30, 2009 and $12.9 million for the three months ended September 30, 2008, a decrease of 6%. Included in cost of revenue for the third quarter of 2009 is approximately a $0.5 million benefit due to shipments of previously written down inventory that had previously been considered to have been excess inventory during 2008 and approximately a $0.2 million benefit from release of inventory reserves previously recorded in 2009. Gross margin remained relatively flat at $17.6 million for the three months ended September 30, 2009 compared to $17.7 million for the three months ended September 30, 2008. Gross margin as a percent of net revenue was 59.3% for the three months ended September 30, 2009 and 57.8% for the three months ended September 30, 2008. The increase in gross margin percentage was primarily due to the $0.5 million benefit related to the sale of previously written down inventory, the $0.2 million benefit from release of inventory reserves, cost reduction activities and operational improvements.

Research and Development. Research and development expenses were $6.8 million for the three months ended September 30, 2009 and $7.1 million for the three months ended September 30, 2008, a decrease of 5%. The decrease was primarily due to a decrease in product development and prototype expenses of $0.6 million, partially offset by an increase in wages and related expenses of $0.4 million.

Selling, General and Administrative. Selling, general and administrative expenses were $7.1 million for the three months ended September 30, 2009 and $5.1 million for the three months ended September 30, 2008, an increase of 40%. The increase was primarily due to an increase of $1.7 million in expenses in connection with our litigation referenced under "Legal Proceedings" in Item 1 of Part II of this quarterly report on Form 10-Q.

Income Tax. Income tax provision was $0.2 million and $0.2 million for the three months ended September 30, 2009 and 2008, respectively.

Comparison of Nine Months Ended September 30, 2009 to Nine Months Ended September 30, 2008

Net Revenue. Net revenue was $70.8 million in the nine months ended September 30, 2009 and $82.3 million in the nine months ended September 30, 2008, a decrease of 14%. The decrease in net revenue was primarily due to decreases of $6.7 million, $4.8 million, and $0.4 million in the desktop and workstation, server and storage and networking and communications markets, respectively, partially offset by an increase of $0.4 million in the consumer and portable market.

Cost of Revenue and Gross Margin. Cost of revenue was $29.6 million for the nine months ended September 30, 2009 and $35.6 million for the nine months ended September 30, 2008, a decrease of 17%. Included in cost of revenue for the first nine months of 2009 is approximately a $1.6 million benefit due to shipments of previously written down inventory that had previously been considered to have been excess inventory during 2008, partially offset by $0.4 million of charges to reduce the carrying value of inventory to its net realizable value. Gross margin was $41.1 million for the nine months ended September 30, 2009 and $46.7 million for the nine months ended September 30, 2008, a decrease of 12%. Gross margin as a percent of net revenue was 58.1% for the nine months ended September 30, 2009 and 56.7% for the nine months ended September 30, 2008. The increase in gross margin percentage was primarily due to the $1.6 million benefit related to the sale of previously written down inventory, cost reduction activities and operational improvements partially offset by lower volumes.

Research and Development. Research and development expenses were $19.1 million for the nine months ended September 30, 2009 and $19.8 million for the nine months ended September 30, 2008, a decrease of 3%. The decrease was primarily due to a decrease in product development and prototype expenses of $1.3 million, partially offset by an increase of $0.5 million in stock-based compensation expenses.

Selling, General and Administrative. Selling, general and administrative expenses were $17.7 million for the nine months ended September 30, 2009 and $14.0 million for the nine months ended September 30, 2008, an increase of 26%. The increase was primarily due to an increase of $3.6 million in expenses in connection with our litigation referenced under "Legal Proceedings" in Item 1 of Part II of this quarterly report on Form 10-Q.

Income Tax. Income tax provision was $0.4 million and $0.5 million for the nine months ended September 30, 2009 and 2008, respectively.

Liquidity and Capital Resources

As of September 30, 2009, we had working capital of $80.0 million, including cash, cash equivalents and short-term investments of $72.1 million, compared to working capital of $71.7 million, including cash, cash equivalents and short-term investments of $57.4 million, as of December 31, 2008. We currently have no debt and believe that our current cash, cash equivalents and investments, as well as cash flows from operations, will be sufficient to fund our operations and meet our capital needs for the current fiscal year.

Our operating activities provided net cash of $16.0 million for the nine months ended September 30, 2009 compared to net cash provided of $17.7 million for the nine months ended September 30, 2008. The increase in cash provided from operating activities was primarily due to net income of $4.0 million, a decrease in inventory of $5.2 million and an increase in accrued liabilities of $2.2 million. The decrease in inventory was mainly due to increased sales during the third quarter of 2009. The increase in accrued liabilities is primarily due to legal accruals of $1.5 million. Partially offsetting the above increases in cash was an increase in accounts receivable of $1.9 million due to an increase in revenue. The primary sources of cash from operations for the nine months ended September 30, 2008 were primarily due to net income of $13.2 million, adjustments for depreciation and amortization of $1.8 million, stock-based compensation of $3.0 million, and an increase in accrued liabilities of $4.4 million. The increases were partially offset by an increase in inventory of $4.9 million.

Our investing activities used net cash of $1.0 million for the nine months ended September 30, 2009 for the purchase of short-term investments of $15.0 million and purchase of property and equipment of $1.0 million, partially offset by the maturity of short-term investments of $15.0 million. Our investing activities used net cash of $8.0 million for the nine months ended September 30, 2008 from the purchase of $2.1 million in property and equipment and $6.9 million in short-term investments, partially offset by the maturity of short-term investments of $1.0 million.

Our financing activities used net cash of $0.3 million for the nine months ended September 30, 2009 for common stock repurchases of $5.1 million, partially offset by proceeds of $4.8 million from the exercise of employee stock options and proceeds from our employee stock purchase plan. Our financing activities provided net cash of $0.9 million for the nine months ended September 30, 2008 from $3.4 million from the exercise of employee stock options and proceeds from our employee stock purchase plan, partially offset by the use of $2.4 million to repurchase shares of our common stock.

Contractual Obligations

The following table sets forth our contractual obligations as of September 30,
2009 (in thousands) and the periods in which such obligations are expected to be
settled:



                                              Less than      1-3       3-5     More than
                                    Total      1 year       years     years     5 years
     Operating lease obligations   $ 2,429   $       942   $ 1,427   $    60   $       -
     Purchase obligations            2,633         2,633        -         -            -

                                   $ 5,062   $     3,575   $ 1,427   $    60   $       -

Operating lease obligations consist of the estimated obligations under the Company's real property or facility leases. Purchase obligations are comprised of the estimated obligation for in-process silicon wafers. We depend entirely upon third-party foundries to manufacture our silicon wafers. Due to lengthy foundry lead times, we typically order these materials up to three months or . . .