Form 10-Q

10-Q 1 d10q.htm FORM 10-Q Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 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 March 31, 2008

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 000-51349

Advanced Analogic Technologies Incorporated

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)


Delaware		77-0462930
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

3230 Scott Blvd., Santa Clara, California		95054
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code:

(408) 737-4600

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 Exchange 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 by check mark whether the Registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨ Smaller Reporting Company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

There were 45,640,447 shares of the Registrant’s common stock issued and outstanding as of April 28, 2008.

ADVANCED ANALOGIC TECHNOLOGIES, INCORPORATED

TABLE OF CONTENTS


		PAGE

PART I. FINANCIAL INFORMATION		3

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)		3

CONDENSED CONSOLIDATED BALANCE SHEETS AT MARCH 31, 2008 AND DECEMBER 31, 2007		3

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2008 AND MARCH 31, 2007		4

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2008 AND MARCH 31, 2007		5

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS		7

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		15

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		21

ITEM 4. CONTROLS AND PROCEDURES		22

PART II. OTHER INFORMATION		23

ITEM 1. LEGAL PROCEEDINGS		23

ITEM 1A. RISK FACTORS		23

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		34

ITEM 3. DEFAULTS UPON SENIOR SECURITIES		34

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS		34

ITEM 5. OTHER INFORMATION		34

ITEM 6. EXHIBITS		34

PART I. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

ADVANCED ANALOGIC TECHNOLOGIES INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share and par value)


	March 31, 2008			December 31, 2007 (*)
Assets
Current assets
Cash and cash equivalents	$	75,879		$	53,779
Short-term investments		35,350			60,448

Total cash, cash equivalents and short-term investments		111,229			114,227
Accounts receivable, net of allowances		13,853			14,428
Inventories		14,056			12,214
Prepaid expenses and other current assets		1,692			2,273
Notes receivable		2,000			2,000
Deferred income taxes		591			591

Total current assets		143,421			145,733
Property and equipment, net		5,593			4,699
Other assets		4,120			1,377
Deferred income taxes		6,718			6,815
Intangibles, net		1,837			2,127
Goodwill		15,717			15,717

Total assets	$	177,406		$	176,468

Liabilities and stockholders’ equity Current liabilities
Accounts payable	$	10,768		$	7,938
Accrued liabilities		4,116			8,472
Income tax payable		821			1,367
Current portion of capital lease obligations		154			151

Total current liabilities		15,859			17,928
Long-term income tax payable		1,353			1,053
Long-term capital lease obligations		1			41
Other long-term liabilities		176			155

Total liabilities		17,389			19,177

Stockholders’ equity
Common stock, $0.001 par value—100,000,000 shares authorized; 45,612,570 and 45,355,884 shares issued and outstanding as of March 31, 2008 and December 31, 2007, respectively		46			45
Additional paid-in capital		168,650			166,763
Deferred stock-based compensation		(642	)		(1,058	)
Accumulated other comprehensive loss		(132	)		(108	)
Accumulated deficit		(7,905	)		(8,351	)

Total stockholders’ equity		160,017			157,291

Total liabilities and stockholders’ equity	$	177,406		$	176,468

*	Amounts as of December 31, 2007 were derived from the December 31, 2007 audited consolidated financial statements.

See accompanying notes to condensed consolidated financial statements.

ADVANCED ANALOGIC TECHNOLOGIES INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share amounts)


	Three Months Ended March 31,
	2008			2007
Net revenue	$	25,101		$	21,108
Cost of revenue		11,369			9,932

Gross profit		13,732			11,176

Operating expenses:
Research and development		7,659			7,103
Sales, general and administrative		6,445			6,202
Patent litigation		262			1,589

Total operating expenses		14,366			14,894

Income (loss) from operations		(634	)		(3,718	)
Interest and other income (expense):
Interest income		1,129			1,369
Interest expense and other income (expense), net		15			(271	)

Total interest and other income (expense), net		1,144			1,098

Income (loss) before income taxes		510			(2,620	)
Provision for income taxes		64			131

Net income (loss)	$	446		$	(2,751	)

Net income (loss) per share:
Basic	$	0.01		$	(0.06	)
Diluted	$	0.01		$	(0.06	)
Weighted average shares used in net income (loss) per share calculation:
Basic		45,491			44,319
Diluted		47,060			44,319

See accompanying notes to condensed consolidated financial statements.

ADVANCED ANALOGIC TECHNOLOGIES INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)


	Three Months Ended March 31,
	2008			2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	446		$	(2,751	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		707			700
Stock-based compensation		1,727			1,710
Cumulative effect of adoption of FIN 48		—			543
Provision for doubtful accounts		—			(4	)
Excess tax benefit from payment of share based awards		(487	)		—
Tax benefit from employee stock option plans		46			—
(Gain) loss on disposal of property and equipment		(14	)		1
Loss on liquidation of a foreign branch office		—			266
Changes in operating assets and liabilities:
Accounts receivable		575			(706	)
Inventory		(1,816	)		(138	)
Prepaid expenses and other current assets		630			287
Other assets		93			(63	)
Deferred income taxes		145			(1,715	)
Accounts payable		2,697			2,987
Accrued expenses and other liabilities		(4,263	)		(1,589	)
Income taxes payable		(250	)		1,267

Net cash provided by operating activities		236			795

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(1,171	)		(919	)
Purchases of short-term investments		(6,721	)		(13,341	)
Proceeds from sales and maturities of short-term investments		28,754			13,000
Proceeds from sale of property and equipment		14			—

Net cash provided by (used in) investing activities		20,876			(1,260	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of common stock options		505			260
Excess tax benefits from stock-based compensation		487			—
Principal payments on capital lease obligations		(37	)		(33	)

Net cash provided by financing activities		955			227

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS		33			(44	)


NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		22,100		(282	)
CASH AND CASH EQUIVALENTS—Beginning of period		53,779		58,121

CASH AND CASH EQUIVALENTS—End of period	$	75,879	$	57,839

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Increases (decreases) in accounts payable and accrued liabilities related to property and equipment purchases	$	18	$	(87	)
Cash paid for interest	$	4	$	9
Cash paid for income taxes	$	94	$	37

See accompanying notes to condensed consolidated financial statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of Advanced Analogic Technologies Incorporated (the “Company”) have been prepared in accordance with the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). Certain information and disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted in accordance with these rules and regulations. The information in this report should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in its annual report on Form 10-K filed with the SEC on March 4, 2008.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary to summarize fairly the Company’s financial position, results of operations and cash flows for the interim periods presented. The operating results for the three months ended March 31, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008 or for any other future period. The condensed consolidated balance sheet as of December 31, 2007 is derived from the audited consolidated financial statements as of and for the year then ended.

2. INVESTMENTS

The Company accounts for its investment instruments in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS No. 115”). At March 31, 2008, the Company had investments in short-term debt instruments which were classified as available-for-sale under SFAS No. 115. Short-term investments consist primarily of investment grade debt securities with a maturity of greater than 90 days at the time of purchase with the exception of certain auction rate securities discussed below. The Company classifies investments with maturities greater than one year as short-term investments as it considers all investments a potential source of operating cash regardless of maturity date. The Company’s debt securities are carried at fair market value with the related unrealized gains and losses included in accumulated other comprehensive loss, which is a separate component of stockholders’ equity. As of March 31, 2008, none of the securities in which the Company invested were secured by real estate. The cost of securities sold is based on the specific identification method. Interest earned on securities is included in “Interest income” in the Condensed Consolidated Statements of Operations.

The Company adopted SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”) as of January 1, 2008 to measure the fair value of certain of its financial assets required to be measured on a recurring basis, including available-for-sale fixed income securities and certain equity investment. Under SFAS No. 157, based on the observability of the inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:

Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2: Directly or indirectly observable market based inputs or unobservable inputs used in models or other valuation methodologies.

Level 3: Unobservable inputs that are not corroborated by market data. The inputs require significant management judgment or estimation.

Fair value measurements of financial assets on a recurring basis as of March 31, 2008:


	Fair Value Measurements as of March 31, 2008 Using:
	Quoted Prices in Active Markets for Identical Assets		Direct or Indirect Observable Inputs		Significant Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
	(in thousands)
U.S. Government agency bonds	$	13,192	$	—	$	—	$	13,192
U.S. Treasury bills		9,993		—		—		9,993
U.S. Corporate bonds		21,336		—		—		21,336
Commercial paper		—		2,595		—		2,595
Money market funds		54,979		—		—		54,979
Auction rate securities		—		—		2,824		2,824
Municipal bonds		1,320		—		—		1,320
Private equity investment		—		—		802		802

Total	$	100,820	$	2,595	$	3,626	$	107,041

Amounts included in:
Cash and Cash equivalents	$	66,770	$	1,295	$	—	$	68,065
Short-term investments		34,050		1,300		—		35,350
Other assets		—		—		3,626		3,626

Total	$	100,820	$	2,595	$	3,626	$	107,041

The following tables provide a reconciliation of the beginning and ending balances for the assets measured at fair value using significant unobservable inputs (Level 3):


	Fair Value Measurement Using Significant Unobservable Inputs (Level 3)
	Auction rate securities			Private equity investment		Total
	(in thousands)
Beginning balances as of January 1, 2008	$	—		$	802	$	802
Total gains or (losses) (unrealized) included in accumulated other comprehensive loss		(376	)		—		(376	)
Transfers in and/or out of Level 3		3,200			—		3,200

Ending balances as of March 31, 2008	$	2,824		$	802	$	3,626

Auction Rate Securities

As of March 31, 2008, the Company had $2.8 million of auction rate securities (“ARS”), the fair value of which has been measured using Level 3 inputs. These ARS are collateralized mostly with Federal Family Education Loan Program student loans. The monthly auctions have historically provided a liquid market for these securities. The three ARS in the Company’s portfolio had successful auctions until January 2008 and as such, their fair value would have been measured using level 1 inputs at January 1, 2008. However, since February 2008, there has not been a successful auction in that there were insufficient buyers for these ARS, therefore the Company transferred them from Level 1 to Level 3 category as of March 31, 2008.

The Company has used a discounted cash flow model to determine the estimated fair value of its investment in ARS as of March 31, 2008. The assumptions used in preparing the discounted cash flow model include estimates for interest rates, estimates for discount rates using yields of comparable traded instruments adjusted for illiquidity and other risk factors, amount of cash flows and expected holding periods of the ARS. These inputs reflect the Company’s own assumptions about the assumptions market participants would use in pricing the ARS, including assumptions about risk, developed based on the best information available in the circumstances.

Based on this assessment of fair value, as of March 31, 2008, the Company determined there was a decline in the fair value of its ARS investments of approximately $0.4 million, which was deemed temporary as the Company currently has the ability and intent to hold these ARS investments until a recovery of the auction process or until maturity (ranging from 2025 to 2046). As of March 31, 2008, the Company reclassified the entire ARS investment balance from short-term investments to long-term other assets on its condensed consolidated balance sheet because of the Company’s belief that it will take longer than one year for its investments in ARS to settle.

Private Equity Investment

In addition to the ARS, the Company also holds an equity investment in a non-publicly traded company of $0.8 million that is included in long-term other assets. This investment is accounted for under the cost method and evaluated for other-than-temporary impairment at each reporting period. During the quarter ended March 31, 2008, the Company did not recognize an impairment on this investment.

3. STOCK-BASED COMPENSATION

On January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), “Share-Based Payment,” (“SFAS No. 123(R)”), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options and employee stock purchases related to the Employee Stock Purchase Plan based on estimated fair values.

The following table summarizes stock-based compensation expense related to stock options, including the amortization of the intrinsic value under Accounting Principles Board Opinion 25, “Accounting for Stock Issued to Employees,” for pre-April 4, 2005 options, for the three months ended March 31, 2008 and March 31, 2007, which was allocated as follows:


	Three Months Ended March 31,
Income statement classifications	2008		2007
	(in thousands)
Cost of sales	$	77	$	65
Research and development		790		611
Sales, general and marketing		860		1,034

Total stock-based compensation expense	$	1,727	$	1,710

The related tax effect for stock-based compensation expense for the three months ended March 31, 2008 and 2007 was approximately $199,000 and $377,000, respectively. The related tax effect was determined using the applicable tax rates in jurisdictions to which this expense relates.

For options granted subsequent to January 1, 2006, the Company estimates expected volatility based on a combination of historical and market-based implied volatility in accordance with guidance in SFAS No. 123(R) and SEC Topic 14, “Share-Based Payment (SAB 107)”. The Company determined that a combination of implied volatility and historical volatility is more reflective of market conditions and a better indicator of expected volatility than using purely historical volatility. The expected term of employee stock options represents the weighted-average period that the stock options are expected to remain outstanding. Starting from the fourth quarter of 2006, the Company derived the expected term assumption based on the Company and its peer group’s weighted average vesting period combined with the post-vesting holding period. Prior to the fourth quarter of 2006, the Company used the simplified method to calculate the expected term for its options, as allowed by SAB 107. The risk-free interest rate assumption is based upon observed interest rates appropriate for the expected term of the Company’s employee stock options. The dividend yield assumption is based on the Company’s history and expectation of dividend payouts. The Company has never declared or paid any cash dividends on common stock, and it does not anticipate paying any cash dividends in the foreseeable future.

The following table includes the weighted average assumptions utilized for purposes of calculating the valuation of the Company’s stock option grants for the three months ended March 31, 2008 and March 31, 2007:


	Three Months Ended March 31,
	2008		2007
Volatility	53	%	50	%
Expected option term (in years)	4.04		4.25
Expected annual dividend yield	0	%	0	%
Risk free interest rate	2.68	%	4.50	%

4. NET INCOME (LOSS) PER SHARE

The Company calculates net income (loss) per share in accordance with SFAS No. 128, “Earnings Per Share” (“SFAS No. 128”). Under SFAS No. 128, basic net income (loss) per common share is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding during the reporting period excluding shares subject to repurchase. Diluted net income per common share reflects the effects of potentially dilutive securities, which consist of common stock options and warrants outstanding and restricted common stock subject to repurchase, using the treasury stock method. Basic and diluted net loss per share are the same for the three months ended March 31, 2007 due to the Company’s incurring losses in those periods.

A reconciliation of shares used in the calculation of basic and diluted net income (loss) per share is as follows:


	Three Months Ended March 31,
	2008		2007
	(in thousands)
Weighted average common shares outstanding	45,516		44,395
Weighted average shares subject to repurchase	(25	)	(76	)

Shares used to calculate basic net income (loss) per share	45,491		44,319

Effect of dilutive securities:
Common stock warrants	8		—
Common stock options	1,536		—
Weighted average shares subject to repurchase	25		—

Potentially dilutive common stock equivalents	1,569		—

Weighted average common equivalent shares outstanding, assuming dilution	47,060		44,319

Approximately 6.7 million and 6.7 million shares of potentially dilutive common equivalent shares were excluded from the net income (loss) per share calculation for the quarter ended March 31, 2008 and 2007, respectively, as their inclusion would have been antidilutive.

5. OTHER COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) includes charges or credits to equity that are not the result of transactions with owners. The components of comprehensive income (loss) are as follows:


	Three Months Ended March 31,
	2008			2007
	(in thousands)
Net income (loss), as reported	$	446		$	(2,751	)
Changes in cumulative translation adjustment		168			230
Changes in unrealized gains /losses on investments, net of taxes		(192	)		5

Total other comprehensive income (loss)	$	422		$	(2,516	)

The changes in unrealized gains or losses on investments during the first quarter of 2008 included an unrealized impairment loss on the Company’s auction rate securities of $242,000, net of taxes. See Note 2 for details.

The changes in cumulative translation adjustment during the first quarter of 2007 included a write-off of $0.3 million cumulative translation adjustment loss as a result of the liquidation of the Company’s Sweden branch office.

6. DETAILS OF CERTAIN BALANCE SHEET COMPONENTS


	March 31, 2008		December 31, 2007
	(in thousands)
Work in process	$	8,768	$	7,876
Finished goods		5,288		4,338

Total inventories	$	14,056	$	12,214

Computers and software	$	5,351	$	4,733
Office and test equipment		6,159		5,744
Leasehold improvements		1,351		1,101

		12,861		11,578


Accumulated depreciation and amortization		(7,268	)		(6,879	)

Total property and equipment, net	$	5,593		$	4,699

Accrued payroll and benefits	$	2,085		$	6,049
Deferred revenue		199			219
Accrued legal and accounting services		676			621
Warranty reserve		87			101
Accrued payables and other		1,069			1,482

Total accrued liabilities	$	4,116		$	8,472

7. GOODWILL AND INTANGIBLE ASSETS

In October 2006, the Company acquired Analog Power Semiconductor Corporation (“AP Semi”). The purchase consideration was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed on the basis of their estimated fair values on the acquisition date under SFAS No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”). All of the Company’s goodwill and intangible assets are as a result of the AP Semi acquisition.

The carrying amount of goodwill at March 31, 2008 was $15.7 million, which did not change from December 31, 2007. The Company will perform its annual goodwill impairment analysis during the third quarter of 2008 pursuant to the steps and requirements under SFAS No. 142 and determine if goodwill is impaired.

The following table summarizes intangible assets as of March 31, 2008 and December 31, 2007, respectively, (in thousands):


	Intangible assets, gross				Accumulated amortization						Intangible assets, net
	March 31, 2008		December 31, 2007		March 31, 2008			December 31, 2007			March 31, 2008		December 31, 2007
Core technology	$	2,900	$	2,900	$	(1,371	)	$	(1,129	)	$	1,529	$	1,771
Customer relationships		580		580		(272	)		(224	)		308		356

Total	$	3,480	$	3,480	$	(1,643	)	$	(1,353	)	$	1,837	$	2,127

Amortization expense for the three months ended March 31, 2008 and 2007 was $290,000 and $290,000, respectively. Estimated future amortization expense for the remainder of 2008 and 2009 is $870,000 and $967,000, respectively.

8. SEGMENT INFORMATION

As defined by the requirements of SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information,” the Company operates in one reportable segment: the design, development, marketing and sale of power management semiconductor products and solutions for the communications, computing and consumer portable and personal electronics marketplace. The Company’s chief operating decision maker is its chief executive officer.

The following is a summary of net revenue by geographic region based on the location to which the product is shipped:


	Three Months Ended March 31,
	2008		2007
	(in thousands)
South Korea	$	14,619	$	11,592
China		4,742		5,226
Taiwan		4,578		3,018
Europe		447		550
North America (principally United States)		489		575
Japan		226		147

Total	$	25,101	$	21,108

The following is a summary of net revenue by product type:


	Three Months Ended March 31,
	2008				2007
	Amount		Percent of net revenue		Amount		Percent of net revenue
	(dollar amounts in thousands)
Display and Lighting Solutions	$	14,810	59	%	$	11,901	56	%
Voltage Regulation and DC/DC Conversion		6,747	27	%		5,055	24	%
Interface and Power Management		3,199	13	%		3,762	18	%
Battery Management		345	1	%		390	2	%

Total	$	25,101	100	%	$	21,108	100	%

The following table summarizes net revenue and accounts receivable for customers who accounted for 10% or more of accounts receivable or net revenue, respectively:


	Accounts Receivable as of				Net Revenue Three Months Ended March 31,
Customer	March 31, 2008		December 31, 2007		2008		2007
A	34	%	19	%	29	%	24	%
B	19	%	29	%	10	%	12	%
C	17	%	17	%	12	%	14	%
D	—		—		12	%	—

9. INCOME TAXES

The Company recorded a tax provision of approximately $64,000 and $131,000 for the three months ended March 31, 2008 and 2007, respectively. The Company accounts for income taxes under the provisions of SFAS No. 109, “Accounting for Income Taxes.” Under this method, the Company determines deferred tax assets and liabilities based upon the differences between the financial statement and tax bases of the Company’s assets and liabilities using tax rates in effect for the year in which the Company expects the differences to affect taxable income. The Company adopted SFAS No. 123(R) as of January 1, 2006, and, as a result, incurred significant stock-based compensation expense, including amounts related to incentive stock options for which no corresponding tax benefit is recognized unless a disqualifying disposition occurs. Disqualifying dispositions result in a reduction of the provision for income taxes in the quarter when the disqualifying disposition occurs in an amount equal to the tax benefit relating to previously expensed stock compensation. During the three months ended March 31, 2008 and 2007, the provision for income taxes was reduced by approximately $5,000 and $21,000, respectively, as a result of disqualifying dispositions.

During the three months ended March 31, 2008, the Company increased its total amount of unrecognized tax benefits as calculated under FASB Interpretation No. 48 (“FIN No. 48”), “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” by approximately $299,000, including an accrual of interest and penalties of approximately $8,000. The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense.

The Company is subject to taxation in the United States and various states and foreign jurisdictions. We are currently under examination by the Internal Revenue Service for the 2005 and 2006 tax year. As of March 31, 2008, no audit adjustments have been made. Currently, the Company cannot estimate the range of reasonably possible change in unrecognized tax benefits in the next 12 months.

10. LEGAL PROCEEDINGS

In May 2003, the Company received a letter from Linear Technology Corporation (“Linear Technology”) alleging that certain of its charge pump products infringed United States Patent No. 6,411,531 (‘531 Patent) owned by Linear Technology. In August 2004, the Company received a letter from Linear Technology alleging that certain of its switching regulator products infringed United States Patent Nos. 5,481,178, 6,304,066 and 6,580,258 (‘258 Patent). In response to these letters, the Company contacted Linear Technology to convey its good faith belief that it does not infringe the patents in question. Subsequently, the Company became aware of a marketing campaign conducted by Linear Technology in which it sought to disrupt the Company’s business relationships and sales by suggesting to the Company’s customers that its products infringe the same U.S. patents mentioned in its two letters to the Company. As a result, in February 2006, the Company initiated a lawsuit against Linear Technology for unfair business practices, interference with existing and prospective customers and trade libel, as well as a declaration of patent invalidity and non-infringement. This case is currently stayed pending the outcome of the United States International Trade Commission (“USITC”) investigation described in the following paragraph.

In March 2006, the USITC responded to a complaint filed by Linear Technology by initiating an investigation under Section 337 of the Tariff Act to determine if certain of the Company’s products infringe certain patents owned by Linear Technology. The accused products include charge pumps and switching regulators and are similar to the products involved in the Company’s lawsuit with Linear Technology.

In a Final Determination issued September 22, 2007, the USITC left unchanged its earlier initial determination that the Company’s charge pumps do not violate Section 337 of the Tariff Act because they do not infringe any valid claim of ‘531 Patent owned by Linear Technology.

The Final Determination also found that a majority of the Company’s switching regulator designs do not infringe Linear Technology’s ‘258 Patent. The USITC also found that one family of switching regulator products infringes certain claims of the ‘258 Patent. Following normal USITC procedure, the USITC issued a limited exclusion order under Section 337 of the Tariff Act prohibiting the direct importation by the Company of this particular product family. This exclusion order does not, however, prevent the Company’s customers from importing their products into the United States. To date, the Company’s sales of this product family in the United States have been minimal. Linear Technology’s request that downstream products be barred from importation was denied.

Linear Technology is now appealing portions of the Final Determination to the United States Court of Appeals for the Federal Circuit. The Company is opposing this appeal and is also appealing unfavorable portions of the Final Determination.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

•

our expectations regarding our expenses, sales and operations;

•

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

•

our ability to anticipate the future needs of our customers;

•

our plans for future products and enhancements of existing products;

•

our growth strategy elements;

•

our increased headcount as we expand our operations;

•

our intellectual property;

•

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

•

our ability to attract customers.

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

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

Overview

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

Our net revenue in the first quarter of 2008 increased 19 percent compared to the first quarter of 2007 primarily as a result of continued increase in revenue from sale of our Display, Lighting Solutions, Voltage Regulation and DC/DC Conversion product families and increased sales primarily in Korea and Taiwan. Gross profit in the first quarter of 2008 increased to 55% compared to 53% in the first quarter of 2007 primarily due to a favorable impact from product yields.

Cash, cash equivalents and short term investments as of March 31, 2008 decreased by $3 million to $111 million compared to December 31, 2007, due to reclassification of $3 million of auction rate securities from short-term investments to long-term other assets. We continue to be debt free as of March 31, 2008.

Critical Accounting Estimates

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

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

Results of Operations

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


	Three Months Ended March 31,
	2008				2007
	(in thousands, except percentages)
Net revenue	$	25,101	100.0	%	$	21,108	100.0	%
Cost of revenue		11,369	45.3			9,932	47.1

Gross profit		13,732	54.7			11,176	52.9
Operating expenses:
Research and development		7,659	30.5			7,103	33.7
Sales, general and administrative		6,445	25.7			6,202	29.4


Patent litigation		262		1.0			1,589		7.5

Total operating expenses		14,366		57.2			14,894		70.6

Income (loss) from operations		(634	)	(2.5	)		(3,718	)	(17.6	)
Interest and other income (expense), net:
Interest income		1,129		4.5			1,369		6.5
Interest expense and other income (expense), net		15		0.1			(271	)	(1.3	)

Total interest and other income, net		1,144		4.6			1,098		5.2

Income (loss) before income taxes		510		2.1			(2,620	)	(12.4	)
Provision for income taxes		64		0.3			131		0.6

Net income (loss)	$	446		1.8	%	$	(2,751	)	(13.0	)%

Comparison of Three Months ended March 31, 2008 and March 31, 2007

Revenues

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


	Three Months Ended March 31,
	2008				2007
	Amount		Percent of net revenue		Amount		Percent of net revenue
	(dollar amounts in thousands)
Display and Lighting Solutions	$	14,810	59	%	$	11,901	56	%
Voltage Regulation and DC/DC Conversion		6,747	27	%		5,055	24	%
Interface and Power Management		3,199	13	%		3,762	18	%
Battery Management		345	1	%		390	2	%

Total	$	25,101	100	%	$	21,108	100	%

Our net revenue for the first quarter of 2008 as compared to the first quarter of 2007 increased $4.0 million, or 19%. This growth reflected increased sales of our Display, Lighting Solutions, Voltage Regulation and DC/DC Conversion product families, as a result of increased demand. Total unit shipments in the first quarter of 2008 increased 23% compared to the first quarter of 2007 while the average selling prices were almost flat.

Geographically, sales in Korea for the first quarter of 2008 increased by $3.0 million compared to the first quarter of 2007 due to higher demand from our OEMs and sales in Taiwan increased by $1.6 million due to higher demand from several of our distributors. Sales in China decreased by $0.5 million compared to the first quarter of 2007 due to higher inventory level at one of our China distributors at the end of 2007 compared to the prior year.

Gross Profit


	Three Months Ended March 31,
	2008			2007			Increase (Decrease)
	(in thousands, except percentages)
Net revenue	$	25,101		$	21,108		$	3,993		18.9	%
Cost of revenue		11,369			9,932			1,437		14.5	%

Gross profit	$	13,732		$	11,176

Gross margin percentage		54.7	%		52.9	%		1.8	%

Our gross margin was 55% for the first quarter of 2008, compared to 53% for the first quarter of 2007. This increase was primarily due to approximately 2% favorable impact from product yields in the first quarter of 2008 compared to the first quarter of 2007 and a favorable 2% impact from sale of previously expensed research and development material in the first quarter of 2008, partially offset by approximately 2% increase of unfavorable impact on the gross margin from writing down excess inventory in the first quarter of 2008 as described below.

During the first quarter of 2008, our gross inventory write-down was approximately $0.8 million, offset by the sale of $0.3 million of previously written down inventory. During the first quarter of 2007, our gross inventory write-down was approximately $1.1 million, offset by the sale of $1.0 million of previously written down inventory. The net effect of inventory write-down on our gross margin contributed to an unfavorable 2% decrease to our gross margin during the first quarter of 2008 relative to the first quarter of 2007.

Research and Development


	Three Months Ended March 31,									Increase (Decrease)
	2008			2007						Increase (Decrease)
	(in thousands, except percentages)
Research and development	$	7,659		$	7,103		$	556		7.8	%
Percentage of net revenue		30.5	%		33.7	%		(3.2	%)

Research and development expenses for the first quarter of 2008 increased by $556,000 as compared to the first quarter of 2007 primarily due to a $0.7 million increase in payroll and benefit related expenses as a result of higher headcount, a $0.3 million increase in information technology, occupancy and other research and development operation support expenses, offset by lower NRE expense of $0.4 million. Research and development expense as a percentage of net revenue decreased approximately 3% due to a comparatively larger increase in net revenue during the first quarter in 2008.

Sales, General and Administrative


	Three Months Ended March 31,									Increase (Decrease)
	2008			2007						Increase (Decrease)
	(in thousands, except percentages)
Sales, general and administrative	$	6,445		$	6,202		$	243		3.9	%
Percentage of net revenue		25.7	%		29.4	%		(3.7	%)

Sales, general and administrative expenses for first quarter of 2008 increased by $243,000 as compared to the first quarter of 2007 primarily due to a $0.1 million increase in travel expenses and a $0.2 million increase in information technology, occupancy and rent expense. Sales, general and administrative expense as a percentage of net revenue decreased approximately 4% due to a comparatively larger increase in net revenue during the first quarter in 2008.

Patent Litigation


	Three Months Ended March 31,						Increase (Decrease)
	2008			2007			Increase (Decrease)
	(in thousands, except percentages)
Patent litigation	$	262		$	1,589		$	(1,327	)	(83.5	%)
Percentage of net revenue		1.0	%		7.5	%		(6.5	%)

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

Interest Income

Interest income from investments of approximately $1.1 million in the first quarter of 2008 decreased $0.2 million compared to the first quarter of 2007 due to lower average interest rates during the first quarter of 2008.

Interest and Other Income (Expense), Net

Other income was approximately zero in the first quarter of 2008 while other expense was approximately $0.3 million in the first quarter of 2007, primarily as a result a $0.3 million write-off of cumulative translation adjustment loss as a result of the liquidation of our Sweden branch office during the first quarter of 2007.

Provision for Income Taxes

We recorded a tax provision of approximately $64,000 and $131,000 for the three months ended March 31, 2008 and 2007, respectively. We account for income taxes under the provisions of SFAS No. 109, “Accounting for Income Taxes.” Under this method, we determine deferred tax assets and liabilities based upon the differences between the financial statement and tax bases of our assets and liabilities using tax rates in effect for the year in which we expect the differences to affect taxable income. We adopted SFAS No. 123(R) as of January 1, 2006, and, as a result, incurred significant stock-based compensation expense, including amounts related to incentive stock options for which no corresponding tax benefit is recognized unless a disqualifying disposition occurs. Disqualifying dispositions result in a reduction of the provision for income taxes in the quarter when the disqualifying disposition occurs in an amount equal to the tax benefit relating to previously expensed stock compensation. During the three months ended March 31, 2008 and 2007, the provision for income taxes was reduced by approximately $5,000 and $21,000, respectively, as a result of disqualifying dispositions.

During the three months ended March 31, 2008, we increased our total amount of unrecognized tax benefits as calculated under FASB Interpretation No. 48 (“FIN No. 48”), “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” by approximately $299,000, including an accrual of interest and penalties of approximately $8,000. We recognized interest and penalties accrued related to unrecognized tax benefits in income tax expense.

We are subject to taxation in the United States and various states and foreign jurisdictions. We are currently under examination by the Internal Revenue Service for the 2005 and 2006 tax year. As of March 31, 2008, no audit adjustments have been made. Currently, we cannot estimate the range of reasonably possible change in unrecognized tax benefits in the next 12 months.

Liquidity and Capital Resources


	Three Months Ended March 31,					Increase (Decrease)
	2008		2007			Increase (Decrease)
	(in thousands, except percentages)
Net cash provided by operating activities	$	236	$	795		$	(559	)	-70	%
Net cash provided by (used in) investing activities		20,876		(1,260	)		22,136		-1757	%
Net cash provided by financing activities		955		227			728		321	%
Effect of exchange rate changes on cash and cash equivalents		33		(44	)		77		-175	%

Net increase (decrease) on cash and cash equivalents	$	22,100	$	(282	)	$	22,382

Our cash, cash equivalents and short term investments were $111.2 million as of March 31, 2008 and $114.2 million as of December 31, 2007.

Net Cash Provided by Operating Activities

Net cash provided by operating activities was $0.2 million for the three months ended March 31, 2008. Net income of $0.5 million was adjusted for non-cash charges consisting primarily of $0.7 million of depreciation and amortization expense and $1.7 million of stock-based compensation expense. Amortization expense included $0.3 million related to the AP Semi acquisition. Accounts payable increased by $2.7 million due to increased purchases of materials and services to meet expected demand. Accrued liabilities balance decreased by $4.3 million as we paid out 2007 bonuses during the first quarter of 2008. Inventory increased by $1.8 million in anticipation of sales during the remainder of 2008.

Net cash provided by operating activities was $0.8 million for the three months ended March 31, 2007. Net loss of $2.8 million was adjusted for non-cash charges consisting primarily of $0.7 million of depreciation and amortization expense and $1.7 million of stock-based compensation expense. Accounts payable balance increased by $3 million, offset by a decrease of $1.6 million in accrued expenses. The net increase was primarily due to increased purchases of materials and production equipment to meet expected demand. Accounts receivable balance increased due to higher revenue during the period. Depreciation and amortization expense increased mainly due to amortization of acquired intangible assets related to our acquisition of AP Semi during the fourth quarter of 2006.

Net Cash Provided by (Used in) Investing Activities

Net cash provided by investing activities was $20.9 million in the three months ended March 31, 2008, primarily as a result of a net cash inflow of $22 million from sales, maturities and purchases of our short-term investments, as a result of our actions to move our funds to shorter term investments to maintain our liquidity level. The net cash inflow from investments was offset by $1.2 million used to purchase testing and other equipment and to invest in office leasehold improvements.

Net cash used in investing activities was $1.3 million in the three months ended March 31, 2007, primarily as a result of $0.9 million used to purchase various equipment and to support our internal infrastructure growth and a net cash outflow of $0.4 million from purchases and maturities of our short-term investments.

Net Cash Provided by Financing Activities

Net cash provided by financing activities was $1.0 million in the three months ended March 31, 2008, primarily from net proceeds of $0.5 million from exercises of common stock options and $0.5 million of excess tax benefit from employee stock-based compensation.

Net cash provided by financing activities was $0.2 million in the three months ended March 31, 2007, primarily as a result of $0.3 million net proceeds from exercises of common stock options.

Liquidity

We believe our existing cash, cash equivalents and short-term investment balances, as well as cash expected to be generated from operating activities, will be sufficient to meet our anticipated cash needs for at least the next 12 months.

Our long-term future capital requirements will depend on many factors, including our level of revenue, the timing and extent of spending to support our product development efforts, the expansion of sales and marketing activities, the timing of our introductions of new products, the costs to ensure access to adequate manufacturing capacity, our level of acquisition activity or other strategic transactions, the continuing market acceptance of our products and the amount and intensity of our litigation activity. We could be required, or could elect, to seek additional funding through public or private equity or debt financing and additional funds may not be available on terms acceptable to us or at all.

Off Balance Sheet Arrangements

We have not entered into any transactions with unconsolidated entities whereby we have financial guarantees, subordinated retained interests, derivative instruments or other contingent arrangements that expose us to material continuing risks, contingent liabilities, or any other obligation under a variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us.

Contractual Obligations

The following table describes our principal contractual cash obligations as of March 31, 2008:


	Total		Remaining 2008		2009		2010		2011		2012		2013 and beyond
	(in thousands)
Obligations under capital leases	$	155	$	114	$	41	$	—	$	—	$	—	$	—
Operating leases		6,307		1,154		1,272		1,020		550		568		1,743
Purchase commitments ⁽¹⁾		6,214		5,032		788		394		—		—		—

Total contractual obligations	$	12,676	$	6,300	$	2,101	$	1,414	$	550	$	568	$	1,743

⁽¹⁾	Purchase commitments consist primarily of our commitment to purchase wafers and technology licenses.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

At March 31, 2008, we had cash and cash equivalents totaling $75.9 million, compared to $53.8 million at December 31, 2007. At March 31, 2008, we had $35.4 million in short-term investments as compared to $60.4 million at December 31, 2007. Cash equivalents have an original or remaining maturity when purchased of 90 days or less; short-term investments generally have an original or remaining maturity when purchased of greater than 90 days. The increase in cash and cash equivalent balances and the decrease in short-term investments reflected our change in investment policy as a result of the recent liquidity crisis. We are moving our investments into more liquid instruments such as treasury notes.

The taxable equivalent interest rates for the three months ended March 31, 2008 and 2007, on those cash equivalents and short-term investments average approximately 4.0% and 5.4%, respectively. The primary objective of our investment activities is to preserve principal while maximizing income without significantly increasing risk. While none of the securities in which we invested are secured by real estate, these securities may be subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. To minimize this risk, we may maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including commercial paper, money market funds, debt securities and treasury notes.

A hypothetical increase in market interest rates of 100 basis points from the market rates in effect at March 31, 2008 would cause the fair value of these investments to decrease by an immaterial amount, which would not have significantly impacted our financial position or results of operations. Declines in interest rates over time will result in lower interest income. Based upon our analysis the fair values did not change materially as our investments are of short duration.

At March 31, 2008, we also have approximately $2.8 million of auction rate securities (“ARS”) which were illiquid. We reclassified these securities from short-term investments to long-term other assets. In addition, we recognized approximately $0.4 million of unrealized impairment loss because the fair value of these ARS measured using Level 3 inputs under the requirements of SFAS No. 157 is below the carrying value. We have the ability and intent to hold these ARS until maturity because not having access to these funds does not have any significant impact on our current or anticipated liquidity needs.

ITEM 4.

CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. As of March 31, 2008 our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, concluded that our disclosure controls and procedures were effective to ensure that information that we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 were recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

(b) Changes in Internal Controls Over Financial Reporting

There was no change in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the first quarter of 2008 covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II. OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

In May 2003, we received a letter from Linear Technology Corporation (“Linear Technology”) alleging that certain of our charge pump products infringed United States Patent No. 6,411,531 (‘531 Patent) owned by Linear Technology. In August 2004, we received a letter from Linear Technology alleging that certain of our switching regulator products infringed United States Patent Nos. 5,481,178, 6,304,066 and 6,580,258 (‘258 Patent). In response to these letters, we contacted Linear Technology to convey our good faith belief that we do not infringe the patents in question. Subsequently, we became aware of a marketing campaign conducted by Linear Technology in which it sought to disrupt our business relationships and sales by suggesting to our customers that our products infringe the same U.S. patents mentioned in its two letters to us. As a result, in February 2006, we initiated a lawsuit against Linear Technology for unfair business practices, interference with existing and prospective customers and trade libel, as well as a declaration of patent invalidity and non-infringement. This case is currently stayed pending the outcome of the United States International Trade Commission (“USITC”) investigation described in the following paragraph.

In March 2006, the USITC responded to a complaint filed by Linear Technology by initiating an investigation under Section 337 of the Tariff Act to determine if certain of our products infringe certain patents owned by Linear Technology. The accused products include charge pumps and switching regulators and are similar to the products involved in our lawsuit with Linear Technology.

In a Final Determination issued September 22, 2007, the USITC left unchanged its earlier initial determination that our charge pumps do not violate Section 337 of the Tariff Act because they do not infringe any valid claim ‘531 Patent owned by Linear Technology.

The Final Determination also found that a majority of our switching regulator designs do not infringe Linear Technology’s ‘258 Patent. The USITC also found that one family of switching regulator products infringes certain claims of the ‘258 Patent. Following normal USITC procedure, the USITC issued a limited exclusion order under Section 337 of the Tariff Act prohibiting the direct importation by us of this particular product family. This exclusion order does not, however, prevent our customers from importing their products into the United States. To date, our sales of this product family in the United States have been minimal. Linear Technology’s request that downstream products be barred from importation was denied.

Linear Technology is now appealing portions of the Final Determination to the United States Court of Appeals for the Federal Circuit. We are opposing this appeal and are also appealing unfavorable portions of the Final Determination.

ITEM 1A.

RISK FACTORS

Our customers may cancel their orders, change production quantities or delay production, and if we fail to forecast demand for our products accurately, we may incur product shortages, delays in product shipments or excess or insufficient product inventory.

We generally do not obtain firm, long-term purchase commitments from our customers. Because production lead times often exceed the amount of time required to fulfill orders, we often must build in advance of orders, relying on an imperfect demand forecast to project volumes and product mix. Our demand forecast accuracy can be adversely affected by a number of factors, including inaccurate

forecasting by our customers, changes in market conditions, new part introductions by our competitors that lead to our loss of previous design wins, adverse changes in our product order mix and demand for our customers’ products or models. China, in particular, is an emerging market where forecasting by our distributors is not accurate, and there can be rapid changes in the distribution system and market conditions. Even after an order is received, our customers may cancel these orders or request a decrease in production quantities. Any such cancellation or decrease subjects us to a number of risks, most notably that our projected sales will not materialize on schedule or at all, leading to unanticipated revenue shortfalls and excess or obsolete inventory which we may be unable to sell to other customers. Alternatively, if we are unable to project customer requirements accurately, we may not build enough products, which could lead to delays in product shipments and lost sales opportunities in the near term, as well as force our customers to identify alternative sources, which could affect our ongoing relationships with these customers. We have in the past had customers dramatically increase their requested production quantities with little or no advance notice and after they had submitted their original order. We have on occasion been unable to fulfill these revised orders within the time period requested. Either underestimating or overestimating demand would lead to excess, obsolete or insufficient inventory, which could harm our operating results, cash flow and financial condition, as well as our relationships with our customers.

We receive a substantial portion of our revenues from a small number of OEM customers and distributors, and the loss of, or a significant reduction in, orders from those customers or our other largest customers would adversely affect our operations and financial condition.

We receive a substantial portion of our revenues from two of our OEM customers, LG Electronics Inc. of South Korea and Samsung of South Korea, as well as from one of our distributors, ChiefTech Electronics Ltd. of China. We received an aggregate of approximately 29%, 10% and 12% of our revenue from LG Electronics, ChiefTech and Samsung in the first quarter of 2008 and 24%, 12% and 14% in the first quarter of 2007, respectively. In addition, we sell to a number of Samsung’s contract manufacturers. Total sales to Samsung and its contract manufacturers represented 25% and 24% of our net revenue for the first quarter of 2008 and 2007, respectively. We anticipate that we will continue to be dependent on these customers for a significant portion of our revenue in the immediate future; however, we do not have long-term contractual purchase commitments from them, and we cannot assure you that they will continue to be our customers.

We received an aggregate of approximately 87% and 81% of our revenues from our ten largest customers in the first quarter of 2008 and 2007, respectively. Any action by one of our largest customers that affects our orders, product pricing or vendor status could significantly reduce our revenues and harm our financial results. In the future, our sales to our large customers will continue to be susceptible to quarterly fluctuation as our customers manage their inventories, principally for seasonal variations. In particular, our customers’ increase in inventory of our products in advance of the peak buying season during the second half of year for wireless handsets often leads to sequentially lower sales of our products in the first calendar quarter and, potentially, late in the fourth calendar quarter. Because our largest customers account for such a significant part of our business, the loss of, or a decline in sales to, any of our major customers would negatively impact our business.

Our operating results have fluctuated in the past and we expect our operating results to continue to fluctuate.

Our revenues are difficult to predict and have varied significantly in the past from period to period. We expect our revenues and expense levels to continue to vary in the future, making it difficult to predict our future operating results. In particular, we experience seasonality and variability in demand for our products as our customers manage their inventories. Our customers tend to increase inventory of our products in anticipation of the peak fourth quarter buying season for the mobile consumer electronic devices in which our products are used, which often leads to sequentially lower sales of our products in the first calendar quarter and, potentially, late in the fourth calendar quarter.

Additional factors that could cause our results to fluctuate include:

•

the forecasting, scheduling, rescheduling or cancellation of orders by our customers, particularly in China and other emerging markets;

•

costs associated with litigation, especially related to intellectual property;

•

liquidity and cash flow of our distributors and end-market customers;

•

changes in manufacturing costs, including wafer, test and assembly costs, and manufacturing yields, product quality and reliability;

•

the timing and availability of adequate manufacturing capacity from our manufacturing suppliers;

•

our ability to successfully define, design and release new products in a timely manner that meet our customers’ needs;

•

the timing, performance and pricing of new product introductions by us and by our competitors;

•

general economic conditions in the countries where we operate or our products are used;

•

changes in exchange rates, interest rates, tax rates and tax withholding;

•

geopolitical stability, especially affecting China, Taiwan and Asia in general; and

•

changes in domestic and international tax laws.

Unfavorable changes in any of the above factors, most of which are beyond our control, could significantly harm our business and results of operations.

We may be unsuccessful in developing and selling new products or in penetrating new markets.

We operate in a dynamic environment characterized by rapidly changing technologies and industry standards and technological obsolescence. Our competitiveness and future success depends on our ability to design, develop, manufacture, assemble, test, market and support new products and enhancements on a timely and cost-effective basis. A fundamental shift in technologies in any of our product markets could harm our competitive position within these markets. Our failure to anticipate these shifts, to develop new technologies or to react to changes in existing technologies could materially delay our development of new products, which could result in product obsolescence, decreased revenues and a loss of design wins to our competitors. The success of a new product depends on accurate forecasts of long-term market demand and future technological developments, as well as on a variety of specific implementation factors, including:

•

effective marketing, sales and service;

•

timely and efficient completion of process design and device structure improvements and implementation of manufacturing, assembly and test processes; and

•

the quality, performance and reliability of the product.

If we fail to introduce new products or penetrate new markets, our revenues will likely decrease over time and our financial condition could suffer.

Due to defects and failures that may occur, our products may not meet specifications, which may cause customers to return or stop buying our products and may expose us to product liability claims.

Our customers generally establish demanding specifications for quality, performance and reliability that our products must meet. Integrated circuits, or ICs, as complex as ours often encounter development delays and may contain undetected defects or failures when first introduced or after commencement of commercial shipments, which might require product replacement or recall. In addition, our customers may not use our products in a way that is consistent with our published specifications. If defects and failures occur in our products during the design phase or after, or our customers use our products in ways that are not consistent with their intended use, we could experience lost revenues, increased costs, including warranty expense and costs associated with customer support, delays in or cancellations or rescheduling of orders or shipments, or product returns or discounts, any of which would harm our operating results. We cannot assure you that we will have sufficient resources, including any available insurance, to satisfy any asserted claims.

The nature of the design process requires us to incur expenses prior to earning revenues associated with those expenses, and we will have difficulty selling our products if system designers do not design our products into their electronic systems.

We devote significant time and resources in working with our customers’ system designers to understand their future needs and to provide products that we believe will meet those needs. If a customer’s system designer initially chooses a competitor’s product for a particular electronic system, it becomes significantly more difficult for us to sell our products for use in that electronic system because changing suppliers can involve significant cost, time, effort and risk for our customers.

We often incur significant expenditures in the development of a new product without any assurance that our customers’ system designers will select our product for use in their electronic systems. We often are required to anticipate which product designs will generate demand in advance of our customers expressly indicating a need for that particular design. In some cases, there is minimal or no demand for our products in our anticipated target applications. Even if our products are selected by our customers’ system designers, a substantial period of time will elapse before we generate revenues related to the significant expenses we have incurred. The reasons for this delay generally include the following elements of our product sales and development cycle timeline and related influences:

•

our customers usually require a comprehensive technical evaluation of our products before they incorporate them into their electronic systems;

•

it can take up to 12 months from the time our products are selected to complete the design process;

•

it can take an additional nine to 12 months or longer to complete commercial introduction of the electronic systems that use our products, if they are introduced at all;

•

original equipment manufacturers typically limit the initial release of their electronic systems to evaluate performance and consumer demand; and

•

the development and commercial introduction of products incorporating new technology are frequently delayed.

We estimate that the overall sales and development cycle timeline of an average product is approximately 16 months.

Additionally, even if system designers use our products in their electronic systems, we cannot assure you that these systems will be commercially successful. As a result, we are unable to accurately forecast the volume and timing of our orders and revenues associated with any new product introductions.

Any increase in the manufacturing cost of our products could reduce our gross margins and operating profit.

The semiconductor business exhibits ongoing competitive pricing pressure from customers and competitors. Accordingly, any increase in the cost of our products, whether by adverse purchase price variances or adverse manufacturing cost variances, will reduce our gross margins and operating profit. For example, if we do not incorporate the partially fabricated wafers held for us by our suppliers into our products in a timely fashion, we may still become obligated to purchase these materials, which may reduce our gross margins. We do not have many long-term supply agreements with our manufacturing suppliers and, consequently, we may not be able to obtain price reductions or anticipate or prevent future price increases from our suppliers.

The average selling price of our products may decline, or a change in the mix of product orders may occur, either of which could reduce our gross margins.

During a power management product’s life, its selling price tends to decrease for a particular application. As a result, to maintain gross margins on our products, we must continue to identify new applications for our products, reduce manufacturing costs for our existing products and introduce new products. If we are unable to identify new, high gross margin applications for our existing products, reduce our production costs or sell new, high gross margin products, our gross margins will suffer. A sustained reduction in our gross margins could harm our future operating results, cash flow and financial condition, which could lead to a significant drop in the price of our common stock.

Because we receive a substantial portion of our revenues through distributors, their financial viability and ability to access the capital markets could impact our ability to continue to do business with them and could result in lower revenues, which could adversely affect our operating results and our customer relationships.

We obtain a portion of our revenues through sales to distributors located in Asia who act as our fulfillment representatives. Sales to distributors accounted for 37% and 39% of our revenues for the first quarter of 2008 and 2007, respectively. In the normal course of their operation as fulfillment

representatives, these distributors typically perform functions such as order scheduling, shipment coordination, inventory stocking, payment and collections and, when applicable, currency exchange between purchasers of our products and these distributors. Our distributors’ compensation for these functions is reflected in the price of the products we sell to these distributors. Many of our current distributors also serve as our sales representatives procuring orders for us to fill directly. If these distributors are unable to pay us in a timely manner or if we anticipate that they will not pay us, we may elect to withhold future shipments, which could adversely affect our operating results. If one of our distributors experiences severe financial difficulties, becomes insolvent or declares bankruptcy, we could lose product inventory held by that distributor and we could be required to write off the value of any receivables owed to us by that distributor. We could also be required to record bad debt expense in excess of our reserves. This is particularly true of our principal distributor in China when sales have decreased and payments slowed during the first quarter of 2008. We may not be successful in recognizing these indications or in finding replacement distributors in a timely manner, or at all, any of which could harm our operating results, cash flow and financial condition.

Our distributor arrangements often require us to accept product returns and to provide price protection and if we fail to properly estimate our product returns and price protection reserves, this may adversely impact our reported financial information.

A substantial portion of our sales are made through third-party distribution arrangements, which include stock rotation rights that generally permit the return of up to 5% of the previous six months’ purchases. We generally accept these returns in the second and fourth quarter of each annual period. Our arrangements with our distributors typically also include price protection provisions if we reduce our list prices. We record estimated returns at the time of shipment, and we record reserves for price protection at the time we decide to reduce our list prices. In the future, we could receive returns or claims that are in excess of our estimates and reserves, which could harm our operating results.

Our distributor arrangements often require us to accept returns of unsold products if contractual arrangements with a distributor are terminated, which could harm our operating results or, if we fail to take steps, could harm our relationship with these distributors and lead to a loss of revenues.

If our relationship with any of our distributors deteriorates or terminates, it could lead to a temporary or permanent loss of revenues until a replacement sales channel can be established to service the affected end-user customers, as well as inventory write-offs or accounts receivable write-offs. We may not be successful in finding suitable alternative distributors and this could adversely affect our ability to sell in certain locations or to certain end-user customers. We also may be obligated to repurchase unsold products from a distributor if we decide to terminate our relationship with that distributor.

Our current backlog may not be indicative of future sales.

Due to the nature of our business, in which order lead times may vary, and the fact that customers are generally allowed to reschedule or cancel orders on short notice, we believe that our backlog is not necessarily a good indicator of our future sales. Our quarterly revenues also depend on orders booked and shipped in that quarter. Because our lead times for the manufacturing of our products generally take six to ten weeks, we often must build in advance of orders. This exposes us to certain risks, most notably the possibility that expected sales will not occur, which may lead to excess inventory, and we may not be able to sell this inventory to other customers. In addition, we supply LG Electronics, one of our largest customers, through its central hub and we do not record backlog with respect to the products we ship to the hub. Therefore, our backlog may not be a reliable indicator of future sales.

If consumer demand for mobile consumer electronic devices declines, our revenues will decrease.

Our products are used primarily in the mobile consumer electronic devices market. For the foreseeable future, we expect to see the significant majority of our revenues continue to come from this market, especially in wireless handsets. If consumer demand for these products declines, our revenues will decrease. If we are unsuccessful in identifying alternative markets for our products in a timely manner, our operating results will suffer dramatically.

Substantially all of our manufacturing suppliers, customers and operations are located in Asia, which subjects us to additional risks, including regional economic influences, logistical complexity, political instability and natural disasters including earthquakes.

We conduct, and expect to continue to conduct, almost all of our business with companies that are located outside the United States. Based on ship-to locations, approximately 96% and 97% of our revenues came from customers in Asia, particularly South Korea, Taiwan, China and Japan, in the first quarter of 2008 and 2007, respectively. A vast majority of our contract manufacturing operations are located in South Korea, Taiwan, Malaysia and China. In addition, we have a design center in Shanghai, China. As a result of our international focus, we face several challenges, including:

•

increased complexity and costs of managing international operations;

•

longer and more difficult collection of receivables;

•

political and economic instability;

•

limited protection of our intellectual property;

•

unanticipated changes in local regulations, including tax regulations;

•

timing and availability of import and export licenses; and

•

foreign currency exchange fluctuations relating to our international operating activities.

Our corporate headquarters in Santa Clara, California, our operations office in Chupei, Taiwan, and the production facilities of one of our wafer fabrication suppliers and several of our assembly and test suppliers in Hsinchu and across Taiwan are located near seismically active regions and are subject to periodic earthquakes. We do not maintain earthquake insurance and our business could be damaged in the event of a major earthquake or other natural disaster.

In addition to risks in our operations from natural disasters, our customers are also subject to these risks. Any disaster impacting our customers could result in loss of orders, delay of business and temporary regional economic recessions.

We are also more susceptible to the regional economic impact of health crises. Because we anticipate that we will continue to rely heavily on foreign companies or U.S. companies operating in Asia for our future growth, the above risks and issues that we do not currently anticipate could adversely affect our ability to conduct business and our results of operations.

We outsource our wafer fabrication, testing, packaging, warehousing and shipping operations to third parties, and rely on these parties to produce and deliver our products according to requested demands in specification, quantity, cost and time.

We rely on third parties for substantially all of our manufacturing operations, including wafer fabrication, wafer probe, wafer thinning, assembly, final test, warehousing and shipping. We depend on these parties to supply us with material of a requested quantity in a timely manner that meets our standards for yield, cost and manufacturing quality. Any problems with our manufacturing supply chain could adversely impact our ability to ship our products to our customers on time and in the quantity required, which in turn could cause an unanticipated decline in our sales and possibly damage our customer relationships.

Our products are manufactured at a limited number of locations. If we experience manufacturing problems at a particular location, we would be required to transfer manufacturing to a backup supplier. Converting or transferring manufacturing from a primary supplier to a backup fabrication facility could be expensive and could take as long as six to 12 months. During such a transition, we would be required to meet customer demand from our then-existing inventory, as well as any partially finished goods that can be modified to the required product specifications. We do not seek to maintain sufficient inventory to address a lengthy transition period because we believe it is uneconomical to keep more than minimal inventory on hand. As a result, we may not be able to meet customer needs during such a transition, which could delay shipments, cause a production delay or stoppage for our customers, result in a decline in our sales and damage our customer relationships.

In addition, a significant portion of our sales is to customers that practice just-in-time order management from their suppliers, which gives us a very limited amount of time in which to process and complete these orders. As a result, delays in our production or shipping by the parties to whom we outsource these functions could reduce our sales, damage our customer relationships and damage our reputation in the marketplace, any of which could harm our business, results of operations and financial condition.

The loss of any of our key personnel could seriously harm our business, and our failure to attract or retain specialized technical and management talent could impair our ability to grow our business.

The loss of services of one or more of our key personnel could seriously harm our business. In particular, our ability to define and design new products, gain new customers and grow our business depends on the continued contributions of Richard K. Williams, our President, Chief Executive Officer and Chief Technical Officer, as well as our senior level sales, finance, operations, technology and engineering personnel. Our future growth will also depend significantly on our ability to recruit and retain qualified and talented managers and engineers, along with key manufacturing, quality, sales and marketing staff members. There remains intense competition for these individuals in our industry, especially those with power and analog semiconductor design and applications expertise. We cannot assure you we will be successful in finding, hiring and retaining these individuals. If we are unable to recruit and retain such talent, our product and technology development, manufacturing, marketing and sales efforts could be impaired.

We do not expect to sustain our recent growth rate, and we may not be able to manage any future growth effectively.

We have experienced significant growth in a short period of time. Our revenues have increased from approximately $1.0 million in 2001 to $110.0 million in 2007. We do not expect to achieve similar growth rates in future periods. You should not rely on our operating results for any prior quarterly or annual periods as an indication of our future operating performance. If we are unable to maintain adequate revenue growth, our financial results could suffer and our stock price could decline.

We have also grown from 110 employees on January 1, 2004 to 296 employees on March 31, 2008, with many located in regional and international offices. Our international growth may subject us to income and transaction taxes in the United States and in multiple foreign locations. Our future effective tax rates could be affected by changes in our U.S. and foreign tax estimates and liabilities, or changes in tax laws or the interpretation of such tax laws. If additional taxes are assessed against us, our operating results or financial condition could be materially affected.

Our expansion has placed a significant strain on our management, personnel, systems and resources. Any future expansion is likely to result in additional strain on our managerial infrastructure. To manage our growth successfully and handle the responsibilities of being a public company, we believe we must effectively:

•

recruit, hire, train and manage additional qualified engineers for our research and development activities, especially in the positions of design engineering, product and test engineering, and applications engineering;

•

continue to implement and improve adequate administrative, financial and operational systems, procedures and controls; and

•

enhance our information technology support for enterprise resource planning and design engineering by adapting and expanding our systems and tool capabilities, and properly training new hires as to their use.

If we are unable to manage our growth effectively, we may not be able to take advantage of market opportunities or develop new products, our introduction of derivative products may be delayed and we may fail to satisfy customer requirements, maintain product quality, execute our business plan or respond to competitive pressures.

A failure to maintain our international structure may adversely affect our tax rate, financial condition and operating results.

During 2005, we realigned certain areas of our operations in connection with the implementation of an international structure. This realignment required us to transfer certain functions previously handled in our Santa Clara, California headquarters to offices in foreign jurisdictions, primarily Macau. If we fail to maintain our realigned operations, our operating results may be adversely affected. Additionally, our international structure results in an increased volume of transactions and accounting for those transactions

may require us to increase our headcount either domestically or internationally. A failure to process those transactions in an accurate and timely manner could be indicative of a material weakness in our internal controls over financial reporting. Our international structure requires that we understand complex tax laws and regulations in various domestic and international jurisdictions. If we are unable to comply with domestic and international tax laws, our tax rate and our financial condition may be adversely impacted. Further, the domestic and international tax laws governing our structure are subject to change, which could adversely affect our operations and financial results.

We compete against companies with substantially greater financial and other resources, and our market share or gross margins may be reduced if we are unable to respond to competitive challenges effectively.

The analog, mixed-signal, or analog with digital, and power management semiconductor industry in which we operate is highly competitive and dynamic, and we expect it to remain so. Our ability to compete effectively depends on defining, designing and regularly introducing new products that meet or anticipate the power management needs of our customers’ next-generation products and applications. We compete with numerous domestic and international semiconductor companies, many of which have greater financial and other resources with which to pursue marketing, technology development, product design, manufacturing, quality, sales and distribution of their products.

We consider our primary competitors to be Maxim Integrated Products, Inc., Linear Technology Corporation, Texas Instruments Incorporated, Semtech Corporation and National Semiconductor Corporation. We expect continued competition from existing competitors as well as from new entrants into the power management semiconductor market. Our ability to compete depends on a number of factors, including:

•

our success in identifying new and emerging markets, applications and technologies, and developing power management solutions for these markets;

•

our products’ performance and cost effectiveness relative to that of our competitors’ products;

•

our ability to deliver products in large volume on a timely basis at a competitive price;

•

our success in utilizing new and proprietary technologies to offer products and features previously not available in the marketplace;

•

our ability to recruit application engineers and designers; and

•

our ability to protect our intellectual property.

We cannot assure you that our products will compete favorably or that we will be successful in the face of increasing competition from new products and enhancements introduced by our existing competitors or new companies entering this market.

Assertions by third parties of infringement by us of their intellectual property rights could result in significant costs, reduce sales of our products and cause our operating results to suffer.

The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights and positions, which has resulted in protracted and expensive litigation for many companies. We have in the past received, and expect that in the future we may receive, communications from various industry participants alleging our infringement of their patents, trade secrets or other intellectual property rights. Any lawsuits resulting from such allegations could subject us to significant liability for damages and invalidate our proprietary rights. Any potential intellectual property litigation also could force us to do one or more of the following:

•

stop selling products or using technology that contain the allegedly infringing intellectual property;

•

incur significant legal expenses;

•

pay damages to the party claiming infringement;

•

redesign those products that contain the allegedly infringing intellectual property; and

•

attempt to obtain a license to the relevant intellectual property from third parties, which may not be available on reasonable terms or at all.

We initiated a lawsuit against Linear Technology Corporation in February 2006 for unfair business practices, interference with existing and prospective customers and trade libel, as well as a declaration of patent invalidity and non-infringement. In this case, we are seeking to prevent Linear Technology from continuing a marketing campaign designed to disrupt our business relationships and sales by suggesting to our customers that our products infringe several U.S. patents owned by Linear Technology. As we informed Linear Technology in 2003 and 2004, and as discussed in our prior public filings, we believe that none of our products infringe the patents in question. However, whether or not we prevail in this lawsuit, we expect to incur significant legal expenses related to this case. In February 2006, in a related action, Linear Technology petitioned the United States International Trade Commission (“USITC”) requesting that the USITC initiate an investigation to determine if certain of our products infringe certain patents owned by Linear Technology under Section 337 of the Tariff Act. The patents involved in this action are a subset of the patents involved in the lawsuit that we filed against Linear Technology. The accused products include charge pumps and switching regulators and are similar to the products involved in our lawsuit with Linear Technology.

The Final Determination also found that a majority of our switching regulator designs do not infringe Linear’s Patent No. 6,580,258 (‘258 Patent). The USITC also found that one family of switching regulator products infringes certain claims of the ‘258 Patent. Following normal USITC procedure, the USITC issued a limited exclusion order under Section 337 of the Tariff Act prohibiting the direct importation by us of this particular product family. This exclusion order does not, however, prevent our customers from importing their products into the United States. Linear Technology’s request that downstream products be barred from importation was denied.

On February 20, 2008, Linear Technology filed a complaint with the USITC seeking an enforcement proceeding to correct alleged violations of the limited exclusion order of September 22, 2007. We will take reasonable steps to protect our interests should the USITC agree to institute the requested enforcement action. We believe that none of our products infringe the Linear Technology patents in question. However, whether or not we prevail in this appeal, we expect to incur significant legal expenses. Uncertainty over the outcome of our litigation with Linear Technology may cause our customers or potential customers to elect not to include our products that are the subject of this litigation into the design of their systems. Once a customer’s system designer initially chooses a competitor’s product for a particular electronic system, it becomes significantly more difficult for us to sell our products for use in that electronic system, because changing suppliers can involve significant cost, time, effort and risk for our customers. As a result, our litigation with Linear Technology or any similar future litigation may reduce both our current and future revenues. If we are unsuccessful in this case, our business and our ability to compete in foreign markets could be harmed, and we could be enjoined from selling the accused products in the United States, either directly or indirectly, which could have a material adverse impact on our revenues, financial condition, results of operations and cash flows.

Our failure to protect our intellectual property rights adequately could impair our ability to compete effectively or to defend ourselves from litigation, which could harm our business, financial condition and results of operations.

We rely primarily on patent, copyright, trademark and trade secret laws, as well as confidentiality and non-disclosure agreements to protect our proprietary technologies and know-how. While we have more than 50 patents issued or allowed in the United States or foreign countries and a larger number of pending applications, the rights granted to us may not be meaningful or provide us with any commercial advantage. For example, these patents could be challenged or circumvented by our competitors or be declared invalid

or unenforceable in judicial or administrative proceedings. The failure of our patents to adequately protect our technology might make it easier for our competitors to offer similar products or technologies. Our foreign patent protection is generally not as comprehensive as our U.S. patent protection and may not protect our intellectual property in some countries where our products are sold or may be sold in the future. Even if foreign patents are granted, effective enforcement in foreign countries may not be available. Many U.S.-based companies have encountered substantial intellectual property infringement in foreign countries, including countries where we sell products.

Monitoring unauthorized use of our intellectual property is difficult and costly. It is possible that unauthorized use of our intellectual property may occur without our knowledge. We cannot assure you that the steps we have taken will prevent unauthorized use of our intellectual property. Our failure to effectively protect our intellectual property could reduce the value of our technology in licensing arrangements or in cross-licensing negotiations, and could harm our business, results of operations and financial condition. We may in the future need to initiate infringement claims or litigation. Litigation, whether we are a plaintiff or a defendant, can be expensive, time-consuming and may divert the efforts of our technical staff and managerial personnel, which could harm our business, whether or not such litigation results in a determination favorable to us.

Any acquisitions we make could disrupt our business, result in integration difficulties or fail to realize anticipated benefits, which could adversely affect our financial condition and operating results.

We may choose to acquire companies, technologies, assets and personnel that are complementary to our business, including for the purpose of expanding our new product design capacity, introducing new design, market or application skills or enhancing and expanding our existing product lines. In October 2006, we acquired Analog Power Semiconductor Corporation and related assets and personnel, primarily located in Shanghai, China. Acquisitions involve numerous risks, including the following:

•

difficulties in integrating the operations, systems, technologies, products and personnel of the acquired companies;

•

diversion of management’s attention from normal daily operations of the business and the challenges of managing larger and more widespread operations resulting from acquisitions;

•

difficulties in entering markets in which we may have no or limited direct prior experience and where competitors may have stronger market positions;

•

the potential loss of key employees, customers, distributors, suppliers and other business partners of the companies we acquire following and continuing after announcement of acquisition plans;

•

improving and expanding our management information systems to accommodate expanded operations;

•

insufficient revenue to offset increased expenses associated with acquisitions; and

•

addressing unforeseen liabilities of acquired businesses.

Acquisitions may also cause us to:

•

issue capital stock that would dilute our current stockholders’ percentage ownership;

•

use a substantial portion of our cash resources or incur debt;

•

assume liabilities;

•

record goodwill or incur amortization expenses related to certain intangible assets; and

•

incur large and immediate write-offs and other related expenses.

Any of these factors could prevent us from realizing the anticipated benefits of an acquisition, and our failure to realize these benefits could adversely affect our business. In addition, we may not be successful in identifying future acquisition opportunities or in consummating any acquisitions that we may pursue on favorable terms, if at all. Any transactions that we complete may impair stockholder value or otherwise adversely affect our business and the market price of our stock. Failure to manage and successfully integrate acquisitions could materially harm our financial condition and operating results.

Our operating results, financial condition and cash flows may be adversely impacted by worldwide political and economic uncertainties and specific conditions in the markets we address, including the cyclical nature of and volatility in the semiconductor industry.

The semiconductor industry has historically exhibited cyclical behavior which at various times has included significant downturns in customer demand. These conditions have caused significant variations in product orders and production capacity utilization, as well as price erosion. Because a significant portion of our expenses is fixed in the near term or is incurred in advance of anticipated sales, we may not be able to decrease our expenses rapidly enough to offset any unanticipated shortfall in revenues. If this situation were to occur, it could adversely affect our operating results, cash flow and financial condition.

Additionally, general worldwide economic conditions have recently experienced a downturn due to slower economic activity, concerns about inflation and deflation, increased energy costs, decreased consumer confidence, reduced corporate profits and capital spending, adverse business conditions and liquidity concerns in the wired and wireless communications markets, recent international conflicts and terrorist and military activity and the impact of natural disasters and public health emergencies. These conditions make it extremely difficult for our customers, our vendors and us to accurately forecast and plan future business activities, and they could cause U.S. and foreign businesses to slow spending on our products and services, which would delay and lengthen sales cycles. We cannot predict the timing, strength or duration of any economic slowdown or subsequent economic recovery, worldwide, or in the semiconductor industry. If the economy or markets in which we operate do not continue at their present levels, our business, financial condition and results of operations will likely be materially and adversely affected.

Our business may be adversely impacted if our end customers cannot obtain sufficient supplies of other components in their products to meet their production projections and target quantities.

Our power management products are used by our customers in conjunction with a number of other components such as digital integrated circuits, baseband processors, microcontrollers and digital signal processors. If for any reason our customers incur a shortage of any component, their ability to produce the forecasted quantity of their end product or model may be adversely affected and our product sales would decline until such shortage is remedied. Such a situation could harm our operating results, cash flow and financial condition.

A failure of our information systems would adversely impact our ability to process orders for and manufacture products.

We operate a multinational business enterprise with manufacturing, administration and sales groups located in Asia, Europe and the United States. These disparate groups are connected by a virtual private network-based enterprise resource planning system, where daily manufacturing operations and order entry functions rely on maintaining a reliable network among locations. Any failure of our computer network or our enterprise resource planning system would impede our ability to schedule orders, monitor production work in process and ship and bill our finished goods to our customers.

Changes in effective tax rates or adverse outcomes resulting from examination of our income tax returns could adversely affect our results.

Our future effective tax rates could be adversely affected by lower than anticipated earnings in countries where we have lower statutory rates and higher than anticipated earnings in countries where we have higher statutory rates, by changes in the valuation of our deferred tax assets and liabilities, or by changes in tax laws, regulations, accounting principles or interpretations thereof. Further, as a result of certain ongoing employment and capital investment commitments made by us, our income in certain countries is subject to reduced tax rates, and in some cases is wholly exempt from tax. Our failure to meet such commitments could adversely impact our effective tax rate. In addition, we are subject to the continuous examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from these continuous examinations will not have an adverse effect on our operating results and financial condition.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

ITEM 5.

OTHER INFORMATION

Not applicable.

ITEM 6.

EXHIBITS


31.1		Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section, nor shall it be deemed incorporated by reference in any filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.

ADVANCED ANALOGIC TECHNOLOGIES INCORPORATED

SIGNATURE

Pursuant to the requirements 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.


	ADVANCED ANALOGIC TECHNOLOGIES INCORPORATED

Dated: April 29, 2008	By:	/s/ Brian R. McDonald
		Brian R. McDonald
		Chief Financial Officer, Vice President of
		Worldwide Finance and Secretary

EXHIBIT INDEX


31.1		Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents