STOCK PLANS AND SHARE BASED COMPENSATION:

Stock Plans

As of June 30, 2011, the Company had five stock-based compensation plans (the “Plans”) which are described below.

2007 Equity Incentive Plan

The 2007 Equity Incentive Plan (the "2007 Plan") was adopted by the board of directors on September 10, 2007 and approved by the stockholders on November 7, 2007 as an amendment and restatement of the 1997 Stock Option Plan (the "1997 Plan"). The 2007 Plan provides for the grant of incentive stock options, nonstatutory stock options, restricted stock awards, restricted stock unit awards (”RSUs”), stock appreciation rights, performance stock awards and other stock awards to employees, directors and consultants. As of June 30, 2011, the maximum remaining number of shares that may be issued under the 2007 Plan was 6,855,024 shares, which consists of the shares remaining available for issuance under the 1997 Plan, including shares subject to outstanding options and stock awards under the 1997 Plan. Pursuant to the 2007 Plan, the exercise price for incentive stock options and nonstatutory stock options is generally at least 100% of the fair market value of the underlying shares on the date of grant. Options generally vest over 48 months measured from the date of grant. Options generally expire no later than ten years after the date of grant, subject to earlier termination upon an optionee's cessation of employment or service.

Beginning January 27, 2009, grants pursuant to the Directors Equity Compensation Program (that was adopted by the board of directors on January 27, 2009) to nonemployee directors have been made primarily under the 2007 Plan. The Directors Equity Compensation Program provides in certain circumstances (depending on the status of the particular director's holdings of Company stock options) for the automatic grant of nonstatutory stock options to nonemployee directors of the Company on the first trading day of July in each year over their period of service on the board of directors. Further, each future nonemployee director of the Company would be granted under the 2007 Plan: (a) on the first trading day of the month following commencement of service, an option to purchase the number of shares of common stock equal to: the fraction of a year between the date of the director's appointment to the board of directors and the next July 1, multiplied by 8,000, which option shall vest on the next July 1^st; and (b) on the first trading day of July following commencement of service, an option to purchase 24,000 shares vesting monthly over the three year period commencing on the grant date. The Directors Equity Compensation Program will remain in effect at the discretion of the board of directors or the compensation committee.

On July 28, 2009, the 2007 Plan was amended generally to prohibit outstanding options or stock appreciation rights from being cancelled in exchange for cash without stockholder approval.

1997 Stock Option Plan

In June 1997, the board of directors adopted the 1997 Stock Option Plan (the "1997 Plan"), whereby the board of directors could grant incentive stock options and nonstatutory stock options to purchase the Company's common stock to key employees, directors and consultants. The exercise price of incentive stock options could not be less than 100% of the fair market value of the Company's common stock on the date of grant. The exercise price of nonstatutory stock options may not be less than 85% of the fair market value of the Company's common stock on the date of grant. Effective November 2007, the board of directors determined that no further options would be granted under the 1997 Plan, and shares remaining available for issuance under the 1997 Plan, including shares subject to outstanding options under the 1997 Plan were transferred to the 2007 Equity Incentive Plan. All outstanding options would continue to be governed and remain outstanding in accordance with their existing terms.

1997 Outside Directors Stock Option Plan

In September 1997, the board of directors adopted the 1997 Outside Directors Stock Option Plan (the ''Directors Plan''). A total of 800,000 shares of common stock have been reserved for issuance under the Directors Plan. The exercise price per share of all options granted under the Directors Plan is equal to the fair market value of a share of common stock on the date of grant. Options granted under the Directors Plan have a maximum term of ten years after the date of grant, subject to earlier termination upon an optionee's cessation of service. The Directors Plan provides that each future nonemployee director of the Company will be granted an option to purchase 30,000 shares on which such individual first becomes a nonemployee director of the Company (the ''Initial Grant''). Thereafter, each nonemployee director who has served on the board of directors continuously for 12 months will be granted an additional option to purchase 10,000 shares of common stock (an ''Annual Grant''). Approximately 1/3^rd of Initial Grants became exercisable one year after the date of grant and 1/36^th of the Initial Grant will become exercisable monthly thereafter. Each Annual Grant will become exercisable in twelve equal monthly installments beginning in the 25th month after the date of grant, subject to the optionee's continuous service. In the event of certain changes in control of the Company, all options outstanding under the Directors Plan will become immediately vested and exercisable in full. The board of directors suspended grants under the Directors Plan, and nonemployee directors have received, and will receive, initial and annual grants primarily under the Power Integrations 2007 Equity Incentive Plan (described above) pursuant to the “Directors Equity Compensation Program” (see description above). The suspension of grants under the Directors Plan is indefinite, and will last until the board of directors or compensation committee determines that grants under the Directors Plan will no longer be suspended.

On July 28, 2009, the Directors Plan was amended generally to prohibit outstanding options from being amended 1) to reduce the exercise price of such outstanding options or 2) canceled in exchanged for cash, other awards or options with a lower exercise price without stockholder approval.

1998 Nonstatutory Stock Option Plan

In July 1998, the board of directors adopted the 1998 Nonstatutory Stock Option Plan (the “1998 Plan”); whereby the board of directors may grant nonstatutory stock options to employees and consultants, but only to the extent that such options do not require approval of the Company's stockholders. The 1998 Plan has not been approved by the Company's stockholders. The exercise price of nonstatutory stock options may not be less than 85% of the fair market value of the Company's common stock on the date of grant. As of June 30, 2011, the maximum number of shares that may be issued under the 1998 Plan was 1.0 million and as of that date no shares are available for future issuance. In general, options vest over 48 months. Options generally have a maximum term of ten years after the date of grant, subject to earlier termination upon an optionee's cessation of employment or service.

On July 28, 2009, the 1998 Plan was amended generally to prohibit outstanding options from being amended 1) to reduce the exercise price of such outstanding options or 2) canceled in exchanged for cash, other awards or options with a lower exercise price without stockholder approval.

1997 Employee Stock Purchase Plan

Under the 1997 Employee Stock Purchase Plan (the “Purchase Plan”), eligible employees may apply accumulated payroll deductions, which may not exceed 15% of an employee's compensation, to the purchase of shares of the Company's common stock at periodic intervals. The purchase price of stock under the Purchase Plan is equal to 85% of the lower of (i) the fair market value of the Company's common stock on the first day of each offering period, or (ii) the fair market value of the Company's common stock on the purchase date (as defined in the Purchase Plan). Each offering period consists of one purchase period of approximately six months duration. An aggregate of 3,000,000 shares of common stock is reserved for issuance to employees under the Purchase Plan. As of June 30, 2011, 2,287,552 shares had been purchased and 712,448 shares were reserved for future issuance under the Purchase Plan.

Stock-Based Compensation

The Company applies the provisions of ASC 718-10. Under the provisions of ASC 718-10, the Company recognizes the fair value of stock-based compensation in financial statements over the requisite service period of the individual grants, which generally equals a four-year vesting period. The Company uses estimates of volatility, expected term, risk-free interest rate, dividend yield and forfeitures in determining the fair value of these awards and the amount of compensation expense to recognize. The Company uses the straight-line method to amortize all stock awards granted over the requisite service period of the award.

Determining Fair Value of Stock Options

The Company uses the Black-Scholes valuation model for valuing stock option grants using the following assumptions and estimates:

Expected Volatility. The Company calculates expected volatility as an average of implied volatility and historical volatility.

Expected Term. The Company utilizes a model which uses historical exercise, cancellation and outstanding option data to calculate the expected term of stock option grants.

Risk-Free Interest Rate. The Company bases the risk-free interest rate used in the Black-Scholes valuation model on the implied yield available on a U.S. Treasury note with a term approximately equal to the expected term of the underlying grants.

Dividend Yield. The dividend yield was calculated by dividing the annual dividend by the average closing price of the Company's common stock on a quarterly basis.

Estimated Forfeitures. The Company uses historical data to estimate pre-vesting option forfeitures, and records share-based compensation expense only for those awards that are expected to vest.

The following table summarizes the stock-based compensation expense recognized in accordance with ASC 718-10 for the three and six months ended June 30, 2011 and June 30, 2010 (in thousands).



	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2011		2010		2011		2010
Cost of revenues	$	216	$	173	$	455	$	329
Research and development	980		929		1,791		1,656
Sales and marketing	543		639		1,210		1,049
General and administrative	705		775		1,492		1,509
Total stock-based compensation expense	$	2,444	$	2,516	$	4,948	$	4,543

As of June 30, 2011 there were approximately $6.8 million, net of expected forfeitures, of total unrecognized compensation expense related to stock options. The unrecognized compensation expense at June 30, 2011 is expected to be recognized over a weighted-average period of 2.1 years.

As of June 30, 2011, the Company had $0.9 million of total unrecognized compensation expense, net of estimated forfeitures, related to performance-based share grants. The unamortized compensation expense will be recognized on a straight-line basis, and is expected to be recognized over the remainder of 2011.

As of June 30, 2011, the Company had $12.4 million of total unrecognized compensation expense, net of estimated forfeitures, related to restricted stock units. The unamortized compensation expense will be recognized on a straight-line basis, and is expected to be recognized over a weighted-average period of 3.4 years.

As of June 30, 2011, the total unrecognized compensation cost under the Purchase Plan to purchase the Company's common stock was approximately $0.1 million. The Company will amortize this cost on a straight-line basis over approximately 0.5 years.

Stock compensation expense in the three and six months ended June 30, 2011 was $2.4 million (comprised of approximately $0.9 million related to stock options, $0.3 million related to performance shares, $0.9 million related to restricted stock units, $0.2 million related to the Purchase Plan and $0.1 million in compensation expense amortized from beginning inventory) and $4.9 million (comprised of approximately $2.1 million related to stock options, $0.7 million related to performance shares, $1.4 million related to restricted stock units, $0.6 million related to the Purchase Plan and $0.1 million in compensation expense amortized from beginning inventory), respectively.

Stock compensation expense in the three and six months ended June 30, 2010, was $2.5 million (comprised of approximately $1.2 million related to stock options, $0.8 million related to performance shares, $0.3 million related to restricted stock units, $0.2 million related to the Purchase Plan and $23,000 in compensation expense capitalized into inventory) and $4.5 million (comprised of approximately $2.6 million related to stock options, $1.1 million related to performance shares, $0.3 million related to restricted stock units, $0.5 million related to the Purchase Plan and $17,000 in compensation expense capitalized into inventory).

The fair value of stock options granted is established on the date of the grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:



	Three Months Ended		Six Months Ended
	June 30,		June 30,
	2011	2010	2011	2010

Risk-free interest rates	2.20%	2.25%	2.20%	2.25%
Expected volatility rates	44%	48%	44%	48%
Expected dividend yield	0.54%	0.54%	0.54%	0.54%
Expected term of stock options (in years)	6.00	5.12	6.00	5.12
Weighted-average grant date fair value of options granted	$15.71	$15.59	$15.71	$15.59

The fair value of employees’ stock purchase rights under the Purchase Plan was estimated using the Black-Scholes model with the following weighted-average assumptions:



	*Three Months Ended		Six Months Ended
	June 30,		June 30,
	2011	2010	2011	2010
Risk-free interest rates	—%	—%	0.17%	0.17% - 0.28%
Expected volatility rates	—%	—%	37%	36% - 40%
Expected dividend yield	—%	—%	0.51%	0.34% - 0.55%
Expected term of purchase right (years)	—	—	0.50	0.50
Weighted-average estimated fair value of purchase rights	$—	$—	$9.40	$7.96

________________

*There were no employee stock purchase rights granted in the three months ended June 30, 2011 and 2010.

A summary of stock option activity under the Plans, excluding performance-based shares and restricted stock units, as of June 30, 2011, and changes during the six months then ended, is presented below:



	Shares (in thousands)		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)
Outstanding at January 1, 2011	4,433		$	22.68
Granted	96		36.95
Exercised	(616	)	19.83
Forfeited or expired	(58	)	25.18
Outstanding at June 30, 2011	3,855		$	23.46	4.91	$	57,726
Exercisable at June 30, 2011	3,152		$	22.73	4.16	$	49,480
Vested and expected to vest at June 30, 2011	3,815		$	23.38	4.87	$	57,434

The total intrinsic value of options exercised during the three and six months ended June 30, 2011 was $5.4 million and $11.6 million, respectively, and the intrinsic value of options exercised during the three and six months ended June 30, 2010 was $9.0 million and $17.3 million, respectively.

Performance-based Awards

Under the performance-based awards program, the Company awards units in the first half of the performance year in an amount equal to twice the target number of shares to be issued if the target performance metrics are met. The number of shares that are released at the end of the performance year can range from zero to 200% of the targeted number depending on the Company's performance. The performance metrics of this program are annual targets consisting of net revenue and non-GAAP operating earnings. Each performance-based award granted from the 2007 Plan will reduce the number of shares available for issuance under the 2007 Plan by 2.0 shares.

During the six months ended June 30, 2011, the Company issued approximately 93,000 performance-based awards to employees and executives. As the net revenue and non-GAAP operating earnings are considered performance conditions, expenses associated with these awards, net of estimated forfeitures, will be recorded throughout the year depending on the number of shares expected to be earned based on progress toward the performance targets. The cost of performance-based awards was determined using the fair value of the Company's common stock on the date of the grant, reduced by the discounted present value of dividends expected to be declared before the awards vest.

In January 2011, it was determined that the Company had reached the maximum level of the established performance targets for the performance-based awards granted in 2010. Accordingly, the 85,000 performance-based awards, which were fully vested, were released to the Company's employees and executives in the first quarter of 2011.

A summary of performance-based awards outstanding as of June 30, 2011, and activity during the six months then ended, is presented below:



	Shares (in thousands)		Weighted- Average Grant Date Fair Value Per Share		Weighted-Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)
Outstanding at January 1, 2011	85		$	34.97
Granted	93		36.90
Vested	(85	)	34.97
Forfeited or expired	(6	)	36.61
Outstanding at June 30, 2011	87		$	36.93	0.5	$	3,340
Vested and expected to vest at June 30, 2011	42				0.5	$	1,607

The weighted average grant-date fair value per share of performance-based awards granted in the six months ended June 30, 2011 was approximately $36.90. There were no performance-based awards granted in the second quarter of 2011. The weighted average grant-date fair value per share of performance-based awards granted in the three and six months ended June 30, 2010 was approximately $38.61 and $34.86, respectively. The grant date fair value of awards released, which were fully vested, in the six months ended June 30, 2011 and 2010 was approximately $3.0 million and $2.3 million, respectively. There were no performance-based awards released in either of the three months ended June 30, 2011 and June 30, 2010.

Restricted Stock Units (RSUs)

The Company grants restricted stock units to employees under the 2007 Plan. The RSUs typically vest ratably over a certain period of time, subject to the employee's continued service to the Company over that period. RSUs granted to employees typically vest over a four-year period, and are converted into shares of the Company's common stock upon vesting on a one-for-one basis. The cost of the RSUs is determined using the fair value of the Company's common stock on the date of the grant, reduced by the discounted present value of dividends expected to be declared before the awards vest. Compensation is recognized on a straight-line basis over the requisite service period of each grant adjusted for estimated forfeitures. Each RSU award granted from the 2007 plan will reduce the number of shares available for issuance under the 2007 Plan by 2 shares.

A summary of RSUs outstanding as of June 30, 2011, and changes during the six months then ended, is as follows:



	Shares (in thousands)		Weighted- Average Grant Date Fair Value Per Share		Weighted-Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)
Outstanding at January 1, 2011	260		$	36.30
Granted	239		36.33
Vested	(54	)	36.61
Forfeited or expired	(13	)	36.89
Outstanding at June 30, 2011	432		$	36.26	2.12	$	16,583
Outstanding and expected to vest at June 30, 2011	374				2.10	$	14,374

The weighted-average grant-date fair value of RSUs awarded in the three and six months ended June 30, 2011 was approximately $36.24 and $36.33, respectively. The weighted-average grant-date fair value of RSUs awarded in the three and six months ended June 30, 2010 was approximately $36.75 and $36.73, respectively. The grant date fair value of awards vested in the three and six months ended June 30, 2011 was approximately $1.9 million and $2.0 million; there were no RSUs vested in the three and six months ended June 30, 2010.