Prepared by R.R. Donnelley Financial -- Form 10-Q for period ended March 31st, 2002

	March 31, 2002			December 31, 2001
		(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	65,338		$	62,141
Short-term investments		18,706			14,724
Accounts receivable		7,641			5,124
Inventories		19,637			23,622
Deferred tax assets		5,346			5,346
Prepaid expenses and other current assets		1,309			1,526

Total current assets		117,977			112,483
PROPERTY AND EQUIPMENT, net		21,997			23,182

	$	139,974		$	135,665

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current portion of capitalized lease obligations	$	340		$	440
Accounts payable		3,586			4,641
Accrued payroll and related expenses		2,743			3,164
Taxes payable and other accrued liabilities		3,960			1,604
Deferred income on sales to distributors		1,888			1,798

Total current liabilities		12,517			11,647

LONG TERM LIABILITIES:
Capitalized lease obligations, net of current portion		215			275
Deferred rent		518			441

Total long term liabilities		733			716

STOCKHOLDERS’ EQUITY:
Common stock		28			28
Additional paid-in capital		83,555			81,758
Stockholder notes receivable		—			(38	)
Cumulative translation adjustment		(116	)		(117	)
Retained earnings		43,257			41,671

Total stockholders’ equity		126,724			123,302

	$	139,974		$	135,665

	Three Months Ended March 31,
	2002		2001
NET REVENUES:
Product sales	$	23,390	$	25,821
License fees and royalties		280		375

Total net revenues		23,670		26,196
COST OF REVENUES		13,368		12,781

GROSS PROFIT		10,302		13,415

OPERATING EXPENSES:
Research and development		3,607		3,546
Sales and marketing		3,402		3,510
General and administrative		1,433		1,302

Total operating expenses		8,442		8,358

INCOME FROM OPERATIONS		1,860		5,057
OTHER INCOME, net		405		522

INCOME BEFORE PROVISION FOR INCOME TAXES		2,265		5,579
PROVISION FOR INCOME TAXES		679		1,707

NET INCOME	$	1,586	$	3,872

EARNINGS PER SHARE:
Basic	$	0.06	$	0.14

Diluted	$	0.05	$	0.14

SHARES USED IN PER SHARE CALCULATION:
Basic		28,126		27,522

Diluted		29,429		28,449

	Three Months Ended March 31,
	2002			2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	1,586		$	3,872
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,682			1,579
Employee deferred compensation expense		—			35
Non-employee stock options		47			—
Deferred rent		77			94
Provision for accounts receivable and other allowances		155			170
Income tax benefit from employee stock option plan		273			351
Change in operating assets and liabilities:
Accounts receivable		(2,672	)		(338	)
Inventories		3,985			(35	)
Prepaid expenses and other current assets		217			141
Accounts payable		(1,055	)		(365	)
Accrued liabilities		1,935			79
Deferred income on sales to distributors		90			182

Net cash provided by operating activities		6,320			5,765

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(497	)		(4,040	)
Purchases of short-term investments		(4,000	)		(9,500	)
Proceeds from sales and maturities of short-term investments		18			12,247

Net cash used in investing activities		(4,479	)		(1,293	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock		1,478			1,230
Proceeds from stockholder note repayment		38			—
Principal payments under capitalized lease obligations		(160	)		(189	)

Net cash provided by financing activities		1,356			1,041

NET INCREASE IN CASH AND CASH EQUIVALENTS		3,197			5,513
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		62,141			36,462

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	65,338		$	41,975

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest	$	9		$	21

Cash paid for income taxes	$	202		$	1,116

While the financial information furnished is unaudited, the condensed consolidated financial statements included in this report reflect all adjustments (consisting only of normal recurring adjustments) which the Company considers necessary for the fair presentation of the results of operations for the interim periods covered and of the financial condition of the Company at the date of the interim balance sheet. The results for interim periods are not necessarily indicative of the results for the entire year. The condensed consolidated financial statements should be read in conjunction with the Power Integrations, Inc. consolidated financial statements for the year ended December 31, 2001 included in its Form 10-K.

The Company considers cash invested in highly liquid financial instruments with an original maturity of three months or less to be cash equivalents. Cash investments in highly liquid financial instruments with original maturities greater than three months but not longer than fifteen months are classified as short-term investments. As of March 31, 2002, the Company’s short-term investments consisted of U.S. government backed securities, corporate commercial paper and other high quality commercial and municipal securities, which were classified as held-to-maturity and were valued using the amortized cost method which approximates market.

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

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. On an on-going basis, the Company evaluates its estimates, including those related to revenue recognition and allowances for receivables and inventories. These estimates are based on historical facts and various other assumptions that the Company believes to be reasonable at the time the estimates are made.

SFAS No. 130, ‘‘Reporting Comprehensive Income,’’ establishes standards for reporting and the presentation of comprehensive income and its components. SFAS No. 130, requires companies to report a new measurement of income to include unrealized gains and losses, net of the tax effect that have historically been excluded from net income and reflected instead in stockholders’ equity. Comprehensive income for the Company consists of net income plus the effect of foreign currency translation adjustments, which is not material for the three months ended March 31, 2002 and 2001. Accordingly, comprehensive income closely approximates actual net income.

SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information.” establishes standards for reporting and the presentation of reportable business segments, i.e., the management approach. This approach requires that business segment information used by management to assess performance and manage company resources be the source for information disclosure. On this basis, the Company is organized and operates as one business segment, the design, development, manufacture and marketing of proprietary, high-voltage, analog integrated circuits for use primarily in the AC to DC power conversion markets.

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

	Three Months Ended March 31,
	2002		2001
Basic earnings per share:
Net income	$	1,586	$	3,872

Weighted average common shares		28,126		27,522

Basic earnings per share	$	0.06	$	0.14


Diluted earnings per share:
Net income	$	1,586	$	3,872

Weighted average common shares		28,126		27,522
Weighted average common share equivalents:
Options		1,292		925
Employee stock purchase plan		11		2

Diluted weighted average common shares		29,429		28,449

Diluted earnings per share	$	0.05	$	0.14

Income tax expense for the three-month periods ended March 31, 2002 and 2001 includes a provision for Federal, state and foreign taxes based on the annual estimated effective tax rate applicable to the Company and its subsidiaries for the year. The difference between the Federal statutory rate of 35% and the Company’s effective tax rate of 30% for the three months ended March 31, 2002 and 2001 is primarily due to the beneficial impact of international sales, research and development credits and Federal tax-exempt investments.

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

We design, develop, manufacture and market proprietary, high-voltage, analog integrated circuits, or ICs, for use primarily in AC to DC power conversion markets. We have targeted high-volume power supply markets, including the communications, consumer, computer and industrial electronics markets. Our initial focus is on those applications that are sensitive to size, portability, energy efficiency and time-to-market. We believe our patented TOPSwitch ICs, introduced in 1994, are the first highly integrated power conversion ICs to achieve widespread market acceptance. We introduced an enhanced family of ICs, TOPSwitch-II, in April 1997. In September 1998, we announced the TinySwitch family of integrated circuits for power supplies used in a broad range of electronic products. TinySwitch ICs, which are designed to reduce energy leakage by incorporating our new EcoSmart technology, enable a new class of light, compact, energy-efficient power supplies. In March 2000, we introduced the TOPSwitch-FX family of products, which also incorporates our EcoSmart technology to help engineers meet the growing need for environmentally friendly power solutions. In November 2000, we introduced the TOPSwitch-GX family of products. The GX family is capable of supplying output levels from 6 watts to 290 watts. We believe that the FX and GX families of ICs give power supply design engineers the ability to cost-effectively integrate additional functionality into the power supplies they design. In March 2001, we introduced the TinySwitch-II family of products with power levels ranging from 3 watts to 20 watts. All of our products introduced since 1998 incorporate our EcoSmart technology.

	Percentage of Total Net Revenues for Three Months Ended March 31,
	2002		2001
Net revenues:
Product sales	98.8	%	98.6	%
License fees and royalties	1.2		1.4

Total net revenues	100.0		100.0
Cost of revenues	56.5		48.8

Gross profit	43.5		51.2

Operating expenses:
Research and development	15.2		13.5
Sales and marketing	14.4		13.4
General and administrative	6.0		5.0

Total operating expenses	35.6		31.9

Income from operations	7.9		19.3
Other income, net	1.7		2.0

Income before provision for income taxes	9.6		21.3
Provision for income taxes	2.9		6.5

Net income	6.7	%	14.8	%

Net revenues from product sales represented $23.4 million and $25.8 million in the first quarter of 2002 and 2001, respectively. The decrease in net revenues from product sales for the three months ended March 31, 2002 was generally in our consumer and industrial end markets and due primarily to the unfavorable economic conditions during the period compared to the three months ended March 31, 2001. We expect our full year revenue mix for 2002, as a percentage of net revenues in the end markets which we serve, to be approximately 35% in the communications category, 30% in the consumer market category, 25% in the computer category, 7% in the industrial category and 3% in all other. We also expect the mix of our product families for the full year to be approximately 40% for TOPSwitch and TOPSwitch II, 34% for TinySwitch and TinySwitch II and 24% for TOPSwitch FX and GX.

International sales were $23.0 million in the first quarter of 2002 compared to $23.3 million for the same period in 2001, a decrease of $0.3 million, or 1.5%, which represented 97.1% of net revenues compared to 89.1% in the comparable period of 2001. Although the power supplies using our products are designed and distributed worldwide, most of these power supplies are manufactured in Asia. As a result, sales to this region were 80.2% and 68.8% of our product sales for the three months ended March 31, 2002 and 2001, respectively. We expect international sales to continue to account for a large portion of our net revenues.

31, 2002, sales to one customer accounted for 20.1% of net revenues, and for the three months ended March 31, 2001, that same customer accounted for 22.2% of net revenues. A second customer accounted for 16.7% of net revenues for the three months ended March 31, 2002 and 13.5% of net revenues for the three months ended March 31, 2001. Both of these customers are distributors. A third customer, who is an original equipment manufacturer, accounted for 13.7% of net revenues for the three months ended March 31, 2002. There were no other customers accounting for sales of more than 10% during the periods reported.

Cost of revenues; Gross profit. Gross profit is equal to net revenues less cost of revenues. Our cost of revenues consists primarily of costs associated with the purchase of wafers from Matsushita and OKI, the assembly and packaging of our products, and internal labor and overhead associated with the testing of both wafers and packaged components. Gross profit for the first quarter of 2002 was $10.3 million, or 43.5% of net revenues, compared to $13.4 million, or 51.2% of net revenues for the same period in 2001. The decrease in gross profit percentage for the three months ended March 31, 2002 was due primarily to the adverse impact of competitive pricing pressure from customers for lower pricing, partially offset by decreases in our wafer and assembly costs. We expect our gross profit to remain in a range of 43% to 45% for 2002, but if pricing pressures from our customers increase during the year, the current economic slowdown continues or worsens or for other reasons, our gross profit could decline.

Research and development expenses. Research and development expenses consist primarily of employee-related expenses, expensed material and facility costs associated with the development of new processes and new products. We also expense prototype wafers and mask sets related to new products as research and development costs until new products are released to production. Research and development expenses for the first quarter of 2002 were $3.6 million compared to $3.5 million for the same period in 2001, which represented 15.2% and 13.5% of our net revenues in each period, respectively. We expect research and development expenses to continue to increase in absolute dollars but to fluctuate as a percentage of our net revenues.

Sales and marketing expenses. Sales and marketing expenses consist primarily of employee-related expenses, commissions to sales representatives and facilities expenses, including expenses associated with our regional sales offices and applications engineering. Sales and marketing expenses for the first quarter of 2002 were $3.4 million compared to $3.5 million for the same period in 2001, which represented 14.4% and 13.4% of our net revenues in each period, respectively. The decrease for the three months ended March 31, 2002 resulted primarily from a decrease in sales representative commissions related to lower sales compared to the first quarter of 2001. Included in the above marketing expenses are costs associated with applications engineering, which represented $0.9 million and $0.8 million for the three months ended March 31, 2002 and 2001, respectively. We expect sales and marketing expenses to generally increase in absolute dollars but to fluctuate as a percentage of our net revenues.

General and administrative expenses. General and administrative expenses consist primarily of employee-related expenses for administration, finance, human resources and general management, as well as consulting, outside services, legal and auditing expenses. For the quarters ended March 31, 2002 and 2001, general and administrative expenses were $1.4 million and $1.3 million, respectively, which represented 6.0% and 5.0% of our net revenues in each period. The increase in spending, for the comparable three-month periods, was attributable primarily to increases in outside professional and legal expenses. We expect general and administrative expenses to increase in absolute dollars, but to fluctuate as a percentage of our net revenues.

Provision for income taxes. Provision for income taxes represents Federal, state and foreign taxes. The provision for income taxes was $0.7 million for the first quarter of 2002 compared to $1.7 million for the same period in 2001. Our estimated effective tax rate used for both 2002 and 2001 was 30%. The difference between the Federal statutory rate of 35% and our effective tax rate for both years is due primarily to the beneficial impact of international sales, research and development credits and Federal tax-exempt investments.

Union Bank of California, we can borrow up to $10.0 million. A portion of the credit line is used to cover advances for commercial letters of credit and standby letters of credit, which we provide to Matsushita and OKI prior to the shipment of wafers by these foundries to us. The balance of this credit line is unused and available as of March 31, 2002. The line of credit agreement, which expires on July 1, 2002, contains financial covenants requiring that we maintain profitability on a quarterly basis and not pay or declare dividends without the bank’s prior consent. As of March 31, 2002, we were in compliance with these financial covenants. We are currently in the process of renewing the line of credit agreement. We have financed a significant portion of our machinery and equipment through capital equipment leases. There was no additional equipment financing during the three months ended March 31, 2002.

As of March 31, 2002, we had working capital, defined as current assets less current liabilities, of approximately $105.5 million, an increase of approximately $4.6 million from December 31, 2001. Our operating activities generated cash of $6.3 million and $5.8 million in the three months ended March 31, 2002 and 2001, respectively. Cash generated in the first three months of 2002 was principally the result of net income in the amount of $1.6 million, depreciation and amortization, a decrease in inventory and an increase in accrued liabilities, partially offset by an increase in accounts receivable and a decrease in accounts payable. Cash generated in the first three months of 2001 was principally the result of net income in the amount of $3.9 million, depreciation and amortization, and an increase in accrued liabilities, partially offset by an increase in accounts receivable and a decrease in accounts payable.

Our investing activities were a net transfer to short-term investments from cash and cash equivalents of $4.0 million in the three months ended March 31, 2002, and a net transfer from short-term investments to cash and cash equivalents of $2.7 million in the three months ended March 31, 2001. Purchases of property and equipment were $0.5 million and $4.0 million in the three months ended March 31, 2002 and 2001, respectively.

During the first quarter of 2002, a significant portion of our cash flow was generated by our operations. If our operating results deteriorate during 2002, as a result of decrease in customer demand or severe pricing pressures from our customers or our competitors, our ability to generate positive cash flow from operations may be jeopardized. In that case, we may be forced to use our cash, cash equivalents and short-term investments to fund our operations. We believe that cash generated from operations, together with existing sources of liquidity, will satisfy our projected working capital and other cash requirements for at least the next 12 months.

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

We do not have long-term contracts with any of our customers and if they fail to place, or if they cancel or reschedule orders for our products, our operating results and business may suffer. Our business is characterized by short-term customer orders and shipment schedules. The ordering patterns of some of our existing large customers have been unpredictable in the past, and we expect that customer-ordering patterns will continue to be unpredictable in the future. Not only does the volume of units ordered by particular customers vary substantially from period to period, but also purchase orders received from particular customers often vary substantially from early oral estimates provided by those customers for planning purposes. In addition, customer orders can be canceled or rescheduled without significant penalty to the customer. In the past we have experienced customer cancellations of substantial orders for reasons beyond our control, and significant cancellations could occur again at any time.

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

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

If demand for our products declines in the major end markets that we serve, our net revenues will decrease. Applications of our products in the consumer, communications and computer end markets, such as cellular phone chargers, stand-by power supplies for PCs and main power supplies for TV set top boxes have and will continue to account for a large percentage of our net revenues. We expect that a significant level of our net revenues and operating results will continue to be dependent upon these applications in the near term. The demand for these products has been highly cyclical and has been subject to significant economic downturns at various times. The announcements of economic slowdown by major companies in some of the end markets we serve, indirectly through our customers, have caused a slowdown in demand for some of our ICs. When our customers are not successful in maintaining high levels of demand for their products, their demand for our ICs decreases, which adversely affects our operating results. Any significant downturn in demand in these markets would cause our net revenues to decline and could cause the price of our stock to fall.

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

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

Our international sales activities account for a substantial portion of our net revenues and subject us to substantial risks. Sales to customers outside of the United States account for a large portion of our net revenues, including approximately 97% of our net revenues in the quarter ended March 31, 2002. If our international sales declined and we were unable to increase domestic sales, our revenues would decline and our operating results would be harmed. International sales involve a number of risks to us, including:

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

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

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

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

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

If our efforts to enhance existing products and introduce new products are not successful, we may not be able to generate demand for our products. Our success depends in significant part upon our ability to develop new ICs for high-voltage power conversion for existing and new markets, to introduce these products in a timely manner and to have these products selected for design into products of leading manufacturers. New product introduction schedules are subject to the risks and uncertainties that typically accompany development and delivery of complex technologies to the market place, including product development delays and defects. If we fail to develop and sell new products in a timely manner, our net revenues could decline.

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

We rely on a continuous supply of power to conduct operations, and any disruption in the availability of power supplied to us could interrupt our operations, increase our expenses and harm our business. In 2000 and 2001, California experienced an energy crisis which caused the state to implement periodic rolling blackouts throughout California. Most of our operations are located in California, although part of our inventory is stored and shipped from an overseas facility. We currently have only limited backup generators for emergency alternate sources of power in the event of a blackout. If blackouts interrupt our supply of power, we would be temporarily unable to continue operations at our facilities. Any such interruption in our ability to continue operations at our facilities could delay shipments of our products to customers, and could result in lost revenue, which could harm our business and results of operations.

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

In the event of an earthquake, terrorist act or other disaster, our operations may be interrupted and our business would be harmed. Our principal executive offices and operating facilities are located near San Francisco, California. This area has been subject to severe earthquakes. In the event of an earthquake, we may be temporarily unable to continue operations at our facilities and we may suffer significant property damage. Any such interruption in our ability to continue operations at our facilities could delay the development and shipment of our products.

activities and associated political instability, and the impact of heightened security concerns on domestic and international travel and commerce. Such uncertainties could also lead to delays or cancellations of customer orders, a general decrease in corporate spending or our inability to effectively market and sell our products. Any of these results could substantially harm our business and results of operations, causing a decrease in our revenues.

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

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

We have adopted anti-takeover measures, which may make it more difficult for a third party to acquire us. Our board of directors has the authority to issue up to 3,000,000 shares of preferred stock and to determine the price, rights, preferences and privileges of those shares without any further vote or action by the stockholders. The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of shares of preferred stock, while potentially providing flexibility in connection with possible acquisitions and for other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock. We have no present intention to issue shares of preferred stock.

In February 1999, our board of directors adopted a Preferred Stock Purchase Rights Plan intended to guard against hostile takeover tactics. The adoption of this plan was not in response to any proposal to acquire us, and the board is not aware of any such effort. The existence of this plan could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock.

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

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

	Carrying Value		Average Interest Rate
Cash Equivalents:
Taxable securities	$	39,064	2.36	%

Total cash equivalents		39,064	2.36	%

Short-term Investments:
U.S. corporate securities		8,743	3.14	%
U.S. government securities		4,098	3.16	%
Tax-exempt securities		5,865	3.29	%

Total short-term investments		18,706	3.20	%

Total investment securities	$	57,770	2.78	%

Foreign Currency Exchange Risk. We transact business in various foreign countries. Our primary foreign currency cash flows are in Asia and Western Europe. Currently, we do not employ a foreign currency hedge program utilizing foreign currency forward exchange contracts as the foreign currency transactions and risks to date have not been significant. We do maintain a Japanese yen account with a U. S. Bank for payments to suppliers and for cash receipts from Japanese suppliers and customers denominated in Japanese yen.

Exhibit Number		Description
10.14		Executive Benefits Agreement between us and Balu Balakrishnan dated April 25, 2002.
10.15		Executive Benefits Agreement between us and Derek Bell dated April 25, 2002.
10.16		Executive Benefits Agreement between us and John M. Cobb dated April 25, 2002.
10.17		Executive Benefits Agreement between us and Bruce Renouard dated April 25, 2002.
10.18		Executive Benefits Agreement between us and Daniel M. Selleck dated April 25, 2002.
10.19		Executive Benefits Agreement between us and John Tomlin dated April 25, 2002.
10.20		Executive Benefits Agreement between us and Clifford J. Walker dated April 25, 2002.

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

5245 Hellyer Avenue, San Jose, California		95138
(Address of principal executive offices)		(Zip code)

Class		Outstanding at April 30, 2002
Common Stock, $.001 par value		28,257,563 shares

PART I.	FINANCIAL INFORMATION	Page

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets	3

	Condensed Consolidated Statements of Operations	4

	Condensed Consolidated Statements of Cash Flows	5

	Notes To Condensed Consolidated Financial Statements	6

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

Item 3.	Quantitative and Qualitative Disclosures About Market Risks	18

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	19

Item 2.	Changes in Securities and Use of Proceeds	19

Item 3.	Defaults upon Senior Securities	19

Item 4.	Submission of Matters to Vote of Security Holders	19

Item 5.	Other Information	19

Item 6.	Exhibits and Reports on Form 8-K	19

SIGNATURES		20

	March 31, 2002		December 31, 2001
Raw materials	$	589	$	1,571
Work-in-process		8,979		12,528
Finished goods		10,069		9,523

	$	19,637	$	23,622

	Three Months Ended March 31,
Customer	2002		2001
A	20.1	%	22.2	%
B	16.7	%	13.5	%
C	13.7	%	*

	POWER INTEGRATIONS, INC.

Dated: May 10, 2002	By:	/s/ JOHN M. COBB
		John M. Cobb Chief Financial Officer

	Three Months Ended March 31,
	2002		2001
Taiwan	30.2	%	28.9	%
Hong Kong/China	22.1	%	25.7	%
Korea	12.6	%	8.9	%
Singapore	11.4	%	1.3	%
Europe – all other	8.5	%	12.6	%
Germany	7.6	%	7.3	%
Japan	1.8	%	1.5	%
Other	2.9	%	2.9	%

Total foreign	97.1	%	89.1	%