® Clean Edge^® Green Energy Index, The Cleantech Index^®, and the Ardour Global Index^SM. For more information, including design-support tools and resources, please visit www.powerint.com; visit Power Integrations’ Green Room for a comprehensive guide to energy-efficiency standards around the world.

Note Regarding Use of Non-GAAP Financial Measures

In addition to the company's consolidated financial statements, which are presented according to GAAP, the company provides certain non-GAAP financial information that excludes stock-based compensation expenses recorded under Accounting Standard Codification 718-10, amortization of acquisition-related intangible assets, a 2013 gain related to asset sales, the tax effects of these items, and a tax benefit recognized in the second quarter of 2014. The company uses these non-GAAP measures in its own financial and operational decision-making processes and, with respect to one measure, in setting performance targets for employee-compensation purposes. Further, the company believes that these non-GAAP measures offer an important analytical tool to help investors understand the company’s core operating results and trends, and to facilitate comparability with the operating results of other companies that provide similar non-GAAP measures. These non-GAAP measures have certain limitations as analytical tools and are not meant to be considered in isolation or as a substitute for GAAP financial information. For example, stock-based compensation is an important component of the company’s compensation mix, and will continue to result in significant expenses in the company’s GAAP results for the foreseeable future, but is not reflected in the non-GAAP measures. Also, other companies, including companies in Power Integrations’ industry, may calculate non-GAAP measures differently, limiting their usefulness as comparative measures.

Note Regarding Forward-Looking Statements

The statements in this press release relating to the company’s projected third-quarter financial performance and growth opportunities for the second half of 2014 are forward-looking statements reflecting management's current expectations and beliefs. These forward-looking statements are based on current information that is, by its nature, subject to rapid and even abrupt change. Due to risks and uncertainties associated with the company's business, actual results could differ materially from those projected or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to: changes in global macroeconomic conditions, which may impact the level of demand for the company’s products; potential changes and shifts in customer demand away from end products that utilize the company's integrated circuits to end products that do not incorporate the company's products; the effects of competition, which may cause the company to decrease its selling prices for its products; the outcome and cost of patent litigation, which may affect sales of the company’s products or could result in higher expenses and charges than currently expected; unforeseen costs and expenses; and unfavorable fluctuations in component costs resulting from changes in commodity prices and/or the exchange rate between the U.S. dollar and the Japanese yen. In addition, new product introductions and design wins are subject to the risks and uncertainties that typically accompany development and delivery of complex technologies to the marketplace, including product development delays and defects and market acceptance of the new products. These and other risk factors that may cause actual results to differ are more fully explained under the caption “Risk Factors” in the company's most recent Quarterly Report on Form 10-Q, filed with the Securities and Exchange Commission (SEC) on May 5, 2014. The company is under no obligation (and expressly disclaims any obligation) to update or alter its forward-looking statements, whether as a result of new information, future events or otherwise, except as otherwise required by the rules and regulations of the SEC.

Power Integrations, EcoSmart and the Power Integrations logo are trademarks or registered trademarks of Power Integrations, Inc. All other trademarks are property of their respective owners.

POWER INTEGRATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per-share amounts)
				Three Months Ended												Six Months Ended
				June 30, 2014				March 31, 2014				June 30, 2013				June 30, 2014				June 30, 2013
NET REVENUES				$	88,985			$	83,073			$	87,922			$	172,058			$	164,962
COST OF REVENUES					40,249				37,096				41,715				77,345				78,891
GROSS PROFIT					48,736				45,977				46,207				94,713				86,071
OPERATING EXPENSES:
Research and development					14,366				13,490				13,489				27,856				25,761
Sales and marketing					11,434				10,975				10,242				22,409				19,901
General and administrative					7,813				7,646				8,066				15,459				15,800
Amortization of acquisition-related intangible assets					798				1,135				1,122				1,933				2,244
		Total operating expenses			34,411				33,246				32,919				67,657				63,706
INCOME FROM OPERATIONS					14,325				12,731				13,288				27,056				22,365
Gain on sale of assets held for sale					-				-				497				-				497
Other income (expense), net					198				257				68				455				285
INCOME BEFORE PROVISION (BENEFIT) FOR INCOME TAXES					14,523				12,988				13,853				27,511				23,147
PROVISION (BENEFIT) FOR INCOME TAXES					(2,193	)			625				181				(1,568	)			(1,428	)
NET INCOME				$	16,716			$	12,363			$	13,672			$	29,079			$	24,575
EARNINGS PER SHARE:
		Basic		$	0.55			$	0.41			$	0.47			$	0.96			$	0.85
		Diluted		$	0.54			$	0.40			$	0.45			$	0.93			$	0.82
SHARES USED IN PER-SHARE CALCULATION:
		Basic			30,310				30,239				29,178				30,275				28,967
		Diluted			31,110				31,167				30,158				31,150				29,977
SUPPLEMENTAL INFORMATION:
Stock-based compensation expenses included in:
		Cost of revenues		$	298			$	219			$	264			$	517			$	528
		Research and development			1,339				1,212				1,640				2,551				2,746
		Sales and marketing			864				935				795				1,799				1,624
		General and administrative			1,674				1,549				1,629				3,223				3,066
		Total stock-based compensation expense		$	4,175			$	3,915			$	4,328			$	8,090			$	7,964
Cost of revenues includes:
		Amortization of acquisition-related intangible assets		$	645			$	645			$	645			$	1,290			$	1,290
Operating expenses include:
		Patent-litigation expenses		$	1,127			$	1,186			$	807			$	2,313			$	2,206
REVENUE MIX BY END MARKET
		Communications			15	%			18	%			21	%			17	%			21	%
		Computer			12	%			10	%			10	%			11	%			10	%
		Consumer			38	%			37	%			34	%			37	%			35	%
		Industrial			35	%			35	%			35	%			35	%			34	%

POWER INTEGRATIONS, INC.
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES TO GAAP RESULTS
(in thousands, except per-share amounts)
						Three Months Ended												Six Months Ended
						June 30, 2014				March 31, 2014				June 30, 2013				June 30, 2014				June 30, 2013
RECONCILIATION OF GROSS PROFIT
GAAP gross profit						$	48,736			$	45,977			$	46,207			$	94,713			$	86,071
		GAAP gross profit margin					54.8	%			55.3	%			52.6	%			55.0	%			52.2	%
Stock-based compensation included in cost of revenues							298				219				264				517				528
Amortization of acquisition-related intangible assets							645				645				645				1,290				1,290
Non-GAAP gross profit						$	49,679			$	46,841			$	47,116			$	96,520			$	87,889
		Non-GAAP gross profit margin					55.8	%			56.4	%			53.6	%			56.1	%			53.3	%
RECONCILIATION OF OPERATING EXPENSES
GAAP operating expenses						$	34,411			$	33,246			$	32,919			$	67,657			$	63,706
Less:		Stock-based compensation expense included in operating expenses
				Research and development			1,339				1,212				1,640				2,551				2,746
				Sales and marketing			864				935				795				1,799				1,624
				General and administrative			1,674				1,549				1,629				3,223				3,066
				Total			3,877				3,696				4,064				7,573				7,436
		Amortization of acquisition-related intangible assets					798				1,135				1,122				1,933				2,244
Non-GAAP operating expenses						$	29,736			$	28,415			$	27,733			$	58,151			$	54,026
RECONCILIATION OF INCOME FROM OPERATIONS
						$	14,325			$	12,731			$	13,288			$	27,056			$	22,365
		GAAP operating margin					16.1	%			15.3	%			15.1	%			15.7	%			13.6	%
Add:		Total stock-based compensation					4,175				3,915				4,328				8,090				7,964
		Amortization of acquisition-related intangible assets					1,443				1,780				1,767				3,223				3,534
Non-GAAP income from operations						$	19,943			$	18,426			$	19,383			$	38,369			$	33,863
		Non-GAAP operating margin					22.4	%			22.2	%			22.0	%			22.3	%			20.5	%
RECONCILIATION OF PROVISION (BENEFIT) FOR INCOME TAXES
GAAP provision (benefit) for income taxes						$	(2,193	)		$	625			$	181			$	(1,568	)		$	(1,428	)
		GAAP effective tax rate					-15.1	%			4.8	%			1.3	%			-5.7	%			-6.2	%
Benefit associated with tax settlement							(3,331	)			-				-				(3,331	)			-
Tax effect of other adjustments to GAAP results							(115	)			(548	)			(802	)			(663	)			(3,097	)
Non-GAAP provision for income taxes						$	1,253			$	1,173			$	983			$	2,426			$	1,669
		Non-GAAP effective tax rate					6.2	%			6.3	%			5.1	%			6.2	%			4.9	%
RECONCILIATION OF NET INCOME PER SHARE (DILUTED)
GAAP net income						$	16,716			$	12,363			$	13,672			$	29,079			$	24,575
Adjustments to GAAP net income
		Stock-based compensation					4,175				3,915				4,328				8,090				7,964
		Amortization of acquisition-related intangible assets					1,443				1,780				1,767				3,223				3,534
		Gain on sale of assets held for sale					-				-				(497	)			-				(497	)
		Benefit associated with tax settlement					(3,331	)			-				-				(3,331	)			-
		Tax effect of items excluded from non-GAAP results					(115	)			(548	)			(802	)			(663	)			(3,097	)
Non-GAAP net income						$	18,888			$	17,510			$	18,468			$	36,398			$	32,479
Average shares outstanding for calculation of non-GAAP income per share (diluted)							31,110				31,167				30,158				31,150				29,977
Non-GAAP net income per share (diluted)						$	0.61			$	0.56			$	0.61			$	1.17			$	1.08
GAAP income per share						$	0.54			$	0.40			$	0.45			$	0.93			$	0.82

POWER INTEGRATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
				June 30, 2014				March 31, 2014				December 31, 2013
ASSETS
		CURRENT ASSETS:
		Cash and cash equivalents		$	79,060			$	83,967			$	92,928
		Short-term marketable securities			133,354				133,684				109,179
		Accounts receivable			16,443				16,421				12,389
		Inventories			51,269				47,934				42,235
		Deferred tax assets			2,011				2,059				2,059
		Prepaid expenses and other current assets			13,590				17,027				18,632
		Total current assets			295,727				301,092				277,422
		PROPERTY AND EQUIPMENT, net			91,368				92,142				90,141
		INTANGIBLE ASSETS, net			36,960				38,478				40,334
		GOODWILL			80,599				80,599				80,599
		DEFERRED TAX ASSETS			8,904				5,686				9,449
		OTHER ASSETS			4,031				3,332				3,476
		Total assets		$	517,589			$	521,329			$	501,421
LIABILITIES AND STOCKHOLDERS’ EQUITY
		CURRENT LIABILITIES:
		Accounts payable		$	22,802			$	23,600			$	20,772
		Accrued payroll and related expenses			8,786				8,046				8,900
		Taxes payable			2,054				1,768				2,266
		Deferred taxes			1,110				1,325				943
		Deferred income on sales to distributors			19,128				17,844				15,727
		Other accrued liabilities			1,701				1,698				1,810
		Total current liabilities			55,581				54,281				50,418
		LONG-TERM LIABILITIES
		Income taxes payable			2,397				2,612				6,885
		Deferred taxes			4,647				4,991				5,273
		Other liabilities			2,301				2,267				2,159
		Total liabilities			64,926				64,151				64,735
STOCKHOLDERS' EQUITY:
		Common stock			30				30				30
		Additional paid-in capital			216,337				234,667				223,660
		Accumulated other comprehensive loss			(190	)			(315	)			(470	)
		Retained earnings			236,486				222,796				213,466
		Total stockholders' equity			452,663				457,178				436,686
		Total liabilities and stockholders' equity		$	517,589			$	521,329			$	501,421

POWER INTEGRATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
				Three Months Ended												Six Months Ended
				June 30, 2014				March 31, 2014				June 30, 2013				June 30, 2014				June 30, 2013
CASH FLOWS FROM OPERATING ACTIVITIES:
		Net income		$	16,716			$	12,363			$	13,672			$	29,079			$	24,575
		Adjustments to reconcile net income to cash provided by operating activities
		Depreciation			3,876				3,971				3,993				7,847				7,968
		Amortization of intangible assets			1,518				1,856				1,842				3,374				3,684
		Gain on disposal of property and equipment			-				159				17				159				17
		Gain on sale of assets held for sale			-				-				(497	)			-				(497	)
		Stock-based compensation expense			4,175				3,915				4,328				8,090				7,964
		Amortization of premium on marketable securities			421				394				147				815				251
		Deferred income taxes			(3,729	)			3,864				848				135				(2,388	)
		Decrease in accounts receivable allowances			-				(15	)			(133	)			(15	)			(153	)
		Excess tax benefit from employee stock plans			(213	)			-				-				(213	)			-
		Tax benefit associated with employee stock plans			364				-				-				364				-
		Change in operating assets and liabilities:
		Accounts receivable			(22	)			(4,017	)			(901	)			(4,039	)			(8,294	)
		Inventories			(3,294	)			(5,652	)			528				(8,946	)			1,421
		Prepaid expenses and other assets			3,475				1,825				1,270				5,300				5,198
		Accounts payable			782				1,088				625				1,870				3,457
		Taxes payable and other accrued liabilities			881				(5,624	)			(1,652	)			(4,743	)			(480	)
		Deferred income on sales to distributors			1,285				2,116				548				3,401				3,484
		Net cash provided by operating activities			26,235				16,243				24,635				42,478				46,207
CASH FLOWS FROM INVESTING ACTIVITIES:
		Purchases of property and equipment			(5,420	)			(4,465	)			(2,942	)			(9,885	)			(6,892	)
		Proceeds from sale of property and equipment			-				-				36				-				36
		Proceeds from sale of assets held for sale			-				-				959				-				959
		Purchases of marketable securities			-				(24,751	)			(25,801	)			(24,751	)			(45,223	)
		Proceeds from maturities of marketable securities			-				-				15,350				-				16,850
		Net cash used in investing activities			(5,420	)			(29,216	)			(12,398	)			(34,636	)			(34,270	)
CASH FLOWS FROM FINANCING ACTIVITIES
		Net proceeds from issuance of common stock			2,822				7,045				6,044				9,867				14,749
		Repurchase of common stock			(25,731	)			-				-				(25,731	)			-
		Payments of dividends to stockholders			(3,026	)			(3,033	)			(2,344	)			(6,059	)			(4,654	)
		Excess tax benefit from employee stock plans			213				-				-				213				-
		Net cash provided by (used in) financing activities			(25,722	)			4,012				3,700				(21,710	)			10,095
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS					(4,907	)			(8,961	)			15,937				(13,868	)			22,032
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD					83,967				92,928				69,489				92,928				63,394
CASH AND CASH EQUIVALENTS AT END OF PERIOD				$	79,060			$	83,967			$	85,426			$	79,060			$	85,426

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