WAFER FOUNDRY AGREEMENT

EXHIBIT 10.7



AMENDED WAFER FOUNDRY AGREEMENT

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This Agreement is made on this 29th day of June, 1995 by and among POWER INTEGRATIONS, INC., a corporation duly organized and existing under the laws of the State of California, U.S.A., having its principal place of business at 411 Clyde Avenue, Mountain View, California 94043 ("PI"), and



MATSUSHITA ELECTRONICS CORPORATION, a corporation duly organized under the laws of Japan, having its principal place of business at 1-1 Saiwai-cho, Takatsuki- shi, Osaka-fu, 569 Japan ("MEC"), and



MATSUSHITA ELECTRIC INDUSTRIAL CO., LTD., a corporation duly organized under the laws of Japan, acting through Industrial Sales Office for Americas having its principal place of business at Twin 21 National Tower, 1-61 Shiromi 2 Chome, Chuo-ku, Osaka 540 Japan ("MEI"), (MEC and MEI shall be hereby regarded as single party when indicated as "MEC/MEI").



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A. PI is the owner and developer of certain integrated circuit process technologies required to manufacture high voltage integrated circuits.



B. PI has no wafer fabrication facility and desires to obtain a cost competitive foundry to manufacture wafers for PI, in order to provide a source for the wafers PI requires, and to assure a long term supply of wafers.



C. MEC/MEI has wafer fabrication facilities in Japan and the United States and desires full utilization and efficient operation of its wafer fabrication facilities.



D. Effective June 29, 1990, MEC and PI entered into a Technology License Agreement (the "Prior License Agreement"), a Wafer Foundry Agreement (the "Prior Foundry Agreement") and a Distribution Agreement.



E. The Prior License Agreement and the Prior Foundry Agreement will expire, unless previously extended, on June 29, 1995.



F. MEC/MEI and PI have established a fruitful business relationship.



G. MEC/MEI and PI desire to extend the Prior Foundry Agreement on the terms set forth in this Agreement.



H. MEC and PI intend to enter into an extension of the Prior License Agreement (the "Amended License Agreement") at the same time that they enter into this Agreement.



[*] IDENTIFIES REDACTED MATERIAL DELETED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION







PI and MEC/MEI, intending to be legally bound, hereby agree as follows:



ARTICLE I

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For the purpose of this Agreement, all capitalized terms not otherwise defined in this Agreement and defined in the Amended License Agreement shall have the meanings set forth in the Amended License Agreement, and the following terms have the following meanings:



1.1 "Fab" means any of the existing or future wafer fabrication facilities in Japan or the United States of any company in the Matsushita Group.



1.2 "Wafer(s)" means wafer(s) for Products which MEC fabricates under this Agreement for sale to PI through MEI.





ARTICLE II

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MEC DEVELOPMENT ASSISTANCE AND WAFER FOUNDRY SERVICE

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2.1 Information Transfer. Information relating to the Baseline

-------------------- Process, Products and Updates, if any, shall continue to be transferred, pursuant to the provisions of Article II of the Amended License Agreement, from PI to MEC/MEI and from MEC/MEI to PI for purposes of prototype development fabrication and production fabrication by MEC/MEI at the Fab pursuant to the terms of this Article II.



2.2 5-Inch Wafer Manufacturing.

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(a) MEC plans to begin manufacturing 5-inch Wafers for PI beginning in about October 1995.



(b) MEC will pay for mask sets and sample Wafers for two PI Products that will be required for the qualification of the 5" wafer process.



(c) MEC will also pay for the generation of mask sets for the transfer to the 5" production line of eight additional Products to be designated by PI. MEC and PI will each bear 50% of the costs for generating mask sets for the transfer to the 5" production line of more additional Products to be designated by PI. PI can substitute improved versions of Products for these mask sets instead of the current Products in the 4" line, which will be replaced to the improved type after product qualification on the 5" manufacturing line. PI will pay for the sample 5" Wafers on all of these Products that pass the wafer acceptance criteria.





(d) PI will pay all costs of mask making and for all sample Wafers of any PI Products to be newly introduced to the 5" line in addition to the transferred Product types stipulated in subsections (b) and (c) of this Section 2.2.



(e) PI Products will be introduced to the 5" line starting in October 1995 at a rate that will require MEC to produce no more than 2 to 3 new mask sets for PI Products per month. Only that number of PI Products may be introduced to the 5" line before June 1996 that will require MEC to produce not more than ten total mask sets for PI Products, including new types and transferred types, in that time period.



(f) Notwithstanding the foregoing provisions of this Section 2.2, for PI Products that will be second sourced by MEC, the mask set and sample wafer costs will be shared equally between MEC and PI.



2.3 Updates of Baseline Process.

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(a) Except as otherwise provided in Section 2.2 above, MEC/MEI shall use its best efforts to bring-up Updates of Baseline Process, if any, at the Fab at which PI Products then are made in order to supply PI with prototype Wafers and production Wafers as contemplated by this Agreement.



(b) Except as otherwise provided in Section 2.2 above, the parties agree that each party shall pay all of its own expenses incurred in order to perform its obligations under Section 2.3(a).



(c) Except as otherwise provided in Section 2.2 above, during the term of this Agreement, the allocation of the costs and expenses incurred by MEC, after consultation with PI and if requested by PI, for (i) improvement of the existing manufacturing processes for PI Products; or (ii) establishment of a new manufacturing process, and/or (iii) transfer of manufacturing process from one Fab to another Fab, whichever is necessary to diligently comply with this Agreement shall be negotiated in good faith between the parties hereto.



2.4 Bring-Up of New Products, etc.

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(a) Throughout the term of this Agreement, MEC/MEI shall make its best effort to commit human, capital and financial resources necessary and reasonably calculated to permit it to timely fulfill all of its obligations under this Agreement, including, but not limited to, appropriate capital expenditures and allocation of capacity, facilities and experienced personnel for an engineering/manufacturing team to ensure an expeditious Product technology transfer; an expeditious bring-up of new Products including Updates of Products at the Fab; and a smooth production build-up beyond the period of prototype development of such Products.





(b) Except as otherwise provided in Section 2.2 above, during the period of prototype production development and sample Wafer production development for new Products including Updates of Products, PI shall bear the cost of mask making for all PI Products and pay for all Wafers requested by and delivered to PI.



(c) Except as otherwise provided in Section 2.2 above, during the period of prototype production development and sample Wafer production development for new Products including Updates of Products, MEC/MEI shall bear any and all the costs of Wafers used or disposed of by MEC/MEI for the production or development.



2.5 Qualification of a New Fab. A Fab not qualified under the Prior

-------------------------- Foundry Agreement shall be qualified by PI for the purpose of this Agreement in the event three runs of wafers for the qualifying Product at that Fab have passed the evaluation test of PI then in effect. Except as otherwise provided in Section 2.2 above, MEC/MEI shall bear all costs of qualifying any new Fab, including the cost of all Wafers used or disposed of by MEC/MEI or PI during such qualification.



ARTICLE III

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WAFER SUPPLY

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3.1 Wafer Quantities.

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(a) MEC/MEI shall make available to PI from the production capacity of the Fab not less than the following quantities of tested wafers for delivery to PI during the following months, and PI shall purchase not less than [*] of such quantities:



1995 1996

JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN

4" wafers [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*] [*]

5" wafers [*] [*] [*] [*] [*] [*]





If MEC is unable to supply the quantities of 5" wafers set forth above, for any 5" wafers not supplied, MEC will substitute that number of 4" wafers that will provide an equivalent number of die, at a price of [*] per 4" wafer. The monthly wafer quantities supplied by MEC may vary by about [*] from the quantities shown above, provided that a shortfall in any month will be made up within the next two months.



(b) During the term of this Agreement, the parties hereto will negotiate in good faith to establish, by the end of each February, the minimum annual quantity and minimum monthly quantity of wafers for the next fiscal year of MEC/MEI (April 1 through March 31), that MEC/MEI shall supply to PI, and PI



[*] IDENTIFIES REDACTED MATERIAL DELETED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION



shall purchase from MEC/MEI, under this Agreement, and MEC shall reserve the production capacity therefor, except that the quantities for April, May and June 1996 will be as set forth in Section 3.1(a) above.



(c) At either party's request, the parties shall negotiate in good faith the terms and conditions for MEC/MEI to supply to PI, and for PI to purchase from MEC/MEI, more than the minimum quantities of wafers agreed between the parties.



(d) PI shall order Products in lots, each of which contains the number of Wafers as set forth in Appendix B to the Prior Foundry Agreement.

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3.2 Prices.

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(a) Except as otherwise provided in Section 3.1 above, the purchase price payable by PI to MEC/MEI for the quantities of wafers set forth in the table in Section 3.1 above will be [*] per wafer for 4" wafers and [*] per wafer for 5" wafers. Wafer pricing for Products manufactured after June 30, 1996 will be established by the parties in good faith negotiations.



(b) If the parties, after good faith negotiations, do not agree on future wafer pricing or quantities, then, until June 30, 1997, MEC/MEI will supply to PI, and PI will purchase from MEC, monthly, wafers at the quantities actually sold by MEC/MEI to PI during June 1996. If MEC is unable to supply only 5" wafers during such period, for any 5" wafers not supplied, MEC will supply that number of 4" wafers that will provide an equivalent number of die. The prices of wafers supplied during such period will be [*] per wafer for 4" wafers and [*] per wafer for 5" wafers. If the parties, after good faith negotiations, do not agree on future wafer pricing or quantities for any time after June 30, 1997, then, after such date, neither party will have any obligation to purchase or supply wafers under this Agreement.



(c) Wafers shall be tested in accordance with test procedures as agreed by MEC and PI. All Wafers shall be FOB point of shipment by MEC/MEI.



3.3 Most Favored Customer. The prices of Wafers purchased by PI under

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