POWER INTEGRATIONS, INC. IMMEDIATELY EXERCISABLE NONSTATUTORY STOCK OPTION AGREEMENT (EXECUTIVE)

Exhibit 10.40

POWER INTEGRATIONS, INC.

IMMEDIATELY EXERCISABLE

NONSTATUTORY STOCK OPTION AGREEMENT

(EXECUTIVE)

THIS IMMEDIATELY EXERCISABLE NONSTATUTORY STOCK OPTION AGREEMENT (the “ Option Agreement ”) is made and entered into as of XXXXX , by and between Power Integrations, Inc. and XXXXXX (the “ Optionee ”).

The Company has granted to the Optionee pursuant to the Power Integrations, Inc. 1997 Stock Option Plan (the “ Plan ”) an option to purchase certain shares of Stock, upon the terms and conditions set forth in this Option Agreement (the “ Option ”). The Option shall in all respects be subject to the terms and conditions of the Plan.

1.1 Definitions . Whenever used herein, the following terms shall have their respective meanings set forth below:

(a) “Date of Option Grant” means XXXXX .

(b) “ Number of Option Shares ” means XXX Stock, as adjusted from time to time pursuant to Section 9.

(c) “ Exercise Price ” means XXXX share of Stock, as adjusted from time to time pursuant to Section 9.

(d) “ Initial Exercise Date ” means the later of the Date of Option Grant or the date the Optionee’s Service commences.

(e) “ Initial Vesting Date ” means the date occurring six (6) months after (check one):

þ     the Date of Option Grant.

¨                  , 2000.

(f) “ Vested Shares ” means, on any relevant date, that portion of the Number of Option Shares which has vested in accordance with the vesting schedule set forth above in this Option Agreement. Provided that the Optionee’s Service has not terminated prior to the relevant date, an initial installment of shares will become Vested Shares on the initial “Full Vest” date set forth in Section 1.1(e) above, and thereafter the remaining shares will become Vested Shares in substantially equal installments, with the last such installment vesting on the last “Full Vest” date set forth above. Notwithstanding the foregoing, vesting of the shares subject to the Option shall be accelerated pursuant to the relevant provisions of the Benefits Agreement (defined below).

(g) “ Option Expiration Date ” means the date ten (10) years after the Date of Option Grant.

(h) “Benefits Agreement” means the Executive Officer Benefits Agreement between the Company and the Optionee dated April 19, 2002, and any amendments thereto.

(i) “ Board ” means the Board of Directors of the Company. If one or more Committees have been appointed by the Board to administer the Plan, “ Board ” also means such Committee(s).

(j) “ Code ” means the Internal Revenue Code of 1986, as amended, and any applicable regulations promulgated thereunder.

(k) “ Company ” means Power Integrations, Inc., a Delaware corporation, or any successor corporation thereto.

(l) “ Consultant ” means any person, including an advisor, engaged by a Participating Company to render services other than as an Employee or a Director.

(m) “ Director ” means a member of the Board or of the board of directors of any other Participating Company.

(n) “ Disability ” means the inability of the Optionee, in the opinion of a qualified physician acceptable to the Company, to perform the major duties of the Optionee’s position with the Participating Company group because of the sickness or injury of the Optionee.

(o) “ Employee ” means any person treated as an employee (including an officer or a Director who is also treated as an employee) in the records of a Participating Company; provided, however, that neither service as a Director nor payment of a director’s fee shall be sufficient to constitute employment for purposes of the Option Agreement.

(p) “ Exchange Act ” means the Securities Exchange Act of 1934, as amended.

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(q) “ Fair Market Value ” means, as of any date, the value of a share of Stock or other property as determined by the Board, in its sole discretion, or by the Company, in its sole discretion, if such determination is expressly allocated to the Company herein, subject to the following:

(i) If, on such date, there is a public market for the Stock, the Fair Market Value of a share of Stock shall be the closing sale price of a share of Stock (or the mean of the closing bid and asked prices of a share of Stock if the Stock is so quoted instead) as quoted on the Nasdaq National Market, the Nasdaq Small-Cap Market or such other national or regional securities exchange or market system constituting the primary market for the Stock, as reported in the Wall Street Journal or such other source as the Company deems reliable. If the relevant date does not fall on a day on which the Stock has traded on such securities exchange or market system, the date on which the Fair Market Value shall be established shall be the last day on which the Stock was so traded prior to the relevant date, or such other appropriate day as shall be determined by the Board, in its sole discretion.

(ii) If, on such date, there is no public market for the Stock, the Fair Market Value of a share of Stock shall be as determined by the Board without regard to any restriction other than a restriction which, by its terms, will never lapse.

(r) “ Incentive Stock Option ” means an Option intended to be (as set forth in the Option Agreement) and which qualifies as an incentive stock option within the meaning of Section 422(b) of the Code.

(s) “ Insider ” means an officer or a Director of the Company or any other person whose transactions in Stock are subject to Section 16 of the Exchange Act.

(t) “ Nonstatutory Stock Option ” means an Option not intended to be (as set forth in the Option Agreement) or which does not qualify as an Incentive Stock Option.

(u) “ Parent Corporation ” means any present or future “parent corporation” of the Company, as defined in Section 424(e) of the Code.

(v) “ Participating Company ” means the Company or any Parent Corporation or Subsidiary Corporation.

(w) “ Participating Company Group ” means, at any point in time, all corporations collectively which are then Participating Companies.

(x) “ Securities Act ” means the Securities Act of 1933, as amended.

(y) “ Service ” means the Optionee’s employment or service with the Participating Company Group, whether in the capacity of an Employee, a Director or a Consultant. The Optionee’s Service shall not be deemed to have terminated merely because of a change in the capacity in which the Optionee renders Service to the Participating Company Group or a change in the Participating Company for which the Optionee renders such Service, provided that there is no interruption or termination of the Optionee’s Service. Furthermore, the Optionee’s Service with the Participating Company Group shall not be deemed to have

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terminated if the Optionee takes any military leave, sick leave, or other bona fide leave of absence approved by the Company; provided, however, that if any such leave exceeds ninety (90) days, on the ninety-first (91st) day of such leave the Optionee’s Service shall be deemed to have terminated unless the Optionee’s right to return to Service with the Participating Company Group is guaranteed by statute or contract. Notwithstanding the foregoing, unless otherwise designated by the Company or required by law, a leave of absence shall not be treated as Service for purposes of determining the Optionee’s Vested Ratio. The Optionee’s Service shall be deemed to have terminated either upon an actual termination of Service or upon the corporation for which the Optionee performs Service ceasing to be a Participating Company. Subject to the foregoing, the Company, in its sole discretion, shall determine whether the Optionee’s Service has terminated and the effective date of such termination. (NOTE: If the Option is exercised more than three (3) months after the date on which the Optionee ceased to be an Employee (other than by reason of death or a permanent and total disability as defined in Section 22(e)(3) of the Code), the Option will be treated as a Nonstatutory Stock Option and not as an Incentive Stock Option to the extent required by Section 422 of the Code.)

(z) “ Stock ” means the common stock of the Company, as adjusted from time to time in accordance with Section 9.

(aa) “ Subsidiary Corporation ” means any present or future “subsidiary corporation” of the Company, as defined in Section 424(f) of the Code.

1.2 Construction . Captions and titles contained herein are for convenience only and shall not affect the meaning or interpretation of any provision of this Option Agreement. Except when otherwise indicated by the context, the singular shall include the plural and the plural shall include the singular. Use of the term “or” is not intended to be exclusive, unless the context clearly requires otherwise.

2.1 Tax Status of Option . This Option is intended to be a Nonstatutory Stock Option and shall not be treated as an Incentive Stock Option within the meaning of Section 422(b) of the Code.

2.2 Election Under Section 83(b) of the Code . If the Optionee exercises this Option to purchase shares of Stock that are both nontransferable and subject to a substantial risk of forfeiture, the Optionee understands that the Optionee should consult with the Optionee’s tax advisor regarding the advisability of filing with the Internal Revenue Service an election under Section 83(b) of the Code, which must be filed no later than thirty (30) days after the date on which the Optionee exercises the Option. Shares acquired upon exercise of the Option are nontransferable and subject to a substantial risk of forfeiture if, for example, (a) they are unvested and are subject to a right of the Company to repurchase such shares at the Optionee’s original purchase price if the Optionee’s Service terminates, (b) the Optionee is an Insider and, under certain circumstances, exercises the Option within six (6) months of the Date of Option Grant (if a class of equity security of the Company is registered under Section 12 of the Exchange Act), or (c) the Optionee is subject to a restriction on transfer to comply with “Pooling-of-Interests Accounting” rules. Failure to file an election under Section 83(b), if

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appropriate, may result in adverse tax consequences to the Optionee. The Optionee acknowledges that the Optionee has been advised to consult with a tax advisor prior to the exercise of the Option regarding the tax consequences to the Optionee of the exercise of the Option. AN ELECTION UNDER SECTION 83(b) MUST BE FILED WITHIN 30 DAYS AFTER THE DATE ON WHICH THE OPTIONEE PURCHASES SHARES. THIS TIME PERIOD CANNOT BE EXTENDED. THE OPTIONEE ACKNOWLEDGES THAT TIMELY FILING OF A SECTION 83(b) ELECTION IS THE OPTIONEE’S SOLE RESPONSIBILITY, EVEN IF THE OPTIONEE REQUESTS THE COMPANY OR ITS REPRESENTATIVE TO FILE SUCH ELECTION ON HIS OR HER BEHALF.

All questions of interpretation concerning this Option Agreement shall be determined by the Board. All determinations by the Board shall be final and binding upon all persons having an interest in the Option. Any officer of a Participating Company shall have the authority to act on behalf of the Company with respect to any matter, right, obligation, or election which is the responsibility of or which is allocated to the Company herein, provided the officer has apparent authority with respect to such matter, right, obligation, or election.

4.1 Right to Exercise . Except as otherwise provided herein, the Option shall be exercisable on and after the Initial Exercise Date and prior to the termination of the Option (as provided in Section 6) in an amount not to exceed the Number of Option Shares less the number of shares previously acquired upon exercise of the Option, subject to the Optionee’s agreement that any shares purchased upon exercise are subject to the Company’s repurchase right set forth in Section 11.

4.2 Method of Exercise . Exercise of the Option shall be by written notice to the Company which must state the election to exercise the Option, the number of whole shares of Stock for which the Option is being exercised and such other representations and agreements as to the Optionee’s investment intent with respect to such shares as may be required pursuant to the provisions of this Option Agreement. The written notice must be signed by the Optionee and must be delivered in person, by certified or registered mail, return receipt requested, by confirmed facsimile transmission, or by such other means as the Company may permit, to the Chief Financial Officer of the Company, or other authorized representative of the Participating Company Group, prior to the termination of the Option as set forth in Section 6, accompanied by (i) full payment of the aggregate Exercise Price for the number of shares of Stock being purchased and (ii) an executed copy, if required herein, of the then current form of escrow agreement referenced below. The Option shall be deemed to be exercised upon receipt by the Company of such written notice, the aggregate Exercise Price, and, if required by the Company, such executed agreement.

4.3 Payment of Exercise Price .

(a) Forms of Consideration Authorized . Except as otherwise provided below, payment of the aggregate Exercise Price for the number of shares of Stock for

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which the Option is being exercised shall be made (i) in cash, by check, or cash equivalent, (ii) by tender to the Company of whole shares of Stock owned by the Optionee having a Fair Market Value (as determined by the Company without regard to any restrictions on transferability applicable to such stock by reason of federal or state securities laws or agreements with an underwriter for the Company) not less than the aggregate Exercise Price, (iii) by means of a Cashless Exercise, as defined in Section 4.3(c), or (iv) by any combination of the foregoing.

(b) Tender of Stock . Notwithstanding the foregoing, the Option may not be exercised by tender to the Company of shares of Stock to the extent such tender of Stock would constitute a violation of the provisions of any law, regulation or agreement restricting the redemption of the Company’s stock. The Option may not be exercised by tender to the Company of shares of Stock unless such shares either have been owned by the Optionee for more than six (6) months or were not acquired, directly or indirectly, from the Company.

(c) Cashless Exercise . A “ Cashless Exercise ” means the assignment in a form acceptable to the Company of the proceeds of a sale or loan with respect to some or all of the shares of Stock acquired upon the exercise of the Option pursuant to a program or procedure approved by the Company (including, without limitation, through an exercise complying with the provisions of Regulation T as promulgated from time to time by the Board of Governors of the Federal Reserve System). The Company reserves, at any and all times, the right, in the Company’s sole and absolute discretion, to decline to approve or terminate any such program or procedure.

4.4 Tax Withholding . At the time the Option is exercised, in whole or in part, or at any time thereafter as requested by the Company, the Optionee hereby authorizes withholding from payroll and any other amounts payable to the Optionee, and otherwise agrees to make adequate provision for (including by means of a Cashless Exercise to the extent permitted by the Company), any sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Participating Company Group, if any, which arise in connection with the Option, including, without limitation, obligations arising upon (i) the exercise, in whole or in part, of the Option, (ii) the transfer, in whole or in part, of any shares acquired upon exercise of the Option, (iii) the operation of any law or regulation providing for the imputation of interest, or (iv) the lapsing of any restriction with respect to any shares acquired upon exercise of the Option. The Optionee is cautioned that the Option is not exercisable unless the tax withholding obligations of the Participating Company Group are satisfied. Accordingly, the Optionee may no