Thanks for everyone's replies. Sorry, I should have included schematic first time. I also included a little screen shot from the data sheet that shows the output driver on the TLC59108F. As far as not using PWM from the micro to directly drive is because I want to control 32 channels and don't want to deal with a micro that large. I also, like the modular nature of a building block of 8, so I can scale to higher or lower if needed. Also, I can fuse each block of 8 etc.... Now I did consider putting a small micro on each board, but then I have to manage code on each one etc. So, that was kind of the motivation with going with this LED driver.
I haven't really decided on what micro i'm going to use, probably an AVR, or was thinking about trying out that launchpad thing since it's so cheap. Currently I'm testing with an Arduino.
If the TLC59108F chip didn't have the feature of tolerating 17V on it's output pins, I would have used a small transistor to drive to the gate, but I thought I could pull it off with just a resistor. Also, the chip isn't actually a CMOS chip, it only tolerates 17V on it's output pins.
A high side n-Channel actually works because when you initially apply 12V to the Gate, the source is initially @ 0V and the device turns on, as current starts to flow the voltage seen at the source starts to rise. Once the voltage hits 12v-(Vgs threshold, about 1.5V on a logic level ), the device will turn off and on around that voltage. So, you see a voltage drop across from the drain to source of about the Vgs threshold voltage. I think this is rather bad thermally as it is quite hot for about .5A, however same Mosfet used as a low side switch is nice and cool.
I think I will go back and re-check all the ground pins on this chip it has 3. That seems like a likely problem.