Under the terms of the Company's May 2003 acquisition agreement to purchase HiNT, additional consideration comprising of shares of the Company's common stock and cash is payable if certain HiNT product sales milestones were met by June 30, 2004. Based on the product sales through June 30, 2004, the Company will issue approximately 337,000 additional shares to the former shareholders of HiNT, and pay cash of approximately $137,000 to former employees and warrant holders of HiNT. These final share and cash payments became issuable on July 30, 2004. The fair value of the additional shares of common stock of approximately $3.0 million and cash of approximately $137,000 will be recorded as goodwill on the Company's balance sheet.

This Report on Form 10-Q contains forward-looking statements within the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, including statements regarding our expectations, hopes, intentions, beliefs or strategies regarding the future. Such forward- looking statements also include statements regarding our future gross margin, our future research and development expenses, our future selling, general and administrative expenses, our future deferred compensation expenses, our ability to meet our capital requirements for the next twelve months and our future capital requirements. Actual results could differ materially from those projected in such forward-looking statements. Factors that could cause actual results to differ include unexpected changes in the mix of our product sales, unexpected pricing pressures, or unexpected capital requirements that may arise due to the NetChip acquisition or other possible acquisitions. Actual results could also differ for the reasons noted under the sub-heading "Factors That May Affect Future Operating Results" and in other sections of this report on Form 10-Q. All forward-looking statements included in this Form 10-Q are based on information available to us on the date of this Report on Form 10-Q, and we assume no obligation to update the forward-looking statements, or to update the reasons why actual results could differ from those projected in the forward-looking statements.

The following discussion should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2003.

PLX was founded in 1986, and since 1994 we have focused on development of I/O interface semiconductors and related software and development tools that are used in systems incorporating the PCI standard. In 1994 and 1995, a significant portion of our revenues were derived from the sale of semiconductor devices that perform similar functions as our current products, except they were based on a variety of industry standards. Our revenues since 1996 have been derived predominantly from the sale of semiconductor devices based on the PCI standard to a large number of customers in a variety of applications including networking and telecommunications, enterprise storage, imaging, industrial and other embedded applications as well as in related adapter cards. We generate less than 1% of our revenues from sales of our software and development tools.

In May 2004, we acquired NetChip Technology, Inc. a supplier of high-performance semiconductors based on Universal Serial Bus (USB) and Peripheral Component Interconnect (PCI) standards. NetChip also has PCI Express products in devemopment that complement our PCI Express chips. Beginning May 24, 2004, our operating results include results of NetChip Technology, Inc. and its products.

We utilize a "fabless" semiconductor business model whereby we purchase wafers and packaged and tested semiconductor devices from independent manufacturing foundries. This approach allows us to focus on defining, developing, and marketing our products and eliminates the need for us to invest large amounts of capital in manufacturing facilities and work-in- process inventory.

We rely on a combination of direct sales personnel, distributors, and manufacturers' representatives throughout the world to sell a significant portion of our products. We pay manufacturers' representatives a commission on sales while we sell products to distributors at a discount from the selling price. We generally recognize revenue at the time of title passage. Recognition of sales to distributors, including international distributors, is deferred until the product is resold by the distributors to end users. See "Certain Factors That May Affect Future Operating Results -- A Large Portion of Our Revenues Is Derived From Sales to Third-Party Distributors Who May Terminate Their Relationships with Us at Any Time."

Our gross margins have fluctuated in the past and are expected to fluctuate in the future due to changes in product and customer mix, write-downs and recoveries of excess or obsolete inventory, the position of our products in their respective life cycles, and specific product manufacturing costs.

The time period between initial customer evaluation and design completion can range from six to twelve months or more. Furthermore, there is typically an additional six to twelve month or greater period after design completion before a customer requests volume production of our products. Due to the variability and length of these design cycles and variable demand from customers, we may experience significant fluctuations in new orders from month to month. In addition, we typically make inventory purchases prior to receiving customer orders. Consequently, if anticipated sales and shipments in any quarter do not occur when expected, expenses and inventory levels could be disproportionately high, and our results for that quarter and potentially future quarters would be materially and adversely affected.

Our long-term success will depend on our ability to introduce new products. While new products typically generate little or no revenues during the first twelve months following their introduction, our revenues in subsequent periods depend upon these new products. Due to the lengthy sales cycle and additional time before our customers request volume production, significant revenues from our new products typically occur twelve to twenty-four months after product introduction. As a result, revenues from newly introduced products have, in the past, produced a small percentage of our total revenues in the year the product was introduced. See "Certain Factors That May Affect Future Operating Results -- Our Lengthy Sales Cycle Can Result in Uncertainty and Delays with Regard to Our Expected Revenues."

The following table summarizes historical results of operations as a percentage of net revenues for the periods shown.

                                                                      Three Months Ended      Six Months Ended
                                                                            June 30,              June 30,
                                                                    --------------------  --------------------
                                                                        2004       2003       2004       2003
                                                                    ---------  ---------  ---------  --------- 
Net revenues......................................................     100.0 %    100.0 %    100.0 %    100.0 %
Cost of revenues..................................................      35.1       29.1       31.8       29.3
                                                                    ---------  ---------  ---------  ---------
Gross margin......................................................      64.9       70.9       68.2       70.7
                                                                    ---------  ---------  ---------  ---------
Operating expenses:
  Research and development........................................      31.3       45.0       32.9       44.3
  Selling, general and administrative.............................      26.9       36.9       29.0       36.4
  In-process research and development.............................       8.0       10.1        4.4        5.1
  Amortization of purchased intangible assets.....................       3.2        2.4        2.9        2.0
                                                                    ---------  ---------  ---------  ---------
Total operating expenses..........................................      69.4       94.4       69.2       87.8
                                                                    ---------  ---------  ---------  ---------
Loss from operations..............................................      (4.5)     (23.5)      (1.0)     (17.1)
Interest income and other, net....................................       0.7        1.2        0.7        1.2
                                                                    ---------  ---------  ---------  ---------
Loss before provision (benefit) for income taxes..................      (3.8)     (22.3)      (0.3)     (15.9)
Provision (benefit) for income taxes..............................        --       (0.3)       0.7       (0.1)
                                                                    ---------  ---------  ---------  ---------
Net loss..........................................................      (3.8)%    (22.0)%     (1.0)%    (15.8)%
                                                                    =========  =========  =========  =========

Net revenues consist of product revenues generated principally by sales of our semiconductor devices. Net revenues for the three months ended June 30, 2004 were $14.0 million, an increase of 61.8% from $8.7 million for the three months ended June 30, 2003. The increase was primarily due to higher unit shipments as well as revenues generated from the USB products acquired as part of the NetChip Technology, Inc. acquisition. Our USB products are characterized by relatively fast customer design cycles, relatively fast product ramps and relatively short customer product life cycles. These factors may result in a greater degree of revenue fluctuation from USB products as compared to our PCI business.

For the three months ended June 30, 2004 and 2003, 10% and 11%, respectively, of net revenues were derived from sales to the same distributor. No other distributor or direct customer represented greater than 10% of net revenues.

Net revenues for the six months ended June 30, 2004 were $25.7 million, an increase of 49.5% from $17.2 million for the six months ended June 30, 2003. The increase was primarily due to higher unit shipments as well as revenues generated from the USB products acquired as part of the NetChip Technology, Inc. acquisition. For the six months ended June 30, 2004 and 2003, 11% and 10%, respectively, of net revenues were derived from sales to the same distributor. No other distributor or direct customer represented greater than 10% of net revenues.

Gross margin represents net revenues less the cost of revenues. Cost of revenues includes the cost of (1) purchasing semiconductor devices from our independent foundries, (2) package, assembly and test services from our independent foundries and assembly and test contractors and (3) our operating costs associated with the procurement, storage, and shipment of products.

Gross margin for the three months ended June 30, 2004 was 64.9%, a decrease of 6.0% from 70.9% for the same period in 2003. The decrease in gross margin was due primarily to an expected change in the company's product and customer mix associated with the acquisition of NetChip.

Gross margin for the six months ended June 30, 2004 was 68.2%, a decrease of 2.5% from 70.7% for the same period in 2003. Excluding benefits from selling previously written-down inventory of approximately $0.2 million and $0.3 million for the six months ended June 30, 2004 and 2003, respectively, gross margin decreased to 67.5% for the six months ended June 30, 2004, from 68.8% for the same period in 2003. The decrease in gross margin was due primarily to an expected change in the company's product and customer mix associated with the acquisition of NetChip.

We expect gross margin as a percentage of revenues will likely decrease in future periods as a result of the expected change in our product and customer mix associated with the acquisition of NetChip.

Research and development (R&D) expenses consist primarily of salaries and related costs of employees engaged in research, design, and development activities. In addition, expenses for outside engineering consultants and non-recurring engineering at our independent foundries and deferred compensation are included in research and development expenses.

R&D as a percentage of net revenues decreased to 31.3% for the three months ended June 30, 2004, as compared to 45.0% for the same period in 2003. The percentage decrease is due primarily to revenues increasing at a higher rate than costs. In absolute dollars, R&D expenses increased by $0.5 million or 13% to $4.4 million for the three months ended June 30, 2004 from $3.9 million for the same period in 2003. Excluding deferred compensation amortization of $13,000 and $0.4 million for the three months ended June 30, 2004 and 2003, respectively, R&D increased by $0.8 million to $4.4 million for the three months ended June 30, 2004 from $3.5 million for the same period in 2003. The increase in R&D was due to higher compensation and benefit expenses of $0.3 million resulting mainly from the NetChip acquisition, and increases in consulting expenses and engineering tools expense of $0.1 million and $0.4 million associated with the development of new products and enhancement of existing products, respectively.

R&D as a percentage of net revenues decreased to 32.9% for the six months ended June 30, 2004, as compared to 44.3% for the same period in 2003. The percentage decrease is due primarily to revenues increasing at a higher rate than costs. In absolute dollars, R&D expenses increased by $0.9 million or 12% to $8.5 million for the six months ended June 30, 2004 from $7.6 million for the same period in 2003. Excluding deferred compensation of $24,000 and $0.8 million for the six months ended June 30, 2004 and 2003, R&D increased by $1.6 million to $8.4 million for the six months ended June 30, 2004 from $6.8 million for the same period in 2003. The increase in R&D was due to higher compensation and benefit expenses of $0.8 million resulting mainly from the NetChip acquisition, and increases in consulting expenses and engineering tools expense of $0.2 million and $0.5 million associated with the development of new products and enhancement of existing products, respectively.

We expect research and development expenses in absolute dollars to likely increase in future periods.

Selling, general and administrative (SG&A) expenses consist primarily of employee-related expenses, professional fees, trade show and other promotional expenses, and sales commissions to manufacturers' representatives.

SG&A as a percentage of net revenues decreased to 26.9% for the three months ended June 30, 2004, as compared to 36.9% for the same period in 2003. The percentage decrease is due primarily to revenues increasing at a higher rate than costs. In absolute dollars, SG&A expenses increased by $0.6 million or 18% to $3.8 million for the three months ended June 30, 2004 from $3.2 million for the same period in 2003. The increase in SG&A was due to higher compensation and benefit expenses of $0.3 million and an increase of approximately $0.2 million in sales commissions to manufacturer's representatives as a result of higher revenues.

SG&A as a percentage of net revenues decreased to 29.0% for the six months ended June 30, 2004, as compared to 36.4% for the same period in 2003. The percentage decrease is due primarily to revenues increasing at a higher rate than costs. In absolute dollars, SG&A expenses increased by $1.2 million or 19.1% to $7.4 million for the six months ended June 30, 2004 from $6.3 million for the same period in 2003. The increase in SG&A was due to higher compensation and benefit expenses of $0.6 million and an increase of approximately $0.3 million in sales commissions to manufacturer's representatives as a result of higher revenues.

We expect selling, general and administrative expense in absolute dollars to likely increase in future periods.

Purchased in-process research and development (IPRD) of $1.1 million and $0.9 million in the second quarter of 2004 and 2003, respectively, represents the write-off of in-process research and development associated with our acquisitions of NetChip Technologies, Inc. on May 24, 2004 and HiNT Corp. on May 22, 2003 (collectively, the "Acquired Companies"). At the date of each acquisition noted above, the projects associated with the IPRD efforts had not yet reached technological feasibility and the IPRD had no alternative future uses. Accordingly, these amounts were expensed on the respective acquisition dates of each of the Acquired Companies.

The NetChip IPRD was determined by estimating the expected cash flows from the project once commercially viable, discounting the net cash flows to their present value, and then applying a percentage of completion to the calculated value as defined below.

Net Cash Flows. The net cash flows from the identified project utilized were based on estimates of revenues, cost of sales, research and development costs, selling, general, and administrative costs, and income taxes from the project. These estimates were based on assumptions mentioned below. The research and development costs excluded costs to bring the acquired in-process project to technological feasibility. The estimated revenues were based on management projections of the acquired in-process project.

Discount Rate. The discount rate used in the present value calculation was derived from a weighted average cost of capital, adjusted upward to reflect the additional risk inherent in the development life cycle, including the useful life of the technology, profitability level of the technology, and the uncertainty of technology advances that are known at the date of the acquisition. The cost of capital used in discounting the net cash flows from acquired in-process technology was 30%.

Percentage of Completion. Percentage of completion was determined by using costs incurred by NetChip Technology, Inc. prior to the acquisition date compared to the remaining research and development to be completed to bring the project to technological feasibility. As of the acquisition date, the Company estimated the project was approximately 60% complete.

The Company expects to complete the project within approximately 6-9 months from the acquisition date. However, development of this project remains a significant risk to the Company due to the remaining effort to achieve technical feasibility, integration of NetChip Technology, Inc. into the Company, employee retention, rapidly changing customer markets and significant competitive threats from numerous companies. Failure to bring these products to market in a timely manner could adversely impact sales and profitability of the Company in the future. Additionally, the value of the intangible assets acquired may become impaired.

Amortization of purchased intangible assets for the three months ended June 30, 2004 was $0.4 million, an increase of $0.2 million from $0.2 million for the three months ended June 30, 2003. Amortization of purchased intangibles for the six months ended June 30, 2004 was $0.7 million, an increase of $0.4 million from $0.3 million for the six months ended June 30, 2003. The increase for both the three and six months ended June 30, 2004 compared to June 30, 2003 is due to additional amortization expense from developed/core technology and customer base acquired as a result of the NetChip Technology, Inc. acquisition in May 2004 (see Note 4 to the condensed consolidated financial statements).

We recorded deferred compensation of $0.9 million related to unvested stock options assumed in connection with the acquisition of NetChip Technology, Inc. in May 2004. The amount of deferred compensation is presented as a reduction of stockholders' equity and is amortized ratably over the vesting period of the applicable stock grants.

Amortization of deferred compensation decreased by $0.3 million to $28,000 for the three months ended June 30, 2004 from $0.4 million from the same period in 2003. Amortization of deferred compensation decreased by $0.8 million to $46,000 for the six months ended June 30, 2004 from $0.8 million for the same period in 2003. The decrease in deferred compensation for the three and six months ended June 30, 2004 is primarily the result of certain stock options becoming fully vested. This decrease was partially offset by additional deferred compensation recorded from the NetChip Technology, Inc. acquisition. Substantially all of these amounts are recorded in research and development expenses.

We expect deferred compensation expense in absolute dollars to likely increase in future periods as a result of the NetChip Technology, Inc. acquisition.

Interest income reflects interest earned on cash, cash equivalents and short-term and long-term marketable securities balances. Interest income and other remained relatively flat at $0.1 million for each of the three months ended June 30, 2004 and 2003 and at $0.2 million for each of the six months ended June 30, 2004 and 2003.

Income tax expense of $172,000 was recorded for the six months ended June 30, 2004 compared to an income tax benefit of $16,000 for the six months ended June 30, 2003. Income tax expense for the six months ended June 30, 2004 is primarily due to federal alternative minimum tax, miscellaneous state income tax payable, and foreign income taxes currently payable. The current expense differs from the expected provision derived by applying the applicable U.S. federal statutory rate to the loss from operations primarily due to nondeductible acquisition-related items.

Deferred tax assets are recognized when there is sufficient evidence that it is more likely than not that such deferred tax assets will be realized. The Company has determined that such evidence does not currently exist. Therefore, a full valuation allowance has been established to reserve the Company's net deferred tax asset.

Cash and cash equivalents and short and long-term marketable securities were $31.3 million at June 30, 2004, an increase of $8.2 million from $23.1 million at December 31, 2003. The increase was primarily due to (1) net loss of $0.3 million adjusted for non-cash expenses of $3.1 million, (2) increases in accounts payable and accrued expenses of $1.1 million and $0.7 million, respectively, (3) a decrease in accounts receivable of $0.4 million, (4) an increase in cash received as a result of the acquisition of NetChip Technology, Inc. of $2.8 million, and (5) cash received of $1.3 million from the exercise of stock options. This was partially offset by an increase in inventory of $1.1 million.

In May 2003 we completed the acquisition of HiNT Corp., a fabless semiconductor supplier of Peripheral Component Interconnect (PCI) and PCI-X bridge chips. Under the terms of the acquisition agreement, additional consideration comprising of shares of our common stock and cash is payable if certain HiNT product sales milestones were met by June 30, 2004. Based on the product sales through June 30, 2004, we will issue 337,162 additional shares to the former shareholders of HiNT and pay cash of approximately $137,000 to former employees and warrant holders of HiNT. These final share and cash payments became issuable on July 30, 2004.

On May 24, 2004, we purchased NetChip Technology, Inc., a supplier of high-performance semiconductors based on Universal Serial Bus (USB) and Peripheral Component Interconnect (PCI) standards. NetChip also has PCI Express products in devemopment that complement our PCI Express chips. As consideration for this acquisition, we issued 2,035,077 shares of our common stock to former NetChip shareholders and assumed 126,419 options to purchase common stock. Additional consideration of our common stock with a maximum aggregate value of $10 million may be paid out to the former shareholders of NetChip Technology, Inc. in the event USB products acquired as part of the NetChip Technology, Inc. acquisition meet certain gross profit milestones approximately one year following the close of this acquisition.

In September 2002, our Board of Directors authorized the repurchase of up to 2,000,000 shares of common stock.  At the discretion of the management, we can repurchase the shares from time to time in the open market or in privately negotiated transactions.  As of June 30, 2004, approximately 774,000 shares had been repurchased for approximately $1,867,000 in cash. We did not repurchase any shares during the six month period ended June 30, 2004.

As of June 30, 2004, inventory purchase commitments were $6.1 million. There were no other significant changes in contractual obligations or commercial commitments outstanding.

We believe that our existing resources, together with cash generated from our operations will be sufficient to meet our capital requirements for at least the next twelve months. Our future capital requirements will depend on many factors, including the inventory levels we maintain, the level of investment we make in new technologies and improvements to existing technologies and the levels of monthly expenses required to launch new products. From time to time, we may also evaluate potential acquisitions and equity investments complementary to our technologies and market strategies. To the extent that existing resources and future earnings are insufficient to fund our future activities, we may need to raise additional funds through public or private financings. Additional funds may not be available or, if available, we may not be able to obtain them on terms favorable to us and our stockholders.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosures of contingent assets and liabilities in the consolidated financial statements and accompanying notes. The SEC has defined a company's critical accounting policies as the ones that are most important to the portrayal of the company's financial condition and results of operations, and which require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, we have identified the critical accounting policies and judgments addressed below. We also have other key accounting policies which involve the use of estimates, judgments and assumptions that are significant to understanding our results. Although we believe that our estimates, assumptions and judgments are reasonable, they are based upon information presently available. Actual results may differ significantly from these estimates under different assumptions, judgments or conditions.

Inventory Write-downs. We evaluate the write-downs for inventory based on a combination of factors. Based on the life of the product, sales history, obsolescence, and sales forecast, we record write-downs ranging from 0% to 100%. Any adverse changes to our future product demand may result in increased write-downs, resulting in decreased gross margin. In addition, future sales on any of our previously written down inventory may result in increased gross margin in the period of sale.

Allowance for Doubtful Accounts. We evaluate the collectibility of our accounts receivable based on length of time the receivables are past due and our historical bad debt experience. We record reserves for bad debts against amounts due to reduce the net recognized receivable to the amount we reasonably believe will be collected. We have certain customers with individually large amounts due at any given balance sheet date. Any unanticipated change in one of those customer's credit worthiness or other matters affecting the collectibility of amounts due from such customers could have a material affect on our results of operations in the period in which such changes or events occur.

Goodwill.  We perform goodwill impairment tests annually on November 1 and between annual tests if indicators of potential impairment exist. Although at June 30, 2004, no impairment of goodwill has been recognized, it is reasonably possible that assumptions upon which the recoverability of goodwill were based could differ in the future. In that event, impairment charges could be required.

Taxes. We account for income taxes using the liability method. Deferred taxes are determined based on the differences between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. As of June 30, 2004, we carried a valuation allowance for the entire deferred tax asset as a result of uncertainties regarding the realization of the asset balance. Future taxable income and/or tax planning strategies may eliminate all or a portion of the need for the valuation allowance. In the event we determine we are able to realize our deferred tax asset, an adjustment to the valuation allowance may increase income in the period such determination is made.

This quarterly report on Form 10-Q contains forward- looking statements which involve risks and uncertainties. Our actual results could differ materially from those anticipated by such forward-looking statements as a result of certain factors, including those set forth below.

Our quarterly operating results have fluctuated significantly in the past and are expected to fluctuate significantly in the future based on a number of factors, many of which are not under our control. Our operating expenses, which include product development costs and selling, general and administrative expenses, are relatively fixed in the short-term. If our revenues are lower than we expect because we sell fewer semiconductor devices, delay the release of new products or the announcement of new features, or for other reasons, we may not be able to quickly reduce our spending in response.

Other circumstances that can affect our operating results include:

• the timing of significant orders, order cancellations and reschedulings,
• the loss of a significant customer(s),
• our significant customers could lose market share that may affect our business,
• the availability of production capacity at the fabrication facilities that manufacture our products,
• our ability to develop, introduce and market new products and technologies on a timely basis,
• introduction of products and technologies by our competitors,
• shifts in our product mix toward lower margin products,
• changes in our pricing policies or those of our competitors or suppliers, including decreases in unit average selling prices of our products,
• the availability and cost of materials to our suppliers,
• general economic conditions, and
• political climate.

In addition, our USB products, which we acquired as part of our May 2004 acquisition of NetChip Technology, Inc., are characterized by relatively fast consumer design cycles, relatively fast product ramps and relatively short customer product life cycles. These factors may result in a greater degree of revenue fluctuation from USB products, as compared to our PCI business.

These factors are difficult to forecast, and these or other factors could adversely affect our business. Any shortfall in our revenues would have a direct impact on our business. In addition, fluctuations in our quarterly results could adversely affect the market price of our common stock in a manner unrelated to our long-term operating performance.

There have been a significant number of mergers and acquisitions in the semiconductor industry in the past. As part of our business strategy, we expect to review acquisition prospects that would complement our existing product offerings, improve market coverage or enhance our technological capabilities. Future acquisitions could result in any of all of the following:

• potentially dilutive issuances of equity securities,
• large acquisition-related write-offs,
• the incurrence of debt and contingent liabilities or amortization expenses related to other intangible assets,
• difficulties in the assimilation of operations, personnel, technologies, products and the information systems of the acquired companies,
• diversion of management's attention from other business concerns,
• risks of entering geographic and business markets in which we have no or limited prior experience, and
• potential loss of key employees of acquired organizations.

We have had limited experience with acquisitions in the past and may not be able to successfully integrate any businesses, products, technologies or personnel that may be acquired in the future. Our failure to do so could have a material adverse effect on our business.

We have no long-term volume purchase commitments from any of our significant customers. We cannot be certain that our current customers will continue to place orders with us, that orders by existing customers will continue at the levels of previous periods or that we will be able to obtain orders from new customers. In addition, some of our customers supply products to end-market purchasers and any of these end-market purchasers could choose to reduce or eliminate orders for our customers' products. This would in turn lower our customers' orders for our products.

We anticipate that sales of our products to a relatively small number of customers will continue to account for a significant portion of our net sales. Due to these factors, the following have in the past and may in the future reduce our net sales or earnings:

• the reduction, delay or cancellation of orders from one or more of our significant customers;
• the selection of competing products or in-house design by one or more of our current customers;
• the loss of one or more of our current customers; or
• a failure of one or more of our current customers to pay our invoices.

Our customers typically perform numerous tests and extensively evaluate our products before incorporating them into their systems. The time required for test, evaluation and design of our products into a customer's equipment can range from six to twelve months or more. It can take an additional six to twelve months or more before a customer commences volume shipments of equipment that incorporates our products. Because of this lengthy sales cycle, we may experience a delay between the time when we increase expenses for research and development and sales and marketing efforts and the time when we generate higher revenues, if any, from these expenditures.

In addition, the delays inherent in our lengthy sales cycle raise additional risks of customer decisions to cancel or change product plans. When we achieve a design win, there can be no assurance that the customer will ultimately ship products incorporating our products. Our business could be materially adversely affected if a significant customer curtails, reduces or delays orders during our sales cycle or chooses not to release products incorporating our products.

We operate in an industry that is subject to evolving industry standards, rapid technological changes, rapid changes in customer demands and the rapid introduction of new, higher performance products with shorter product life cycles. As a result, we expect to continue to make significant investments in research and development. However, we may not have adequate funds from operations or otherwise to devote to research and development, forcing us to reduce our research and development efforts. Also, we must manage product transitions successfully, since announcements or introductions of new products by us or our competitors could adversely affect sales of our existing products because these existing products can become obsolete or unmarketable for specific purposes. There can be no assurance that we will be able to develop and introduce new products or enhancements to our existing products on a timely basis or in a manner which satisfies customer needs or achieves widespread market acceptance. Any significant delay in releasing new products could adversely affect our reputation, give a competitor a first-to-market advantage or allow a competitor to achieve greater market share. The failure to adjust to rapid technological change could harm our business, financial condition, results of operations and cash flows.

We believe that our growth prospects depend upon our ability to gain customer acceptance of our products and technology. Market acceptance of products depends upon numerous factors, including compatibility with other products, adoption of relevant interconnect standards, perceived advantages over competing products and the level of customer service available to support such products. There can be no assurance that growth in sales of new products will continue or that we will be successful in obtaining broad market acceptance of our products and technology.

We expect to spend a significant amount of time and resources to develop new products and refine existing products. In light of the long product development cycles inherent in our industry, these expenditures will be made well in advance of the prospect of deriving revenues from the sale of any new products. Our ability to commercially introduce and successfully market any new products is subject to a wide variety of challenges during this development cycle, including start-up bugs, design defects and other matters that could delay introduction of these products to the marketplace. In addition, since our customers are not obligated by long-term contracts to purchase our products, our anticipated product orders may not materialize, or orders that do materialize may be cancelled. As a result, if we do not achieve market acceptance of new products, we may not be able to realize sufficient sales of our products in order to recoup research and development expenditures. The failure of any of our new products to achieve market acceptance would harm our business, financial condition, results of operation and cash flows.

To establish market acceptance of a new semiconductor device, we must dedicate significant resources to research and development, production and sales and marketing. We incur substantial costs in developing, manufacturing and selling a new product, which often significantly precede meaningful revenues from the sale of this product. Consequently, new products can require significant time and investment to achieve profitability. Investors should understand that our efforts to introduce new semiconductor devices or other products or services may not be successful or profitable. In addition, products or technologies developed by others may render our products or technologies obsolete or noncompetitive.

We record as expenses the costs related to the development of new semiconductor devices and other products as these expenses are incurred. As a result, our profitability from quarter to quarter and from year to year may be adversely affected by the number and timing of our new product launches in any period and the level of acceptance gained by these products.

We do not manufacture any of our semiconductor devices. Therefore, we are referred to in the semiconductor industry as a "fabless" producer of semiconductors. Consequently, we depend upon third party manufacturers to produce semiconductors that meet our specifications. We currently have third party manufacturers that can produce semiconductors which meet our needs. However, as the semiconductor industry continues to progress towards smaller manufacturing and design geometries, the complexities of producing semiconductors will increase. Decreasing geometries may introduce new problems and delays that may affect product development and deliveries. Due to the nature of the semiconductor industry and our status as a "fabless" semiconductor company, we could encounter fabrication- related problems that may affect the availability of our semiconductor devices, delay our shipments or may increase our costs.

The cyclical nature of the semiconductor industry drives wide fluctuations in available capacity at third party manufacturers.  We believe that the industry is now in a period of high demand which is creating an environment of capacity shortages.   We may be unable to obtain adequate manufacturing or assembly capacity from our third-party manufacturers and assembly subcontractors to meet our customers' delivery requirements even if we adequately forecast customer demand.

None of our semiconductor devices are currently manufactured by more than one supplier. We place our orders on a purchase order basis and do not have a long term purchase agreement with any of our existing suppliers. In the event that the supplier of a semiconductor device was unable or unwilling to continue to manufacture this product in the required volume, we would have to identify and qualify a substitute supplier. Introducing new products or transferring existing products to a new third party manufacturer or process may result in unforeseen device specification and operating problems. These problems may affect product shipments and may be costly to correct. Silicon fabrication capacity may also change, or the costs per silicon wafer may increase. Manufacturing-related problems may have a material adverse effect on our business.

Competition in the semiconductor industry is intense. If our main target market, the embedded systems market, continues to grow, the number of competitors may increase significantly. In addition, new semiconductor technology may lead to new products that can perform similar functions as our products. Some of our competitors and other semiconductor companies may develop and introduce products that integrate into a single semiconductor device the functions performed by our semiconductor devices. This would eliminate the need for our products in some applications.

In addition, competition in our markets comes from companies of various sizes, many of which are significantly larger and have greater financial and other resources than we do and thus can better withstand adverse economic or market conditions. Also, as we start to sell our processor products, we will compete with established embedded microprocessor companies and others. Many of these indirect competitors and microprocessor companies have significantly greater financial, technical, marketing and other resources than PLX. Therefore, we cannot assure you that we will be able to compete successfully in the future against existing or new competitors, and increased competition may adversely affect our business. See "Business -- Competition," and " -- Products" in Part I of Item I of our Form 10-K for the year ended December 31, 2003.

Our future success depends on electronic equipment manufacturers that design our semiconductor devices into their systems. We must anticipate market trends and the price, performance and functionality requirements of current and potential future electronic equipment manufacturers and must successfully develop and manufacture products that meet these requirements. In addition, we must meet the timing requirements of these electronic equipment manufacturers and must make products available to them in sufficient quantities. These electronic equipment manufacturers could develop products that provide the same or similar functionality as one or more of our products and render these products obsolete in their applications.

We do not have purchase agreements with our customers that contain minimum purchase requirements. Instead, electronic equipment manufacturers purchase our products pursuant to short-term purchase orders that may be canceled without charge. We believe that in order to obtain broad penetration in the markets for our products, we must maintain and cultivate relationships, directly or through our distributors, with electronic equipment manufacturers that are leaders in the embedded systems markets. Accordingly, we will incur significant expenditures in order to build relationships with electronic equipment manufacturers prior to volume sales of new products. If we fail to develop relationships with additional electronic equipment manufacturers to have our products designed into new embedded systems or to develop sufficient new products to replace products that have become obsolete, our business would be materially adversely affected.

Demand for our products depends in large part on the development and expansion of the high-performance embedded systems markets including networking and telecommunications, enterprise storage, imaging and industrial applications. The size and rate of growth of these embedded systems markets may in the future fluctuate significantly based on numerous factors. These factors include the adoption of alternative technologies, capital spending levels and general economic conditions. Demand for products that incorporate high-performance embedded systems may not grow.

Our products are complex. While we test our products, these products may still have errors, defects or bugs that we find only after commercial production has begun. We have experienced errors, defects and bugs in the past in connection with new products.

Our customers may not purchase our products if the products have reliability, quality or compatibility problems. This delay in acceptance could make it more difficult to retain our existing customers and to attract new customers. Moreover, product errors, defects or bugs could result in additional development costs, diversion of technical and other resources from our other development efforts, claims by our customers or others against us, or the loss of credibility with our current and prospective customers. In the past, the additional time required to correct defects has caused delays in product shipments and resulted in lower revenues. We may have to spend significant amounts of capital and resources to address and fix problems in new products.

We must continuously develop our products using new process technology with smaller geometries to remain competitive on a cost and performance basis. Migrating to new technologies is a challenging task requiring new design skills, methods and tools and is difficult to achieve.

Our success depends to a significant extent upon our senior management and key technical and sales personnel. The loss of one or more of these employees could have a material adverse effect on our business. We do not have employment contracts with any of our executive officers.

Our success also depends on our ability to attract and retain qualified technical, sales and marketing, customer support, financial and accounting, and managerial personnel. Competition for such personnel in the semiconductor industry is intense, and we may not be able to retain our key personnel or to attract, assimilate or retain other highly qualified personnel in the future. In addition, we may lose key personnel due to attrition, including health, family and other reasons. We have experienced, and may continue to experience, difficulty in hiring and retaining candidates with appropriate qualifications. If we do not succeed in hiring and retaining candidates with appropriate qualifications, our business could be materially adversely affected.

We depend on distributors to sell a significant portion of our products. For the six months ended June 30, 2004 and 2003, net revenues through distributors accounted for approximately 50% and 54%, respectively, of our net revenues. Some of our distributors also market and sell competing products. Distributors may terminate their relationships with us at any time. Our future performance will depend in part on our ability to attract additional distributors that will be able to market and support our products effectively, especially in markets in which we have not previously distributed our products. We may lose one or more of our current distributors or may not be able to recruit additional or replacement distributors. The loss of one or more of our major distributors could have a material adverse effect on our business, as we may not be successful in servicing our customers directly or through manufacturers' representatives.

Substantially all of our revenues are derived from sales of products, which rely on the PCI standard. If the embedded systems markets move away from this standard and begin using new standards, we may not be able to successfully design and manufacture new products that use these new standards. There is also the risk that new products we develop in response to new standards may not be accepted in the market. In addition, the PCI standard is continuously evolving, and we may not be able to modify our products to address new PCI specifications. Any of these events would have a material adverse effect on our business.

When marketing and selling our semiconductor devices, we believe we enjoy a competitive advantage based on the availability of development tools offered by third parties. These development tools are used principally for the design of other parts of the embedded system but also work with our products. We will lose this advantage if these third party tool vendors cease to provide these tools for existing products or do not offer them for our future products. This event could have a material adverse effect on our business. We have no written agreements with these third parties, and these parties could choose to stop providing these tools at any time.

Our future success and competitive position depend upon our ability to obtain and maintain proprietary technology used in our principal products. Currently, we have limited protection of our intellectual property in the form of patents and rely instead on trade secret protection. Our existing or future patents may be invalidated, circumvented, challenged or licensed to others. The rights granted thereunder may not provide competitive advantages to us. In addition, our future patent applications may not be issued with the scope of the claims sought by us, if at all. Furthermore, others may develop technologies that are similar or superior to our technology, duplicate our technology or design around the patents owned or licensed by us. In addition, effective patent, trademark, copyright and trade secret protection may be unavailable or limited in foreign countries where we may need protection. We cannot be sure that steps taken by us to protect our technology will prevent misappropriation of the technology.

We may from time to time receive notifications of claims that we may be infringing patents or other intellectual property rights owned by third parties. While there is currently no intellectual property litigation pending against us, litigation could result in significant expenses to us and adversely affect sales of the challenged product or technology. This litigation could also divert the efforts of our technical and management personnel, whether or not the litigation is determined in our favor. In addition, we may not be able to develop or acquire non-infringing technology or procure licenses to the infringing technology under reasonable terms. This could require expenditures by us of substantial time and other resources. Any of these developments would have a material adverse effect on our business.

In the last few years, the semiconductor industry has been characterized by significant downturns and wide fluctuations in supply and demand. Also, during this time, the industry has experienced significant fluctuations in anticipation of changes in general economic conditions. This cyclicality has led to significant variances in product demand and production capacity. It has also accelerated erosion of average selling prices per unit. We may experience periodic fluctuations in our future financial results because of industry-wide conditions.

Sales outside of North America accounted for 63.2% of our revenues for the six months ended June 30, 2004. In 2003, 2002, and 2001, sales outside of North America accounted for 62.9%, 58.4%, and 43.7% of our revenues, respectively. Sales outside of North America may fluctuate in future periods and may continue to account for a large portion of our revenues. In addition, equipment manufacturers who incorporate our products into their products sell their products outside of North America, thereby exposing us indirectly to foreign risks. Further, most of our semiconductor products are manufactured outside of North America. Accordingly, we are subject to international risks, including:

• difficulties in managing distributors,
• difficulties in staffing and managing foreign subsidiary and branch operations,
• political and economic instability,
• foreign currency exchange fluctuations,
• difficulties in accounts receivable collections,
• potentially adverse tax consequences,
• timing and availability of export licenses,
• changes in regulatory requirements, tariffs and other barriers,
• difficulties in obtaining governmental approvals for telecommunications and other products, and
• the burden of complying with complex foreign laws and treaties.

Because sales of our products have been denominated to date exclusively in United States dollars, increases in the value of the United States dollar will increase the price of our products so that they become relatively more expensive to customers in the local currency of a particular country, which could lead to a reduction in sales and profitability in that country.

Our executive officers, directors and other principal stockholders, in the aggregate, beneficially own a substantial amount of our outstanding common stock. Although these stockholders do not have majority control, they currently have, and likely will continue to have, significant influence with respect to the election of our directors and approval or disapproval of our significant corporate actions. This influence over our affairs might be adverse to the interests of other stockholders. In addition, the voting power of these stockholders could have the effect of delaying or preventing a change in control of PLX.

Anti-takeover provisions of Delaware law and our Certificate of Incorporation may make a change in control of PLX more difficult, even if a change in control would be beneficial to the stockholders. These provisions may allow the Board of Directors to prevent changes in the management and control of PLX.

As part of our anti-takeover devices, our Board of Directors has the ability to determine the terms of preferred stock and issue preferred stock without the approval of the holders of the common stock. Our Certificate of Incorporation allows the issuance of up to 5,000,000 shares of preferred stock. There are no shares of preferred stock outstanding. However, because the rights and preferences of any series of preferred stock may be set by the Board of Directors in its sole discretion without approval of the holders of the common stock, the rights and preferences of this preferred stock may be superior to those of the common stock. Accordingly, the rights of the holders of common stock may be adversely affected. Consistent with Delaware law, our Board of Directors may adopt additional anti-takeover measures in the future.

We have an investment portfolio comprised of fixed income securities, including amounts classified as cash equivalents, short-term and long-term investments. Our investment portfolio totaled $28.1 million at June 30, 2004. These securities are subject to interest rate fluctuations and will decrease in market value if interest rates increase.

The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. We invest primarily in high quality, short-term and long-term debt instruments. A hypothetical 100 basis point increase in interest rates would result in approximately a $0.2 million decrease (less than 1%) in the fair value of our available-for-sale securities.

Name                 Votes For    Votes Withheld 
Michael J. Salameh   21,320,365          798,730
D. James Guzy        19,114,863        3,004,232
Timothy Draper       21,199,733          919,362
John H. Hart         21,392,600          726,495
Robert H. Smith      21,458,633          660,462

                                                                                        Broker
                                                   For        Against      Abstain     Non-Votes 

1.  Amendment of amended and restated             15,373,094    1,248,090      340,756    5,157,155
     certificate of incorporation.

2.  Approval of issuance of common stock in       15,724,148      895,590      342,202    5,157,155
     the NetChip Technology, Inc. acquisition.

3.  Approval of an amendment to the PLX           12,576,690    2,730,489    1,654,761    5,157,155
     Technology, Inc. 1999 Stock Incentive
     Plan.

4.  Ratification of the appointment of Ernst      21,241,759      299,985      577,351           --
     & Young LLP as independent auditors for
     the fiscal year ending December 31, 2004.

a. Exhibits

Exhibit Number	Description
2.1	Agreement and Plan of Reorganization by and among PLX Technology, Inc., NC Acquisition Sub, Inc., NetChip Technology, Inc. and Wei-Ti Liu as Shareholders' Agent (1)
3.1	Certificate of Amendment to Amended and Restated Certificate of Incorporation.
4.1	Registration Rights Agreement (2)
10.1*	NetChip Technology, Inc. 1996 Flexible Stock Incentive Plan.
10.2*	PLX Technology, Inc. 2004 Bonus and Deferred Compensation Plan.
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes- Oxley Act of 2002.
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer Pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer Pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	(1) Incorporated by reference to Exhibit 2.1 to Form 8-K filed on March 9, 2004.
	(2) Incorporated by reference to Exhibit 4.2 to Form S-3 filed on June 21, 2004
	* Management contract or compensatory plan or arrangement.

 

2. Reports on Form 8-K

1. A report on Form 8-K was filed by the Company on May 25, 2004 relating to the acquisition of Net Chip Technology, Inc.
2. A report on Form 8-K was furnished by the Company on April 15, 2004 relating to a press release announcing the Company's preliminary earnings release for the quarter ended March 31, 2004.






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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

PLX TECHNOLOGY, INC.

 

Date: August 3, 2004

By /s/ Rafael Torres

Rafael Torres

Vice President, Finance and Chief Financial Officer

(Authorized Officer and

Principal Financial Officer)






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EXHIBIT INDEX

 

Exhibit Number	Description
2.1	Agreement and Plan of Reorganization by and among PLX Technology, Inc., NC Acquisition Sub, Inc., NetChip Technology, Inc. and Wei-Ti Liu as Shareholders' Agent (1)
3.1	Certificate of Amendment to Amended and Restated Certificate of Incorporation.
4.1	Registration Rights Agreement (2)
10.1*	NetChip Technology, Inc. 1996 Flexible Stock Incentive Plan.
10.2*	PLX Technology, Inc. 2004 Bonus and Deferred Compensation Plan.
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes- Oxley Act of 2002.
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer Pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer Pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	(1) Incorporated by reference to Exhibit 2.1 to Form 8-K filed on March 9, 2004.
	(2) Incorporated by reference to Exhibit 4.2 to Form S-3 filed on June 21, 2004.
	* Management contract or compensatory plan or arrangement.






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