The unaudited condensed consolidated financial statements include all of the accounts of the Company and those of its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated.

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

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 amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates and such differences may be material to the financial statements.

                                                    Three Months Ended    Nine Months Ended
                                                        September 30,       September 30,
                                                   -------------------- --------------------
                                                      2004       2003      2004       2003
                                                   ---------  --------- ---------  ---------
Net income (loss)................................       327        129        67     (2,584)
Unrealized gain (loss) on marketable securities,         54        (30)     (118)       (79)
Cumulative translation adjustments...............        (5)       (13)        1         (5)
                                                   ---------  --------- ---------  ---------
Comprehensive net income (loss)..................       376         86       (50)    (2,668)
                                                   =========  ========= =========  =========

In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51", which requires companies to consolidate certain types of variable interest entities. A variable interest entity is an entity that has inadequate invested equity at risk to meet expected future losses, or whose holders of the equity investments lack any of the following three characteristics: (i) the ability to make the Company's decisions about the entity's activities; (ii) the obligation to absorb the entity's losses if they occur; (iii) the right to receive the entity's future returns if they occur. Adoption of this statement did not have a material impact on the Company's financial position, results of operations or cash flows.

On May 24, 2004, the Company purchased NetChip Technology, Inc., a supplier of high-performance semiconductors based on Universal Serial Bus (USB) and Peripheral Component Interconnect (PCI) standards. The aggregate purchase price, including acquisition costs, was $22.2 million, and was substantially all paid in the form of the Company's common stock and options to purchase common stock. The Company acquired NetChip Technology, Inc. in order to expand its position of strength in the market for PCI, PCI-X and PCI Express interconnect chips to include the USB product line, where NetChip offers an industry-leading product line offering high-performance and low-power products for the USB 2.0 market. NetChip also has PCI Express products in development that complement the Company's PCI Express chips.

The Company's financial results for the three and nine months ended September 30, 2004 reflect the acquisition from the date the transaction was closed.

The purchase price of the NetChip Technology, Inc. acquisition is summarized below (in thousands):

Fair value of common stock issued............. $     21,405
Fair value of options assumed.................          315
Acquisition costs.............................          524
                                                ------------
Total consideration........................... $     22,244
                                                ============

The Company issued an aggregate of 2,035,077 shares of its common stock valued at $21.4 million. The Company also assumed 126,419 stock options with a total value of approximately $0.3 million. The stock options were valued using the Black-Scholes valuation model. Additionally, the Company incurred approximately $0.5 million in professional fees, including legal, valuation and accounting fees related to the acquisition, which were included as part of the purchase price consideration for this transaction.

PLX also recorded $0.9 million in deferred compensation on the unvested options, assumed in connection with the acquisition of NetChip Technology, Inc. Deferred compensation is being amortized over the remaining vesting periods of these assumed options, generally three years.

Additional consideration of the Company's common stock with a maximum aggregate value of approximately $10 million may be paid out to the former shareholders of NetChip Technology, Inc. in the event USB gross profits meet certain milestones in the period ending approximately one year following the close of the transaction. Any additional consideration will become goodwill in the period such additional consideration becomes payable.

The allocation of the Company's purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed is summarized below (in thousands). The allocation was based on management's assessment of the fair value of the identified assets and liabilities assumed.

Net tangible assets........................... $      3,144
In-process technology.........................        1,123
Goodwill and other intangible assets:
    Goodwill..................................       11,998
    Developed/Core Technology.................        3,594
    Customer Base.............................        2,385
                                                ------------
                                                     17,977
                                                ------------
Net assets acquired........................... $     22,244
                                                ============

Net tangible assets acquired were comprised primarily of cash, inventory, accounts receivables, accounts payables, and other accrued liabilities. The acquired in-process technology was written-off in the second quarter of 2004. The estimated weighted average useful life of the intangible assets for the developed/core technology and customer base created as a result of the acquisition of NetChip Technology, Inc. is approximately 6 and 3 years, respectively. Amortization of developed/core technology was $0.2 million for both the three and the nine month periods ended September 30, 2004. Amortization of customer base was $0.2 million and $0.3 million, respectively, for the three and nine months ended September 30, 2004.

The $1.1 million allocation of the purchase price to the acquired in-process technology was determined by identifying research projects in areas for which technological feasibility had not been established and no alternative future uses existed. The Company acquired technology consisting of PCI Express solutions. The value 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 September 30, 2004, the Company estimated the project was over 90% complete. The Company expects to complete the project in the first quarter of 2005.

On May 22, 2003, the Company purchased HiNT Corp., a fabless semiconductor supplier of Peripheral Component Interconnect (PCI) and PCI-X bridge chips, for an aggregate purchase price, of $15.6 million.  In addition, the Company issued 337,162 shares of common stock valued at approximately $3.0 million and paid approximately $137,000 to former employees and warrant holders of HiNT because certain product sales milestones were met as of June 30, 2004.  This additional consideration was recorded as goodwill during the three months ended September 30, 2004. On May 24, 2004, the Company purchased NetChip Technology, Inc., a supplier of high-performance semiconductors based on Universal Serial Bus (USB) and Peripheral Component Interconnect (PCI) standards, for an aggregate purchase price of $22.2 million, as described above.

The unaudited pro forma financial information combines the historical statements of operations of the Company, NetChip Technology, Inc., and HiNT Corp. for the three and nine months ended September 30, 2004 and 2003 and gives effect to the transactions, including the amortization of other intangible assets and the amortization of deferred compensation, as if they occurred at the beginning of each period presented. The amount of the aggregate purchase price allocated to purchased in-process research and development for each of the transactions has been excluded from the pro forma information, as it is a non-recurring item.

The unaudited pro forma information is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have occurred if the transaction had been consummated at the dates indicated, nor is it necessarily indicative of future operating results of the combined companies and should not be construed as representative of these amounts for any future periods (in thousands, except per share data).

                                                         Three Months Ended     Nine Months Ended
                                                             September 30,        September 30,
                                                        --------------------  --------------------
                                                           2004       2003       2004       2003
                                                        ---------  ---------  ---------  ---------
Net revenues.......................................... $  15,457  $  12,072  $  50,669  $  33,821
Net income (loss)..................................... $     327  $    (301) $   1,465  $  (2,922)
Net income (loss) per share - basic .................. $    0.01  $   (0.01) $    0.06  $   (0.11)
Shared used to compute basic per share amounts........    26,452     26,169     26,358     26,312
Net income (loss) per share - diluted ................ $    0.01  $   (0.01) $    0.05  $   (0.11)
Shared used to compute diluted per share amounts......    27,239     26,169     27,474     26,312

The following table sets forth the computation of basic and diluted net income (loss) per share (in thousands, except per share data):

                                                         Three Months Ended     Nine Months Ended
                                                            September 30,         September 30,
                                                        --------------------  --------------------
                                                           2004       2003       2004       2003
                                                        ---------  ---------  ---------  ---------

Net income (loss)..................................... $     327  $     129  $      67  $  (2,584)
                                                        ========== ========== ========== ==========

Weighted average shares of common stock
   outstanding........................................    26,342     23,797     25,028     22,392
                                                        ---------  ---------  ---------  ---------

Net income (loss) per share - basic................... $    0.01  $    0.01  $    0.00  $   (0.12)
                                                        ========== ========== ========== ==========
Shares used in computing basic net income (loss)
   per share..........................................    26,342     23,797     25,028     22,392
Dilutive effect of stock options......................       787        645      1,116         --
                                                        ---------  ---------  ---------  ---------
Shares used in computing diluted net income
   (loss) per share...................................    27,129     24,442     26,144     22,392
                                                        ========== ========== ========== ==========
Net income (loss) per share - diluted................. $    0.01  $    0.01  $    0.00  $   (0.12)
                                                        ========== ========== ========== ==========

Employee stock options to purchase approximately 3.9 and 3.7 million shares for the three month periods ended September 30, 2004 and September 30, 2003, respectively, were outstanding, but were not included in the computation of diluted earnings per share because the exercise price of the stock options was greater than the average share price of the common shares and, therefore, the effect would have been anti-dilutive.

Employee stock options to purchase approximately 3.6 million shares for the nine month period ended September 30, 2004 were outstanding, but were not included in the computation of diluted earnings per share because the exercise price of the stock options was greater than the average share price of the common shares and, therefore, the effect would have been anti-dilutive. As the Company incurred a loss for the nine month period ended September 30, 2003, the effect of the dilutive securities, totaling 4.3 million equivalent shares, have been excluded from the computation of diluted loss per share, as their impact would have been anti-dilutive.

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 September 30, 2004 was 63.5%, a decrease of 8.8% from 72.3% for the same period in 2003. Excluding benefits from selling previously written-down inventory of approximately $0.4 million and $0.2 million for the three months ended September 30, 2004 and 2003, respectively, gross margin decreased to 61.1% for the three months ended September 30, 2004, from 70.7% for the same period in 2003. The decrease in gross margin was primarily due to higher unit shipments of our USB products which deliver lower margins compared to our PCI products. The USB product line was acquired pursuant to our acquisition of NetChip, which was completed in May 2004.

Gross margin for the nine months ended September 30, 2004 was 66.5%, a decrease of 4.8% from 71.3% for the same period in 2003. Excluding benefits from selling previously written-down inventory of approximately $0.5 million for each of the nine months ended September 30, 2004 and 2003, gross margin decreased to 65.1% for the nine months ended September 30, 2004, from 69.5% for the same period in 2003. The decrease in gross margin was primarily due to higher unit shipments of our USB products which deliver lower margins compared to our PCI products.

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 engineering tooling costs at our independent foundries and deferred compensation are included in research and development expenses.

R&D as a percentage of net revenues decreased to 30.8% for the three months ended September 30, 2004, as compared to 37.1% 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 $1.0 million or 24.9% to $4.8 million for the three months ended September 30, 2004 from $3.8 million for the same period in 2003. Excluding deferred compensation amortization of $34,000 and $0.1 million for the three months ended September 30, 2004 and 2003, respectively, R&D increased by $1.0 million to $4.7 million for the three months ended September 30, 2004 from $3.7 million for the same period in 2003. The increase in R&D was due to higher compensation and benefit expenses of $0.5 million resulting mainly from higher headcount resulting from the NetChip acquisition, and an increase in engineering tools expense of $0.5 million associated with the development of new products and enhancement of existing products.

R&D as a percentage of net revenues decreased to 32.1% for the nine months ended September 30, 2004, as compared to 41.6% 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 $1.8 million or 15.7% to $13.2 million for the nine months ended September 30, 2004 from $11.4 million for the same period in 2003. Excluding deferred compensation of $58,000 and $0.9 million for the nine months ended September 30, 2004 and 2003, R&D increased by $2.7 million to $13.2 million for the nine months ended September 30, 2004 from $10.5 million for the same period in 2003. The increase in R&D was due to higher compensation and benefit expenses of $1.3 million resulting mainly from higher headcount resulting from the NetChip and HiNT acquisitions, an increase in engineering tools expense of $1.0 million associated with the development of new products and enhancement of existing products, and an increase in software license expense of $0.3 million.

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 27.2% for the three months ended September 30, 2004, as compared to 32.1% 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 $0.9 million or 27.5% to $4.2 million for the three months ended September 30, 2004 from $3.3 million for the same period in 2003. The increase in SG&A was due primarily to higher compensation and benefit expenses of $0.2 million resulting mainly from higher headcount resulting from the NetChip acquisition, higher consulting and professional fees of $0.4 million resulting mainly from our Sarbanes Oxley compliance effort, and an increase of approximately $0.1 million in sales commissions to manufacturer's representatives as a result of higher revenues.

SG&A as a percentage of net revenues decreased to 28.3% for the nine months ended September 30, 2004, as compared to 34.8% 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 $2.1 million or 22.0% to $11.7 million for the nine months ended September 30, 2004 from $9.6 million for the same period in 2003. The increase in SG&A was due primarily to higher compensation and benefit expenses of $0.9 million resulting mainly from higher headcount in connection with acquisitions, higher consulting and professional fees of $0.5 million resulting mainly from our Sarbanes Oxley compliance effort, and an increase of approximately $0.5 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 Technology, 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 September 30, 2004, the Company estimated the project was over 90% complete. The Company expects to complete the project in the first quarter of 2005.

Amortization of purchased intangible assets for the three months ended September 30, 2004 was $0.5 million, an increase of $0.2 million from $0.3 million for the three months ended September 30, 2003. Amortization of purchased intangibles for the nine months ended September 30, 2004 was $1.2 million, an increase of $0.6 million from $0.6 million for the nine months ended September 30, 2003. The increase for both the three and nine months ended September 30, 2004 compared to September 30, 2003 is due primarily 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). This increase was partially offset by a $0.1 million reduction in amortization expense on certain Sebring patents which were fully amortized as of June 2004.

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, generally three years.

Amortization of deferred compensation decreased by $71,000 to $54,000 for the three months ended September 30, 2004 from $0.1 million from the same period in 2003. Amortization of deferred compensation decreased by $0.8 million to $0.1 million for the nine months ended September 30, 2004 from $0.9 million for the same period in 2003. The decrease in deferred compensation for the three and nine months ended September 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.

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 September 30, 2004 and 2003 and at $0.3 million for each of the nine months ended September 30, 2004 and 2003.

Income tax expense of $0.2 million and $0.4 million was recorded for the three and nine month periods ended September 30, 2004, respectively, compared to income tax expense of $32,000 and $16,000 for the same periods in 2003. Income tax expense is primarily due to federal alternative minimum tax, miscellaneous state income taxes 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 income from operations primarily due to nondeductible acquisition-related items and a change in the valuation allowance.

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 $31.8 million at September 30, 2004, an increase of $8.7 million from $23.1 million at December 31, 2003. The increase was primarily due to (1) net income of $0.1 million adjusted for non-cash expenses of $4.2 million, (2) increases in accounts payable, deferred revenues, and accrued compensation and benefits of $1.7 million, $0.7 million, and $0.3 million, respectively, (3) decreases in accounts receivable and other current assets of $0.4 million and $0.5 million, respectively, (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 $1.4 million from the exercise of stock options. This was partially offset by an increase in inventory of $2.0 million and capital expenditures of $1.5 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 earn-out consideration comprising of shares of our common stock and cash was payable if certain HiNT product sales milestones were met as of June 30, 2004. During the three months ended September 30, 2004, we issued 337,162 additional shares valued at $3.0 million to the former shareholders of HiNT and paid cash of approximately $137,000 to former employees and warrant holders of HiNT.

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 September 30, 2004, approximately 774,000 shares had been repurchased for approximately $1,867,000 in cash. We did not repurchase any shares during the nine month period ended September 30, 2004.

As of September 30, 2004, non-cancelable inventory purchase commitments were $3.5 million as compared with $1.7 million at December 31, 2003. 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 September 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 September 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.

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:

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.

Historically, a relatively small number of customers have accounted for a significant portion of our net revenues in any particular period. For the three months ended September 30, 2004, one direct customer and one distributor accounted for 10% and 13%, respectively, of net revenues. For the same period in 2003, a different distributor accounted for 12% of net revenues. For the nine months ended September 30, 2004, one distributor accounted for 12% of net revenues.  For the same period in 2003, a different distributor accounted for 10% of net revenues. No other individual direct customer or distributor represented greater than 10% of net revenues.

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:

We are spending an increased amount of management time and external resources to comply with changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and Nasdaq Stock Market rules. In particular, Section 404 of the Sarbanes-Oxley Act of 2002 requires management's annual review and evaluation of our internal control systems, and attestations of the effectiveness of these systems by our independent auditors. We are currently documenting and testing our internal control systems and procedures and considering improvements that may be necessary in order for us to comply with the requirements of Section 404 by the end of 2004. This process has required us to hire outside advisory services and has resulted in additional administrative expenses. In addition, the evaluation and attestation processes required by Section 404 are new and neither companies nor auditing firms have significant experience in testing or complying with these requirements. Accordingly, we may encounter problems or delays in completing the review and evaluation, the implementation of improvements and the receipt of a positive attestation by our independent auditors. While we believe that we currently have adequate internal controls over financial reporting, in the event that we or our independent auditors determine that our controls over financial reporting are not effective as defined under Section 404, investor perceptions of our company may be adversely affected and could cause a decline in the market price of our stock.

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 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, 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 nine months ended September 30, 2004 and 2003, net revenues through distributors accounted for approximately 50.8% and 60.0 %, 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.

A majority 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 66.6% of our revenues for the nine months ended September 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:

Unregistered Sales of Equity Securities. In connection with our acquisition of HiNT in May 2003, we agreed to pay certain additional earn-out consideration of shares of our common stock and cash if certain HiNT product sales milestones were met as of June 30, 2004. Certain of such milestones have been met. Consequently, for such earn-out consideration payment, we issued 337,162 shares to former shareholders of HiNT and paid $137,000 to former employees and warrant holders of HiNT during the three months ended September 30, 2004. The shares were issued in reliance on Rule 506 of Regulation D under the Securities Act of 1933, as amended, and have been registered for resale on a Form S-3.

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.