plx_2013body10k.htm

PLX Technology, Inc.

INDEX TO

ANNUAL REPORT ON FORM 10-K

FOR YEAR ENDED DECEMBER 31, 2013

Part I.		Page

Item 1.	Business	2
Item 1A.	Risk Factors	14
Item 1B.	Unresolved Staff Comments	21
Item 2.	Properties	22
Item 3.	Legal Proceedings	22
Item 4.	Mine Safety Disclosures	22
Part II.
Item 5.	Market for Registrant's Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities	23
Item 6.	Selected Financial Data	25
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	25
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 8.	Financial Statements and Supplementary Data	36
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosures	36
Item 9A.	Controls and Procedures	36
Item 9B.	Other Information	37
Part III.
Item 10.	Directors, Executive Officers and Corporate Governance	38
Item 11.	Executive Compensation	38
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	38
Item 13.	Certain Relationships and Related Transactions, and Director Independence	38
Item 14.	Principal Accountant Fees and Services	38
Part IV.
Item 15.	Exhibits and Financial Statement Schedules	39
Signatures		74

PART I

ITEM 1: BUSINESS

Overview

PLX Technology, Inc. (“We”, "PLX" or the "Company"), designs, develops, manufactures and sells integrated circuits that perform critical system connectivity functions. These interconnect products are fundamental building blocks for standards-based electronic equipment. The Company markets its products to major customers worldwide that sell electronic systems in the enterprise, consumer, server, storage, communications, personal computer (PC), peripheral and embedded markets.

The explosive growth of cloud-based computing has provided a significant opportunity for PLX, since the data centers that house cloud data and applications have traditionally been limited by their ability to offer high-performance, low-cost, low-power, scalable interconnections. Large public and private data center companies are aggressively promoting open architectures for all types of equipment and software that enables use of off-the-shelf components and systems, allowing significant cost and density improvements. The level of integration is increasing, and the need for rapid expansion forces these customers to build their systems using standards-based, off-the-shelf devices.

The Company is a market share leader in PCI Express switches and bridges. We recognized the trend towards this serial, switched interconnect technology early, launched products for this market long before our competitors and have deployed multiple generations of products to serve a general-purpose market. In addition to enabling customer differentiation through our product features, the breadth of those products’ range is in itself a significant benefit to our customers, since we can serve the complete needs of our customers with cost-effective solutions tailored to specific system requirements. The Company supplies an industry-leading, extensive portfolio of PCI Express switches; PCI Express bridges that allow backward compatibility to the previous PCI standard; and other bridging technology that enables seamless interoperability between two of the most popular mainstream interconnects: PCI Express and Universal Serial Bus (USB). Our extensive experience with PCI Express connectivity products enables PLX to deliver reliable devices that operate in non-ideal, real-world system environments.

Several trends within the data center industry are putting more emphasis on the performance and features of standard interconnection products. These include:

·	High-density data centers, which make the traditional solutions inadequate in terms of power consumption and management, and cost of ownership;

·	I/O Virtualization, which allows multiple host processors to share communication and storage devices;

·	Convergence, which enables different protocols to be delivered on standard, high-volume interconnection technologies;

Growth in on-line transactions and high-performance computing that are driving increased use of solid state disk (SSD) subsystems for performance, which demands high-bandwidth interconnection in order to scale effectively and benefits from interconnection features that reduce overhead and increase performance; and

·	The SSD market is growing at 2-3x annually.

PLX offers a complete solution consisting of semiconductor devices, software development kits, hardware design kits, software drivers and firmware solutions that enable added-value features in our products. We differentiate our products by offering higher performance at lower power, enabling a richer customer experience based on proprietary features that enable system-level customer advantages, offering the industry’s broadest PCI Express portfolio and providing capabilities that enable a customer to get to market more quickly.

The Company has enhanced its systems and software capability in particular over the past several years. This has become important, since the high level of integration of the silicon devices has driven more of the intelligence of the system into fewer devices. This has made the architecture of the building blocks critical to overall system performance, necessitating a closer relationship between the vendor and customer to achieve aggressive system operating goals. In addition, the highly integrated solutions have become more complex, and both time-to-market goals and performance targets can only be reasonably attained if the device vendor supplies the appropriate software as part of the overall solution. PLX’s customers view the Company as a resource from the start of their system development, defining their architectures and making their trade-offs based on the features available in PLX products.

The PLX growth strategy has several key components:

·	Identify the technology trends and discontinuities that drive high-volume markets and deliver highly differentiated products to that market before the competition;

·	Offer added-value features that enable our customers to differentiate their products;

·	Focus on adding value at competitive prices that enable high-volume adoption of our customers’ solutions;

·	Deliver comprehensive solutions, including semiconductor devices, the necessary software and development kits to allow rapid time-to-market and worldwide local technical support;

·	Identify where PLX can enable the market and expand the total addressable market (TAM) built from our leadership silicon and complimentary software.

PLX is a Delaware corporation established in 1986, with headquarters at 870 W. Maude Avenue, Sunnyvale, California 94085. The telephone number is (408) 774-9060. Additional information about PLX is available on our Website at http://www.plxtech.com. Information contained in the Website is not part of this report.

Our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports and the Proxy Statement for our Annual Meeting of Stockholders, are made available, free of charge, on our Website, http://www.plxtech.com, as soon as reasonably practicable after the reports have been filed with or furnished to the Securities and Exchange Commission.

Industry Background

High speed interconnect technology has largely consolidated over the past decade, converging on several mainstream standards that serve different roles within the system. PCI Express has become the dominant interconnect within enterprise-class individual electronic systems (sometimes referred to as “within the box”), while Ethernet and USB are the primary general-purpose interconnect technologies between individual electronic systems (sometimes referred to as “box-to-box”). PCI Express is now being pursued as an ideal box-to-box alternative to Ethernet and InfiniBand in certain applications, due to its high performance, low power, low cost, and ease of connectivity to native PCI Express devices within the box.

The convergence of interconnects is happening due to the inherent cost and power advantages that accrue when many companies compete based on commonly used interconnection and has been enabled by the mainstream standards being enhanced to allow them to fit into a wider variety of usage models.

Cloud-based computing, where basic storage and computational functions have been consolidated into a smaller number of extremely large compute and storage farms, has invigorated the enterprise market in particular, and has put renewed focus on the ability to move data around quickly and efficiently, and within very aggressive cost and power envelopes. This industry shift has made the choice of interconnect technology into a key differentiator -- and a standards-based approach crucial to success.

The need to achieve ambitious price points is important, since the vendors who supply cloud services are competing with each other, and this can only be accomplished by spreading the development cost of the subsystems over a broad customer base. This is only possible within the framework of a standards-based approach that allows the industry at large to use the same basic building blocks.

Power dissipation has become critical, since the density of computing and storage has reached the point where there are tangible, significant costs associated with supplying power to the computer room, and in cooling the equipment. This need for lower power pushes the industry toward even deeper submicron fabrication technologies, with the costs of this move also favoring those who can amortize their development investments over a wide customer base. This is possible only through a framework based on standards.

Although the connections on PLX-based products employ industry standards that allow interoperability between vendors, PLX differentiates its products by offering lower overall system cost, lower power, higher performance and a rich feature-set. The Company is currently focused solely on the PCI Express standard and developing its industry-leading switch portfolio. In order to supplement the usage of PCI Express, the Company also offers a variety of other bridging solutions, the most significant of which bridge PCI Express to USB and legacy PCI.

PCI Express, also known as PCIe, is the primary interconnection mechanism inside computing systems today. Since there is at least one, and sometimes many, PCI Express ports on most system building blocks, the least costly and highest-performance approach for connecting the various system devices together is through this interconnection pathway. To provide appropriate connection between subsystems in complex multi-chip systems, a switch is the most cost-effective approach. The switch is thus a fundamental building block for the system, carrying data to and from the subsystems without impeding the native performance of the underlying devices. For many of the end-points that do not have native PCI Express connections, PLX also provides bridging solutions to translate the protocol.

The USB standard was designed to replace the expensive, slow, unreliable and un-scalable parallel interconnects of the time. USB was originally used to connect PCs with peripherals such as printers and external storage. Its speed has been upgraded continuously since its initial rollout, and USB has become the most popular interconnect between electronic systems in the consumer market and commonly used in multi-function printers in office environments. USB has also become the natural way that users add to/upgrade their systems with peripherals, eliminating the need to open the case and add plug-in cards.

There are several trends accelerating the penetration of PLX products in the enterprise and cloud markets. The first is the rapid growth of data mining, Internet searches, social media, rich multi-media content, cloud storage/computing and on-line transactions. This requires instant presentation of data or content to the applications or users. Traditional storage based on hard disk drive (HDD) is not fast enough to keep-up with high-speed content access requirements of these new applications and users. The industry has created multiple tiers for data based on the application needs. Such data needed for ultra-fast transitions is stored in system RAM (“ultra-hot”), whereas data for very fast transitions (“hot”) is kept in flash devices, normal (“warm”) data is stored in HDDs and data not actively accessed (“cold”) is stored in tape-based systems. As the nature of the data changes from ultra-hot to cold, it moves from one storage medium to the other.

SSDs, often referred to as flash-based storage, at one point were exorbitantly expensive and had limited life due to the limited number of time one could write data into them. However, recent technology enhancements have allowed higher densities, a greater number of write cycles and reduced cost. This has enabled huge architectural changes in enterprise and cloud computing, with storage and SSDs now part of every system in the data center.

Initial migration to SSDs started with the use of Serial Attached SCSI (SAS), Serial ATA (SATA) and Fibre Channel, but this requires translation from PCI Express to the respective protocol as all x86-based enterprise CPUs only offer PCI Express ports that connect to external I/Os. This adds to the latency of the data or content being transferred. The enterprise portion of the SSD market is moving to PCI Express as one of the primary and preferred interfaces, and new standards have been defined, such as NVMe, SATA Express and SCSI Express.

This has created a significant opportunity for PLX as the industry is adopting PCI Express-based SSD solutions at a very fast pace, potentially resulting in rapid growth for the PCI Express switches that connect these SSDs to host systems or provide fan-out capabilities.

The second industry trend that favors the PLX product focus is the continued increase in CPU and I/O speeds, especially in communication and storage subsystems. As speeds of these subsystems increase, the demand for greater bandwidth in the component-level interconnect grows. Since PLX is the leader in mainstream PCI Express interconnection technology, it is in a unique position to satisfy this demand.

PCI Express has become so common that it is often the main connectivity port on CPU, storage and communication devices, or one of a select few. This has created an opportunity for the technology to expand beyond its board-level dominance to being a single, converged fabric inside cloud and data center racks. And since PLX is already supplying the majority of the stand-alone switching and bridging devices, it enables the company to identify and deploy products that take advantage of the synergies between inside-the-box and outside-the-box solutions.

The trend toward greater processing and I/O performance has been paralleled by several other trends: I/O virtualization and fabric convergence. Computing systems have long used the concept of virtualization to enable individual users on a single system to appear to have all of the processor, I/O and storage -- all managed by the hardware and operating system. As the processing power increased, and as standard operating systems such as Windows and Linux became dominant, virtualization was expanded to include even the operating system. In current systems, not only do users believe that they have all of the resources, they also write their code based on one of the supported operating systems, and users co-exist without knowledge that other users are “running” on something entirely different. These improvements have led to the common use of special-purpose virtualization hardware features supported by software.

The initial I/O virtualization systems generally used a software approach. However, this approach yielded poor performance and took up more of the processing subsystem than was acceptable. It did not scale as easily because of the inherent limitations of a software-only implementation. As with the other virtualization initiatives, hardware has become available to offload some of the tasks, and today there are systems deployed that allow a single host processor to share a limited number of I/O and storage subsystems with efficient hardware assistance.

The next phase of this evolution is to enable multiple host processors to share all of the I/O subsystems in the same way. Today, there is no standard, widely deployed method to do this with hardware assistance. The existing solutions are either proprietary or niche. The most effective place for this multi-host I/O virtualization to exist is in the fabric that connects together the host processors and I/O. This fabric can be based on PCI Express, and the company is currently designing solutions that include hardware and software enabling the next phase of the virtualization. To be successful, the solution needs to allow a step-by-step migration from the current system to the new, more powerful systems, and that is the approach the Company is taking.

The final pertinent migration trend in the data center is fabric convergence. The benefits of consolidation and standardization have been discussed several times, and they especially apply to the pathways over which information travels to and from the processing systems. The economies of scale, rapid deployment, redundancy and development cost advantages are significant when a wide range of different communication and storage protocols – each one well suited to a specific purpose – can share a mainstream, high-performance connectivity technology.

The clear advantages made possible by separating the CPU, communication and storage subsystems -- and by allowing them to interact through a high-speed, mainstream converged interconnect mechanism -- are driving significant industry trends. One of the more high-profile industry initiatives to address this need is the Open Compute Platform, which has brought together industry leaders with the goal of a broadly supported standard approach.

One final trend that offers an opportunity for PLX is the use of large numbers of lower power-processors or systems-on-a-chip (SOCs) to address certain popular applications such as data analytics and Web hosting. These systems, called microservers, offer reduced cost and power by replacing high-end processors with many smaller engines working in parallel to solve the same problem. Current microserver systems use either proprietary interconnects, or low-bandwidth standard interconnects to create the platform.

Both of these approaches have the drawbacks already explored earlier. The proprietary interconnects limit the system to a small subset of the possible devices; those that have been ported to that interconnect. And low-bandwidth standard interconnects, such as 1G Ethernet, limit the ultimate performance of the system, relegating them to the applications with little inter-processor communication.

Microservers are ideal platforms for a properly featured PCI Express interconnection. Since the processing or SOC engines have PCI Express as one of their ports, they can be connected together through PCI Express, with the advantage of provisioning the bandwidth necessary for a wide range of applications. This is all done with standards in mind, and can leverage the wide variety of PCI Express devices in use.

PLX identified these trends several years ago, and began an initiative to create a high-speed, virtualized, converged fabric based on PCI Express. This solution has been given the name ExpressFabric® technology, and it combines the features discussed above. ExpressFabric is meant to satisfy the demands of a single data center rack or several racks, and will co-exist with other mainstream interconnect technologies such as Ethernet and InfiniBand -- each technology dominating the subsystems in which its technical capability and historical advantages are best suited.

Strategy

PLX provides standards-based, off-the-shelf interconnect solutions to enable high performance, low cost, added-value features and rapid customer time-to-market. Although the external connections are standard in order to enable high volume markets, the products themselves offer proprietary advantages through innovative technology.

PLX seeks to identify technology trends and to provide products that cater to these trends during the early, high-growth phase of technology market discontinuities. This allows the Company to establish itself as a product leader and has provided a powerful incumbency benefit as the target technology becomes mainstream.

We recognized the promise of PCI Express in the early days of the standard, and brought to market industry-leading switches and bridges in 2004, gaining market share at key customers necessary for success. We continue to enjoy market share leadership in the PCI Express interconnect market and invest to maintain this position, if not grow it. Our rise to this position included a broad PCI Express Gen2 product line rollout in 2007, and our newest products based on the Gen3 specification. The Company now offers an industry-leading 18 PCI Express Gen3 switches with many more in development or planned.

Given the company’s focus on interconnect, and the high penetration into our target markets, PLX has identified which standards are most important to bridge and introduced devices that allow PCI Express devices to bridge to USB 3.0. This unique technology allows customer products that have PCI Express as a connection point inside the box – which is the most common capability on both standard products and ASICs – to interconnect with devices outside the box based on the most popular consumer-level, general- purpose USB standard.

The Company recognized several years ago that the increasing use of PCI Express as the dominant connection on CPU, storage and communication devices targeted for the enterprise and computing markets -- and the need for a lower-cost, lower-power solution in high-density enterprise and cloud data centers -- created an opportunity to extend the use of PCI Express outside the box. PLX then identified the additional features that were necessary to make this a successful solution, and initiated the design of switching solutions to complete the migration from the existing solutions to PCI Express. This is being done within a standards-based approach, and these products are expected to be deployed in enterprise systems starting in late 2014 and growing over the next several years.

The Company has identified software capability as both a strategic necessity for PLX and an effective way to differentiate itself. As systems become more integrated, and as PCI Express takes on a far greater role as a connection both inside and outside the box, allowing the same basic hardware to be modified for particular uses opens up new business opportunities. In particular, allowing a general-purpose processing engine to direct how a switching device operates expands the available market for switches by making them suitable for non-traditional usages.

The trends cited here, especially I/O virtualization and fabric convergence, cannot be properly addressed through hardware-only mechanisms. It takes too long to bring out a hardware product with features tailored for a wide variety of different uses, and it is too expensive to modify it to suit each one effectively. PLX switches have been successful with a hardware-based approach since the same basic functions can be used in many systems. But in order to extend into the subsystems that are being guided by the switch, a significant software component is needed.

This software approach does more than just extend what a particular switching device can do. It also substantially raises the barrier for alternate approaches to the same problem. The Company has always been dedicated to supporting and conforming to standards, and to robust interoperability. And the PLX software strategy takes this same approach. PLX software-enhanced switches will operate with existing operating systems, drivers and applications, and thus allow the reuse of the large and diverse library of such programs. But the underlying building blocks that are deeply embedded in the PLX hardware/software hybrid solution are specific to the Company. By offering industry-leading features, performance, power and cost, customers are offered a strong and unique value proposition by adopting the PLX approach. Once adopted, there is a virtuous cycle of reuse, making it possible to bring a subsequent product to market more quickly.

In addition, once these software-enhanced switches have been deployed, it offers an additional revenue opportunity for PLX. Many customers will take PLX reference code and enhance it for their own use. They purchase the Company’s switches, but do their own software development. However, given the significant impact that the software has on the switch’s capability, and the fact that PLX has a better understanding of its devices than anyone not involved in their development, some customers will benefit from having PLX provide software building blocks tuned to their specifications. In addition to getting software that will perform better on PLX hardware than it would had they developed the software themselves, customers can in some cases they get to market more quickly by having PLX provide the service, which allows them to focus on the areas that are their own added value.

PLX focuses on offering leadership features to our customers at price points made possible through high-volume delivery of standards-based solutions.

We focus on system-level performance in all of our products. Since interconnect choice has such a large impact on system performance, we identify those areas that might limit overall latency or throughput and enhance them. This is done through advanced silicon design techniques, and also through innovative software and firmware that identify where the overhead is in the system.

We provide low-power solutions to our customers since this has become a major differentiator for total system cost and environmental reasons. PLX enables reduced power through its wide range of devices designers select from for optimal designs, and through design techniques that modulate power for sections of the device that are not in use.

We offer added-value features that enable customer product differentiation. For PCI Express, this includes features such as the capability for hosts to communicate with each other in a high-performance manner, multiple virtual channels for greater control of data flow, integrated DMA for higher performance in control planes, and the ability to share I/O virtually.

We focus on providing these capabilities at competitive prices. We have a full customer owned tooling (COT) capability, whereby PLX handles all of the design, placement and layout of the circuits, and we manage the packaging and test pipeline. We deploy our products on mainstream, high-volume semiconductor technology process nodes, using advanced synthesis and layout techniques to provide the best trade-off between features and cost.

PLX provides more than just semiconductor devices; we focus on providing the whole product, and offer technical expertise that enables our customers to get to market quickly with a robust high-end product.

·	We supply hardware-based rapid development kits (RDK) as part of our standard offering. This allows customers to evaluate our products easily, and enables software development and interoperability testing to begin prior to customers developing their own hardware.

·	We provide simulation models to customers that allow them to develop their own devices and verify that they interoperate with our products prior to getting silicon.

We provide complete software development kits (SDKs) that includes kernel-level drivers, a user-level application programming interface (API), customized binary software for each customer, sample code for some of the advanced features and a state-of-the-art graphical user interface (GUI) that allows customers to easily bring up their system. Our solutions comply with industry-leading operating systems.

In addition to these visible features, our products also include on-chip capabilities that allow rapid debug of complex system problems in order to improve time-to-market. This allows high-speed signals to be effectively measured and debugged during development, in manufacturing and even in the field, without adding special and often expensive instrumentation.

·	We offer worldwide technical experts, with local, direct field applications engineers (FAEs) in North America, Europe and throughout Asia.

Discontinued Operations

PLX attempted to extend its penetration into the overall enterprise market through the October 2010 acquisition of Teranetics, Inc., a privately held fabless provider of high-performance mixed-signal semiconductors. Teranetics, the broadly recognized leader in 10 Gigabit Ethernet over copper physical layer (10GBase-T PHY) technology, delivered the industry’s first fully integrated single-chip implementation of single-port and dual-port 10GBase-T PHY silicon.

The 10G Ethernet market developed more slowly than had previously been anticipated and, as a result, the Company divested the associated products. The Company completed the sale of a portion of its physical layer 10GBase-T integrated circuit (“PHY”) family of products pursuant to an Asset Purchase Agreement between the Company and Aquantia Corporation dated September 14, 2012. The Company had also entered into an Asset Purchase Agreement with Entropic Communications, Inc. on July 6, 2012, as amended on November 21, 2012, pursuant to which the Company completed the sale of its digital channel stacking switch product line within the PHY product family, including certain assets exclusively related to the product line. Together, these divestitures completed the sale of the PHY business. These divestitures were intended to reduce future spending and operating losses associated with this business.

The operations of the PHY related business have been segregated from continuing operations and are presented as discontinued operations in the Company’s consolidated statement of operations. Unless otherwise indicated, the following discussions pertain only to our continuing operations.

Technology

PLX focuses on providing differentiated products to customers that are leaders in their market. In order to achieve this, we have developed unique core competencies in the underlying technologies necessary for success.

Semiconductor Design. Our engineers have substantial expertise in designing complex, reliable, high-performance products. We utilize state-of-the-art electronic design automation (EDA) tools and techniques for the entire design pipeline, and have developed proprietary verification mechanisms to ensure robust operation prior to committing to silicon. It is relatively straightforward to get a device to operate in normal, error-free environments. However, it is much more challenging to have that device operate predictably and reliably in environments where errors occur in the system and where unexpected or complex combinations of transactions occur. PLX has built up an industry-leading suite of tests that ensure such reliable operation in real-world customer systems.

In addition to software-based simulation techniques, we have also invested in flexible emulation platforms that enable our designers to run real software on a version of our design prior to committing to silicon. This allows our products to operate in more complex system-level environments, where subtle and undocumented behaviors often exist.

PLX has a dedicated team and the appropriate EDA tools to translate the design into the database used to fabricate the device. This physical design capability allows the Company to provide a smaller, lower-power product, since the engineers who are doing this placement and layout work are part of our staff and work with the design engineers from the start of the project. This capability also allows us to produce a product with higher signal integrity, which enables the device to work in a wider range of noisy environments more predictably.

When we receive our initial sample silicon back from the third-party wafer fabrication facility, we validate the product prior to sending it to our demanding customer base. As with the pre-silicon verification, this post-silicon phase makes use of our years of product releases to ensure robust product operation. We have invested in the talent and equipment, and use our extensive proprietary test suites, to fully validate the device. In addition, we have built up a broad interoperability lab, where we exercise the product with a growing number of other components and subsystems to ensure reliable operation in a range of real-world environments.

Software Technology. We have invested in a complete software development capability. In order to enable our customers to get to market quickly, PLX provides device drivers that support our products for the most popular operating systems, as well as API libraries that allow programmers to quickly make use of our products. In order to ensure that our products provide the highest performance possible, we have developed the tools and expertise to understand where the software bottlenecks occur in real-world systems, and our device drivers make use of this knowledge to increase the performance of targeted applications. In addition to the software that resides on the host device, we offer embedded software, also known as firmware, that runs on standard, general-purpose processors.

System Level Expertise. As part of the PLX ExpressFabric initiative, the Company has developed the expertise necessary to go beyond just the chip, and we can now enable our customers to deploy systems that use our PCI Express switches in flexible, rack-level configurations. This expertise includes an understanding of how systems are constructed, where application performance can be improved through a combination of special-purpose hardware and the supporting software, and how best to migrate current designs to higher-performing, lower-power and lower-cost PCI Express-based systems. In order to achieve this proficiency, the Company has hired industry experts, and created development and demonstration systems for PLX and customer use.

This new capability includes a significantly enhanced and qualitatively different approach to software development and deployment by the Company. In the past, we have focused on providing sample code and software packages that exercised specific features of our chips. As part of our new system focus, we offer fully working firmware that controls the advanced new hardware that we are designing into our newest switches, and host software that completes a basic, fully functional rack-based fabric. Having developed the expertise to complete the system, the Company can better advise and support our customers in how they should create their own platforms, and we can even offer added-value development services for customers who wish to hire PLX to create portions of their software offering.

PLX has also developed demonstration and development hardware platforms that go beyond what we have provided in the past. The development kits that we have developed prior to the ExpressFabric initiative were generally simple boards that allowed a limited amount of low-level evaluation and development of designs based on PLX devices. With our new system focus, we have created a rack-level platform that offers a working fabric box. This includes a compact 1U form factor box that can be hooked up to the rest of the system through standard networking cables, and firmware and software to complete the package. PLX has publicly demonstrated preliminary versions of this system, which have been delivered to early customers.

Real-World Debug Capability. Our products have proprietary hardware features that allow complex problems to be solved in the field without special instrumentation, and performance monitoring hardware that makes visible important system performance metrics. We include software as part of our normal release that takes these hardware features and allows them to be easily deployed through a modern GUI interface. We also enable the programmer to view and change the registers in our device quickly and easily, and provide access to data books for an explanation of the registers. A full complement of collateral and software downloads are accessible via our public website.

One important skill that the company has developed is the ability to validate and characterize high-speed SerDes and PHY signals, especially with regard to how they perform in dense configurations and often-unfriendly operating environments. PLX has done this through many generations of products that have been deployed in customers’ highly diverse systems. The company has added special-purpose hardware capabilities within the newer generations of devices and enabled them through the appropriate software. This has created validation and characterization platforms that rely on a combination of state-of-the-art test equipment and a deep level of knowledge shaped by years of experience.

Products

Our products consist of interconnect semiconductors, fully supported by the software and hardware kits that enable our customers to get to market quickly with robust, differentiated solutions.

PCI Express Switches. Since PCI Express is a point-to-point serial interconnect standard, it generally requires a switch to connect multiple devices to each other. Examples of applications include fan-out in servers and storage systems, multi-graphics engines in gaming and workstation systems, control planes in networking and communications systems and backplanes in embedded and industrial equipment. PLX switches allow aggregation of multi-channel Ethernet, Fibre Channel, graphics and SAS cards to the host. PLX switch products are offered in various configurations as requirements vary from one application to the next. PCI Express switches have become a basic building block in today’s systems using this standard. PLX started in 2004 with the Gen1 family of PCI Express at 2.5 Gigabits per second per lane, followed by Gen2 products in late 2007, in which the data rate doubled to 5.0 Gigabits per second per lane. The company now offers an industry-leading 18 PCI Express Gen3 switches (8 Gigabits per second per lane), including the world’s largest Gen3 PCI Express switch at 96 lanes and 24 ports.

PCI Express Bridges. PCI Express bridges allow devices with other standards to be used in systems that need to interoperate with PCI Express. These bridges facilitate connection back to conventional PCI for purposes of upgrading and even include products that connect PCI Express to another popular I/O interface: USB 3.0. Bridges of this kind allow users to quickly bring a new product to market. Applications using these bridge devices include servers, storage host bus adapters, graphics, TV tuners and security systems. We also offer bridges that translate PCI Express to general-purpose serial and parallel ports.

USB Interface Chips. USB interface chips are used by computer peripherals and consumer products to interoperate through an external cabled connection. These devices have been used on products such as multi-function printers, portable media players, portable navigation systems and hard disks. Our USB interface chips offer connection to either PCI or a general-purpose interface, providing a simple connection that provides high performance across a wide array computing and consumer applications. Current PLX products support the latest SuperSpeed USB 3.0 standard.

PCI Bridges. PLX offers a range of general-purpose bridges that translate and extend the PCI bus. These products offer a bridge between PCI and a variety of other serial and parallel general-purpose interfaces. Our PCI-to-PCI bridges increase the number of peripheral devices that can be included in a microprocessor-based system. PLX’s bridge product line spans the entire PCI range, from 32-bit 33MHz through 64-bit 66MHz, and include 133MHz PCI-X devices. No new PCI products are in development.

Direct Attached Storage (DAS). DAS devices are SOC products that allow external consumer storage peripherals to be easily connected to a PC through either a USB, 1394 or external Serial ATA (SATA) connection. Our current products support the USB 3.0 standard. No new DAS products are in development.

Customers, Sales and Marketing

We offer approximately 120 products to more than 1,000 active customers worldwide through both direct and indirect sales channels. Our major customers are among the world’s leading electronics manufacturers, a customer base whose requirements call for high data communication processing and high performance.

We have sales and sales support teams in the United States, China, Japan, France, Taiwan and the United Kingdom.

We supplement our direct sales force with manufacturers’ representatives for our products in North America, South America and Europe. In addition, we have distributors who support our sales and marketing activities in North America, South America, Europe and Asia.

Sales in North America represented 21%, 16% and 20%, of net revenues for 2013, 2012 and 2011, respectively. All worldwide sales to date have been denominated in U.S. dollars. We have one operating segment, the sale of semiconductor devices. Additional segment reporting information is included in Note 15 to the consolidated financial statements in this form 10-K.

Net revenues through distributors accounted for approximately 85%, 89% and 89% of our net revenues for 2013, 2012 and 2011, respectively. Revenues related to sales through distributors are expected to continue to account for a large portion of our total revenues. See "Item 1A, Risk Factors - 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" in this Form 10-K.

There were no direct end customers that accounted for more than 10% of net revenues. Sales to the following distributors accounted for 10% or more of net revenues:

	Years Ended December 31,
	2013			2012			2011
Excelpoint Systems Pte Ltd.		32	%		27	%		24	%
Avnet, Inc.		23	%		24	%		24	%
Answer Technology, Inc.		12	%		19	%		18	%

We provide technical support and assistance to existing and potential customers in designing, testing and qualifying system designs that incorporate our products. Technical support to customers is provided through field and factory applications engineers, technical marketing personnel, web-based support and, if necessary, product design engineers. We believe that superior technical support plays a pivotal role in building long-term relationships with customers by providing our customers a focus on time-to-market and a high-level of customer satisfaction, while encouraging customers to use our next-generation products.

Since the components we produce are largely proprietary and generally not available from pin-compatible second sources, we consider our end customer to be the entity specifying the use of our component in their design. These end customers may then purchase our products directly from us, from an external sales representative or distributor or through a third party manufacturer contracted to produce their designs.

Competition

The markets for our products are highly competitive and we expect competition to intensify as current competitors expand their product offerings and new competitors enter our markets. Our ability to compete effectively and to expand our business will depend on our ability to continue to recruit key engineering talent, execute on new product developments and pursue customers to design-in these new products into their applications. We compete with other semiconductor suppliers that offer standard semiconductors, application-specific standard products, highly integrated CPUs and fully customized ICs, including embedded software, chips and board-level products.

The principal competitive factors in our markets include: time to market, quality of hardware/software designs and end-market system expertise; price; product benefits characterized by performance, features, quality and compatibility with standards; access to advanced process and packaging technologies at competitive prices; and sales and technical support, which includes assisting our customers with integration of our products and software into their systems, and providing support from the concept stage through design, launch and production.

Research and Development

Our future success will depend to a large extent on our ability to rapidly develop and introduce new products and enhancements to our existing products that meet emerging industry standards and satisfy changing customer requirements. We have made and expect to continue to make substantial investments in research and development and to participate in the development of new and existing industry standards.

The majority of our engineers are involved in semiconductor device development, with the remaining engineers working on software and reference design hardware. Before development of any new products commence, our marketing managers work closely with research and development engineers and customers to develop a comprehensive requirements specification. In addition, our marketing managers and engineers review the applicable industry standards and incorporate desired changes into the new product specifications. After the product is designed and commercially available, our engineers continue to work with various customers on specific design issues to understand emerging requirements that may be incorporated into future product generations or product upgrades.

Our research and development expenditures totaled $24.9 million, $27.5 million and $28.2 million in 2013, 2012 and 2011, respectively. Research and development expenses consist primarily of tape-out related costs at the independent foundries, salaries and related costs, including share-based compensation and expenses for outside engineering consultants. We perform our research and development activities at our headquarters in Sunnyvale, California, and also in Bangalore, India. We periodically seek to hire additional skilled development engineers who are currently in short supply. Our business could be adversely affected if we encounter delays in hiring additional engineers. See "Item 1A, Risk Factors - Certain Factors That May Affect Future Operating Results - We Could Lose Key Personnel Due to Competitive Market Conditions and Attrition" in this Form 10-K.

Our future performance depends on a number of factors, including our ability to identify emerging technology trends in our target markets, define and develop competitive new products in a timely manner, enhance existing products to differentiate them from those of competitors, and bring products to market at competitive prices. The technical innovations and product development required for us to remain competitive are inherently complex and require long development cycles. We typically must incur substantial research and development costs before the technical feasibility and commercial viability of a product can be ascertained. We must also continue to make significant investments in research and development in order to continually enhance the performance and functionality of our products to keep pace with competitive products and customer demands for improved performance and new features. Revenues from future products or product enhancements may not be sufficient to recover the development costs associated with these products or enhancements. The failure to successfully develop new products on a timely basis could have a material adverse effect on our business.

Manufacturing

We have adopted a "fabless" semiconductor manufacturing model and outsource all of our semiconductor manufacturing, assembly and testing. This approach allows us to focus our resources on the design, development and marketing of products, and significantly reduces our capital requirements. Currently, our products are primarily being fabricated, assembled or tested by Advanced Semiconductor Engineering, Ardentec, Atmel, Epson, Faraday, Fujitsu, First Semiconductor Technology, Open-Silicon, Renesas, STATS ChipPAC Ltd., Taiwan Semiconductor Manufacturing Corporation, UMC and Unimicron. These manufacturers fabricate, assemble and test our products based on the design and test specifications we have provided. A small number of our products are currently manufactured by more than one supplier, and we expect a substantial amount of our products to be single-source manufactured for the foreseeable future. We must place orders three to four months in advance of expected delivery of finished goods. We maintain inventory levels based on current lead times from foundries, plus safety stock to account for fluctuations in demand. Our inventory comprises a large portion of our working capital. As a result, we have limited ability to react to fluctuations in demand for our products which could cause us to have either an excess or a shortage of inventory of a particular product and reduced product revenues.

In the event of a loss of, or a decision by us to change, a key supplier or foundry, qualifying a new supplier or foundry and commencing volume production would likely involve delay and expenses, resulting in lost revenues, reduced operating margins and possible detriment to customer relationships. Since we place our orders on a purchase order basis and do not have a long-term volume purchase agreement with any of our existing suppliers, any of these suppliers may allocate capacity to the production of other products while reducing deliveries to us on short notice. While we believe we currently have good relationships with our foundries and adequate capacity to support our current sales levels, there can be no assurance that adequate foundry capacity will be available in the future on acceptable terms, if at all. See "Item 1A, Risk Factors - Certain Factors That May Affect Future Operating Results - Our Independent Manufacturers May Not Be Able To Meet Our Manufacturing Requirements" in this Form 10-K.

Our semiconductor devices are currently fabricated using a range of semiconductor manufacturing processes. We must continuously develop our devices using more advanced processes to remain competitive on a cost and performance basis. Migrating to new technologies is a challenging task requiring new design skills, methods and software tools. We believe that the transition of our products to smaller geometries will be important for us to remain competitive. Our business could be materially adversely affected if any transition to new processes is delayed or inefficiently implemented. See " Item 1A, Risk Factors - Certain Factors That May Affect Future Operating Results - Defects in Our Products Could Increase Our Costs and Delay Our Product Shipments" in this Form 10-K.

Intellectual Property

Our future success and competitive position depend upon our ability to obtain and maintain the proprietary technology used in our principal products. Most of our current products include implementations of the PCI, PCI Express and USB industry standards, which are available to other companies. We hold 51 patents on PCI Express switching, interconnect and storage technologies that will expire at various dates beginning in 2014 through 2033. In the future, we plan to seek patent protection when we believe it is necessary.

Our existing or future patents may be invalidated, circumvented, challenged or licensed to others. The rights granted 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 this protection. We cannot be sure that steps taken by us to protect our technology will prevent misappropriation of it.

The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights or positions. This often results in significant, often protracted and expensive litigation. We may from time to time receive notifications of claims that we may be infringing patents or other intellectual property rights owned by other third parties. If it is necessary or desirable, we may seek licenses under these third party patents or intellectual property rights. However, we cannot be sure that licenses will be offered or that the terms of any offered licenses will be acceptable to us.

The failure to obtain a license from a third party for technology used by us could cause us to incur substantial liabilities and to suspend the manufacture or shipment of products or our use of processes requiring the technology. Litigation could result in significant expenses to us, adversely affect sales of the challenged product or technology and divert the efforts of our technical and management personnel, whether or not the litigation is determined in our favor. In the event of an adverse result in any litigation, we could be required to pay substantial damages, cease the manufacture, use, sale or importation of infringing products, expend significant resources to develop or acquire non-infringing technology and discontinue the use of processes requiring the infringing technology or obtain licenses to the infringing technology. In addition, we may not be successful in developing or acquiring the necessary licenses 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. See "Item 1A, Risk Factors - Certain Factors That May Affect Future Operating Results - Our Limited Ability to Protect Our Intellectual Property and Proprietary Rights Could Adversely Affect Our Competitive Position" in this Form 10-K.

Employees

As of December 31, 2013, we employed a total of 157 employees, including 84 engaged in research and development, 48 engaged in sales and marketing, 5 engaged in manufacturing operations and 20 engaged in general administration activities. We also from time to time employ part-time employees and hire contractors. Our employees are not represented by any collective bargaining agreement, and we have never experienced a work stoppage. We believe that our employee relations are good.

Backlog

PLX's backlog at any particular date is not necessarily indicative of actual sales for any succeeding period. This results from expected changes in product delivery schedules and cancellation of product orders. In addition, PLX's sales will often reflect orders shipped in the same quarter that they are received.

Acquisition Activity

On April 30, 2012, the Company entered into an Agreement and Plan of Merger ("Merger Agreement") with Integrated Device Technology, Inc. ("IDT") in which IDT would purchase all of the Company's outstanding shares of common stock in exchange for consideration, per share, comprised of (i) $3.50 in cash plus (ii) 0.525 of a share of IDT common stock.

The Merger Agreement was subject to various conditions, including, but not limited to (i) at least a majority of shares of PLX common stock then outstanding (calculated on a fully diluted basis) being tendered into the Offer, (ii) the expiration or termination of the applicable Hart-Scott-Rodino Act ("HSR Act") waiting period, (iii) the registration statement for IDT's common stock issuable in connection with the Offer and Merger being declared effective by the SEC and the listing of such shares on Nasdaq and (iv) the absence of any Company Material Adverse Effect (as defined in the Merger Agreement) with respect to PLX's business.

On December 18, 2012, the United States Federal Trade Commission ("FTC") filed an administrative complaint challenging IDT's proposed acquisition of PLX. On December 19, 2012, as a result of the FTC's determination to challenge the proposed acquisition, IDT and PLX mutually agreed to terminate the Merger Agreement.

ITEM 1A: RISK FACTORS

FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

If a company’s operating results are below the expectation of public market analysts or investors, then the market price of its common stock could decline. Many factors that can affect a company’s quarterly and annual results are difficult to control or predict. Factors which can affect the operating results of a semiconductor company such as PLX are described below.

Risks and uncertainties that could cause actual results to differ materially from those described herein include the following:

Our Operating Results May Fluctuate Significantly Due To Factors Which Are Not Within Our Control

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 one or more significant customers;

·	introduction of products and technologies by our competitors or partners;

·	the availability of production capacity at the fabrication facilities that manufacture our products;

·	our significant customers could lose market share that may affect our business;

·	integration of our product functionality into our customers’ products;

·	our ability to develop, introduce and market new products and technologies on a timely basis;

·	unexpected issues that may arise with devices in production;

·	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;

·	contractual terms of supply agreements with our customers;

·	the availability and cost of materials to our suppliers;

·	costs associated with third party legal actions;

·	general macroeconomic conditions;

·	environmental related conditions, such as natural disasters; and

·	the political climate.

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.

The Cyclical Nature Of The Semiconductor Industry May Lead To Significant Variances In The Demand For Our Products

In the past, the semiconductor industry has been characterized by significant downturns and wide fluctuations in supply and demand. Also, 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.

Global Economic Conditions May Continue to Have an Adverse Effect on Our Businesses and Results of Operations

In late 2008 and 2009, the severe tightening of the credit markets, turmoil in the financial markets and weakening global economy contributed to slowdowns in the industries in which we operate. Economic uncertainty exacerbated negative trends in spending and caused certain customers to push out, cancel or refrain from placing orders, which reduced revenue. We have seen market conditions improve; however, a slowdown in the economic recovery or worsening global economic conditions may result in difficulties in obtaining capital and uncertain market conditions may lead to the inability of some customers to obtain affordable financing, resulting in lower sales. Customers with liquidity issues may lead to additional bad debt expense. These conditions may also similarly affect key suppliers, which could affect their ability to deliver parts and result in delays in the availability of product. Further, these conditions and uncertainty about future economic conditions make it challenging for us to forecast our operating results, make business decisions and identify the risks that may affect our business, financial condition and results of operations. If the current improving economic conditions are not sustained or begin to deteriorate again or if we are not able to timely and appropriately adapt to changes resulting from the difficult macroeconomic environment, our business, financial condition or results of operations may be materially and adversely affected.

Because A Substantial Portion Of Our Net Revenues Are Generated By A Small Number Of Large Customers, If Any Of These Customers Delays Or Reduces Its Orders, Our Net Revenues And Earnings Will Be Harmed

Historically, a relatively small number of customers have accounted for a significant portion of our net revenues in any particular period. See Note 5 of the consolidated financial statements for customer concentrations.

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 revenues. Due to these factors, the following have in the past and may in the future reduce our net revenues 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

·	the failure of one or more of our current customers to pay our invoices.

Intense Competition In The Markets In Which We Operate May Reduce The Demand For Or Prices Of Our Products

Competition in the semiconductor industry is intense. If our main target market, the microprocessor-based 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. 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 “Item 1, Business - Competition” and “-Products” in this Form 10-K.

Our Independent Manufacturers May Not Be Able To Meet Our Manufacturing Requirements

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 located in China, Japan, Korea, Malaysia, Singapore and Taiwan 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 increase our costs.

Only a small number 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 our products 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.

Failure To Translate Design Wins Into Revenue Could Result in Delayed Revenue Growth

We had seen strong design activity with our PCI Express Gen2 products in 2009 resulting in PCI Express revenue growth between 2010 and 2012, when these designs moved into production. We are currently seeing significantly greater design activity and potential revenue with our Gen3 products. We believe that our revenue growth over the next several years will be driven by these programs moving to production. However, if these programs do not materialize, our revenue growth may be delayed.

Lower Demand For Our Customers’ Products Will Result In Lower Demand For Our Products

Demand for our products depends largely on the development and expansion of the high-performance microprocessor-based systems markets including networking and telecommunications, enterprise and consumer storage, imaging and industrial applications. The size and rate of growth of these microprocessor-based 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 microprocessor-based systems may not grow.

Our Lengthy Sales Cycle Can Result In Uncertainty And Delays With Regard To Our Expected Revenues

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.

Failure To Have Our Products Designed Into The Products Of Electronic Equipment Manufacturers Will Result In Reduced Sales

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 microprocessor-based systems or to develop sufficient new products to replace products that have become obsolete, our business would be materially adversely affected.

Defects In Our Products Could Increase Our Costs And Delay Our Product Shipments

Our products are complex and we use third party developed intellectual property, including serdes, in the design of our products. 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.

Failure Of Our Products To Gain Market Acceptance Would Adversely Affect Our Financial Condition

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.

A Large Portion Of Our Revenues Is Derived From Sales To Third-Party Distributors Who May Terminate Their Relationships With Us At Any Time

We depend on distributors to sell a significant portion of our products. Sales through distributors accounted for approximately 85%, 89% and 89% of our net revenues in 2013, 2012 and 2011, respectively. 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.

The Demand For Our Products Depends Upon Our Ability To Support Evolving Industry Standards

A majority of our revenues are derived from sales of products, which rely on the PCI Express, PCI and USB standards. If markets move away from these standards 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, these standards are continuously evolving, and we may not be able to modify our products to address new specifications. Any of these events would have a material adverse effect on our business.

We Must Make Significant Research And Development Expenditures Prior To Generating Revenues From Products

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 Could Lose Key Personnel Due To Competitive Market Conditions And Attrition

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.

The Successful Marketing And Sales Of Our Products Depend Upon Our Third Party Relationships, Which Are Not Supported By Written Agreements

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 microprocessor-based 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 Limited Ability To Protect Our Intellectual Property And Proprietary Rights Could Adversely Affect Our Competitive Position

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.

See the information contained under the caption “Litigation” in Note 14 of the consolidated financial statements in this Form 10-K for a description of the four lawsuits filed against us by a company alleging patent infringement. During the course of these litigations as well as any other future intellectual property litigations, we will incur costs associated with defending or prosecuting these matters. These litigations could also divert the efforts of our technical and management personnel, whether or not they are determined in our favor. In addition, if it is determined in such a litigation that we have infringed the intellectual property rights of others, 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.

Acquisitions Could Adversely Affect Our Financial Condition And Could Expose Us To Unanticipated Liabilities

As part of our business strategy, we expect to continue to review acquisition prospects that would complement our existing product offerings, improve market coverage or enhance our technological capabilities. Potential future acquisitions could result in any or all of the following:

·	potentially dilutive issuances of equity securities;

·	large acquisition-related write-offs;

·	potential patent and trademark infringement claims against the acquired company;

·	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;

·	the incurrence of additional operating losses and expenses of companies we may acquire;

·	possible delay or failure to achieve expected synergies;

·	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;

·	potential loss of key employees; and

·	potential lawsuits from shareholders.

Because We Sell Our Products To Customers Outside Of The United States And Because Our Products Are Incorporated With Products Of Others That Are Sold Outside Of The United States We Face Foreign Business, Political And Economic Risks

Sales outside of the United States accounted for 80%, 84% and 80% of our net revenues in 2013, 2012 and 2011, respectively. Sales outside of the United States 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 the Unites States, thereby exposing us indirectly to foreign risks. Further, most of our semiconductor products are manufactured outside of the United States. 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.

We May Be Required To Record A Significant Charge To Earnings If Our Goodwill Or Other Long Lived Asset Become Impaired

Under generally accepted accounting principles, we review our long lived assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is tested for impairment annually during the fourth quarter and between annual tests in certain circumstances. Factors that may be considered a change in circumstances, indicating that the carrying value of our goodwill or other long lived assets may not be recoverable, include a persistent decline in stock price and market capitalization, reduced future cash flow estimates and slower growth rates in our industry. We have recorded goodwill related to prior acquisitions, and may do so in connection with any potential future acquisitions. In the fourth quarter of 2013, we tested the goodwill acquired and determined there was no impairment. We may be required to record a significant charge in our financial statements during the period in which any additional impairment of our goodwill or other long lived assets is determined, which would adversely impact our results of operations.

Customer Demands And New Regulations Related To Conflict-Free Minerals May Force Us To Incur Additional Expenses

In August 2012, under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the SEC adopted new requirements for companies that use certain minerals and derivative metals (referred to as “conflict minerals,” regardless of their actual country of origin) in their products. These new requirements will require companies to investigate, disclose and report whether or not such metals originated from the Democratic Republic of Congo or adjoining countries. In January 2013, the SEC’s conflicts minerals disclosure rules became effective, requiring companies to make their first conflict minerals disclosures on or before May 31, 2014 for the 2013 calendar year. We are currently evaluating the disclosure requirements in order to comply with these disclosures, if any, within the prescribed time frame.

In the semiconductor industry, these minerals are most commonly found in metals. As there may be only a limited number of suppliers offering “conflict free” metals, we cannot be sure that we will be able to obtain necessary metals in sufficient quantities or at competitive prices. Also, since our supply chain is complex and some suppliers will not share their confidential supplier information, we may face challenges with our customers and suppliers if we are unable to sufficiently verify that the metals used in our products are “conflict free”. Some customers may choose to disqualify us as a supplier and we may have to write off inventory in the event that it becomes unsalable as a result of these regulations.

Our Business Could Be Materially Adversely Affected As A Result Of Natural Disasters, Acts Of War Or Terrorism

Our operations and those of our suppliers and customers are vulnerable to interruption by fire, earthquake, flood and other natural disasters, as well as act of terrorism, war and other events beyond our control. If such events were to occur, it could result in a significant reduction of end-customer demand and/or availability of materials, a disruption of the global supply chain and an increase in the cost of products that we purchase. Any of these events would have a material adverse effect on our business.

Our Principal Stockholders Have Significant Voting Power And May Take Actions That May Not Be In The Best Interests Of Our Other Stockholders

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.

The Anti-Takeover Provisions In Our Certificate of Incorporation Could Adversely Affect The Rights Of The Holders Of Our Common Stock

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 Added Three New Directors To Our Board Of Directors In 2013, Which May Lead To Changes In The Execution Of Our Business Strategies And Objectives.

In connection with our annual meeting of shareholders on December 18, 2013, three new directors were elected to our board of directors. This turnover in our board of directors may lead to changes in the execution of our business strategies and objectives as these new directors analyze our business and contribute to the formulation of our business strategies and objectives.

ITEM 1B: UNRESOLVED STAFF COMMENTS

None.

ITEM 2: PROPERTIES

We own one facility in Sunnyvale, California, which has approximately 55,000 square feet. This facility comprises our headquarters and includes our research and development, sales and marketing and administration departments. Internationally, we lease offices in China, India, Japan and Taiwan. These leases comprise approximately 15,138 square feet and have terms expiring in or prior to April 2016. We believe that our current facilities will be adequate through 2014.

ITEM 3: LEGAL PROCEEDINGS

The information contained under the caption “Litigation” in Note 14 of our notes to the consolidated financial statements included in Part IV, Item 15, of this Form 10-K is incorporated by reference into this Item 3.

ITEM 4: MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is traded on The NASDAQ Global Market and has been quoted on The NASDAQ Global Market under the symbol "PLXT" since its initial public offering on April 5, 1999. The following table sets forth, for the periods indicated, the range of quarterly high and low sales price for our common stock as reported on The NASDAQ Global Market:

2013	High		Low
First Quarter	$	5.15	$	3.71
Second Quarter	$	4.89	$	4.31
Third Quarter	$	6.12	$	4.66
Fourth Quarter	$	6.85	$	5.35

2012	High		Low
First Quarter	$	4.16	$	2.73
Second Quarter	$	6.71	$	3.70
Third Quarter	$	6.38	$	5.07
Fourth Quarter	$	5.79	$	3.41

As of February 28, 2014, there were approximately 76 holders of record of our common stock and as of that date, the last reported sales price of our common stock was $5.96.

We have never paid cash dividends on our common stock. We currently intend to retain earnings, if any, for use in our business and do not anticipate paying any cash dividends in the foreseeable future. Any future declaration and payment of dividends will be subject to the discretion of our Board of Directors, will be subject to applicable law and will depend upon our results of operations, earnings, financial condition, contractual limitations, cash requirements, future prospects and other factors deemed relevant by our Board of Directors.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

In September 2002, our Board of Directors authorized the repurchase of up to 2,000,000 shares of common stock. In July 2008, our Board of Directors authorized an additional 2,000,000 shares under the repurchase program. At the discretion of the management, we can repurchase the shares from time to time in the open market or in privately negotiated transactions. We purchased approximately 1,730,000 shares for $8.4 million between 2002 and 2008. We did not purchase any additional shares in between 2009 and 2013. As of December 31, 2013, under the Board’s repurchase authorization, we had the capacity to repurchase an additional 2,269,000 shares.

Performance Graph

	Cumulative Total Return

	12/08		12/09		12/10		12/11		12/12		12/13
PLX Technology, Inc.		100.00		187.79		209.88		166.86		211.05		382.56
Russell 2000		100.00		127.17		161.32		154.59		179.86		249.69
Philadelphia Semiconductor		100.00		159.68		183.23		186.05		204.93		268.55

The graph and other information furnished under the above caption "Performance Graph" in this Part II, Item 5 of this Form 10-K shall not be deemed to be "soliciting material" or to be "filed" with the SEC or subject to Regulation 14A or 14C, or to the liabilities of the Exchange Act, as amended.

ITEM 6: SELECTED FINANCIAL DATA

The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this Annual Report on Form 10-K.

		Years Ended December 31,
		2013		2012			2011		2010		2009 (2)
	in thousands, except per share data
Consolidated Statement of Operations data:
Net revenues (1)		$	104,490	$	100,248		$	111,152	$	115,540	$	82,832
Gross profit (1)			59,131		58,786			64,552		67,787		46,932
Operating income (loss) from continuing operations (1)			7,522		(4,816	)		6,003		6,820		(15,490	)
Income (loss) from continuing operations (1)			7,136		(5,201	)		3,104		4,642		(18,802	)
Basic income (loss) per share from continuing operations (1)		$	0.16	$	(0.12	)	$	0.07	$	0.12	$	(0.53	)
Shares used to compute basic per share amounts			45,603		44,882			44,559		38,942		35,653
Diluted income (loss) per share from continuing operations (1)		$	0.15	$	(0.12	)	$	0.07	$	0.12	$	(0.53	)
Shares used to compute diluted per share amounts			46,523		44,882			45,016		39,625		35,653

		Years Ended December 31,
		2013		2012		2011		2010		2009 (2)
	in thousands
Consolidated Balance Sheet data:
Cash and cash equivalents		$	11,021	$	14,673	$	12,097	$	5,835	$	11,299
Working capital			30,303		14,243		21,340		24,833		49,945
Total assets			77,160		72,979		96,818		121,971		84,020
Total long term borrowings			5,000		-		2,000		-		-
Total long term note payable and capital lease obligations			-		-		-		1,731		1,098
Total stockholders' equity		$	57,906	$	46,672	$	75,219	$	97,808	$	71,999

(1)	In 2012 we completed the sale of certain assets of our PHY product family. The results of operations for this business has been segregated and excluded from the continuing operations presented. Periods prior to October 1, 2010, the date the disposed business was acquired, are not impacted.

(2)	Results of operations for 2009 include a loss of $3.8 million on the fair value remeasurement of the contingently convertible note payable associated with the acquisition of Oxford in January 2009.

ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

This Annual Report on Form 10-K and certain information incorporated herein by reference contain forward-looking statements within the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. All statements contained in this Report on Form 10-K that are not purely historical are forward-looking statements, including, without limitation, statements regarding our expectations, objectives, anticipations, plans, hopes, beliefs, intentions or strategies regarding the future. Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements.

Forward-looking statements include, without limitation, the statements regarding the following:

·	our plan to seek to identify technology trends and to provide products that cater to these trends during the early, high-growth phase of technology market discontinuities;

·	our expectation that our system-level products will be deployed in enterprise systems in late 2014 and will be growing over the next several years;

·	our expectation that revenues related to sales through distributors will continue to account for a large portion of total revenues;

·	our belief that superior technical support plays a pivotal role in building long-term relationships with customers;

·	our belief that our future success depends on our ability to rapidly develop and introduce new products and enhancements that meet industry standards and customer requirements;

·	our expectation that we will continue to make significant investments in research and development in order to continually enhance the performance and functionality of our products to keep pace with competitive products and customer demands for improved performance and new features;

·	our belief that we must continuously develop our devices using more advanced processes to remain competitive on a cost and performance basis;

·	our belief that the transition of our products to smaller geometries will be important for us to remain competitive;

·	our intention to retain earnings for use in our business and not to pay any cash dividend in the foreseeable future;

·	our belief that our long-term success will depend on our ability to introduce new products;

·	our belief that we may be required to carry higher levels of inventory because of the difficulty in predicting future levels of sales and profitability;

·	statements regarding industry trends that favor PLX product and statements regarding future PLX products;

·	our revenue growth in 2014 and our expected revenues in the first quarter of 2014;

·	our expected gross margin in 2014;

·	our SG&A expenses in 2014;

·	our future deferred tax valuation allowance; and

·	our belief that our existing resources, together with cash expected to be generated from our operations, will be sufficient to meet our capital requirements for at least the next twelve months.

All forward-looking statements included in this document are subject to additional risks and uncertainties further discussed under "Item 1A: Risk Factors - Factors That May Affect Future Operating Results" and are based on information available to us on the date hereof. We assume no obligation to update any such forward-looking statements. It is important to note that our actual results could differ materially from those included in such forward-looking statements. The factors that could cause our actual results to differ from those included in such forward-looking statements are set forth under the heading "Item 1A: Risk Factors - Factors That May Affect Future Operating Results," as well as those disclosed from time to time in our reports on Forms 10-Q and 8-K and our Annual Reports to Stockholders.

The following discussion should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this report.

Overview

PLX is a market share leader in PCI Express switches and bridges. We recognized the trend towards this serial, switched interconnect technology early, launched products for this market long before our competitors and have deployed multiple generations of products to serve a general-purpose market. In addition to enabling customer differentiation through our product features, the breadth of those products’ range is in itself a significant benefit to our customers, since we can serve the complete needs of our customers with cost-effective solutions tailored to specific system requirements. PLX supplies an industry-leading, extensive portfolio of PCI Express switches; PCI Express bridges that allow backward compatibility to the previous PCI standard; and other bridging technology that enables seamless interoperability between two of the most popular mainstream interconnects: PCI Express and Universal Serial Bus (USB). Our extensive experience with PCI Express connectivity products enables PLX to deliver reliable devices that operate in non-ideal, real-world system environments.

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.

The time period between initial customer evaluation and design completion is generally between six and twelve months, though it can be longer in some circumstances. 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 “Item 1A, Risk Factors - Certain Factors That May Affect Future Operating Results -- Our Lengthy Sales Cycle Can Result in Uncertainty and Delays with Regard to Our Expected Revenues” in this Form 10-K.

Discontinued operations

On September 20, 2012, the Company completed the sale of a portion of its physical layer 10GBase-T integrated circuit (“PHY”) family of products pursuant to an Asset Purchase Agreement between the Company and Aquantia Corporation dated September 14, 2012. The Company had also entered into an Asset Purchase Agreement (the “Entropic APA”) with Entropic Communications, Inc., on July 6, 2012, as amended on November 21, 2012, pursuant to which the Company completed the sale of its digital channel stacking switch product line within the PHY product family, including certain assets exclusively related to the product line. Together, these divestitures completed the sale of the PHY business. The 10G Ethernet market developed more slowly than had previously been anticipated and the divestitures were intended to reduce future spending and operating losses associated with this business. The operations of the PHY related business have been segregated from continuing operations and are presented as discontinued operations in the Company’s consolidated statement of operations. Unless otherwise indicated, the following discussions in Results of Operations pertain only to our continuing operations.

Results of Operations

Comparison of Years Ended December 31, 2013, 2012 and 2011

Net Revenues. Net revenues consist of revenues generated principally by sales of our semiconductor devices as well as occasional IP and development service revenue.

The following table shows the revenue by type (in thousands) and as a percentage of net revenues:

	Years Ended December 31,
	2013				2012				2011
PCI Express revenue	$	75,582	72.3	%	$	66,780	66.6	%	$	61,557	55.4	%
Connectivity revenue		28,908	27.7	%		33,468	33.4	%		49,595	44.6	%
	$	104,490			$	100,248			$	111,152

Net revenues for the year ended December 31, 2013 were $104.5 million, an increase of $4.2 million or 4.2% from $100.2 million in 2012. The increase in 2013 was due to higher sales of our PCI Express products primarily due to the ramp of our Gen3 products, partially offset by lower sales of our Connectivity products as a result of the decline in demand for products used in systems nearing end of life and the customer transition from our legacy products to our PCI Express products.

Net revenues for the year ended December 31, 2012 were $100.2 million, a decrease of $10.9 million or 9.8% from $111.2 million in 2011. In 2011, we recorded licensed IP and development service revenue of $1.9 million primarily associated with our consumer storage technology. Excluding IP and development service revenue, revenues decreased $9.0 million or 8.3% compared to 2011. The decrease in 2012 was due to lower sales of our Connectivity products as a result of the decline in demand for products used in systems nearing end of life and the customer transition from our legacy products to our PCI Express products, partially offset by higher sales of our PCI Express products due to the increase of Gen3 product shipments.

We currently expect to see revenue growth through 2014 for our PCI Express products and continued declines of our Connectivity products. However, the first quarter of 2014 may be relatively flat compared to the fourth quarter of 2013 as a result of a larger direct customer transitioning to a managed inventory process, which may delay inventory draws until they consume their owned inventory, thereby delaying the period of our revenue recognition. Additionally, one of our assembly manufacturers’ bumping line was shut down in late December 2013 by the Taiwanese authorities limiting the upside capacity for a few of our Gen2 products.

There were no direct end customers that accounted for more than 10% of net revenues. Sales to the following distributors accounted for 10% or more of net revenues:

	Years Ended December 31,
	2013			2012			2011
Excelpoint Systems Pte Ltd.		32	%		27	%		24	%
Avnet, Inc.		23	%		24	%		24	%
Answer Technology, Inc.		12	%		19	%		18	%

We continue to generate significant revenues from Asia. For the year ended December 31, 2013, 2012 and 2011, approximately 70%, 71% and 68%, respectively, of net revenues were generated from Asia.

Future demand for our products is uncertain and is highly dependent on general economic conditions and the demand for products that contain our chips. Customer demand for semiconductors can change quickly and unexpectedly. Our revenue levels have been highly dependent on the amount of new orders that are received for products to be delivered to the customer within the same quarter, also called “turns fill” orders. Because of the long cycle time to build our products and our lack of visibility into demand when turns fill orders are high, it is difficult to predict which products to build to match future demand. We believe the current high turns fill requirements will continue indefinitely. The high turns fill orders pattern, together with the uncertainty of product mix and pricing, makes it difficult to predict future levels of sales and profitability and may require us to carry higher levels of inventory.

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

	Years Ended December 31,
	2013			2012			2011
	in thousands
Gross profit	$	59,131		$	58,786		$	64,552
Gross margin		56.6	%		58.6	%		58.1	%

Gross profit for the year ended December 31, 2013 was relatively flat compared to 2012 while gross margin decreased 2.0 percentage points or 3.4%. The decrease in product gross margin was due primarily to product and customer mix of our PCI Express products and lower sales of our Connectivity products, partially offset by reduced costs on our PCI Express Gen3 builds as we move from our early revision products and into production volume builds. Internet Machines contingent royalty accrual, which started in the third quarter of 2013, accounted for 0.4 percentage points of the 2013 margin decrease.

Gross profit for the year ended December 31, 2012 decreased by 8.9%, or $5.8 million compared to 2011. Excluding the IP and development service revenue of $1.9 million which was recorded at a 100% margin in 2011, 2011 gross margin was 57.4% and gross profit was $62.7 million. 2012 gross profit decreased 6.2% or $3.9 million compared to 2011. The decrease in absolute dollars was due to the decrease in overall product sales, while the increase in gross margin percentage was due primarily to decreased sales of the low margin Consumer Storage devices within the Connectivity product grouping.

We expect gross margin to remain relatively flat in 2014. Future gross profit and gross margin are highly dependent on the product and customer mix, provisions and sales of previously written down inventory, the position of our products in their respective life cycles and specific manufacturing costs. Accordingly, we are not able to predict future gross profit levels or gross margins with certainty.

Research and Development Expenses. Research and development (R&D) expenses consist primarily of tape-out costs at the independent foundries, salaries and related costs, including share-based compensation, software licenses and expenses for outside engineering consultants included in R&D expenses.

	Years Ended December 31,
	2013			2012			2011
	in thousands
R&D expenses	$	24,876		$	27,532		$	28,218
As a percentage of revenues		23.8	%		27.5	%		25.4	%

R&D expenses decreased by $2.7 million, or 9.7% in the year ended December 31, 2013 compared to 2012. The decrease was primarily due to a decrease in tape-out-related activities of $3.4 million due to timing of projects taped-out, partially offset by an increase in compensation and benefit related expenses of $0.8 million due to the increase in headcount.

R&D expenses decreased by $0.7 million, or 2.4% in the year ended December 31, 2012 compared to 2011. Expenses relating to the 2011 divested UK design team were $0.2 million and $6.0 million in 2012 and 2011, respectively. Excluding the impact of the divestiture, R&D expenses increased by $5.1 million or 23.0%. The increase was primarily due to increases in tape-out-related activities of $3.1 million due to timing of projects taped-out, compensation and benefit expenses of $0.9 million due to an increase in headcount and variable compensation of $0.5 million as a result of the changes in the plan to tie variable compensation to personal and group performance objectives as well as financial metrics. In addition, due to the IDT acquisition activities, which were subsequently terminated, retention measures were put in place, particularly RSU grants resulting in an increase in share-based compensation expense of $0.4 million.

We believe continued spending on research and development to develop new products is critical to our success. R&D spending will continue to fluctuate due to timing of projects and tape-out related activities.

Selling, General and Administrative Expenses. Selling, general and administrative (SG&A) expenses consist primarily of salaries and related costs, including share-based compensation, sales commissions to manufacturers’ representatives and professional fees, as well as trade show and other promotional expenses.

	Years Ended December 31,
	2013			2012			2011
	in thousands
SG&A expenses	$	26,442		$	28,927		$	28,037
As a percentage of revenues		25.3	%		28.9	%		25.2	%

SG&A expenses decreased by $2.5 million or 8.6% in the year ended December 31, 2013 compared to 2012. The decrease was primarily due to decreases in legal fees of $3.2 million due to the charges incurred in the first half of 2012 in connection with the Internet Machines patent infringement lawsuit, which included the February 2012 trial of the First Suit, compensation and benefit related expenses due to the decrease in headcount of $0.3 million and employee related commissions of $0.5 million. These decreases were partially offset by an accrual of $1.0 million in 2013 as a result of the Court’s post-verdict ruling in the Internet Machines’ lawsuit and expenses relating to the contested proxy for our December 18, 2013 annual shareholders’ meeting of $1.0 million.

SG&A expenses increased by $0.9 million or 3.2% in the year ended December 31, 2012 compared to 2011. The increase was primarily due to an increase in variable compensation of $0.9 million as a result of the changes in the plan to tie variable compensation to personal and group performance objectives as well as financial metrics. In addition, due to the IDT acquisition activities, which were subsequently terminated, retention measures were put in place, particularly RSU grants and a one-time increase in employee related commissions, resulting in increases in share-based compensation expense of $0.6 million and employee commissions of $0.5 million. These increases were partially offset by a decrease in compensation and benefit expenses of $1.2 million due to a decrease in headcount.

See Note 14 of the consolidated financial statements for additional information around the patent infringement complaints.

We expect SG&A expenses to remain relatively flat in 2014 as a result of our continued focus on cost control.

Acquisition and Restructuring Related Costs.

	Years Ended December 31,
	2013		2012		2011
	in thousands
Deal costs	$	12	$	6,898	$	88
Escrow claim settlement		-		-		(1,397	)
Severance costs		279		-		501
Lease commitment accrual		-		-		301
	$	291	$	6,898	$	(507	)

In 2013, we recorded $12,000 of outside legal and accounting costs associated with the wrap up of the IDT acquisition activities, which were terminated in December 2012. In 2012, we recorded acquisition related costs of $6.9 million, primarily for outside legal and banking expenses associated with the IDT acquisition activities. In 2011, we recorded $0.1 million in acquisition related costs associated with the October 1, 2010 acquisition of Teranetics. As a result of the indemnity claims we communicated to the Teranetics stockholders’ representative, we negotiated a $1.9 million reduction against the two promissory notes. The settlement included the cancelation of the $1.5 million note due in October 2013 and was recorded in 2011 as a reduction to acquisition and restructuring related costs in the Consolidated Statement of Operations for the assessed fair value of $1.4 million for the portion of the claims not directly related to the operations of the PHY activity. Deal costs related primarily to outside legal and accounting costs.

In 2013, we recorded approximately $0.3 million of severance and benefit related costs, included in acquisition and restructuring related costs in the Consolidated Statement of Operations, related to the termination of 4 employees worldwide as part of the restructuring of SG&A activities as a result of the divestiture of the PHY business. In 2011, we recorded approximately $0.5 million of severance and benefit related costs related to the termination of 14 employees as a result of the downsizing and refocus of the operations in the UK early in the year and cost control efforts as a result of the Teranetics acquisition. See Note 8 of the consolidated financial statements for additional information.

In 2011, in connection with the downsizing of the UK operations, we recorded lease commitment accrual and leasehold impairment charges of $0.3 million. See Note 8 of the consolidated financial statements for additional information.

Amortization of Purchased Intangible Assets. Amortization of acquired intangible assets consists of amortization expense related to developed core technology, tradename and customer base acquired in the Oxford acquisition in January 2009.

	Years Ended December 31,
	2013			2012			2011
	in thousands
Amortization of purchased intangible assets	$	-		$	245		$	2,801
As a percentage of revenues		0.0	%		0.2	%		2.5	%

As of December 31, 2012 all purchased intangibles were fully amortized, and therefore there was no amortization expense in 2013. The 2012 amortization expense was related to the Oxford NAS developed core technology. Amortization of acquired intangible assets decreased by $2.6 million or 91.3% in the year ended December 31, 2012 compared to 2011. The decrease in amortization expense was due to the Oxford USB and Serial developed core technology becoming fully amortized in 2011 and the useful life change and acceleration of the Network Attached Storage (NAS) Connectivity developed core technology amortization as a result of the divestiture of the UK design team in October 2011.

Interest Income, Interest Expense and Other, Net.

	Years Ended December 31,
	2013			2012			2011
	in thousands
Interest income	$	86		$	33		$	73
Interest expense		(247	)		(203	)		(165	)
Other income (expense)		4			21			(56	)
	$	(157	)	$	(149	)	$	(148	)

Interest income reflects interest earned primarily on cash, cash equivalents and short-term and long-term investment balances.

Interest expense for the years ended December 31, 2013 was due to interest recorded on the line of credit borrowings. In 2012 interest expense consisted of interest recorded on the line of credit borrowings and our capital lease obligations. In 2011 interest expense consisted of interest recorded on the note associated with the acquisition of Teranetics and capital lease obligations.

Other income (expense) includes foreign currency transaction gains and losses and other miscellaneous transactions. Other income may fluctuate significantly due to currency fluctuations.

Provision for Income Taxes. Provision for income taxes for the year ended December 31, 2013 was $0.2 million on pretax income of $7.4 million, compared to a provision of $0.2 million on a pretax loss of $5.0 million and a provision of $2.8 million on pretax income of $5.9 million for the periods ended December 31, 2012 and 2011, respectively. Our 2013 provision differs from the provision derived by applying the applicable U.S. federal statutory rate to income from continuing operations due primarily to the benefit of research and development tax credits and nondeductible permanent items. Our 2012 provision differs from the benefit derived by applying the applicable U.S. federal statutory rate to the loss from continuing operations due primarily to the change in valuation allowance for the net deferred tax asset, partially offset by a benefit of research and development tax credits and nondeductible permanent items. Our 2011 provision differs from the provision derived by applying the applicable U.S. federal statutory rate to income from continuing operations due primarily to nondeductible permanent items, partially offset by a benefit of research and development tax credits. See Note 12 of the consolidated financial statements for the reconciliation of statutory tax rates.

As of December 2013, we have a valuation allowance against net deferred assets. While encouraged by the pretax profit earned in 2013 and by the favorable trend of our recent financial results, management believes it is appropriate to obtain confirmatory evidence that the improvement in our results in operations is sustainable, and the realization of at least some of the deferred income tax assets are more likely than not, before reversing a portion of the valuation allowance to earnings. See Note 12 of the consolidated financial statements for additional information on our deferred tax assets.

We intend to review, on a quarterly basis, the conclusions reached about the appropriate amount of our deferred income tax asset valuation allowance. If we continue to generate profits in 2014 and beyond, it is possible that the US valuation allowance position will be reversed in the foreseeable future. We expect a significant benefit to be recorded in the period the valuation allowance reversal is recorded and a significantly higher effective tax rate in periods following the valuation allowance reversal.

Liquidity and Capital Resources

Cash and Investments. We invest cash not needed for current operations predominantly in certificate of deposits and debt instruments that are highly liquid, of high-quality investment grade and predominantly have maturities of less than one year with the intent to make such funds readily available for operating purposes. As of December 31, 2013 cash, cash equivalents and short and long-term marketable securities were $20.4 million, an increase of $3.7 million from $16.7 million at December 31, 2012, and an increase of $0.6 million from $19.8 million at December 31, 2011.

Operating Activities.

	Years Ended December 31,
	2013			2012			2011
	in thousands
Income from continuing operations, net of non-cash items	$	12,080		$	1,638		$	10,397
Income (loss) from discontinued operations, net of non-cash items		147			(14,968	)		(18,690	)
Changes in working capital		(7,936	)		893			5,637
Net cash provided by (used in) operating activities	$	4,291		$	(12,437	)	$	(2,656	)

Cash provided by (used in) operating activities primarily consists of net income (loss) adjusted for certain non-cash items including depreciation, amortization, share-based compensation expense, impairments, provisions for excess and obsolete inventories, other non-cash items and the effect of changes in working capital and other activities. Cash provided by operating activities in 2013 was $4.3 million compared to cash used in operations of $12.4 million in 2012. 2012 included loss from discontinued operations, adjusted for non-cash items, of $15.0 million. Excluding the impact from discontinued operations, cash provided by operating activities was $4.1 million and $2.5 million in 2013 and 2012, respectively. The increase in cash flow provided by continuing operations was primarily due to an increase in income from continuing operations, net of non-cash items, partially offset by changes in our working capital as a result of larger vendor payments related to the IDT acquisition in 2013, which were accrued in 2012. Our days sales outstanding increased due to stronger shipments late in the fourth quarter 2013 compared to the same period in 2012. Our days payable outstanding decreased as we paid off the payables related to the IDT acquisition activities. Inventory was relatively flat.

Cash used in operating activities in 2012 was $12.4 million compared to cash used in operating activities of $2.7 million and included loss from discontinued operations, adjusted for non-cash items, of $15.0 million and $18.7 million in 2012 and 2011, respectively. Excluding the impact from discontinued operations, cash provided by operating activities was $2.5 million and $16.0 million, respectively. The decrease in cash flow provided by continuing operations was primarily due to a decrease in income from continuing operations, net of non-cash items and changes in our working capital. Our days sales outstanding was relatively flat. The increase in inventory reflects strong demand for our PCI Express products. Our days payable outstanding increased due to the increase of payable related to the IDT acquisition activities, which were subsequently terminated, and the timing of vendor payments.

Investing Activities. Our investing activities are primarily driven by investment of our excess cash, sales of investments, business acquisitions and divestitures and capital expenditures. Capital expenditures have generally been comprised of purchases of engineering equipment, computer hardware, software, server equipment and furniture and fixtures. Cash used in investing activities in 2013 of $6.5 million was due to purchases of investments (net of maturities) of $7.4 million and capital expenditures of $1.1 million, partially offset by the Entropic escrow payment received of $2.0 million in connection with the sale of the PHY business. Cash provided by investing activities in 2012 of $13.4 million was due to the proceeds received from the sale of the PHY business of $10.4 million and the sales and maturities of investments (net of purchases) of $5.5 million, partially offset by capital expenditures of $2.6 million.

Financing Activities. Cash used in financing activities in 2013 of $1.4 million was primarily due to principal payments made against the line of credit of $3.0 million, partially offset by proceeds from the exercise of stock options of $1.9 million. Cash provided by financing activities in 2012 of $1.7 million was due to the borrowings against the line of credit (net of principal payments) of $6.0 million and proceeds from the exercise of stock options of $1.2 million, partially offset by the payment of the note associated with the 2010 acquisition of Teranetics of $4.8 million and payments made on capital lease obligations of $0.6 million.

As of December 31, 2013, we had the following significant contractual obligations and commercial commitments (in thousands):

	Payments due in
			Less than		1-3		More than
	Total		1 Year		Years		3 Years
Operating leases - facilities and equipment	$	379	$	236	$	143	$	-
Software licenses		3,783		2,966		817		-
Inventory purchase commitments		8,964		8,964		-		-
Borrowings against line of credit		5,000		-		5,000		-
Total cash obligations	$	18,126	$	12,166	$	5,960	$	-

On September 30, 2011, we entered into an agreement with Silicon Valley Bank to establish a two-year $10.0 million revolving loan facility. On April 22, 2013, the agreement was amended to increase the facility to $15.0 million and extend the maturity date to September 30, 2015. Borrowings under the credit facility bear interest at rates equal to the prime rate announced from time to time in The Wall Street Journal. As of December 31, 2013 the prime rate was 3.25%. The facility also provides for commitment, unused facility and letter-of-credit fees. As of December 31, 2013 there is $5.0 million outstanding against the facility. In addition, the company issued an irrevocable letter of credit of $0.8 million against the facility for the bond issued as a result of the judgment in the Internet Machines litigation. Borrowing availability as of December 31, 2013 is $9.2 million. The facility is subject to certain financial covenants for (“EBITDA”), as defined in the agreement, and a monthly quick ratio computation (PLX’s cash, investments and accounts receivable divided by current liabilities). We were in compliance with all financial covenants associated with this facility as of December 31, 2013. See Note 13 of the consolidated financial statements for additional information.

Based on the June 19, 2013 Court’s ruling in the Internet Machines litigation, we were required to issue a bond of $2.7 million for pre-judgment damages awarded and future royalties. As of December 31, 2013, we accrued $2.3 million of the $2.7 million judgment under other accrued expenses in our Consolidated Balance Sheet. Future royalties will be accrued as incurred. See Note 14 of the consolidated financial statements for more information on the Internet Machines litigation.

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 level of investment we make in new technologies and improvements to existing technologies and the levels of monthly expenses required to launch new products. 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 be difficult to obtain and may not be available or, if available, we may not be able to obtain them on terms favorable to us and our stockholders.

See Note 14 to our consolidated financial statements for additional information on our contractual obligations and commercial commitments.

Critical Accounting Policies

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 U.S. Securities and Exchange Commission (“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. For additional information see Note 1 to the consolidated financial statements. 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.

Revenue Recognition. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collection is reasonably assured.

Revenue from product sales to direct customers and distributors is recognized upon shipment and transfer of risk of loss, if we believe collection is reasonably assured and all other revenue recognition criteria are met. We assess the probability of collection based on a number of factors, including past transaction history and the customer’s creditworthiness. At the end of each reporting period, the sufficiency of allowances for doubtful accounts is assessed based on the age of the receivable and the individual customer’s creditworthiness.

We offer pricing protection to two distributors whereby we support the distributor’s resale product margin on certain products held in the distributor’s inventory. We analyze current requests for credit in process, also known as ship and debits, historical rates and amounts of credits issued and inventory at the distributor to determine the ending sales reserve required for this program. We also offer stock rotation rights to two distributors such that they can return up to a total of 5% of products purchased every six months in exchange for other PLX products of equal value. We analyze current stock rotation requests, past experience and ending inventory to determine the ending sales reserve required for this program. Provisions for reserves are charged directly against revenue and related reserves are recorded as a reduction to accounts receivable.

Inventory Valuation. We evaluate the need for potential inventory provisions by considering a combination of factors, including the life of the product, sales history, obsolescence, sales forecasts and expected sales prices. Any adverse changes to our future product demand may result in increased provisions, 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 collectability of our accounts receivable based on length of time the receivables are past due. Generally, our customers have between thirty days to forty five days to remit payment of invoices. We record reserves for bad debts against amounts due to reduce the net recognized receivable to the amount we reasonably believe will be collected. Once we have exhausted collection efforts, we will reduce the related accounts receivable against the allowance established for that receivable. We have certain customers with individually large amounts due at any given balance sheet date. Any unanticipated change in one of those customers’ creditworthiness or other matters affecting the collectability of amounts due from such customers could have a material effect on our results of operations in the period in which such changes or events occur. Historically, our write-offs have been insignificant.

Goodwill. Our methodology for allocating the purchase price related to business acquisitions is determined through established valuation techniques. Goodwill is measured as the excess of the cost of the acquisition over the amounts assigned to identifiable tangible and intangible assets acquired less assumed liabilities. We have one operating segment and business reporting unit, the sales of semiconductor devices, and we perform goodwill impairment tests annually during the fourth quarter and between annual tests if indicators of potential impairment exist.

Long-lived Assets. We review long-lived assets, principally property and equipment and identifiable intangibles, for impairment whenever events or circumstances indicate that the carrying amount of assets may not be recoverable. We evaluate recoverability of assets to be held and used by comparing the carrying amount of an asset to estimated future net undiscounted cash flows generated by the asset. If such assets are considered to be impaired, the impairment recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. In addition, if we determine the useful life of an asset is shorter than we had originally estimated, we accelerate the rate of depreciation over the assets’ new, shorter useful life.

Share-Based Compensation. We estimate the value of employee stock options on the date of grant using the Black-Scholes model. The determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to the expected stock price volatility over the term of the awards and the actual and projected employee stock option exercise behaviors. The expected term of options granted is derived from historical data on employee exercises and post-vesting employment termination behavior. We calculate expected volatility using the historical volatility of stock. We estimate the amount of forfeitures at the time of grant and revise, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The fair value of employee restricted stock units is equal to the market value of our common stock on the date the award is granted.

Taxes. We account for income taxes using the asset and 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 December 31, 2013, we have determined that negative evidence supports the need for a full valuation allowance against our net deferred tax assets. In assessing the ability to realize deferred tax assets, management considers whether it is more likely than not that some portion or all of a deferred tax asset will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of sufficient future taxable income during the periods in which those temporary differences become deductible. We continue to review our conclusions about the appropriate amount of our deferred income tax asset valuation allowance in light of circumstances existing in current periods and considering the expected future period results and will maintain a full valuation until sufficient positive evidence exists to support a reversal of the valuation allowance. If we continue to generate profits in 2014 and beyond, it is possible that the US valuation allowance position will be reversed in the foreseeable future. We expect a significant benefit to be recorded in the period the valuation allowance reversal is recorded and a significantly higher effective tax rate in periods following the valuation allowance reversal.

Recent Accounting Pronouncements

In February 2013, the FASB issued amendments to the accounting guidance for presentation of comprehensive income to improve the reporting of reclassifications out of accumulated other comprehensive income. The amendments do not change the current requirements for reporting net income or other comprehensive income, but do require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where the net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about these amounts. For public companies, these amendments are effective prospectively for reporting periods beginning after December 15, 2012. Other than a change in presentation, the adoption of this guidance did not have a material impact on our consolidated financial statements.

In July 2013, the FASB issued guidance to address the diversity in practice related to the financial statement presentation of unrecognized tax benefits as either a reduction of a deferred tax asset or a liability when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists. This guidance is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.

ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

We have an investment portfolio of fixed income securities, including amounts classified as cash equivalents short-term investments and long-term investments of approximately $10.3 million at December 31, 2013. 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 less than a $58,000 decrease (less than 1%) in the fair value of our available-for-sale securities. At December 31, 2013, we had an unrealized loss on our investments of approximately $1,000 and an unrealized gain of less than $1,000 at December 31, 2012.

ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this Item is contained in the financial statements and schedule set forth in Item 15 (a) of this Form 10-K.

ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A: CONTROLS AND PROCEDURES

Controls and Procedures

(a)	Evaluation of disclosure controls and procedures.

Based on their evaluation as of December 31, 2013, our Chief Executive Officer and Chief Financial Officer, have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) were effective to ensure that the information required to be disclosed by us in this Annual Report on Form 10-K was recorded, processed, summarized and reported within the time periods specified in the SEC's rules and instructions for Form 10-K and that such disclosure controls and procedures were also effective to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

(b) Changes in internal controls.

There has been no change in our internal control over financial reporting that occurred during our most recent fiscal year that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

Management's Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2013. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control-Integrated Framework (1992). Our management has concluded that, as of December 31, 2013, our internal control over financial reporting is effective based on these criteria.

Our independent registered public accounting firm, BDO USA, LLP, which audited the financial statements in this Annual Report on Form 10-K, independently assessed the effectiveness of the company’s internal control over financial reporting. BDO USA, LLP has issued an attestation report, included in Part IV, Item 15(a) of this report.

ITEM 9B: OTHER INFORMATION

None.

PART III

ITEM 10: DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE