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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K



|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------

For the fiscal year ended: December 31, 2006



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from:  to

Commission
File Number 0-19084

PMC-Sierra, Inc.

(Exact name of registrant as specified in its charter)



|                                               |  |                                     
|---------------------------------------------- |  | ------------------------------------
|Delaware                                       |  | 94-2925073                          
|(State or other jurisdiction of incorporation) |  | (I.R.S. Employer Identification No.)

3975 Freedom Circle

Santa Clara, CA 95054

(Address of principal executive offices, including zip
code)

Registrants telephone number, including area code: (408) 239-8000

Securities registered pursuant to Section 12(b) of the Act:



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Title of each class                                            |  | Name of exchange on which registered
|Common Stock, $0.001 Par Value Preferred Stock Purchase Rights |  | The NASDAQ Stock Market LLC         

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes  x    No ̈

Indicate by check mark if the Registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.

Yes ̈No  x

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x    No ̈

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
Registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer
and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x                 Accelerated filer ̈Non-accelerated filer ̈

Indicate by check mark if the Registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes ̈No  x

The aggregate market value of the voting stock held by
nonaffiliates of the Registrant, based upon the closing sale price of the Common Stock on June 30, 2006 as reported by the NASDAQ Global Market, was approximately $807.8 million. Shares of Common Stock held by each executive officer and
director and by each person known to the Registrant who owns 5% or more of the outstanding voting stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive
determination for other purposes.

As of February 26, 2007, the Registrant had 212,391,239 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions
of the Proxy Statement for Registrants 2007 Annual Meeting of Stockholders are

incorporated by reference into Part III of this Form
10-K Report.



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TABLE OF CONTENTS



|           |  |                                                                                                              |  |     
|---------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|           |  |                                                                                                              |  | Page
|           |  | PART I                                                                                                       |  |     
|Item 1.    |  | Business                                                                                                     |  | 3   
|Item 1A.   |  | Risk Factors                                                                                                 |  | 17  
|Item 1B.   |  | Unresolved Staff Comments                                                                                    |  | 31  
|Item 2.    |  | Properties                                                                                                   |  | 31  
|Item 3.    |  | Legal Proceedings                                                                                            |  | 31  
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                          |  | 33  
|           |  | PART II                                                                                                      |  |     
|Item 5.    |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 34  
|Item 6.    |  | Selected Financial Data                                                                                      |  | 36  
|Item 7.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 40  
|Item 7A.   |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 58  
|Item 8.    |  | Financial Statements and Supplementary Data                                                                  |  | 61  
|Item 9.    |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 101 
|Item 9A.   |  | Controls and Procedures                                                                                      |  | 101 
|Item 9B.   |  | Other Information                                                                                            |  | 106 
|           |  | PART III                                                                                                     |  |     
|Item 10.   |  | Directors, Executive Officers and Corporate Governance                                                       |  | 107 
|Item 11.   |  | Executive Compensation                                                                                       |  | 107 
|Item 12.   |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 107 
|Item 13.   |  | Certain Relationships and Related Transactions, and Director Independence                                    |  | 108 
|Item 14.   |  | Principal Accountant Fees and Services                                                                       |  | 108 
|           |  | PART IV                                                                                                      |  |     
|Item 15.   |  | Exhibits and Financial Statement Schedules                                                                   |  | 108 
|SIGNATURES |  | 113                                                                                                         



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PART I



|Item 1. | Business
|------- | --------

OVERVIEW

PMC-Sierra, Inc. (PMC or the Company) designs, develops, markets and supports communications semiconductors, storage
semiconductors and microprocessors primarily for the communications service provider, storage, and enterprise markets. We have approximately 270 different semiconductor devices that are sold to leading equipment and design manufacturers, who in turn
supply their equipment principally to communications network service providers and enterprises. We provide superior semiconductor solutions for our customers by leveraging our intellectual property, design expertise and systems knowledge across a
broad range of applications and industry protocols.

PMC-Sierra was incorporated in the State of California in 1983 and reincorporated in the State of
Delaware in 1997. Our Common Stock trades on the NASDAQ Global Market under the symbol PMCS and is included in the S&P 500 index.

Our
principal executive offices are located at 3975 Freedom Circle, Santa Clara, California 95054, and our phone number is (408) 239-8000. Our internet webpage is located at www.pmc-sierra.com; however, the information in, or that can be
accessed through, our webpage is not part of this report. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to such reports are available, free of charge, on our webpage after we
electronically file or furnish such material with the Securities and Exchange Commission, or SEC.

Our fiscal year normally ends on the last Sunday of the
calendar year. Fiscal years 2006 and 2004 consisted of 52 weeks, and fiscal 2005 consisted of 53 weeks and ended on Saturday, December 31. In this Annual Report on Form 10-K, PMC-Sierra, PMC, the Company,
us, our or we, means PMC-Sierra, Inc. together with our subsidiary companies.

FORWARD-LOOKING STATEMENTS

This Annual Report and the portions of our Proxy Statement
incorporated by reference into this Annual Report contain forward-looking statements that involve risks and uncertainties. We use words such as anticipates, believes, plans, expects,
future, intends, may, should, estimates, predicts, potential, continue, becoming, transitioning and similar expressions to
identify such forward-looking statements.

These forward-looking statements apply only as of the date of this Annual Report. We undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons,
including the risks we face as described under Factors That You Should Consider Before Investing in PMC-Sierra and elsewhere in this Annual Report and our other filings with the SEC. Investors are cautioned not to place undue reliance on
these forward-looking statements, which reflect managements analysis only as of the date hereof. Such forward-looking statements include statements as to, among others:



| |  |  | business strategy;
| | - |  | ------------------



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| |  |  | sales, marketing and distribution;
| | - |  | ----------------------------------



| |  |  | wafer fabrication capacity;
| | - |  | ---------------------------



| |  |  | competition and pricing;
| | - |  | ------------------------



| |  |  | critical accounting policies and estimates;
| | - |  | -------------------------------------------



| |  |  | customer product inventory levels, needs and order levels;
| | - |  | ----------------------------------------------------------



| |  |  | demand for networking, storage and consumer equipment;
| | - |  | ------------------------------------------------------



| |  |  | net revenues;
| | - |  | -------------



| |  |  | gross profit;
| | - |  | -------------



| |  |  | research and development expenses;
| | - |  | ----------------------------------



| |  |  | selling, general and administrative expenditures;
| | - |  | -------------------------------------------------



| |  |  | interest and other income;
| | - |  | --------------------------



| |  |  | foreign exchange rates;
| | - |  | -----------------------



| |  |  | capital resources sufficiency;
| | - |  | ------------------------------



| |  |  | restructuring activities, expenses and associated annualized savings; and
| | - |  | -------------------------------------------------------------------------



| |  |  | our business outlook.
| | - |  | ---------------------

We undertake no obligation to
update the forward-looking statements in this Annual Report on Form 10-K. Accordingly, this Form 10-K should be read in conjunction with our periodic filings made with the SEC subsequent to the date of the original filing, including any amendments
to those filings, as well as any Current Reports filed on Form 8-K subsequent to the date of the original filing.

The
2006 Stock Option Review

In 2006, our Audit Committee completed a review of our stock option-award practices. Based on the results of the review we
concluded that the accounting measurement dates for certain stock option grants awarded primarily during the years 1998-2001, differ from the measurement dates previously used to determine any stock-based compensation expense for the years
1998-2002. We determined that for certain option grants the allocations to individual recipients and/or the proper documentation of formal corporate approvals had not been completed as of the original accounting measurement dates. As a result, new
accounting measurement dates were applied to the affected option grants. As the majority of the stock options in question were cancelled in an option exchange program in 2002 or were otherwise fully vested, the new measurement dates do not affect
operating results for 2003 and subsequent years. The Audit Committee concluded that, while the Company used incorrect accounting measurement dates for certain stock option grants awarded primarily during the years 1998-2001, those errors were
not the product of any deliberate misconduct by the Companys executives, staff, or members of its board of directors.

As a result of the review
we adjusted our opening stockholders equity on the consolidated balance sheet as at December 31, 2002 and on the consolidated balance sheets for all subsequent periods. The effect of the adjustments was to increase capital stock and
additional paid-in capital and increase accumulated deficit on all consolidated balance sheets commencing in 2003. These are offsetting reclassification entries within stockholders equity on the consolidated balance sheet and the total opening
amount of stockholders equity in 2003 and subsequent consolidated balance sheets did not change. The incremental expenses resulting from the re-measurement, by year, were as follows:



|            |  |                |       
|----------- |  | -------------- | ------
|Fiscal year |  | (in thousands)
|1999        |  | $              | 4,919 
|2000        |  |                | 17,810
|2001        |  |                | 28,242
|2002        |  |                | 38,659
|            |  |                |       
|            |  | $              | 89,630
|            |  |                |       



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The restatement had no impact on our consolidated statements of operations or consolidated statements of cash flows in
2003 or subsequent periods. The restatement had no impact on our cash position or previously reported revenues.

INDUSTRY OVERVIEW

Continued growth in Internet usage and digital consumer devices continues to drive increasing demand for bandwidth and
efficient networks that can manage these higher levels of data traffic. At the same time, communication service providers are seeking ways to increase their revenues by bundling and delivering a range of services to their customers in a
cost-effective manner. To enable the triple play of services (which includes voice, video, and data), communication service providers continue to transition their voice-centric infrastructure to data-centric networks. Newer applications
such as Voice Over Internet Protocol (VoIP), video-on-demand, Internet Protocol Television (IPTV), third generation wireless services, and network-attached storage are being deployed globally. This is resulting in increasing requirements for service
providers and enterprises to upgrade and improve their network infrastructure and storage management capabilities. Enterprises, corporations, small offices and home offices are expanding their networks to better capture, store, and access large
quantities of data efficiently and securely.

Different types of data transmitted at various speeds over the Internet require service providers and
enterprises to invest in multi-service equipment that can aggregate and transport these varied types of network traffic. In simplified terms, Internet traffic moves over a series of distinct networks, with each network built using copper wires,
coaxial cables or fiber optic cables. These networks carry high-speed traffic in the form of electrical and optical signals that are transmitted and received by complex networking equipment. To ensure this equipment and varied networks can
communicate and interoperate with each other, communications equipment manufacturers and makers of communications semiconductors have developed numerous communications standards and protocols for the industry. These communications and storage
protocols make it easier for complex high-speed data traffic to be sent, received and stored reliably and efficiently  whether intra-office, across the country, or internationally. The products we sell, and the protocols used in development of
our devices, are described below.

MARKETS THAT WE SERVE

We sell our semiconductor solutions primarily into five general areas of the worldwide network infrastructure, which we refer to as the Access, Metro, Enterprise Storage,
Enterprise Networking, and Customer Premise markets. The products and solutions that we sell into the Metro and Access areas of the market are largely driven by the capital spending of service providers in the



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telecommunications industry, and traditionally our sales in these areas have represented the majority of our annual revenues (approximately 70% in 2005). Our
products and solutions that are sold into the Enterprise Storage, Enterprise Networking and Customer Premise areas are driven primarily by the capital spending of corporations, enterprises, and smaller businesses, and our sales in these areas have
represented a smaller portion of revenues (approximately 30% in 2005). In 2006 the mix of our revenues shifted to approximately 50% from the telecommunications market and 50% from the enterprise and storage markets. This shift occurred primarily as
a result of the acquisitions we completed during the year.

In 2006 we acquired the Storage Semiconductor Business from Avago Technologies Inc. We
purchased the Storage Semiconductor Business due to the market position it had in the Fibre Channel Controller market and the growth opportunities for standard semiconductor solutions in the enterprise storage market. Since the acquisition we have
experienced the benefits from product synergies between the acquired business and PMC-Sierras disk interconnect storage IC business.

In 2006 we also
purchased Passave, Inc., a company that develops system-on-chip semiconductor solutions for the Fiber To The Home (FTTH) access market. We purchased Passave due to its market share leadership in Passive Optical Networking (PON) solutions for central
office and customer premise FTTH applications.

The general market areas that we currently serve and some typical equipment in those markets that may
contain our semiconductor solutions are described below. Due to the complexity of the telecommunications network, it is not possible to sharply delineate networking functions or markets served. In addition, many of our products may be used in
multiple classes of networking equipment that are deployed across all of the market areas identified below, while some of our other products have highly specialized applications. For example, our microprocessors can be used in many networking
equipment applications (such as color laser printers or high-speed routers), while a single wireless infrastructure chip may only be used in one specific application (e.g., pre-distortion of power amplification for a wireless base station). In some
situations, different OEMs might use solutions in equipment addressing more than one of the market areas noted below. Further, during the lifecycle of their products, our customers may redesign their products and exclude our devices from the new
design. We are not always aware when customers undertake such actions.

Access

The access area of the telecommunications network infrastructure encompasses both wired and wireless equipment that aggregates data traffic from homes and businesses and
transmits it to the central offices in the metro and the wide area network (WAN). Our semiconductors are used in the access area of the network in equipment such as SONET/SDH add-drop multiplexers (which add and drop signals or streams of data from
optical networks) and switches (which direct the data traffic to other destinations within the network). Two key industry protocols that help in packaging information into formats for transportation across various networks are Asynchronous Transfer
Mode (ATM) and Internet Protocol (IP). As networks slowly converge over time, more data-centric and hybrid multi-service equipment is required to handle IP, ATM and multi-protocol traffic.

Another technology used in the access area is Digital Subscriber Line (DSL), which allows for high-speed data communication over existing copper telephone lines between
end-users and



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service providers. DSL uses a complex digital signal processing technique to achieve typical downstream data speeds of 1.5 megabits per second and typical
upstream speeds of 128 kilobits per second. DSL is largely intended for residential and small business customers who desire higher speed access to Internet services. With increasing demand for faster bandwidth, service providers in some regions are
beginning to deploy Asymmetric DSL (ADSL2 and ADSL 2+) and Very High Speed DSL (VDSL) to increase transmission rates over copper wires.

In both Asia and
some parts of North America, Passive Optical Networking (PON) is being deployed to facilitate a FTTH strategy. Instead of copper cables, fiber is deployed to the neighborhood, the multi-dwelling unit, or the residence, to increase bandwidth and
reach in both uploading and downloading files in both directions. The two current industry standards related to PON are Ethernet Passive Optical Networking (EPON), which delivers bandwidth at a rate of 1 Gigabit per second (Gbps), and Gigabit
Passive Optical Networking (GPON), which delivers bandwidth at a rate of 2.5 Gbps. The advantage of PON is that it provides high bandwidth without sensitivity to the distance between the central office and the subscriber.

The Access area of the network also involves the termination and distribution of separate higher speed data signals into lower speed data signals. Many of our networking
devices used in wireline communications can be deployed in the transmission of wireless data traffic to the network in wireless base station transceivers.

Metro

The metropolitan area of the
telecommunications infrastructure is primarily a fiber optic-based network that provides high-speed communications and data transfer within a city center or regional area. This portion of the network manages traffic inside its own region, and also
manages traffic between the access and long-haul transport networks for inter-city or international transmission.

For high-capacity data communication
over fiber optic systems, the standard used is called SONET (for Synchronous Optical Network) in North America and parts of Asia, and called SDH (for Synchronous Digital Hierarchy) in the rest of the world. In addition to using SONET/SDH to increase
the bandwidth, or capacity, of their networks, many service providers have also deployed equipment that uses an optical technology called dense wave division multiplexing. Rather than transmitting a single light signal over an optical fiber, dense
wave division multiplexing allows many different light signals (each of a different wavelength) to be transmitted simultaneously. By deploying this technique at higher transmission rates, carriers can move more signals across transmission lines.

Our products and solutions are used in metro equipment such as multi-service switches and edge routers that gather and process signals in different
protocols, and then transmit them to the next destination as quickly and efficiently as possible. The next-generation equipment in the metro portion of the network that can handle different data protocols is often referred to as multi-service
provisioning platforms that facilitate the efficient transmission of internet protocol (IP) packets over optical fiber.

Enterprise Storage

Institutions and businesses connect to their data storage either directly or indirectly, the latter using network-attached
systems (NAS) or storage area networks (SAN). Fibre Channel



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protocol, which is the standard for the transfer of information between computers and storage devices (hard disk drives), is the dominant standard in the
storage area of the market, with the market transitioning from fibre channel operating at 2 Gigabits per second to fibre channel operating at 4 Gigabits per second. In addition, there is a shift occurring in storage networking from parallel to
serial interconnections and two standards have emerged which are Serial-Attached SCSI (better known as SAS) and Serial ATA (SATA), both of which are just starting to be introduced into storage networks today. Another standard is called Internet
Protocol SCSI (or iSCSI), but this is not expected to gain broad acceptance and deployment until later this decade.

Our products and solutions in this
area enable the high-speed interconnection of the servers, switches and storage devices that comprise these systems so that large quantities of data can be stored, managed and moved securely. Our focus in this area is on fibre channel interconnect
and fibre channel controllers, with switching solutions for both SAS and SATA.

Enterprise Networking

The enterprise area of the network includes equipment that is deployed primarily in the office for data communications and other local area network applications.
Equipment such as switches and routers are used by both large and small businesses and enterprises to manage their data on an inter-office and intra-office basis. This market also includes office network equipment such as laser printers or
multi-function printers, where we sell our standalone microprocessors and integrated SoCs or system-on-chip designs.

Ethernet is a protocol historically
used within an enterprises local area networks, or LANs, but is now moving out into the wide area networks, or WANs. Service providers are beginning to transport Ethernet traffic over their existing SONET infrastructure because service
providers are familiar with SONET, which provides a relatively efficient way to handle increasing amounts of data moving from the LAN to the WAN.

Customer Premise

Customer premise equipment usually includes the residential and home office markets. This includes wired
and wireless Voice-over-IP routers where we have multi-service processing solutions and reference designs for OEMs and Original Design Manufacturers, or ODMs. It also includes networked attached storage solutions for residences and residential
gateways that enable triple play services integrating data, video and voice. We currently derive less than 5% of our revenues from the customer premise market.

OUR PRODUCTS

Most of our
semiconductors can be divided into broadly defined functional categories identified below. As with descriptions of the network, particular categories may overlap and a device may be present in more than one category. In addition, some products may
integrate several different functions and therefore could be classified in one or more categories. For example, some of our products convert high-speed analog signals to digital signals and split or combine various transmission signals.

Line interface units: these devices, also referred to as transceivers, transmit and receive signals over a physical medium such as wire, cable or fiber. The line
interface unit determines the speed and timing characteristics of the signals, and may also convert them from a serial stream of data into a parallel stream before they are further processed for transmission to the next destination.



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Framers and mappers: before the data can be sent to the next destination, it must be converted into a proper format for
transmission in the network. For example, the framing function arranges the bits into different size formats, commonly referred to as cell or packet formats, and attaches the appropriate information to the formats to ensure
they reach their destinations. In turn, this data may be inserted into other frames, such as SONET/SDH frames, for transmission across high-speed fiber optics.

Packet and cell processors: these devices examine the contents of cells, or packets, and perform various management and reporting functions. For instance, a switch or router may use a packet or cell processor to determine if a signal is
voice or video in order to allocate the proper amount of bandwidth.

Controllers: rapid growth in data storage needs is driving a requirement for more
cost-effective and larger capacity storage systems. Controller products based on Fibre Channel, Serial Attached SCSI (SAS), and Serial ATA (SATA), are enabling technologies for building network-attached storage system architectures that meet the new
cost and capacity needs.

Traffic managers and switch fabrics: traffic managers organize, schedule and queue cells and packets into and out of switches.
Switch fabrics interconnect the wires and fibers, allowing the data to be routed to its intended destination.

Microprocessors: these devices perform the
high-speed computations that help identify and control the flow of signals and data in many different types of network equipment used in the communications, enterprise and consumer markets. With greater demand for integration of features and
functions on a single device, more system-on-chip solutions are being developed.

Serializers/Deserializers: these devices convert networking traffic
between slower speed parallel streams and higher speed serial streams. OEMs use serial streams to reduce networking equipment line connections, and parallel streams to allow them to apply lower cost traffic management technologies.

System-On-A-Chip (SOCs) : Integrated I/Os, microprocessors, memory, system bus, and physical layer functions on one monolithic semiconductor device
(chip).

OUR STRATEGY

Our high-speed semiconductor solutions are based on our knowledge of network applications, system requirements and networking protocols, and high-speed mixed-signal and system-on-chip design expertise. To achieve our goal of profitably
expanding our business, we are pursuing the following five strategies:

1. Expand our breadth of product solutions in the enterprise storage systems
market.

We are broadening our product line in the enterprise storage markets. In addition to our Fibre Channel product line, we have leading edge
high-performance interconnect devices designed



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on protocols such as SAS and SATA. We expect the need for faster and more complex devices based on these protocols to increase as next-generation storage
systems are deployed. We significantly expanded our Fibre Channel product offering in 2006 as a result of the acquisition of the Storage Semiconductor Business of Avago (formerly the semiconductor group of Agilent). We are currently working on
developing multi-protocol controllers for our OEM customers as well as working on a further integration of features and devices to increase performance and reduce cost.

2. Continue to strengthen our overall position in the wide area network (WAN) of the telecommunications market and introduce solutions in the customer premise market such as residential broadband gateways.

We are working very closely with large companies in the service provider and enterprise markets to help them design and develop standard semiconductor solutions that
we anticipate will meet their performance requirements while lowering their costs. A significant number of our products are used by OEMs that sell their network equipment to worldwide telecommunications service providers. In 2006 we made a strategic
acquisition in Passave Inc. to address the increased requirement for bandwidth as service providers introduce products such as IPTV and other services globally. We continue to focus our R&D on the growth segments of Passaves business,
including: last-mile access, metro optical transport, edge routing, multi-service switching, wireless infrastructure, wireline access, voice-over-IP, and residential broadband gateways.

3. Continue to increase our presence in Asian markets.

We continue to strengthen our relationships and business activity with our Asian customers. In 2006 we entered the Japanese FTTH market in a significant way through the acquisition of Passave, and we continue to seek
further expansion in Korea, Taiwan, and China. To support our customers, we have increased our sales, service and design center in Shanghai, China and opened a technology center in Bangalore, India in early 2006. Over half of our total revenues were
received from the Asia Pacific region in 2006, which includes China and Japan. Based on PMCs revenues in 2006, some of our largest customers in the Peoples Republic of China were Huawei, ZTE, and Fibrehome, and in Japan our largest
customers were Mitsubishi Electric, Fujitsu, NEC, and Ricoh. Our customers in Asia are broadening their product offerings in 3G wireless infrastructure, metro optical transport, storage networking, laser and multi-function printers, and customer
premise equipment.

4. Leverage our technical expertise across a diverse base of applications.

We have a strong history of analog, digital, mixed signal and microprocessor expertise and we are able to integrate many of these functions and protocols into complex
devices. We leverage our common technologies and intellectual property across a broad range of networking equipment. Many OEMs recognize they can obtain highly complex, broadband communications technology from companies such as ours rather than
dedicating their own resources to develop custom chips. We intend to take advantage of our customers growing requirements to outsource more of the silicon content in their networking and storage equipment that allows the OEMs to reduce their
development costs and improve time-to-market while differentiating their products in other ways. We are constantly looking at ways to lower costs and increase integration for our customers, such as our capability in system-on-a-chip (SoC) design
capabilities that can incorporate third party intellectual property and various interface requirements.



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5. Provide best-in-class products, customer service and technical support.

We work very closely with our customers to ensure they get the best service and technical support required to assist them with their product development efforts. We
believe our largest customers and their products will take an increasing percentage of the overall market in their areas of expertise. Customers such as Alcatel/Lucent, Cisco, EMC, Hewlett Packard, Fujitsu, Huawei, Juniper, Mitsubishi Electric, NEC,
Nortel, Ricoh, and ZTE, are aligning their design and manufacturing operations with key suppliers such as PMC.

SALES, MARKETING AND DISTRIBUTION

Our sales and marketing strategy is to have
our products designed into our customers equipment by developing superb products for which we provide premium service and technical support. Our marketing team is focused on developing new products and solutions that meet the needs of our
customers, including original equipment manufacturers and original design manufacturers. We are often involved in the early stages of design concerning our customers plans for new equipment. This helps us determine if our existing products can
be used in their new equipment or if new devices need to be created for the application. To assist us in our planning process, we are in regular contact with our key customers to discuss industry trends, emerging standards and ways in which we can
assist in their new product requirements.

Our sales and marketing teams actively demonstrate our devices with other industry suppliers and provide
technical information to our customers. Technical support is essential to our customers success, and we provide this through field application engineers, technical marketing and systems engineers. We also provide more detailed information and
support for our product line through our corporate website and special customer-accessible extranet sites. We believe that providing comprehensive product service and support is critical to shortening customers design cycles and maintaining a
competitive position in the markets that we serve.

Our sales team is focused on selling and supporting our chips and chipsets for equipment providers who
are in turn selling their products to service providers, enterprises, or consumers. To better match our available sales resources to market opportunities we also focus our sales and support efforts on target customers.

We sell our products to end customers directly and through distributors and independent manufacturers representatives. In 2006, approximately 35% of our orders
were shipped through our distributors, approximately 52% were sent by us directly to contract manufacturers selected by OEMs, and the balance were sent directly to our OEM customers.

In 2006, our largest distributor was Avnet Inc., which represented our products worldwide (excluding Japan, Israel, and Taiwan). In North America, we recognize sales through Avnet on a sell-through basis, which occurs
when Avnet ships our products to the end customer. In 2006, total sales shipped through Avnet worldwide were 22% of total revenues. Our second largest distributor is Macnica Inc. Sales shipped through this distributor in 2006 were approximately 5%
of total revenues.

Our sales outside of the United States, based on customer billing location, accounted for 76%



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of total revenue in 2006, 61% in 2005, and 62% in 2004. Our sales to customers in Asia, including Japan and China, continued to increase in 2006 (57% of
sales) from 2005 (50% of sales) in part because many of our OEM customers increased the use of Asia-based contract manufacturers for the assembly of their products. Sales to Cisco Systems and EMC Corporation through distributors, contract
manufacturers and direct sales each represented more than 10% of our total revenues in 2006.

MANUFACTURING

PMC-Sierra is a fabless company, meaning that we do not own or operate foundries for the production of the
silicon wafers from which our products are made. Instead, we work with independent merchant foundries and chip assemblers for the manufacture of our products. We believe our fabless approach to manufacturing provides us with the benefit of superior
manufacturing capability, scalability, as well as the flexibility to move wafer manufacture, assembly and test of our products to the vendors that offer the best technology and service, at a competitive price.

Our lead-time, or the time required to manufacture our devices, is typically 10 to 14 weeks. Based on this lead-time, our team of production planners initiates purchase
orders with our wafer suppliers and with our chip assemblers for the assembly and test of our parts so that, to the best of our ability, our products are available to meet customer demand.

Wafer Fabrication

We manufacture our
products at independent foundries using standard Complementary Metal Oxide Semiconductor (CMOS) process techniques. We have in the past purchased substantially all of the silicon wafers from which we manufacture our products from Taiwan
Semiconductor Manufacturing Corporation (TSMC), and Chartered Semiconductor Manufacturing Ltd. (Chartered). These independent foundries produce the wafers for our networking products at feature sizes down to 90 nanometer. By
using independent foundries to fabricate our wafers, we are better able to concentrate our resources on designing, developing and testing of new products. In addition, we avoid the fixed costs associated with owning and operating fabrication and
chip assembly facilities, and the costs associated with updating these facilities to manage constantly evolving process technologies.

We have supply
agreements with both TSMC and Chartered that were renewed through December 30, 2008. Deposits we have made to secure access to wafer fabrication capacity were $5.1 million at December 31, 2006. Under these supply agreements, the foundries
must supply certain quantities of wafers per year. Neither of these agreements have minimum unit volume requirements but we are obliged under one of the agreements to purchase a minimum percentage of our total annual wafer requirements provided that
the foundry is able to continue to offer competitive technology, pricing, quality and delivery. These agreements may be terminated at any time if either party violates the terms of the agreements. We do not currently anticipate any problems in
renewing these supply agreements beyond the current expiry dates.

Assembly and Test

Once our wafers are fabricated, they must be probed, or inspected, to identify which individual units, referred to as die, were properly manufactured. Most wafers that we
purchase are sent



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directly to an outside assembly house where the die are individually cut and packaged into semiconductor devices. The individual devices are then run through
various electrical, mechanical and visual tests before customer delivery. With most of our products, we have the option to probe the wafers or test the final chips in-house or subcontract the probing or testing to independent subcontractors.

Quality Assurance

The
industries that we serve require high quality, reliable semiconductors for incorporation into their equipment. We pre-qualify each vendor, foundry, assembly and test subcontractor. Wafers supplied by outside foundries must meet our incoming quality
and test standards. We conduct a portion of our test operations on advanced mixed signal and digital test equipment in our Burnaby facility. The remainder of our testing is performed predominantly by independent Asian and U.S. companies.

In 2006, there has been an increase in the proportion of products being produced for PMC by turnkey ASIC vendors due to the acquisitions. Although PMC does
not physically manage the bulk of this production, these products follow approved and audited flows conforming to PMCs Quality Assurance requirements.

RESEARCH AND DEVELOPMENT

Our research and development efforts are market and customer-focused and often involve the development of both hardware and software. These devices and reference designs
are targeted for use in enterprise, storage and service provider markets. Increasingly, our OEM customers that serve these end markets are demanding complete solutions with software support and complex feature sets.

From time to time we announce new products to the public once development of the product is substantially completed, and there are no longer significant costs to be
incurred. As we have a portfolio of approximately 270 products, we do not consider any individual new product or group of products released in a year to be material, beyond our continuing development of a portfolio of products that meet our
customers future needs.

At the end of fiscal 2006, we had design centers in the United States (California, Oregon, and Pennsylvania), Canada
(British Columbia, Saskatchewan, Manitoba, and Quebec), and India (Bangalore).

Our investment in research and development was $158.7 million in 2006,
$118.7 million in 2005 and $120.5 million in 2004.

BACKLOG

Our sales originate from customer purchase orders. However, our customers frequently revise order quantities and shipment schedules to reflect changes in their
requirements. We believe that orders placed with delivery dates in excess of six months are not firm orders. As of December 31, 2006, our backlog of products scheduled for shipment within six months totaled approximately $75.3 million. Unless
our customers cancel or defer to a subsequent year a portion of this backlog, we expect this entire backlog to be filled in 2007. Our backlog of products as of December 31, 2005 for shipment within six months totaled approximately $52.6
million.



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Our backlog includes our backlog of shipments to direct customers, minor distributors and a portion of shipments by our
major distributor to end customers. Our customers may cancel or defer backlog orders. Accordingly, we believe that our backlog at any given time is not a meaningful indicator of future long-term revenues.

COMPETITION

We typically face competition at the customer design stage when our customers are determining which semiconductor components to use in their equipment designs.

Most of our customers choose a particular semiconductor component primarily based on whether the component:



| |  |  | meets the functional requirements;
| | - |  | ----------------------------------



| |  |  | interfaces easily with other components in the product;
| | - |  | -------------------------------------------------------



| |  |  | meets power usage requirements;
| | - |  | -------------------------------



| |  |  | is priced competitively; and
| | - |  | ----------------------------



| |  |  | is commercially available on a timely basis.
| | - |  | --------------------------------------------

OEMs
are becoming more price conscious as semiconductors sourced from third party suppliers start to comprise a larger portion of the total materials cost in OEM equipment. This price sensitivity from our customers can lead to aggressive price
competition by competing suppliers that may force us to decrease our prices significantly to win a design and therefore decrease our gross profit.

OEMs
also consider the quality of the supplier when determining which component to include in a design. Many of our customers will consider the breadth and depth of the suppliers technology, as using one supplier for a broad range of technologies
can often simplify and accelerate the design of next generation equipment. OEMs will also consider a suppliers design execution reputation, as many OEMs design their next generation equipment concurrently with the semiconductor component
design. OEMs also consider whether a supplier has been pre-qualified, as this ensures that components made by that supplier will meet the OEMs quality standards.

Our competitors can be classified into two major groups. First, we compete against established peer-group semiconductor companies that focus on the communications semiconductor business. These companies include
Applied Micro Circuits Corporation, Broadcom, Conexant Systems, Emulex, Exar Corporation, LSI Logic Corporation, Marvell Technology Group, Mindspeed Technologies, Qlogic, Cortina Systems, and Transwitch. Many of these companies are well financed,
have significant communications semiconductor technology assets and established sales channels, and depend on the market in which we participate for the bulk of their revenues.

Second, we also compete with major domestic and international semiconductor companies,



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including Freescale, Infineon, Integrated Device Technology, Maxim Integrated Products, and Texas Instruments. Some of these companies are concentrating an
increasing amount of their substantial financial and other resources on the markets in which we participate.

Over the next few years, it is possible for
additional competitors to enter the market with new products, some of which may also have greater financial and other resources than us.

We are also
continuing to expand into certain markets, such as storage and wireless infrastructure, that have established incumbents with substantial financial and other resources. Some of these incumbents derive a majority of their earnings from these markets.
We expect continued strong competition in these markets.

LICENSES, PATENTS
AND TRADEMARKS

We rely in part on patents to protect our intellectual property and have been awarded 208
U.S. and 65 foreign patents for circuit designs and other innovations used in the design and architecture of our products. In addition, we have 84 patent applications pending in the U.S. Patent and Trademark office. Our patents typically expire 20
years from the patent application date, with our existing patents expiring between 2010 and 2026.

We do not consider our business to be materially
dependent upon any one patent. We believe that a strong portfolio of patents combined with other factors such as our ability to innovate, technological expertise and the experience of our personnel are important to compete effectively in our
industry. Our patent portfolio also provides the flexibility to negotiate or cross license intellectual property with other semiconductor companies to broaden the features in our products.

To protect our other intellectual property we rely on mask work protection, trademarks, copyrights, trade secret laws, employee and third-party nondisclosure agreements,
and licensing arrangements.

Our only material license is the MIPS microprocessor architecture license from MIPS Technologies Inc., on which our
microprocessor-based products are based. While the desktop computer microprocessor market is dominated by the Intel Corporations x86 complex instruction set computing, or CISC architecture, several competing microprocessor
architectures have emerged for other microprocessor markets such as the embedded computing market. Because of their higher performance and smaller space requirements, most of the competing architectures, such as the MIPS architecture, utilize
reduced instruction set computing, or RISC architectures. The MIPS architecture is widely supported through semiconductor design software, operating systems and companion integrated circuits. Because this license supports the architecture behind our
microprocessors, we must retain the MIPS license in order to produce our next generation microprocessor products. However, this license may be terminated only if we do not make the required royalty payments or breach confidentiality obligations.

PMC, PMCS, PMC-Sierra and our logo are our registered trademarks and service marks. We own other trademarks and service marks not appearing in this Annual
Report. Any other trademarks used in this Annual Report are owned by other entities.



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EMPLOYEES

As of December 31, 2006, we had 1183 employees, including 715 in Research and Development, 105 in Production and Quality Assurance, 252 in Sales and Marketing and
111 in Administration. Our employees are not represented by a collective bargaining agreement and we have never experienced any related work stoppage.



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|ITEM 1A. | Risk Factors.
|-------- | -------------

Our Company is subject to a number of risks
affecting our operating results  some are normal to the fabless semiconductor industry, some are the same or similar to those disclosed in previous SEC filings, and some may be present in the future. You should carefully consider all of these
risks and the other information in this report before investing in PMC. The fact that certain risks are endemic to the industry does not lessen the significance of the risk.

We are subject to rapid changes in demand for our products due to short order lead times, customer inventory levels, production schedules, fluctuations in demand for networking equipment and our customer
concentration.

As a result of the following risks, our business, financial condition or operating results could be materially adversely affected. This
could cause the trading price of our securities to decline, and you may lose part or all of your investment.

Our revenues and profits may fluctuate
because of factors that are beyond our control, including variation in our turns business.

Our ability to project revenues is limited because a
significant portion of our quarterly revenues may be derived from orders placed and shipped in the same quarter, which we call our turns business. Our turns business varies widely quarter to quarter. Our customers may delay product
orders and reduce delivery lead-time expectations, which reduces our ability to project revenues beyond the current quarter. While we evaluate end users and contract manufacturers inventories of our products to assess the impact of
inventories on our projected turns business, we do not have complete information on their inventories. This could cause our projections of a quarters turn business to be inaccurate, leading to lower revenues than projected.

We may fail to meet our forecasts if our customers cancel or delay the purchase of our products.

Many of our customers have numerous product lines, numerous component requirements for each product, sizeable and complex supplier structures, and typically engage
contract manufacturers for additional manufacturing capacity. In addition, our customers often shift buying patterns as they manage inventory levels, market different products, or change production schedules. This makes forecasting their production
requirements difficult and can lead to an inventory surplus of certain of their components. This also reduces our visibility for revenues beyond the current quarter, so projections of full-year results based on current guidance from customers may
not be realized.

We may be unable to deliver products to customers when they require them if we incorrectly estimate future demand, and this may cause the
timing of shipments of our products to fluctuate. Our book-to-bill ratio in a quarter does not predict accurately revenues in the next quarter. Because a significant portion of our operating expenses are fixed, even a small revenue shortfall can
have a disproportionately negative effect on our operating results.



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If the demand for our customers products declines, demand for our products will be similarly
affected and our revenues, gross margins and operating performance will be adversely affected.

Our customers are subject to their own business cycles,
most of which are unpredictable in commencement, depth and duration. We cannot accurately predict the continued demand of our customers products and the demands of our customers for our products. In the past, telecommunication service
providers have reduced capital spending without notice, adversely affecting our revenues. As a result of this uncertainty, our past operating results may not be indicative of our future operating results. It is possible that, in future periods, our
results may be below the expectations of public market analysts and investors. This could cause the market price of our common stock to decline.

We rely on a few customers for a major portion of our sales, any one of which could materially impact our revenues should they change their ordering pattern.

We depend on a limited number of customers for a major portion of our revenues. Through direct, distributor and subcontractor purchases, Cisco Systems and EMC Corporation accounted for more than 10% of our revenues in
2006. The companies that constitute our largest customers may change due to the Storage Semiconductor Business and Passave acquisitions. We do not have long-term volume purchase commitments from any of our major customers. We sell our products
solely on the basis of purchase orders. Those customers could decide to cease purchasing products with little or no notice and without significant penalties. A number of factors could cause our customers to cancel or defer orders, including
interruptions to their operations due to a downturn in their industries, delays in manufacturing their own product offerings into which our products are incorporated and natural disasters. Accordingly, our future operating results will continue to
depend on the success of our largest customers and on our ability to sell existing and new products to these customers in significant quantities.

The loss
of a key customer, or a reduction in our sales to any major customer or our inability to attract new significant customers could materially and adversely affect our business, financial condition or results of operations.

Product sales mix may adversely affect our profitability over time.

Our products range widely in terms of the margins they generate. A change in product sales mix could impact our operating results materially.

As a result of our internal review of our stock option practices and related restatement of financial results, we have become subject to an informal SEC inquiry and shareholder litigation, which may not be resolved
favorably and will require significant management time and attention and accounting and legal resources, which could negatively affect our business, results of operations and cash flows.

As a result of our restatement of the 2005 10-K, the SEC has commenced an informal inquiry regarding the Companys stock option practices, and we have been named as
defendant in three derivative lawsuits. In addition, we may become the subject of government or private litigation, including an investigation by the Department of Justice. There are no assurances that the SEC inquiry will result in the same
conclusions as those reached in the Audit Committees review. This may result in different or additional materially adverse accounting or tax impacts



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on our historical financial statements relating to stock option grants. In addition, the SEC inquiry and shareholder litigation may require significant human
and financial resources that could otherwise be devoted to the operation of our business. If we are subject to an adverse finding resulting from the SEC investigation or litigation, we could be required to pay damages or penalties or have other
remedies imposed upon us. An SEC investigation or litigation may also impair our ability to timely file reports with the Securities and Exchange Commission in the future, which could lead to our inability to continue to meet NASDAQ listing
requirements and comply with contractual commitments to do so, and impair our ability to grant employee equity incentives. In addition, we could become the target of costly class-action securities litigation related to other matters in the future.
Considerable legal and accounting expenses related to these matters have been incurred to date and significant expenditures may continue to be incurred in the future. Any new investigation or litigation could adversely affect our business, results
of operations, financial position and cash flows.

Our 2006 acquisitions may adversely affect our results of operations and be dilutive to existing
shareholders.

In addition to the risks the Company generally faces in connection with acquisitions, including difficulties in assimilating and
integrating the operations, personnel, technologies, products and information systems of acquired businesses, there are several risks that the Company faces in connection with the acquisitions of Passave Inc., and the Avago Storage Semiconductor
Business.

We purchased Passave in part based on projected growth in the Fiber To The Home market. This growth depends on many factors, including service
provider capital expenditures, consumer adoption of FTTH-based services and government policy. The timing of development of the North American FTTH market is less certain than in Asian markets.

Whether and when the Passave acquisition becomes accretive to PMC depends on growth in both Passaves and PMCs business. Projected tax rates for
Passaves business assume continued tax incentives from the state of Israel.

PMC must successfully integrate Passaves personnel and operations
with PMCs personnel and operations to achieve the benefits of the acquisition.

The Storage Semiconductor Business acquisition may make the Company
reliant on a limited number of customers for a major portion of its revenues. PMC may also be unsuccessful at, either selling the existing products of the acquired business, or developing and selling new products of the combined company. PMC may not
achieve its goal of improving time-to-market for integrated circuits using its existing technology and the acquired business technology.

If PMC
fails to successfully address integration challenges in a timely manner, or at all, it may not realize the anticipated benefits or synergies of the acquisition to the extent, or in the time frame, anticipated. Even if the acquired businesses are
successfully integrated, the Company may not receive the expected benefits of the acquisitions, which are based on forecasts, which are subject to numerous assumptions which may prove to be inaccurate. Any one of these integration challenges or any
combination thereof could adversely affect PMCs cash flow and results of operations, and as a result, the acquisition may prove to be dilutive to existing shareholders.



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We are involved in litigation with UTStarcom that may be expensive and time consuming.

In November 2005, UTStarcom, Inc. filed a suit against Passave in the Santa Clara County Superior Court in California, which is more fully described under Part I
Item 3. Legal Proceedings. We believe that we have meritorious defenses to UTStarcoms claims. Although we have attempted to try to resolve this claim, we may not be able to do so on reasonable terms, if at all. If PMC loses
this litigation, a court could require us to pay substantial damages. Any negotiated resolution of the UTStarcom claim could also require PMC to make substantial payments. Either of these results could have a material adverse effect on our business,
results of operations and financial condition.

Changes in the political and economic climate in China and Taiwan may have a significant impact on our
profitability.

China represents a significant portion of our net revenues (15% and 19% for the years ended December 31, 2006 and 2005,
respectively) and substantially all of Passaves revenues in 2006 were derived from product sales in Japan. Our financial condition and results of operations are becoming increasingly dependent on our sales in China and the majority of our
wafer supply comes from Taiwan. China has large organizations with major programs that can start and stop quickly. For example, in 2004 our operating profits were adversely affected by a sudden slowdown in telecom infrastructure build-out in China.
Instability in Chinas economic environment could lead to a contraction of capital spending by our customers. Economic shutdowns, decreases in demand in these markets for our products and overall negative market conditions in Asia could have a
disproportionate effect on our overall business results. Additional risks to us include economic sanctions imposed by the U.S. government, imposition of tariffs and other potential trade barriers or regulations, uncertain protection for intellectual
property rights and generally longer receivable collection periods.

Hostilities in Israel may have a significant impact on our Israeli
subsidiarys ability to conduct its business.

One of our subsidiaries is located in Israel, and employs approximately 150 people. If regional
hostilities resume, a significant number of the subsidiarys employees may be called into active military duty at any time. As a result, while product development schedules have not to date been impacted, there may be delays in their ability to
meet future development schedules. It is not clear if the hostilities will resume, and if so, how many PMC employees may be called to military duty or otherwise affected by any potential hostilities.

Our revenues may decline if we do not maintain a competitive portfolio of products.

We are experiencing significantly greater competition from many different market participants as the market in which we participate matures. In addition, we are expanding into markets, such as the wireless
infrastructure, enterprise storage, customer premise equipment, and generic microprocessor markets, which have established incumbents with substantial financial and technological resources. We expect more intense competition than that which we have
traditionally faced as some of these incumbents derive a majority of their earnings from these markets.



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We typically face competition at the design stage, where customers evaluate alternative design approaches requiring
integrated circuits. The markets for our products are intensely competitive and subject to rapid technological advancement in design tools, wafer manufacturing techniques, process tools and alternate networking technologies. We may not be able to
develop new products at competitive pricing and performance levels. Even if we are able to do so, we may not complete a new product and introduce it to market in a timely manner. Our customers may substitute use of our products in their next
generation equipment with those of current or future competitors, reducing our future revenues. With the shortening product life and design-in cycles in many of our customers products, our competitors may have more opportunities to supplant
our products in next generation systems.

Our customers are increasingly price conscious, as semiconductors sourced from third party suppliers comprise a
greater portion of the total materials cost in networking equipment. We continue to experience aggressive price competition from competitors that wish to enter into the market segments in which we participate. These circumstances may make some of
our products less competitive, and we may be forced to decrease our prices significantly to win a design. We may lose design opportunities or may experience overall declines in gross margins as a result of increased price competition.

Over the next few years, we expect additional competitors, some of which may also have greater financial and other resources, to enter the market with new products.
These companies, individually or collectively, could represent future competition for many design wins, and subsequent product sales.

Design wins do
not translate into near-term revenues and the timing of revenues from newly designed products is often uncertain.

From time to time, we announce new
products and design wins for existing and new products. While some industry analysts may use design wins as a metric for future revenues, many design wins have not, and will not, generate any revenues for us, as customer projects are cancelled or
unsuccessful in their end market. In the event a design win generates revenues, the amount of revenues will vary greatly from one design win to another. In addition, most revenue-generating design wins do not translate into near-term revenues. Most
revenue-generating design wins take more than two years to generate meaningful revenues.

We may be unsuccessful in transitioning the
design of our new products to new manufacturing processes.

Many of our new products are designed to take advantage of new manufacturing processes
offering smaller device geometries as they become available, since smaller geometries can provide a product with improved features such as lower power requirements, increased performance, more functionality and lower cost. We believe that the
transition of our products to, and introduction of new products using, smaller device geometries is critical for us to remain competitive. We could experience difficulties in migrating to future smaller device geometries or manufacturing processes,
which would result in the delay of the production of our products. Our products may become obsolete during these delays, or allow competitors parts to be chosen by customers during the design process.



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Since many of the products we develop do not reach full production sales volumes for a number of
years, we may incorrectly anticipate market demand and develop products that achieve little or no market acceptance.

Our products generally take
between 12 and 24 months from initial conceptualization to development of a viable prototype, and another 3 to 18 months to be designed into our customers equipment and sold in production quantities. Our products often must be redesigned
because manufacturing yields on prototypes are unacceptable or customers redefine their products to meet changing industry standards or customer specifications. As a result, we develop products many years before volume production and may
inaccurately anticipate our customers needs.

We may have to redesign our products to meet evolving industry standards and customer
specifications, which may prevent or delay future revenue growth.

We sell products to customers whose characteristics include evolving industry
standards, short product lifespans, and new manufacturing and design technologies. Many of the standards and protocols for our products are based on networking technologies that may not have been widely adopted or ratified by one or more of the
standard-setting bodies in our customers industries. Our customers may delay or alter their design demands during this standard-setting process. In response, we must redesign our products to suit these changing demands. Redesign is expensive
and usually delays the production of our products. Our products may become obsolete during these delays.

Our strategy includes broadening our business
into the Enterprise, Storage and Consumer markets. We may not be successful in achieving significant sales in these markets.

The Enterprise, Storage
and Consumer markets are already serviced by incumbent suppliers who have established relationships with customers. We may be unsuccessful in displacing these suppliers, or having our products designed into products for different market needs. In
order to compete against incumbents, we may need to lower our prices to win new business, which could lower our gross margin. We may incur increased research, development and sales costs to address these new markets. These markets typically are
characterized by stronger price competition and, consequently, lower per unit profit margins. If we are successful in these markets, our overall profit margins could decline, as lower margin products may comprise a greater portion of our revenues.

We are subject to the risks of conducting business outside the United States, which may impair our sales, development or manufacturing of our products.

In addition to selling our products in a number of countries, a significant portion of our research and development and manufacturing is conducted
outside the United States. The geographic diversity of our business operations could hinder our ability to coordinate design and sales activities. If we are unable to develop systems and communication processes to support our geographic diversity,
we may suffer product development delays or strained customer relationships.



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The final determination of our income tax liability may be materially different from our income tax
provision.

We are subject to income taxes in both the United States and international jurisdictions. Significant judgment is required in
determining our worldwide provision for income taxes. In the ordinary course of our business, there are many transactions where the ultimate tax determination is uncertain. Additionally our calculations of income taxes are based on our
interpretations of applicable tax laws in the jurisdictions in which we file. Although we believe our tax estimates are reasonable, there is no assurance that the final determination of our income tax liability will not be materially different
than what is reflected in our income tax provisions and accruals. Should additional taxes be assessed as a result of new legislation, an audit or litigation, if our effective tax rate should change as a result of changes in federal,
international or state and local tax laws, or if we were to change the locations where we operate, there could be a material effect on our income tax provision and net income in the period or periods in which that determination is made, and
potentially to future periods as well. For instance, our estimated tax provision rate increased significantly at the end of 2006 due to an increase in our estimated tax liability following receipt in 2007 of a written communication from a tax
authority examining the historic transfer pricing policies and practices of certain companies within the PMC-Sierra group. As a result, we increased our provision for periods prior to 2006 by $29.9 million and increased our 2006 expected tax rate
from approximately 17% to 22%.

We may lose our ability to design or produce products, could face additional unforeseen costs or could
lose access to key customers if any of the nations in which we conduct business impose trade barriers or new communications standards.

We may have
difficulty obtaining export licenses for certain technology produced for us outside the United States. If a foreign country imposes new taxes, tariffs, quotas, and other trade barriers and restrictions or the United States and a foreign country
develop hostilities or change diplomatic and trade relationships, we may not be able to continue manufacturing or sub-assembly of our products in that country and may have fewer sales in that country. We may also have fewer sales in a country that
imposes new communications standards or technologies. This could inhibit our ability to meet our customers demand for our products and lower our revenues.

If foreign exchange rates fluctuate significantly, our profitability may decline.

We are exposed to foreign
currency rate fluctuations because a significant part of our development, test, and selling and administrative costs are in Canadian dollars, and our selling costs are incurred in a variety of currencies around the world. The U.S. dollar has
devalued significantly compared to the Canadian dollar and this trend may continue. To protect against reductions in value and the volatility of future cash flows caused by changes in foreign



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exchange rates, we enter into foreign currency forward contracts. The contracts reduce, but do not eliminate, the impact of foreign currency exchange rate
movements. In addition, this foreign currency risk management policy may not be effective in addressing long-term fluctuations since our contracts do not extend beyond a 12-month maturity.

We regularly limit our exposure to foreign exchange rate fluctuations from our Canadian dollar net asset or liability positions. We do not hedge our accrual for Canadian
income taxes in the ordinary course of business, and consequently in 2006 we recorded a $0.4 million foreign exchange gain relating to this item. Our profitability would be materially impacted by a 5% shift in the foreign exchange rates between
United States and Canadian currencies.

We are exposed to the credit risk of some of our customers.

Many of our customers employ contract manufacturers to produce their products and manage their inventories. Many of these contract manufacturers represent greater credit
risk than our networking equipment customers, who generally do not guarantee our credit receivables related to their contract manufacturers.

In addition,
a significant portion of our sales flows through our distribution channel, which generally represent a higher credit risk. Should these companies encounter financial difficulties, our revenues could decrease, and collection of our significant
accounts receivables with these companies could be jeopardized.

Our business strategy contemplates acquisition of other products, technologies, or
businesses, which could adversely affect our operating performance.

Acquiring products, intellectual property, technologies, or businesses from third
parties is a core part of our business strategy. That strategy depends on the availability of suitable acquisition candidates at reasonable prices and our ability to resolve challenges associated with integrating acquired businesses into our
existing business. These challenges include integration of product lines, sales forces, customer lists and manufacturing facilities, development of expertise outside our existing business, diversion of management time and resources, and possible
divestitures, inventory write-offs and other charges. We also may be forced to replace key personnel who may leave our Company as a result of the acquisition. We cannot be certain that we will find suitable acquisition candidates or that we will be
able to meet these challenges successfully.

An acquisition could absorb substantial cash resources, require us to incur or assume debt obligations, or
issue additional equity. If we are not able to obtain financing, then we may not be in a position to consummate acquisitions. If we issue equity securities in connection with an acquisition, we may dilute our common stock with securities that have
an equal or a senior interest in our Company.

From time to time, we license, or acquire, technology from third parties to incorporate into our
products. Incorporating technology into our products may be more costly, or require additional management attention to achieve the desired functionality.

The complexity of our products could result in unforeseen or undetected defects or bugs, which could adversely affect the market acceptance of new products and damage our reputation with current or prospective customers.



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Although our customers, our suppliers, and we rigorously test our products, our highly complex products may contain
defects or bugs. We have in the past experienced, and may in the future, experience defects and bugs in our products. If any of our products contain defects or bugs, or have reliability, quality or compatibility problems that are significant to our
customers, our reputation may be damaged and customers may be reluctant to buy our products. This could materially and adversely affect our ability to retain existing customers or attract new customers. In addition, these defects or bugs could
interrupt or delay sales to our customers.

We may have to invest significant capital and other resources to alleviate problems with our products. If any
of these problems are not found until after we have commenced commercial production of a new product, we may be required to incur additional development costs and product recall, repair or replacement costs. These problems may also result in claims
against us by our customers or others. In addition, these problems may divert our technical and other resources from other development efforts. Moreover, we would likely lose, or experience a delay in, market acceptance of the affected product or
products, and we could lose credibility with our current and prospective customers.

Our 2005 restructuring activities will increase our dependence on
microprocessor cores licensed from third parties.

In June 2005, we implemented a workforce reduction plan that eliminated 63 positions from research
and development in our Santa Clara design center. A significant portion of our revenues is derived from sales of microprocessors that have been developed at this location. In the future, our microprocessor road map will be dependent on successful
acquisition and integration of microprocessor cores developed by third parties. If we experience difficulties in obtaining or integrating intellectual property from these third parties, it could delay or prevent the development of
microprocessor-based products in the future.

The loss of personnel could delay us from designing new products.

To succeed, we must retain and hire technical personnel highly skilled at the design and test functions needed to develop high-speed networking products. The competition
for such employees is intense.

We do not have employment agreements in place with many of our key personnel. As employee incentives, we issue common stock
options that generally have exercise prices at the market value at the time of grant and that are subject to vesting. As our stock price varies substantially, the stock options we grant to employees are effective as retention incentives only if they
have economic value.

We may not be able to meet customer demand for our products if we do not accurately predict demand or if we fail to secure
adequate wafer fabrication or assembly parts and capacity.

We currently do not have the ability to accurately predict what products our customers will
need



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in the future. Anticipating demand is difficult because our customers face volatile pricing and demand for their end-user networking equipment, our customers
are focusing more on cash preservation and tighter inventory management, and because we supply a large number of products to a variety of customers and contract manufacturers who have many equipment programs for which they purchase our products. Our
customers are frequently requesting shipment of our products earlier than our normal lead times. If we do not accurately predict what mix of products our customers may order, we may not be able to meet our customers demand in a timely manner
or we may be left with unwanted inventory, which could adversely affect our future operating results. In addition, if our customers relationships are disrupted for inability to deliver sufficient products or for any other reason, including
reasons unrelated to us, it would have a significant negative impact on our business.

We depend on third-party subcontractors to
assemble, obtain packaging materials for, and test substantially all of our current semiconductor products. If we lose the services of any of our subcontractors or if these subcontractors are unable to attain sufficient packaging materials,
shipments of our products may be disrupted, which could harm our customer relationships and adversely affect our revenues.

Third-party contractors
located primarily in Asia assemble, obtain packaging materials for, and test substantially all of our current semiconductor products. Because we rely on third-party subcontractors to perform these functions, we cannot directly control our
product delivery schedules and quality assurance. This lack of control has in the past resulted, and could in the future result, in product shortages or quality assurance problems that could delay shipments of our products or increase our
manufacturing, assembly or testing costs.

If our third-party subcontractors are unable to obtain sufficient packaging materials for our products in a
timely manner, we may experience a significant product shortage or delay in product shipments, which could seriously harm our customer relationships and materially and adversely affect our net sales. If any of these subcontractors experiences
capacity constraints or financial difficulties, suffers any damage to its facilities, experiences power outages or any other disruption of assembly or testing capacity, we may not be able to obtain alternative assembly and testing services in a
timely manner. Due to the amount of time that it usually takes us to qualify assemblers and testers, we could experience significant delays in product shipments if we are required to find alternative assemblers or testers for our
components. Any problems that we may encounter with the delivery, quality or cost of our products could damage our customer relationships and materially and adversely affect our results of operations. We are continuing to develop
relationships with additional third-party subcontractors to assemble and test our products. However, even if we use these new subcontractors, we will continue to be subject to all of the risks described above.

Our business may be adversely affected if its customers cannot obtain sufficient supplies of other components needed in their product offerings to
meet their production projections and target quantities.

Some of our products are used by customers in conjunction with a number of other components,
such as transceivers, microcontrollers and digital signal processors. If, for any reason, our customers experience a shortage of any component, their ability to produce the



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forecasted quantity of their product offerings may be affected adversely and our product sales would decline until the shortage is remedied. Such a situation
could harm our operating results, cash flow and financial condition.

We rely on limited sources of wafer fabrication, the loss of which
could delay and limit our product shipments.

We do not own or operate a wafer fabrication facility. Three outside wafer foundries supply more than 95%
of our semiconductor wafer requirements. Our wafer foundry suppliers also make products for other companies and some make products for themselves, thus we may not have access to adequate capacity or certain process technologies. We have less control
over delivery schedules, manufacturing yields and costs than competitors with their own fabrication facilities. If the wafer foundries we use are unable or unwilling to manufacture our products in required volumes, or at specified times, we may have
to identify and qualify acceptable additional or alternative foundries. This qualification process could take six months or longer. We may not find sufficient capacity quickly enough, if ever, at an acceptable cost, to satisfy our production
requirements.

Some companies that supply our customers are similarly dependent on a limited number of suppliers to produce their products. These other
companies products may be designed into the same networking equipment into which our products are designed. Our order levels could be reduced materially if these companies are unable to access sufficient production capacity to produce in
volumes demanded by our customers because our customers may be forced to slow down or halt production on the equipment into which our products are designed.

We depend on third parties in Asia for assembly of our semiconductor products that could delay and limit our product shipments.

Subcontractors in Asia assemble all of our semiconductor products into a variety of packages. Raw material shortages, political and social instability, assembly house service disruptions, currency fluctuations, or
other circumstances in the region could force us to seek additional or alternative sources of supply or assembly. This could lead to supply constraints or product delivery delays that, in turn, may result in the loss of revenues. Capacity in the
assembly industry has become scarce, lengthening lead times. This could become more severe, which could in turn adversely affect our revenues. We have less control over delivery schedules, assembly processes, quality assurances, raw material
supplies, and costs than competitors that do not outsource these tasks.

Our business is vulnerable to interruption by earthquake, fire,
power loss, telecommunications failure, terrorist activity and other events beyond our control.

We do not have sufficient business interruption
insurance to compensate us for actual losses from interruption of our business that may occur, and any losses or damages incurred by us could have a material adverse effect on our business. We are vulnerable to a major earthquake and other
calamities. We have operations in seismically active regions in California, and we rely on third-party wafer fabrication facilities in seismically active regions in Asia. We have not undertaken a systematic analysis of the potential consequences to
our business and financial results from a major earthquake in either region. We are unable to predict the effects of any such event, but the effects could be seriously harmful to our business.



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Our estimated restructuring accruals may not be adequate.

In 2005 and 2006, we implemented restructuring plans to streamline production and reduce and reallocate operating costs. In 2001 and 2003, we implemented plans to
restructure our operations in response to the decline in demand for our networking products. We reduced the workforce and consolidated or shut down excess facilities in an effort to bring our expenses into line with our reduced revenue expectations.

While management uses all available information to estimate these restructuring costs, particularly facilities costs, our accruals may prove to be
inadequate. If our actual sublease revenues or the results of our exiting negotiations differ from our assumptions, we may have to record additional charges, which could materially affect our results of operations, financial position and cash flow.

From time to time, we become defendants in legal proceedings about which we are unable to assess our exposure and which could become significant
liabilities upon judgment.

We become defendants in legal proceedings from time to time. Companies in our industry have been subject to claims related
to patent infringement and product liability, as well as contract and personal claims. We may not be able to accurately assess the risk related to these suits, and we may be unable to accurately assess our level of exposure. These proceedings may
result in material charges to our operating results in the future if our exposure is material and if our ability to assess our exposure becomes clearer.

If we cannot protect our proprietary technology, we may not be able to prevent competitors from copying our technology and selling similar products, which would harm our revenues.

To compete effectively, we must protect our intellectual property. We rely on a combination of patents, trademarks, copyrights, trade secret laws, confidentiality
procedures and licensing arrangements to protect our intellectual property rights. We hold numerous patents and have a number of pending patent applications.

We might not succeed in obtaining patents from any of our pending applications. Even if we are awarded patents, they may not provide any meaningful protection or commercial advantage to us, as they may not be of sufficient scope or
strength, or may not be issued in all countries where our products can be sold. In addition, our competitors may be able to design around our patents.

We
develop, manufacture and sell our products in Asian and other countries that may not protect our products or intellectual property rights to the same extent as the laws of the United States. This makes piracy of our technology and products more
likely. Steps we take to protect our proprietary information may not be adequate to prevent theft of our technology. We may not be able to prevent our competitors from independently developing technologies that are similar to or better than ours.



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Our products employ technology that may infringe on the intellectual property and the proprietary rights of third
parties, which may expose us to litigation and prevent us from selling our products.

Vigorous protection and pursuit of intellectual property rights or
positions characterize the semiconductor industry. This often results in expensive and lengthy litigation. We, and our customers or suppliers, may be accused of infringing on patents or other intellectual property rights owned by third parties in
the future. An adverse result in any litigation could force us to pay substantial damages, stop manufacturing, using and selling the infringing products, spend significant resources to develop non-infringing technology, discontinue using certain
processes or obtain licenses to the infringing technology. In addition, we may not be able to develop non-infringing technology, or find appropriate licenses on reasonable terms.

Patent disputes in the semiconductor industry are often settled through cross-licensing arrangements. Because we currently do not have a substantial portfolio of patents compared to our larger competitors, we may not
be able to settle an alleged patent infringement claim through a cross-licensing arrangement. We are therefore more exposed to third party claims than some of our larger competitors and customers.

The majority of our customers are required to obtain licenses from and pay royalties to third parties for the sale of systems incorporating our semiconductor devices.
Customers may also make claims against us with respect to infringement.

Furthermore, we may initiate claims or litigation against third parties for
infringing our proprietary rights or to establish the validity of our proprietary rights. This could consume significant resources and divert the efforts of our technical and management personnel, regardless of the litigations outcome.

Securities we issue to fund our operations could dilute your ownership.

We may decide to raise additional funds through public or private debt or equity financing. If we raise funds by issuing equity securities, the percentage ownership of current stockholders will be reduced and the new
equity securities may have priority rights to your investment. We may not obtain sufficient financing on terms that are favorable to you or us. We may delay, limit or eliminate some or all of our proposed operations if adequate funds are not
available.

Our stock price has been and may continue to be volatile.

We expect that the price of our common stock will continue to fluctuate significantly, as it has in the past. In particular, fluctuations in our stock price and our price-to-earnings multiple may have made our stock
attractive to momentum, hedge or day-trading investors who often shift funds into and out of stocks rapidly, exacerbating price fluctuations in either direction particularly when viewed on a quarterly basis.

Securities class action litigation has often been instituted against a company following periods of volatility and decline in the market price of their securities. If
instituted against us, regardless of the outcome, such litigation could result in substantial costs and diversion of our



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managements attention and resources and have a material adverse effect on our business, financial condition and operating results. In addition, we
could incur substantial punitive and other damages relating to this litigation.

Provisions in Delaware law, our charter documents and our stockholder
rights plan may delay or prevent another entity from acquiring us without the consent of our Board of Directors.

We adopted a stockholder rights plan
in 2001, pursuant to which we declared a dividend of one share purchase right for each outstanding share of common stock. If certain events occur, including if an investor tenders for or acquires more than 15% of our outstanding common stock,
stockholders (other than the acquirer) may exercise their rights and receive $650 worth of our common stock in exchange for $325 per right, or we may, at our option, issue one share of common stock in exchange for each right, or we may redeem the
rights for $0.001 per right. The issuance of the rights could have the effect of delaying or preventing a change in control of us.

In addition, our Board
of Directors has the right to issue preferred stock without stockholder approval, which could be used to dilute the stock ownership of a potential hostile acquirer. Delaware law imposes some restrictions on mergers and other business combinations
between us and any holder of 15% or more of our outstanding common stock.

Although we believe these provisions of our charter documents, Delaware law and
our stockholder rights plan will provide for an opportunity to receive a higher bid by requiring potential acquirers to negotiate with our Board of Directors, these provisions apply even if the offer may be considered beneficial by some
stockholders.



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|ITEM 1B. | Unresolved Staff Comments.
|-------- | --------------------------

On January 19, 2007, we received a
comment letter from the SEC asking us to further amend our Form 10-K for the year ended December 31, 2005 (the 2005 10-K/A) to comply with the recently issued SEC guidance in Sample Letter Sent in Response to Inquiries Related
to Filing Restated Financial Statements for Errors in Accounting for Stock Option Grants (the Sample Letter). In subsequent discussions and correspondence with the SEC, the SEC has agreed that we may comply with the guidance in the
Sample Letter in this Annual Report on Form 10-K for the year ended December 31, 2006 instead of amending our 2005 10-K/A. We have amended the disclosure herein to comply with the Sample Letter.



|ITEM 2. | Properties.
|------- | -----------

PMC leases properties in 24 locations worldwide.
Approximately 27% of the space leased by PMC was excess at December 31, 2006. Approximately 40% of the excess space has been subleased and we are actively pursuing opportunities to sublease or negotiate our exit from the remaining excess
facilities.

We lease a total of 108,000 square feet in Santa Clara, California, to house our US design, engineering, sales and marketing operations. In
2006 we vacated approximately 35,000 square feet in Santa Clara in connection with our workforce reduction activities.

Our Canadian operations are located
in Burnaby, British Columbia where we lease 147,000 square feet of office space in two separate buildings. These locations support a significant portion of our product development, manufacturing, marketing, sales and testing activities. In late 2006
we vacated approximately 91,000 square feet in Kanata, Ontario in connection with operational consolidation activities.

We also operate nine additional
research & development centers: three in Canada, three in the US, one in Bangalore, India, one in Herzliya, Israel and one in Shanghai, China.

We
have eleven sales/operations offices located in Europe, Asia, the Middle East and North America.



|ITEM 3. | Legal Proceedings.
|------- | ------------------

Stockholder Derivative Lawsuits

Three derivative actions have been filed against the Company, as a nominal defendant, and various current and former officers and/or
directors: (1) Meissner v. Bailey, et al., Santa Clara Superior Court Case No. 1-06-CV-071329 (filed September 18, 2006); (2) Beiser v. Bailey, et al., United States District Court for the Northern District of
California Case No. 5:06-CV-05330-RS (filed August 29, 2006); and (3) Barone v. Bailey, et al., United States District Court for the Northern District of California Case No. 4:06-CV-06473-SBA (filed October 16,
2006). On November 21, 2006 the Beiserand Barone actions were consolidated into one case. On January 18, 2007, the Santa Clara County Superior Court in California ordered that the Meissner action be stayed pending the
outcome of the consolidated, federal Beiser/Baroneaction. A consolidated complaint in the Beiser/Barone action was filed on January 29, 2007 (the Consolidated Complaint).



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The Consolidated Complaint generally alleges that various current and former Company directors and/or officers breached
their duty of loyalty and/or duty of care to the Company and its shareholders that these purported breaches of fiduciary duties caused harm to the Company, and the plaintiffs seek to recover damages on behalf of the Company. The Consolidated
Complaint also alleges violations of federal securities laws. The Company is a nominal defendant in the case, but any recovery in the litigation would be paid to the Company, rather than to its shareholders. The Company has engaged independent legal
counsel to prepare joint defense arrangements for the various defendants.

UTStarcom

On November 17, 2005, UTStarcom, Inc. filed a suit against Passave in the Santa Clara County Superior Court in California. In that claim, UTStarcom raised various
demands regarding issues relating to the interaction of Passaves PAS 5001 system-on-a-chip with a particular companys switch used by UTStarcom in its Fiber-to-the-home (FTTH) products. In the suit, UTStarcom asserts various
claims for breach of contract and breach of warranty and requests indemnity associated with the sale of Passaves PAS 5001 products. UTStarcom claims that it incorporated those products into its FTTH products that were shipped to a particular
customer, and that customer informed UTStarcom that those FTTH products supplied by UTStarcom were experiencing unacceptable data interruptions. UTStarcom further claims the data interruptions were caused by the failure of Passaves PAS 5001 to
properly interface with another companys switch in the UTStarcom product. UTStarcom also claims that Passave breached certain warranties contained in its purchase orders and is obligated to indemnify UTStarcom and its customers for any damages
that resulted from a breach of these warranties. UTStarcom further claims that its customers have submitted claims to UTStarcom, which UTStarcom also alleges stem from its products failure attributable to Passaves chips. UTStarcom also
claims that it has incurred costs and expenses in an amount exceeding $30 million in connection with the product defects it claims are attributable to the PAS 5001 products. On January 16, 2007, Passave filed its response to the amended
complaint and also filed a cross-complaint against UT Starcom alleging interference with prospective economic advantage and breach of contract.

We believe
that Passave has meritorious defenses to UTStarcoms claims and valid basis for its cross-complaint. Nevertheless, Passave has informed UTStarcom that it is prepared to replace a number of such system-on-a-chips that Passave had shipped to it
as an accommodation to UTStarcom. Although we have attempted to try to resolve this dispute, we may not be able to do so on reasonable terms, if at all. If we lose this litigation, a court could require us to pay substantial damages. Any negotiated
resolution of the UTStarcom claim could also require us to make substantial payments. Either of these results could have a material adverse effect on our business, results of operations and financial condition.



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|ITEM 4. | Submission of Matters to a Vote of Security Holders.
|------- | ----------------------------------------------------

None.



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PART II



|ITEM 5. | Market for Registrants Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities.
|------- | ----------------------------------------------------------------------------------------------------------------

Stock Price Information. Our Common Stock trades on the NASDAQ Global Market under the symbol PMCS. The following table sets forth, for the periods indicated, the high
and low closing sale prices for our Common Stock as reported by the NASDAQ Global Market:



|               |  |      |       |     |   |     
|-------------- |  | ---- | ----- | --- | - | ----
|Fiscal 2006    |  | High |       | Low
|First Quarter  |  | $    | 12.45 |     | $ | 7.97
|Second Quarter |  |      | 13.57 |     |   | 8.55
|Third Quarter  |  |      | 9.25  |     |   | 4.86
|Fourth Quarter |  |      | 7.96  |     |   | 5.92
|               |  |     
|Fiscal 2005    |  | High |       | Low
|First Quarter  |  | $    | 10.84 |     | $ | 8.48
|Second Quarter |  |      | 9.68  |     |   | 7.49
|Third Quarter  |  |      | 10.69 |     |   | 8.27
|Fourth Quarter |  |      | 9.00  |     |   | 6.34

Stockholders

To maintain consistency, the information provided above is based on the last day of the calendar quarter rather than the last day of the fiscal quarter. As of February 26, 2007 there were 1,101 holders of record of
our Common Stock. On February 26, 2007, the last reported sales price of our common stock was $7.31 per share.

Dividends

We have never paid cash dividends on our Common Stock. We currently intend to retain earnings, if any, for use in our business or to fund acquisitions and
do not anticipate paying any cash dividends in the foreseeable future.



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Stock Performance Graph

The following graph shows a comparison of cumulative total stockholder returns for PMC, the NASDAQ Global Market, the line-of-business index for semiconductors and related devices (SIC code 3674) furnished by
Georgeson Shareholder Communications Inc., and the S&P 500 Index. The graph assumes the investment of $100 on December 31, 2001. The performance shown is not necessarily indicative of future performance.

LOGO



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|ITEM 6. | Selected Financial Data
|------- | -----------------------

The following tables set forth data from
our consolidated financial statements for each of our last five fiscal years. The data for fiscal year 2002 is set forth below this table to provide information on the adjustments made as a result of the restatement (See Note 2 to the Consolidated
Financial Statements). This information should be read together with the Consolidated Financial Statements and related Notes contained in this Annual Report and in our prior and subsequent reports filed with the SEC, as well as the section of this
Annual Report and our other reports entitled Managements Discussion and Analysis of Financial Condition and Results of Operations.



|                                                                           |  |                                                      |           |   |                     |   |         |                     |  |   |                     |   |  |   |         |  
|-------------------------------------------------------------------------- |  | ---------------------------------------------------- | --------- | - | ------------------- | - | ------- | ------------------- |  | - | ------------------- | - |  | - | ------- | -
|                                                                           |  | Year Ended (in thousands, except for per share data) |          
|                                                                           |  | December 31,2006(1)                                  |           |   | December 31,2005(2) |   |         | December 26,2004(3) |  |   | December 28,2003(4) |  
|STATEMENT OF OPERATIONS DATA:                                              |  |                                                      |           |   |                     |   |         |                     |  |   |                     |   |  |   |         |  
|Net revenues                                                               |  | $                                                    | 424,992   |   |                     | $ | 291,411 |                     |  | $ | 297,383             |   |  | $ | 249,483 |  
|Cost of revenues                                                           |  |                                                      | 146,456   |   |                     |   | 80,963  |                     |  |   | 87,542              |   |  |   | 87,875  |  
|Gross profit                                                               |  |                                                      | 278,536   |   |                     |   | 210,448 |                     |  |   | 209,841             |   |  |   | 161,608 |  
|Research and development                                                   |  |                                                      | 158,661   |   |                     |   | 118,720 |                     |  |   | 120,492             |   |  |   | 119,790 |  
|Selling, general and administrative                                        |  |                                                      | 102,363   |   |                     |   | 56,278  |                     |  |   | 46,832              |   |  |   | 46,665  |  
|Amortization of purchased intangible assets                                |  |                                                      | 33,381    |   |                     |   |        |                     |  |   |                    |   |  |   |        |  
|In-process research and development                                        |  |                                                      | 35,300    |   |                     |   |        |                     |  |   |                    |   |  |   |        |  
|Restructuring costs and other charges                                      |  |                                                      | 6,119     |   |                     |   | 13,833  |                     |  |   | 3,520               |   |  |   | 15,314  |  
|Acquisition costs                                                          |  |                                                      |          |   |                     |   |        |                     |  |   | 1,212               |   |  |   |        |  
|                                                                           |  |                                                      |           |   |                     |   |         |                     |  |   |                     |   |  |   |         |  
|(Loss) income from operations                                              |  |                                                      | (57,288   | ) |                     |   | 21,617  |                     |  |   | 37,785              |   |  |   | (20,161 | )
|Interest income, net                                                       |  |                                                      | 8,979     |   |                     |   | 12,106  |                     |  |   | 4,859               |   |  |   | 1,709   |  
|Foreign exchange loss                                                      |  |                                                      | (109      | ) |                     |   | (3,259  | )                   |  |   | (1,295              | ) |  |   | (954    | )
|(Loss) gain on extinguishment of debt and amortization of debt issue costs |  |                                                      | (968      | ) |                     |   | (1,809  | )                   |  |   | (2,233              | ) |  |   | 287     |  
|(Loss) gain on investments                                                 |  |                                                      | (1,269    | ) |                     |   | 1,439   |                     |  |   | 9,242               |   |  |   | 2,416   |  
|(Provision for) recovery of income taxes                                   |  |                                                      | (49,237   | ) |                     |   | (2,108  | )                   |  |   | 3,323               |   |  |   | 8,712   |  
|                                                                           |  |                                                      |           |   |                     |   |         |                     |  |   |                     |   |  |   |         |  
|Net (loss) income                                                          |  | $                                                    | (99,892   | ) |                     | $ | 27,986  |                     |  | $ | 51,681              |   |  | $ | (7,991  | )
|                                                                           |  |                                                      |           |   |                     |   |         |                     |  |   |                     |   |  |   |         |  
|Net income (loss) per share - basic:                                       |  | $                                                    | (0.49     | ) |                     | $ | 0.15    |                     |  | $ | 0.29                |   |  | $ | (0.05   | )
|Net income (loss) per share - diluted:                                     |  | $                                                    | (0.49     | ) |                     | $ | 0.15    |                     |  | $ | 0.27                |   |  | $ | (0.05   | )
|Shares used in per share calculation - basic                               |  |                                                      | 203,470   |   |                     |   | 184,098 |                     |  |   | 180,353             |   |  |   | 173,568 |  
|Shares used in per share calculation - diluted                             |  |                                                      | 203,470   |   |                     |   | 189,132 |                     |  |   | 188,903             |   |  |   | 173,568 |  
|                                                                           | 
|                                                                           |  | (in thousands)                                       |          
|BALANCE SHEET DATA:                                                        |  |                                                      |           |   |                     |   |         |                     |  |   |                     |   |  |   |         |  
|Working capital                                                            |  | $                                                    | 192,146   |   |                     | $ | 565,501 |                     |  | $ | 152,306             |   |  | $ | 317,444 |  
|Cash, cash equivalents, and short-term investments                         |  |                                                      | 258,914   |   |                     |   | 627,476 |                     |  |   | 274,686             |   |  |   | 411,928 |  
|Long-term investment in bonds and notes                                    |  |                                                      |          |   |                     |   |        |                     |  |   | 139,111             |   |  |   | 41,569  |  
|Total assets                                                               |  |                                                      | 1,006,557 |   |                     |   | 732,949 |                     |  |   | 507,024             |   |  |   | 552,956 |  
|Long-term debt (including current portion)                                 |  |                                                      | 225,000   |   |                     |   | 225,000 |                     |  |   | 68,071              |   |  |   | 175,000 |  
|Stockholders equity                                                       |  |                                                      | 570,428   |   |                     |   | 354,047 |                     |  |   | 299,337             |   |  |   | 226,297 |  



|(1) | Results for the year ended December 31, 2006 include $8.2 million purchase accounting adjustments to inventory, $1.8 million stock-based compensation expense,
and $0.8 million in additional contractor costs included in Cost of revenues; $19.9 million stock-based compensation expense, $2.4 million for employee-related taxes, and $0.2 million acquisition-related relocation expenses included in Selling,
general and administrative expenses; $16.2 million stock-based compensation expense included in Research
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | and development expenses; a $0.5 million foreign exchange gain on Canadian taxes; $29.9 million increase in our estimated tax provision for previous years as
a result of a written communication received in 2007 from a tax authority and $7.0 million withholding and other taxes on repatriation of funds included in the provision for income taxes.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Results for the year ended December 31, 2005 include $13.8 million restructuring costs, $0.9 million reversal of provision for doubtful accounts receivable included in Selling,
general and administrative expenses, $6.3 million tax benefits comprised of $5.3 million excess R&D tax credits and $1.0 million recovery of prior year sales tax, and $3.4 million foreign exchange loss on Canadian taxes.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Results for the year ended December 26, 2004 include $3.5 million net charge for additional excess facilities costs related to our 2001 restructurings, $1.3 million elimination
of a provision for employee-related taxes included in Selling, general and administrative expenses, $9.2 million gain on sale of investments, $5.1 million recovery of prior year taxes, $9.4 million tax recovery based on agreements and assessments
with Canada Revenue Agency and $1.5 million foreign exchange loss on Canadian taxes.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | Results for the year ended December 28, 2003 include a $15.3 million net charge for restructuring costs comprised of $7.2 million for workforce reduction, $11.9 million for
excess facilities, $1.4 for asset impairments, $4.5 million reversal of excess facilities costs related to our October 2001 restructuring and $0.7 million reversal of excess workforce reduction costs related to our January 2003 restructuring plan,
the $1.8 million elimination of a provision for potential litigation costs included in Selling, general and administrative expenses, and a $3.5 million receipt of prior year income taxes.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                                    |  |                                           |         |   |            |   |         |          |  |   |          |  
|------------------------------------------------------------------- |  | ----------------------------------------- | ------- | - | ---------- | - | ------- | -------- |  | - | -------- | -
|                                                                    |  | Year ended December 29, 2002(5), (6)      |        
|                                                                    |  | As Reported                               |         |   | Adjustment |   |         | Restated | 
|                                                                    |  | (in thousands, except for per share data) |        
|STATEMENT OF OPERATIONS DATA:                                       |  |                                           |         |   |            |   |         |          |  |   |          |  
|Net revenues                                                        |  | $                                         | 218,093 |   |            | $ |        |          |  | $ | 218,093  |  
|Cost of revenues                                                    |  |                                           | 89,542  |   |            |   | 2,706   |          |  |   | 92,248   |  
|Gross profit                                                        |  |                                           | 125,845 |   |            |   |        |          |  |   | 125,845  |  
|Research and development                                            |  |                                           | 140,379 |   |            |   | 16,237  |          |  |   | 156,616  |  
|Selling, general and administrative                                 |  |                                           | 63,587  |   |            |   | 19,716  |          |  |   | 83,303   |  
|Impairment of property and equipment                                |  |                                           | 1,824   |   |            |   |        |          |  |   | 1,824    |  
|                                                                    |  |                                           |         |   |            |   |         |          |  |   |          |  
|Loss from operations                                                |  |                                           | (77,239 | ) |            |   | (38,659 | )        |  |   | (115,898 | )
|Interest income, net                                                |  |                                           | 6,518   |   |            |   |        |          |  |   | 6,518    |  
|Foreign exchange loss                                               |  |                                           | (1      | ) |            |   |        |          |  |   | (1       | )
|Loss on extinguishment of debt and amortization of debt issue costs |  |                                           | (1,564  | ) |            |   |        |          |  |   | (1,564   | )
|Loss on sale of investments                                         |  |                                           | (11,579 | ) |            |   |        |          |  |   | (11,579  | )
|Recovery of income taxes                                            |  |                                           | 18,858  |   |            |   |        |          |  |   | 18,858   |  
|                                                                    |  |                                           |         |   |            |   |         |          |  |   |          |  
|Net loss                                                            |  | $                                         | (65,007 | ) |            | $ | (38,659 | )        |  | $ | (103,666 | )
|                                                                    |  |                                           |         |   |            |   |         |          |  |   |          |  
|Net loss per share -basic:                                          |  | $                                         | (0.38   | ) |            | $ | (0.23   | )        |  | $ | (0.61    | )
|Net loss per share - diluted:                                       |  | $                                         | (0.38   | ) |            | $ | (0.23   | )        |  | $ | (0.61    | )
|                                                                    |  |                                           |        
|Shares used in per share calculation - basic                        |  |                                           | 170,107 |   |            |   | 170,107 |          |  |   | 170,107  |  
|Shares used in per share calculation - diluted                      |  |                                           | 170,107 |   |            |   | 170,107 |          |  |   | 170,107  |  
|BALANCE SHEET DATA:                                                 |  |                                           |         |   |            |   |         |          |  |   |          |  
|Working capital                                                     |  | $                                         | 229,021 |   |            | $ |        |          |  | $ | 229,021  |  
|Cash, cash equivalents, and short-term investments                  |  |                                           | 416,659 |   |            |   |        |          |  |   | 416,659  |  
|Long-term investment in bonds and notes                             |  |                                           | 148,894 |   |            |   |        |          |  |   | 148,894  |  
|Total assets                                                        |  |                                           | 728,716 |   |            |   |        |          |  |   | 728,716  |  
|Long-term debt (including current portion)                          |  |                                           | 275,000 |   |            |   |        |          |  |   | 275,000  |  
|Stockholders equity                                                |  |                                           | 198,639 |   |            |   |        |          |  |   | 198,639  |  



|(5) | Results for the year ended December 29, 2002 include a $4.0 million allowance for inventories in excess of twelve-month demand, recorded in cost of revenues, a
$1.8 million write-down for impairment of property and equipment, a $15.3 million charge for impairment of other investments recorded in loss on investments and a $3.8 million gain on sale of other investments. In accordance with the adoption of
Statement of Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets, we ceased amortizing goodwill at the beginning of 2002, thereby eliminating amortization expense of approximately $2 million.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

|(6) | Based on the results of a review by the Audit Committee we concluded that the accounting measurement dates for certain stock option grants awarded primarily during the years
1998-2001 differ from the measurement dates previously used to determine any stock-based compensation expense for the years 1998-2002. As a result of the application of different accounting measurement dates to the affected option grants, we
recorded an aggregate of $89.6 million of increased stock-based compensation expense for fiscal years 1999 through 2002. Of this amount, stock-based compensation expense of $38.7 million was recorded in 2002. See Note 2 to the Consolidated Financial
Statements.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



38



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##### Table of Contents

Quarterly Comparisons

The following tables set forth the consolidated statements of operations for each of our last eight quarters. This quarterly information is derived from unaudited interim financial statements and has been prepared on the same basis as the
annual Consolidated Financial Statements. In managements opinion, this quarterly information reflects all adjustments necessary for fair presentation of the information for the periods presented. The operating results for any quarter are not
necessarily indicative of results for any future period.



|                                                                    |  |                                          |         |   |                              |   |         |            |  |   |           |   |  |            |         |   |           |   |         |            |  |   |           |   |  |   |         |   |  |   |         |  
|------------------------------------------------------------------- |  | ---------------------------------------- | ------- | - | ---------------------------- | - | ------- | ---------- |  | - | --------- | - |  | ---------- | ------- | - | --------- | - | ------- | ---------- |  | - | --------- | - |  | - | ------- | - |  | - | ------- | -
|                                                                    |  | Quarterly Data                           |        
|                                                                    |  | (in thousands except for per share data) |        
|                                                                    |  | Year Ended December 31, 2006             |         |   | Year Ended December 31, 2005 |  
|                                                                    |  | Fourth (1)                               |         |   | Third (2)                    |   |         | Second (3) |  |   | First (4) |   |  | Fourth (5) |         |   | Third (6) |   |         | Second (7) |  |   | First (8) |  
|STATEMENT OF OPERATIONS DATA:                                       |  |                                          |         |   |                              |   |         |            |  |   |           |   |  |            |         |   |           |   |         |            |  |   |           |   |  |   |         |   |  |   |         |  
|Net revenues                                                        |  | $                                        | 101,917 |   |                              | $ | 116,514 |            |  | $ | 118,780   |   |  | $          | 87,781  |   |           | $ | 77,556  |            |  | $ | 76,203    |   |  | $ | 71,541  |   |  | $ | 66,111  |  
|Cost of revenues                                                    |  |                                          | 37,125  |   |                              |   | 39,146  |            |  |   | 43,560    |   |  |            | 26,625  |   |           |   | 19,839  |            |  |   | 20,131    |   |  |   | 21,372  |   |  |   | 19,621  |  
|Gross profit                                                        |  |                                          | 64,792  |   |                              |   | 77,368  |            |  |   | 75,220    |   |  |            | 61,156  |   |           |   | 57,717  |            |  |   | 56,072    |   |  |   | 50,169  |   |  |   | 46,490  |  
|Research and development                                            |  |                                          | 41,713  |   |                              |   | 41,611  |            |  |   | 41,587    |   |  |            | 33,749  |   |           |   | 30,643  |            |  |   | 27,205    |   |  |   | 29,456  |   |  |   | 31,416  |  
|Selling, general and administrative                                 |  |                                          | 26,362  |   |                              |   | 29,235  |            |  |   | 27,174    |   |  |            | 19,593  |   |           |   | 14,968  |            |  |   | 14,839    |   |  |   | 13,466  |   |  |   | 13,004  |  
|Amortization of purchased intangible assets                         |  |                                          | 10,136  |   |                              |   | 11,202  |            |  |   | 9,934     |   |  |            | 2,110   |   |           |   |        |            |  |   |          |   |  |   |        |   |  |   |        |  
|In-process research and development                                 |  |                                          |        |   |                              |   |        |            |  |   | 20,500    |   |  |            | 14,800  |   |           |   |        |            |  |   |          |   |  |   |        |   |  |   |        |  
|Restructuring costs and other charges                               |  |                                          | 453     |   |                              |   | 6,404   |            |  |   |          |   |  |            | (738    | ) |           |   |        |            |  |   | 5,359     |   |  |   | 7,606   |   |  |   | 868     |  
|                                                                    |  |                                          |         |   |                              |   |         |            |  |   |           |   |  |            |         |   |           |   |         |            |  |   |           |   |  |   |         |   |  |   |         |  
|(Loss) income from operations                                       |  |                                          | (13,872 | ) |                              |   | (11,084 | )          |  |   | (23,975   | ) |  |            | (8,358  | ) |           |   | 12,106  |            |  |   | 8,669     |   |  |   | (359    | ) |  |   | 1,202   |  
|Interest income, net                                                |  |                                          | 2,297   |   |                              |   | 1,849   |            |  |   | 1,267     |   |  |            | 3,566   |   |           |   | 4,044   |            |  |   | 2,874     |   |  |   | 2,502   |   |  |   | 2,685   |  
|Foreign exchange gain (loss)                                        |  |                                          | 3,508   |   |                              |   | (252    | )          |  |   | (3,378    | ) |  |            | 13      |   |           |   | 197     |            |  |   | (3,378    | ) |  |   | 512     |   |  |   | (590    | )
|Loss on extinguishment of debt and amortization of debt issue costs |  |                                          | (242    | ) |                              |   | (242    | )          |  |   | (242      | ) |  |            | (242    | ) |           |   | (175    | )          |  |   |          |   |  |   |        |   |  |   | (1,634  | )
|Gain (loss) on investments                                          |  |                                          |        |   |                              |   |        |            |  |   | (3,118    | ) |  |            | 1,849   |   |           |   |        |            |  |   |          |   |  |   |        |   |  |   | 1,439   |  
|(Provision for) recovery of income taxes                            |  |                                          | (33,891 | ) |                              |   | (1,796  | )          |  |   | (2,388    | ) |  |            | (11,161 | ) |           |   | (2,073  | )          |  |   | 2,230     |   |  |   | 2,126   |   |  |   | (175    | )
|                                                                    |  |                                          |         |   |                              |   |         |            |  |   |           |   |  |            |         |   |           |   |         |            |  |   |           |   |  |   |         |   |  |   |         |  
|Net (loss) income                                                   |  | $                                        | (42,200 | ) |                              | $ | (11,525 | )          |  | $ | (31,834   | ) |  | $          | (14,333 | ) |           | $ | 18,245  |            |  | $ | 5,935     |   |  | $ | 529     |   |  | $ | 3,277   |  
|                                                                    |  |                                          |         |   |                              |   |         |            |  |   |           |   |  |            |         |   |           |   |         |            |  |   |           |   |  |   |         |   |  |   |         |  
|Net income (loss) per share - basic                                 |  | $                                        | (0.20   | ) |                              | $ | (0.05   | )          |  | $ | (0.16     | ) |  | $          | (0.08   | ) |           | $ | 0.10    |            |  | $ | 0.03      |   |  | $ | 0.00    |   |  | $ | 0.02    |  
|Net income (loss) per share - diluted                               |  | $                                        | (0.20   | ) |                              | $ | (0.05   | )          |  | $ | (0.16     | ) |  | $          | (0.08   | ) |           | $ | 0.10    |            |  | $ | 0.03      |   |  | $ | 0.00    |   |  | $ | 0.02    |  
|Shares used in per share calculation - basic                        |  |                                          | 212,295 |   |                              |   | 211,298 |            |  |   | 203,067   |   |  |            | 187,218 |   |           |   | 185,703 |            |  |   | 185,110   |   |  |   | 183,386 |   |  |   | 182,192 |  
|Shares used in per share calculation - diluted                      |  |                                          | 212,295 |   |                              |   | 211,298 |            |  |   | 203,067   |   |  |            | 187,218 |   |           |   | 188,805 |            |  |   | 190,739   |   |  |   | 188,305 |   |  |   | 188,678 |  



|(1) | Results include $0.5 million stock-based compensation expense included in Cost of revenues, $5.5 million stock-based compensation expense included in Research and development
expenses, $5.4 million stock-based compensation expense included in Selling, general and administrative expenses, $3.5 million foreign exchange gain on Canadian taxes, and $29.9 million increase in our estimated tax provision for previous years as a
result of a written communication received in 2007 from a tax authority.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Results include $0.4 million stock-based compensation expense included in Cost of revenues, $4.2 million stock-based compensation expense included in Research and development
expenses, $6.0 million stock-based compensation expense and $2.4 million employee-related taxes included in Selling, general and administrative expenses, and $0.1 million foreign exchange gain on Canadian taxes.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Results include $5.7 million purchase accounting adjustments to inventory and $0.5 million stock-based compensation expense included in Cost of revenues, $4.0 million stock-based
compensation expense included in Research and development expenses, $5.5 million stock-based compensation expense included in Selling, general and administrative expenses and $3.3 million foreign exchange loss on Canadian taxes.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | Results include $2.8 million purchase accounting adjustments to inventory, $0.5 million in additional contractor costs, and $0.4 million stock-based compensation expense included in
Cost of revenues; $2.5 million stock-based compensation expense included in Research and Development expenses; $3.0 million stock-based compensation expense and $0.2 million relocation expenses included in Selling, General and administrative
expenses; $0.1 million foreign exchange gain on Canadian taxes; and $7.0 million withholding and other taxes on repatriation of funds.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) | Results include $0.2 million foreign exchange gain on Canadian taxes and $5.3 million excess R&D tax credits.
|--- | -------------------------------------------------------------------------------------------------------------



|(6) | Results include $5.4 million restructuring costs for excess facilities vacated in the third quarter of 2005 and $3.4 million foreign exchange loss on Canadian taxes.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(7) | Results include $7.6 million restructuring costs including $6.7 million for workforce reduction and $0.9 million for asset write-downs; $0.9 million reversal of provision for
doubtful accounts receivable included in Selling, general and administrative expenses and $0.5 million foreign exchange gain on Canadian taxes.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(8) | Results include $0.9 million restructuring costs relating to workforce reduction, $1.0 million reversal of state income tax and $0.7 million foreign exchange loss on Canadian taxes.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

|I
TEM 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations.
|-------- | --------------------------------------------------------------------------------------

The following discussion of the financial condition and results of our operations should be read in conjunction with the Consolidated Financial Statements and notes thereto included elsewhere in this Annual Report.

OVERVIEW

We generate revenues from the sale of semiconductor
devices that we have designed and developed. Almost all of our revenues in any given year come from the sale of semiconductors that are developed prior to that year. For example, the majority of our revenues in 2006 came from products that were
acquired through business combinations in 2006 or were developed in 2005 and earlier. After an individual product is completed and announced it may take several years before that device generates any significant revenues. Our current revenue is
generated by a portfolio of approximately 270 products.

In addition to incurring costs for the marketing, sales, and administration of selling existing
products, we expend a substantial amount every year for the development of new semiconductor devices. We determine the amount to invest in the development of new semiconductors based on our assessment of the future market opportunities for those
components, and the estimated return on investment. To compete globally we must invest in businesses and technologies that are both growing in demand and cost competitive in the geographic markets that we serve. Going forward, we plan to continue to
aggressively focus on the cost side of our business and find ways to improve on operational efficiencies.

In 2006 we completed the integration of the
Storage Semiconductor Business, which we acquired from Avago on February 28, 2006. Our consolidated results include the results of the Storage Semiconductor Business from the acquisition date. We purchased the Storage Semiconductor Business due
to the market position the Storage Semiconductor Business has in the Fibre Channel controller market and the growth opportunities for standard semiconductor solutions in the enterprise storage market. Since the acquisition we have experienced the
benefits from product synergies between the Storage Semiconductor Business Fibre Channel controllers and PMCs Fibre Channel and SAS disk-interconnect products. This acquisition contributed $95.7 million in revenues during the ten months
since the acquisition date, primarily from the Tachyon product line, and we expect continued growth in 2007.

During the fourth quarter of 2006 we
continued the financial and operational integration of Passave Inc., which we acquired on May 4, 2006. Passave develops system-on-chip semiconductor solutions for the Fiber To The Home (FTTH) access market. The results of Passave are included
in our consolidated results from the date of acquisition. We purchased Passave due to its market share leadership in Passive Optical Networking (PON) solutions for central office and customer premise FTTH applications, and in the eight months since
the acquisition date, Passave contributed $30.7 million in revenues. In the second half of 2006 we experienced lower activity levels of FTTH deployment in Japan, especially as it relates to Ethernet Passive Optical Networking (EPON) products, due
partly to a slowdown in equipment orders in Japan, and also due to a lower ratio of network-based to subscriber-based Optical Networking Units (ONUs) to Optical Line Terminals (OLTs) which are installed in central offices, than
originally anticipated. We expect orders for both OLTs and ONUs in Japan to slowly improve in the first half of 2007.



40



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##### Table of Contents

During 2006, our Audit Committee completed a review of our stock option-award practices. Based on the results of the
review we concluded that the accounting measurement dates for certain stock option grants awarded during the years 1998-2001 differ from the measurement dates previously used to determine any stock-based compensation expense for the years 1998-2002.
We determined that for certain option grants the allocations to individual recipients and/or the proper documentation of formal corporate approvals had not been completed as of the dates originally used for accounting measurement. As a result, new
accounting measurement dates were applied to the affected option grants. As the majority of the stock options in question were cancelled in an option exchange program in 2002, or were otherwise fully vested, the new measurement dates did not affect
operating results for 2003 and subsequent years. The Audit Committee concluded that, while we used incorrect accounting measurement dates for certain stock option grants awarded during the years 1998-2001, those errors were not the product
of any deliberate misconduct by our executives, staff, or members of our Board of Directors.

As a result of the review, we adjusted our opening
stockholders equity on the consolidated balance sheet as at December 29, 2002 and on the consolidated balance sheets for all subsequent periods. The effect of the adjustments was to increase additional paid-in capital and increase
accumulated deficit on all consolidated balance sheets commencing in 2003. These are offsetting reclassification entries within stockholders equity on the consolidated balance sheet and the total amount of stockholders equity in
2003 and subsequent consolidated balance sheets did not change. The restatement had no impact on our consolidated statements of operations or consolidated statements of cash flows in 2003 or subsequent periods. The restatement had no impact on our
cash position or previously reported revenues.

In August 2006, we received an informal confidential request from the SEC advising us that the SEC has
commenced an informal inquiry into our historical stock-option granting processes. We produced documents in response to the request and are continuing to cooperate with the SEC. In October 2006, we received from the SEC Division of Corporation
Finance, a comment letter on our Form 10-K/A for the year ended December 31, 2005 and our Form 10-Q for the quarter ended July 2, 2006. We have responded to the SECs letter. On January 19, 2007, we received a comment letter from
the SEC asking us to further amend our Form 10-K for the year ended December 31, 2005 (the 2005 10-K/A) to comply with the recently issued SEC guidance in Sample Letter Sent in Response to Inquiries Related to Filing Restated
Financial Statements for Errors in Accounting for Stock Option Grants (the Sample Letter). In subsequent discussions and correspondence with the SEC, the SEC has agreed that we may comply with the guidance in the Sample Letter in
this Annual Report on Form 10-K for the year ended December 31, 2006 instead of amending our 2005 10-K/A. We have amended the disclosure herein to comply with the Sample Letter.

On January 1, 2006, we adopted FAS 123(R) on a modified prospective basis, which resulted in the recognition of stock-based compensation expense of $37.9 million in the year ended December 31, 2006. See
Notes 1 and 4 to the Consolidated Financial Statements for further information on stock-based compensation. The adoption of FAS 123(R) will continue to have an adverse impact on our reported results of operations in future periods.

In order to align our fiscal year end with the calendar year end, fiscal 2005 consisted of 53 weeks compared to 52 weeks in 2006 and 2004.



41



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##### Table of Contents

Net Revenues ($ millions)



|             |  |      |       |        |    |   |      |   |        |  |    |      |  |   |      
|------------ |  | ---- | ----- | ------ | -- | - | ---- | - | ------ |  | -- | ---- |  | - | -----
|             |  | 2006 |       | Change |    |   | 2005 |   | Change |  |    | 2004
|Net revenues |  | $    | 425.0 |        | 46 | % |      | $ | 291.4  |  | (2 | %)   |  | $ | 297.4

Net revenues for 2006 increased $133.6 million, or 46% compared to net revenues for 2005. The increase was driven
by $95.7 million of additional revenue from the acquisition of the Storage Semiconductor Business from Avago and $30.7 million of additional revenue from the acquisition of Passave. Apart from revenues from the acquisitions, in 2006 our revenues
were $7.2 million higher than in 2005. Despite the overall increase for the year, in the second half of 2006 revenues declined sequentially due to lower activity in the communications market. This was caused by a slowdown in equipment orders by
carriers in China, Japan, and North America, in addition to an electronics components supply chain inventory correction primarily in Japan and North America, and US carrier and communications OEM mergers.

Net revenues for 2005 decreased $6.0 million, or 2% compared to net revenues in 2004. Revenues were lower than in 2004 due to a lower volume of units sold in the first
half of 2005 compared to the first half of 2004 due to an inventory rebalancing by our customers that began in the third quarter of 2004 and continued into 2005. Quarterly revenues increased sequentially since the fourth quarter of 2004 but in 2005
were still below levels recorded in early 2004. In the first half of 2005, revenues increased sequentially for several reasons. First, reduced levels of inventories at end customers led to stronger orders; second, telecom-related capital spending in
our end markets continued to increase, especially in the Metro Transport area; and third, product cycles in the Enterprise Storage markets favored the Companys product offering. Increases in revenues in the second half of 2005 were due in
large part to improved activity levels in Edge Routing & Multi-Service Switching, Enterprise Storage, and our Laser Printer business.

Over the
past three years, we have seen significant growth in net revenues generated in Asia. Net revenues from Asia were 57% of total net revenues in 2006, 50% of total net revenues in 2005, and 46% in 2004. We attribute this trend primarily to increased
manufacturing outsourcing into Asia by our OEM customers as well as increased levels of activity at Asian customers.

Gross Profit ($ millions)



|                           |  |      |       |   |        |    |   |      |   |       |        |  |   |      |  |   |       |  
|-------------------------- |  | ---- | ----- | - | ------ | -- | - | ---- | - | ----- | ------ |  | - | ---- |  | - | ----- | -
|                           |  | 2006 |       |   | Change |    |   | 2005 |   |       | Change |  |   | 2004 | 
|Gross profit               |  | $    | 278.5 |   |        | 32 | % |      | $ | 210.4 |        |  | 0 | %    |  | $ | 209.8 |  
|Percentage of net revenues |  |      | 66    | % |        |    |   |      |   | 72    | %      |  |   |      |  |   | 71    | %

Total gross profit for 2006 increased by $68.1 million over gross profit in 2005, which was relatively consistent
with gross profit in 2004. Gross profits increased in 2006 due to higher sales volumes, primarily resulting from the acquisitions. In 2005, despite overall lower sales volumes compared to 2004, gross profit improved due in part to the centralizing
of our manufacturing logistics teams into a single location through our restructuring activities, as well as tightly managing our manufacturing costs.



42



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##### Table of Contents

Gross profit as a percentage of revenues decreased to 66% in 2006 from 72% in 2005 as a
result of the following factors:



| |  |  | the acquisitions changed the overall mix of revenues, decreasing gross profit as a percentage of revenues by 3%;
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | lower margins on our existing products decreased gross profit as a percentage of revenues by 1%; and
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | we recorded $4.2 million higher provisions for excess and obsolete inventory, which decreased gross profit as a percentage of net revenues by 1%.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------

In addition, we recorded $1.8 million stock-based compensation expense in cost of revenues in 2006 compared to none in 2005 and 2004,
which had an impact of less than one percentage point. Many of the acquired products sell at overall lower gross margins, particularly the FTTH products. If the proportion of revenues from FTTH products increases in future periods as anticipated, we
expect declining gross profit as a percentage of revenues to continue.

Gross profit as a percentage of revenues increased to 72% in 2005 from 71% in 2004
as a result of the following factors:



| |  |  | yield improvements and procurement cost reductions, which increased gross profit by approximately 1 percentage point;
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | engineering fees charged to customers for engineering we undertook on their behalf increased from $1.5 million in 2004 to $6.8 million in 2005, increasing gross
profit by 1 percentage point; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | fixed manufacturing costs were spread over lower shipment volumes, reducing gross profit by 1 percentage point.
| | - |  | ---------------------------------------------------------------------------------------------------------------

Other Costs and Expenses ($ millions)



|                                            |  |      |       |   |        |     |    |      |   |       |        |  |    |      |  |   |       |  
|------------------------------------------- |  | ---- | ----- | - | ------ | --- | -- | ---- | - | ----- | ------ |  | -- | ---- |  | - | ----- | -
|                                            |  | 2006 |       |   | Change |     |    | 2005 |   |       | Change |  |    | 2004 | 
|Research and development                    |  | $    | 158.7 |   |        | 34  | %  |      | $ | 118.7 |        |  | (1 | %)   |  | $ | 120.5 |  
|Percentage of net revenues                  |  |      | 37    | % |        |     |    |      |   | 41    | %      |  |    |      |  |   | 41    | %
|                                            |  |      |       |   |       
|Selling, general and administrative         |  | $    | 102.4 |   |        | 82  | %  |      | $ | 56.3  |        |  | 20 | %    |  | $ | 46.8  |  
|Percentage of net revenues                  |  |      | 24    | % |        |     |    |      |   | 19    | %      |  |    |      |  |   | 16    | %
|                                            |  |      |       |   |       
|Amortization of purchased intangible assets |  | $    | 33.4  |   |        | 100 | %  |      |   |      |        |  |    |      |  |   |      |  
|Percentage of net revenues                  |  |      | 8     | % |        |     |    |      |   |      |        |  |    |      |  |   |      |  
|                                            |  |      |       |   |       
|In-process research and development         |  | $    | 35.3  |   |        | 100 | %  |      |   |      |        |  |    |      |  |   |      |  
|Percentage of net revenues                  |  |      | 8     | % |        |     |    |      |   |      |        |  |    |      |  |   |      |  
|                                            |  |      |       |   |       
|Restructuring costs                         |  | $    | 6.1   |   |        | (56 | %) |      | $ | 13.8  |        |  |    |      |  | $ | 3.5   |  
|Percentage of net revenues                  |  |      | 1     | % |        |     |    |      |   | 5     | %      |  |    |      |  |   | 1     | %



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Research and Development Expenses

Our research and development, or R&D, expenses were $40 million, or 34%, higher in 2006 compared to 2005. Total payroll costs, including the acquired businesses, were higher by $16.1 million due to salary
increases, and additional headcount from Passave and the Storage Semiconductor Business for 2006, which were partially offset by savings from our workforce reduction initiatives. In addition, we recorded $16.2 million stock-based compensation
expense compared to none in 2005. Material costs were higher by $6.1 million, office and facilities costs were higher by $1.8 million, depreciation increased by $1.2 million, and training and travel costs also increased by $0.9 million due to the
acquisitions. These increases were offset by lower hardware and software costs of $1.4 million and other cost reductions of $0.9 million.

Our research and
development, or R&D, expenses were $1.8 million, or 1%, lower in 2005 compared to 2004. The decrease was primarily the result of $3.4 million less in personnel costs resulting from workforce reductions initiated in 2005, which were partially
offset by an incremental week in the first quarter and compensation increases in the second quarter of 2005. In addition, development costs were lower by $5.0 million due to the timing of design completions. These decreases were offset by higher
hardware and software costs of $4.7 million, increased depreciation of $0.8 million, and higher travel costs of $0.5 million. Amortization of intellectual property was higher by $0.8 million due to purchases of intellectual property in the second
half of 2004, and other costs were lower by $0.2 million.

Selling, General and Administrative Expenses

Our selling, general and administrative, or SG&A, expenses were $46.1 million, or 82% higher in 2006 compared to 2005. The primary reason for the increase in SG&A
expense as a percentage of revenues were that we recorded $19.9 million of stock-based compensation expense compared to $0.2 million in 2005, and that payroll-related costs were higher by $14.0 million due to increased headcount. We also incurred
additional $3.8 million professional fees, the majority of which related to the investigation by the Audit Committee and the resulting restatement of our financial statements, and $2.5 million in additional payroll withholding taxes associated with
transactions from years 2000 and prior. Sales commissions were higher by $2.0 million, training and travel increased by $1.8 million primarily due to the acquisitions, and office and facilities costs increased by $1.1 million. In addition, in 2005
we reversed $0.9 million provision for doubtful accounts receivable. Other costs increased by $0.3 million.

Our selling, general and administrative, or
SG&A, expenses were $10.0 million, or 22% higher in 2005 compared to 2004. Our SG&A personnel and related costs increased by $6.3 million due to an incremental week in the first quarter and compensation adjustments. In addition, increased
recruitment, travel and training activities resulted in higher costs of approximately $0.7 million. Facilities costs allocated to SG&A increased by $0.8 million. Of the remaining increase, $0.7 was due to higher professional fees from
incremental tax consulting and internal audit, $0.8 million was attributable to higher commissions, and other expenses increased by $0.4 million. These increases were offset by a $0.9 million reversal of a provision for doubtful accounts receivable
based on the completion of an analysis of the credit status of a significant customer due to a change in ownership. 2004 SG&A expenses were lower by a further $1.3 million because we eliminated a provision for employee-related taxes on
completion of a payroll tax audit in that year.



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Amortization of purchased intangible assets and in-process research and development

In 2006 we completed the acquisitions of the Storage Semiconductor Business from Avago, and of Passave, Inc. Amortization of intangible assets acquired from the Storage
Semiconductor Business and Passave was $19.0 million and $14.4 million, respectively, for the year.

In addition, a portion of the purchase for Passave was
allocated to in-process research and development projects and was expensed in the second quarter of 2006 because technological feasibility had not been established and no future alternative uses exist. Projects acquired from Passave include Ethernet
Passive Optical Network (EPON) and Analog Front End (AFE) products, which are based on technology that provides a low-cost method of deploying optical access lines between a carriers central office and a customer site and which provide further
enhancements and functionality to the existing EPON series, and Gigabit Passive Optical Network (GPON) products, which are more complex and support multiple protocols and provide further enhancements to the GPON series.

At the acquisition date, early revisions of the AFE products were in the final stage of design and had been sent out to be manufactured or taped out, with
estimated costs to complete of approximately $0.4 million. By the end of 2006, samples of the AFE products were being tested by customers, and are expected to be in production in 2007. Remaining efforts for completion include final customer
acceptance procedures. The EPON products were in the design testing stage, with estimated costs to complete of approximately $1.9 million. By the end of 2006, the EPON products had been taped out and are expected to be in production in 2007.
Remaining efforts for completion include further qualification and testing, as well as customer acceptance procedures.

GPON products were in the early
design and prototype stages at acquisition, with estimated costs to complete of approximately $4.5 million at the acquisition date. By the end of 2006, some of the products were in the design testing stage, while others were at the coding stage.
Remaining efforts for completion are expected to continue through 2007-2008 and include final stages of development, design testing, tape out, and final testing, as well as customer acceptance.

A portion of the purchase for the Storage Semiconductor Business was allocated to in-process research and development projects and was expensed in the first quarter of
2006 because technological feasibility had not been established and no future alternative uses exist. Projects acquired and expensed include three next-generation Tachyon storage protocol products.

At the acquisition date, two of the next-generation Tachyon products had been taped out, with estimated costs to complete of approximately $0.8 million. By the end of
2006, the products were in testing stages, and are expected to be in production by the first quarter of 2007. Remaining efforts for completion include final customer acceptance procedures for the products.

The third next-generation Tachyon product, a multi-protocol storage controller, was in the early design stage at acquisition, with estimated costs to complete of
approximately $10 million. By the end of 2006, the product was still in the design stage, and based on feedback from our customers, we have re-directed our design resources from this project to other Tachyon controller projects addressing the same
application. Remaining efforts for completion of the product would include further design, tape out, testing, and final customer acceptance procedures.



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Any delays in our estimated completion dates for the acquired products could result in lower market share for the
products as well as lost revenues.

Restructuring Costs and Other Charges

The activity related to excess facility and severance accruals under the Companys restructuring plans during the three years ended December 31, 2006, by year
of plan, were as follows:

Excess facility costs



|                             |  |      |        |   |      |   |        |      |  |   |        |   |  |       |        |   |  |   |        |  
|---------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ----- | ------ | - |  | - | ------ | -
|(in thousands)               |  | 2006 |        |   | 2005 |   |        | 2003 |  |   | 2001   |   |  | Total |       
|Balance at December 28, 2003 |  | $    |       |   |      | $ |       |      |  | $ | 6,339  |   |  | $     | 9,674  |   |  | $ | 16,013 |  
|                             |  |      |        |   |     
|Reversals and adjustments    |  |      |       |   |      |   |       |      |  |   | (119   | ) |  |       |       |   |  |   | (119   | )
|New charges                  |  |      |       |   |      |   |       |      |  |   |       |   |  |       | 3,570  |   |  |   | 3,570  |  
|Cash payments                |  |      |       |   |      |   |       |      |  |   | (2,325 | ) |  |       | (3,404 | ) |  |   | (5,729 | )
|                             |  |      |        |   |      |   |        |      |  |   |        |   |  |       |        |   |  |   |        |  
|Balance at December 26, 2004 |  |      |       |   |      |   |       |      |  |   | 3,895  |   |  |       | 9,840  |   |  |   | 13,735 |  
|                             |  |      |        |   |     
|New charges                  |  |      |       |   |      |   | 5,288  |      |  |   |       |   |  |       |       |   |  |   | 5,288  |  
|Cash payments                |  |      |       |   |      |   | (417   | )    |  |   | (884   | ) |  |       | (2,974 | ) |  |   | (4,275 | )
|                             |  |      |        |   |      |   |        |      |  |   |        |   |  |       |        |   |  |   |        |  
|Balance at December 31, 2005 |  |      |       |   |      |   | 4,871  |      |  |   | 3,011  |   |  |       | 6,866  |   |  |   | 14,748 |  
|                             |  |      |        |   |     
|Reversals and adjustments    |  |      |       |   |      |   | 776    |      |  |   | (2,300 | ) |  |       | 776    |   |  |   | (748   | )
|New charges                  |  |      | 2,338  |   |      |   |       |      |  |   |       |   |  |       |       |   |  |   | 2,338  |  
|Cash payments                |  |      | (227   | ) |      |   | (1,379 | )    |  |   | (162   | ) |  |       | (2,546 | ) |  |   | (4,314 | )
|                             |  |      |        |   |      |   |        |      |  |   |        |   |  |       |        |   |  |   |        |  
|Balance at December 31, 2006 |  | $    | 2,111  |   |      | $ | 4,268  |      |  | $ | 549    |   |  | $     | 5,096  |   |  | $ | 12,024 |  
|                             |  |      |        |   |      |   |        |      |  |   |        |   |  |       |        |   |  |   |        |  
|                             |  |      |        |   |     
|Severance costs              |  |      |        |   |      |   |        |      |  |   |        |   |  |       |        |   |  |   |        |  
|                             |  |      |        |   |     
|(in thousands)               |  | 2006 |        |   | 2005 |   |        | 2003 |  |   | 2001   |   |  | Total |       
|Balance at December 26, 2004 |  | $    |       |   |      | $ |       |      |  | $ |       |   |  | $     |       |   |  | $ |       |  
|                             |  |      |        |   |     
|New charges                  |  |      |        |   |      |   | 7,675  |      |  |   |       |   |  |       |       |   |  |   | 7,675  |  
|Cash payments                |  |      |        |   |      |   | (7,190 | )    |  |   |       |   |  |       |       |   |  |   | (7,190 | )
|                             |  |      |        |   |      |   |        |      |  |   |        |   |  |       |        |   |  |   |        |  
|Balance at December 31, 2005 |  |      |       |   |      |   | 485    |      |  |   |       |   |  |       |       |   |  |   | 485    |  
|                             |  |      |        |   |     
|Reversals and adjustments    |  |      |       |   |      |   | (350   | )    |  |   |       |   |  |       |       |   |  |   | (350   | )
|New charges                  |  |      | 2,968  |   |      |   | 1,562  |      |  |   |       |   |  |       |       |   |  |   | 4,530  |  
|Cash payments                |  |      | (2,432 | ) |      |   | (1,600 | )    |  |   |       |   |  |       |       |   |  |   | (4,032 | )
|                             |  |      |        |   |      |   |        |      |  |   |        |   |  |       |        |   |  |   |        |  
|Balance at December 31, 2006 |  | $    | 536    |   |      | $ | 97     |      |  | $ |       |   |  | $     |       |   |  | $ | 633    |  
|                             |  |      |        |   |      |   |        |      |  |   |        |   |  |       |        |   |  |   |        |  

2006

In the third quarter of 2006, we closed our Ottawa development site in order to reduce operating expenses and the space was vacated by the end of the fourth quarter of 2006. Approximately 35 positions were eliminated,
primarily from research and development, resulting in one-time termination benefit and relocation costs of $2.2 million, and $2.0 million for excess facilities. We also eliminated 10 positions from research and development in our Portland
development site, resulting in restructuring charges of $1.4 million, comprised of $0.8 million in severance, $0.3 million for excess facilities, $0.1 million for contract termination and $0.2 million in asset impairment.

We have made $3.0 million in payments relating to the 2006 plan. As of December 31, 2006, $0.5 million severance costs remained to be paid and payments related to
the excess facilities will extend to 2010.



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2005

During 2005, we completed various restructuring activities aimed at streamlining production and reducing our operating expenses. In the first quarter of 2005, we recorded restructuring charges of $0.9 million in
severance costs related to the termination of 24 employees across all business functions. In the second quarter of 2005, we expanded the workforce reduction activities initiated during the first quarter and terminated 63 employees from research and
development located in the Santa Clara facility. In addition, we consolidated our two manufacturing facilities (Santa Clara, California and Burnaby, British Columbia) into one facility (Burnaby), which involved the termination of 26 employees from
production control, quality assurance, and product engineering. As a result, we recorded total second quarter restructuring charges of $7.6 million, including $6.7 million for termination benefits and a $0.9 million write-down of equipment and
software assets whose value was impaired as a result of these plans. In the third quarter of 2005, we consolidated our facilities and vacated excess office space in the Santa Clara location, and recorded a restructuring charge of $5.3 million for
excess facilities and an additional $0.1 million in severance costs.

In the first quarter of 2006, we continued the workforce reduction plans initiated in
2005 and recorded $1.6 million restructuring charges related to the termination of 19 employees, primarily from research and development, in the Santa Clara facility. During the third quarter of 2006 we reduced our estimated severance accrual
related to the 2005 workforce reduction activities by $0.4 million, and increased the accrual for excess facilities related to the 2005 restructuring by $0.8 million. To date, we have made payments relating to these activities of $10.6 million. As
of December 31, 2006, the software assets have been disposed of and $0.1 million severance costs remain to be paid in 2007. Payments related to the excess facilities will extend to 2011.

2003 and 2001

In 2003 and 2001, we implemented three restructuring plans
aimed at focusing development efforts on key projects and reducing operating costs in response to the severe and prolonged economic downturn in the semiconductor industry. Our assessment of the market demand for our products, and the development
efforts necessary to meet this demand, were key factors in our decisions to implement these restructuring plans. As end markets for our products had contracted, certain projects were curtailed in an effort to cut costs. Cost reductions in all other
functional areas were also implemented, as fewer resources were required to support the reduced level of development and sales activities during these periods.

The January 2003 restructuring included the termination of 175 employees and the closure of design centers in Maryland, Ireland and India, and vacating office space in the Santa Clara facility. To date, we have
recorded restructuring charges of $18.3 million in accordance with SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities, including $1.5 million for asset write-downs. These charges related to workforce reduction,
lease and contract settlement costs, and the write-down of certain property, equipment and software assets whose value was impaired as a result of this restructuring plan. We have disposed of the property improvements and computer equipment, and
software licenses have been cancelled or are no longer being used. In 2006, we reversed $2.3 million of our restructuring accrual because certain floors in the Santa Clara facility that had been vacated in 2003 were re-occupied in 2006 due to the
addition of personnel that occurred with the acquisition of the Storage Semiconductor Business.



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The October 2001 restructuring plan included the termination of 341 employees, the consolidation of excess facilities,
and the curtailment of certain research and development projects, resulting in a restructuring charge of $175.3 million, including $12.2 million of asset write-downs. Due to the continued downturn in real estate markets, we recorded additional
provisions for abandoned office facilities of $1.3 million in the fourth quarter of 2004.

In the first quarter of 2001, we recorded a charge of $19.9
million for a restructuring plan that included the termination of 223 employees across all business functions, the consolidation of a number of facilities and the curtailment of certain research and development projects. Due to the continued
downturn in real estate markets, we recorded additional provisions for abandoned office facilities of $2.2 million in the fourth quarter of 2004, and $0.8 million in the third quarter of 2006.

To date, we have made cash payments of $12.7 million and $174.5 million related to the 2003 and 2001 plans, respectively. We have completed the activities contemplated
in these restructuring plans, but have not yet terminated the leases on all of our surplus facilities. Efforts to exit these sites are ongoing, but the payments related to these facilities could extend to 2011.

Other Income and Expenses ($ millions)



|                                                                    |  |      |      |   |        |      |    |      |   |      |        |  |     |      |  |   |      |   
|------------------------------------------------------------------- |  | ---- | ---- | - | ------ | ---- | -- | ---- | - | ---- | ------ |  | --- | ---- |  | - | ---- | --
|                                                                    |  | 2006 |      |   | Change |      |    | 2005 |   |      | Change |  |     | 2004 | 
|Interest income, net                                                |  | $    | 9.0  |   |        | (26  | %) |      | $ | 12.1 |        |  | 147 | %    |  | $ | 4.9  |   
|Percentage of net revenues                                          |  |      | 2    | % |        |      |    |      |   | 4    | %      |  |     |      |  |   | 2    | % 
|Foreign exchange loss                                               |  | $    | (0.1 | ) |        | (97  | %) |      | $ | (3.3 | )      |  | 154 | %    |  | $ | (1.3 | ) 
|Percentage of net revenues                                          |  |      | 0    | % |        |      |    |      |   | (1   | %)     |  |     |      |  |   | 0    | % 
|Loss on extinguishment of debt and amortization of debt issue costs |  | $    | (1.0 | ) |        | (46  | %) |      | $ | (1.8 | )      |  | (18 | %)   |  | $ | (2.2 | ) 
|Percentage of net revenues                                          |  |      | 0    | % |        |      |    |      |   | (1   | %)     |  |     |      |  |   | (1   | %)
|(Loss) Gain on investments                                          |  | $    | (1.3 | ) |        | (191 | %) |      | $ | 1.4  |        |  | (85 | %)   |  | $ | 9.2  |   
|Percentage of net revenues                                          |  |      | 0    | % |        |      |    |      |   | 0    | %      |  |     |      |  |   | 3    | % 

Interest income, net

Interest income was $9.0 million in 2006 compared to $12.1 million in 2005, a decrease of $3.1 million. In the fourth quarter of 2005, we issued $225.0 million of 2.25% senior convertible notes, which resulted in
higher interest expense for 2006 of $4.0 million. In addition, on February 28, 2006, we paid approximately $431.3 million in cash for the acquisition of the Storage Semiconductor Business, thus reducing our interest income for the remainder of
2006.

Net interest income increased by $7.2 million in 2005 compared to 2004. At December 31, 2004, $68.1 million of our 3.75% convertible
subordinated notes were outstanding. On January 18, 2005, we redeemed these notes for a total of $70.2 million in cash, which included $1.1



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million in accrued interest and a $1.0 million call premium, resulting in a reduction in interest expense of $2.5 million for 2005 compared to 2004. In the
fourth quarter of 2005, we issued $225.0 million 2.25% senior convertible notes, resulting in higher net interest income of approximately $0.7 million as the yield on the short-term deposits exceeded the interest rate on the notes. We earned an
additional $4.0 million due to higher average yields on our cash, short-term and long-term investments.

Foreign exchange loss

Foreign exchange loss decreased to $0.1 million in 2006 compared to $3.3 million in 2005 and $1.3 million in 2004.

We have a significant design presence outside the United States, especially in Canada. The majority of our operating expense exposures to changes in the
value of the Canadian Dollar relative to the United States Dollar have been hedged through September 2007. The foreign exchange loss for all years presented relates primarily to the re-measurement each period of accrued income tax amounts in our
Canadian subsidiary. We do not hedge our accrual for Canadian income taxes in the ordinary course of business (see Item 7A. Quantitative and Qualitative Disclosures About Market Risk).

Loss on extinguishment of debt and amortization of debt issue costs

In the fourth quarter of 2005, we issued $225.0 million 2.25% senior convertible notes and recognized amortization of debt issue costs of $1.0 million during 2006 and $0.2 million in 2005.

On January 18, 2005, we redeemed our remaining outstanding 3.75% convertible subordinated notes. We expensed the $1.0 million call premium and the remaining
unamortized debt issue costs of $0.6 million, resulting in an aggregate net loss on redemption of $1.6 million. We recognized a loss of $1.8 million in 2004 as a result of repurchasing a portion of these notes. Amortization of debt issue costs
related to these notes was $0.4 million in 2004.

(Loss) gain on investments

During 2006, we sold our investment in Ikanos Communications Inc. for proceeds of $5.1 million and recorded a gain of $3.1 million, which has been included in (Loss) gain
on sale of investments on the Statement of Operations. Also included in (Loss) gain on sale of investments were a gain on sale of another investment, as well as an impairment loss of $3.2 million on our investment in a private company, and a $1.3
million loss on sales of other short-term investments that were redeemed prior to maturity to fund the acquisition of the Storage Semiconductor Business.

In 2005, we received $2.2 million as final satisfaction of the mortgage owed to us for a property we sold in 2003. As part of the agreement we surrendered an option to purchase the property. The difference between the proceeds and the
carrying value of the mortgage receivable was recorded as a gain of $0.6 million on the Statement of Operations. In addition, we received $0.7 million that had been in escrow for one year pending final settlement of the sale of our investment in a
private technology company. As a result we recorded a gain for this amount, which has been included in (Loss) gain on investments on the Statement of Operations.



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Provision for Income Taxes

Our provision for income taxes for the year ended December 31, 2006 was $49.2 million on a net loss before taxes of $50.7 million, or 97% of the net loss before taxes, compared to a United States federal
statutory tax rate of 35% (2005  provision of $2.1 million or 7% of net income before taxes, 2004  recovery of $ 3.3 million or 7% of net income before taxes). Our effective tax rate represents a rate that is applicable to all
of our operations crossing multiple tax jurisdictions with tax rates that are different than the United States federal statutory tax rate. A significant portion of our net loss for 2006 consisted of expenses that have no associated tax benefits
due to their non-deductibility and the fact that deferred taxes in the U.S. are fully offset by a valuation allowance. These expenses include amortization of non-deductible intangible assets and in-process research and development, and stock-based
compensation. Our effective tax rate in all years presented reflects recoveries and refunds of prior year taxes paid and tax credits received by our Canadian subsidiary for research and development expenses incurred, offset by valuation allowances
on losses carried forward.

Our estimated tax provision rate increased significantly at the end of 2006 due to an increase in our estimated tax liability
following receipt in 2007 of a written communication from a tax authority examining the historic transfer pricing policies and practices of certain companies within the PMC-Sierra group. As a result, we increased our provision for periods prior to
2006 by $29.9 million. We recorded $7.1 million tax expense in the first quarter of 2006 for withholding and other taxes on the repatriation of funds used to purchase the Storage Semiconductor Business and recorded $3.8 million in net deferred tax
expense associated with both of the acquisitions.

Our 2005 provision for income taxes was affected by three factors. First, we decreased our expected
annual effective tax rate from 25% to 20% based on a sensitivity analysis that considered tax credits available to offset forecast levels of net income. Second, we reversed a $1.0 million accrual for state taxes based on the completion of a tax
audit. Third, we recovered $5.3 million in R&D tax credits in excess of amounts that had previously been recorded.

In 2004, we estimated that the
effective tax rate applicable to our operations was 25%. However, we reduced our tax liabilities associated with current period income primarily for amounts we have or expect to recover from prior year taxes as a result of agreements and assessments
with the Canada Revenue Agency.

See Note 15 to the Consolidated Financial Statements for additional information regarding
income taxes.



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Critical Accounting Policies and Estimates

General

Managements Discussion and Analysis of
Financial Condition and Results of Operations is based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial
statements requires us to make estimates and assumptions that affect the amounts we report as assets, liabilities, revenue and expenses, and the related disclosure of contingent assets and liabilities. Management bases its estimates on historical
experience and on various other assumptions that are reasonable in the circumstances. These estimates could change under different assumptions or conditions.

Our significant accounting policies are outlined in Note 1 to the Consolidated Financial Statements. In managements opinion the following critical accounting policies require the most significant judgment and involve complex
estimation. We also have other policies that we consider to be key accounting policies, such as our policies of revenue recognition, including the deferral of revenues on sales to major distributors; however these policies do not meet the definition
of critical accounting estimates as they do not generally require us to make estimates or judgments that are difficult or subjective.

Valuation of Goodwill and Intangible Assets

The purchase method of accounting for acquisitions requires estimates and assumptions to
allocate the purchase price to the fair value of net tangible and intangible assets acquired, including in-process research and development (IPR&D). The amounts allocated to IPR&D are expensed immediately. The amounts allocated to, and the
useful lives estimated for, other intangible assets, affect future amortization. There are a number of generally accepted valuation methods used to estimate fair value of intangible assets, and we use primarily a discounted cash flow method, which
requires significant management judgment to forecast the future operating results and to estimate the discount factors used in the analysis. If assumptions and estimates used to allocate the purchase price prove to be inaccurate based on actual
results, future asset impairment charges could be required.

Goodwill and intangible assets determined to have indefinite lives are not amortized, but are
subject to an annual impairment test. To determine any goodwill impairment, we perform a two-step process on an annual basis, or more frequently if necessary, to determine 1) whether the fair value of the relevant reporting unit exceeds carrying
value and 2) to measure the amount of an impairment loss, if any. We review our intangible assets for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. Measurement of an impairment loss
is based on the fair value of the asset compared to carrying value.

During the year ended December 31, 2006, our goodwill and intangible asset
balances increased significantly due to the acquisitions. We performed an annual test for impairment of goodwill and intangible assets in the fourth quarter of 2006 and determined that there was no impairment. The assumptions used to test for
impairment, including expected revenues, discount rates, and terminal values, are highly subjective. Valuation models are sensitive to changes in assumptions, and therefore changes in these assumptions in the future could result in significant
impairment charges or changes to our expected amortization.



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Stock-based compensation

On January 1, 2006, we adopted SFAS 123(R), which requires the recognition of compensation expense for all share-based payment awards. Under SFAS 123(R) we measure the fair value of awards of equity instruments
and recognize the cost, net of an estimated forfeiture rate, on a straight-line basis over the period during which services are provided in exchange for the award, generally the vesting period.

Calculating the fair value of stock-based compensation awards requires the input of highly subjective assumptions, including the expected life of the awards and expected
volatility of PMCs stock price. Expected volatility is a statistical measure of the amount by which a stock price is expected to fluctuate during a period. Our estimates of expected volatilities are based on a weighted historical and
market-based implied volatility. In order to determine the expected life of the awards, we use historical data to estimate option exercises and employee terminations; separate groups of employees that have similar historical exercise behavior, such
as directors or executives, are considered separately for valuation purposes. The expected forfeiture rate applied in calculating stock-based compensation cost is estimated using historical data.

The assumptions used in calculating the fair value of stock-based awards involve estimates that require management judgment. If factors change and we use different
assumptions, our stock-based compensation expense could change significantly in the future. In addition, if our actual forfeiture rate is different from our estimate, our stock-based compensation could change significantly in the future. See Notes 1
and 4 to the Consolidated Financial Statements for further information on stock-based compensation.

Restructuring charges - Facilities

In calculating the cost to dispose of our excess facilities we had to estimate for each location the amount to be paid in lease termination payments,
the future lease and operating costs to be paid until the lease is terminated, and the amount of sublease revenues. This required us to estimate the timing and costs of each lease to be terminated, the amount of operating costs for the affected
facilities, and the timing and rate at which we might be able to sublease each site. To form our estimates for these costs we performed an assessment of the affected facilities and considered the current market conditions for each site.

During 2001, we recorded total charges of $155 million for the restructuring of excess facilities as part of restructuring plans implemented that year. The total
remaining estimate of $5.1 million related to the 2001 restructuring plans represents 100% of the estimated total future operating costs and lease obligations for the affected sites.

In the first quarter of 2003, we announced a further restructuring of our operations, which resulted in the closing of an additional four product development sites and the recording of $9.6 million charge related to
these facilities. During 2006 we reversed $2.3 million of this provision because a portion of the space was re-occupied. The total remaining estimate of $0.5 million represents 100% of the estimated total future operating costs and lease obligations
for the affected sites.



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In the third quarter of 2005, we recorded charges of $5.3 million for the restructuring of excess facilities in connection with the restructuring plans
implemented in 2005. The total remaining estimate of $4.3 million represents 100% of the estimated total future operating costs and lease obligations for the site.

In the third quarter of 2006, we announced the closure of our development site in Ottawa and recorded total charges of $2.3 million for the restructuring of excess facilities. The total remaining estimate of $2.1 million represents 100% of
the estimated total future operating costs and lease obligations for the site.

We believe our estimates of the obligations for the closing of sites remain
sufficient to cover anticipated settlement costs. However, our assumptions on either the lease termination payments, operating costs until terminated, or the amounts and timing of offsetting sublease revenues may turn out to be incorrect and our
actual cost may be materially different from our estimates. If our actual costs exceed our estimates, we would incur additional expenses in future periods.

Income Taxes

In estimating our annual effective tax rate we review our forecasted net income for the year by
geographic area and apply the appropriate tax rates. We also consider the income tax credits available in each tax jurisdiction.

Our operations are
conducted in a number of countries with complex tax legislation and regulations pertaining to our activities. We have recorded income tax liabilities based on our estimates and interpretations of those regulations for the countries we operate in.
However our estimates are subject to review and assessment by the tax authorities and the courts of those countries. For example, our estimated tax provision rate increased significantly at the end of 2006 due to an increase in our estimated tax
liability following receipt in 2007 of a written communication from a tax authority concerning past transfer pricing policies and practices of certain companies within the PMC-Sierra group. As a result, we increased our provision for periods prior
to 2006 by $29.9 million. The timing of any such review and final assessment of our liabilities by local authorities is substantially out of our control and is dependent on the actions by those authorities in the countries we operate in. Any
re-assessment of our tax liabilities by tax authorities may result in adjustments of the income taxes we pay or refunds that are due to us.

In certain
jurisdictions we have incurred losses and other costs that can be applied against future taxable earnings to reduce our tax liability on those earnings. As we are uncertain of realizing the future benefit of those losses and expenditures, we have
taken a valuation allowance against all domestic and foreign deferred tax assets.

Business Outlook

We expect our revenues for the first quarter of 2007 to be approximately $98 to $105 million based on typical order patterns. As in the past, and consistent with business
practice in the semiconductor industry, a portion of our revenues are likely to be derived from orders placed and shipped during the same quarter, which we call our turns business. Our turns business varies from quarter to quarter. In
the fourth quarter of 2006, net orders booked and shipped



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within the quarter were approximately 28% of quarterly sales, and we expect the turns percentage to be lower in the first quarter of 2007 compared with the
fourth quarter of 2006. Our long-term average turns percentage is approximately 30%.

We anticipate our first quarter 2007 gross margin percentage to
remain in the 64% range including approximately $0.5 million stock-based compensation expense. As in past quarters this could vary depending on the volumes of products sold, since many of our costs are fixed. Margins will also vary depending on the
mix of products sold.

We expect our first quarter 2007 research and development and selling, general and administrative expenses to be approximately $73
million to $74 million including stock-based compensation expense of approximately $10 million to $11 million. Therefore, we expect our first quarter core operating research and development and selling, general and administrative expenses to be
approximately $63 million.

We expect that we will incur significant amortization of purchased intangible assets related to the 2006 acquisitions in the
first quarter of 2007.

We anticipate that net interest income will be approximately $1.5 million in the first quarter of
2007.

Liquidity and Capital Resources

Our principal source of liquidity at December 31, 2006 was $258.9 million in cash and cash equivalents.

In 2006, we generated $32.1 million of cash from operating activities. Changes in working capital accounts included:



| |  |  | a $44.7 million increase in our income taxes payable primarily due to a $29.9 million increase in our estimated tax liability following receipt in 2007 of a written
communication from a tax authority, as well as the withholding and other taxes accrued as a result of repatriating funds to purchase the Storage Semiconductor Business, and the translation from Canadian Dollars to U.S. dollars at the end of 2006;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a $15.4 million increase in prepaid expenses due primarily to renewals of design tool software contracts;
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | a $14.3 million decrease in accounts payable and accrued liabilities due primarily to payment of accrued interest on the senior convertible notes, other payroll
related accruals;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a $6.2 million increase in inventory, which reduced the calculated number of times our inventory turned over on an annualized basis from 5.6 at the end of 2005 to
4.3 at the end of 2006;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a $2.2 million decrease in accounts receivable, on which our calculated number of days outstanding at the end of 2006 was 33 days compared to 37 at the end of 2005,
primarily due to higher revenues from the acquisitions of the Storage Semiconductor Business and Passave;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a $2.6 million net decrease in accrued restructuring costs due to $6.1 million of additional charges recorded in 2006, offset by $8.6 million in payments; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a $0.3 million decrease in deferred income due to the level of shipments to our major distributor.
| | - |  | --------------------------------------------------------------------------------------------------



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Cash flows from our investment activities included:



| |  |  | cash used to purchase the Storage Semiconductor Business for approximately $419.4 million, net of $17.5 million acquired from the Passave acquisition;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | cash proceeds of $222.4 million from the sale or maturity of short-term debt investments;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | proceeds of $5.4 million from the sale of strategic investments and other assets; and
| | - |  | -------------------------------------------------------------------------------------



| |  |  | investments of $13.2 million for the purchases of property, equipment and intangible assets.
| | - |  | --------------------------------------------------------------------------------------------

Cash flows from our financing activities included:



| |  |  | cash proceeds of $26.0 million from the issuance of common stock under our equity-based compensation plans.
| | - |  | -----------------------------------------------------------------------------------------------------------

As of December 31, 2006 we have the following commitments:



|                                  |  |       |         |      |   |        |  |      |        |      |   |        |  |            |        |  |   |        |  |   |        
|--------------------------------- |  | ----- | ------- | ---- | - | ------ |  | ---- | ------ | ---- | - | ------ |  | ---------- | ------ |  | - | ------ |  | - | -------
|(in thousands)                    |  | Total |         | 2007 |   | 2008   |  | 2009 |        | 2010 |   | 2011   |  | After 2011
|Contractual Obligations           |  |       |         |      |   |        |  |      |        |      |   |        |  |            |        |  |   |        |  |   |        
|                                  |  |       |         |      |   |        | 
|Operating Lease Obligations:      |  |       |         |      |   |        |  |      |        |      |   |        |  |            |        |  |   |        |  |   |        
|Minimum Rental Payments           |  | $     | 44,136  |      | $ | 11,454 |  | $    | 12,760 |      | $ | 7,869  |  | $          | 7,431  |  | $ | 4,622  |  | $ |       
|Estimated Operating Cost Payments |  |       | 14,676  |      |   | 4,141  |  |      | 3,727  |      |   | 2,810  |  |            | 2,799  |  |   | 1,199  |  |   |       
|                                  |  |       |         |      |   |        | 
|Long Term Debt:                   |  |       |         |      |   |        |  |      |        |      |   |        |  |            |        |  |   |        |  |   |        
|Principal Repayment               |  |       | 225,000 |      |   |       |  |      |       |      |   |       |  |            |       |  |   |       |  |   | 225,000
|Interest Payments                 |  |       | 96,190  |      |   | 5,063  |  |      | 5,063  |      |   | 5,063  |  |            | 5,063  |  |   | 5,063  |  |   | 70,875 
|Purchase and other Obligations    |  |       | 15,830  |      |   | 4,580  |  |      | 4,276  |      |   | 5,579  |  |            | 1,395  |  |   |       |  |   |       
|                                  |  |       |         |      |   |        |  |      |        |      |   |        |  |            |        |  |   |        |  |   |        
|                                  |  | $     | 395,832 |      | $ | 25,238 |  | $    | 25,826 |      | $ | 21,321 |  | $          | 16,688 |  | $ | 10,884 |  | $ | 295,875
|                                  |  |       |         |      |   |        |  |      |        |      |   |        |  |            |        |  |   |        |  |   |        

On October 26, 2005, we issued $225 million aggregate principal amount of 2.25% senior convertible notes due
2025 and have recorded these Notes as long-term debt. Issuance costs of $6.8 million have been deferred and are being amortized over seven years.

The
notes rank equal in right of payment with our other unsecured senior indebtedness and mature on October 15, 2025 unless earlier redeemed by us at our option, or converted or put to us at the option of the holders. Interest is payable
semi-annually in arrears on April 15 and October 15 of each year, commencing on April 15, 2006. We may redeem all or a portion of the notes at par on and after October 20, 2012. The holders may require that we repurchase notes on
October 15, 2012, 2015 and 2020 respectively.

Holders may convert the notes into the right to receive the conversion value (i) when our stock
price exceeds 120% of the approximately $8.80 per share initial conversion price for a specified period, (ii) in certain change in control transactions, and (iii) when the trading price of the notes does not exceed a minimum price level.
For each $1,000 principal amount of notes, the conversion value represents the amount equal to 113.6687 shares multiplied by the per share price of our common stock at the time of conversion. If the conversion value exceeds $1,000 per $1,000 in
principal of notes, we will pay $1,000 in cash and may pay the amount exceeding $1,000 in cash, stock or a combination of cash and stock, at our election.



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We entered into a Registration Rights Agreement with the holders of the Notes, under which we are required to keep the
shelf registration statement effective until the earlier of (i) the sale pursuant to the shelf registration statement of all of the notes and/or shares of common stock issuable upon conversion of the notes, and (ii) the expiration of the
holding period applicable to such securities held by non-affiliates under Rule 144(k) under the Securities Act, or any successor provision, subject to certain permitted exceptions.

We will be required to pay liquidated damages, subject to some limitations, to the holders of the notes if we fail to comply with our obligations to register the notes and the common stock issuable upon conversion of
the notes or the registration statement does not become effective within the specified time periods. In no event will liquidated damages accrue after the second anniversary of the date of issuance of the notes or at a rate exceeding 0.50% of the
issue price of the notes. We will have no other liabilities or monetary damages with respect to any registration default. If the holder has converted some or all of its notes into common stock, the holder will not be entitled to receive any
liquidated damages with respect to such common stock or the principal amount of the notes converted.

Purchase obligations are comprised of commitments to
purchase design tools and software for use in product development. Included in the purchase commitments above is $15.8 million in design software tools, which will be spent between 2007 and 2010. We have not included open purchase orders for
inventory or other expenses issued in the normal course of business in the purchase obligations shown above. We estimate these other commitments to be approximately $11.3 million at December 31, 2006 for inventory and other expenses that will
be received in the coming 90 days and that will require settlement 30 days thereafter.

We have a line of credit with a bank that allows us to borrow up to
$0.8 million provided we maintain eligible investments with the bank equal to the amount drawn on the line of credit. At December 31, 2006 we had committed $0.8 million under letters of credit as security for office leases.

We expect to use approximately $23.0 million of cash in 2007 for capital expenditures including purchases of intellectual property. Based on our current operating
prospects, we believe that existing sources of liquidity will be sufficient to satisfy our projected operating, working capital, capital expenditure, purchase obligations, and remaining restructuring requirements through the end of 2007.

Our estimated tax provision rate increased significantly at the end of 2006 due to an increase in our estimated tax liability following receipt in 2007 of a written
communication from a tax authority concerning past transfer pricing policies and practices of certain companies within the PMC-Sierra group. We have various tax uncertainties for which, in compliance with current accounting literature, we have
recorded significant tax payables and accruals. In the unlikely event we are required to pay all or a significant portion of such amounts in one payment, our cash reserves will be significantly reduced. This could hinder our ability to enter into
strategic transactions and could impair our operations. Should we seek additional financing for operational needs, we cannot assure you that the financing will be available on favorable terms or at all.



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While we believe our current liquidity will be sufficient to meet our long-term needs for capital, we operate in an
industry that is subject to rapid technological and economic changes. In addition, we may contemplate mergers and acquisitions of other companies or assets as part of our business strategy. Consequently in the future we may determine that our
sources of liquidity are insufficient and we may proceed with financing or other activities, which may dilute your investment or impact our liquidity and operating results.

Recent Accounting Pronouncements

In June
2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). This interpretation clarifies the recognition threshold and measurement of a tax position taken on a tax return, and requires expanded
disclosure with respect to the uncertainty in income taxes. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating whether adoption of FIN 48 will have a significant impact on its future
financial condition or results of operations.

Off-balance Sheet Arrangements

As of December 31, 2006, the Company had no off-balance sheet financing arrangements.



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|Item 7A. | Quantitative and Qualitative Disclosures About Market Risk.
|-------- | -----------------------------------------------------------

The
following discussion regarding our risk management activities contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those projected in the forward-looking statements.

Cash Equivalents and Short-term Investments

We regularly maintain a short and long term investment portfolio of various types of government and corporate debt instruments. Our investments are made in accordance with an investment policy approved by our Board of Directors. Maturities
of these instruments are less than two and one half years, with the majority being within one year. To minimize credit risk, we diversify our investments and select minimum ratings of P-1 or A by Moodys, or A-1 or A by Standard and
Poors, or equivalent. We classify these securities as available-for-sale and they are carried at fair market value.

Investments in instruments with
both fixed and floating rates carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted because of a rise in interest rates, while floating rate securities may produce less income than expected
if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations because of changes in interest rates, or we may suffer losses in principal if we were to sell securities that have declined in market
value because of changes in interest rates.

We do not attempt to reduce or eliminate our exposure to interest rate risk through the use of derivative
financial instruments.

Based on a sensitivity analysis performed on the financial instruments held at December 31, 2006, the impact to the fair value
of our investment portfolio by a shift in the yield curve of plus or minus 50, 100 or 150 basis points would result in a decline, or increase, in portfolio value of less than $0.1 million.

Senior Convertible Notes:

At December 31, 2006,
$225 million of our 2.25% senior convertible notes were outstanding. Because we pay fixed interest coupons on our notes, market interest rate fluctuations do not impact our debt interest payments. However, the fair value of our senior convertible
notes will fluctuate as a result of changes in the price of our common stock, changes in market interest rates and changes in our credit worthiness.

Our
2.25% senior convertible notes are not listed on any securities exchange or included in any automated quotation system, but are registered for resale under the Securities Act of 1933.

The notes rank equal in right of payment with our other unsecured senior indebtedness and mature on October 15, 2025 unless earlier redeemed by us at our option, or converted or put to us at the option of the
holders. Interest is payable semi-annually in arrears on April 15 and October 15 of each year, commencing on April 15, 2006. We may redeem all or a portion of the notes at par on and after October 20, 2012. The holders may
require that we repurchase notes on October 15, 2012, 2015 and 2020 respectively.



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Holders may convert the notes into the right to receive the conversion value (i) when our stock price exceeds 120%
of the approximately $8.80 per share initial conversion price for a specified period, (ii) in certain change in control transactions, and (iii) when the trading price of the notes does not exceed a minimum price level. For each $1,000
principal amount of notes, the conversion value represents the amount equal to 113.6687 shares multiplied by the per share price of our common stock at the time of conversion. If the conversion value exceeds $1,000 per $1,000 in principal of notes,
we will pay $1,000 in cash and may pay the amount exceeding $1,000 in cash, stock or a combination of cash and stock, at our election.

Foreign Currency

Our sales and corresponding receivables are denominated primarily in United States dollars. We generate a significant
portion of our revenues from sales to customers located outside the United States including Canada, Europe, the Middle East and Asia. We are subject to risks typical of an international business including, but not limited to, differing economic
conditions, changes in political climate, differing tax structures, other regulations and restrictions and foreign exchange rate volatility. Accordingly, our future results could be materially adversely affected by changes in these or other factors.

Through our operations in Canada and elsewhere outside the United States, we incur research and development, sales, customer support and administrative
expenses in Canadian and other foreign currencies. We are exposed, in the normal course of business, to foreign currency risks on these expenditures, particularly in Canada. In our effort to manage such risks, we have adopted a foreign currency risk
management policy intended to reduce the effects of potential short-term fluctuations on our operating results stemming from our exposure to these risks. As part of this risk management, we enter into foreign exchange forward contracts on behalf of
our Canadian subsidiary. These forward contracts offset the impact of exchange rate fluctuations on forecasted cash flows or firm commitments. We limit the forward contracts operational period to 12 months or less and we do not enter into foreign
exchange forward contracts for trading purposes. Because we do not engage in foreign exchange risk management techniques beyond these periods, our cost structure is subject to long-term changes in foreign exchange rates.

As at December 31, 2006, we had 6 currency forward contracts outstanding that qualified and were designated as cash flow hedges. The U.S. dollar notional amount of
these contracts was $57.9 million and the contracts had a fair value of ($1.7) million.

We attempt to limit our exposure to foreign exchange rate
fluctuations from our Canadian dollar net asset or liability positions. We do not hedge our accruals for Canadian income taxes in the ordinary course of business, and consequently in 2006 we recorded a $0.4 million foreign exchange gain relating to
this item. Our profitability would be materially impacted by a shift in the foreign exchange rates between United States and Canadian currencies. For example, if the value of the United States dollar decreased by 5% relative to the Canadian dollar,
our profitability would decrease by $5.6 million.

Other Investments:

Our other investments include strategic investments in privately held companies that are carried on our balance sheet at cost, net of write-downs for non-temporary declines in market value.



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We expect to make additional investments like these in the future. These investments are inherently risky, as they typically are comprised of investments in
companies and partnerships that are still in the start-up or development stages. The market for the technologies or products that they have under development is typically in the early stages, and may never materialize. We could lose our entire
investment in these companies and partnerships or may incur an additional expense if we determine that the value of these assets has been impaired. For example, in the second quarter of 2006 we recorded a charge of $3.2 million for impairment of an
investment in a private company. We may record additional impairment charges should we determine that our investments have incurred a non-temporary decline in value.



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|Item 8. | Financial Statements and Supplementary Data.
|------- | --------------------------------------------

The chart entitled
Quarterly Data contained in Item 6 Part II hereof is hereby incorporated by reference into the Item 8 of Part II of this Form 10-K.

Consolidated Financial Statements Included in Item 8:



|                                                                                                     |  |     
|---------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                     |  | Page
|Report of Independent Registered Public Accountants                                                  |  | 62  
|                                                                                                     | 
|Consolidated Balance Sheets                                                                          |  | 63  
|                                                                                                     | 
|Consolidated Statements of Operations                                                                |  | 64  
|                                                                                                     | 
|Consolidated Statements of Cash Flows                                                                |  | 65  
|                                                                                                     | 
|Consolidated Statements of Stockholders Equity                                                      |  | 66  
|                                                                                                     | 
|Notes to Consolidated Financial Statements                                                           |  | 67  
|                                                                                                     | 
|Reports on Internal Control Over Financial Reporting included in Item 9A:                            |  |     
|                                                                                                     | 
|Managements Annual Report on Internal Control over Financial Reporting                              |  | 104 
|                                                                                                     | 
|Report of Independent Registered Public Accountants                                                  |  | 105 
|                                                                                                     | 
|Schedules for each of the three years in the period ended December 31, 2006 included in Item 15 (a): |  |     
|                                                                                                     | 
|Valuation and Qualifying Accounts                                                                    |  | 115 

Schedules not listed above have been omitted because they are not applicable or are not required, or the
information required to be set forth therein is included in the financial statements or the notes thereto.



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders
of PMC-Sierra, Inc.

We have audited the accompanying consolidated balance sheets of PMC-Sierra, Inc. and subsidiaries (the Company) as of December 31,
2006 and 2005, and the related consolidated statements of operations, stockholders equity, and cash flows for each of the three years in the period ended December 31, 2006. Our audits also included the financial statement schedule listed in
the Index at Item 15(a). These financial statements and financial statement schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and financial statement schedule
based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial
position of PMC-Sierra, Inc. and subsidiaries as of December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.

As discussed in Note 1 to the consolidated financial statements, the Company adopted Statement of Financial Accounting
Standard No. 123(R), Share-Based Payment, effective January 1, 2006.

We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of the Companys internal control over financial reporting as of December 31, 2006, based on the criteria established in Internal Control--Integrated Frameworkissued
by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2007 expressed an unqualified opinion on managements assessment of the effectiveness of the Companys internal control over
financial reporting and an unqualified opinion on the effectiveness of the Companys internal control over financial reporting.



|                                         
|-----------------------------------------
|/s/ DELOITTE & TOUCHE LLP                
|Independent Registered Public Accountants
|                                         
|Vancouver, Canada                        
|February 28, 2007                        



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PMC-Sierra, Inc.

CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)



|                                                                                      |  |              |           |   |                  |   |           |  
|------------------------------------------------------------------------------------- |  | ------------ | --------- | - | ---------------- | - | --------- | -
|                                                                                      |  | December 31, |          
|                                                                                      |  | 2006         |           |   | 2005             |  
|                                                                                      |  |              |           |   | Restated(Note 2) |  
|ASSETS:                                                                               |  |              |           |   |                  |   |           |  
|Current assets:                                                                       |  |              |           |   |                  |   |           |  
|Cash and cash equivalents                                                             |  | $            | 258,914   |   |                  | $ | 405,566   |  
|Short-term investments                                                                |  |              |          |   |                  |   | 221,910   |  
|Accounts receivable, net of allowance for doubtful accounts of $1,768 (2005 - $1,768) |  |              | 37,303    |   |                  |   | 31,799    |  
|Inventories                                                                           |  |              | 34,505    |   |                  |   | 14,046    |  
|Prepaid expenses and other current assets                                             |  |              | 17,164    |   |                  |   | 13,630    |  
|                                                                                      |  |              |           |   |                  |   |           |  
|Total current assets                                                                  |  |              | 347,886   |   |                  |   | 686,951   |  
|                                                                                      |  |             
|Investments and other assets                                                          |  |              | 15,050    |   |                  |   | 16,390    |  
|Property and equipment, net                                                           |  |              | 18,904    |   |                  |   | 10,981    |  
|Goodwill                                                                              |  |              | 395,943   |   |                  |   | 7,907     |  
|Intangible assets, net                                                                |  |              | 223,629   |   |                  |   | 5,575     |  
|Deposits for wafer fabrication capacity                                               |  |              | 5,145     |   |                  |   | 5,145     |  
|                                                                                      |  |              |           |   |                  |   |           |  
|                                                                                      |  | $            | 1,006,557 |   |                  | $ | 732,949   |  
|                                                                                      |  |              |           |   |                  |   |           |  
|LIABILITIES AND STOCKHOLDERS EQUITY:                                                 |  |              |           |   |                  |   |           |  
|Current liabilities:                                                                  |  |              |           |   |                  |   |           |  
|Accounts payable                                                                      |  | $            | 19,074    |   |                  | $ | 21,507    |  
|Accrued liabilities                                                                   |  |              | 51,199    |   |                  |   | 40,619    |  
|Income taxes payable                                                                  |  |              | 59,428    |   |                  |   | 32,050    |  
|Deferred income taxes                                                                 |  |              | 2,042     |   |                  |   | 1,037     |  
|Accrued restructuring costs                                                           |  |              | 12,657    |   |                  |   | 15,233    |  
|Deferred income                                                                       |  |              | 11,340    |   |                  |   | 11,004    |  
|                                                                                      |  |              |           |   |                  |   |           |  
|Total current liabilities                                                             |  |              | 155,740   |   |                  |   | 121,450   |  
|                                                                                      |  |             
|2.25% Senior convertible notes due October 15, 2025                                   |  |              | 225,000   |   |                  |   | 225,000   |  
|Deferred taxes and other tax liabilities                                              |  |              | 52,657    |   |                  |   | 29,090    |  
|Commitments and contingencies (Note 11)                                               |  |              |           |   |                  |   |           |  
|                                                                                      |  |             
|PMC special shares convertible into 2,099 (2005 - 2,459) shares of common stock       |  |              | 2,732     |   |                  |   | 3,362     |  
|                                                                                      |  |             
|Stockholders equity                                                                  |  |              |           |   |                  |   |           |  
|Common stock, par value $.001; 900,000 shares authorized;                             |  |              |           |   |                  |   |           |  
|210,650 shares issued and outstanding (2005 - 183,306)                                |  |              | 230       |   |                  |   | 184       |  
|Additional paid in capital                                                            |  |              | 1,327,578 |   |                  |   | 1,008,501 |  
|Accumulated other comprehensive (loss) income                                         |  |              | (1,127    | ) |                  |   | 1,723     |  
|Accumulated deficit                                                                   |  |              | (756,253  | ) |                  |   | (656,361  | )
|                                                                                      |  |              |           |   |                  |   |           |  
|Total stockholders equity                                                            |  |              | 570,428   |   |                  |   | 354,047   |  
|                                                                                      |  |              |           |   |                  |   |           |  
|                                                                                      |  | $            | 1,006,557 |   |                  | $ | 732,949   |  
|                                                                                      |  |              |           |   |                  |   |           |  

See notes to the consolidated financial statements.



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PMC-Sierra, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except for per share amounts)

|                                                                    |  |                  |         |   |                  |   |         |                  |  |   |         |  
|------------------------------------------------------------------- |  | ---------------- | ------- | - | ---------------- | - | ------- | ---------------- |  | - | ------- | -
|                                                                    |  | December 31,2006 |         |   | December 31,2005 |   |         | December 26,2004 | 
|Net revenues                                                        |  | $                | 424,992 |   |                  | $ | 291,411 |                  |  | $ | 297,383 |  
|Cost of revenues                                                    |  |                  | 146,456 |   |                  |   | 80,963  |                  |  |   | 87,542  |  
|                                                                    |  |                  |         |   |                  |   |         |                  |  |   |         |  
|Gross profit                                                        |  |                  | 278,536 |   |                  |   | 210,448 |                  |  |   | 209,841 |  
|                                                                    |  |                  |        
|Other costs and expenses:                                           |  |                  |         |   |                  |   |         |                  |  |   |         |  
|Research and development                                            |  |                  | 158,661 |   |                  |   | 118,720 |                  |  |   | 120,492 |  
|Selling, general and administrative                                 |  |                  | 102,363 |   |                  |   | 56,278  |                  |  |   | 46,832  |  
|Amortization of purchased intangible assets                         |  |                  | 33,381  |   |                  |   |        |                  |  |   |        |  
|In-process research and development                                 |  |                  | 35,300  |   |                  |   |        |                  |  |   |        |  
|Restructuring costs and other charges                               |  |                  | 6,119   |   |                  |   | 13,833  |                  |  |   | 3,520   |  
|Acquisition costs                                                   |  |                  |        |   |                  |   |        |                  |  |   | 1,212   |  
|                                                                    |  |                  |         |   |                  |   |         |                  |  |   |         |  
|(Loss) income from operations                                       |  |                  | (57,288 | ) |                  |   | 21,617  |                  |  |   | 37,785  |  
|                                                                    |  |                  |        
|Other income (expense)                                              |  |                  |         |   |                  |   |         |                  |  |   |         |  
|Interest income, net                                                |  |                  | 8,979   |   |                  |   | 12,106  |                  |  |   | 4,859   |  
|Foreign exchange loss                                               |  |                  | (109    | ) |                  |   | (3,259  | )                |  |   | (1,295  | )
|Loss on extinguishment of debt and amortization of debt issue costs |  |                  | (968    | ) |                  |   | (1,809  | )                |  |   | (2,233  | )
|(Loss) gain on investments                                          |  |                  | (1,269  | ) |                  |   | 1,439   |                  |  |   | 9,242   |  
|                                                                    |  |                  |         |   |                  |   |         |                  |  |   |         |  
|(Loss) income before (provision for) recovery of income taxes       |  |                  | (50,655 | ) |                  |   | 30,094  |                  |  |   | 48,358  |  
|(Provision for) recovery of income taxes                            |  |                  | (49,237 | ) |                  |   | (2,108  | )                |  |   | 3,323   |  
|                                                                    |  |                  |         |   |                  |   |         |                  |  |   |         |  
|Net (loss) income                                                   |  | $                | (99,892 | ) |                  | $ | 27,986  |                  |  | $ | 51,681  |  
|                                                                    |  |                  |         |   |                  |   |         |                  |  |   |         |  
|Net (loss) income per common share - basic                          |  | $                | (0.49   | ) |                  | $ | 0.15    |                  |  | $ | 0.29    |  
|                                                                    |  |                  |         |   |                  |   |         |                  |  |   |         |  
|Net (loss) income per common share - diluted                        |  | $                | (0.49   | ) |                  | $ | 0.15    |                  |  | $ | 0.27    |  
|                                                                    |  |                  |         |   |                  |   |         |                  |  |   |         |  
|Shares used in per share calculation - basic                        |  |                  | 203,470 |   |                  |   | 184,098 |                  |  |   | 180,353 |  
|Shares used in per share calculation - diluted                      |  |                  | 203,470 |   |                  |   | 189,132 |                  |  |   | 188,903 |  

See notes to the consolidated financial statements.



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PMC-Sierra, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                                                  |  |                  |          |   |                  |   |          |                  |  |   |          |  
|------------------------------------------------------------------------------------------------- |  | ---------------- | -------- | - | ---------------- | - | -------- | ---------------- |  | - | -------- | -
|                                                                                                  |  | December 31,2006 |          |   | December 31,2005 |   |          | December 26,2004 | 
|Cash flows from operating activities:                                                             |  |                  |          |   |                  |   |          |                  |  |   |          |  
|Net (loss) income                                                                                 |  | $                | (99,892  | ) |                  | $ | 27,986   |                  |  | $ | 51,681   |  
|Adjustments to reconcile net (loss) income to net cash provided by operating activities:          |  |                  |          |   |                  |   |          |                  |  |   |          |  
|Stock-based compensation                                                                          |  |                  | 37,908   |   |                  |   | 215      |                  |  |   | 697      |  
|In-process research and development                                                               |  |                  | 35,300   |   |                  |   |         |                  |  |   |         |  
|Amortization of intangible assets                                                                 |  |                  | 36,990   |   |                  |   | 2,344    |                  |  |   | 1,012    |  
|Depreciation of property and equipment                                                            |  |                  | 10,820   |   |                  |   | 9,563    |                  |  |   | 14,300   |  
|Amortization of debt issuance costs                                                               |  |                  | 968      |   |                  |   | 191      |                  |  |   | 509      |  
|Loss (gain) on investments and other assets                                                       |  |                  | 1,269    |   |                  |   | (1,255   | )                |  |   | (9,242   | )
|Reversal of write-down of excess inventory, net                                                   |  |                  |         |   |                  |   | (1,904   | )                |  |   | (219     | )
|Gain on disposal of property and equipment                                                        |  |                  |         |   |                  |   | (184     | )                |  |   |         |  
|Loss on extinguishment of debt                                                                    |  |                  |         |   |                  |   | 1,618    |                  |  |   | 1,845    |  
|Impairment of purchased intangible assets                                                         |  |                  |         |   |                  |   | 538      |                  |  |   | 175      |  
|Changes in operating assets and liabilities:                                                      |  |                  |          |   |                  |   |          |                  |  |   |          |  
|Accounts receivable                                                                               |  |                  | 2,203    |   |                  |   | (11,868  | )                |  |   | 1,714    |  
|Inventories                                                                                       |  |                  | (6,181   | ) |                  |   | 3,681    |                  |  |   | 2,671    |  
|Prepaid expenses and other current assets                                                         |  |                  | (15,416  | ) |                  |   | 3,489    |                  |  |   | (3,831   | )
|Accounts payable and accrued liabilities                                                          |  |                  | (14,296  | ) |                  |   | 6,416    |                  |  |   | (21,076  | )
|Income taxes payable                                                                              |  |                  | 44,664   |   |                  |   | 4,749    |                  |  |   | 20,147   |  
|Accrued restructuring costs                                                                       |  |                  | (2,576   | ) |                  |   | 2,095    |                  |  |   | (2,531   | )
|Deferred income                                                                                   |  |                  | 336      |   |                  |   | 3,357    |                  |  |   | (8,074   | )
|                                                                                                  |  |                  |          |   |                  |   |          |                  |  |   |          |  
|Net cash provided by operating activities                                                         |  |                  | 32,097   |   |                  |   | 51,031   |                  |  |   | 49,778   |  
|                                                                                                  |  |                  |          |   |                  |   |          |                  |  |   |          |  
|Cash flows from investing activities:                                                             |  |                  |          |   |                  |   |          |                  |  |   |          |  
|Acquisition of businesses, net of cash acquired                                                   |  |                  | (419,436 | ) |                  |   |         |                  |  |   |         |  
|Purchases of short-term available-for-sale investments                                            |  |                  |         |   |                  |   | (138,759 | )                |  |   | (15,921  | )
|Proceeds from sales and maturities of short-term available-for-sale investments                   |  |                  | 222,357  |   |                  |   | 173,422  |                  |  |   | 14,067   |  
|Purchases of long-term available-for-sale investments in bonds and notes                          |  |                  |         |   |                  |   | (35,231  | )                |  |   | (191,980 | )
|Proceeds from sales and maturities of long-term available-for-sale investments in bonds and notes |  |                  |         |   |                  |   | 71,021   |                  |  |   | 126,087  |  
|Purchases of investments and other assets                                                         |  |                  |         |   |                  |   | (5,693   | )                |  |   | (6,074   | )
|Proceeds from sales of other investments                                                          |  |                  | 5,445    |   |                  |   | 772      |                  |  |   | 20,067   |  
|Proceeds from refund of wafer fabrication deposits                                                |  |                  |         |   |                  |   | 1,634    |                  |  |   |         |  
|Purchases of property and equipment                                                               |  |                  | (8,011   | ) |                  |   | (5,156   | )                |  |   | (9,922   | )
|Proceeds from sale of property                                                                    |  |                  |         |   |                  |   | 2,604    |                  |  |   |         |  
|Purchase of intangible assets                                                                     |  |                  | (5,144   | ) |                  |   | (3,454   | )                |  |   | (5,921   | )
|                                                                                                  |  |                  |          |   |                  |   |          |                  |  |   |          |  
|Net cash (used in) provided by investing activities                                               |  |                  | (204,789 | ) |                  |   | 61,160   |                  |  |   | (69,597  | )
|                                                                                                  |  |                  |          |   |                  |   |          |                  |  |   |          |  
|Cash flows from financing activities:                                                             |  |                  |          |   |                  |   |          |                  |  |   |          |  
|Repurchase of convertible subordinated notes                                                      |  |                  |         |   |                  |   | (70,177  | )                |  |   | (106,929 | )
|Proceeds from issuance of senior convertible notes                                                |  |                  |         |   |                  |   | 225,000  |                  |  |   |         |  
|Payment of debt issuance costs                                                                    |  |                  |         |   |                  |   | (6,788   | )                |  |   |         |  
|Proceeds from issuance of common stock                                                            |  |                  | 26,040   |   |                  |   | 24,064   |                  |  |   | 22,065   |  
|                                                                                                  |  |                  |          |   |                  |   |          |                  |  |   |          |  
|Net cash provided by (used in) financing activities                                               |  |                  | 26,040   |   |                  |   | 172,099  |                  |  |   | (84,864  | )
|                                                                                                  |  |                  |          |   |                  |   |          |                  |  |   |          |  
|Net (decrease) increase in cash and cash equivalents                                              |  |                  | (146,652 | ) |                  |   | 284,290  |                  |  |   | (104,683 | )
|Cash and cash equivalents, beginning of the year                                                  |  |                  | 405,566  |   |                  |   | 121,276  |                  |  |   | 225,959  |  
|                                                                                                  |  |                  |          |   |                  |   |          |                  |  |   |          |  
|Cash and cash equivalents, end of the year                                                        |  | $                | 258,914  |   |                  | $ | 405,566  |                  |  | $ | 121,276  |  
|                                                                                                  |  |                  |          |   |                  |   |          |                  |  |   |          |  
|Supplemental disclosures of cash flow information:                                                |  |                  |          |   |                  |   |          |                  |  |   |          |  
|Cash paid for interest                                                                            |  | $                | 5,063    |   |                  | $ | 1,085    |                  |  | $ | 4,134    |  
|Cash refund of income taxes                                                                       |  |                  | 2,241    |   |                  |   | 3,224    |                  |  |   | 22,316   |  
|Cash paid for income taxes                                                                        |  |                  | 6,891    |   |                  |   | 3,200    |                  |  |   | 163      |  
|                                                                                                  |  |                  |         
|Supplemental disclosures of non-cash investing and financing activities:                          |  |                  |          |   |                  |   |          |                  |  |   |          |  
|Issuance of common stock and assumption of stock options on acquisition                           |  | $                | 254,546  |   |                  | $ |         |                  |  | $ |         |  
|Conversion of PMC-Sierra special shares into common stock                                         |  |                  | 629      |   |                  |   | 1,072    |                  |  |   | 85       |  

See notes to the consolidated financial statements.



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PMC-Sierra, Inc.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

(in thousands)



|                                                                                        |  |                      |  |             |     |                          |   |                           |  |   |                                            |   |  |                                      |        |   |                          |   |          |   |  |   |          |  
|--------------------------------------------------------------------------------------- |  | -------------------- |  | ----------- | --- | ------------------------ | - | ------------------------- |  | - | ------------------------------------------ | - |  | ------------------------------------ | ------ | - | ------------------------ | - | -------- | - |  | - | -------- | -
|                                                                                        |  | Shares ofCommonStock |  | CommonStock |     | AdditionalPaid inCapital |   | DeferredStockCompensation |  |   | AccumulatedOtherComprehensiveloss (income) |   |  | RetainedEarnings(AccumulatedDeficit) |        |   | TotalStockholdersEquity |  
|Balances at December 28, 2003 - Restated (Note 2)                                       |  | 174,289              |  | $           | 174 |                          | $ | 960,313                   |  |   |                                           |   |  | $                                    | 1,838  |   |                          | $ | (736,028 | ) |  | $ | 226,297  |  
|Net income                                                                              |  |                     |  |             |    |                          |   |                          |  |   |                                           |   |  |                                      |       |   |                          |   | 51,681   |   |  |   | 51,681   |  
|Other comprehensive income (loss):                                                      |  |                      |  |             |     |                          |   |                           |  |   |                                            |   |  |                                      |        |   |                          |   |          |   |  |   |          |  
|Change in net unrealized gains on investments                                           |  |                     |  |             |    |                          |   |                          |  |   |                                           |   |  |                                      | (1,559 | ) |                          |   |         |   |  |   | (1,559   | )
|Change in fair value of derivatives                                                     |  |                     |  |             |    |                          |   |                          |  |   |                                           |   |  |                                      | 71     |   |                          |   |         |   |  |   | 71       |  
|                                                                                        |  |                      |  |             |     |                          |   |                           |  |   |                                            |   |  |                                      |        |   |                          |   |          |   |  |   |          |  
|Comprehensive income                                                                    |  |                      |  |             |     |                          |   |                           |  |   |                                            |   |  |                                      |        |   |                          |   |          |   |  |   | 50,193   |  
|                                                                                        |  |                      |  |             |     |                          |   |                           |  |   |                                            |   |  |                                      |        |   |                          |   |          |   |  |   |          |  
|Conversion of special shares into common stock                                          |  | 23                   |  |             |    |                          |   | 85                        |  |   |                                           |   |  |                                      |       |   |                          |   |         |   |  |   | 85       |  
|Issuance of common stock under stock benefit plans                                      |  | 4,198                |  |             | 5   |                          |   | 22,060                    |  |   |                                           |   |  |                                      |       |   |                          |   |         |   |  |   | 22,065   |  
|Deferred stock compensation                                                             |  |                     |  |             |    |                          |   | 697                       |  |   | (697                                       | ) |  |                                      |       |   |                          |   |         |   |  |   |         |  
|Amortization of deferred stock compensation                                             |  |                     |  |             |    |                          |   |                          |  |   | 697                                        |   |  |                                      |       |   |                          |   |         |   |  |   | 697      |  
|                                                                                        |  |                      |  |             |     |                          |   |                           |  |   |                                            |   |  |                                      |        |   |                          |   |          |   |  |   |          |  
|Balances at December 26, 2004 - Restated (Note 2)                                       |  | 178,510              |  |             | 179 |                          |   | 983,155                   |  |   |                                           |   |  |                                      | 350    |   |                          |   | (684,347 | ) |  |   | 299,337  |  
|Net income                                                                              |  |                     |  |             |    |                          |   |                          |  |   |                                           |   |  |                                      |       |   |                          |   | 27,986   |   |  |   | 27,986   |  
|Other comprehensive income (loss):                                                      |  |                      |  |             |     |                          |   |                           |  |   |                                            |   |  |                                      |        |   |                          |   |          |   |  |   |          |  
|Change in net unrealized gains on investments                                           |  |                     |  |             |    |                          |   |                          |  |   |                                           |   |  |                                      | 929    |   |                          |   |         |   |  |   | 929      |  
|Change in fair value of derivatives                                                     |  |                     |  |             |    |                          |   |                          |  |   |                                           |   |  |                                      | 444    |   |                          |   |         |   |  |   | 444      |  
|                                                                                        |  |                      |  |             |     |                          |   |                           |  |   |                                            |   |  |                                      |        |   |                          |   |          |   |  |   |          |  
|Comprehensive income                                                                    |  |                      |  |             |     |                          |   |                           |  |   |                                            |   |  |                                      |        |   |                          |   |          |   |  |   | 29,359   |  
|                                                                                        |  |                      |  |             |     |                          |   |                           |  |   |                                            |   |  |                                      |        |   |                          |   |          |   |  |   |          |  
|Conversion of special shares into common stock                                          |  | 438                  |  |             |    |                          |   | 1,072                     |  |   |                                           |   |  |                                      |       |   |                          |   |         |   |  |   | 1,072    |  
|Issuance of common stock under stock benefit plans                                      |  | 4,358                |  |             | 5   |                          |   | 24,059                    |  |   |                                            |   |  |                                      |       |   |                          |   |         |   |  |   | 24,064   |  
|Deferred stock compensation                                                             |  |                     |  |             |    |                          |   | 215                       |  |   | (215                                       | ) |  |                                      |       |   |                          |   |         |   |  |   |         |  
|Amortization of deferred stock compensation                                             |  |                     |  |             |    |                          |   |                          |  |   | 215                                        |   |  |                                      |       |   |                          |   |         |   |  |   | 215      |  
|                                                                                        |  |                      |  |             |     |                          |   |                           |  |   |                                            |   |  |                                      |        |   |                          |   |          |   |  |   |          |  
|Balances at December 31, 2005 - Restated (Note 2)                                       |  | 183,306              |  |             | 184 |                          |   | 1,008,501                 |  |   |                                           |   |  |                                      | 1,723  |   |                          |   | (656,361 | ) |  |   | 354,047  |  
|Net loss                                                                                |  |                     |  |             |    |                          |   |                          |  |   |                                           |   |  |                                      |       |   |                          |   | (99,892  | ) |  |   | (99,892  | )
|Other comprehensive income (loss):                                                      |  |                      |  |             |     |                          |   |                           |  |   |                                            |   |  |                                      |        |   |                          |   |          |   |  |   |          |  
|Change in net unrealized gains on investments                                           |  |                     |  |             |    |                          |   |                          |  |   |                                           |   |  |                                      | (12    | ) |                          |   |         |   |  |   | (12      | )
|Change in fair value of derivatives                                                     |  |                     |  |             |    |                          |   |                          |  |   |                                           |   |  |                                      | (2,838 | ) |                          |   |         |   |  |   | (2,838   | )
|                                                                                        |  |                      |  |             |     |                          |   |                           |  |   |                                            |   |  |                                      |        |   |                          |   |          |   |  |   |          |  
|Comprehensive loss                                                                      |  |                      |  |             |     |                          |   |                           |  |   |                                            |   |  |                                      |        |   |                          |   |          |   |  |   | (102,742 | )
|                                                                                        |  |                      |  |             |     |                          |   |                           |  |   |                                            |   |  |                                      |        |   |                          |   |          |   |  |   |          |  
|Issuance of common stock and assumption of stock options on acquisition of Passave Inc. |  | 19,851               |  |             | 19  |                          |   | 254,527                   |  |   |                                           |   |  |                                      |       |   |                          |   |         |   |  |   | 254,546  |  
|Conversion of special shares into common stock                                          |  | 361                  |  |             |    |                          |   | 629                       |  |   |                                           |   |  |                                      |       |   |                          |   |         |   |  |   | 629      |  
|Issuance of common stock under stock benefit plans                                      |  | 7,132                |  |             | 27  |                          |   | 26,013                    |  |   |                                           |   |  |                                      |       |   |                          |   |         |   |  |   | 26,040   |  
|Stock-based compensation expense                                                        |  |                     |  |             |    |                          |   | 37,908                    |  |   |                                           |   |  |                                      |       |   |                          |   |         |   |  |   | 37,908   |  
|                                                                                        |  |                      |  |             |     |                          |   |                           |  |   |                                            |   |  |                                      |        |   |                          |   |          |   |  |   |          |  
|Balances at December 31, 2006                                                           |  | 210,650              |  | $           | 230 |                          | $ | 1,327,578                 |  | $ |                                           |   |  | $                                    | (1,127 | ) |                          | $ | (756,253 | ) |  | $ | 570,428  |  
|                                                                                        |  |                      |  |             |     |                          |   |                           |  |   |                                            |   |  |                                      |        |   |                          |   |          |   |  |   |          |  

See notes to the consolidated financial statements.



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NOTE 1. Summary of Significant Accounting Policies

Description of business. PMC-Sierra, Inc (the Company or PMC) designs, develops, markets and supports high-speed broadband communications semiconductors, storage semiconductors and
microprocessors for metro, access, Fiber To The Home, wireless infrastructure, storage, laser printers and customer premise equipment. The Company offers worldwide technical and sales support through a network of offices in North America, Europe and
Asia.

Basis of presentation. The accompanying Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the
United States Securities and Exchange Commission (SEC) and United States Generally Accepted Accounting Principles. Fiscal 2006 consisted of 52 weeks and ended on Sunday, December 31. Fiscal 2005 consisted of 53 weeks and ended on
Saturday, December 31. Fiscal 2004 consisted of 52 weeks and ended on Sunday, December 26. The Companys reporting currency is the United States dollar. The accompanying Consolidated Financial Statements include the accounts of
PMC-Sierra, Inc. and any of its subsidiaries or investees in which PMC exercises control. As at December 31, 2006 and 2005, all subsidiaries included in these Consolidated Financial Statements were wholly owned by PMC. All inter-company
accounts and transactions have been eliminated.

Estimates. The preparation of financial statements and related disclosures in conformity with
accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Estimates are used for, but not limited to,
stock-based compensation, purchase accounting assumptions including those used to calculate the fair value of intangible assets and goodwill, the accounting for doubtful accounts, inventory reserves, depreciation and amortization, asset impairments,
sales returns, warranty costs, income taxes, restructuring costs, and contingencies. Actual results could differ from these estimates.

Cash and cash
equivalents. At December 31, 2006, Cash and cash equivalents included $0.8 million (December 31, 2005 - $0.8 million) pledged with a bank as collateral for letters of credit issued as security for leased facilities. Cash equivalents are
defined as highly liquid debt instruments with maturities at the date of purchase of 90 days or less. Short-term investments are defined as money market instruments or bonds and notes with original maturities greater than 90 days, but less than one
year. Investments in bonds and notes are defined as bonds and notes with original or remaining maturities greater than 365 days. Any investments in bonds and notes maturing within one year of the balance sheet date are reclassified to and reported
as short-term investments.

Under Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities, management classifies investments as available-for-sale or held-to-maturity at the time of purchase and re-evaluates such designation as of each balance sheet date. Investments classified as held-to-maturity securities are stated
at amortized cost with corresponding premiums or discounts amortized against interest income over the life of the investment. Marketable equity and debt securities not classified as held-to-maturity are classified as available-for-sale and reported
at fair value. The cost of securities sold is based on the specific identification method. Unrealized gains and losses on these investments, net of any related tax effect are included in equity as a separate component of stockholders equity.



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Inventories. Inventories are stated at the lower of cost (first-in, first out) or market (estimated net realizable
value). Cost is computed using standard cost, which approximates actual average cost. The Company provides inventory allowances on obsolete inventories and inventories in excess of twelve-month demand for each specific part.

Inventories (net of reserves of $8.4 million and $8.5 million at December 31, 2006 and 2005, respectively) were as follows:



|                 |  |              |        |      |   |       
|---------------- |  | ------------ | ------ | ---- | - | ------
|                 |  | December 31,
|(in thousands)   |  | 2006         |        | 2005
|Work-in-progress |  | $            | 17,463 |      | $ | 8,311 
|Finished goods   |  |              | 17,042 |      |   | 5,735 
|                 |  |              |        |      |   |       
|                 |  | $            | 34,505 |      | $ | 14,046
|                 |  |              |        |      |   |       

In fiscal 2006, the Company reduced inventory reserves by $2.3 million (2005 - $1.8 million, 2004  $4.0
million) for inventory that was scrapped during the year.

Investments in private entities. The Company has investments in privately traded
companies in which it has less than 20% of the voting rights and in which it does not exercise significant influence. The Company monitors these investments for impairment and makes appropriate reductions in carrying values when necessary. These
investments are included in Investments and other assets on the Companys balance sheet and are carried at cost, net of write-downs for impairment.

Investments in public companies. In 2005 the Company had an investment in a publicly traded company in which it had less than 20% of the voting rights and in which it did not exercise significant influence. These securities were
classified as available-for-sale and reported at fair value, based upon quoted market prices, with the unrealized gains or losses, net of any related tax effect, included as a separate component of stockholders equity.

Deposits for wafer fabrication capacity. The Company has wafer supply agreements with two independent foundries. Under these agreements, the Company has deposits
of $5.1 million (2005 - $5.1 million) to secure access to wafer fabrication capacity. During 2006, the Company purchased $42.0 million ($34.7 million and $37.2 million in 2005 and 2004, respectively) from these foundries. Purchases in any year may
or may not be indicative of any future period since wafers are purchased based on current market pricing and the Companys volume requirements change in relation to sales of its products.

In each year, the Company is entitled to receive a refund of a portion of the deposits based on the annual purchases from these suppliers compared to the target levels
in the wafer supply agreements. In 2006, PMC renewed its supply agreements through December 30, 2008 with its two main foundries with no changes in terms. In the first quarter of 2005 the Company received a refund of $1.6 million with respect
to these deposits and no refunds were received in 2006 and 2004.

Property and equipment, net. Property and equipment is stated at cost, net of
write-downs for impairment, and accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, ranging from two to five years. Leasehold improvements are capitalized and amortized
over the shorter of their estimated useful lives or the lease term.



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The components of property and equipment, net are as follows:



|                                 |  |       |         |                         |   |          |     |  |   |       
|-------------------------------- |  | ----- | ------- | ----------------------- | - | -------- | --- |  | - | ------
|December 31, 2006 (in thousands) |  | Gross |         | AccumulatedAmortization |   |          | Net
|Machinery and equipment          |  | $     | 193,611 |                         | $ | (177,780 | )   |  | $ | 15,831
|Leasehold improvements           |  |       | 14,384  |                         |   | (11,811  | )   |  |   | 2,573 
|Furniture and fixtures           |  |       | 14,527  |                         |   | (14,027  | )   |  |   | 500   
|                                 |  |       |         |                         |   |          |     |  |   |       
|Total                            |  | $     | 222,522 |                         | $ | (203,618 | )   |  | $ | 18,904
|                                 |  |       |         |                         |   |          |     |  |   |       



|                                 |  |       |         |                          |   |          |     |  |   |       
|-------------------------------- |  | ----- | ------- | ------------------------ | - | -------- | --- |  | - | ------
|December 31, 2005 (in thousands) |  | Gross |         | Accumulated Amortization |   |          | Net
|Machinery and equipment          |  | $     | 177,596 |                          | $ | (168,294 | )   |  | $ | 9,302 
|Leasehold improvements           |  |       | 12,620  |                          |   | (11,134  | )   |  |   | 1,486 
|Furniture and fixtures           |  |       | 14,049  |                          |   | (13,856  | )   |  |   | 193   
|                                 |  |       |         |                          |   |          |     |  |   |       
|Total                            |  | $     | 204,265 |                          | $ | (193,284 | )   |  | $ | 10,981
|                                 |  |       |         |                          |   |          |     |  |   |       

Goodwill. Goodwill is recorded when the purchase price paid for an acquisition exceeds the estimated fair
value of the net identified tangible and intangible assets acquired. The Company performs a two-step process on an annual basis, or more frequently if necessary, to determine 1) whether the fair value of the relevant reporting unit exceeds carrying
value and 2) the amount of an impairment loss, if any. The Company completed this process in December 2006, 2005 and 2004 and determined that there was no impairment to goodwill.

Intangible assets, net. Intangible assets, net, consist of intangible assets acquired through business combinations (See Note 3. Business Combinations), which are amortized over their estimated useful lives
ranging from 4 to 10 years or have indefinite lives, and purchased developed technology assets that are amortized over their economic lives, which are normally three years. The components of intangible assets, net are as follows:



|                                 |  |       |         |                         |   |         |     |  |               |         |  |           
|-------------------------------- |  | ----- | ------- | ----------------------- | - | ------- | --- |  | ------------- | ------- |  | ----------
|December 31, 2006 (in thousands) |  | Gross |         | AccumulatedAmortization |   |         | Net |  | Estimatedlife
|Backlog                          |  | $     | 4,000   |                         | $ | (4,000  | )   |  | $             |        |  | < 1 year  
|Core technology                  |  |       | 129,700 |                         |   | (14,473 | )   |  |               | 115,227 |  | 8 years   
|Customer Relationships           |  |       | 66,600  |                         |   | (7,242  | )   |  |               | 59,358  |  | 8 years   
|Existing technology              |  |       | 46,000  |                         |   | (7,667  | )   |  |               | 38,333  |  | 4 years   
|Trademarks                       |  |       | 3,600   |                         |   |        |     |  |               | 3,600   |  | indefinite
|Developed technology assets      |  |       | 14,619  |                         |   | (7,508  | )   |  |               | 7,111   |  | 3 years   
|                                 |  |       |         |                         |   |         |     |  |               |         |  |           
|Total                            |  | $     | 264,519 |                         | $ | (40,890 | )   |  | $             | 223,629 |  |           
|                                 |  |       |         |                         |   |         |     |  |               |         |  |           



|                                 |  |       |        |                         |   |         |     |  |               |       |  |        
|-------------------------------- |  | ----- | ------ | ----------------------- | - | ------- | --- |  | ------------- | ----- |  | -------
|December 31, 2005 (in thousands) |  | Gross |        | AccumulatedAmortization |   |         | Net |  | Estimatedlife
|Developed technology assets      |  | $     | 18,881 |                         | $ | (13,306 | )   |  | $             | 5,575 |  | 3 years
|                                 |  |       |        |                         |   |         |     |  |               |       |  |        



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Estimated future amortization expense for intangible assets is as follows:



|               |  |       
|-------------- |  | ------
|(in thousands) |  | $     
|2007           |  | 43,059
|2008           |  | 41,643
|2009           |  | 40,436
|2010           |  | 25,726
|2011           |  | 18,918
|thereafter     |  | 50,247

Impairment of long-lived assets. The Company reviews its long-lived assets, other than goodwill, for
impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. To determine recoverability, the Company compares the carrying value of the assets to the estimated future undiscounted
cash flows. Measurement of an impairment loss for long-lived assets held for use is based on the fair value of the asset. Long-lived assets classified as held for sale are reported at the lower of carrying value and fair value less estimated selling
costs. For assets to be disposed of other than by sale, an impairment loss is recognized when the carrying value is not recoverable and exceeds the fair value of the asset.

Accrued liabilities. The components of accrued liabilities are as follows:



|                                  |  |              |        |      |   |       
|--------------------------------- |  | ------------ | ------ | ---- | - | ------
|                                  |  | December 31,
|(in thousands)                    |  | 2006         |        | 2005
|Accrued compensation and benefits |  | $            | 21,977 |      | $ | 15,260
|Other accrued liabilities         |  |              | 29,222 |      |   | 25,359
|                                  |  |              |        |      |   |       
|                                  |  | $            | 51,199 |      | $ | 40,619
|                                  |  |              |        |      |   |       

Foreign currency translation. For all foreign operations, the U.S. dollar is used as the functional
currency. Monetary assets and liabilities in foreign currencies are translated into U.S. dollars using the exchange rate as of the balance sheet date. Revenues and expenses are translated at average rates of exchange during the year. Gains and
losses from foreign currency transactions are reported separately as foreign exchange gain (loss) under Other income (expense) on the Statement of Operations.

Derivatives and Hedging Activities. Fluctuating foreign exchange rates may significantly impact PMCs net income and cash flows. The Company periodically hedges forecasted foreign currency transactions related to certain
operating expenses. All derivatives are recorded in the balance sheet at fair value. For a derivative designated as a fair value hedge, changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized
in net (loss) income. For a derivative designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive income and are recognized in net (loss) income when the hedged item
affects net (loss) income. Ineffective portions of changes in the fair value of cash flow hedges are recognized in net (loss) income. If the derivative used in an economic hedging relationship is not designated in an accounting hedging relationship
or if it becomes ineffective, changes in the fair value of the derivative are recognized in net income. During the year ended December 31, 2006, all hedges were designated as cash flow hedges.



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Fair value of financial instruments. The estimated fair value of financial instruments has been determined by the
Company using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts that the Company could realize in a current market exchange.

The carrying values of cash equivalents, accounts
receivable and accounts payable approximate fair value because of their short maturities.

The fair value of the Companys short-term investments, and
investment in bonds and notes are determined using estimated market prices provided for those securities (see Note 7). The fair value of investments in public companies is determined using quoted market prices for those securities. The fair value of
investments in private entities is not readily determinable due to the illiquid market for these investments. The fair value of the deposits for wafer fabrication capacity is not readily determinable because the timing of the related future cash
flows is not determinable and there is no market for the sale of these deposits.

Our 2.25% senior convertible notes are not listed on any securities
exchange or included in any automated quotation system, but have been traded over the counter, on the Portal Market or under Rule 144 of the Securities Act of 1933. The exchange prices from these trades are not always available to us and may not be
reliable. Trades under the Portal Market do not reflect all trades of the securities and the figures recorded are not independently verified. The price of our senior convertible notes as quoted by Bloomberg on December 31, 2006 was $105.82 per
$100 in face value, resulting in an aggregate fair value of approximately $238.1 million.

As of and for the year ended December 31, 2006, the use of
derivative financial instruments was not material to the results of operations or our financial position (see Derivatives and Hedging Activities)

Concentrations. The Company maintains its cash, cash equivalents, short-term investments and long-term investments in investment grade financial instruments with high-quality financial institutions, thereby reducing credit risk
concentrations.

At December 31, 2006, approximately 21% (2005 - 31%) of accounts receivable represented amounts due from one of the
Companys distributors. The Company believes that this concentration and the concentration of credit risk resulting from trade receivables owing from high-technology industry customers is substantially mitigated by the Companys credit
evaluation process, relatively short collection periods and the geographical dispersion of the Companys sales. The Company generally does not require collateral security for outstanding amounts.

The Company relies on a limited number of suppliers for wafer fabrication capacity.

Revenue recognition. The Company recognizes product revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or
determinable, and collectibility is reasonably assured. PMC generates revenues from direct sales, sales to distributors and sales of consignment inventory.



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The Company recognizes revenues on goods shipped directly to customers at the time of shipping as that is when title
passes to the customer and all revenue recognition criteria specified above are met.

PMC has a two-tier distribution network, distinguishing between major
and minor distributors. The Company currently has one major distributor in North America for which it recognizes revenue on a sell-through basis, utilizing information provided by the distributor. This distributor maintains significantly higher
levels of inventory than minor distributors and is given business terms to return a portion of inventory and receive credits for changes in selling prices to end customers, the magnitude of which is not known at the time goods are shipped to this
distributor. PMC personnel are often involved in the sales from this distributor to end customers and the Company may utilize inventory at the major distributor to satisfy product demand by other customers.

PMC recognizes revenues from minor distributors at the time of shipment. These distributors are also given business terms to return a portion of inventory and receive
credits for changes in selling prices to end customers. At the time of shipment, product prices are fixed and determinable and the amount of future returns and pricing allowances to be granted in the future can be reasonably estimated and accrued.

The Company has consignment inventory which is held at the customers premises. PMC recognizes revenue on these goods when the customer uses them in
production, as that is when title passes to the customer. These sales from consignment inventory are subject to the same warranty terms that are applied to direct sales.

PMC product sales are subject to warranty claims against regular mechanical or electrical failure. PMC maintains accruals for potential returns based on its historical experience.

Research and development expenses. The Company expenses research and development (R&D) costs as incurred. R&D costs include payroll and related costs,
materials, services and design tools used in product development, depreciation, and other overhead costs including facilities and computer equipment costs. Intellectual property (IP) purchased from third parties is capitalized and amortized over the
expected useful life of the IP. For the years ended December 31, 2006 and 2005 and December 26, 2004, research and development expenses were $158.7 million, $118.7 million, and $120.5 million.

Product warranties. The Company provides a limited warranty on most of its standard products and accrues for the cost at the time of shipment. The Company
estimates its warranty costs based on historical failure rates and related repair or replacement costs. The following table summarizes the activity related to the product warranty liability during fiscal 2006 , 2005 and 2004:



|                                                               |  |                  |       |   |                  |   |       |                  |  |   |       |  
|-------------------------------------------------------------- |  | ---------------- | ----- | - | ---------------- | - | ----- | ---------------- |  | - | ----- | -
|(in thousands)                                                 |  | December 31,2006 |       |   | December 31,2005 |   |       | December 26,2004 | 
|Beginning balance                                              |  | $                | 3,997 |   |                  | $ | 3,492 |                  |  | $ | 2,897 |  
|Accrual for new warranties issued                              |  |                  | 1,541 |   |                  |   | 1,398 |                  |  |   | 1,343 |  
|Reduction for payments (in cash or in kind)                    |  |                  | (759  | ) |                  |   | (207  | )                |  |   | (89   | )
|Adjustments related to changes in estimate of warranty accrual |  |                  | (448  | ) |                  |   | (686  | )                |  |   | (659  | )
|                                                               |  |                  |       |   |                  |   |       |                  |  |   |       |  
|Ending balance                                                 |  | $                | 4,331 |   |                  | $ | 3,997 |                  |  | $ | 3,492 |  
|                                                               |  |                  |       |   |                  |   |       |                  |  |   |       |  



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The semiconductor industry is subject to volatility in shipment levels and the rate of warranty returns tends to
fluctuate depending on whether the industry is in times of growth or contraction. The Company adjusts its rate of accrual to reflect the level of returns typical of the industry cycle.

Other Indemnifications. From time to time, on a limited basis, the Company indemnifies customers, as well as suppliers, contractors, lessors, and others with whom it has contracts, against combinations of loss,
expense, or liability arising from various triggering events related to the sale and use of Company products, the use of their goods and services, the use of facilities, the state of assets that we sell and other matters covered by such contracts,
normally up to a specified maximum amount. The Company evaluates estimated losses for such indemnifications under SFAS No. 5, Accounting for Contingencies, as interpreted by FASB Interpretation No. 45, Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. The Company has no history of indemnification claims for such obligations and has not accrued any liabilities related to such indemnifications
in the consolidated financial statements.

Stock-based compensation. On January 1, 2006, the Company adopted Statement of Financial Accounting
Standards No. 123 (revised 2004), Share-Based Payment (SFAS 123(R)), which requires the recognition of compensation expense for all share-based payment awards. SFAS 123(R) requires the Company to measure the cost of services
received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost of such award will be recognized over the period during which services are provided in exchange for the award, generally the vesting
period. The Company adopted SFAS 123(R) using the modified prospective transition method and therefore prior period results have not been restated.

In
March 2005, the SEC issued Staff Accounting Bulletin No. 107 (SAB 107). The interpretations in SAB 107 express the views of the SEC staff regarding the interaction between SFAS 123(R) and certain SEC rules and regulations and provide the
staffs views regarding the valuation of share-based payment arrangements for public companies. The Company applied the principles of SAB 107 in connection with its adoption of SFAS 123(R).

During the year ended December 31, 2006, the Company recognized $37.9 million in stock-based compensation expense or $0.19 per share. No tax benefits were
attributed to stock-based compensation expense because a valuation allowance was maintained for all net deferred tax assets.

Prior to the adoption of SFAS
123(R), the Company recognized stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and applied the disclosure
provisions of SFAS 123, Accounting for Stock-Based Compensation (SFAS 123) as if the Company had applied the fair value method to measuring stock-based compensation expense. If the Company had accounted for stock-based compensation in
accordance with the fair value method as prescribed by SFAS 123, net loss and net loss per share for, 2005, and 2004 would have been:



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|                                                                                                                              |  |                  |         |   |                  |   |         |  
|----------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | - | ---------------- | - | ------- | -
|(in thousands, except per share amounts)                                                                                      |  | December 31,2005 |         |   | December 26,2004 |  
|Net (loss) income, as reported                                                                                                |  | $                | 27,986  |   |                  | $ | 51,681  |  
|Adjustments (Restated - see Note 2):                                                                                          |  |                  |         |   |                  |   |         |  
|Stock-based employee compensation expense included in net income                                                              |  |                  | 215     |   |                  |   | 697     |  
|Additional stock-based employee compensation expense under fair value based method for all awards, net of related tax effects |  |                  | (47,531 | ) |                  |   | (60,683 | )
|                                                                                                                              |  |                  |         |   |                  |   |         |  
|Net loss, adjusted                                                                                                            |  | $                | (19,330 | ) |                  | $ | (8,305  | )
|                                                                                                                              |  |                  |         |   |                  |   |         |  
|Basic net income per share, as reported                                                                                       |  | $                | 0.15    |   |                  | $ | 0.29    |  
|                                                                                                                              |  |                  |         |   |                  |   |         |  
|Basic net loss per share, adjusted                                                                                            |  | $                | (0.10   | ) |                  | $ | (0.05   | )
|                                                                                                                              |  |                  |         |   |                  |   |         |  
|Diluted net income per share, as reported                                                                                     |  | $                | 0.15    |   |                  | $ | 0.27    |  
|                                                                                                                              |  |                  |         |   |                  |   |         |  
|Diluted net loss per share, adjusted                                                                                          |  | $                | (0.10   | ) |                  | $ | (0.05   | )
|                                                                                                                              |  |                  |         |   |                  |   |         |  

On October 28, 2005, the Board of Directors of the Company approved an acceleration of vesting of the
Companys stock options granted on December 29, 2003 to employees and executive officers under the Companys 1994 Incentive Stock Plan and its 2001 Stock Option Plan that have an exercise price per share of $20.13 (the
Acceleration). As a result of the Acceleration, options to purchase approximately 2.4 million shares of the Companys common stock became immediately exercisable, of which options to purchase 0.8 million shares were held
by executive officers. As these options had exercise prices in excess of the current market value of the Companys common stock, based on the closing price of $6.34 per share on October 28, 2005, and were not fully achieving their original
objectives of incentive compensation and employee retention, the Company expects the acceleration to have a positive effect on employee morale, retention and perception of option value. In addition, the accelerated vesting eliminates future
compensation expense the Company would otherwise recognize in its statement of operations with respect to these accelerated options upon the adoption of Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based
Payment (SFAS 123R).

See Note 5 to the Consolidated Financial Statements for further information on stock-based
compensation.

Interest income, net. The components of interest income, net are as follows:



|                                   |  |                  |        |   |                  |   |        |                  |  |   |        |  
|---------------------------------- |  | ---------------- | ------ | - | ---------------- | - | ------ | ---------------- |  | - | ------ | -
|(in thousands)                     |  | December 31,2006 |        |   | December 31,2005 |   |        | December 26,2004 | 
|Interest income                    |  | $                | 13,942 |   |                  | $ | 13,502 |                  |  | $ | 7,925  |  
|Interest expense on long-term debt |  |                  | (4,963 | ) |                  |   | (1,396 | )                |  |   | (3,066 | )
|                                   |  |                  |        |   |                  |   |        |                  |  |   |        |  
|                                   |  | $                | 8,979  |   |                  | $ | 12,106 |                  |  | $ | 4,859  |  
|                                   |  |                  |        |   |                  |   |        |                  |  |   |        |  

Income taxes. Income taxes are reported under Statement of Financial Accounting Standards No. 109 and,
accordingly, deferred income taxes are recognized using the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carry forwards. Valuation allowances are provided if, after considering available evidence, it is more likely than not that some or all of
the deferred tax assets will not be realized.



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Net income (loss) per common share. Basic net income (loss) per share is computed using the weighted average
number of common shares outstanding during the period. The PMC-Sierra Ltd. Special Shares have been included in the calculation of basic net income (loss) per share. Diluted net income (loss) per share is computed using the weighted average number
of common and dilutive common equivalent shares outstanding during the period. Dilutive common equivalent shares consist of stock options, shares issuable on our Employee Share Purchase Plan and common shares issuable on conversion of our senior
convertible notes.

Segment reporting. Segmented information is reported in accordance with Statement of Financial Accounting Standards No. 131
(SFAS 131), Disclosures about Segments of an Enterprise and Related Information. SFAS 131 uses a management approach to report financial and descriptive information about a companys operating segments. Operating segments are
revenue-producing components of a company for which separate financial information is produced internally for the companys management. In all periods presented, the Company operated in one reportable segment: networking products.

Recent Accounting Pronouncements.In February 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards No. 155, Accounting for Certain Hybrid Financial Instrumentsan amendment of FASB Statements No. 133 and 140 (SFAS 155). This Statement amends FASB Statement No. 133, Accounting for Derivative Instruments
and Hedging Activities, and Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This Statement resolves issues addressed in Statement 133 Implementation Issue No. D1,
Application of Statement 133 to Beneficial Interests in Securitized Financial Assets. This Statement will be effective for financial instruments acquired or issued by the Company after the beginning of its 2007 fiscal year. The Company
expects that the adoption of this Statement will not have a material effect on its financial condition or results of operations.

In March 2006, the FASB
issued Statement of Financial Accounting Standards No. 156, Accounting for Servicing of Financial Assets - an amendment of FASB Statement No. 140 (SFAS 156). This Statement provides guidance addressing the recognition and
measurement of separately recognized servicing assets and liabilities, common with mortgage securitization activities, and provides an approach to simplify efforts to obtain hedge accounting treatment. SFAS 156 is effective after the beginning of an
entitys fiscal year that begins after September 15, 2006. The Company expects that the adoption of this Statement will have no impact on its financial condition or results of operations.

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). This interpretation clarifies the recognition
threshold and measurement of a tax position taken on a tax return, and requires expanded disclosure with respect to the uncertainty in income taxes. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is
currently evaluating the impact, if any, that adoption of FIN 48 will have on its financial condition or results of operations.

In September 2006, the
FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS 157). This Statement defines fair value, establishes



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guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value measurements but
rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The Company expects that adoption of SFAS 157 will not have a material
impact on its financial condition or results of operations.

In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin No. 108 (SAB 108). SAB 108 provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB 108 permits existing public
companies to record the cumulative effect of initially applying this approach in the fiscal year ending after November 15, 2006 by recording necessary correcting adjustments to the carrying values of assets and liabilities as of the beginning
of that year with the offsetting adjustment recorded to the opening balance of retained earnings. Adoption of SAB 108 did not have a material impact on its financial condition and results of operations.

Reclassifications. Certain prior year amounts have been reclassified in order to conform to the 2006 presentation.

NOTE 2. Restatement of Consolidated Financial Statements

In
August 2006, the Audit Committee of the Company completed a review of the Companys stock option-award practices. Based on the results of the review, the Company concluded that, pursuant to the requirements of Accounting Principles Board
Opinion No. 25,Accounting for Stock Issued to Employees (APB 25) that were in effect prior to 2006, the accounting measurement dates for certain stock option grants awarded during the years 1998-2001 differ from the measurement dates
previously used to determine any stock-based compensation expense for the years 1998-2002. The Company determined that for certain option grants the allocations to individual recipients and/or the proper documentation of formal corporate approvals
had not been completed as of the dates originally used for accounting measurement. As a result, new accounting measurement dates were applied to the affected option grants. A summary of the adjustments by type is as follows:



| |  |  | Stock-based compensation expense of $44.7 million was recorded with respect to nine stock option grants to Section 16 Officers (executives) and non-executives
that were approved by unanimous written consents (UWCs) or other
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | delegation documents, where the last approval of the grants, primarily to non-executives, was received after the dates for which we set the exercise price of
the options. New accounting measurement dates were assigned to these grants as of the date that we received the last written approval. For three grants, application of the new measurement date did not result in stock-based compensation expense
because the stock price had declined over the period. The majority of these option grants were cancelled in the 2002 option exchange program, resulting in immediate recognition of the remaining unamortized expense.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Stock-based compensation expense of $20.6 million was recorded with respect to a stock option grant which was substantially all to non-executives where allocations
were revised after the grant date. New accounting measurement dates were assigned to these grants as of the date the allocation to individual recipients was completed. This option grant was cancelled in the 2002 option exchange program, resulting in
immediate recognition of the remaining unamortized expense.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Stock-based compensation expense of $24.3 million was recorded with respect to a stock option grant which was substantially all to executives where the Company was
unable to locate sufficient documentation that confirmed the selection of the grant date. A new accounting measurement date was assigned to this grant as of the date immediately prior to the Companys public announcement of the grant in an
earnings conference call. This option grant was cancelled in the 2002 option exchange program, resulting in immediate recognition of the remaining unamortized expense.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As the majority of the stock options in question were cancelled in an option exchange program in 2002, or were otherwise fully vested, the new measurement dates did not affect operating results for 2003 and subsequent
years. The Audit Committee concluded that, while the Company used incorrect accounting measurement dates for certain stock option grants awarded during the years 1998-2001, those errors were not the product of any deliberate misconduct by
the Companys executives, staff, or members of its Board of Directors.

As a result of the review the Company adjusted its opening stockholders
equity as at December 29, 2002 and on the consolidated balance sheets for all subsequent periods. The effect of the adjustments was to increase additional paid-in capital and increase accumulated deficit on all consolidated balance sheets
commencing in 2003. The restatement had no impact on the Companys consolidated statements of operations or consolidated statements of cash flows in 2003 or subsequent periods. The restatement had no impact on the Companys cash position
or previously reported revenues.

The adjustments would have increased stock-based compensation expense in each of the years impacted, by type, as follows:



|                                               |  |      |        |      |   |        |  |      |        |       |   |       |  |   |       
|---------------------------------------------- |  | ---- | ------ | ---- | - | ------ |  | ---- | ------ | ----- | - | ----- |  | - | ------
|(in thousands)                                 |  | 2002 |        | 2001 |   | 2000   |  | 1999 |        | Total
|Receipt of final approval                      |  | $    | 19,473 |      | $ | 15,597 |  | $    | 5,021  |       | $ | 4,590 |  | $ | 44,681
|Allocation to recipients                       |  |      | 3,744  |      |   | 3,785  |  |      | 12,789 |       |   | 329   |  |   | 20,647
|Sufficiency of documentation of date selection |  |      | 15,442 |      |   | 8,860  |  |      |       |       |   |      |  |   | 24,302
|                                               |  |      |        |      |   |        |  |      |        |       |   |       |  |   |       
|                                               |  | $    | 38,659 |      | $ | 28,242 |  | $    | 17,810 |       | $ | 4,919 |  | $ | 89,630
|                                               |  |      |        |      |   |        |  |      |        |       |   |       |  |   |       



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As a result of the restatement, total stock-based compensation expense under APB 25 for the years preceding 2003 would
have been:



|                                                    |  |      |        |      |   |        |  |      |        |       |   |        |  |   |        
|--------------------------------------------------- |  | ---- | ------ | ---- | - | ------ |  | ---- | ------ | ----- | - | ------ |  | - | -------
|(in thousands)                                      |  | 2002 |        | 2001 |   | 2000   |  | 1999 |        | Total
|Compensation cost previously reported               |  | $    | 2,813  |      | $ | 41,184 |  | $    | 36,264 |       | $ | 5,121  |  | $ | 85,382 
|Additional compensation cost due to the restatement |  |      | 38,659 |      |   | 28,242 |  |      | 17,810 |       |   | 4,919  |  |   | 89,630 
|                                                    |  |      |        |      |   |        |  |      |        |       |   |        |  |   |        
|Total compensation cost- restated                   |  | $    | 41,472 |      | $ | 69,426 |  | $    | 54,074 |       | $ | 10,040 |  | $ | 175,012
|                                                    |  |      |        |      |   |        |  |      |        |       |   |        |  |   |        

The following table presents the impact of the restatement on the Companys previously reported consolidated
balance sheets:



|                           |  |                       |          |   |             |   |         |             |  |   |           |  
|-------------------------- |  | --------------------- | -------- | - | ----------- | - | ------- | ----------- |  | - | --------- | -
|                           |  | December 31, 2005     |         
|                           |  | As PreviouslyReported |          |   | Adjustments |   |         | As Restated | 
|Additional paid in capital |  | $                     | 918,871  |   |             | $ | 89,630  |             |  | $ | 1,008,501 |  
|Accumulated deficit        |  | $                     | (566,731 | ) |             | $ | (89,630 | )           |  | $ | (656,361  | )

NOTE 3. Business Combinations

Storage Semiconductor Business

On
February 28, 2006, the Company completed the acquisition of the former storage semiconductor business of Agilent Technologies, Inc. (the Storage Semiconductor Business) pursuant to the terms of the Purchase and Sale Agreement dated
October 28, 2005 (the Purchase Agreement) between PMC and Avago Technologies Pte. Limited (Avago). These financial statements include the results of operations of the acquired business from the acquisition date.

PMC purchased the Storage Semiconductor Business due to its strategic and product fit with PMC, the market position the Storage Semiconductor Business has
in the Fibre Channel controller market, the design capabilities of its engineering team, and the growth opportunities for standard semiconductor solutions in the enterprise storage market. The Storage Semiconductor Business was part of
Agilents Semiconductor Products Group (as defined in the Purchase Agreement), which Avago, an entity created by Kohlberg Kravis Roberts & Co. and Silver Lake Partners, acquired in December 2005. Under the terms of the Purchase
Agreement, Palau Acquisition Corporation, a Delaware corporation and direct wholly owned subsidiary of PMC purchased the Storage Semiconductor Business for the following consideration:



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|                                             |  |   |        
|-------------------------------------------- |  | - | -------
|(in thousands)                               |  |  
|Cash paid on closing date                    |  | $ | 424,505
|Additional cash for post-closing adjustments |  |   | 6,822  
|Merger costs                                 |  |   | 5,602  
|                                             |  |   |        
|Total consideration                          |  | $ | 436,929
|                                             |  |   |        

Merger costs include investment banking, legal and accounting fees, and other external costs directly related to
the acquisition.

The total purchase price has been allocated to the fair value of assets acquired and liabilities assumed, and the excess of the purchase
price over the net assets acquired was recorded as goodwill, which for this acquisition is deductible for tax purposes. The allocation was determined by management based on a third-party valuation. Subsequent to the acquisition date, the initial
purchase price and residual goodwill were adjusted by $1.1 million for additional inventory, by $4.0 million for design software licenses, and by $1.7 million for settlement of a legal matter. The allocation of the purchase price was as follows:



|                                    |  |   |         |  
|----------------------------------- |  | - | ------- | -
|(in thousands)                      |  |   |        
|In-process research and development |  | $ | 14,800  |  
|Inventory                           |  |   | 10,720  |  
|Property and equipment              |  |   | 7,177   |  
|Intangible assets                   |  |   | 167,400 |  
|Goodwill                            |  |   | 244,052 |  
|Liabilities assumed                 |  |   | (7,220  | )
|                                    |  |   |         |  
|Net assets acquired                 |  | $ | 436,929 |  
|                                    |  |   |         |  

Intangible assets acquired, and their respective estimated remaining useful lives, over which each asset will be
amortized on a straight-line basis, are:



|                                    |  |                     |         |                                       |           
|----------------------------------- |  | ------------------- | ------- | ------------------------------------- | ----------
|(in thousands)                      |  | Estimatedfair value |         | Estimatedaverage remaininguseful life
|Core technology                     |  | $                   | 114,300 |                                       | 8 years   
|Customer relationships              |  |                     | 46,300  |                                       | 10 years  
|Trademarks                          |  |                     | 3,600   |                                       | indefinite
|Backlog                             |  |                     | 3,200   |                                       | six months
|In-process research and development |  |                     | 14,800  |                                       | N/A       
|                                    |  |                     |         |                                       |           
|Total intangible assets acquired    |  | $                   | 182,200 |                                       |           
|                                    |  |                     |         |                                       |           

The amount allocated to in-process research and development (IPR&D) represents an estimate of the fair value
of research projects that have not reached technological feasibility and have no alternative future use. The estimated fair value of IPR&D was expensed immediately following the consummation of the acquisition.

PMC acquired three next-generation Tachyon storage protocol IPR&D projects related to the Storage Semiconductor Business. One of the projects is a multi-protocol
storage controller



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which was in the early stage of development, and two projects were next-generation Tachyon projects in later stages of development. The value assigned to
IPR&D was calculated using the income approach by determining cash flow projections related to the identified projects. The assumptions included information on revenues from existing products and future expected trends for each technology, with
an estimated useful life of 5 to 9 years. The rates used to discount the net cash flows to their present values were based upon a weighted average cost of capital of 19%. The discount rate was determined after consideration of market rates of return
on debt and equity capital and the risk associated with achieving forecasted sales related to the assets acquired.

The fair value, expected costs to
complete, and anticipated completion date for each project is as follows:



|                                          |  |                     |        |                           |   |                         |  |     
|----------------------------------------- |  | ------------------- | ------ | ------------------------- | - | ----------------------- |  | ----
|(in thousands)                            |  | Estimatedfair value |        | Expectedcosts to complete |   | Expectedcompletion date
|Next generation Tachyon products          |  | $                   | 9,400  |                           | $ | 800                     |  | 2007
|Multi-protocol storage controller         |  |                     | 5,400  |                           |   | 10,000                  |  | 2007
|                                          |  |                     |        |                           |   |                         |  |     
|Total in-process research and development |  | $                   | 14,800 |                           |   |                         |  |     
|                                          |  |                     |        |                           |   |                         |  |     

Passave Inc.

On
May 4, 2006, the Company acquired Passave, Inc. (Passave), a privately held Delaware corporation, pursuant to the Agreement and Plan of Merger (the Merger Agreement), dated April 4, 2006, among the Company, a newly
formed direct wholly-owned subsidiary of the Company (Merger Sub), Passave, and a representative of certain securityholders of Passave. Under the terms of the Merger Agreement, the Company issued shares of its common stock and assumed
stock options, and incurred merger costs having a total value of $304.0 million for all of the outstanding capital stock, warrants and outstanding stock options of Passave. Of this amount, $257.5 million was allocated to the purchase price, and
$46.5 million related to unvested stock and stock options of Passave which will be recorded as stock-based compensation over the requisite service period in accordance with FAS 123(R). The fair value of options assumed was calculated using a
lattice-binomial method. Of the consideration received by stockholders of Passave, approximately 10% is being held in escrow to satisfy certain indemnification and other obligations. The Company and the securityholders of Passave have each agreed to
indemnify the other for, among other things, breaches of representations, warranties and covenants of the Company and Passave in the Merger Agreement. These financial statements include the results of operations of Passave from the acquisition date.

PMC purchased Passave due to its market share leadership in Passive Optical Networking solutions. This acquisition fits with PMCs strategic intent
to address the high-growth Fiber Access market and is aligned with PMCs developments in Customer Premises Equipment. The preliminary purchase price is:



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|                                            |  |   |        
|------------------------------------------- |  | - | -------
|(in thousands)                              |  |  
|PMC shares                                  |  | $ | 224,411
|Vested Passave stock options assumed by PMC |  |   | 30,135 
|Merger costs                                |  |   | 2,950  
|                                            |  |   |        
|Total preliminary purchase price            |  | $ | 257,496
|                                            |  |   |        

The total purchase price has been allocated on a preliminary basis to the fair value of assets acquired and
liabilities assumed, and the excess of the purchase price over the net assets acquired was recorded as goodwill, which for this acquisition is not deductible for tax purposes. The preliminary allocation was determined by management based on a
third-party valuation. Areas of the purchase price that are not yet finalized and may result in future amounts payable by PMC relate to settlement of a legal matter, and the residual goodwill. Merger costs include investment banking fees, legal and
accounting fees and other external costs directly related to the merger.

Net assets acquired consist of the following:



|                                    |  |   |        
|----------------------------------- |  | - | -------
|(in thousands)                      |  |  
|Tangible assets, net of liabilities |  | $ | 10,512 
|Intangible assets                   |  |   | 82,500 
|In-process research and development |  |   | 20,500 
|Goodwill                            |  |   | 143,984
|                                    |  |   |        
|Net assets acquired                 |  | $ | 257,496
|                                    |  |   |        

Intangible assets acquired, and their respective estimated remaining useful lives, over which each asset will be
amortized on a straight-line basis, are:



|                                    |  |                     |         |                                       |             
|----------------------------------- |  | ------------------- | ------- | ------------------------------------- | ------------
|(in thousands)                      |  | Estimatedfair value |         | Estimatedaverage remaininguseful life
|Existing technology                 |  | $                   | 46,000  |                                       | 4 years     
|Core technology                     |  |                     | 15,400  |                                       | 4 years     
|Customer relationships              |  |                     | 20,300  |                                       | 4 years     
|Backlog                             |  |                     | 800     |                                       | eight months
|In-process research and development |  |                     | 20,500  |                                       | N/A         
|                                    |  |                     |         |                                       |             
|Total intangible assets             |  | $                   | 103,000 |                                       |             
|                                    |  |                     |         |                                       |             

The amount allocated to in-process research and development (IPR&D) represents an estimate of the fair value
of research projects that have not reached technological feasibility and have no alternative future use. The estimated fair value of IPR&D was expensed immediately following the consummation of the acquisition.



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PMC acquired the following IPR&D projects from Passave:



| |  |  | EPON and AFE products  provide further enhancements and functionality to the EPON series
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | GPON products  provide further enhancements and functionality to the GPON series
| | - |  | ---------------------------------------------------------------------------------

The value assigned to IPR&D was calculated using the income approach by determining cash flow projections related to identified projects. The assumptions included
information on revenues from existing products and future expected trends for each technology, with an estimated useful life of 6 years. The stage of completion of each project was estimated to determine the discount rates to be applied to the
valuation of the in-process technology. Based upon the level of completion and the risk associated with in-process technology, we applied discount rates that ranged from 20%  23% to value the projects acquired.

The fair value, expected costs to complete, and anticipated completion date for each project is as follows:



|                                          |  |                     |        |                           |   |                         |  |     
|----------------------------------------- |  | ------------------- | ------ | ------------------------- | - | ----------------------- |  | ----
|(in thousands)                            |  | Estimatedfair value |        | Expected coststo complete |   | Expectedcompletion date
|EPON products                             |  | $                   | 18,500 |                           | $ | 1,900                   |  | 2007
|GPON products                             |  |                     |       |                           |   | 4,500                   |  | 2008
|AFE projects                              |  |                     | 2,000  |                           |   | 400                     |  | 2007
|                                          |  |                     |        |                           |   |                         |  |     
|Total in-process research and development |  | $                   | 20,500 |                           |   |                         |  |     
|                                          |  |                     |        |                           |   |                         |  |     

Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets
acquired. In accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, goodwill will not be amortized but will instead be tested for impairment annually or more frequently if certain
indicators are present.

The pro forma financial information presented below gives effect to the acquisitions of Passave and the Storage Semiconductor
Business as if both acquisitions had occurred as of the beginning of each fiscal year presented below. If the acquisitions had occurred at the beginning of 2005, the $35.3 million charge for in-process research and development and
acquisition-related costs would have been expensed in 2005. Amortization of intangible assets would have been higher by $43.3 million, and $6.0 million, in 2005 and 2006, respectively. In addition, stock-based compensation would have been higher by
$17.4 million and $3.9 million in 2005 and 2006, respectively, due to amortization of expense associated with unvested options assumed with exercise prices below fair market value on the acquisition date.

The pro forma results do not purport to represent what the Companys results of operations actually would have been if the transactions had occurred on the date
indicated or what the results of operations will be in future periods.



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|                                               |  |              |         |   |      |   |         |  
|---------------------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | -
|                                               |  | December 31, |        
|(in thousands)                                 |  | 2006         |         |   | 2005 |  
|Pro forma revenues                             |  | $            | 461,429 |   |      | $ | 446,387 |  
|Pro forma net loss                             |  |              | (66,454 | ) |      |   | (64,775 | )
|Pro forma basic and diluted net loss per share |  | $            | (0.33   | ) |      | $ | (0.32   | )

NOTE 4. Derivative Instruments

The Company generates revenues in U.S. dollars but incurs a portion of its operating expenses in various foreign currencies, primarily the Canadian dollar. To minimize the short-term impact of foreign currency
fluctuations on the Companys operating expenses, the Company uses currency forward contracts.

Currency forward contracts that are used to hedge
exposures to variability in forecasted foreign currency cash flows are designated as cash flow hedges. The maturities of these instruments are less than twelve months. For these derivatives, the gain or loss from the effective portion of the hedge
is initially reported as a component of other comprehensive income in stockholders equity and subsequently reclassified to earnings in the same period in which the hedged transaction affects earnings. The gain or loss from the ineffective
portion of the hedge is recognized as interest income or expense immediately.

At December 31, 2006, the Company had six currency forward contracts
outstanding that qualified and were designated as cash flow hedges. The U.S. dollar notional amount of these contracts was $57.9 million and the contracts had a fair value of ($1.7) million. No portion of the hedging instruments gain or loss
was excluded from the assessment of effectiveness and the ineffective portions of hedges had no impact on earnings.

NOTE 5. Stock-Based Compensation

At December 31, 2006, the Company has two stock-based compensation programs, which are described below. None of the Companys stock-based awards
are classified as liabilities. The Company did not capitalize any stock-based compensation cost, and recorded compensation expense for the year ended December 31, 2006 as follows:



|                                    |  |                             |       
|----------------------------------- |  | --------------------------- | ------
|(in thousands)                      |  | Year endedDecember 31, 2006
|Cost of revenues                    |  | $                           | 1,809 
|Research and development            |  |                             | 16,210
|Selling, general and administrative |  |                             | 19,889
|                                    |  |                             |       
|Total                               |  | $                           | 37,908
|                                    |  |                             |       

The Company received cash of $26.0 million from all stock-based awards during the year ended December 31,
2006. The total intrinsic value of stock awards exercised during the year ended December 31, 2006, was $43.4 million.



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As of December 31, 2006 there was $70.0 million of total unrecognized compensation cost related to nonvested
stock-based compensation arrangements granted under the Companys stock option plans, which is expected to be recognized over a period of 3.2 years.

The fair value of the Companys stock option awards granted to employees during the year ended December 31, 2006 was estimated using a lattice-binomial valuation model. Prior to the second quarter of 2005, the fair value of the
Companys stock option awards to employees was estimated, for disclosure purposes under SFAS 123, using a Black-Scholes option pricing model which was developed for use in estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. The Company believes that the binomial model provides a better estimate of the fair value of stock option awards because it considers the contractual term of the option, the probability that the option will
be exercised prior to the end of its contractual life, and the probability of termination or retirement of the option holder in computing the value of the option. Both models require the input of highly subjective assumptions including the expected
stock price volatility and expected life.

The Companys estimates of expected volatilities are based on a weighted historical and market-based
implied volatility. The Company uses historical data to estimate option exercises and employee terminations within the valuation model; separate groups of employees that have similar historical exercise behavior are considered separately for
valuation purposes. The expected term of options granted is derived from the output of the stock option valuation model and represents the period of time that granted options are expected to be outstanding. The risk-free rate for periods within the
contractual life of the stock option is based on the U.S. Treasury yield curve in effect at the time of the grant.

The fair values of the Companys
stock option and ESPP awards were estimated using the following weighted average assumptions:

Stock Options:



|                              |  |                 |   |  |                 |   |  |                 |  
|----------------------------- |  | --------------- | - |  | --------------- | - |  | --------------- | -
|                              |  | December31,2006 |   |  | December31,2005 |   |  | December26,2004 |  
|Expected life (years)         |  | 3.9             |   |  | 3.8             |   |  | 2.9             |  
|Expected volatility           |  | 58              | % |  | 60              | % |  | 96              | %
|Risk-free interest rate       |  | 4.8             | % |  | 3.9             | % |  | 2.2             | %
|                              |  |                 |  
|Employee Share Purchase Plan: |  |                 |   |  |                 |   |  |                 |  
|                              |  | December31,2006 |   |  | December31,2005 |   |  | December26,2004 |  
|Expected life (years)         |  | 1.3             |   |  | 1.3             |   |  | 1.5             |  
|Expected volatility           |  | 50              | % |  | 53              | % |  | 99              | %
|Risk-free interest rate       |  | 4.9             | % |  | 3.5             | % |  | 1.6             | %

During 2005, management re-examined certain assumptions related to the level of expected volatility used in the
Companys option pricing model. As a result, volatility for the years ended December 31, 2006 and December 31, 2005 was calculated using a weighted historical and market-based implied volatility. For the year ended December 26,
2004, volatility was calculated using 5-year historical volatility.



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Stock Option Plans

The
Company issues its common stock under the provisions of various stock option plans. Stock option awards are granted with an exercise price equal to the closing market price of the Companys common stock at the grant date. The options generally
expire within five to ten years and vest over four years.

In 2001, the Company simplified its plan structure. The 2001 Stock Option Plan (the 2001
Plan) was created to replace a number of stock option plans the Company had assumed in connection with mergers and acquisitions completed prior to 2001. The number of shares available for issuance under the 1994 Incentive Stock Plan
(1994 Plan) were approved by stockholders. New stock options or other equity incentives may only be issued under the 1994 Plan and the 2001 Plan. In the second quarter of 2006 the Company assumed the stock option plans and all
outstanding stock options of Passave as part of the merger consideration.

Activity under the option plans during the year ended December 31, 2006 was
as follows:



|                                             |  |                   |   |  |                                 |       |                                                             |      |                                    |   |     
|-------------------------------------------- |  | ----------------- | - |  | ------------------------------- | ----- | ----------------------------------------------------------- | ---- | ---------------------------------- | - | ----
|                                             |  | Number of Options |   |  | Weighted average price pershare |       | Weighted averageremaining contractualterm per share - Years |      | Aggregate intrinsicvalue per share
|Outstanding, December 31, 2005               |  | 27,896,299        |   |  | $                               | 10.01 |                                                             |      |                                    |   |     
|Granted                                      |  | 8,977,590         |   |  | $                               | 10.10 |                                                             |      |                                    |   |     
|Assumed on acquisition of Passave            |  | 6,431,670         |   |  | $                               | 1.38  |                                                             |      |                                    |   |     
|Exercised                                    |  | (6,674,228        | ) |  | $                               | 3.43  |                                                             |      |                                    |   |     
|Cancelled, Forfeited                         |  | (2,276,278        | ) |  | $                               | 9.21  |                                                             |      |                                    |   |     
|Expired                                      |  | (1,359,059        | ) |  | $                               | 16.36 |                                                             |      |                                    |   |     
|                                             |  |                   |   |  |                                 |       |                                                             |      |                                    |   |     
|Outstanding, December 31, 2006               |  | 32,995,994        |   |  | $                               | 9.55  |                                                             | 7.27 |                                    | $ | 0.72
|Vested & Expected to Vest, December 31, 2006 |  | 31,439,860        |   |  | $                               | 9.56  |                                                             | 7.14 |                                    | $ | 0.76
|Exercisable, December 31, 2006               |  | 18,576,917        |   |  | $                               | 10.57 |                                                             | 6.01 |                                    | $ | 0.74

No adjustment has been recorded for fully vested options that expired during the year ended December 31,
2006. A reversal of less than $0.4 million was recorded for pre-vesting forfeitures.

The following table summarizes information on options outstanding and
exercisable for the combined option plans at December 31, 2006:



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|                         |  |                     |  |                                                 |  |                                       |       |                    |            |                                       |   |      
|------------------------ |  | ------------------- |  | ----------------------------------------------- |  | ------------------------------------- | ----- | ------------------ | ---------- | ------------------------------------- | - | -----
|                         |  | Options Outstanding |  | Options Exercisable                            
|Range of Exercise Prices |  | OptionsOutstanding  |  | WeightedAverageRemainingContractualLife (years) |  | WeightedAverageExercisePrice perShare |       | OptionsExercisable |            | WeightedAverageExercisePrice perShare
|$0.01  $5.95            |  | 10,586,002          |  | 7.01                                            |  | $                                     | 4.47  |                    | 7,848,588  |                                       | $ | 4.96 
|$6.00  $7.87            |  | 7,138,474           |  | 7.65                                            |  |                                       | 7.60  |                    | 2,966,349  |                                       |   | 7.58 
|$7.89  $10.82           |  | 3,925,797           |  | 7.38                                            |  |                                       | 9.04  |                    | 1,824,021  |                                       |   | 9.07 
|$10.97  $15.35          |  | 5,911,486           |  | 8.85                                            |  |                                       | 11.16 |                    | 517,333    |                                       |   | 12.62
|$15.98  $189.94         |  | 5,434,235           |  | 5.48                                            |  |                                       | 20.64 |                    | 5,420,626  |                                       |   | 20.65
|                         |  |                     |  |                                                 |  |                                       |       |                    |            |                                       |   |      
|$0.01  $189.94          |  | 32,995,994          |  | 7.27                                            |  | $                                     | 9.55  |                    | 18,576,917 |                                       | $ | 10.57
|                         |  |                     |  |                                                 |  |                                       |       |                    |            |                                       |   |      

The weighted-average estimated fair values of employee stock options granted during fiscal 2006, 2005, and 2004
were $4.60, $3.34, $10.48, per share, respectively.

Employee Stock Purchase Plan

In 1991, the Company adopted an Employee Stock Purchase Plan (ESPP) under Section 423 of the Internal Revenue Code. The ESPP allows eligible participants to purchase shares of the Companys
common stock through payroll deductions at a purchase price of 85% of the lower of the fair market value of the Companys stock on the close of the first trading day or last trading day of the six-month purchase period. Under the ESPP, the
number of shares authorized to be available for issuance under the plan are increased automatically on January 1 of each year until the expiration of the plan. The increase will be limited to the lesser of (i) 1% of the outstanding shares
on January 1 of each year, (ii) 2,000,000 shares (after adjusting for stock dividends), or (iii) an amount to be determined by the Board of Directors.

During 2006, 457,566 shares were issued under the Plan at a weighted-average price of $7.34 per share. As of December 31, 2006, 7,903,387 shares were available for future issuance under the ESPP (December 31,
2005 - 6,527,512).

The weighted-average estimated fair values of Employee Stock Purchase Plan awards during fiscal years 2006, 2005, and 2004, were $3.27,
$3.18, and $3.00 per share, respectively.

NOTE 6. Restructuring and Other Costs

The activity related to excess facility and severance accruals under the Companys restructuring plans during the year ended December 31, 2006, by year of plan, were as follows:



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Excess facility costs



|                             |  |      |        |   |      |   |        |      |  |   |        |   |  |       |        |   |  |   |        |  
|---------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ----- | ------ | - |  | - | ------ | -
|(in thousands)               |  | 2006 |        |   | 2005 |   |        | 2003 |  |   | 2001   |   |  | Total |       
|Balance at December 28, 2003 |  | $    |       |   |      | $ |       |      |  | $ | 6,339  |   |  | $     | 9,674  |   |  | $ | 16,013 |  
|                             |  |      |        |   |     
|Reversals and adjustments    |  |      |       |   |      |   |       |      |  |   | (119   | ) |  |       |       |   |  |   | (119   | )
|New charges                  |  |      |       |   |      |   |       |      |  |   |       |   |  |       | 3,570  |   |  |   | 3,570  |  
|Cash payments                |  |      |       |   |      |   |       |      |  |   | (2,325 | ) |  |       | (3,404 | ) |  |   | (5,729 | )
|                             |  |      |        |   |      |   |        |      |  |   |        |   |  |       |        |   |  |   |        |  
|Balance at December 26, 2004 |  |      |       |   |      |   |       |      |  |   | 3,895  |   |  |       | 9,840  |   |  |   | 13,735 |  
|                             |  |      |        |   |     
|New charges                  |  |      |       |   |      |   | 5,288  |      |  |   |       |   |  |       |       |   |  |   | 5,288  |  
|Cash payments                |  |      |       |   |      |   | (417   | )    |  |   | (884   | ) |  |       | (2,974 | ) |  |   | (4,275 | )
|                             |  |      |        |   |      |   |        |      |  |   |        |   |  |       |        |   |  |   |        |  
|Balance at December 31, 2005 |  |      |       |   |      |   | 4,871  |      |  |   | 3,011  |   |  |       | 6,866  |   |  |   | 14,748 |  
|                             |  |      |        |   |     
|Reversals and adjustments    |  |      |       |   |      |   | 776    |      |  |   | (2,300 | ) |  |       | 776    |   |  |   | (748   | )
|New charges                  |  |      | 2,338  |   |      |   |       |      |  |   |       |   |  |       |       |   |  |   | 2,338  |  
|Cash payments                |  |      | (227   | ) |      |   | (1,379 | )    |  |   | (162   | ) |  |       | (2,546 | ) |  |   | (4,314 | )
|                             |  |      |        |   |      |   |        |      |  |   |        |   |  |       |        |   |  |   |        |  
|Balance at December 31, 2006 |  | $    | 2,111  |   |      | $ | 4,268  |      |  | $ | 549    |   |  | $     | 5,096  |   |  | $ | 12,024 |  
|                             |  |      |        |   |      |   |        |      |  |   |        |   |  |       |        |   |  |   |        |  
|                             |  |      |        |   |     
|Severance costs              |  |      |        |   |      |   |        |      |  |   |        |   |  |       |       
|                             |  |      |        |   |     
|(in thousands)               |  | 2006 |        |   | 2005 |   |        | 2003 |  |   | 2001   |   |  | Total |       
|Balance at December 26, 2004 |  | $    |       |   |      | $ |       |      |  | $ |       |   |  | $     |       |   |  | $ |       |  
|                             |  |      |        |   |     
|New charges                  |  |      |        |   |      |   | 7,675  |      |  |   |       |   |  |       |       |   |  |   | 7,675  |  
|Cash payments                |  |      |        |   |      |   | (7,190 | )    |  |   |       |   |  |       |       |   |  |   | (7,190 | )
|                             |  |      |        |   |      |   |        |      |  |   |        |   |  |       |        |   |  |   |        |  
|Balance at December 31, 2005 |  |      |       |   |      |   | 485    |      |  |   |       |   |  |       |       |   |  |   | 485    |  
|                             |  |      |        |   |     
|Reversals and adjustments    |  |      |       |   |      |   | (350   | )    |  |   |       |   |  |       |       |   |  |   | (350   | )
|New charges                  |  |      | 2,968  |   |      |   | 1,562  |      |  |   |       |   |  |       |       |   |  |   | 4,530  |  
|Cash payments                |  |      | (2,432 | ) |      |   | (1,600 | )    |  |   |       |   |  |       |       |   |  |   | (4,032 | )
|                             |  |      |        |   |      |   |        |      |  |   |        |   |  |       |        |   |  |   |        |  
|Balance at December 31, 2006 |  | $    | 536    |   |      | $ | 97     |      |  | $ |       |   |  | $     |       |   |  | $ | 633    |  
|                             |  |      |        |   |      |   |        |      |  |   |        |   |  |       |        |   |  |   |        |  

2006

In the third
quarter of 2006, the Company closed its Ottawa development site in order to reduce operating expenses, vacating the excess space by the end of the fourth quarter of 2006. Approximately 35 positions were eliminated, primarily from research and
development, resulting in one-time termination benefit and relocation costs of $2.2 million, and $1.6 million for excess facilities. The Company also eliminated 10 positions from research and development in its Portland development site, resulting
in restructuring charges of $1.4 million comprised of $0.8 million in severance, $0.3 million in excess facilities, $0.1 million for contract termination and $0.2 million in asset impairment. During the fourth quarter of 2006 the remaining portion
of the Ottawa facility was vacated, resulting in a restructuring charge of $0.4 million.

To date, the Company has made payments relating to the 2006 plan
of $3.0 million. As of December 31, 2006, $0.5 million severance costs remained to be paid in 2007 and payments related to the excess facilities will extend to 2010.

2005

During 2005, the Company completed various restructuring activities aimed at streamlining production and reducing its
operating expenses. In the first quarter of 2005, the Company recorded restructuring charges of $0.9 million in severance costs related to the termination of



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24 employees across all business functions. In the second quarter of 2005, the Company expanded the workforce reduction activities initiated during the first
quarter of 2005 and terminated 63 employees from research and development located in the Santa Clara facility. In addition, the Company consolidated its two manufacturing facilities (Santa Clara, California and Burnaby, British Columbia) into one
facility (Burnaby), which involved the termination of 26 employees from production control, quality assurance, and product engineering. As a result, the Company recorded total second quarter restructuring charges of $7.6 million including $6.7
million for termination benefits and a $0.9 million write-down of equipment and software assets whose value was impaired as a result of these plans. On completion of these workforce reduction activities, in the third quarter of 2005 the Company
consolidated its facilities and vacated excess office space in the Santa Clara location, and recorded a restructuring charge of $5.3 million for excess facilities and an additional $0.1 million in severance costs.

In the first quarter of 2006, the Company continued its workforce reduction plans initiated in 2005 and recorded $1.6 million restructuring charges related to the
termination of 19 employees, primarily from research and development, in the Santa Clara facility. During the third quarter of 2006 the Company reduced its estimated severance accrual related to the 2005 workforce reduction activities by $0.4
million, and increased the accrual for excess facilities related to the 2005 restructuring by $0.8 million.

To date, the Company has made payments
relating to these activities of $10.6 million. As of December 31, 2006, the software assets have been disposed of and $0.1 million severance costs remained to be paid in 2007. Payments related to the excess facilities will extend to 2011.

2003 and 2001

In 2003 and 2001, the Company implemented
three restructuring plans aimed at focusing development efforts on key projects and reducing operating costs in response to the severe and prolonged economic downturn in the semiconductor industry. PMCs assessment of the market demand for its
products, and the development efforts necessary to meet this demand, were key factors in its decisions to implement these restructuring plans. As end markets for the Companys products had contracted, certain projects were curtailed in an
effort to cut costs. Cost reductions in all other functional areas were also implemented, as fewer resources were required to support the reduced level of development and sales activities during these periods.

The January 2003 restructuring included the termination of 175 employees and the closure of design centers in Maryland, Ireland and India. To date, PMC has recorded a
restructuring charge of $18.3 million including $1.5 million for asset write-downs. These charges related to workforce reduction, lease and contract settlement costs, and the write-down of certain property, equipment and software assets whose value
was impaired as a result of this restructuring plan. The Company has disposed of the property improvements and computer equipment, and software licenses have been cancelled or are no longer being used. In 2006, the Company reversed $2.3 million of
its restructuring accrual because certain floors in the Santa Clara facility that had been vacated in 2003 were re-occupied in 2006 due to the acquisition of the Storage Semiconductor Business.

The October 2001 restructuring plan included the termination of 341 employees, the consolidation of excess facilities, and the curtailment of certain research and
development



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projects, resulting in a restructuring charge of $175.3 million, including $12.2 million of asset write-downs. Due to the continued downturn in real estate
markets, the Company recorded additional provisions for abandoned office facilities of $1.3 million in the fourth quarter of 2004.

In the first quarter of
2001, the Company recorded a charge of $19.9 million for a restructuring plan that included the termination of 223 employees across all business functions, the consolidation of a number of facilities and the curtailment of certain research and
development projects. Due to the continued downturn in real estate markets, the Company recorded additional provisions for abandoned office facilities of $2.2 million in the fourth quarter of 2004, and $0.8 million in the third quarter of 2006.

To date, the Company has made cash payments of $12.7 million and $174.5 million related to the 2003 and 2001 plans, respectively. The Company has
completed the activities contemplated in these restructuring plans, but has not yet terminated the leases on its surplus facilities. Efforts to exit these sites are ongoing, but the payments related to these facilities could extend to 2011.

NOTE 7. Investments in Debt Securities

The following
tables summarize the Companys investments in debt securities:



|                                        |  |              |         |      |   |        
|--------------------------------------- |  | ------------ | ------- | ---- | - | -------
|                                        |  | December 31,
|(in thousands)                          |  | 2006         |         | 2005
|Available-for-sale:                     |  |              |         |      |   |        
|US Government Treasury and Agency notes |  | $            |        |      | $ | 129,920
|Corporate bonds and notes               |  |              | 153,249 |      |   | 441,167
|                                        |  |              |         |      |   |        
|                                        |  | $            | 153,249 |      | $ | 571,087
|                                        |  |              |         |      |   |        
|Reported as:                            |  |              |         |      |   |        
|Cash equivalents                        |  | $            | 153,249 |      | $ | 349,177
|Short-term investments                  |  |              |        |      |   | 221,910
|                                        |  |              |         |      |   |        
|                                        |  | $            | 153,249 |      | $ | 571,087
|                                        |  |              |         |      |   |        

The total fair value of available-for-sale investments at December 31, 2006 was $153.2 million (2005 - $571.1
million) with all investments maturing within 1 month. There was no unrealized gain or loss on these investments at December 31, 2006 (2005 - $1.7 million).

NOTE 8. Investments and Other Assets

The components of other investments and assets are as follows:



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|                                         |  |              |        |      |   |       
|---------------------------------------- |  | ------------ | ------ | ---- | - | ------
|                                         |  | December 31,
|(in thousands)                           |  | 2006         |        | 2005
|Investment in Ikanos Communications Inc. |  | $            |       |      | $ | 3,817 
|Investments in private entities          |  |              | 2,000  |      |   | 5,414 
|Deferred debt issue costs (Note 10)      |  |              | 5,645  |      |   | 6,612 
|Other assets                             |  |              | 7,405  |      |   | 547   
|                                         |  |              |        |      |   |       
|                                         |  | $            | 15,050 |      | $ | 16,390
|                                         |  |              |        |      |   |       

During 2006, the Company recorded a $3.2 million impairment loss on its investment in a private company, which was
its carrying value. This was offset by a $0.1 million gain on sale of another investment. In addition, the Company sold its investment in Ikanos Communications Inc. (Ikanos) in 2006 for proceeds of $5.1 million and recorded a gain of $3.1 million,
included in Gain on investments on the Statement of Operations.

During 2005, in connection with the IPO of Ikanos, the Companys non-voting preferred
shares of Ikanos were converted into 258,960 shares of common stock of Ikanos. These shares are not tradeable until the end of the first quarter of 2006, and are subject to regulatory trading restrictions thereafter. The Companys investment in
Ikanos was classified as available-for-sale and reported at fair value, with unrealized gains and losses recorded as Other Comprehensive (Loss) Income.

In
2005, the Company received $2.2 million as final satisfaction of the mortgage owed to the Company for a property it sold in 2003. As part of the agreement the Company surrendered an option to purchase the property. The difference between the
proceeds and the carrying value of the mortgage receivable was recorded as a gain of $0.6 million, included in Gain on sale of investments on the Consolidated Statement of Operations. In addition, the Company received $0.7 million in 2005 that had
been in escrow for one year pending final settlement of the sale of its investment in a private technology company. As a result the Company recorded a gain for this amount, which has been included in Gain on sale of investments on the Consolidated
Statement of Operations.

The Company monitors the value of its investments for impairment and records an impairment charge to reflect any decline in value
below its cost basis, if that decline is considered to be other than temporary. The assessment of impairment in carrying value is based on the market value trends of similar public companies, the current business performance of the entities in which
we have invested, and if available, the estimated future market potential of the companies and venture funds.

During 2006 the Company made deposits of
$7.4 million related to long-term design tool contracts. These costs are being amortized according to usage over the contract term, which ends in 2010.

NOTE 9. Lines of credit

At December 31, 2006, the Company had available a revolving line of credit with a bank under which the Company
may borrow up to $0.8 million with interest at the banks alternate base rate (annual rate of 8.75% at December 31, 2006) as long as the Company maintains eligible



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investments with the bank in an amount equal to its drawings. This agreement will expire in July 2007 . At December 31, 2006, $0.8 million cash was
deposited with the bank to offset the amount committed under letters of credit used as security for a facility lease.

NOTE 10. Long-term debt

2.25% Senior convertible notes

On October 26, 2005, the Company
issued $225 million aggregate principal amount of 2.25% senior convertible notes due 2025. The Company has recorded these Notes as long-term debt and issuance costs of $6.8 million have been deferred and will be amortized over seven years, which is
the Companys earliest call date. This approximates the effective interest method.

The notes rank equal in right of payment with our other unsecured
senior indebtedness and mature on October 15, 2025 unless earlier redeemed by the Company at its option, or converted or put to the Company at the option of the holders. Interest is payable semi-annually in arrears on April 15 and
October 15 of each year, commencing on April 15, 2006. The Company may redeem all or a portion of the notes at par on and after October 20, 2012. The holders may require that the Company repurchase notes on October 15, 2012, 2015
and 2020 respectively.

Holders may convert the notes into the right to receive the conversion value (i) when the Companys stock price exceeds
120% of the approximately $8.80 per share initial conversion price for a specified period, (ii) in certain change in control transactions, and (iii) when the trading price of the notes does not exceed a minimum price level. For each $1,000
principal amount of notes, the conversion value represents the amount equal to 113.6687 shares multiplied by the per share price of the Companys common stock at the time of conversion. If the conversion value exceeds $1,000 per $1,000 in
principal of notes, the Company will pay $1,000 in cash and may pay the amount exceeding $1,000 in cash, stock or a combination of cash and stock, at the Companys election.

The Company entered into a Registration Rights Agreement with the holders of the notes, under which the Company is required to keep the shelf registration statement effective until the earlier of (i) the sale
pursuant to the shelf registration statement of all of the notes and/or shares of common stock issuable upon conversion of the notes, and (ii) the expiration of the holding period applicable to such securities held by non-affiliates under Rule
144(k) under the Securities Act, or any successor provision, subject to certain permitted exceptions.

The Company will be required to pay liquidated
damages, subject to some limitations, to the holders of the notes if the Company fails to comply with its obligations to register the notes and the common stock issuable upon conversion of the notes or the registration statement does not become
effective within the specified time periods. In no event will liquidated damages accrue after the second anniversary of the date of issuance of the notes or at a rate exceeding 0.50% of the issue price of the notes. The Company will have no other
liabilities or monetary damages with respect to any registration default. If the holder has converted some or all of its notes into common stock, the holder will not be entitled to receive any liquidated damages with respect to such common stock
or the principal amount of the notes converted.



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3.75% Convertible subordinated notes

In August 2001, the Company issued $275 million of convertible subordinated notes maturing on August 15, 2006.

During the third fiscal
quarter of 2003, the Company repurchased $100 million principal amount of these notes for $96.7 million and expensed $1.6 million of related unamortized debt issue costs, resulting in a net gain of $1.7 million. On January 6, 2004, the Company
repurchased $106.9 million of these notes pursuant to a tender offer, at par value. The Company expensed approximately $1.6 million of debt issue costs related to the repurchased notes. The remaining $68.1 million of these notes were redeemed by the
Company on January 18, 2005 for a total of $70.2 million in cash, which included $1.1 million in accrued interest and a $1.0 million call premium.

These notes bore interest at 3.75% payable semi-annually and were convertible into an aggregate of approximately 6.5 million shares of PMCs common stock at any time prior to maturity at a conversion price of approximately $42.43
per share.

NOTE 11. Commitments and Contingencies

Legal Matters:

SEC Informal Inquiry

On
August 18, 2006, PMC received an informal confidential request from the SEC advising that the SEC has commenced an informal inquiry into the Companys historical stock option-granting practices. The Company has produced documents in
response to the SEC request and is continuing to cooperate with the SEC. The Company has engaged outside counsel to represent it in the inquiry. On December 6, 2006, a meeting took place at the SEC in San Francisco during which the Audit
Committee and its special counsel summarized the results of its investigation into the Companys historical option-granting practices.

Stockholder
Derivative Lawsuits

Three derivative actions have been filed against the Company, as a nominal defendant, and various current and former officers
and/or directors: (1) Meissner v. Bailey, et al., Santa Clara Superior Court Case No. 1-06-CV-071329 (filed September 18, 2006); (2) Beiser v. Bailey, et al., United States District Court for the Northern
District of California Case No. 5:06-CV-05330-RS (filed August 29, 2006); and (3) Barone v. Bailey, et al., United States District Court for the Northern District of California Case No. 4:06-CV-06473-SBA (filed
October 16, 2006) . On November 21, 2006 the Beiserand Barone actions were consolidated into one case. On January 18, 2007, the Santa Clara County Superior Court in California ordered that the Meissner action be
stayed pending the outcome of the consolidated, federal Beiser/Barone action. A consolidated complaint in the Beiser/Barone action was filed on January 29, 2007 (the Consolidated Complaint).

The Consolidated Complaint generally alleges that various current and former Company directors and/or officers breached their duty of loyalty and/or duty of care to the
Company and its shareholders, that these purported breaches of fiduciary duties caused harm to the Company, and the plaintiffs seek to recover damages on behalf of the Company. The



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Consolidated Complaint also alleges violations of federal securities laws. The Company is a nominal defendant in the case, but any recovery in the litigation
would be paid to the Company, rather than to its shareholders. The Company has engaged independent legal counsel to prepare joint defense arrangements for the various defendants.

The Company has not accrued any amounts related to settlement of these matters.

UTStarcom

On November 17, 2005, UTStarcom, Inc. filed a suit against Passave in the Santa Clara County Superior Court in California. In that claim, UTStarcom raised various
demands regarding issues relating to the interaction of Passaves PAS 5001 system-on-a-chip with a particular companys switch used by UTStarcom in its Fiber-to-the-home (FTTH) products. In the suit, UTStarcom asserts various
claims for breach of contract and breach of warranty and requests indemnity associated with the sale of Passaves PAS 5001 products. UTStarcom claims that it incorporated those products into its FTTH products that were shipped to a particular
customer, and that customer informed UTStarcom that those FTTH products supplied by UTStarcom were experiencing unacceptable data interruptions. UTStarcom further claims the data interruptions were caused by the failure of Passaves PAS 5001 to
properly interface with another companys switch in the UTStarcom product. UTStarcom also claims that Passave breached certain warranties contained in its purchase orders and is obligated to indemnify UTStarcom and its customers for any damages
that resulted from a breach of these warranties. UTStarcom further claims that its customers have submitted claims to UTStarcom, which UTStarcom also alleges stem from its products failure attributable to Passaves chips. UTStarcom also
claims that it has incurred costs and expenses in an amount exceeding $30 million in connection with the product defects it claims are attributable to the PAS 5001 products. On January 16, 2007, Passave filed its response to the amended
complaint and also filed a cross-complaint against UT Starcom alleging interference with prospective economic advantage and breach of contract.

The
Company believes that Passave has meritorious defenses to UTStarcoms claims and a valid basis for its cross-complaint. Nevertheless, prior to the acquisition by PMC, Passave had informed UTStarcom that it was prepared to replace a number of
such system-on-a-chips that Passave had shipped to it as an accommodation to UTStarcom. Although the Company has attempted to resolve this dispute, it may not be able to do so on reasonable terms, if at all. If the Company loses this litigation, a
court could require the Company to pay substantial damages. Any negotiated resolution of the UTStarcom claim could also require the Company to make substantial payments. Either of these results could have a material adverse effect on the
Companys business, results of operations and financial condition. The Company has accrued the cost of replacement parts.

Operating leases:

The Company leases its facilities under operating lease agreements, which expire at various dates through October 31, 2011.

Rent expense including operating costs for the years ended December 31, 2006, 2005, and 2004 was $10.5 million, $9.1 million, and $9.3 million, respectively.
Excluded from rent expense for 2006 was additional rent and operating costs of $4.2 million (2005 - $4.2 million; 2004 - $4.2 million) related to excess facilities, which were accrued as part of the restructuring programs in 2006, 2005, 2003 and
2001.



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Minimum future rental payments under operating leases are as follows:



|                                                            |  |   |       
|----------------------------------------------------------- |  | - | ------
|Year Ending December 31(in thousands)                       |  |  
|2007                                                        |  | $ | 11,454
|2008                                                        |  |   | 12,760
|2009                                                        |  |   | 7,869 
|2010                                                        |  |   | 7,431 
|2011                                                        |  |   | 4,622 
|                                                            |  |   |       
|Total minimum future rental payments under operating leases |  | $ | 44,136
|                                                            |  |   |       

Supply agreements. The Company has supply agreements with both Chartered and TSMC that were renewed during
2006. These renewed agreements are in effect until December 31, 2008. The Company made deposits to secure access to wafer fabrication capacity of $5.1 million at December 31, 2006 and 2005. Under these agreements, the foundries must supply
certain quantities of wafers per year. Neither of these agreements have minimum unit volume requirements but the Company is obliged under one of the agreements to purchase a minimum percentage of the Companys total annual wafer requirements
provided that the foundry is able to continue to offer competitive technology, pricing, quality and delivery. The agreements may be terminated if either party does not comply with the terms.

Contingencies. In the normal course of business, the Company receives and makes inquiries with regard to possible patent infringements. Where deemed advisable,
the Company may seek or extend licenses or negotiate settlements. Outcomes of such negotiations may not be determinable at any point in time; however, management does not believe that such licenses or settlements will, individually or in the
aggregate, have a material adverse effect on the Companys financial position, results of operations or cash flows.

NOTE 12. Special Shares

At December 31, 2006 and 2005, the Company maintained a reserve of 2,099,000 and 2,459,000 shares, respectively, of PMC common stock to be issued to
holders of PMC-Sierra, Ltd. (LTD) special shares.

The special shares of LTD, the Companys principal Canadian subsidiary, are redeemable or
exchangeable for PMC common stock. Special shares do not vote on matters presented to the Companys stockholders, but in all other respects represent the economic and functional equivalent of PMC common stock for which they can be redeemed or
exchanged at the option of the holders. The special shares have class voting rights with respect to transactions that affect the rights of the special shares as a class and for certain extraordinary corporate transactions involving LTD. If LTD files
for bankruptcy, is liquidated or dissolved, the special shares receive as a preference the number of shares of PMC common stock issuable on conversion plus a nominal amount per share plus unpaid dividends, or at the holders
option convert into LTD ordinary shares, which are the functional equivalent of voting common stock.



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If the Company files for bankruptcy, is liquidated, or dissolved, special shares of LTD receive the cash equivalent of the value
of PMC common stock into which the special shares could be converted, plus unpaid dividends, or at the holders option convert into LTD ordinary shares. If the Company materially breaches its obligations
to special shareholders of LTD (primarily to permit conversion of special shares into PMC common stock), the special shareholders may convert their shares into LTD ordinary shares.

These special shares of LTD are classified outside of stockholders equity until such shares are exchanged for PMC common stock. Upon exchange, amounts will be
transferred from the LTD special shares account to the Companys common stock and additional paid-in capital on the consolidated balance sheet.

NOTE
13. Stockholders Equity

Authorized capital stock of PMC. At December 31, 2006 and 2005, the Company had an authorized capital of
905,000,000 shares, 900,000,000 of which are designated Common Stock, $0.001 par value, and 5,000,000 of which are designated Preferred Stock, $0.001 par value.

Stockholders Rights Plan. The Company adopted a stockholder rights plan in 2001, pursuant to which the Company declared a dividend of one share purchase right for each outstanding share of common stock.
If certain events occur, including if an investor tenders for or acquires more than 15% of the Companys outstanding common stock, stockholders (other than the acquirer) may exercise their rights and receive $650 worth of our common stock in
exchange for $325 per right, or the Company may, at the Companys option, issue one share of common stock in exchange for each right, or the Company may redeem the rights for $0.001 per right.

NOTE 14. Employee Benefit Plans

Post-retirement Health Care
Benefits.Our unfunded post retirement benefit plan, which was assumed in connection with the acquisition of the Storage Semiconductor Business, provides retiree medical benefits to eligible United States employees who meet certain age
and service requirements upon retirement from the Company. These benefits are provided from the date of retirement until the employee qualifies for Medicare coverage. The amount of the retiree medical benefit obligation assumed by the Company was
$1.1 million at the time of the acquisition.

At December 31, 2006, the accumulated postretirement benefit obligation was $1.2 million, with no
unrecognized gain/loss or unrecognized prior service cost. The net period benefit cost was $0.1 million during 2006. No distributions were made from the plan during the period. The Company includes accrued benefit costs for its post-retirement
program in Accrued liabilities on the Companys Consolidated Balance Sheet.

The health care accumulated postretirement benefit obligations were
determined at December 31, 2006 using a discount rate of 7%, and a current year health care trend of 10% decreasing to an ultimate trend rate of 5.0% in 2011.



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Employee Retirement Savings Plans.The Company sponsors a 401(k) retirement plan for its employees in the United
States and similar plans for its employees in Canada and other countries. Employees can contribute a percentage of their annual compensation to the plans, limited to maximum annual amounts set by local taxation authorities. The Company contributed
$4.3 million, $3.8 million, and $3.7 million to the plans in fiscal years 2006, 2005, and 2004, respectively.



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NOTE 15. Income Taxes

The
income tax provisions, calculated under Statement of Financial Accounting Standard No. 109 (SFAS 109), consist of the following:



|                                         |  |                  |        |                  |   |                  |  |   |        |  
|---------------------------------------- |  | ---------------- | ------ | ---------------- | - | ---------------- |  | - | ------ | -
|(in thousands)                           |  | December 31,2006 |        | December 31,2005 |   | December 26,2004 | 
|Current:                                 |  |                  |        |                  |   |                  |  |   |        |  
|Federal                                  |  | $                | 2,248  |                  | $ | 263              |  | $ |       |  
|State                                    |  |                  | 4      |                  |   | 3                |  |   | 3      |  
|Foreign                                  |  |                  | 43,140 |                  |   | 1,842            |  |   | (3,326 | )
|                                         |  |                  |        |                  |   |                  |  |   |        |  
|                                         |  |                  | 45,392 |                  |   | 2,108            |  |   | (3,323 | )
|                                         |  |                  |        |                  |   |                  |  |   |        |  
|Deferred:                                |  |                  |        |                  |   |                  |  |   |        |  
|Federal                                  |  |                  | 3,845  |                  |   |                 |  |   |       |  
|Foreign                                  |  |                  |       |                  |   |                 |  |   |       |  
|                                         |  |                  |        |                  |   |                  |  |   |        |  
|                                         |  |                  | 3,845  |                  |   |                 |  |   |       |  
|                                         |  |                  |        |                  |   |                  |  |   |        |  
|Provision for (recovery of) income taxes |  | $                | 49,237 |                  | $ | 2,108            |  | $ | (3,323 | )
|                                         |  |                  |        |                  |   |                  |  |   |        |  

A reconciliation between the Companys effective tax rate and the U.S. Federal statutory rate is as follows:



|                                                                                     |  |                  |         |   |                  |   |         |                  |  |   |         |  
|------------------------------------------------------------------------------------ |  | ---------------- | ------- | - | ---------------- | - | ------- | ---------------- |  | - | ------- | -
|(in thousands)                                                                       |  | December 31,2006 |         |   | December 31,2005 |   |         | December 26,2004 | 
|Income (loss) before provision for income taxes                                      |  | $                | (50,655 | ) |                  | $ | 30,094  |                  |  | $ | 48,358  |  
|Federal statutory tax rate                                                           |  |                  | 35      | % |                  |   | 35      | %                |  |   | 35      | %
|Income taxes at U.S. Federal statutory rate                                          |  |                  | (17,729 | ) |                  |   | 10,533  |                  |  |   | 16,925  |  
|Tax on intercompany dividend                                                         |  |                  | 45,727  |   |                  |   | 19,871  |                  |  |   |        |  
|Adjustment due to change in estimate                                                 |  |                  | 29,889  |   |                  |   |        |                  |  |   |        |  
|Adjustment of prior year taxes and excess tax credits                                |  |                  | (673    | ) |                  |   | (3,924  | )                |  |   | (5,866  | )
|Non-deductible intangible asset amortization and in-process research and development |  |                  | 12,221  |   |                  |   |        |                  |  |   |        |  
|Non-deductible stock-based compensation                                              |  |                  | 9,299   |   |                  |   | 75      |                  |  |   | 244     |  
|Non-deductible items and other                                                       |  |                  | 5,875   |   |                  |   | (81     | )                |  |   | (5,291  | )
|Incremental tax (recovery) on foreign earnings and other rate differentials          |  |                  | (8,530  | ) |                  |   | (35,677 | )                |  |   | (26,477 | )
|Valuation allowance                                                                  |  |                  | (26,842 | ) |                  |   | 11,311  |                  |  |   | 17,142  |  
|                                                                                     |  |                  |         |   |                  |   |         |                  |  |   |         |  
|Provision for (recovery of) income taxes                                             |  | $                | 49,237  |   |                  | $ | 2,108   |                  |  | $ | (3,323  | )
|                                                                                     |  |                  |         |   |                  |   |         |                  |  |   |         |  

The Companys estimated tax provision rate increased significantly at the end of 2006 due to an increase in
its estimated tax liability following receipt in 2007 of a written communication from a tax authority examining the historic transfer pricing policies and practices of certain companies within the PMC-Sierra group. As a result, the Company increased
its provision for periods prior to 2006 by $29.9 million.

Significant components of the Companys deferred tax assets and liabilities are as follows:



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|                                        |  |              |          |   |      |   |          |  
|--------------------------------------- |  | ------------ | -------- | - | ---- | - | -------- | -
|                                        |  | December 31, |         
|(in thousands)                          |  | 2006         |          |   | 2005 |  
|Deferred tax assets:                    |  |              |          |   |      |   |          |  
|Net operating loss carryforwards        |  | $            | 215,547  |   |      | $ | 241,027  |  
|Capital loss                            |  |              | 42,043   |   |      |   | 42,957   |  
|Credit carryforwards                    |  |              | 25,216   |   |      |   | 29,054   |  
|Reserves and accrued expenses           |  |              | 16,988   |   |      |   | 11,401   |  
|Intangible assets                       |  |              | 8,683    |   |      |   |         |  
|Depreciation and amortization           |  |              | 8,694    |   |      |   | 11,948   |  
|Restructuring and other charges         |  |              | 6,896    |   |      |   | 9,128    |  
|State tax loss carryforwards            |  |              | 6,439    |   |      |   | 11,883   |  
|Deferred income                         |  |              | 2,926    |   |      |   | 2,876    |  
|                                        |  |              |          |   |      |   |          |  
|Total deferred tax assets               |  |              | 333,432  |   |      |   | 360,274  |  
|Valuation allowance                     |  |              | (333,432 | ) |      |   | (360,274 | )
|                                        |  |              |          |   |      |   |          |  
|Total net deferred tax assets           |  |              |         |   |      |   |         |  
|                                        |  |              |          |   |      |   |          |  
|Deferred tax liabilities:               |  |              |          |   |      |   |          |  
|Acquired intangible assets and goodwill |  |              | (12,095  | ) |      |   |         |  
|Capitalized technology                  |  |              | (74      | ) |      |   | (74      | )
|Unrealized gain on investments          |  |              |         |   |      |   | (1,037   | )
|                                        |  |              |          |   |      |   |          |  
|Total deferred tax liabilities          |  |              | (12,169  | ) |      |   | (1,111   | )
|                                        |  |              |          |   |      |   |          |  
|Total net deferred taxes                |  | $            | (12,169  | ) |      | $ | (1,111   | )
|                                        |  |              |          |   |      |   |          |  

At December 31, 2006, the Company has approximately $615.9 million of federal net operating losses, which
will expire through 2026. Approximately $3.1 million of the federal net operating losses is subject to ownership change limitations provided by the Internal Revenue Code of 1986. The Company also has approximately $214.6 million of state tax loss
carryforwards, which expire through 2016. A portion of our net operating losses were used in 2005 and 2006 to reduce the taxes otherwise payable on intercompany dividends. The utilization of a portion of these state losses is also subject to
ownership change limitations provided by the various states income tax legislation.

Included in the credit carry-forwards are $16.7 million of
federal research and development credits which expire through 2025, $2.2 million of federal AMT credits which carryforward indefinitely, $17.8 million of state research and development credits which do not expire, $0.8 million of state research and
development credits which expire through 2008, and $0.8 million of state manufacturers investment credits which expire through 2011.

Included in the
above net operating loss carryforwards are $23.8 million and $3.9 million of federal and state net operating losses related to acquisitions accounted for under the purchase method of accounting. The benefit of such losses, if and when realized, will
be credited first to reduce to zero any goodwill related to the respective acquisition, second to reduce to zero other non-current intangible assets related to the respective acquisition, and third to reduce income tax expense.

Included in the deferred tax assets before valuation allowance are approximately $165.4 million of cumulative tax benefits related to equity transactions, which will be
credited to stockholders equity if and when realized.

The pretax income from foreign operations was $48.2 million, $65.7 million, and $75.8 million
in 2006, 2005, and 2004, respectively. The Company recorded $7.1 million tax expense related to earnings it repatriated in 2006 to fund the purchase of the Storage Semiconductor Business



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in 2006. This distribution does not change the Companys intent to indefinitely reinvest undistributed earnings of
the Companys foreign subsidiaries and accordingly, no additional provision for federal and state income taxes has been provided thereon. It is not practical to estimate the income tax liability that might be incurred on the remittance of such
earnings.

NOTE 16. Segment Information

The Company
operates in one segment: networking products. The networking segment consists of internetworking semiconductor devices and related technical service and support to equipment manufacturers for use in their communications and networking equipment.

Enterprise-wide information is provided below in accordance with SFAS 131. Geographic revenue information is based on the location of the customer
invoiced. Long-lived assets include property and equipment, goodwill and other intangible assets and other long-term assets. Geographic information about long-lived assets is based on the physical location of the assets.



|                                |  |              |         |      |   |         |  |   |        
|------------------------------- |  | ------------ | ------- | ---- | - | ------- |  | - | -------
|                                |  | December 31,
|(in thousands)                  |  | 2006         |         | 2005 |   | 2004   
|Net revenues                    |  |              |         |      |   |         |  |   |        
|United States                   |  | $            | 103,144 |      | $ | 98,619  |  | $ | 111,829
|Asia -excluding China and Japan |  |              | 99,903  |      |   | 51,020  |  |   | 63,239 
|Japan                           |  |              | 79,009  |      |   | 40,790  |  |   | 35,530 
|China                           |  |              | 63,797  |      |   | 54,324  |  |   | 39,030 
|Europe and Middle East          |  |              | 46,922  |      |   | 23,866  |  |   | 24,017 
|Other foreign                   |  |              | 32,217  |      |   | 22,792  |  |   | 23,738 
|                                |  |              |         |      |   |         |  |   |        
|Total                           |  | $            | 424,992 |      | $ | 291,411 |  | $ | 297,383
|                                |  |              |         |      |   |         |  |   |        
|Long-lived assets               |  |              |         |      |   |         |  |   |        
|Canada                          |  | $            | 16,749  |      | $ | 15,990  |  | $ | 12,019 
|United States                   |  |              | 629,102 |      |   | 16,603  |  |   | 16,994 
|Other                           |  |              | 1,072   |      |   | 175     |  |   | 78     
|                                |  |              |         |      |   |         |  |   |        
|Total                           |  | $            | 646,923 |      | $ | 32,768  |  | $ | 29,091 
|                                |  |              |         |      |   |         |  |   |        

During 2006, the Company had four customers whose purchases represented a significant portion of net revenues,
based on billing, including contract manufacturers and distributors. Net revenues from one customer represented approximately 12% of net revenues in 2006, 14% in 2005, and 12% in 2004. Net revenues from a second customer were 12% in 2006, 2005, and
2004. Net revenues from a third customer were 11% in 2006, 8% in 2005, and 12% in 2004. During 2006, the Company had two end customers, Cisco Systems and EMC Corporation, whose purchases represented greater than 10% of our total net revenues (2005
and 2004  Cisco Systems).



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NOTE 17. Net Income (Loss) Per Share

The following table sets forth the computation of basic and diluted net (loss) income per share:



|                                                                |  |                  |         |   |                  |   |                  |  |   |        
|--------------------------------------------------------------- |  | ---------------- | ------- | - | ---------------- | - | ---------------- |  | - | -------
|(in thousands, except per share amounts)                        |  | December 31,2006 |         |   | December 31,2005 |   | December 26,2004
|Numerator:                                                      |  |                  |         |   |                  |   |                  |  |   |        
|Net (loss) income                                               |  | $                | (99,892 | ) |                  | $ | 27,986           |  | $ | 51,681 
|                                                                |  |                  |         |   |                  |   |                  |  |   |        
|Denominator:                                                    |  |                  |         |   |                  |   |                  |  |   |        
|Basic weighted average common shares outstanding(1)             |  |                  | 203,470 |   |                  |   | 184,098          |  |   | 180,353
|Effect of dilutive securities:                                  |  |                  |         |   |                  |   |                  |  |   |        
|Stock options                                                   |  |                  |        |   |                  |   | 5,034            |  |   | 8,550  
|                                                                |  |                  |         |   |                  |   |                  |  |   |        
|Basic and diluted weighted average common shares outstanding(1) |  |                  | 203,470 |   |                  |   | 189,132          |  |   | 188,903
|                                                                |  |                  |         |   |                  |   |                  |  |   |        
|Basic net (loss) income per share                               |  | $                | (0.49   | ) |                  | $ | 0.15             |  | $ | 0.29   
|                                                                |  |                  |         |   |                  |   |                  |  |   |        
|Diluted net (loss) income per share                             |  | $                | (0.49   | ) |                  | $ | 0.15             |  | $ | 0.27   
|                                                                |  |                  |         |   |                  |   |                  |  |   |        

In 2006, the Company had approximately 6.0 million options that were not included in diluted net loss per
share because they would be antidilutive.



|(1) | PMC-Sierra, Ltd. Special Shares are included in the calculation of basic weighted average common shares outstanding.
|--- | --------------------------------------------------------------------------------------------------------------------

NOTE 18. Comprehensive Income

The
components of comprehensive income, net of tax, are as follows:



|                                                                                                         |  |                  |          |   |                  |   |                  |  |   |        |  
|-------------------------------------------------------------------------------------------------------- |  | ---------------- | -------- | - | ---------------- | - | ---------------- |  | - | ------ | -
|(in thousands)                                                                                           |  | December 31,2006 |          |   | December 31,2005 |   | December 26,2004 | 
|Net (loss) income                                                                                        |  | $                | (99,892  | ) |                  | $ | 27,986           |  | $ | 51,681 |  
|Other comprehensive (loss) income:                                                                       |  |                  |          |   |                  |   |                  |  |   |        |  
|Change in net unrealized gains on investments, net of tax of $91 in 2006 (2005 - $246 and 2004 - $1,083) |  |                  | (12      | ) |                  |   | 929              |  |   | (1,559 | )
|Change in fair value of derivatives, net of tax of $1,530 in 2006 ( 2005 - $727 and 2004 - $20)          |  |                  | (2,838   | ) |                  |   | 444              |  |   | 71     |  
|                                                                                                         |  |                  |          |   |                  |   |                  |  |   |        |  
|Total                                                                                                    |  | $                | (102,742 | ) |                  | $ | 29,359           |  | $ | 50,193 |  
|                                                                                                         |  |                  |          |   |                  |   |                  |  |   |        |  



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PART II



|ITEM 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
|------- | -------------------------------------------------------------------------------------

None.



|ITEM 9A. | Controls and Procedures.
|-------- | ------------------------

In evaluating the effectiveness of our
internal control over financial reporting as of December 31, 2006, we considered the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and
compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a
risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a
control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.

Following the completion of an intensive internal investigation during the second quarter of fiscal 2006, the Company concluded that there were material accounting
errors which resulted from material weaknesses in our internal controls and procedures with respect to a number of stock option grants during the period 1998 to 2001. Some of these stock options were granted with an exercise price equal to the
NASDAQ closing market price for our common stock on the date set forth on written consents signed by directors or the date communicated by the directors who believed they had appropriate delegated authority to grant the options. We
used the stated date of these consents as the measurement date for the purpose of accounting for them under GAAP, and as a result recorded no compensation expense in connection with the grants.

The Company concluded that a number of written consents were not fully executed or effective on the stated dates and thus that using the stated date as the measurement
date was incorrect. We determined a revised measurement date for each stock option grant based on the information now available to us. Generally, the changes in measurement dates are due to several kinds of errors:



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| |  |  | we treated unanimous written consents approving stock option grants as effective on the date stated on the consent, instead of the date upon which we received the
consent form containing the last signature required for unanimity; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we treated option grants to multiple employees as effective prior to the date upon which we had determined the exact number of options that would be granted to each
individual employee, or we failed to assure that lists of grantees and amounts of stock option grants could not be changed following the date of grant; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we failed to assure that there were written minutes for all meetings of the Compensation Committee or Board of Directors that documented the grant of stock options
rather than relying on verbal approvals or failed to assure that there would be no missing documents with respect to stock option grants;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we failed to assure that our Stock Administration and Human Resources personnel received adequate supervision and training on how to comply with the requirements of
accounting standard APB 25 and that our personnel entered stock option grants into our share management accounting software on a timely basis; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we failed to assure that there was proper delegation of authority to grant stock options and that documents evidencing delegation of authority and selection of
dates for stock grants were completed on a timely basis.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

These actions and failures led to the restatement of our financial statements
and therefore constitute material weaknesses in our internal controls at the time the first stock option awards were first recorded.

Restatement of the Consolidated Financial Statements

In the second quarter of 2006, after an internal review of past option grants, we
identified certain stock option grants, primarily from the years 1998-2001, where evidence to support selected measurement dates was unclear. The Audit Committee of the Board of Directors completed a review of the Companys stock option
practices with the assistance of independent counsel. The Audit Committee concluded that, while the Company used incorrect accounting measurement dates for certain stock option grants, as more fully discussed above, those errors were not a product
of any deliberate misconduct by the Companys executives, staff or members of the Board of Directors.

The Company has, however, restated certain
financial results. In cases where the closing market price on the revised measurement date exceeded the NASDAQ closing market price on the original measurement date, we have determined compensation expense equal to this excess to be recognized over
the vesting term of each option or until the option was surrendered during our six month and a day option exchange program, at which point any unamortized compensation expense was accelerated into the period in which the options were
surrendered for our 2002 option exchange program. By September 30, 2002, all options granted between 1998 and 2001 for which we determined we would recognize additional stock based compensation expense were either fully vested or were
surrendered by employees so that all such stock-based compensation expense was recognized.

As a result, we adjusted the components of our opening
stockholders equity on the balance sheet for 2003 and subsequent years. The effect of the adjustments was to increase each of capital stock and paid-in capital and accumulated deficit on 2003 and subsequent balance sheets by approximately $89
million. These are offsetting reclassification entries within stockholders equity on the balance sheet and the total opening amount of stockholders equity in 2003 did not change. The restatement had no impact on our statements of
operations or statements of cash flows in 2003 or subsequent periods.



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To remediate the material weakness in the recording of stock option grants described above well prior to
December 31, 2006, we have implemented additional measures since the 1998-2001 period in which most of the options with improper measurement dates were granted. These additional measures include:



| |  |  | In November 2002, the Chief Financial Officer undertook to review on a prospective basis the Companys grants of stock options made as the grants occurred and
therefore initiated many of the remedial actions described below.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company formed a Disclosure Committee which operates independently from the Chief Financial Officer and considers the financial statement disclosure
implications of various Company activities, including the accounting for stock options granted.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company increased supervision and review by the Chief Financial Officer of work product of the stock administration group and members of the human resources
staff who are involved with the granting of stock options and the stock grant processes as well as records generated by outside counsel with respect to stock administration.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company provided additional training for personnel in areas associated with the stock option granting processes to increase competency levels of the personnel
involved.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In 2004 and 2005 the Company retained an independent public accounting firm to assist in carrying out internal audit activities and in complying with the
requirements to certify its internal control over financial reporting. One of the key business cycles identified was the stock administration function. Control objectives and related control activities were identified, evaluated and tested, and
found to be operating effectively.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In concluding that our disclosure controls and procedures were effective as of December 31,
2006, management considered, among other things, the control deficiencies related to accounting for stock-based compensation and control environment, which resulted in the need to restate our previously issued financial statements as disclosed in
Note 2 to the Consolidated Financial Statements included in Item 8 of this report. Management concluded that the control deficiencies that resulted in the restatement of the previously issued financial statements did not constitute a material
weakness as of December 31, 2006 because management determined that as of December 31, 2006 there were effective controls designed and in place to prevent or detect a material misstatement and therefore the likelihood of stock-based
compensation being materially misstated is not more than remote.

Conclusion Regarding the Effectiveness of Disclosure Controls and
Procedures

Our chief executive officer and our chief financial officer evaluated our disclosure controls and procedures as defined in
Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 as amended (the Exchange Act) as of December 31, 2006. They concluded that as of the evaluation date, our disclosure controls and procedures are effective to
ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate
to allow timely decisions regarding required disclosure, and that such information is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.



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Managements Annual 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) and 15d -15(f) of the Securities Exchange Act of 1934 as amended).

Our management assessed the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control 
Integrated Framework. Based on our assessment and those criteria, management believes that we maintained effective control over financial reporting as of December 31, 2006.

We have excluded from our assessment the internal control over financial reporting at Passave, Inc., which was acquired on May 4, 2006, and whose financial statements constitute 3.2% and 4.0% of net and total
assets, respectively, 7.2% of revenues, and 22.3% of net loss of the consolidated financial statement amounts as of December 31, 2006.

Because of its
inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Deloitte and Touche LLP, the independent
registered public accounting firm that audited the financial statements included in this Annual Report, has issued an attestation report on managements assessment of the registrants internal control over financial reporting. The
attestation report is included herein.

Changes in Internal Controls over Financial Reporting

There were no changes in our internal controls during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.



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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of PMC-Sierra, Inc.

We have
audited managements assessment, included in the accompanying Managements Annual Report on Internal Control over Financial Reporting, that PMC-Sierra, Inc. and subsidiaries (the Company) maintained effective internal control over
financial reporting as of December 31, 2006 based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. As described in Managements Annual
Report on Internal Control over Financial Reporting, management excluded from its assessment the internal control over financial reporting at Passave, Inc., which was acquired on May 4, 2006 and whose financial statements constitute 3.2 percent and
4.0 percent of net and total assets, respectively, 7.2 percent of revenues, and 22.3 percent of net loss of the consolidated financial statement amounts as of and for the year ended December 31, 2006. Accordingly, our audit did not include the
internal control over financial reporting at Passave, Inc. The Companys management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express an opinion on managements assessment and an opinion on the effectiveness of the Companys internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting,
evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinions.

A companys internal control over financial reporting is a process designed by, or under the supervision of, the
companys principal executive and principal financial officers, or persons performing similar functions, and effected by the companys board of directors, management, and other personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors
of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls,
material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are



105



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subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.

In our opinion, managements assessment that the Company maintained effective internal
control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the criteria established in Internal ControlIntegrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of
the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2006 of the Company and our report dated February 28, 2007 expressed an
unqualified opinion on those financial statements and financial statement schedule and included an explanatory paragraph regarding the Companys adoption of Statement of Financial Accounting Standard No. 123(R) Share-Based Payment.

/s/ DELOITTE & TOUCHE LLP

Independent Registered Public
Accountants

Vancouver, Canada

February 28, 2007



|ITEM 9B. | Other Information.
|-------- | ------------------

None.



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PART III



|ITEM 10. | Directors, Executive Officers and Corporate Governance.
|-------- | -------------------------------------------------------

The
information concerning our directors and executive officers required by this Item is incorporated by reference from the information set forth in the sections entitled Election of Directors, Code of Business Conduct and
Ethics, Executive Officers, and Section 16(a) Beneficial Ownership Reporting Compliance in our Proxy Statement for the 2007 Annual Stockholder Meeting.



|ITEM 11. | Executive Compensation.
|-------- | -----------------------

The information required by this Item is
incorporated by reference from the information set forth in the sections entitled Director Compensation and Executive Compensation in our Proxy Statement for the 2007 Annual Stockholder Meeting.



|ITEM 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
|-------- | -----------------------------------------------------------------------------------------------

The information concerning security ownership of certain beneficial owners that is required by this Item is incorporated by reference from the information set forth in the section entitled Common Stock Ownership
of Certain Beneficial Owners and Management in our Proxy Statement for the 2007 Annual Stockholder Meeting.

Equity Compensation Plan Information:

The following table provides information as of December 31, 2006 with respect to the shares of our common stock that may be issued under our existing
equity compensation plans.



|                                                               |  |                                                                      |  |                                                      |       |                                                                                          |            |    
|-------------------------------------------------------------- |  | -------------------------------------------------------------------- |  | ---------------------------------------------------- | ----- | ---------------------------------------------------------------------------------------- | ---------- | ---
|                                                               |  | Number of Securities tobe issued upon exerciseof outstanding options |  | Weighted-averageexercise price ofoutstanding options |       | Number of securitiesremaining available forfuture
issuanceunder equity compensationplans |           
|Equity compensation plans approved by security holders (1)     |  | 26,921,936                                                           |  | $                                                    | 10.01 |                                                                                          | 22,470,831 | (2)
|Equity compensation plans not approved by security holders (3) |  | 6,072,259                                                            |  | $                                                    | 7.58  |                                                                                          | 11,099,132 |    
|                                                               |  |                                                                      |  |                                                      |       |                                                                                          |            |    
|Balance at December 31, 2006                                   |  | 32,994,195                                                           |  | $                                                    | 9.55  |                                                                                          | 33,569,963 |    
|                                                               |  |                                                                      |  |                                                      |       |                                                                                          |            |    



|(1) | Consists of the 1994 Incentive Stock Plan (the 1994 Plan) and the 1991 Employee Stock Purchase Plan (the 1991 Plan).
|--- | ------------------------------------------------------------------------------------------------------------------------



|(2) | Includes 14,567,444 shares available for issuance in the 1994 plan and 7,903,387 shares available for issuance in the 1991 Plan.
|--- | --------------------------------------------------------------------------------------------------------------------------------



|(3) | Consists of the 2001 Stock Option Plan (the 2001 Plan), which was created to replace a number of stock option plans assumed by us in connection with mergers and
acquisitions we completed prior to 2001. The number of options that may be granted under the 2001
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Plan equals (i) the number of shares reserved under the assumed stock option plans that were not
subject to outstanding or exercised options plus (ii) the number of options that were outstanding at the time the plans were assumed but that have subsequently been cancelled plus (iii) 10 million shares that were added to the plan in
2003. Also includes Passave Inc. 2003 Israeli Option Plan (the 2003 Plan) and the Passave, Inc 2005 U.S. Stock Incentive Plan (the 2005 Plan), which were assumed through the Passave acquisition.

In accordance with the terms of the plans, on January 1, 2007 an additional 2,106,903 options were automatically available for issuance under the 1991 Plan.



|ITEM 13. | Certain Relationships and Related Transactions, and Director Independence.
|-------- | --------------------------------------------------------------------------

The information required by this Item is incorporated by reference from the information set forth in the section entitled Executive Compensation Change of Control and Severance Agreements in our Proxy Statement for the 2007
Annual Stockholder Meeting.



|ITEM 14. | Principal Accountant Fees and Services.
|-------- | ---------------------------------------

The information required
by this Item is incorporated by reference in our Proxy Statement for the 2007 Annual Stockholder Meeting.

PART IV



|ITEM 15. | Exhibits and Financial Statement Schedules.
|-------- | -------------------------------------------



|    |  |    |  |                                                                                                                                                                                                    
|--- |  | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | 1. |  | Consolidated Financial Statements                                                                                                                                                                  
|    |  |   
|    |  |    |  | The financial statements (including the notes thereto) listed in the accompanying index to financial statements and financial statement schedules are filed within this Annual Report on Form
10-K.
|    |  |   
|    |  | 2. |  | Financial Statement Schedules                                                                                                                                                                      
|    |  |   
|    |  |    |  | Financial Statement Schedules required by this item are listed on page 116 of this Annual Report on Form 10-K.                                                                                     
|    |  |   
|    |  | 3. |  | Exhibits                                                                                                                                                                                           
|    |  |   
|    |  |    |  | The exhibits listed under Item 15(c) are filed as part of this Form 10-K Annual Report.                                                                                                            



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|(b) | Exhibits pursuant to Item 601 of Regulation S-K.
|--- | ------------------------------------------------

Incorporated by Reference



|              |  |                                                                                                                                                            |  |      |  |            |  |        |  |              
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- |  | ---------- |  | ------ |  | -------------
|ExhibitNumber |  | Description                                                                                                                                                |  | Form |  | Date       |  | Number |  | Filedherewith
|              |  |                                                                                                                                                            |  |      | 
|3.1           |  | Restated Certificate of Incorporation of the Registrant, as amended on May 11, 2001                                                                        |  | 10-Q |  | 05/16/2001 |  | 3.2    |  |              
|              |  |                                                                                                                                                            |  |      | 
|3.2           |  | Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock of the Registrant                               |  | S-3  |  | 11/08/2001 |  | 3.2    |  |              
|              |  |                                                                                                                                                            |  |      | 
|3.3           |  | Bylaws of the Registrant, as amended                                                                                                                       |  | 10-Q |  | 11/14/2001 |  | 3.2    |  |              
|              |  |                                                                                                                                                            |  |      | 
|4.1           |  | Specimen of Common Stock Certificate of the Registrant                                                                                                     |  | S-3  |  | 08/27/1997 |  | 4.4    |  |              
|              |  |                                                                                                                                                            |  |      | 
|4.2           |  | Exchange Agreement dated September 2, 1994 by and between the Registrant and PMC-Sierra, Ltd.                                                              |  | 8-K  |  | 02/19/1994 |  | 2.1    |  |              
|              |  |                                                                                                                                                            |  |      | 
|4.3           |  | Amendment to Exchange Agreement effective August 9, 1995                                                                                                   |  | 8-K  |  | 09/06/1995 |  | 2.1    |  |              
|              |  |                                                                                                                                                            |  |      | 
|4.4           |  | Terms of PMC-Sierra, Ltd. Special Shares                                                                                                                   |  | S-3  |  | 09/19/1995 |  | 4.3    |  |              
|              |  |                                                                                                                                                            |  |      | 
|4.5           |  | Preferred Stock Rights Agreement, as amended and restated as of July 27, 2001, by and between the Registrant and American Stock Transfer and Trust Company |  | 10-Q |  | 11/14/2001 |  | 4.3    |  |              
|              |  |                                                                                                                                                            |  |      | 
|4.6           |  | Purchase and Sale Agreement dated October 28, 2005, between PMC-Sierra, Inc. and Avago Technologies Pte. Limited                                           |  | 8-K  |  | 11/03/2005 |  | 2.1    |  |              
|              |  |                                                                                                                                                            |  |      | 
|4.7           |  | Indenture Agreement dated October 26, 2005, between the Company and U.S. Bank National Association, as trustee                                             |  | 8-K  |  | 10/26/2005 |  | 2.1    |  |              
|              |  |                                                                                                                                                            |  |      | 
|4.8           |  | Agreement and Plan of Merger dated April 4, 2006, between PMC-Sierra, Inc. and Passave Inc.                                                                |  | 8-K  |  | 04/04/2006 |  | 2.1    |  |              
|              |  |                                                                                                                                                            |  |      | 
|10.1^         |  | 1991 Employee Stock Purchase Plan, as amended                                                                                                              |  |      |  |            |  |        |  | X            
|              |  |                                                                                                                                                            |  |      | 
|10.2^         |  | 1994 Incentive Stock Plan, as amended                                                                                                                      |  |      |  |            |  |        |  | X            
|              |  |                                                                                                                                                            |  |      | 
|10.3^         |  | 2001 Stock Option Plan, as amended                                                                                                                         |  |      |  |            |  |        |  | X            



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|              |  |                                                                                                                                                                                                                                                                                                         |  |      |  |            |  |        |  |              
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- |  | ---------- |  | ------ |  | -------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                             |  | Form |  | Date       |  | Number |  | Filedherewith
|              |  |                                                                                                                                                                                                                                                                                                         |  |      | 
|10.4^         |  | Form of Indemnification Agreement between the Registrant and its directors and officers, as amended and restated                                                                                                                                                                                        |  | 10-K |  | 03/28/03   |  | 10.4   |  |              
|              |  |                                                                                                                                                                                                                                                                                                         |  |      | 
|10.5^         |  | Form of Executive Employment Agreement by and between the Registrant and the executive officers                                                                                                                                                                                                         |  | 10-K |  | 03/28/03   |  | 10.5   |  |              
|              |  |                                                                                                                                                                                                                                                                                                         |  |      | 
|10.6          |  | Net Building Lease dated May 15, 1996 by and between PMC-Sierra, Ltd. and Pilot Pacific Developments Inc.                                                                                                                                                                                               |  | 10-K |  | 04/14/1997 |  | 10.20  |  |              
|              |  |                                                                                                                                                                                                                                                                                                         |  |      | 
|10.7          |  | Building Lease Agreements between WHTS Freedom Circle Partners, LLC and the Registrant                                                                                                                                                                                                                  |  | 10-Q |  | 08/08/2000 |  | 10.36  |  |              
|              |  |                                                                                                                                                                                                                                                                                                         |  |      | 
|10.7          |  | First Amendment to Building Lease Agreements between WHTS Freedom Circle Partners, LLC and the Registrant                                                                                                                                                                                               |  | 10-Q |  | 11/14/2001 |  | 10.46  |  |              
|              |  |                                                                                                                                                                                                                                                                                                         |  |      | 
|10.8          |  | Building Lease Agreement between Kanata Research Park Corporation and PMC-Sierra, Ltd                                                                                                                                                                                                                   |  | 10-K |  | 04/02/2001 |  | 10.44  |  |              
|              |  |                                                                                                                                                                                                                                                                                                         |  |      | 
|10.9          |  | Building Lease Agreement between Transwestern  Robinson I, LLC and PMC-Sierra US, Inc.                                                                                                                                                                                                                 |  | 10-K |  | 04/02/2001 |  | 10.45  |  |              
|              |  |                                                                                                                                                                                                                                                                                                         |  |      | 
|10.10*        |  | Forecast and Option Agreement by and among the Registrant, PMC-Sierra, Ltd., and Taiwan Semiconductor Manufacturing Corporation.                                                                                                                                                                        |  | 10-K |  | 03/20/2000 |  | 10.31  |  |              
|              |  |                                                                                                                                                                                                                                                                                                         |  |      | 
|10.11*        |  | Deposit agreement dated January 31, 2000 by and between Chartered Semiconductor Manufacturing Ltd. and the Registrant.                                                                                                                                                                                  |  | 10-Q |  | 05/10/2000 |  | 10.35  |  |              
|              |  |                                                                                                                                                                                                                                                                                                         |  |      | 
|10.13*        |  | Technology License Agreement, by and between Weitek Corporation and MIPS Computer Systems, Inc.                                                                                                                                                                                                         |  |      |  |            |  |        |  |              
|              |  |                                                                                                                                                                                                                                                                                                         |  |      | 
|              |  | Assignment Agreement, by and between Weitek Corporation and PMC-Sierra US, Inc. (formerly Quantum Effect Design, Inc.)  Amendment No. 1 to the Technology License Agreement, by and between MIPS Technologies, Inc. and
PMC-Sierra US, Inc. (formerly Quantum Effect Design, Inc.) dated March 31, 1997 |  | S-3  |  | 01/04/2002 |  | 10.47  |  |              



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|              |  |                                                                                                                      |  |      |  |            |  |        |  |              
|------------- |  | -------------------------------------------------------------------------------------------------------------------- |  | ---- |  | ---------- |  | ------ |  | -------------
|ExhibitNumber |  | Description                                                                                                          |  | Form |  | Date       |  | Number |  | Filedherewith
|              |  |                                                                                                                      |  |      | 
|10.14         |  | Sixth Amendment to Building Lease Agreement between PMC-Sierra, Ltd. and Production Court Property Holdings Inc.     |  | 10-Q |  | 11/10/2003 |  | 10.1   |  |              
|              |  |                                                                                                                      |  |      | 
|10.15         |  | Amendment for Purchase and Sale of Real Property between WHTS Freedom Circle Partners II, L.L.C. and PMC-Sierra, Inc |  | 10-Q |  | 11/10/2003 |  | 10.2   |  |              
|              |  |                                                                                                                      |  |      | 
|10.16         |  | Amendment for Purchase and Sale of Real Property between PMC-Sierra, Inc. and WB Mission Towers, L.L.C               |  | 10-Q |  | 11/10/2003 |  | 10.3   |  |              
|              |  |                                                                                                                      |  |      | 
|10.17         |  | Employment Agreement between Alan F. Krock and PMC-Sierra, Inc                                                       |  | 8-K  |  | 11/16/2006 |  | 10.1   |  |              
|              |  |                                                                                                                      |  |      | 
|10.18         |  | Employment Agreement between Steve Perna and PMC-Sierra, Inc                                                         |  | 8-K  |  | 06/09/2006 |  | 10.1   |  |              
|              |  |                                                                                                                      |  |      | 
|11.1          |  | Calculation of earnings per share (1)                                                                                |  |      |  |            |  |        |  | X            
|              |  |                                                                                                                      |  |      | 
|12.1          |  | Statement of Computation of Ratio of Earnings to Fixed Charges                                                       |  |      |  |            |  |        |  | X            
|              |  |                                                                                                                      |  |      | 
|21.1          |  | Subsidiaries of the Registrant                                                                                       |  |      |  |            |  |        |  | X            
|              |  |                                                                                                                      |  |      | 
|23.1          |  | Consent of Deloitte & Touche LLP, Independent Registered Public Accountants.                                         |  |      |  |            |  |        |  | X            
|              |  |                                                                                                                      |  |      | 
|24.1          |  | Power of Attorney (2)                                                                                                |  |      |  |            |  |        |  | X            
|              |  |                                                                                                                      |  |      | 
|31.1          |  | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer).                   |  |      |  |            |  |        |  | X            
|              |  |                                                                                                                      |  |      | 
|31.2          |  | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer).                   |  |      |  |            |  |        |  | X            



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|              |  |                                                                                                                           |  |      |  |      |  |        |  |              
|------------- |  | ------------------------------------------------------------------------------------------------------------------------- |  | ---- |  | ---- |  | ------ |  | -------------
|ExhibitNumber |  | Description                                                                                                               |  | Form |  | Date |  | Number |  | Filedherewith
|              |  |                                                                                                                           |  |      | 
|32.1          |  | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer) (furnished, not filed). |  |      |  |      |  |        |  | X            
|              |  |                                                                                                                           |  |      | 
|32.2          |  | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer) (furnished, not filed). |  |      |  |      |  |        |  | X            



|* | Confidential portions of this exhibit have been omitted and filed separately with the Commission.
|- | -------------------------------------------------------------------------------------------------



|^ | Indicates management compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 15(c) of Form 10K.
|- | ----------------------------------------------------------------------------------------------------------------------------



|(1) | Refer to Note 17 of the consolidated financial statements included in Item 8 of Part II of this Annual Report.
|--- | --------------------------------------------------------------------------------------------------------------



|(2) | Refer to Signature page of this Annual Report.
|--- | ----------------------------------------------

---

|(c) | Financial Statement Schedules required by this item are listed on page 115 of this Annual Report on Form 10-K.
|--- | --------------------------------------------------------------------------------------------------------------



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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|                    |  |                                                         
|------------------- |  | --------------------------------------------------------
|                    |  | PMC-SIERRA, INC.                                        
|                    |  | (Registrant)                                            
|                    | 
|Date: March 1, 2007 |  | /s/ Alan F. Krock                                       
|                    |  | Alan F. Krock                                           
|                    |  | Vice President, (duly authorized officer)               
|                    |  | Chief Financial Officer and Principal Accounting Officer



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POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Robert L. Bailey and Alan F. Krock, jointly and severally, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may or cause to be done by virtue hereof.

Pursuant to
the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.



|                                             |  |                                                                                                         |  |              
|-------------------------------------------- |  | ------------------------------------------------------------------------------------------------------- |  | -------------
|Name                                         |  | Title                                                                                                   |  | Date         
|                                             |  |                                                                                                        
|/s/ Robert L. Bailey  Robert L.
Bailey       |  | President, Chief Executive Officer (Principal Executive Officer) and Chairman of the Board of Directors |  | March 1, 2007
|                                             |  |                                                                                                        
|/s/ Alan F. Krock  Alan F.
Krock             |  | Vice President, Chief Financial Officer (and Principal Accounting Officer)                              |  | March 1, 2007
|                                             |  |                                                                                                        
|/s/ Richard E. Belluzzo  Richard E.
Belluzzo |  | Director                                                                                                |  | March 1, 2007
|                                             |  |                                                                                                        
|/s/ James V. Diller  James V.
Diller         |  | Director                                                                                                |  | March 1, 2007
|                                             |  |                                                                                                        
|/s/ William Kurtz  William
Kurtz             |  | Director                                                                                                |  | March 1, 2007
|                                             |  |                                                                                                        
|/s/ Frank Marshall   Frank
Marshall          |  | Director                                                                                                |  | March 1, 2007
|                                             |  |                                                                                                        
|/s/ Jonathan Judge  Jonathan
Judge           |  | Director                                                                                                |  | March 1, 2007
|                                             |  |                                                                                                        
|/s/ Michael Farese  Michael
Farese           |  | Director                                                                                                |  | March 1, 2007



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SCHEDULE II - Valuation and Qualifying Accounts



|                                                       |  |                            |        |                                    |   |        |            |  |   |                       |   |  |   |       
|------------------------------------------------------ |  | -------------------------- | ------ | ---------------------------------- | - | ------ | ---------- |  | - | --------------------- | - |  | - | ------
|                                                       |  | (in thousands)            
|                                                       |  | Balance atbeginningof year |        | Charged toexpensesor otheraccounts |   |        | Write-offs |  |   | Balance atend of year
|Allowance for doubtful accounts:                       |  |                            |        |                                    |   |        |            |  |   |                       |   |  |   |       
|December 31, 2006                                      |  | $                          | 1,768  |                                    | $ |       |            |  | $ |                      |   |  | $ | 1,768 
|December 31, 2005                                      |  | $                          | 2,665  |                                    | $ | (897   | )          |  | $ |                      |   |  | $ | 1,768 
|December 26, 2004                                      |  | $                          | 2,849  |                                    | $ | (184   | )          |  | $ |                      |   |  | $ | 2,665 
|                                                       |  |                            |        |                                   
|Allowance for obsolete inventory and excess inventory: |  |                            |        |                                    |   |        |            |  |   |                       |   |  |   |       
|December 31, 2006                                      |  | $                          | 8,454  |                                    | $ | 2,276  |            |  | $ | (2,321                | ) |  | $ | 8,409 
|December 31, 2005                                      |  | $                          | 12,190 |                                    | $ | (1,904 | )          |  | $ | (1,832                | ) |  | $ | 8,454 
|December 26, 2004                                      |  | $                          | 16,199 |                                    | $ | (24    | )          |  | $ | (3,985                | ) |  | $ | 12,190
|                                                       |  |                            |        |                                   
|Allowance for warranty claims:                         |  |                            |        |                                    |   |        |            |  |   |                       |   |  |   |       
|December 31, 2006                                      |  | $                          | 3,997  |                                    | $ | 1,093  |            |  | $ | (759                  | ) |  | $ | 4,331 
|December 31, 2005                                      |  | $                          | 3,492  |                                    | $ | 712    |            |  | $ | (207                  | ) |  | $ | 3,997 
|December 26, 2004                                      |  | $                          | 2,897  |                                    | $ | 1,343  |            |  | $ | (748                  | ) |  | $ | 3,492 



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INDEX TO EXHIBITS



|              |  |                                                                                                        |  |           
|------------- |  | ------------------------------------------------------------------------------------------------------ |  | ----------
|ExhibitNumber |  | Description                                                                                            |  | PageNumber
|              |  |                                                                                                       
|10.1          |  | 1991 Employee Stock Purchase Plan, as amended                                                          |  |           
|              |  |                                                                                                       
|10.2          |  | 1994 Incentive Stock Plan, as amended                                                                  |  |           
|              |  |                                                                                                       
|10.3          |  | 2001 Stock Option Plan, as amended                                                                     |  |           
|              |  |                                                                                                       
|12.1          |  | Statement of Computation of Ratio of Earnings to Fixed Charges                                         |  |           
|              |  |                                                                                                       
|21.1          |  | Subsidiaries of the Registrant                                                                         |  |           
|              |  |                                                                                                       
|23.1          |  | Consent of Deloitte & Touche LLP                                                                       |  |           
|              |  |                                                                                                       
|31.1          |  | Certification of Chief Executive Officer pursuant to Section 302 (a) of the Sarbanes-Oxley Act of 2002 |  |           
|              |  |                                                                                                       
|31.2          |  | Certification of Chief Financial Officer pursuant to Section 302 (a) of the Sarbanes-Oxley Act of 2002 |  |           
|              |  |                                                                                                       
|32.1          |  | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer)      |  |           
|              |  |                                                                                                       
|32.2          |  | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer)      |  |           



116