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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





Form 10 - Q







|x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ---------------------------------------------------------------------------------------

for the quarterly period ended September 27, 2009



| ̈ | 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)





A Delaware
Corporation - I.R.S. NO. 94-2925073

3975 Freedom Circle

Santa Clara, CA 95054

(408) 239-8000





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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such files).    Yes   ̈    No   ̈

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



|                        |  |   |  |                           |  |  
|----------------------- |  | - |  | ------------------------- |  | -
|Large accelerated filer |  | x |  | Accelerated filer         |  |  ̈
|                        |  |   | 
|Non- accelerated filer  |  |  ̈ |  | Smaller reporting company |  |  ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).    Yes   ̈    No  x

Common shares outstanding at November 2, 2009  227,493,259









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INDEX



|                               |  |                                                                                       |  |   
|------------------------------ |  | ------------------------------------------------------------------------------------- |  | --
|                               |  | Page                                                                                 
|PART I - FINANCIAL INFORMATION |  |                                                                                      
|                               |  |                                                                                      
|Item 1.                        |  | Financial Statements (unaudited)                                                      |  |   
|                               |  |                                                                                      
|                               |  | -    Condensed Consolidated Statements of Operations                                  |  | 3 
|                               |  |                                                                                      
|                               |  | -    Condensed Consolidated Balance Sheets                                            |  | 4 
|                               |  |                                                                                      
|                               |  | -    Condensed Consolidated Statements of Cash Flows                                  |  | 5 
|                               |  |                                                                                      
|                               |  | -    Notes to the Condensed Consolidated Financial Statements                         |  | 6 
|                               |  |                                                                                      
|Item 2.                        |  | Managements Discussion and Analysis of Financial Condition and Results of
Operations |  | 31
|                               |  |                                                                                      
|Item 3.                        |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 50
|                               |  |                                                                                      
|Item 4.                        |  | Controls and Procedures                                                               |  | 53
|                               | 
|PART II - OTHER INFORMATION    |  |                                                                                      
|                               |  |                                                                                      
|Item 1.                        |  | Legal Proceedings                                                                     |  | 54
|                               |  |                                                                                      
|Item 1A.                       |  | Risk Factors                                                                          |  | 56
|                               |  |                                                                                      
|Item 2.                        |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 72
|                               |  |                                                                                      
|Item 3.                        |  | Defaults Upon Senior Securities                                                       |  | 72
|                               |  |                                                                                      
|Item 4.                        |  | Submission Of Matters To A Vote By Stockholders                                       |  | 72
|                               |  |                                                                                      
|Item 5.                        |  | Other Information                                                                     |  | 72
|                               |  |                                                                                      
|Item 6.                        |  | Exhibits                                                                              |  | 72
|                               | 
|Signatures                     |  | 73                                                                                   



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##### Table of Contents

Part I - FINANCIAL INFORMATION

Item 1 - Financial Statements (Unaudited)

PMC-Sierra, Inc.

CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except for per share amounts)



|                                                                                         |                   |                    |         |                                       |                   |   |                   |   |  |                                       |         |   |  |   |         |  
|---------------------------------------------------------------------------------------- | ----------------- | ------------------ | ------- | ------------------------------------- | ----------------- | - | ----------------- | - |  | ------------------------------------- | ------- | - |  | - | ------- | -
|                                                                                         |                   | Three Months Ended |         |                                       | Nine Months Ended |  
|                                                                                         | September 27,2009 |                    |         | September 28,2008As adjusted - Note 1 |                   |   | September 27,2009 |   |  | September 28,2008As adjusted - Note 1 |        
|Net revenues                                                                             |                   | $                  | 130,876 |                                       |                   | $ | 139,356           |   |  | $                                     | 356,642 |   |  | $ | 404,235 |  
|Cost of revenues                                                                         |                   |                    | 44,432  |                                       |                   |   | 47,373            |   |  |                                       | 120,648 |   |  |   | 139,752 |  
|                                                                                         |                   |                    |         |                                       |                   |   |                   |   |  |                                       |         |   |  |   |         |  
|Gross profit                                                                             |                   |                    | 86,444  |                                       |                   |   | 91,983            |   |  |                                       | 235,994 |   |  |   | 264,483 |  
|                                                                                         |                   |                    |         |                                      
|Other costs and expenses:                                                                |                   |                    |         |                                       |                   |   |                   |   |  |                                       |         |   |  |   |         |  
|Research and development                                                                 |                   |                    | 35,823  |                                       |                   |   | 39,688            |   |  |                                       | 110,834 |   |  |   | 116,993 |  
|Selling, general and administrative                                                      |                   |                    | 19,743  |                                       |                   |   | 23,565            |   |  |                                       | 63,854  |   |  |   | 71,954  |  
|Amortization of purchased intangible assets                                              |                   |                    | 9,836   |                                       |                   |   | 9,836             |   |  |                                       | 29,508  |   |  |   | 29,508  |  
|Restructuring costs and other charges                                                    |                   |                    | 175     |                                       |                   |   | (259              | ) |  |                                       | 813     |   |  |   | 785     |  
|                                                                                         |                   |                    |         |                                       |                   |   |                   |   |  |                                       |         |   |  |   |         |  
|Income from operations                                                                   |                   |                    | 20,867  |                                       |                   |   | 19,153            |   |  |                                       | 30,985  |   |  |   | 45,243  |  
|                                                                                         |                   |                    |         |                                      
|Other income (expense):                                                                  |                   |                    |         |                                       |                   |   |                   |   |  |                                       |         |   |  |   |         |  
|Foreign exchange gain (loss)                                                             |                   |                    | (1,094  | )                                     |                   |   | 873               |   |  |                                       | 109     |   |  |   | 2,965   |  
|Gain on repurchase of senior convertible notes, net and amortization of debt issue costs |                   |                    | (50     | )                                     |                   |   | (94               | ) |  |                                       | (150    | ) |  |   | 4,599   |  
|Loss on subleased facilities                                                             |                   |                    |        |                                       |                   |   |                  |   |  |                                       | (538    | ) |  |   |        |  
|Interest income (expense), net                                                           |                   |                    | (487    | )                                     |                   |   | 181               |   |  |                                       | (2,139  | ) |  |   | 622     |  
|Recovery on investments                                                                  |                   |                    |        |                                       |                   |   | 400               |   |  |                                       |        |   |  |   | 400     |  
|Loss on investment securities                                                            |                   |                    |        |                                       |                   |   | (11,790           | ) |  |                                       |        |   |  |   | (11,790 | )
|                                                                                         |                   |                    |         |                                       |                   |   |                   |   |  |                                       |         |   |  |   |         |  
|Income before provision for income taxes                                                 |                   |                    | 19,236  |                                       |                   |   | 8,723             |   |  |                                       | 28,267  |   |  |   | 42,039  |  
|Recovery of (provision for) income taxes                                                 |                   |                    | 8,583   |                                       |                   |   | (4,266            | ) |  |                                       | 3,484   |   |  |   | 77,445  |  
|                                                                                         |                   |                    |         |                                       |                   |   |                   |   |  |                                       |         |   |  |   |         |  
|Net income                                                                               |                   | $                  | 27,819  |                                       |                   | $ | 4,457             |   |  | $                                     | 31,751  |   |  | $ | 119,484 |  
|                                                                                         |                   |                    |         |                                       |                   |   |                   |   |  |                                       |         |   |  |   |         |  
|                                                                                         |                   |                    |         |                                      
|Net income per common share - basic                                                      |                   | $                  | 0.12    |                                       |                   | $ | 0.02              |   |  | $                                     | 0.14    |   |  | $ | 0.54    |  
|Net income per common share - diluted                                                    |                   | $                  | 0.12    |                                       |                   | $ | 0.02              |   |  | $                                     | 0.14    |   |  | $ | 0.53    |  
|                                                                                         |                   |                    |         |                                      
|Shares used in per share calculation - basic                                             |                   |                    | 227,123 |                                       |                   |   | 222,335           |   |  |                                       | 225,276 |   |  |   | 221,091 |  
|Shares used in per share calculation - diluted                                           |                   |                    | 231,863 |                                       |                   |   | 225,803           |   |  |                                       | 228,172 |   |  |   | 223,573 |  

See notes to the condensed consolidated financial statements.



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PMC-Sierra, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except par value)



|                                                                                                                 |  |                   |           |   |                                      |   |           |  
|---------------------------------------------------------------------------------------------------------------- |  | ----------------- | --------- | - | ------------------------------------ | - | --------- | -
|                                                                                                                 |  | September 27,2009 |           |   | December 28,2008As adjusted - Note 1 |  
|ASSETS:                                                                                                          |  |                   |           |   |                                      |   |           |  
|Current assets:                                                                                                  |  |                   |           |   |                                      |   |           |  
|Cash and cash equivalents                                                                                        |  | $                 | 181,044   |   |                                      | $ | 97,839    |  
|Short-term investments                                                                                           |  |                   | 94,019    |   |                                      |   | 209,685   |  
|Accounts receivable, net of allowance for doubtful accounts of $1,226 (2008 - $1,148)                            |  |                   | 48,261    |   |                                      |   | 40,191    |  
|Inventories, net                                                                                                 |  |                   | 26,259    |   |                                      |   | 34,003    |  
|Prepaid expenses and other current assets                                                                        |  |                   | 14,501    |   |                                      |   | 9,683     |  
|Deferred tax assets                                                                                              |  |                   | 3,994     |   |                                      |   | 3,949     |  
|                                                                                                                 |  |                   |           |   |                                      |   |           |  
|Total current assets                                                                                             |  |                   | 368,078   |   |                                      |   | 395,350   |  
|Goodwill                                                                                                         |  |                   | 396,144   |   |                                      |   | 396,144   |  
|Intangible assets, net                                                                                           |  |                   | 121,626   |   |                                      |   | 153,956   |  
|Investment securities                                                                                            |  |                   | 144,519   |   |                                      |   |          |  
|Prepaid expenses                                                                                                 |  |                   | 22,751    |   |                                      |   |          |  
|Property and equipment, net                                                                                      |  |                   | 14,253    |   |                                      |   | 15,858    |  
|Investments and other assets                                                                                     |  |                   | 8,753     |   |                                      |   | 3,512     |  
|Deposits for wafer fabrication capacity                                                                          |  |                   | 5,145     |   |                                      |   | 5,145     |  
|                                                                                                                 |  |                   |           |   |                                      |   |           |  
|                                                                                                                 |  | $                 | 1,081,269 |   |                                      | $ | 969,965   |  
|                                                                                                                 |  |                   |           |   |                                      |   |           |  
|LIABILITIES AND STOCKHOLDERS EQUITY:                                                                            |  |                   |           |   |                                      |   |           |  
|Current liabilities:                                                                                             |  |                   |           |   |                                      |   |           |  
|Accounts payable                                                                                                 |  | $                 | 26,175    |   |                                      | $ | 17,066    |  
|Accrued liabilities                                                                                              |  |                   | 53,139    |   |                                      |   | 51,390    |  
|Liability for unrecognized tax benefit                                                                           |  |                   | 28,565    |   |                                      |   | 23,398    |  
|Income taxes payable                                                                                             |  |                   | 3,807     |   |                                      |   |          |  
|Deferred income taxes                                                                                            |  |                   | 1,767     |   |                                      |   | 2,042     |  
|Accrued restructuring costs                                                                                      |  |                   | 4,565     |   |                                      |   | 5,938     |  
|Deferred income                                                                                                  |  |                   | 11,958    |   |                                      |   | 11,200    |  
|                                                                                                                 |  |                   |           |   |                                      |   |           |  
|Total current liabilities                                                                                        |  |                   | 129,976   |   |                                      |   | 111,034   |  
|2.25% senior convertible notes due October 15, 2025                                                              |  |                   | 57,584    |   |                                      |   | 55,357    |  
|Long-term obligations                                                                                            |  |                   | 4,578     |   |                                      |   | 503       |  
|Deferred taxes                                                                                                   |  |                   | 21,598    |   |                                      |   | 17,806    |  
|Liability for unrecognized tax benefit                                                                           |  |                   | 8,664     |   |                                      |   | 3,352     |  
|                                                                                                                 |  |                  
|PMC special shares convertible into 1,648 (2008 - 2,045) shares of common stock                                  |  |                   | 2,115     |   |                                      |   | 2,655     |  
|                                                                                                                 |  |                  
|Contingencies (Note 11)                                                                                          |  |                   |           |   |                                      |   |           |  
|                                                                                                                 |  |                  
|Stockholders equity:                                                                                            |  |                   |           |   |                                      |   |           |  
|Common stock, par value $.001: 900,000 shares authorized; 226,985 shares issued and outstanding (2008 - 221,335) |  |                   | 247       |   |                                      |   | 241       |  
|Additional paid in capital                                                                                       |  |                   | 1,512,218 |   |                                      |   | 1,471,476 |  
|Accumulated other comprehensive income (loss)                                                                    |  |                   | 1,779     |   |                                      |   | (3,218    | )
|Accumulated deficit                                                                                              |  |                   | (657,490  | ) |                                      |   | (689,241  | )
|                                                                                                                 |  |                   |           |   |                                      |   |           |  
|Total stockholders equity                                                                                       |  |                   | 856,754   |   |                                      |   | 779,258   |  
|                                                                                                                 |  |                   |           |   |                                      |   |           |  
|                                                                                                                 |  | $                 | 1,081,269 |   |                                      | $ | 969,965   |  
|                                                                                                                 |  |                   |           |   |                                      |   |           |  

See notes to the condensed consolidated financial statements.



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PMC-Sierra, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)



|                                                                                  |                   |                   |          |                                       |  |   |          |  
|--------------------------------------------------------------------------------- | ----------------- | ----------------- | -------- | ------------------------------------- |  | - | -------- | -
|                                                                                  |                   | Nine Months Ended |         
|                                                                                  | September 27,2009 |                   |          | September 28,2008As adjusted - Note 1 | 
|Cash flows from operating activities:                                             |                   |                   |          |                                       |  |   |          |  
|Net income                                                                        |                   | $                 | 31,751   |                                       |  | $ | 119,484  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |                   |                   |          |                                       |  |   |          |  
|Depreciation and amortization                                                     |                   |                   | 42,437   |                                       |  |   | 44,521   |  
|Stock-based compensation                                                          |                   |                   | 16,212   |                                       |  |   | 19,719   |  
|Non-cash accretion of investment securities                                       |                   |                   | (419     | )                                     |  |   |         |  
|Foreign exchange gain on tax liability, net                                       |                   |                   | 292      |                                       |  |   | (3,311   | )
|Gain on repurchase of senior convertible notes, net                               |                   |                   |         |                                       |  |   | (4,873   | )
|Loss on subleased facilities                                                      |                   |                   | 538      |                                       |  |   |         |  
|                                                                                  |                   |                  
|Changes in operating assets and liabilities:                                      |                   |                   |          |                                       |  |   |          |  
|Accounts receivable                                                               |                   |                   | (8,070   | )                                     |  |   | (6,856   | )
|Inventories                                                                       |                   |                   | 7,995    |                                       |  |   | (3,938   | )
|Prepaid expenses and other current assets                                         |                   |                   | 2,403    |                                       |  |   | 4,972    |  
|Accounts payable and accrued liabilities                                          |                   |                   | 6,598    |                                       |  |   | (22,101  | )
|Deferred income taxes and income taxes payable                                    |                   |                   | (6,893   | )                                     |  |   | (79,718  | )
|Accrued restructuring costs                                                       |                   |                   | (1,373   | )                                     |  |   | (3,971   | )
|Deferred income                                                                   |                   |                   | 758      |                                       |  |   | 288      |  
|                                                                                  |                   |                   |          |                                       |  |   |          |  
|Net cash provided by operating activities                                         |                   |                   | 92,229   |                                       |  |   | 64,216   |  
|                                                                                  |                   |                   |          |                                       |  |   |          |  
|Cash flows from investing activities:                                             |                   |                   |          |                                       |  |   |          |  
|Purchases of property and equipment                                               |                   |                   | (4,570   | )                                     |  |   | (5,406   | )
|Purchase of intangible assets                                                     |                   |                   | (1,398   | )                                     |  |   | (5,645   | )
|Distributions of short-term investments                                           |                   |                   | 170,802  |                                       |  |   |         |  
|Disposals of investment securities                                                |                   |                   | 11,142   |                                       |  |   |         |  
|Purchases of investment securities                                                |                   |                   | (209,311 | )                                     |  |   | (119,067 | )
|                                                                                  |                   |                   |          |                                       |  |   |          |  
|Net cash used in investing activities                                             |                   |                   | (33,335  | )                                     |  |   | (130,118 | )
|                                                                                  |                   |                   |          |                                       |  |   |          |  
|Cash flows from financing activities:                                             |                   |                   |          |                                       |  |   |          |  
|Repurchase of senior convertible notes                                            |                   |                   |         |                                       |  |   | (95,491  | )
|Proceeds from issuance of common stock                                            |                   |                   | 24,311   |                                       |  |   | 16,510   |  
|                                                                                  |                   |                   |          |                                       |  |   |          |  
|Net cash provided by (used in) financing activities                               |                   |                   | 24,311   |                                       |  |   | (78,981  | )
|                                                                                  |                   |                   |          |                                       |  |   |          |  
|Effect of exchange rate changes on cash and cash equivalents                      |                   |                   |         |                                       |  |   | (658     | )
|Net increase (decrease) in cash and cash equivalents                              |                   |                   | 83,205   |                                       |  |   | (145,541 | )
|Cash and cash equivalents, beginning of the period                                |                   |                   | 97,839   |                                       |  |   | 364,922  |  
|                                                                                  |                   |                   |          |                                       |  |   |          |  
|Cash and cash equivalents, end of the period                                      |                   | $                 | 181,044  |                                       |  | $ | 219,381  |  
|                                                                                  |                   |                   |          |                                       |  |   |          |  

See notes to the condensed consolidated financial statements.



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PMC-Sierra, Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1. Summary of Significant Accounting Policies

Description of business. PMC-Sierra, Inc. (the Company or PMC) designs, develops, markets and supports
semiconductor solutions for Enterprise Infrastructure, and Wide Area Network Infrastructure markets. The Company offers worldwide technical and sales support through a network of offices in North America, Europe and Asia.

Basis of presentation. The accompanying Condensed Consolidated Financial Statements have been prepared pursuant to the rules and
regulations of the United States Securities and Exchange Commission (the SEC) and United States Generally Accepted Accounting Principles (GAAP). Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules or regulations. These interim Condensed Consolidated Financial Statements are unaudited, but reflect all adjustments that are, in the
opinion of management, necessary to provide a fair statement of results for the interim periods presented. These Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and
accompanying notes in the Companys Annual Report on Form 10-K for the year ended December 28, 2008. The results of operations for the interim periods are not necessarily indicative of results to be expected in future periods. Fiscal 2009
will consist of 52 weeks and will end on Sunday, December 27, 2009. Fiscal 2008 consisted of 52 weeks and ended on Sunday, December 28, 2008. The first three quarters of 2009 and 2008 consisted of 39 weeks each.

Estimates.The preparation of financial statements and related disclosures in conformity with GAAP 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 valuation of investments, allowance for doubtful accounts, inventory reserves, depreciation and amortization, asset impairments, sales returns, warranty costs, income taxes including uncertain
tax positions, restructuring costs, assumptions used to measure the fair value of the debt component of our senior convertible notes and contingencies. Actual results could differ from these estimates.



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Inventories. Inventories are stated at the lower of cost (first-in, first-out) or
market (estimated net realizable value). Inventories (net of reserves of $9.4 million and $9.3 million at September 27, 2009 and December 28, 2008, respectively) were as follows:



|                 |  |                   |        |                  |   |       
|---------------- |  | ----------------- | ------ | ---------------- | - | ------
|(in thousands)   |  | September 27,2009 |        | December 28,2008
|Work-in-progress |  | $                 | 14,628 |                  | $ | 11,391
|Finished goods   |  |                   | 11,631 |                  |   | 22,612
|                 |  |                   |        |                  |   |       
|                 |  | $                 | 26,259 |                  | $ | 34,003
|                 |  |                   |        |                  |   |       

Derivatives and Hedging Activities.Fluctuating foreign exchange rates may
negatively impact PMCs operations and cash flows. The Company periodically hedges foreign currency forecasted transactions related to certain operating expenses. All derivatives are recorded in the Condensed Consolidated 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 income (loss). 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 (loss) and are recognized in net income (loss) when the hedged item affects net income (loss). Ineffective portions of changes in the fair
value of cash flow hedges are recognized in net income (loss). 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 (loss). During the quarter ended September 27, 2009, all hedges were designated as cash flow hedges.

Product warranties. The Company provides a limited warranty on most of its standard products and accrues for the estimated cost at the time of shipment. The Company estimates its warranty costs
based on historical failure rates and related repair or replacement costs. The change in the Companys accrued warranty obligations from December 28, 2008 to September 27, 2009 and for the same period in the prior year were as
follows:



|                                                               |  |                   |       |   |                   |   |        |  
|-------------------------------------------------------------- |  | ----------------- | ----- | - | ----------------- | - | ------ | -
|                                                               |  | Nine Months Ended |      
|(in thousands)                                                 |  | September 27,2009 |       |   | September 28,2008 |  
|Balance, beginning of the period                               |  | $                 | 6,031 |   |                   | $ | 6,239  |  
|Accrual for new warranties issued                              |  |                   | 1,074 |   |                   |   | 862    |  
|Reduction for payments and product replacements                |  |                   | (642  | ) |                   |   | (1,369 | )
|Adjustments related to changes in estimate of warranty accrual |  |                   | (423  | ) |                   |   | 358    |  
|                                                               |  |                   |       |   |                   |   |        |  
|Balance, end of the period                                     |  | $                 | 6,040 |   |                   | $ | 6,090  |  
|                                                               |  |                   |       |   |                   |   |        |  

The Companys accrual for warranty obligations is included in accrued
liabilities in the Condensed Consolidated Balance Sheet.



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Other Indemnifications.From time to time, on a limited basis, the Company
indemnifies its customers, as well as its suppliers, contractors, lessors, and others with whom it enters into contracts, against combinations of loss, expense, or liability arising from various triggering events related to the sale and use of its
products, the use of their goods and services, the use of facilities, the state of assets that the Company sells and other matters covered by such contracts, normally up to a specified maximum amount. The Company evaluates estimated losses for such
indemnifications. The Company has no history of significant indemnification claims for such obligations.

Stock-based
compensation.The Company accounts for its compensation expense for all share-based payment awards in accordance with GAAP. GAAP 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.

During the three and nine months ended September 27, 2009, the Company recognized $5.1 million and $16.2 million in stock-based
compensation expense, respectively. Where a tax deduction for stock-based compensation was available to the Company, a valuation allowance for the related deferred tax assets was recorded.

The Company uses the straight-line method over the requisite service period for attributing stock-based compensation expense. See Note 4 for
further information on stock-based compensation.

Recent Accounting Pronouncements

FASB Establishes Accounting Standards Codification

In July 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2009-01, Generally Accepted Accounting Principles (ASC Topic 105)
which establishes the FASB Accounting Standards Codification (the Codification or ASC) as the official single source of authoritative U.S. generally accepted accounting principles. All existing accounting standards are
superceded. All other accounting guidance not included in the Codification will be considered non-authoritative, except for rules and interpretive releases of the SEC, which are sources of authoritative GAAP for SEC registrants.

Referencing to the Codification is, as follows: ASC Topic XXX-YY-ZZ-AA, where XXX is the Topic, YY is the Subtopic, ZZ is the Section, and
AA is the paragraph.

Following the Codification, the Board will only issue Accounting Standards Updates (ASU)
that serve to update the Codification, provide background information about the guidance and provide the basis for conclusions on the changes to the Codification.



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The Codification is not intended, and did not change the Companys application of GAAP,
but it will change the way GAAP is organized and presented. The Codification is effective for the Companys third fiscal quarter ended September 27, 2009 financial statements and the principal impact on the Companys financial
statements is limited to disclosures as all future references to authoritative accounting literature will be referenced in accordance with the Codification.

Impact of ASC Topic 470

Effective December 29, 2008, the
Company retrospectively adopted the ASC Topic 470, the Debt Topic for the accounting of convertible debt instruments that may be settled in cash upon conversion (including partial settlements), as required, which changed the treatment for the
Companys convertible securities, which may be settled fully or partially in cash. Under ASC Topic 470, cash settled convertible securities are separated into their debt and equity components. The value assigned to the debt component is the
estimated fair value, as of the issuance date, of a similar debt instrument without the conversion feature, and the difference between the proceeds for the convertible debt and the amount reflected as debt, is recorded as equity. As a result, the
debt component is recorded at a discount from its face value, reflecting its below market coupon interest rate. The debt is subsequently accreted to its face value over its expected term, with the accretion being reflected as additional interest
expense in the consolidated statement of operations.

The Company issued senior convertible notes (the Notes) with
a face value of $225.0 million and bearing interest at a rate of 2.25% per annum in October 2005. At the date of issuance, the Companys borrowing rate for similar debt instruments without any equity conversion features was estimated to be
8.0% per annum. This borrowing rate of 8.0% was estimated using assumptions that market participants would use in pricing the liability component, including market interest rates, credit standing, yield curves and volatilities; all of
which are defined as Level 2 observable inputs. Under ASC Topic 470, at the issuance date, the debt and equity components would have been $155.6 million and $69.4 million, respectively, before considering related issuance costs. The debt, which is
recorded at a discount from its face value at issuance, is accreted to its face value over seven years, which is the earliest date at which the holders of these Notes may redeem them, with accretion being reflected as additional interest expense in
the consolidated statement of operations.

The Company recorded issuance costs of $6.8 million of which $4.7 million were
deferred and are being amortized over seven years, which is the earliest date at which the holders of these Notes may redeem them, which approximates the effective interest method. The remaining $2.1 million was recorded as equity.



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The following tables are reconciliations between amounts reported in previous filings as of
the year ended December 28, 2008 and for the third quarter of 2008 to the amounts reported in the current filing for these same periods to reflect retroactive adjustments:



|                                                                                                                                                                                                                                               |  |                                      |         |   |                                     |   |         |                                     |  |   |                |   |  |   |           |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------ | ------- | - | ----------------------------------- | - | ------- | ----------------------------------- |  | - | -------------- | - |  | - | --------- | -
|                                                                                                                                                                                                                                               |  |                                      |         |   |                                     |   |         | Year EndedDecember 28,
2008         | 
|(in thousands)                                                                                                                                                                                                                                 |  |                                      |         |   |                                     |   |         | As adjusted                         |  |   | As reported**  |  
|Assets:                                                                                                                                                                                                                                        |  |                                      |         |   |                                     |   |         |                                     |  |   |                |   |  |   |           |  
|Deferred debt issue costs*                                                                                                                                                                                                                     |  |                                      |         |   |                                     |   |         |                                     |  | $ | 774            |   |  | $ | 1,127     |  
|Total assets                                                                                                                                                                                                                                   |  |                                      |         |   |                                     |   |         |                                     |  |   | 969,965        |   |  |   | 970,318   |  
|                                                                                                                                                                                                                                               |  |                                      |         |  
|Liabilities and Stockholders Equity:                                                                                                                                                                                                          |  |                                      |         |   |                                     |   |         |                                     |  |   |                |   |  |   |           |  
|2.25% senior convertible notes due October 15, 2025                                                                                                                                                                                            |  |                                      |         |   |                                     |   |         |                                     |  |   | 55,357         |   |  |   | 68,340    |  
|Additional paid in capital                                                                                                                                                                                                                     |  |                                      |         |   |                                     |   |         |                                     |  |   | 1,471,476      |   |  |   | 1,436,306 |  
|Accumulated deficit                                                                                                                                                                                                                            |  |                                      |         |   |                                     |   |         |                                     |  |   | (689,241       | ) |  |   | (666,701  | )
|Total liabilities and stockholders equity                                                                                                                                                                                                     |  |                                      |         |   |                                     |   |         |                                     |  |   | 969,965        |   |  |   | 970,318   |  
|                                                                                                                                                                                                                                              
|*       Deferred debt issue costs are included
in the Condensed Consolidated Balance Sheets as Investments and other assets. **     Balances are as reported in the Companys Annual Report on Form 10-K for the year ended December 28, 2008. | 
|                                                                                                                                                                                                                                               |  |                                     
|                                                                                                                                                                                                                                               |  | Three Months EndedSeptember 28,
2008 |         |   | Nine Months EndedSeptember 28,
2008 |  
|(in thousands, except for per share amounts)                                                                                                                                                                                                   |  | As adjusted                          |         |   | As reported***                      |   |         | As adjusted                         |  |   | As reported*** |  
|Condensed Consolidated Statement of Operations:                                                                                                                                                                                                |  |                                      |         |   |                                     |   |         |                                     |  |   |                |   |  |   |           |  
|                                                                                                                                                                                                                                               |  |                                      |         |  
|Interest income (expense)                                                                                                                                                                                                                      |  | $                                    | 181     |   |                                     | $ | 1,481   |                                     |  | $ | 622            |   |  | $ | 5,102     |  
|                                                                                                                                                                                                                                               |  |                                      |         |  
|Gain on repurchase of senior convertible notes, net of amortization of debt issue costs                                                                                                                                                        |  |                                      | (94     | ) |                                     |   | (137    | )                                   |  |   | 4,599          |   |  |   | 871       |  
|Net income                                                                                                                                                                                                                                     |  | $                                    | 4,457   |   |                                     | $ | 5,714   |                                     |  | $ | 119,484        |   |  | $ | 120,236   |  
|Net income per common share - basic                                                                                                                                                                                                            |  | $                                    | 0.02    |   |                                     | $ | 0.03    |                                     |  | $ | 0.54           |   |  | $ | 0.54      |  
|Net income per common share - diluted                                                                                                                                                                                                          |  | $                                    | 0.02    |   |                                     | $ | 0.03    |                                     |  | $ | 0.53           |   |  | $ | 0.54      |  
|                                                                                                                                                                                                                                               |  |                                      |         |  
|Shares used in per share calculation - basic                                                                                                                                                                                                   |  |                                      | 222,335 |   |                                     |   | 222,335 |                                     |  |   | 221,091        |   |  |   | 221,091   |  
|Shares used in per share calculation - diluted                                                                                                                                                                                                 |  |                                      | 225,803 |   |                                     |   | 225,803 |                                     |  |   | 223,573        |   |  |   | 223,573   |  
|                                                                                                                                                                                                                                               | 
|***     Balances are as reported in the Companys Form 10-Q for the quarter ended
September 28, 2008.                                                                                                                                          |  |                                      |         |   |                                    
|                                                                                                                                                                                                                                               |  |                                      |        
|                                                                                                                                                                                                                                               |  |                                      |         |   |                                     |   |         | Nine Months EndedSeptember 28, 2008 | 
|(in thousands)                                                                                                                                                                                                                                 |  |                                      |         |   |                                     |   |         | As adjusted                         |  |   | As reported*** |  
|Condensed Consolidated Statements of Cash Flows:                                                                                                                                                                                               |  |                                      |         |   |                                     |   |         |                                     |  |   |                |   |  |   |           |  
|Cash flows from operating activities:                                                                                                                                                                                                          |  |                                      |         |   |                                     |   |         |                                     |  |   |                |   |  |   |           |  
|Adjustments to reconcile net income to net cash provided by operating activities:                                                                                                                                                              |  |                                      |         |   |                                     |   |         |                                     |  |   |                |   |  |   |           |  
|Depreciation and amortization                                                                                                                                                                                                                  |  |                                      |         |   |                                     |   |         |                                     |  | $ | 44,521         |   |  | $ | 40,247    |  
|Gain on repurchase of senior convertible notes, net                                                                                                                                                                                            |  |                                      |         |   |                                     |   |         |                                     |  |   | (4,873         | ) |  |   | (1,351    | )



|*** | Balances are as reported in the Companys Form 10-Q for the quarter ended September 28, 2008.
|--- | ---------------------------------------------------------------------------------------------

See Note 7. Long-Term Obligations for required disclosures.

Fair Value Accounting

In September 2006, the FASB issued ASC Topic
820, the Fair Value Measurements and Disclosures Topic,which defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value



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measurements. ASC Topic 820 is effective for financial statements issued for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued ASC Topic 820-10-15-1A, which
delayed the effective date of ASC Topic 820 for certain non-financial assets and liabilities to fiscal years beginning after November 15, 2008. In October 2008, the FASB issued within ASC Topic 820, guidance for determining the fair value of a
financial asset when the market for that asset is not active, whereby entities must account for revisions to fair value estimates resulting from the change in accounting estimate under ASC Topic 250, the Accounting Changes and Error Corrections
Topic, but do not need to provide the disclosures required by that topic. The adoption of ASC Topic 820 did not have a material impact on the Companys condensed consolidated financial statements.

In April 2009, the FASB issued three updates that provide additional application guidance and enhanced disclosures regarding fair value
measurements and impairments of securities:



| |  |  | ASC Topic 820-10-65, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly, provides additional guidelines for estimating fair values when there is no active market or where the price inputs being used represent distressed sales. It reaffirms the need to exercise judgment
to ascertain if a formerly active market has become inactive and in determining fair values when markets have become inactive.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | ASC Topic 320-10-65 includes two updates. The first, Recognition and Presentation of Other-Than-Temporary Impairments,provides additional
guidance related to the disclosure of impairment losses on securities and the accounting for impairment losses on debt securities. It does not amend existing guidance related to other-than-temporary impairments of equity securities. The second
update, Interim Disclosures about Fair Value of Financial Instruments, increases the frequency of fair value disclosures. ASC Topic 320-10-65 is effective for fiscal years and interim periods ended after June 15, 2009.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

These updates were effective for the Company beginning the second quarter of fiscal 2009. There was no financial reporting
impact due to the adoption of this standard.



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In August 2009, FASB issued ASU No. 2009-05, which amends Fair Value Measurements
and Disclosures  Overall (ASC Topic 820-10) to provide guidance on the fair value measurement of liabilities. This update requires clarification for circumstances in which a quoted price in an active market for the identical liability is
not available, a reporting entity is required to measure fair value using one or more of the following techniques: 1) a valuation technique that uses either the quoted price of the identical liability when traded as an asset or quoted prices for
similar liabilities or similar liabilities when traded as an asset; or 2) another valuation technique that is consistent with the principles in ASC Topic 820 such as the income or market approach to valuation. The amendments in this update also
clarify that when estimating the fair value of a liability, a reporting entity is not required to include a separate import or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. This
update further clarifies that if the fair value of a liability is determined by reference to a quoted price in an active market for an identical liability, the price would be considered a Level 1 measurement in the fair value hierarchy. Similarly,
if the identical liability has a quoted price when traded as an asset in an active market, it is also a Level 1 fair value measurement if no adjustments to the quoted price of the asset are required. This update is effective for the Companys
fourth fiscal quarter of 2009.

Business Combinations and Noncontrolling interests

In December 2007, the FASB issued ASC Topic 805, the Business Combinations Topic.ASC Topic 805 changes the accounting for
acquisitions that close beginning in 2009. More transactions and events qualify as business combinations and are accounted for at fair value under the new standard. ASC Topic 805 promotes greater use of fair values in financial reporting. Some of
the changes introduce more volatility into earnings. ASC Topic 805 is effective for fiscal years beginning on or after December 15, 2008. There was no financial reporting impact due to this new standard. The Company will apply this new standard
on any future business combinations.

In April 2009, the FASB issued ASC Topic 805-20, the Accounting for Assets
Acquired and Liabilities Assumed in a Business Combination that Arise from Contingencies Topic.This updated guidance amended the accounting treatment for assets and liabilities arising from contingencies in a business combination and requires
that pre-acquisition contingencies be recognized at fair value, if fair value can be reasonably estimated. If fair value cannot be readily determined, measurement should be based on best estimates in accordance with ASC Topic 405, theAccounting for Contingencies Topic.This guidance was effective January 1, 2009. There was no financial reporting impact due to this new standard. The Company will apply this new standard on any future business combinations.

In December 2007, the FASB issued ASC Topic 810-10-65, a part of the Consolidation Topic, which changes the accounting and reporting
for minority interests which are recharacterized as noncontrolling interests and classified as a component of equity. This is effective for fiscal years beginning on or after December 15, 2008. ASC Topic 810 requires retroactive adoption of the
presentation and disclosure requirements for existing minority interests. There was no financial reporting impact due to this new standard.



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Revenue Recognition

In October 2009, the FASB issued the following ASUs:



| |  |  | ASU No. 2009-13, Revenue Recognition (ASC Topic 605)  Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging
Issues Task Force;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | ASU No. 2009-14, Software (ASC Topic 985)  Certain Revenue Arrangements That Income Software Elements, a consensus of the FASB
Emerging Issues Task Force.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------

ASU No. 2009-13: This guidance modifies the fair value requirements of ASC
subtopic 605-25, Revenue Recognition-Multiple Element Arrangements by allowing the use of the best estimate of selling price in addition to Vendor Specific Objective Evidence (VSOE) and Vendor Objective Evidence
(VOE) (now referred to as third party evidence or TPE) for determining the selling price of a deliverable. A vendor is now required to use its best estimate of the selling price when VSOE or TPE of the selling price cannot be
determined. In addition, the residual method of allocating arrangement consideration is no longer permitted.

ASU
No. 2009-14: This guidance modifies the scope of ASC subtopic 985-605, Software-Revenue Recognition to exclude from its requirements (a) non-software components of tangible products and (b) software components of tangible
products that are sold, licensed, or leased with tangible products when software components and nonsoftware components of the tangible product function together to deliver the tangible products essential functionality.

These updates require expanded qualitative and quantitative disclosure and are effective for fiscal years beginning on or after
June 15, 2010. However, companies may elect to adopt as early as interim periods ended September 30, 2009. These updates may be applied either prospectively from the beginning of the fiscal year for new or materially modified arrangements
or retrospectively. The Company is currently evaluating the impact of adopting these updates on the consolidated financial statements.

Other Accounting Changes

In December 2007, the FASB issued ASC Topic 808, the Collaborative
Arrangements Topic. Collaborative arrangements are agreements between parties that participate in some type of joint operating activity. The guidance provided indicators to help identify collaborative arrangements and provides for the reporting
of such arrangements on a gross or net basis pursuant to guidance in existing authoritative literature. The guidance also expanded disclosure requirements about collaborative arrangements. Conclusions within ASC Topic 808 are effective for fiscal
years beginning December 15, 2008 and are to be applied retrospectively. There was no financial reporting impact due to this standard.



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In March 2008, the FASB issued additional guidance within ASC Topic 815-50, the
Derivatives and Hedging Topic,intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures about the effects of an entitys derivative instruments and hedging activities
on its financial position, financial performance, and cash flows. The new guidance is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. There was
no financial reporting impact due to the adoption of this standard.

In April 2008, the FASB issued ASC Topic 350-30-65-1, the
Intangible  Goodwill and OtherTopic, which amends the guidance about estimating the useful lives of recognized intangible assets and requires additional disclosures related to renewing or extending the terms of recognized
intangible assets. This new guidance is effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2008. There was no financial reporting impact due to the adoption of
this standard.

In November 2008, the FASB issued new guidance within ASC Topic 350, the Intangible  Goodwill
and Other Topic for the accounting for defensive intangible assets, which requires entities to account for a defensive intangible asset as a separate unit of accounting at the time of acquisition, not combined with the acquirers
existing recognized or unrecognized intangible assets. This consensus is effective for fiscal years, and interim reporting periods within those fiscal years, beginning on or after December 15, 2008, and will impact the accounting for intangible
assets acquired after the effective date. There was no financial reporting impact due to the adoption of this standard.

In
May 2009, the FASB issued FASB ASC Topic 855, theSubsequent Events Topic. This standard is intended to establish general standards of accounting for and the disclosure of events that occur after the balance sheet date but
before financial statements are issued or are available to be issued. Specifically, this standard sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur
for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an
entity should make about events or transactions that occurred after the balance sheet date. ASC Topic 855 is effective for fiscal years and interim periods ended after June 15, 2009, to be applied prospectively. There was no financial
reporting impact due to the adoption of this standard. The Company has evaluated subsequent events through November 5, 2009, the date of issuance of the Condensed Consolidated Financial Position and Results of Operations.

In June 2009, the FASB issued ASC Topic 810, Accounting for Transfers of Financial Assets, an amendment to SFAS No. 140.
The new standard eliminates the concept of a qualifying special-purpose entity, changes the requirements for derecognizing financial assets, and requires additional disclosures in order to enhance information reported to users of
financial statements by providing greater transparency about transfers of financial assets, including securitization transactions, and an entitys continuing involvement in and exposure to the risks related to transferred financial assets. ASC
Topic 810 is effective for fiscal years beginning after November 15, 2009. The Company will adopt ASC Topic 810 in fiscal 2010 and is evaluating the impact it will have on the Companys consolidated financial statements.



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NOTE 2. Derivative Instruments and Hedging Activities

PMC generates revenues in United States dollars but incurs a portion of its operating expenses in various foreign currencies, primarily
Canadian dollars. To minimize the short-term impact of foreign currency fluctuations, the Company uses currency forward contracts.

As at September 27, 2009, the Company had 12 contracts outstanding to purchase Canadian dollars, all with maturities of less than 12 months, which qualified and were designated as cash flow hedges. As of September 27, 2009, the
United States dollar notional amount of these contracts was $16.4 million and the contracts had a fair value gain of $1.5 million, which was recorded in other comprehensive income net of taxes of $0.4 million on the consolidated balance sheet.

NOTE 3. Fair Value Measurements

On January 1, 2008, the Company adopted ASC Topic 820, theFair Value Measurements Topic, which defines fair value, establishes guidelines for measuring fair value and expands
disclosures on fair value measurements. In February 2008, the FASB issued the related ASC Topic 820-10-15-1A that deferred the effective date of ASC Topic 820 for one year for non-financial assets and liabilities recorded at fair value on a
non-recurring basis. ASC Topic 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date. ASC Topic 820 also specifies a hierarchy of valuation techniques that requires an entity to maximize the use of observable inputs that may be used to measure fair value:

Level 1  Quoted prices in active markets are available for identical assets and liabilities. The Companys Level 1 assets include
cash equivalents, short-term investments, and long-term investments securities, which are generally acquired or sold at par value and are actively traded.

Level 2  Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; or other inputs that are observable or can be corroborated by observable market data
for substantially the full term of the assets or liabilities. The Companys Level 2 liabilities include forward currency contracts whose value is determined using a pricing model with inputs that are observable in the market or corroborated
with observable market data. Level 2 observable inputs were used in estimating interest rates used to determine the fair value of the debt component the Companys senior convertible notes (see Note 1. Summary of Significant Accounting Policies
and Note 7. Long-Term Obligations).

Level 3  Pricing inputs include significant inputs that are generally not
observable in the marketplace. These inputs may be used with internally developed methodologies that result in managements best estimate of fair value. At each balance sheet date, the Company performs an analysis of all instruments subject to
ASC Topic 820 and would include in Level 3 all of those whose fair value is based on significant unobservable inputs. The Companys Level 3 assets include investments in money market funds classified in short-term investments (see Note 6.
Investment Securities).



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Financial assets and liabilities measured on a recurring basis as of September 27, 2009
are summarized below:



|                                                        |         |                                |         |  |         |        |  |   |       
|------------------------------------------------------- | ------- | ------------------------------ | ------- |  | ------- | ------ |  | - | ------
|(in thousands)                                          |         | Fair value, September 27, 2009
|                                                        | Level 1 |                                | Level 2 |  | Level 3
|Assets:                                                 |         |                                |         |  |         |        |  |   |       
|Money market funds (1)                                  |         | $                              | 155,658 |  | $       |       |  | $ | 38,883
|US Treasury and Government Agency Notes (1)             |         |                                | 85,676  |  |         |       |  |   |      
|Corporate bonds and notes (1)                           |         |                                | 80,104  |  |         |       |  |   |      
|US State and Municipal securities                       |         |                                | 19,678  |  |         |       |  |   |      
|Foreign government and agency notes (1)                 |         |                                | 16,521  |  |         |       |  |   |      
|Forward currency contracts (2)                          |         |                                |        |  |         | 1,490  |  |   |      
|                                                        |         |                                |         |  |         |        |  |   |       
|                                                        |         |                                |        
|Total assets                                            |         | $                              | 357,637 |  | $       | 1,490  |  | $ | 38,883
|                                                        |         |                                |         |  |         |        |  |   |       
|Liabilities:                                            |         |                                |         |  |         |        |  |   |       
|2.25% senior convertible notes due October 15, 2025 (3) |         | $                              |        |  | $       | 57,584 |  | $ |      
|                                                        |         |                                |         |  |         |        |  |   |       
|                                                        |         |                                |        
|Total liabilities                                       |         | $                              |        |  | $       | 57,584 |  | $ |      
|                                                        |         |                                |         |  |         |        |  |   |       



|(1) | Included in cash and cash equivalents, short-term investments and long-term investment securities (see Note 6. Investment Securities).
|--- | --------------------------------------------------------------------------------------------------------------------------------------

|(2) | Included in Prepaid expenses and other current assets.
|--- | ------------------------------------------------------

|(3) | See Note 7. Long-Term Obligations.
|--- | ----------------------------------

The following table is a reconciliation of financial assets and liabilities measured at fair value on a recurring basis classified as Level 3 for the third quarter of 2009:



|                                                |  |         |          |  
|----------------------------------------------- |  | ------- | -------- | -
|(in thousands)                                  |  | Level 3 |         
|Balance at December 28, 2008                    |  | $       | 209,685  |  
|Partial distributions from the Reserve Funds    |  |         | (139,143 | )
|                                                |  |         |          |  
|                                                | 
|Balance at March 29, 2009                       |  |         | 70,542   |  
|                                                |  |         |          |  
|Partial distributions from the Reserve Funds    |  |         | (31,659  | )
|                                                |  |         |          |  
|Balance at June 28, 2009 and September 27, 2009 |  | $       | 38,883   |  
|                                                |  |         |          |  

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



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NOTE 4. Stock-Based Compensation

The Company has two stock-based compensation programs, which are described below. None of the Companys stock-based awards under these
plans are classified as liabilities. The Company did not capitalize any stock-based compensation cost, and recorded compensation expense for the three and nine months ended September 27, 2009 and September 28, 2008, as follows:



|                                    |                   |                    |                   |                   |                   |       |                   |   |        |  |   |       
|----------------------------------- | ----------------- | ------------------ | ----------------- | ----------------- | ----------------- | ----- | ----------------- | - | ------ |  | - | ------
|(in thousands)                      |                   | Three Months Ended |                   | Nine Months Ended
|                                    | September 27,2009 |                    | September 28,2008 |                   | September 27,2009 |       | September 28,2008
|Cost of revenues                    |                   | $                  | 149               |                   | $                 | 233   |                   | $ | 580    |  | $ | 958   
|Research and development            |                   |                    | 2,173             |                   |                   | 2,424 |                   |   | 6,566  |  |   | 8,807 
|Selling, general and administrative |                   |                    | 2,798             |                   |                   | 2,700 |                   |   | 9,066  |  |   | 9,954 
|                                    |                   |                    |                   |                   |                   |       |                   |   |        |  |   |       
|Total                               |                   | $                  | 5,120             |                   | $                 | 5,357 |                   | $ | 16,212 |  | $ | 19,719
|                                    |                   |                    |                   |                   |                   |       |                   |   |        |  |   |       

The Company received cash of $17.3 million and $24.3 million related to the issuance
of stock-based awards during the three and nine months ended September 27, 2009, respectively. The Company received cash of $8.5 million and $16.5 million during the three and nine months ended September 28, 2008, respectively.

Equity Award Plans

The
Company issues its common stock under the provisions of the 2008 Equity Plan (the 2008 Plan). 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 10 years and vest over four years.

The 2008 Plan was approved by stockholders at the 2008
Annual Meeting. The 2008 Plan became effective on January 1, 2009 (the Effective Date). It is a successor to the 1994 Incentive Stock Plan (the 1994 Plan) and the 2001 Stock Option Plan (the 2001 Plan). Up to
30,000,000 shares of our common stock have been initially reserved for issuance under the 2008 Plan. The implementation of the 2008 Plan did not affect any options or restricted stock units outstanding under the 1994 Plan or the 2001 Plan on the
Effective Date. To the extent that any of those options or restricted stock units subsequently terminate unexercised or prior to issuance of shares thereunder, the number of shares of common stock subject to those terminated options and restricted
stock units will be added to the share reserve available for issuance under the 2008 Plan, up to an additional 15,000,000 shares. No additional shares may be issued under the 1994 Plan or the 2001 Plan. In 2006, the Company assumed the stock option
plans and all outstanding stock options of Passave, Inc. as part of the merger consideration in that business combination.



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Activity under the option plans during the nine months ended September 27, 2009 was as
follows:



|                                |  |                  |   |  |                                          |       |                                                   |      |                                                |   |           
|------------------------------- |  | ---------------- | - |  | ---------------------------------------- | ----- | ------------------------------------------------- | ---- | ---------------------------------------------- | - | ----------
|                                |  | Number ofoptions |   |  | Weighted averageexercise price per share |       | Weighted averageremaining contractualterm (years) |      | Aggregate intrinsic valueat September 27, 2009
|Outstanding, December 28, 2008  |  | 28,195,000       |   |  | $                                        | 9.35  |                                                   |      |                                                |   |           
|Granted                         |  | 4,025,298        |   |  | $                                        | 5.37  |                                                   |      |                                                |   |           
|Exercised                       |  | (3,098,243       | ) |  | $                                        | 5.51  |                                                   |      |                                                |   |           
|Forfeited                       |  | (3,071,760       | ) |  | $                                        | 12.59 |                                                   |      |                                                |   |           
|                                |  |                  |   |  |                                          |       |                                                   |      |                                                |   |           
|Outstanding, September 27, 2009 |  | 26,050,295       |   |  | $                                        | 8.81  |                                                   | 6.64 |                                                | $ | 61,207,224
|Exercisable, September 27, 2009 |  | 17,033,455       |   |  | $                                        | 10.23 |                                                   | 5.59 |                                                | $ | 29,450,912

No adjustment was required with respect to fully vested options that expired during
the three and nine months ended September 27, 2009. During the three and nine months ended September 27, 2009, adjustments of $2.5 million and $7.8 million, respectively, were recorded for pre-vesting forfeitures associated primarily with
restructuring related activities carried out in 2007.

The fair value of the Companys stock option awards granted to
employees during the nine months ended September 27, 2009 was estimated using a lattice-binomial valuation model. The binomial model 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. The model requires 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 awards were calculated for expense recognition using an estimated forfeiture rate, assuming no expected dividends and using the following weighted average assumptions:



|                        |                   |                    |   |                   |                   |   |                   |     |   |                   |     |  
|----------------------- | ----------------- | ------------------ | - | ----------------- | ----------------- | - | ----------------- | --- | - | ----------------- | --- | -
|                        |                   | Three Months Ended |   |                   | Nine Months Ended |  
|                        | September 27,2009 |                    |   | September 28,2008 |                   |   | September 27,2009 |     |   | September 28,2008 |    
|Expected life (years)   |                   | 3.8                |   |                   | 3.7               |   |                   | 4.5 |   |                   | 4.5 |  
|Expected volatility     |                   | 62                 | % |                   | 57                | % |                   | 66  | % |                   | 57  | %
|Risk-free interest rate |                   | 2.1                | % |                   | 3.1               | % |                   | 1.8 | % |                   | 2.6 | %

The weighted average grant-date fair value per stock option granted during the three
and nine months ended September 27, 2009, was $3.84 and $2.74, respectively. The total intrinsic value of stock options exercised during the three and nine months ended September 27, 2009 was $7.8 million and $10.0 million, respectively.



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As of September 27, 2009, there was $20.8 million of total unrecognized compensation
costs related to unvested stock-based compensation arrangements granted under the plans, which is expected to be recognized over an average period of 2.7 years.

Restricted Stock Units

On February 1, 2007, the Company amended its stock
award plans to allow for the issuance of Restricted Stock Units (RSUs) to employees and members of the Board of Directors. The first grant of RSUs occurred on May 25, 2007. The grants vest over varying terms, up to a maximum of four
years from the date of grant.

A summary of RSU activity during the nine months ended September 27, 2009 is as follows:



|                                                                      |  |                       |   |  |                                           |  |                                               
|--------------------------------------------------------------------- |  | --------------------- | - |  | ----------------------------------------- |  | ----------------------------------------------
|                                                                      |  | Restricted StockUnits |   |  | Weighted AverageRemaining ContractualTerm |  | Aggregate intrinsic valueat September 27, 2009
|Unvested shares at December 28, 2008                                  |  | 1,862,762             |   |  |                                          |  |                                              
|Awarded                                                               |  | 1,100,224             |   |  |                                          |  |                                              
|Released                                                              |  | (386,697              | ) |  |                                          |  |                                              
|Forfeited                                                             |  | (174,906              | ) |  |                                          |  |                                              
|                                                                      |  |                       |   |  |                                           |  |                                               
|End of Period                                                         |  | 2,401,383             |   |  | 1.82                                      |  | 23,005,249                                    
|Restricted Stock Units vested and expected to vest September 27, 2009 |  | 1,931,537             |   |  | 1.77                                      |  | 18,504,127                                    

As of September 27, 2009, total unrecognized compensation costs, adjusted for
estimated forfeitures, related to unvested RSUs was $11.0 million, which is expected to be recognized over the next 3.0 years.

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 at six-month intervals through payroll deductions at a price of 85% of the lower of the fair market value at specific dates in
those six-month intervals (calculated in the manner provided in the plan). Shares of the Companys common stock are offered under the ESPP through a series of successive offering periods, generally with a maximum duration of 24 months.
Under the ESPP, the number of shares authorized to be available for issuance under the plan is 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.



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During the third quarter of 2009, 899,835 shares were issued under the ESPP at a weighted
average price of $4.01 per share. During the nine months ended September 27, 2009 1,816,218 shares were issued under the ESPP at a weighted average price of $3.99. As of September 27, 2009, 8,467,938 shares were available for future
issuance under the ESPP compared to 8,284,156 as at December 28, 2008.

The fair values of share purchases through the
Companys ESPP were calculated using the Black-Scholes option pricing model, applying an estimated forfeiture rate, assuming no expected dividends and using the following weighted average assumptions:



|                        |                   |                    |   |                   |                   |   |                   |     |   |                   |     |  
|----------------------- | ----------------- | ------------------ | - | ----------------- | ----------------- | - | ----------------- | --- | - | ----------------- | --- | -
|                        |                   | Three Months Ended |   |                   | Nine Months Ended |  
|                        | September 27,2009 |                    |   | September 28,2008 |                   |   | September 27,2009 |     |   | September 28,2008 |    
|Expected life (years)   |                   | 1.3                |   |                   | 1.3               |   |                   | 1.3 |   |                   | 1.3 |  
|Expected volatility     |                   | 55                 | % |                   | 47                | % |                   | 59  | % |                   | 49  | %
|Risk-free interest rate |                   | 0.6                | % |                   | 2.2               | % |                   | 0.7 | % |                   | 2.1 | %

The weighted average grant-date fair value of per ESPP award granted during the three
and nine months ended September 27, 2009 was $3.40 and $2.08, respectively.

As of September 27, 2009, total
unrecognized compensation costs, adjusted for estimated forfeitures, related to non-vested ESPP awards was $1.2 million, which is expected to be recognized over the next 0.9 years.



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NOTE 5. Restructuring Costs and Other Charges

The activity related to excess facility, contract termination and severance accruals under the Companys restructuring plans during the
first nine months of 2009, by year of plan, were as follows:

Excess facility costs



|                              |  |      |      |   |      |   |      |      |  |   |        |   |  |       |       |   |  |   |        |  
|----------------------------- |  | ---- | ---- | - | ---- | - | ---- | ---- |  | - | ------ | - |  | ----- | ----- | - |  | - | ------ | -
|(in thousands)                |  | 2007 |      |   | 2006 |   |      | 2005 |  |   | 2001   |   |  | Total |      
|Balance at December 28, 2008  |  | $    | 830  |   |      | $ | 178  |      |  | $ | 3,048  |   |  | $     | 1,875 |   |  | $ | 5,931  |  
|                              |  |      |      |   |     
|Reversals and adjustments     |  |      | 28   |   |      |   | 11   |      |  |   |       |   |  |       | 114   |   |  |   | 153    |  
|New charges                   |  |      | 25   |   |      |   | 82   |      |  |   | 625    |   |  |       |      |   |  |   | 732    |  
|Cash payments                 |  |      | (284 | ) |      |   | (181 | )    |  |   | (1,062 | ) |  |       | (724  | ) |  |   | (2,251 | )
|                              |  |      |      |   |      |   |      |      |  |   |        |   |  |       |       |   |  |   |        |  
|                              |  |      |      |   |     
|Balance at September 27, 2009 |  | $    | 599  |   |      | $ | 90   |      |  | $ | 2,611  |   |  | $     | 1,265 |   |  | $ | 4,565  |  
|                              |  |      |      |   |      |   |      |      |  |   |        |   |  |       |       |   |  |   |        |  
|                              |  |      |      |   |     
|Severance costs               |  |      |      |   |      |   |      |      |  |   |        |   |  |       |       |   |  |   |        |  
|                              |  |     
|(in thousands)                |  | 2007 |      |   |      |  
|Balance at December 28, 2008  |  | $    | 7    |   |     
|Reversals and adjustments     |  |      | 1    |   |     
|Cash payments                 |  |      | (8   | ) |     
|                              |  |      |      |   |     
|Balance at
September 27, 2009 |  | $    |     |   |     
|                              |  |      |      |   |     

2007

In the first quarter of 2007, the Company initiated a cost-reduction plan that involved staff reductions of 175 employees at various sites and the closure of design centers in Saskatoon, Saskatchewan and
Winnipeg, Manitoba. The Company also vacated excess office space at its Santa Clara, California facility. PMC continued to rationalize costs in the fourth quarter of 2007 by reducing headcount by 18 employees primarily at the Burnaby, British
Columbia facility.

In connection with this plan, the Company has recorded $10.5 million in termination and relocation costs,
$3.0 million for excess facilities and $2.5 million in asset impairment charges to date. The Company has made payments of $12.4 million in connection with this plan. Payments related to the excess facilities may extend until 2011.



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The Company initially expected to save approximately $16 million in payroll-related costs on
an annualized basis. The Company achieved its prorated portion of these expected cost savings in 2007. The Company continued to contain costs in accordance with its 2007 restructuring plan; however it also initiated new R&D programs in 2008 that
resulted in increases in payroll-related costs of approximately $4.9 million that partially offset the cost savings anticipated by the 2007 restructuring plan.

2006

In the third quarter of 2006, the Company closed its Ottawa, Ontario
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 the Company recording
restructuring charges for termination benefits, relocation costs and accruals for excess facilities. The Company also eliminated 10 positions from research and development in its Portland, Oregon development site, resulting in restructuring charges
for severance, excess facilities, contract termination costs and asset impairment.

In connection with these two actions in
2006, the Company has recorded $2.6 million in excess facilities and contract termination costs, $3.0 million in severance costs and $0.2 million in asset impairment charges, to date. To date, the Company has made payments of $4.5 million related to
the 2006 plan. All severance costs under these two actions have been paid 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 operating expenses. In the first quarter of 2005, the Company terminated 24 employees across all business functions. In the second quarter of 2005, the Company 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, the Company consolidated two manufacturing facilities (Santa Clara and Burnaby) into one facility (Burnaby), which involved the termination
of 26 employees from production control, quality assurance, and product engineering. In the third quarter, the Company consolidated its facilities and vacated excess space in its Santa Clara location.

In the first quarter of 2006, the Company continued the workforce reduction plans initiated in 2005, primarily from its research and
development group, in the Santa Clara facility.

In the nine months ended September 27, 2009, the Company recorded an
additional $0.6 million for excess facilities as the original assumptions regarding possible sublease of the exited facilities were not realized. The Company also made payments of $1.1 million related to this plan.



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In connection with this plan, the Company has recorded $8.0 million for excess facilities
and contract termination costs, $7.9 million for termination benefits and $0.9 million write-down of equipment and software assets whose assets were impaired to date. The Company has made payments relating to these activities of $14.4 million
related to the 2005 plan. All severance costs have been paid out and payments related to the excess facilities will extend to 2011.

2001

In 2001, the Company implemented two 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. The Companys assessment of the market demand for its products, and the development efforts necessary to meet this demand, were
key factors in the decisions to implement these restructuring plans. 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 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, 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 has recorded additional provisions for abandoned office facilities totaling $3.9 million since 2004. In the first nine months of 2009, the Company
made cash payments of $0.7 million related to this plan, bringing the total cash payments under the 2001 plan to $178.7 million.

The Company has completed the activities contemplated in these restructuring plans, but has not yet terminated the leases on all of its surplus facilities. Efforts to exit these sites are ongoing, but the payments related to these
facilities could extend to 2011.

NOTE 6. Investment Securities

At September 27, 2009, the Company had investments of $396.5 million (December 28, 2008 - $278.9 million) comprised of money market funds, United States Treasury and Government Agency notes, Federal
Deposit Insurance Corporation (FDIC)-insured corporate notes, United States State and Municipal Securities, foreign government and agency notes, and corporate bonds and notes.



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The Companys available for sale investments, by investment type, consist of the
following as at September 27, 2009 and December 28, 2008:



|                                                                   |                |                    |                       |  |                       |       |  |            |     |   |  |   |        
|------------------------------------------------------------------ | -------------- | ------------------ | --------------------- |  | --------------------- | ----- |  | ---------- | --- | - |  | - | -------
|(in thousands)                                                     |                | September 27, 2009
|                                                                   | Amortized Cost |                    | GrossUnrealizedGains* |  | GrossUnrealizedLosses |       |  | Fair Value
|Money market funds                                                 |                | $                  | 194,517               |  | $                     | 24    |  | $          |    |   |  | $ | 194,541
|US Treasury and Government Agency notes                            |                |                    | 84,720                |  |                       | 956   |  |            |    |   |  |   | 85,676 
|Corporate bonds and notes                                          |                |                    | 78,806                |  |                       | 1,330 |  |            | (32 | ) |  |   | 80,104 
|US State and Municipal securities                                  |                |                    | 19,657                |  |                       | 28    |  |            | (7  | ) |  |   | 19,678 
|Foreign government and agency notes                                |                |                    | 16,262                |  |                       | 259   |  |            |    |   |  |   | 16,521 
|                                                                   |                |                    |                       |  |                       |       |  |            |     |   |  |   |        
|Total                                                              |                | $                  | 393,962               |  | $                     | 2,597 |  | $          | (39 | ) |  | $ | 396,520
|                                                                   |                |                    |                       |  |                       |       |  |            |     |   |  |   |        
|                                                                   |               
|*  Gross unrealized gains include accrued interest on investments. |                |                    |                       | 
|                                                                   |               
|(in thousands)                                                     |                | December 28, 2008 
|                                                                   | Amortized Cost |                    | GrossUnrealizedGains  |  | GrossUnrealizedLosses |       |  | Fair Value
|Money market funds                                                 |                | $                  | 278,898               |  | $                     |      |  | $          |    |   |  | $ | 278,898
|                                                                   |                |                    |                       |  |                       |       |  |            |     |   |  |   |        
|Total                                                              |                | $                  | 278,898               |  | $                     |      |  | $          |    |   |  | $ | 278,898
|                                                                   |                |                    |                       |  |                       |       |  |            |     |   |  |   |        

As of September 27, 2009 and December 28, 2008, the fair value of certain
of the Companys available-for-sale securities was less than their cost basis. Management reviewed various factors in determining whether to recognize an impairment charge related to these unrealized losses, including the current financial and
credit market environment, the financial condition and near-term prospects of the issuer of the investment security, the magnitude of the unrealized loss compared to the cost of the investment, length of time the investment has been in a loss
position and the Companys intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery of market value. As of September 27, 2009, the Company determined that the unrealized losses are
temporary in nature and recorded them as a component of accumulated other comprehensive income (loss).



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##### Table of Contents

The Companys investments are classified in the Condensed Consolidated Balance Sheet as
at September 27, 2009 and December 28, 2008, as follows:



|                                |                |                    |            |                   |                |         |            |   |         |  |   |        
|------------------------------- | -------------- | ------------------ | ---------- | ----------------- | -------------- | ------- | ---------- | - | ------- |  | - | -------
|(in thousands)                  |                | September 27, 2009 |            | December 28, 2008
|                                | Amortized Cost |                    | Fair Value |                   | Amortized Cost |         | Fair Value
|Cash and cash equivalents       |                | $                  | 157,959    |                   | $              | 157,982 |            | $ | 69,213  |  | $ | 69,213 
|Short-term investments          |                |                    | 92,476     |                   |                | 94,019  |            |   | 209,685 |  |   | 209,685
|Long-term investment securities |                |                    | 143,527    |                   |                | 144,519 |            |   |        |  |   |       
|                                |                |                    |            |                   |                |         |            |   |         |  |   |        
|Total                           |                | $                  | 393,962    |                   | $              | 396,520 |            | $ | 278,898 |  | $ | 278,898
|                                |                |                    |            |                   |                |         |            |   |         |  |   |        

$38.9 million of the investments held at September 27, 2009 relate to shares of
the Reserve International Liquidity Fund, Ltd. (the International Fund) and the Reserve Primary Fund (the Primary Fund, together the Reserve Funds) for which the Company has outstanding redemption orders. The
Reserve Funds were AAA-rated money market funds that announced redemption delays and suspended trading in September 2008 during the severe disruption in financial markets. The Reserve Funds are in the process of liquidating their portfolio of
investments, which included securities of Lehman Brothers Holdings, Inc. (Lehman Brothers) that was downgraded and has filed for Chapter 11 bankruptcy protection. The Primary Fund has received a United States Security Exchange Commission
order providing that the SEC will supervise the distribution of assets from the Primary Fund. The redemptions from the International Fund are subject to pending litigation that could cause further delay in any redemption of the Companys
investments. In October 2009, the Company received a partial distribution from the Primary Fund in the amount of $1.3 million.

The Company assessed the fair value of its money market funds, including by consideration of Level 2 and Level 3 inputs (see Note 3. Fair Value Measurements) for the Reserve Funds and their underlying securities. Based on this assessment,
the Company recorded an impairment of the Reserve Funds of $11.8 million during the third quarter of 2008, incorporating the Reserve Funds valuation at zero for debt securities of Lehman Brothers held, and a net asset value of $0.97 per share
communicated by the Primary Fund.

In 2008, the Company reclassified its investment in shares of the Reserve Funds from Level
1 to Level 3 of the fair value hierarchy due to the inherent subjectivity and significant judgment related to the fair value of the shares of the Reserve Funds and their underlying securities. Accordingly, the Company changed the valuation method
from a market approach to an income approach. In addition, due to the status of the Reserve Funds, the Company reclassified a portion of these shares from cash and cash equivalents to short-term investments and long-term investment securities, based
on the maturity dates of the underlying securities in the Reserve Funds.

Changes in market conditions and the method and
timing of the liquidation process of the Reserve Funds could result in further adjustments to the fair value and classification of these investments, and these changes could be material.



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NOTE 7. Long-Term Obligations

On October 26, 2005, the Company issued $225.0 million aggregate principal amount of 2.25% senior convertible notes that are due on October 15, 2025.

The Notes rank equal in right of payment with the Companys 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 the 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 share 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.

Impact of Adoption of ASC Topic 470 Debt

See Note 1. Summary for
Significant Accounting Policies for a description of the Companys adoption of ASC Topic 470. The following table summarizes the effects of this new guidance on the Companys consolidated financial statements as at September 27, 2009.



|                                                    |  |                              |        |  
|--------------------------------------------------- |  | ---------------------------- | ------ | -
|(in thousands)                                      |  | September 27,2009Adjustments |       
|Condensed Consolidated Balance Sheets               |  |                              |        |  
|Assets:                                             |  |                              |        |  
|Deferred debt issue costs*                          |  | $                            | 69     |  
|Total assets                                        |  |                              | 69     |  
|                                                    | 
|Liabilities and Stockholders Equity:               |  |                              |        |  
|2.25% senior convertible notes due October 15, 2025 |  |                              | 2,227  |  
|Accumulated deficit                                 |  |                              | (2,158 | )



|* | Deferred debt issue costs are included in the Condensed Consolidated Balance Sheets as Investments and other assets.
|- | --------------------------------------------------------------------------------------------------------------------



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|                                                                                         |  |                                     |         |   |                                    |   |         |  
|---------------------------------------------------------------------------------------- |  | ----------------------------------- | ------- | - | ---------------------------------- | - | ------- | -
|(in thousands, except for per share amounts)                                             |  | Three Months EndedSeptember 27,2009 |         |   | Nine Months EndedSeptember 27,2009 |  
|Condensed Consolidated Statements of Operations                                          |  |                                     |         |   |                                    |   |         |  
|Gain on repurchase of senior convertible notes, net and amortization of debt issue costs |  | $                                   | 23      |   |                                    | $ | 69      |  
|Interest income (expense), net                                                           |  |                                     | (757    | ) |                                    |   | (2,227  | )
|                                                                                         |  |                                     |         |   |                                    |   |         |  
|Net income                                                                               |  |                                     | (734    | ) |                                    |   | (2,158  | )
|                                                                                         |  |                                     |         |   |                                    |   |         |  
|Net income per basic share                                                               |  | $                                   | (0.00   | ) |                                    | $ | (0.01   | )
|Net income per diluted share                                                             |  | $                                   | (0.00   | ) |                                    | $ | (0.01   | )
|                                                                                         |  |                                    
|Shares used in per share calculation - basic                                             |  |                                     | 227,123 |   |                                    |   | 225,276 |  
|Shares used in per share calculation - diluted                                           |  |                                     | 231,863 |   |                                    |   | 228,172 |  
|                                                                                         |  |                                    
|(in thousands)                                                                           |  |                                     |         |   | Nine Months EndedSeptember 27,2009 |  
|Condensed Consolidated Statements of Cash Flows:                                         |  |                                     |         |   |                                    |   |         |  
|Cash flows from operating activities:                                                    |  |                                     |         |   |                                    |   |         |  
|Net income                                                                               |  |                                     |         |   |                                    | $ | (2,158  | )
|Adjustments to reconcile net income to net cash provided by operating activities         |  |                                     |         |   |                                    |   |         |  
|Depreciation and amortization                                                            |  |                                     |         |   |                                    |   | 2,158   |  

As at September 27, 2009, the carrying amount of the equity component is $35.2
million (December 28, 2008 - $35.2 million), and the carrying of the debt component is $57.6 million (December 28, 2008 - $55.4 million), which is the principal amount of $68.3 million (December 28, 2008 - $68.3 million) net of the unamortized
discount of $10.7 million (December 28, 2008 - $12.9 million). The balance of deferred debt issue costs as at September 27, 2009 is $0.6 million (December 28, 2008 - $0.8 million).

The principal amount of the debt reflects the partial repurchase of the Notes in 2008. In the first and fourth quarter of 2008, the Company
repurchased the principal amount of these Notes of $98.0 million and $58.7 million, respectively, for a total of $94.5 million and $43.8 million, respectively. The Company recorded gains related to the debt components on the first and fourth quarter
of 2008 repurchases of $4.9 million and $10.0 million, respectively, in the consolidated statement of operations, and recorded gains related to the equity components on these repurchases of $5.4 million and $10.8 million, respectively, in the
consolidated balance sheet as additional paid in capital. The gains are net of expensed unamortized debt issue costs and transaction costs of $1.5 million and $0.7 million for the first and fourth quarter of 2008, respectively. To measure the fair
value of the converted Notes as of the settlement dates in the first and fourth quarter of 2008, the Company calculated interest rates of 10% and 15%, respectively, using Level 2 observable inputs. This rate was applied to the converted Notes and
coupon interest rate using the same present value technique used in the issuance date valuation.



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##### Table of Contents

NOTE 8. Income Taxes

The Company recorded a recovery of income taxes of $8.6 million and $3.5 million for the three and nine months ended September 27, 2009, respectively, and a provision of income taxes of $4.3 million
and a recovery of income taxes of $77.4 million for the three and nine months ended September 28, 2008, respectively. The majority of the reduction in the provision for income taxes was due to the effect of the foreign exchange translation of a
foreign subsidiary in the third quarter of 2009 compared to the same period in 2008.

The condensed consolidated financial
statements for the nine months ended September 27, 2009 include the tax effects associated with the sale of certain assets between wholly-owned subsidiaries of the Company. GAAP requires the tax expense associated with gains on such
inter-company transactions to be recognized over the estimated life of the related assets. Accordingly, the $22.8 million recorded as long-term prepaid expenses as at September 27, 2009 represents the remaining tax expense to be recognized over
periods of up to six years, with corresponding amounts recorded as current and deferred income taxes payable and as liability for unrecognized tax benefits. The tax expense in the three and nine months ended September 27, 2009 resulting from
these transactions was $0.9 million and $3.1 million, respectively.

During the first half of 2008, one of the Companys
foreign subsidiaries received a written communication from a tax authority resulting in an accrual of $26.5 million, including interest, as part of the liability for unrecognized tax benefits. In the second quarter of 2008, this and certain other
tax matters related to the 2000-2006 tax years were settled for less than had been accrued as part of the Companys liability for unrecognized tax benefits, resulting in the recognition of tax benefits of $124.1 million that were previously
included in the liability for unrecognized tax benefits. As a result of this settlement, the Company agreed to pay $18.0 million in cash and utilized $31.6 million in net investment tax credits. In addition, in the first quarter of 2008, the Company
recognized a further $2.3 million of tax expense arising from an inter-company dividend.

As at September 27, 2009, the
Companys liability for unrecognized tax benefits on a world-wide consolidated basis was $37.2 million. Recognition of an amount different from this estimate would affect the Companys effective tax rate.

NOTE 9. Comprehensive Income

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



|                                              |  |                    |        |                                        |                   |       |                   |  |                                        |        |  |   |         |  
|--------------------------------------------- |  | ------------------ | ------ | -------------------------------------- | ----------------- | ----- | ----------------- |  | -------------------------------------- | ------ |  | - | ------- | -
|                                              |  | Three Months Ended |        |                                        | Nine Months Ended |      
|(in thousands)                                |  | September 27,2009  |        | September 28, 2008As adjusted - Note 1 |                   |       | September 27,2009 |  | September 28, 2008As adjusted - Note 1 |       
|Net income                                    |  | $                  | 27,819 |                                        | $                 | 4,457 |                   |  | $                                      | 31,751 |  | $ | 119,484 |  
|Other comprehensive income:                   |  |                    |        |                                        |                   |       |                   |  |                                        |        |  |   |         |  
|Change in fair value of derivatives           |  |                    | 363    |                                        |                   | (209  | )                 |  |                                        | 4,523  |  |   | (2,300  | )
|Change in fair value of investment securities |  |                    | 514    |                                        |                   |      |                   |  |                                        | 474    |  |   |        |  
|                                              |  |                    |        |                                        |                   |       |                   |  |                                        |        |  |   |         |  
|Total                                         |  | $                  | 28,696 |                                        | $                 | 4,248 |                   |  | $                                      | 36,748 |  | $ | 117,184 |  
|                                              |  |                    |        |                                        |                   |       |                   |  |                                        |        |  |   |         |  



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NOTE 10. Net Income Per Share

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



|                                                       |  |                    |         |                                        |   |                   |  |                                        |         |  |   |        
|------------------------------------------------------ |  | ------------------ | ------- | -------------------------------------- | - | ----------------- |  | -------------------------------------- | ------- |  | - | -------
|                                                       |  | Three Months Ended |         | Nine Months Ended                     
|(in thousands, except per share amounts)               |  | September 27,2009  |         | September 28, 2008As adjusted - Note 1 |   | September 27,2009 |  | September 28, 2008As adjusted - Note 1
|Numerator:                                             |  |                    |         |                                        |   |                   |  |                                        |         |  |   |        
|Net income                                             |  | $                  | 27,819  |                                        | $ | 4,457             |  | $                                      | 31,751  |  | $ | 119,484
|Denominator:                                           |  |                    |         |                                        |   |                   |  |                                        |         |  |   |        
|Basic weighted average common shares outstanding (1)   |  |                    | 227,123 |                                        |   | 222,335           |  |                                        | 225,276 |  |   | 221,091
|Dilutive effect of employee stock options and awards   |  |                    | 4,740   |                                        |   | 3,468             |  |                                        | 2,896   |  |   | 2,482  
|                                                       |  |                    |         |                                        |   |                   |  |                                        |         |  |   |        
|Diluted weighted average common shares outstanding (1) |  |                    | 231,863 |                                        |   | 225,803           |  |                                        | 228,172 |  |   | 223,573
|                                                       |  |                    |         |                                        |   |                   |  |                                        |         |  |   |        
|Basic net income per share                             |  | $                  | 0.12    |                                        | $ | 0.02              |  | $                                      | 0.14    |  | $ | 0.54   
|Diluted net income per share                           |  | $                  | 0.12    |                                        | $ | 0.02              |  | $                                      | 0.14    |  | $ | 0.53   



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

Note 11. Contingencies

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 (the Federal Court)
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.

The Beiser/Barone plaintiffs generally allege 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
stockholders in connection with improperly dating certain employee stock option grants and that these purported breaches of fiduciary duties caused harm to the Company. The plaintiffs seek to recover damages on behalf of the Company. They also
allege violations of federal securities laws. The Company is a nominal defendant, but any recovery in the litigation would be paid to the Company, rather than to its stockholders. The defendants have entered into joint defense
arrangements.



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The defendants moved to dismiss the Beiser/Barone action on various legal grounds
including that the plaintiffs failed to state a claim and failed to plead with particularity facts establishing that a litigation demand on the board of directors of the Company would have been futile at the time they commenced
the derivative lawsuit. The Federal Court dismissed the consolidated complaint on August 22, 2007 and gave plaintiffs leave to amend. The Federal Court dismissed the plaintiffs first amended consolidated complaint on May 8,
2008 and permitted plaintiffs leave to amend one last time. Defendants moved to dismiss the second amended complaint, which motions were to be heard on August 20, 2008.

On July 15, 2008, Ian Beiser, a named plaintiff in the Beiser/Barone action, filed a complaint in the Delaware Court of
Chancery, and it was served on July 18, 2008, compelling the Company to permit plaintiff to inspect and make copies of the Companys books and records. On August 5, 2008, the plaintiffs moved to stay the Federal Court action pending
the books and records action. The Federal Court granted the motion to stay on August 13, 2008, which removed from the calendar the hearing on defendants motions to dismiss, previously scheduled for August 20, 2008.

On February 26, 2009, the Delaware Chancery Court granted the Companys motion to dismiss plaintiffs books and records
demand. This result has lifted the stay on the motion to dismiss the second amended complaint in the Federal Court.

While the
briefing on defendants motions was under way, the parties engaged in mediation and on November 5, 2009 entered into a stipulation of settlement under which the parties have agreed, subject to court approval, to resolve both the
Beiser/Barone action and the Meissner action. Under the stipulation of settlement, the Company has agreed to adopt certain corporate governance reforms and to maintain these and other reforms put in place while the litigation was
pending for a period of three years. The Company has agreed, subject to court approval, to pay plaintiffs counsel $1.6 million in attorneys fees, half of which will be paid by the Company and the other half by the Companys
insurance carrier. In light of the stipulated settlement, the parties have agreed to suspend the briefing on defendants renewed motions to dismiss the Beiser/Barone action. The parties plan to file papers with the Federal
Court as soon as practicable seeking preliminary approval of the settlement and requesting that the Federal Court approve a schedule and process for providing notice to shareholders and set a date for considering a motion for final approval of the
settlement.

The Company has accrued costs of $800,000 to reflect its share of the attorneys fees to be paid to
plaintiffs counsel pursuant to the settlement. As with the rest of the settlement, the agreement to pay attorneys fees and the amount of fees to be paid remain subject to approval by the Federal Court.



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##### Table of Contents

Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

This Quarterly Report contains 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. Our forward-looking statements include statements as to our business outlook, revenues, margins, expenses, tax
provision, capital resources and liquidity sufficiency, sources of liquidity, capital expenditures, interest income and expenses, restructuring activities, cash commitments, purchase commitments, use of cash, our expectation regarding our
amortization of purchased intangible assets and as to our expectation regarding distribution from certain investments.

Investors are
cautioned not to place undue reliance on these forward-looking statements, which reflect managements analysis only as of the date of this Quarterly 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 described under Item 1A. Risk
Factors and elsewhere in this Quarterly Report and our other filings with the Security Exchange Commission (SEC).

OVERVIEW

Our current revenues are generated by a portfolio of more than 350 products, which we have designed
and developed or acquired. Our diverse product portfolio services a number of key end markets: (i) the Enterprise Infrastructure market, which includes our products and solutions that enable the high-speed interconnection of servers, switches
and storage devices that comprise these systems so that large quantities of data can be stored, managed and moved securely, as well as microprocessor-based System-on-Chip (SOC) products for laser printers and enterprise networking; and
(ii) the Wide Area Network (WAN) Infrastructure market whereby our wireline, wireless and Passive Optical Networking (PON) devices are used in access and transport equipment such as routers, optical transport platforms
and wireless base stations that aggregate and process signals in different protocols from enterprises and homes, and then transmit them to the next destination.

We invest a substantial amount every year in the research and 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 are cost competitive in the geographic markets
that we serve. Going forward, we plan to continue to focus on finding innovative solutions to our customers needs while finding further operational efficiencies.



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##### Table of Contents

Results of Operations

Third Quarter of 2009 and 2008

Net revenues



|             |  |               |       |        |   |       |  |    |   
|------------ |  | ------------- | ----- | ------ | - | ----- |  | -- | --
|($ millions) |  | Third Quarter |       | Change |  
|             |  | 2009          |       | 2008   |  
|Net revenues |  | $             | 130.9 |        | $ | 139.4 |  | (6 | )%

Net revenues for the third quarter of 2009 were $130.9 million compared to $139.4
million for the same period in 2008, a decrease of $8.5 million or 6%. Net revenues generated from the Enterprise Infrastructure market, which is served by our storage solutions and microprocessor-based System-On-Chip (SOC) products,
increased by 16%. Net revenues generated from the Wide Area Network (WAN) Infrastructure market, which is served by our wireline and wireless infrastructure products, decreased by 24%.

The growth in net revenues in our Enterprise Infrastructure market noted above was mainly driven by a ramp in production of the 6Gig SAS
(Serial Attached SCSI) -2 RAID (Redundant Array of Independent Disks)-on-Chip device at Hewlett-Packard (HP). We also experienced an increase in sales in our 3Gig and 6Gig SAS expander products. These increases
were offset by decreased net revenues in our other enterprise storage markets, microprocessor business, laser printers and enterprise networking mainly due to the working down of inventories by our customers and the effects of the general economic
slowdown on enterprise spending.

We experienced decline in the WAN Infrastructure market mainly due to consumption of excess
inventory in the third quarter of 2009 and lower levels of capital spending on equipment by carriers in those end markets. As a partial offset to this decline in net revenues, we experienced some increased activity in China and Korea due to
increased deployment of Ethernet Passive Optical Networks (EPON) Fibre-To-The-Home (FTTH) services.

Gross
profit



|                           |  |               |      |   |        |   |      |   |  |    |   
|-------------------------- |  | ------------- | ---- | - | ------ | - | ---- | - |  | -- | --
|($ millions)               |  | Third Quarter |      |   | Change |  
|                           |  | 2009          |      |   | 2008   |   |     
|Gross profit               |  | $             | 86.4 |   |        | $ | 92.0 |   |  | (6 | )%
|Percentage of net revenues |  |               | 66   | % |        |   | 66   | % |  |    |   

Total gross profit decreased $5.6 million in the third quarter of 2009 compared to
the same period in 2008 and gross profit as a percentage of net revenues remained consistent in the third quarter of 2009 as compared to the same period in 2008.



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During the third quarter of 2009, we had a 1% decrease in gross margin as a percentage of
net revenues due to having customer funded application-specific integrated circuit (ASIC) mask sets at zero margin, which we did not have in the third quarter of 2008. This was offset by an increase of 1% attributable to product mix, as
well as the cost reductions achieved during the third quarter of 2009 as compared to the same period in 2008.

Other costs and expenses



|                                            |  |               |      |   |        |   |      |   |  |     |   
|------------------------------------------- |  | ------------- | ---- | - | ------ | - | ---- | - |  | --- | --
|($ millions)                                |  | Third Quarter |      |   | Change |  
|                                            |  | 2009          |      |   | 2008   |   |     
|Research and development                    |  | $             | 35.8 |   |        | $ | 39.7 |   |  | (10 | )%
|Percentage of net revenues                  |  |               | 27   | % |        |   | 28   | % |  |     |   
|                                            |  |               |     
|Selling, general and administrative         |  |               | 19.7 |   |        |   | 23.6 |   |  | (17 | )%
|Percentage of net revenues                  |  |               | 15   | % |        |   | 17   | % |  |     |   
|                                            |  |               |     
|Amortization of purchased intangible assets |  |               | 9.8  |   |        |   | 9.8  |   |  |    | % 
|Percentage of net revenues                  |  |               | 7    | % |        |   | 7    | % |  |     |   
|                                            |  |               |     
|Restructuring costs and other charges       |  |               | 0.2  |   |        |   | (0.3 | ) |  | 167 | % 
|Percentage of net revenues                  |  |               |     | % |        |   |     | % |  |     |   

Research and Development and Selling, General and Administrative Expenses

Our research and development, or R&D expenses decreased by $3.9 million or 10% in the third quarter of 2009 as compared to
the third quarter of 2008. Payroll-related costs decreased by $3.3 million mainly due to the effect of foreign exchange rates on the payroll-related costs in our foreign operations. This decrease was partially offset by an increase in headcount.
Total material costs, including outside consultant services, wafer and photomask costs increased by $1.6 million, mainly due to the additional costs related to the RAID R&D programs. Our infrastructure related expenses decreased by $1.1 million,
mainly due to the decrease in depreciation expenditures. We also received a $0.7 million research and development related government grant in a foreign jurisdiction in the third quarter of 2009 and there was no such grant in 2008. The remaining
decrease in expense of $0.4 million is due to the decrease in other expenses mainly due to the decrease in training and travel expenditures due to cost reduction activities.

Our selling, general and administrative, or SG&A expenses decreased by $3.9 million, or 17% in the third quarter of 2009 as compared to
the third quarter of 2008. Payroll-related costs decreased by $2.5 million mainly due to the effect of foreign exchange rates on the payroll-related costs in our foreign operations and headcount reductions. The other expenditures including
infrastructure related expenses, training and travel decreased by $1.4 million mainly due to cost reduction activities.



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Amortization of purchased intangible assets

In the first and second quarters of 2006, we completed the acquisitions of the Storage Semiconductor Business from Avago, and of Passave,
Inc., respectively. Amortization of intangible assets acquired from the Storage Semiconductor Business and Passave in the third quarter of 2009 was $4.7 million and $5.1 million, respectively. Amortization from the Storage Semiconductor Business and
Passave in the third quarter of 2008 was $4.7 million and $5.1 million, respectively.

Restructuring costs and other
charges

Please refer to the full description of our various restructuring activities and plans in this Managements
Discussion and Analysis under First Nine Months of 2009 and 2008. The activity related to excess facility and severance accruals under our restructuring plans during the third quarter of 2009, by year of plan, were as follows:

Excess facility costs



|                              |  |      |     |   |      |   |     |      |  |   |       |   |  |       |       |   |  |   |       |  
|----------------------------- |  | ---- | --- | - | ---- | - | --- | ---- |  | - | ----- | - |  | ----- | ----- | - |  | - | ----- | -
|(in thousands)                |  | 2007 |     |   | 2006 |   |     | 2005 |  |   | 2001  |   |  | Total |      
|Balance at June 28, 2009      |  | $    | 673 |   |      | $ | 126 |      |  | $ | 2,779 |   |  | $     | 1,441 |   |  | $ | 5,019 |  
|                              |  |      |     |   |     
|Reversals and adjustments     |  |      |    |   |      |   | 2   |      |  |   |      |   |  |       | 30    |   |  |   | 32    |  
|New charges                   |  |      |    |   |      |   |    |      |  |   | 175   |   |  |       |      |   |  |   | 175   |  
|Cash payments                 |  |      | (74 | ) |      |   | (38 | )    |  |   | (343  | ) |  |       | (206  | ) |  |   | (661  | )
|                              |  |      |     |   |      |   |     |      |  |   |       |   |  |       |       |   |  |   |       |  
|Balance at
September 27, 2009 |  | $    | 599 |   |      | $ | 90  |      |  | $ | 2,611 |   |  | $     | 1,265 |   |  | $ | 4,565 |  
|                              |  |      |     |   |      |   |     |      |  |   |       |   |  |       |       |   |  |   |       |  
|Severance costs               |  |      |     |   |      |   |     |     
|                              |  |     
|(in thousands)                |  | 2007 |     |   |      |  
|Balance at June 28, 2009      |  | $    | 4   |   |     
|Cash
payments                 |  |      | (4  | ) |     
|                              |  |      |     |   |     
|Balance at
September 27, 2009 |  | $    |    |   |     
|                              |  |      |     |   |     



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##### Table of Contents

Other income (expense) and Recovery of (provision for) income taxes



|                                                                                         |  |               |      |    |                 |   |       |    |  |      |   
|---------------------------------------------------------------------------------------- |  | ------------- | ---- | -- | --------------- | - | ----- | -- |  | ---- | --
|($ in millions)                                                                          |  | Third Quarter |      |    | Change          |  
|                                                                                         |  | 2009          |      |    | 2008As adjusted |   |      
|Foreign exchange gain (loss)                                                             |  | $             | (1.1 | )  |                 | $ | 0.9   |    |  | (222 | )%
|Percentage of net revenues                                                               |  |               | (1   | )% |                 |   | 1     | %  |  |      |   
|                                                                                         |  |               |     
|Gain on repurchase of senior convertible notes, net and amortization of debt issue costs |  | $             | (0.1 | )  |                 | $ | (0.1  | )  |  |     | % 
|Percentage of net revenues                                                               |  |               |     | %  |                 |   |      | %  |  |      |   
|                                                                                         |  |               |     
|Interest income (expense), net                                                           |  | $             | (0.5 | )  |                 | $ | 0.2   |    |  | (350 | )%
|Percentage of net revenues                                                               |  |               |     | %  |                 |   |      | %  |  |      |   
|                                                                                         |  |               |     
|Recovery on investments, net                                                             |  | $             |     |    |                 | $ | 0.4   |    |  | (100 | )%
|Percentage of net revenues                                                               |  |               |     | %  |                 |   |      | %  |  |      |   
|                                                                                         |  |               |     
|Loss on investment securities                                                            |  | $             |     |    |                 | $ | (11.8 | )  |  | 100  | % 
|Percentage of net revenues                                                               |  |               |     | %  |                 |   | (8    | )% |  |      |   
|                                                                                         |  |               |     
|Recovery of (provision for) income taxes                                                 |  | $             | 8.6  |    |                 | $ | (4.3  | )  |  | 300  | % 
|Percentage of net revenues                                                               |  |               | 7    | %  |                 |   | (3    | )% |  |      |   

Foreign exchange gain (loss)

We have 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 in accordance with our general practice of hedging approximately three quarters in advance.

Our net foreign exchange loss was $1.1 million in the third quarter of 2009, which was primarily due to foreign exchange loss on the
revaluation of our net foreign tax liability. We do not hedge our income tax accruals against fluctuations in foreign currency exchange rates (see Item 3. Quantitative and Qualitative Disclosures About Market Risk). The revaluation of this
foreign tax liability was required because of the foreign exchange rate fluctuations of other currencies against the United States Dollar. The foreign exchange rate between the United States Dollar and the currencies of countries where we have
significant tax liabilities depreciated 5% during the third quarter of 2009 compared to appreciating 3% during the third quarter of 2008.

Gain on repurchase of senior convertible notes, net and amortization of debt issue costs

In connection with our senior convertible notes in the third quarter of 2009, we recognized related deferred debt issue costs of $0.1 million.



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##### Table of Contents

Interest income (expense), net

Net interest income decreased by $0.7 million in the third quarter of 2009 compared to the third quarter of 2008 due mainly to lower
investment yields and this was partially offset by the reduction in interest expense relating to the accretion of the discount related to the senior convertible notes.

Recovery on investments, net

In the third quarter of 2008, we received
$0.4 million as recovery on a previously booked investment loss related to our past investment in a private company.

Loss
on investments

Included in the results of the third quarter of 2008 is an impairment of $11.8 million in the fair values
of our investments in money market funds held by the Reserve International Liquidity Fund Ltd. (the International Fund) and the Reserve Primary Fund (the Primary Fund, together the Reserve Fund). For additional
information, see Critical Accounting Estimates  Investment in Cash Equivalents, Short-Term Investments and Long-Term Investment Securities and Liquidity & Capital Resources included in this Item 2. Managements Discussion and Analysis
of Financial Condition and Results of Operations.

Recovery of (provision for) income taxes

We recorded recovery of income taxes of $8.6 million and a provision for income taxes of $4.3 million for the third quarter of 2009 and 2008,
respectively. During the three months ended September 27, 2009, we experienced a decrease in our provision for income taxes due to the product and income mix across our subsidiaries and the effects of foreign exchange translation of a foreign
subsidiary when comparing to the same period in 2008. The majority of the reduction in the provision for income taxes was due to the effect of the foreign exchange translation of a foreign subsidiary in the third quarter of 2009 compared to the same
period in 2008.

The financial statements for the nine months ended September 27, 2009 include the tax effects associated
with the sale of certain assets between wholly-owned subsidiaries of the Company. GAAP requires the tax expense associated with gains on such inter-company transactions to be recognized over the estimated life of the related assets. Accordingly, the
$22.8 million recorded as long-term prepaid expenses as at September 27, 2009, represents the remaining tax expense to be recognized over periods of up to six years, with corresponding amounts recorded as current and deferred income taxes
payable and as liability for unrecognized tax benefits. The tax expense in the third quarter of 2009 resulting from these transactions was $0.9 million.

During the second quarter of 2008, one of our foreign subsidiaries settled several ongoing tax matters for less than had been accrued as part of its liability for unrecognized tax benefits resulting in
the recognition of tax benefits of $124.1 million that were previously included in the liability for unrecognized tax benefits.



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##### Table of Contents

First Nine Months of 2009 and 2008

Net revenues



|             |  |                   |       |        |   |       |  |     |   
|------------ |  | ----------------- | ----- | ------ | - | ----- |  | --- | --
|($ millions) |  | First Nine Months |       | Change |  
|             |  | 2009              |       | 2008   |  
|Net revenues |  | $                 | 356.6 |        | $ | 404.2 |  | (12 | )%

Net revenues for the first nine months of 2009 were $356.6 million compared to $404.2
million for the same period in 2008, a decrease of $47.6 million or 12%. Net revenues generated from the Enterprise Infrastructure market, which is served by our storage solutions and microprocessor-based SOC products, decreased by 15%. Net revenues
generated from the WAN Infrastructure market, which is served by our wireline and wireless infrastructure products, decreased by 9%.

The decline in net revenues noted above in the Enterprise Infrastructure market was mainly due to the working down of inventories by our customers and the effects of the general economic slowdown on enterprise spending. This decline was
partially offset by an increase in sales of our 6Gig SAS-2 RAID-on-Chip device, which began shipping in production volumes in the second quarter of 2009. In addition, we experienced increased net revenues due to the increased demand for our 3Gig SAS
and 6Gig SAS expander products.

We experienced a decline in the WAN infrastructure market mainly due to consumption of excess
inventory in the first nine months of 2009 and lower levels of capital spending by carriers in those end markets. As a partial offset to this decline in net revenues, we experienced come increased activity in China due to an increase in demand by
our Chinese OEM customers who supply carriers building out 3G wireless networks in China, as well as the increasing demand for aggregation and metro transport equipment that is required to handle the increasing levels of data traffic in that market.

Gross profit



|                           |  |                   |       |   |        |   |       |   |  |     |   
|-------------------------- |  | ----------------- | ----- | - | ------ | - | ----- | - |  | --- | --
|($ millions)               |  | First Nine Months |       |   | Change |  
|                           |  | 2009              |       |   | 2008   |   |      
|Gross profit               |  | $                 | 236.0 |   |        | $ | 264.5 |   |  | (11 | )%
|Percentage of net revenues |  |                   | 66    | % |        |   | 65    | % |  |     |   

Total gross profit decreased $28.5 million in the first nine months of 2009 compared
to the same period in 2008 while gross profit as a percentage of net revenues increased by 1% to 66% from 65% in the first nine months of 2009 as compared to the same period in 2008.



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The increase in gross profit as a percentage is attributable to product mix, as well as the
cost reductions achieved in the first nine months of 2009 as compared to the first nine months of 2008. This was offset by an approximately 1% decrease mainly due to having customer funded ASIC masks set at zero margin during the first nine months
of 2009, which we did not have in the first nine months of 2008.

Other costs and expenses:



|                                            |  |                   |       |   |        |   |       |   |  |     |   
|------------------------------------------- |  | ----------------- | ----- | - | ------ | - | ----- | - |  | --- | --
|($ millions)                                |  | First Nine Months |       |   | Change |  
|                                            |  | 2009              |       |   | 2008   |   |      
|Research and development                    |  | $                 | 110.8 |   |        | $ | 117.0 |   |  | (5  | )%
|Percentage of net revenues                  |  |                   | 31    | % |        |   | 29    | % |  |     |   
|                                            |  |                   |      
|Selling, general and administrative         |  |                   | 63.9  |   |        |   | 72.0  |   |  | (11 | )%
|Percentage of net revenues                  |  |                   | 18    | % |        |   | 18    | % |  |     |   
|                                            |  |                   |      
|Amortization of purchased intangible assets |  |                   | 29.5  |   |        |   | 29.5  |   |  |    | % 
|Percentage of net revenues                  |  |                   | 8     | % |        |   | 7     | % |  |     |   
|                                            |  |                   |      
|Restructuring costs and other charges       |  |                   | 0.8   |   |        |   | 0.8   |   |  |    | % 
|Percentage of net revenues                  |  |                   |      | % |        |   |      | % |  |     |   

Research and development and selling, general and administrative expenses

Our research and development expenses decreased $6.2 million or 5% in the first nine months of 2009 compared to the first nine
months of 2008. Payroll costs decreased by $7.8 million mainly due to the effect of foreign exchange rates on payroll-related costs in our foreign operations, which were partially offset by an increase in headcount. Total material costs, including
outside consultant services, wafer and photomask costs increased by $2.8 million mainly due to the addition costs related to the RAID R&D programs, which were partially offset by a decrease in costs related to completing less tapeouts during the
first nine months of 2009 compared to the same period in 2008. The remaining $1.2 million reduction in expenses relates to the reduction in other expenses including training, travel and infrastructure related expenditures due to cost reduction
activities.

Our selling, general and administrative, expenses decreased by $8.1 million, or 11%, in the first nine months of
2009 compared to the first nine months of 2008. Payroll costs decreased by $7.0 million mainly due to the effect of foreign exchange rates on payroll-related costs in our foreign operations and headcount reductions. The remaining $1.1 million
reduction in expenses relates to the reduction in other expenses including training, travel, marketing and infrastructure related expenditures due to cost reduction activities.



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Amortization of purchased intangible assets

In the first and second quarters of 2006, we completed the acquisitions of the Storage Semiconductor Business from Avago and of Passave,
Inc., respectively. Amortization of intangible assets acquired from the Storage Semiconductor Business and Passave in the first nine months of 2009 was $14.2 million and $15.3 million, respectively. Amortization from the Storage Semiconductor
Business and Passave in the first nine months of 2008 was $14.2 million and $15.3 million, respectively.

Restructuring
costs and other charges

The activity related to excess facility and severance accruals, under our restructuring plans
during the first nine months of 2009, by year of plan, were as follows:

Excess facility costs



|                              |  |      |      |   |      |   |      |      |  |   |        |   |  |       |       |   |  |   |        |  
|----------------------------- |  | ---- | ---- | - | ---- | - | ---- | ---- |  | - | ------ | - |  | ----- | ----- | - |  | - | ------ | -
|(in thousands)                |  | 2007 |      |   | 2006 |   |      | 2005 |  |   | 2001   |   |  | Total |      
|Balance at December 28, 2008  |  | $    | 830  |   |      | $ | 178  |      |  | $ | 3,048  |   |  | $     | 1,875 |   |  | $ | 5,931  |  
|                              |  |      |      |   |     
|Reversals and adjustments     |  |      | 28   |   |      |   | 11   |      |  |   |       |   |  |       | 114   |   |  |   | 153    |  
|New charges                   |  |      | 25   |   |      |   | 82   |      |  |   | 625    |   |  |       |      |   |  |   | 732    |  
|Cash payments                 |  |      | (284 | ) |      |   | (181 | )    |  |   | (1,062 | ) |  |       | (724  | ) |  |   | (2,251 | )
|                              |  |      |      |   |      |   |      |      |  |   |        |   |  |       |       |   |  |   |        |  
|                              |  |      |      |   |     
|Balance at September 27, 2009 |  | $    | 599  |   |      | $ | 90   |      |  | $ | 2,611  |   |  | $     | 1,265 |   |  | $ | 4,565  |  
|                              |  |      |      |   |      |   |      |      |  |   |        |   |  |       |       |   |  |   |        |  
|Severance costs               |  |      |      |   |      |   |      |     
|                              |  |     
|(in thousands)                |  | 2007 |      |   |      |  
|Balance at December 28, 2008  |  | $    | 7    |   |     
|Reversals and adjustments     |  |      | 1    |   |     
|New charges                   |  |      |     |   |     
|Cash payments                 |  |      | (8   | ) |     
|                              |  |      |      |   |     
|Balance at
September 27, 2009 |  | $    |     |   |     
|                              |  |      |      |   |      |   |      |      |  |   |        |   |  |       |       |   |  |   |        |  

During the first nine months of 2009, we made payments totaling $2.3 million for
severance and excess facility costs incurred in connection with past restructuring plans. In addition, we recorded an additional $0.7 million for excess facilities as original assumptions regarding possible sublease on exited facilities were not
realized.

Payments for excess facilities under these restructuring plans may extend to 2011.

Further details regarding each of the restructuring plans noted in the above table are available in our Annual Report on Form 10-K for the
year ended December 28, 2008.



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Other income (expense) and Recovery of (provision for) income taxes



|                                                                                         |  |                   |      |    |                 |   |       |    |  |      |   
|---------------------------------------------------------------------------------------- |  | ----------------- | ---- | -- | --------------- | - | ----- | -- |  | ---- | --
|($ in millions)                                                                          |  | First Nine Months |      |    | Change          |  
|                                                                                         |  | 2009              |      |    | 2008As adjusted |   |      
|Foreign exchange gain                                                                    |  | $                 | 0.1  |    |                 | $ | 3.0   |    |  | (97  | )%
|Percentage of net revenues                                                               |  |                   |     | %  |                 |   | 1     | %  |  |      |   
|                                                                                         |  |                   |     
|Gain on repurchase of senior convertible notes, net and amortization of debt issue costs |  | $                 | (0.2 | )  |                 | $ | 4.6   |    |  | (104 | )%
|Percentage of net revenues                                                               |  |                   |     | %  |                 |   | 1     | %  |  |      |   
|                                                                                         |  |                   |     
|Loss on subleased facilities                                                             |  | $                 | (0.5 | )  |                 | $ |      |    |  | (100 | )%
|Percentage of net revenues                                                               |  |                   |     | %  |                 |   |      | %  |  |      |   
|                                                                                         |  |                   |     
|Interest income (expense), net                                                           |  | $                 | (2.1 | )  |                 | $ | 0.6   |    |  | (450 | )%
|Percentage of net revenues                                                               |  |                   | (1   | )% |                 |   |      | %  |  |      |   
|                                                                                         |  |                   |     
|Recovery on investments, net                                                             |  | $                 |     |    |                 | $ | 0.4   |    |  | (100 | )%
|Percentage of net revenues                                                               |  |                   |     | %  |                 |   |      | %  |  |      |   
|                                                                                         |  |                   |     
|Loss on investment securities                                                            |  | $                 |     |    |                 | $ | (11.8 | )  |  | 100  | % 
|Percentage of net revenues                                                               |  |                   |     | %  |                 |   | (3    | )% |  |      |   
|                                                                                         |  |                   |     
|Recovery of (provision for) income taxes                                                 |  | $                 | 3.5  |    |                 | $ | 77.4  |    |  | (95  | )%
|Percentage of net revenues                                                               |  |                   | 1    | %  |                 |   | 19    | %  |  |      |   

Foreign exchange gain

We have 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 in accordance with our general practice of hedging approximately three quarters in advance.

Our net foreign exchange gain was $0.1 million in the first nine months of 2009, which was primarily due to a $0.3 million foreign exchange
loss on the revaluation of our net foreign tax liabilities. We do not hedge our income tax accruals against fluctuations in foreign currency exchange rates (see Item 3. Quantitative and Qualitative Disclosures About Market Risk). The
revaluation of this foreign tax liability was required because of the fluctuations of other currencies against the United States Dollar. The foreign exchange rate between the United States Dollar and the currencies of countries where we have
significant tax liabilities depreciated 11% during the first nine months of 2009 compared to appreciating 5% during the first nine months of 2008.



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Gain on repurchase of senior convertible notes, net and amortization of debt issue costs

In connection with our repurchase of $98.0 million principal amount of our senior convertible notes in the first quarter
of 2008, we recognized a gain of $4.9 million which is net of the related debt issue costs and transaction costs expensed. We recognized the related amortization of debt issue costs of $0.2 million, and $0.3 million in the first nine months of 2009,
and 2008, respectively.

Loss on subleased facilities

We recorded a $0.5 million loss on subleased facilities during the first nine months of 2009.

Interest income (expense), net

Net interest income decreased by $2.7 million in the first nine months of 2009 compared to the first nine months of 2008 due mainly to lower investment yields partially offset by the decrease in interest
expense relating to the accretion of the discount related to the senior convertible notes.

Recovery on investments, net

In the third quarter of 2008, we received $0.4 million as recovery on a previously booked investment loss related to our
past investment in a private company.

Loss on investments

Included in the results of the third quarter of 2008 is an impairment of $11.8 million in the fair values of our investments in money market
funds held by the Reserve Fund. For additional information, see Critical Accounting Estimates  Investment in Cash Equivalents, Short-Term Investments and Long-Term Investment Securities and Liquidity & Capital Resources included in this
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.

Recovery of (provision
for) income taxes

We recorded a recovery of income taxes of $3.5 million and recovery of income taxes of $77.4 million for
the first nine months of 2009 and 2008, respectively. The recovery in the first nine months of 2009 was primarily due to the effect of foreign exchange translation of a foreign subsidiary, partially offset by tax expense related to certain
inter-company transactions described below. The recovery in the first nine months of 2008 was due to a tax settlement by a foreign subsidiary further described below.

The financial statements for the first nine months of 2009 include the tax effects associated with the sale of certain assets between wholly-owned subsidiaries of the Company. GAAP requires the tax
expense associated with gains on such inter-company transactions to be recognized over the estimated life of the related assets. Accordingly, the $22.8 million recorded as long-term prepaid expenses as at September 27, 2009 represents the
remaining tax expense to be recognized over periods of up to six years, with corresponding amounts recorded as current and deferred income taxes payable and as liability for unrecognized tax benefits. The tax expense in the first nine months of 2009
resulting from these transactions was $3.1 million.

During the first quarter of 2008, one of our foreign subsidiaries
received a written communication from a tax authority, resulting in an accrual of $26.5 million, including interest, as part of the liability for unrecognized tax benefits. In the second quarter of 2008, this subsidiary settled several ongoing tax
matters for less than had been accrued as part of its liability for unrecognized tax benefits, resulting in the recognition of tax benefits of $124.1 million that were previously included in the liability for unrecognized tax benefits.



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Critical Accounting Estimates

General

Managements Discussion and Analysis of Financial Condition and Results of Operations is based upon our Condensed 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 our reported assets, liabilities, revenue and expenses, and related disclosure of our contingent assets and liabilities.
Our significant accounting policies are outlined in Note 1. Summary of Significant Accounting Policies to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 28, 2008, which also provides
commentary on our most critical accounting estimates. The following estimates are of note:

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). Prior to 2009, the amounts allocated to IPR&D were 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.

The value of our intangible assets, including
goodwill, could be impacted by future adverse changes such as: (i) any future declines in our operating results; (ii) a decline in the valuation of technology company stocks, including the valuation of our common stock; (iii) a
further significant slowdown in the worldwide economy or the semiconductor industry; or (iv) any failure to meet the performance projections included in our forecasts of future operating results.



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Goodwill and intangible assets determined to have indefinite lives are not amortized, but
are subject to an annual impairment test in the fourth quarter or more frequently if we believe indicators of impairment exist. 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. In the process of our annual impairment review, we primarily use the income approach
methodology of valuation that includes the discounted cash flow method to determine the fair value of our intangible assets. Significant management judgment is required in the forecasts of future operating results and discount rates used in the
discounted cash flow method of valuation. It is possible, however, that the plans may change and estimates used may prove to be inaccurate. If our actual results, or the plans and estimates used in future impairment analyses, are lower than the
original estimates used to assess the recoverability of these assets, we could incur additional impairment charges.

There
were no indications of impairment to goodwill or intangible assets during the first nine months 2009. Changes in the estimated fair values of these assets in the future could result in significant impairment charges or changes to our expected
amortization.

Stock-Based Compensation

Since January 1, 2006, we have recognized compensation expense for all share-based payment awards. Under ASC Topic 718, Compensation  Stock Compensation, 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 our 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.



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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 expense could change significantly in the future. See Note 1. Summary of Significant Accounting Policies and Note 4 Stock-Based Compensation to the Condensed 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 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, if any, of sublease revenues for each location. 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 or complete negotiations of a lease termination agreement for 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.

For example, we have recorded charges of $3.0
million to date relating to the restructuring of excess facilities in connection with our 2007 restructuring plan. This estimate represents 100% of the estimated future operating costs and lease obligation for the exited space.

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 the termination, 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 and net operating losses, if any, available in each tax jurisdiction.



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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 in which we operate. 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 decreased significantly at the end of 2008 due to one of our foreign subsidiaries settling several ongoing tax matters for tax years 2000-2006. As a
result, we recognized tax benefits of $124.1 million that was previously included in the liability for unrecognized tax benefits. 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 in which we operate. 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.

Investment in Cash Equivalents, Short-Term Investments and Long-Term Investment Securities

Our cash equivalents, short-term investments and long-term investment securities are comprised of money market funds, United States Treasury
and Government Agency notes, Federal Deposit Insurance Corporation (FDIC)-insured corporate notes, United States State and Municipal Securities, foreign government and agency notes, and corporate bonds and notes with minimum ratings of
P-1 or A3 by Moodys, or A-1 or A- by Standard and Poors, or equivalent. At September 27, 2009, these securities had an estimated fair value of $396.5 million.

Beginning in the first quarter of fiscal 2008, the assessment of fair value is based on the provisions of ASC Topic 820, the Fair
Value Measurements and Disclosure Topic. We determined the fair value of our investment securities, which include money market funds, United States Treasury and Government Agency Notes, FDIC-insured corporate notes, United States State
and Municipal Securities, foreign government and agency notes, and corporate bonds and notes, using quoted prices from active markets, quoted prices for similar assets from third-party sources and by performing valuation analyses. In determining if
and when a decline in market value below the carrying value of our investment securities is other-than-temporary, we evaluate on an ongoing basis the market conditions, trends of earnings, financial condition and other key measures for our
investments. We assess impairment of our investment securities in accordance with GAAP.

During 2008, we assessed the
fair value of certain of our investment securities by giving consideration to Level 2 and Level 3 inputs (see Note 3. Fair Value Measurements), for the shares of the Reserve Funds and their underlying securities. Based on this assessment, we
recorded an impairment of the Reserve Funds of $11.8 million during the third quarter of 2008, incorporating the Reserve Funds valuation at zero for debt securities of Lehman Brothers held, and a net asset value of $0.97 per share communicated
by the Reserve Funds Primary Fund. We reassessed the fair value of our investments in money market funds for the third quarter 2009, and there were no further impairments.



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We reclassified our investment in shares of the Reserve Funds from Level 1 to Level 3 of the
fair value hierarchy due to the inherent subjectivity and significant judgment related to the fair value of the shares of the Reserve Funds and their underlying securities. Accordingly, we changed the valuation method from a market approach to an
income approach.

In addition, due to the continuing redemption delays associated with the liquidation proceedings of the
Reserve Funds, we reclassified all of these shares from cash and cash equivalents to short-term investments (see Liquidity and Capital Resources).

Changes in market conditions and the method and timing of the liquidation process of the Reserve Funds could result in further adjustments to the fair value and classification of these investments, and
these changes could be material.

Business Outlook

We expect our revenues for the fourth quarter of 2009 to be approximately $132 to $140 million.

We anticipate our fourth quarter 2009 gross margin percentage to be 65% to 66% including approximately $0.2 million stock-based compensation
expense. As in past quarters this could vary depending on the volume of products sold, since many of our costs are fixed. Margins may also vary depending on the mix of products sold.

We expect our fourth quarter 2009 research and development, and selling, general and administrative expenses, to be approximately between
$57.5 million and $59.5 million, including stock-based compensation expense of approximately between $4.5 million and $5.5 million.

We expect that we will continue to incur significant amortization of purchased intangible assets related to our 2006 acquisitions in the fourth quarter of 2009.



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Liquidity & Capital Resources

Our principal sources of liquidity are cash from operations, short-term investments and long-term investment securities. We employ these
sources of liquidity to support ongoing business activities, acquire or invest in critical or complementary technologies, purchase capital equipment, repurchase our senior convertible notes and finance working capital. The combination of cash, cash
equivalents, short-term investments and long-term investment securities at September 27, 2009 and December 28, 2008 totaled $419.6 million and $307.5 million, respectively, which are composed of the following:



|                                                                                       |  |                    |         |                       |   |                       |  |   |            |   |  |   |        
|-------------------------------------------------------------------------------------- |  | ------------------ | ------- | --------------------- | - | --------------------- |  | - | ---------- | - |  | - | -------
|                                                                                       |  | September 27, 2009
|(in thousands)                                                                         |  | Amortized Cost     |         | GrossUnrealizedGains* |   | GrossUnrealizedLosses |  |   | Fair Value
|Cash                                                                                   |  | $                  | 23,062  |                       | $ |                      |  | $ |           |   |  | $ | 23,062 
|Money market funds                                                                     |  |                    | 194,517 |                       |   | 24                    |  |   |           |   |  |   | 194,541
|US Treasury and Government Agency notes                                                |  |                    | 84,720  |                       |   | 956                   |  |   |           |   |  |   | 85,676 
|Corporate bonds and notes                                                              |  |                    | 78,806  |                       |   | 1,330                 |  |   | (32        | ) |  |   | 80,104 
|US States and Municipal securities                                                     |  |                    | 19,657  |                       |   | 28                    |  |   | (7         | ) |  |   | 19,678 
|Foreign government and agency notes                                                    |  |                    | 16,262  |                       |   | 259                   |  |   |           |   |  |   | 16,521 
|                                                                                       |  |                    |         |                       |   |                       |  |   |            |   |  |   |        
|                                                                                       |  |                    |         |                      
|Total                                                                                  |  | $                  | 417,024 |                       | $ | 2,597                 |  | $ | (39        | ) |  | $ | 419,582
|                                                                                       |  |                    |         |                       |   |                       |  |   |            |   |  |   |        
|                                                                                       |  |                    |         |                      
|*  Gross unrealized gains include accrued interest on investments.                     |  |                    |         |                       |   |                       |  |   |            |   |  |   |        
|                                                                                       | 
|                                                                                       |  | December 28, 2008 
|                                                                                       |  | Amortized Cost     |         | GrossUnrealized       |   | GrossUnrealized       |  |   | Fair Value
|Cash                                                                                   |  | $                  | 28,626  |                       | $ |                      |  | $ |           |   |  | $ | 28,626 
|Money market funds                                                                     |  |                    | 278,898 |                       |   |                      |  |   |           |   |  |   | 278,898
|                                                                                       |  |                    |         |                       |   |                       |  |   |            |   |  |   |        
|                                                                                       |  |                    |         |                      
|Total                                                                                  |  | $                  | 307,524 |                       | $ |                      |  | $ |           |   |  | $ | 307,524
|                                                                                       |  |                    |         |                       |   |                       |  |   |            |   |  |   |        
|                                                                                      
|The investments are recognized in the Condensed Consolidated Balance Sheet as follows:
|                                                                                       |  |                   
|                                                                                       |  | September 27, 2009 |         | December 28, 2008    
|(in thousands)                                                                         |  | Amortized Cost     |         | Fair Value            |   | Amortized Cost        |  |   | Fair Value
|Cash and cash equivalents                                                              |  | $                  | 181,021 |                       | $ | 181,044               |  | $ | 97,839     |   |  | $ | 97,839 
|Short-term investments                                                                 |  |                    | 92,476  |                       |   | 94,019                |  |   | 209,685    |   |  |   | 209,685
|Long-term investment securities                                                        |  |                    | 143,527 |                       |   | 144,519               |  |   |           |   |  |   |       
|                                                                                       |  |                    |         |                       |   |                       |  |   |            |   |  |   |        
|                                                                                       |  |                    |         |                      
|Total                                                                                  |  | $                  | 417,024 |                       | $ | 419,582               |  | $ | 307,524    |   |  | $ | 307,524
|                                                                                       |  |                    |         |                       |   |                       |  |   |            |   |  |   |        



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As of September 27, 2009 and December 28, 2008, we had $57.6 million and $55.4
million of senior convertible notes outstanding, respectively, recorded on our Condensed Consolidated Balance Sheets. The face value of the senior convertible notes as at September 27, 2009 and December 28, 2008 was $68.3 million. In the
future, we expect our cash from operations, short-term investments and long-term investment securities, including distributions from the Reserve Funds, to be our sources of liquidity.

As of September 27, 2009 and December 28, 2008, we had $38.9 million and $209.7 million of our short-term investments relate to
shares of the Reserve Funds for which we have outstanding redemption orders, respectively, recorded on our Consolidated Balance Sheets. The Reserve Funds were AAA-rated money market funds that announced redemption delays and suspended trading in
September 2008 during the severe disruption in financial markets. The Reserve Funds are in the process of liquidating their portfolio of investments, which included securities of Lehman Brothers Holdings, Inc. that was downgraded and has filed for
Chapter 11 bankruptcy protection. The Primary Fund has received an SEC order providing that the SEC will supervise the distribution of assets from the fund.

During the first nine months of 2009, we received distributions of $170.8 million from the Reserve Funds and expect the remainder of this investment to be distributed by the end of fiscal 2009. Subsequent
to September 27, 2009, we received $1.3 million as a partial distribution from the Primary Fund.

Changes in market
conditions and the method and timing of the liquidation process of the Reserve Funds could result in further adjustments to the fair value and classification of these investments, and these changes could be material.

See Critical Accounting Estimates  Investment in Cash Equivalents, Short-Term Investments and Long-Term Investment Securities for
additional information.

Operating Activities  During the first nine months of 2009, we generated net positive operating cash
flows of $92.2 million. The main drivers for this were primarily our $31.8 million net income and the add backs of $59.1 million non-cash operating expenses.

Investing Activities  We used $33.3 million for investing activities in the first nine months of fiscal 2009, including $209.3 million for the purchase of investment securities, and $6.0 for
the purchase of property, plant and equipment and intellectual property, net of $11.1 million received for the disposal of investments securities and $170.8 million in distributions from the Reserve Funds.

Financing activities  Net cash from financing activities of $24.3 million in the first nine months of 2009 was generated from the issuance of
common shares under our employee stock plans.



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As of September 27, 2009, we had cash commitments made up of the following:



|                                  |  |       |         |      |   |       |  |      |        |      |   |        |  |           |       |  |   |       |  |   |       
|--------------------------------- |  | ----- | ------- | ---- | - | ----- |  | ---- | ------ | ---- | - | ------ |  | --------- | ----- |  | - | ----- |  | - | ------
|(in thousands)                    |  | Total |         | 2009 |   | 2010  |  | 2011 |        | 2012 |   | 2013   |  | After2013
|Contractual Obligations           |  |       |         |      |   |       |  |      |        |      |   |        |  |           |       |  |   |       |  |   |       
|                                  |  |       |         |      |   |       | 
|Operating Lease Obligations:      |  |       |         |      |   |       |  |      |        |      |   |        |  |           |       |  |   |       |  |   |       
|Minimum Rental Payments           |  | $     | 32,007  |      | $ | 2,893 |  | $    | 10,725 |      | $ | 7,408  |  | $         | 2,658 |  | $ | 2,550 |  | $ | 5,773 
|Estimated Operating Cost Payments |  |       | 12,060  |      |   | 959   |  |      | 3,639  |      |   | 2,362  |  |           | 1,074 |  |   | 1,074 |  |   | 2,952 
|Long Term Debt:                   |  |       |         |      |   |       |  |      |        |      |   |        |  |           |       |  |   |       |  |   |       
|Principal Repayment               |  |       | 68,340  |      |   |      |  |      |       |      |   |       |  |           |      |  |   |      |  |   | 68,340
|Interest Payments                 |  |       | 26,142  |      |   | 1,538 |  |      | 1,538  |      |   | 1,538  |  |           | 1,538 |  |   | 1,538 |  |   | 18,452
|Purchase and other Obligations    |  |       | 15,768  |      |   | 2,637 |  |      | 6,341  |      |   | 6,047  |  |           | 743   |  |   |      |  |   |      
|                                  |  |       |         |      |   |       |  |      |        |      |   |        |  |           |       |  |   |       |  |   |       
|                                  |  |       |         |      |   |       | 
|                                  |  | $     | 154,317 |      | $ | 8,027 |  | $    | 22,243 |      | $ | 17,355 |  | $         | 6,013 |  | $ | 5,162 |  | $ | 95,517
|                                  |  |       |         |      |   |       |  |      |        |      |   |        |  |           |       |  |   |       |  |   |       

In addition to the amounts shown in the table above, we have recorded $37.2 million
liability for unrecognized tax benefits, as of September 27, 2009 and we are uncertain as to if or when such amounts may be realized.

Purchase obligations as noted in the above table are comprised of commitments to purchase design tools and software for use in product development. Excluded from these purchase obligations are commitments
for inventory or other expenses entered into in the normal course of business. We estimate these other commitments to be approximately $16.0 million at October 26, 2009 for inventory and other expenses that will be received within 90 days and
that will require settlement 30 days thereafter.

Also, in addition to the amounts shown in the table above, we expect to use
approximately $3.5 million of cash in the remainder of 2009 for capital expenditures and purchases of intellectual property.

Based on our current operating prospects, we believe that existing sources of liquidity will satisfy our projected operating, working capital, investing, capital expenditure, and remaining restructuring requirements through 2009.



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Item 3. 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, Short-Term Investments and Long-Term Investment Securities:

We regularly maintain a portfolio of short- and
long-term investments comprised of various types of money market funds, United States Treasury and Government Agency notes, FDIC-insured corporate notes, United States State and Municipal Securities, foreign government and agency notes, and
corporate bonds and notes. Our investments are made in accordance with an investment policy approved by our Board of Directors. Maturities of these instruments are less than 36 months with the majority being within one year. To minimize credit risk,
we diversify our investments and select minimum ratings of P-1 or A3 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. Our
corporate policies prevent us from holding material amounts of asset-backed commercial paper.

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 September 27, 2009, 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 approximately $1.4
million, $2.8 million and $4.2 million, respectively.

Senior Convertible Notes:

At September 27, 2009, $68.3 million in face value of our 2.25% senior convertible notes were outstanding. Because we pay fixed interest
coupons on our senior convertible 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.



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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. We redeemed $98.0 million of the principal of these notes in the first quarter of 2008 at a cost of $95.5 million, including transaction fees and accrued interest. The holders may require that we repurchase
the 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.

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.



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Through our operations in Canada and elsewhere outside of the United States, we incur
research and development, sales, customer support and administrative expenses in 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. In the event that one of the counterparties to our foreign currency forward contracts failed to complete the terms of their contracts, we would purchase Canadian dollars at the spot rate as of the date the funds were
required. If the counterparties to our foreign currency forward contracts that matured in the fiscal quarter ended September 27, 2009 had not fulfilled their contractual obligations and we were required to purchase Canadian dollars at the spot
rate, our operating income for the third quarter would have decreased by $1.5 million.

At September 27, 2009,
we had 12 contracts outstanding to purchase Canadian dollars, all with maturities of less than 12 months that qualified and were designated as cash flow hedges. The U.S. dollar notional amount of these contracts was $16.4 million and the contracts
had a fair value of $1.5 million.

We attempt to limit our exposure to foreign exchange rate fluctuations from our foreign
currency net asset or liability positions. In the first nine months of 2009, we recorded a $0.3 million foreign exchange loss on the revaluation of our net tax liabilities in a foreign jurisdiction. The revaluation of our foreign income tax
liabilities was required because of fluctuations in the value of the United States dollar against other currencies. Our operating income would be materially impacted by a shift in the foreign exchange rates between United States and foreign
currencies that are material to our business. For example, a five percent shift in the foreign exchange rates between United States dollar and Canadian dollar would impact our pre-tax income by approximately $2.0 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. 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. We
may record an impairment charge to our operating results should we determine that these funds have incurred a non-temporary decline in value.



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Item 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

Our management evaluated, with the participation of our chief executive officer and our chief financial officer, our disclosure controls and procedures as of the end of the period covered by this
quarterly report. Based on this evaluation, our chief executive officer and our chief financial officer concluded that 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 Securities Exchange Act of 1934 is accumulated and communicated to management, including our chief executive officer and our chief financial officer, as appropriate, to allow timely decisions regarding required disclosure,
and is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.

Changes in internal control over financial reporting

There was no change
in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act) that occurred during the first nine months of 2009 that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.



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Part II  OTHER INFORMATION

Item 1. 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 (the Federal Court) Case No. 4:06-CV-06473-SBA (filed October 16, 2006). On November 21, 2006, the Beiser and Barone actions were consolidated into one
case. On January 18, 2007, the Santa Clara County Superior Court in California ordered that the Meissneraction be stayed pending the outcome of the consolidated, federal Beiser/Barone action.

The Beiser/Barone plaintiffs generally allege 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 stockholders in connection with improperly dating certain employee stock option grants and that these purported breaches of fiduciary duties caused harm to the Company. The plaintiffs seek to
recover damages on behalf of the Company. They also allege violations of federal securities laws. The Company is a nominal defendant, but any recovery in the litigation would be paid to the Company, rather than to its
stockholders. The defendants have entered into joint defense arrangements.

The defendants moved to dismiss the
Beiser/Barone action on various legal grounds including that the plaintiffs failed to state a claim and failed to plead with particularity facts establishing that a litigation demand on the board of directors of the Company would have
been futile at the time they commenced the derivative lawsuit. The Federal Court dismissed the consolidated complaint on August 22, 2007 and gave plaintiffs leave to amend. The Federal Court dismissed the plaintiffs first
amended consolidated complaint on May 8, 2008 and permitted plaintiffs leave to amend one last time. Defendants moved to dismiss the second amended complaint which motions were to be heard on August 20, 2008.

On July 15, 2008, Ian Beiser, a named plaintiff in the Beiser/Barone action, filed a complaint in the Delaware Court of
Chancery, and it was served on July 18, 2008, compelling the Company to permit plaintiff to inspect and make copies of the Companys books and records. On August 5, 2008, the plaintiffs moved to stay the Federal Court action pending
the books and records action. The Federal Court granted the motion to stay on August 13, 2008, which removed from the calendar the hearing on defendants motions to dismiss, previously scheduled for August 20, 2008.



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On February 26, 2009, the Delaware Chancery Court granted the Companys motion to
dismiss the plaintiffs books and records demand. This result has lifted the stay on the motion to dismiss the second amended complaint in the Federal Court.

While the briefing on defendants motions was under way, the parties engaged in mediation and on November 5, 2009 entered into a stipulation of settlement under which the parties have agreed, subject
to court approval, to resolve both the Beiser/Barone action and the Meissner action. Under the stipulation of settlement, the Company has agreed to adopt certain corporate governance reforms and to maintain these and other reforms
put in place while the litigation was pending for a period of three years. The Company has agreed, subject to court approval, to pay plaintiffs counsel $1.6 million in attorneys fees, half of which will be paid by the Company and
the other half by the Companys insurance carrier. In light of the stipulated settlement, the parties have agreed to suspend the briefing on defendants renewed motions to dismiss the Beiser/Barone action. The parties plan
to file papers with the Federal Court as soon as practicable seeking preliminary approval of the settlement and requesting that the Federal Court approve a schedule and process for providing notice to shareholders and set a date for considering a
motion for final approval of the settlement.

The Company has accrued costs of $800,000 to reflect its share of the
attorneys fees to be paid to plaintiffs counsel pursuant to the settlement. As with the rest of the settlement, the agreement to pay attorneys fees and the amount of fees to be paid remain subject to approval by the Federal Court.



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ITEM 1A. Risk Factors.

Our company is subject to a number of risks  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.

As a result of the following risks, our business, financial condition,
operating results and/or liquidity 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 global growth is subject to a number of economic risks.

As widely reported, financial markets in the United States, Europe and Asia have been experiencing extreme disruption recently, including among other things, extreme volatility in security prices,
severely diminished liquidity and credit availability, rating downgrades of certain investments and declining valuations of others. Governments have taken unprecedented actions intended to address extreme market conditions that include severely
restricted credit and declines in real estate values. We have experienced delays in redemptions of our money market funds and we have recognized an $11.8 million loss on investment securities on our shares of the Reserve International Liquidity
Fund, Ltd. and the Reserve Primary Fund during 2008. Changes in market conditions and the method and timing of the liquidation process of the Reserve Funds could result in further adjustments to the fair value and classification of these
investments, and these changes could be material.

Currently, these conditions have not impaired our liquidity for operational
purposes. There can be no assurance that there will not be a further deterioration in financial markets and confidence in major economies, which may impair our liquidity in the future. The current tightening of credit in financial markets adversely
affects the ability of customers and suppliers to obtain financing for significant purchases and operations and could result in a decrease in or cancellation of orders for our products and services. Our global business is also adversely affected by
decreases in the general level of economic activity, such as decreases in business and consumer spending, financial strength of our customers and suppliers. We are unable to predict the likely duration and severity of the current disruption in
financial markets and adverse economic conditions in the U.S. and other countries.

Finally, our ability to access the capital
markets may be severely restricted at a time when we would like, or need, to access such capital markets, which could have an impact on our flexibility to pursue additional expansion opportunities and maintain our desired level of revenue growth in
the future.



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We are subject to rapid changes in demand for our products due to:



| |  |  | variations in our turns business;
| | - |  | ---------------------------------



| |  |  | short order lead time;
| | - |  | ----------------------



| |  |  | customer inventory levels;
| | - |  | --------------------------



| |  |  | production schedules; and
| | - |  | -------------------------



| |  |  | fluctuations in demand.
| | - |  | -----------------------

As a result of this uncertainty in the demand for our products, our past operating results may not be indicative of our future operating results.

Our revenues and profits may fluctuate because of factors that are beyond our control. As a result, we may fail to meet the expectations of security analysts and investors, which could cause our stock
price to decline.

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 from quarter to quarter. Our customers may delay product orders and reduce delivery lead-time expectations,
which may reduce our ability to project revenues beyond the current quarter. While we regularly evaluate end users and contract manufacturers inventory levels of our products to assess the impact of their inventories on our projected
turns business, we do not have complete information on their inventories. This could cause our projections of a quarters turns 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 or if we are unable to meet their demand.

We rely on customer forecasts in order to estimate the appropriate levels of inventory to build and to project our future revenues. 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. This complex supply chain
creates several variables that make it complicated to accurately forecast our customers demand and accurately monitor their inventory levels of our products. If customer forecasts are not accurate, we may build too much inventory, potentially
leaving us with excess and obsolete inventory, which would reduce our profit margins and adversely affect our operating results. Conversely, we may build too little inventory to meet customer demand causing us to miss revenue-generating
opportunities. The cancellation or deferral of product orders, the return of previously sold products or overproduction due to the failure of anticipated orders to materialize could result in our holding excess or obsolete inventory, which could
result in write-downs of inventory. This difficulty may be compounded when we sell to OEMs indirectly through distributors and other resellers or contract manufacturers, or both, as our forecasts of demand are then based on estimates provided by
multiple parties.



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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 or shortage of certain of their components. In addition, our products vary in terms of profit margins they
generate. If our customers purchase a greater proportion of our lower margin parts in a particular period, it would adversely impact our results of operations.

Further, our distributors provide us with periodic reports of their backlog to end customers, sales to end customers and quantities of our products that they have on hand. If the data that is provided to
us is inaccurate, it could lead to inaccurate forecasting of our revenues or errors in our reported revenues, gross profit and net income.

While backlog is our best estimate of our next quarters revenues, it is industry practice to allow customers to cancel, change or defer orders with limited advance notice prior to shipment. As such,
backlog may be an unreliable indicator of future revenue levels. 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.

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, networking customers 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.



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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. The loss of a key customer could materially impact our results of operations.

We depend on a limited number of customers for large portions of our revenues. During the rolling twelve month period ended September 27, 2009, we had two end customers that accounted for more than 10% of our revenues, namely HP and
Huawei. In the first nine months of 2009, our top ten customers accounted for more than 75% of our revenues. In the first nine months of 2008, our top ten customers accounted for more than 65% of our revenues. 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.

Changes in the political and economic climate
in the countries we do business may adversely affect our operating results.

We earn a substantial proportion of our
revenues in Asia. We conduct an increasing portion of our research and development and manufacturing activities outside North America. We procure substantially all of our wafers from Taiwan and use assemblers and testers throughout Asia.

Given the depth of our sales and operations in Asia, we face risks that could negatively impact our results of operations, including
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. In addition,
fluctuations in foreign currency exchange rates could adversely affect the revenues, net income, earnings per share and cash flow of our operations in affected markets. Similarly, fluctuations in exchange rates may affect demand for our
products in foreign markets or our cost competitiveness and may adversely affect our profitability.



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Our results of operations are increasingly dependent on our sales in China, which on a
bill-to basis, accounted for 36% of our revenues in the third quarter of 2009 compared to 30% in the third quarter of 2008. Government agencies in China have broad discretion and authority over all aspects of the telecommunications and information
technology industry in China; accordingly their decisions may impact our ability to do business in China. Therefore, significant changes in Chinas political and economic conditions and governmental policies could have a substantial negative
impact on our business. The growth of Fibre-To-The-Home technology in China has continued to be strong, however, a slowdown in that growth would have an adverse impact on our operating results.

In addition to selling our products in a number of countries, an increasing portion of our research and development and manufacturing is
conducted outside North America, in particular, India and China. The geographic diversity of our business operations could hinder our ability to coordinate design, manufacturing 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.

The loss of key 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 and restricted stock grants that are subject to time vesting, and, in
the case of options, have exercise prices at the market value on the grant date. As our stock price varies substantially, the equity awards to employees are effective as retention incentives only if they have economic value.

Hostilities in the Middle East and India may have a significant impact on our Israeli and India subsidiaries ability to conduct their business.

We have research and development facilities located in Israel and India which employ approximately 170 and 70 people,
respectively. A catastrophic event, such as a terrorist attack that results in the destruction or disruption of any of our critical business or information technology systems in Israel or India could harm our ability to conduct normal business
operations and our operating results.

On an on-going basis, some of our Israeli employees are periodically called into active
military duty. In the event of severe hostilities breaking out, a significant number of our Israeli employees may be called into active military duty, resulting in delays in various aspects of production, including product development schedules.



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

We are experiencing significantly greater competition in the markets in which we participate. We are expanding into markets, such as the
Enterprise Infrastructure and WAN Infrastructure 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.

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 these markets 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.



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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.

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 three to 18 months to be designed into our customers equipment and sold in production quantities. We sell products whose characteristics include evolving industry standards, short product life spans and new manufacturing
and design technologies. 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. Redesigning our products is expensive and may delay production of our products. Our products may become obsolete during these delays, resulting
in our inability to recoup our initial investments in product development.



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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 results of operations in the period or periods in which that
determination is made, and potentially to future periods as well. During the second quarter of 2008, one of our foreign subsidiaries settled several ongoing tax matters for less than had been accrued as part of its liability for unrecognized tax
benefits, resulting in the recognition of tax benefits of $124.1 million. As a result of this settlement, the Company agreed to pay $18.0 million in cash and utilize $31.6 million in investment tax credits.

The ultimate resolution of outstanding tax matters could be for amounts in excess of our reserves established. Such events could have a
material adverse effect on our liquidity or cash flows in the quarter in which an adjustment is recorded or the tax payment is due.

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 incurred in foreign currencies. The U.S. dollar has fluctuated significantly compared to other foreign currencies and this trend may continue.
To protect against reductions in value and the volatility of future cash flows caused by changes in foreign 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 foreign net asset or liability positions. We recorded a net
$1.0 million foreign exchange loss on the revaluation of our income tax liability, net of deferred tax assets, in the third quarter of 2009 because of the fluctuations in the U.S. dollar against foreign currencies. A five percent shift in the
foreign exchange rates between the U.S. and Canadian dollar would cause an approximately $2.0 million impact to our pre-tax net income.



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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 OEM customers, who 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 represents a higher credit risk. Should these companies encounter financial difficulties, our
revenues could decrease, and collection of our significant accounts receivables with these companies or other customers 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, and 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, 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 an acquisition. We cannot be certain that we will find suitable acquisition candidates or that we will be able to meet these challenges successfully. Acquisitions could also result in customer dissatisfaction, performance problems
with the acquired company, investment, or technology, the assumption of contingent liabilities, or other unanticipated events or circumstances, any of which could harm our business. Consequently, we might not be successful in integrating any
acquired businesses, products or technologies and may not achieve anticipated revenues and cost benefits.

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.



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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 more difficult than expected, 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.

Our current product road map will, in part, be dependent on successful acquisition and integration of intellectual property 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 our products in the future.

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 business may be adversely affected if our customers or suppliers 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 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.



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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. In 2008, two outside wafer foundries supplied 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 for the assembly and testing of our semiconductor products which could delay and limit our product shipments.

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

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.



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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 British Columbia, Canada and California, and we rely on third-party wafer fabrication and testing 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.

Our estimated restructuring accruals may not be adequate.

In 2005, 2006 and 2007, 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 revenue expectations.

While management uses all available information to estimate these restructuring costs, particularly facilities costs, our estimated 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.



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If we cannot protect our proprietary technology, we may not be able to prevent competitors from copying
or misappropriating 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. However, our portfolio of patents includes some expiring in 2009 and subsequent years, which could have a negative effect on our ability to prevent competitors from duplicating certain of our products.

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.

To protect our product technology, documentation and other proprietary information, we enter into confidentiality
agreements with our employees, customers, consultants and strategic partners. We require our employees to acknowledge their obligation to maintain confidentiality with respect to PMCs products. Despite these efforts, we cannot guarantee that
these parties will maintain the confidentiality of our proprietary information in the course of future employment or working with other business partners. We develop, manufacture and sell our products in Asia 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.

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 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 or at all.



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Patent disputes in the semiconductor industry are often settled through cross-licensing
arrangements. Our portfolio of patents may not have the breadth to enable us to settle an alleged patent infringement claim through a cross-licensing arrangement. We may therefore be 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.

In preparing our
financial statements, we make good faith estimates and judgments that may differ materially from actual results.

In
preparing our financial statements in conformity with accounting principles generally accepted in the United States, we must make estimates and judgments in applying our most critical accounting policies. Those estimates and judgments have a
significant impact on the results we report in our consolidated financial statements. 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 valuation of investments, allowance for doubtful accounts, inventory reserves, depreciation and amortization, asset impairments, sales returns, warranty costs, income taxes including uncertain tax positions,
restructuring costs, assumptions used to measure the fair value of the debt component of our senior convertible notes, and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We also have other key accounting policies that are
not as subjective, and therefore their application would not require us to make estimates or judgments that are as significant, but which nevertheless could significantly affect our financial reporting. Actual results may differ materially from
these estimates. If these estimates or their related assumptions change, our operating results for the periods in which we revise our estimates or assumptions could be adversely materially affected.



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We have significant debt in the form of senior convertible notes.

We have $57.6 million carrying value ($68.3 million of face value) of our 2.25% senior convertible notes outstanding. Our debt could
materially and adversely affect our ability to obtain financing for working capital, acquisitions or other purposes, and could make us vulnerable to industry downturns and competitive pressures. Our ability to meet our debt service obligations will
be dependent upon our future performance, which will be subject to financial, business and other factors affecting our operations, many of which are beyond our control. On October 15, 2025, we are obliged to repay the full remaining principal
amount of the notes that have not been converted into our common stock, but we are also subject to certain triggering events that may cause the notes to be repaid earlier.

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 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 such litigation.



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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 2. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------

None.



|Item 3. | Defaults Upon Senior Securities
|------- | -------------------------------

None.



|Item 4. | Submission Of Matters To A Vote By Stockholders
|------- | -----------------------------------------------

None.



|Item 5. | Other Information
|------- | -----------------

None.



|Item 6. | Exhibits
|------- | --------

Exhibits 



|              |  |                                                                                                                                                                   
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|        11.1 |  | Calculation of net income per share  included in Note 10. Net Income Per Share of the financial statements included in Item I of Part I of this Quarterly
Report.
|              | 
|        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)                                                                 



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SIGNATURE

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



|                       |  |                             
|---------------------- |  | ----------------------------
|                       |  | PMC-SIERRA, INC.            
|                       |  | (Registrant)                
|                       | 
|Date: November 6, 2009 |  | /s/    Michael W. Zellner   
|                       |  | Michael W. Zellner          
|                       |  | Vice President,             
|                       |  | Chief Financial Officer and 
|                       |  | Principal Accounting Officer



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