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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 June 28, 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 July 31, 2009  224,864,061









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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                                   |  | 6   
|                               |  |                                                                                      
|                               |  | -   Notes to the Condensed Consolidated Financial Statements                          |  | 6   
|                               |  |                                                                                      
|Item 2.                        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 27  
|                               |  |                                                                                      
|Item 3.                        |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 44  
|                               |  |                                                                                      
|Item 4.                        |  | Controls and Procedures                                                               |  | 46  
|                               | 
|PART II - OTHER INFORMATION    |  |                                                                                      
|                               |  |                                                                                      
|Item 1.                        |  | Legal Proceedings                                                                     |  | 47  
|                               |  |                                                                                      
|Item 1A.                       |  | Risk Factors                                                                          |  | 48  
|                               |  |                                                                                      
|Item 2.                        |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 63  
|                               |  |                                                                                      
|Item 3.                        |  | Defaults Upon Senior Securities                                                       |  | 63  
|                               |  |                                                                                      
|Item 4.                        |  | Submission Of Matters To A Vote By Stockholders                                       |  | 63  
|                               |  |                                                                                      
|Item 5.                        |  | Other Information                                                                     |  | 63  
|                               |  |                                                                                      
|Item 6.                        |  | Exhibits                                                                              |  | 64  
|                               | 
|Signatures                     |  | 65                                                                                   



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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 |         |   | Six Months Ended
|                                                                                         |  | June 28,2009       |         |   | June 29, 2008    |                   |         | June 28,2009 |  |   | June 29, 2008
|                                                                                         |  | Restated - Note 1  |         |   |                  | Restated - Note 1
|Net revenues                                                                             |  | $                  | 123,194 |   |                  | $                 | 139,839 |              |  | $ | 225,766       |   |  | $ | 264,879
|Cost of revenues                                                                         |  |                    | 39,413  |   |                  |                   | 49,073  |              |  |   | 76,216        |   |  |   | 92,379 
|                                                                                         |  |                    |         |   |                  |                   |         |              |  |   |               |   |  |   |        
|Gross profit                                                                             |  |                    | 83,781  |   |                  |                   | 90,766  |              |  |   | 149,550       |   |  |   | 172,500
|                                                                                         |  |                    |         |  
|Other costs and expenses:                                                                |  |                    |         |   |                  |                   |         |              |  |   |               |   |  |   |        
|Research and development                                                                 |  |                    | 36,383  |   |                  |                   | 39,995  |              |  |   | 75,011        |   |  |   | 77,305 
|Selling, general and administrative                                                      |  |                    | 22,222  |   |                  |                   | 24,180  |              |  |   | 44,111        |   |  |   | 48,389 
|Amortization of purchased intangible assets                                              |  |                    | 9,836   |   |                  |                   | 9,836   |              |  |   | 19,672        |   |  |   | 19,672 
|Restructuring costs and other charges                                                    |  |                    | 303     |   |                  |                   | 157     |              |  |   | 638           |   |  |   | 1,044  
|                                                                                         |  |                    |         |   |                  |                   |         |              |  |   |               |   |  |   |        
|Income (loss) from operations                                                            |  |                    | 15,037  |   |                  |                   | 16,598  |              |  |   | 10,118        |   |  |   | 26,090 
|                                                                                         |  |                    |         |  
|Other income (expense):                                                                  |  |                    |         |   |                  |                   |         |              |  |   |               |   |  |   |        
|Foreign exchange gain (loss)                                                             |  |                    | (2,867  | ) |                  |                   | (1,066  | )            |  |   | 1,203         |   |  |   | 2,092  
|Gain on repurchase of senior convertible notes, net and amortization of debt issue costs |  |                    | (50     | ) |                  |                   | (93     | )            |  |   | (100          | ) |  |   | 4,693  
|Loss on subleased facilities                                                             |  |                    |        |   |                  |                   |        |              |  |   | (538          | ) |  |   |       
|Interest income (expense), net                                                           |  |                    | (841    | ) |                  |                   | 113     |              |  |   | (1,652        | ) |  |   | 440    
|                                                                                         |  |                    |         |   |                  |                   |         |              |  |   |               |   |  |   |        
|Income before provision for income taxes                                                 |  |                    | 11,279  |   |                  |                   | 15,552  |              |  |   | 9,031         |   |  |   | 33,315 
|                                                                                         |  |                    |         |  
|(Provision for) recovery of income taxes                                                 |  |                    | (3,430  | ) |                  |                   | 120,397 |              |  |   | (5,099        | ) |  |   | 81,711 
|                                                                                         |  |                    |         |   |                  |                   |         |              |  |   |               |   |  |   |        
|Net income                                                                               |  | $                  | 7,849   |   |                  | $                 | 135,949 |              |  | $ | 3,932         |   |  | $ | 115,026
|                                                                                         |  |                    |         |   |                  |                   |         |              |  |   |               |   |  |   |        
|                                                                                         |  |                    |         |  
|Net income per common share - basic                                                      |  | $                  | 0.03    |   |                  | $                 | 0.62    |              |  | $ | 0.02          |   |  | $ | 0.52   
|Net income per common share - diluted                                                    |  | $                  | 0.03    |   |                  | $                 | 0.60    |              |  | $ | 0.02          |   |  | $ | 0.52   
|                                                                                         |  |                    |         |  
|Shares used in per share calculation - basic                                             |  |                    | 224,861 |   |                  |                   | 221,008 |              |  |   | 224,353       |   |  |   | 220,470
|Shares used in per share calculation - diluted                                           |  |                    | 227,883 |   |                  |                   | 224,984 |              |  |   | 226,327       |   |  |   | 222,966

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)



|                                                                                                                 |  |              |           |   |                                   |   |           |  
|---------------------------------------------------------------------------------------------------------------- |  | ------------ | --------- | - | --------------------------------- | - | --------- | -
|                                                                                                                 |  | June 28,2009 |           |   | December 28,2008Restated - Note 1 |  
|                                                                                                                 | 
|ASSETS:                                                                                                          |  |              |           |   |                                   |   |           |  
|Current assets:                                                                                                  |  |              |           |   |                                   |   |           |  
|Cash and cash equivalents                                                                                        |  | $            | 169,880   |   |                                   | $ | 97,839    |  
|Short-term investments                                                                                           |  |              | 67,453    |   |                                   |   | 209,685   |  
|Accounts receivable, net of allowance doubtful accounts of $1,204 (2008 - $1,148)                                |  |              | 45,441    |   |                                   |   | 40,191    |  
|Inventories, net                                                                                                 |  |              | 25,522    |   |                                   |   | 34,003    |  
|Prepaid expenses and other current assets                                                                        |  |              | 17,869    |   |                                   |   | 9,683     |  
|Deferred tax assets                                                                                              |  |              | 1,107     |   |                                   |   | 3,949     |  
|                                                                                                                 |  |              |           |   |                                   |   |           |  
|Total current assets                                                                                             |  |              | 327,272   |   |                                   |   | 395,350   |  
|Goodwill                                                                                                         |  |              | 396,144   |   |                                   |   | 396,144   |  
|Intangible assets, net                                                                                           |  |              | 132,986   |   |                                   |   | 153,956   |  
|Investment securities                                                                                            |  |              | 117,239   |   |                                   |   |          |  
|Prepaid expenses                                                                                                 |  |              | 23,700    |   |                                   |   |          |  
|Property and equipment, net                                                                                      |  |              | 14,575    |   |                                   |   | 15,858    |  
|Investments and other assets                                                                                     |  |              | 10,046    |   |                                   |   | 3,512     |  
|Deposits for wafer fabrication capacity                                                                          |  |              | 5,145     |   |                                   |   | 5,145     |  
|                                                                                                                 |  |              |           |   |                                   |   |           |  
|                                                                                                                 |  | $            | 1,027,107 |   |                                   | $ | 969,965   |  
|                                                                                                                 |  |              |           |   |                                   |   |           |  
|LIABILITIES AND STOCKHOLDERS EQUITY:                                                                            |  |              |           |   |                                   |   |           |  
|Current liabilities:                                                                                             |  |              |           |   |                                   |   |           |  
|Accounts payable                                                                                                 |  | $            | 16,392    |   |                                   | $ | 17,066    |  
|Accrued liabilities                                                                                              |  |              | 52,907    |   |                                   |   | 51,390    |  
|Liability for unrecognized tax benefit                                                                           |  |              | 25,371    |   |                                   |   | 23,398    |  
|Income taxes payable                                                                                             |  |              | 15,012    |   |                                   |   |          |  
|Deferred income taxes                                                                                            |  |              | 2,106     |   |                                   |   | 2,042     |  
|Accrued restructuring costs                                                                                      |  |              | 5,019     |   |                                   |   | 5,938     |  
|Deferred income                                                                                                  |  |              | 10,585    |   |                                   |   | 11,200    |  
|                                                                                                                 |  |              |           |   |                                   |   |           |  
|Total current liabilities                                                                                        |  |              | 127,392   |   |                                   |   | 111,034   |  
|2.25% senior convertible notes due October 15, 2025                                                              |  |              | 56,827    |   |                                   |   | 55,357    |  
|Long-term obligations                                                                                            |  |              | 5,481     |   |                                   |   | 503       |  
|Deferred taxes                                                                                                   |  |              | 20,085    |   |                                   |   | 17,806    |  
|Liability for unrecognized tax benefit                                                                           |  |              | 7,563     |   |                                   |   | 3,352     |  
|                                                                                                                 |  |             
|PMC special shares convertible into 2,023 (2008 - 2,045) shares of common stock                                  |  |              | 2,637     |   |                                   |   | 2,655     |  
|                                                                                                                 |  |             
|Contingencies (Note 11)                                                                                          |  |              |           |   |                                   |   |           |  
|                                                                                                                 |  |             
|Stockholders equity:                                                                                            |  |              |           |   |                                   |   |           |  
|Common stock, par value $.001: 900,000 shares authorized; 223,559 shares issued and outstanding (2008 - 221,335) |  |              | 243       |   |                                   |   | 241       |  
|Additional paid in capital                                                                                       |  |              | 1,491,286 |   |                                   |   | 1,471,476 |  
|Accumulated other comprehensive income (loss)                                                                    |  |              | 902       |   |                                   |   | (3,218    | )
|Accumulated deficit                                                                                              |  |              | (685,309  | ) |                                   |   | (689,241  | )
|                                                                                                                 |  |              |           |   |                                   |   |           |  
|Total stockholders equity                                                                                       |  |              | 807,122   |   |                                   |   | 779,258   |  
|                                                                                                                 |  |              |           |   |                                   |   |           |  
|                                                                                                                 |  | $            | 1,027,107 |   |                                   | $ | 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)



|                                                                                  |  |                  |          |   |                               |   |         |  
|--------------------------------------------------------------------------------- |  | ---------------- | -------- | - | ----------------------------- | - | ------- | -
|                                                                                  |  | Six Months Ended |         
|                                                                                  |  | June 28,2009     |          |   | June 29,2008Restated - Note 1 |  
|                                                                                  | 
|Cash flows from operating activities:                                             |  |                  |          |   |                               |   |         |  
|Net income                                                                        |  | $                | 3,932    |   |                               | $ | 115,026 |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                  |          |   |                               |   |         |  
|Depreciation and amortization                                                     |  |                  | 28,289   |   |                               |   | 29,652  |  
|Stock-based compensation                                                          |  |                  | 11,092   |   |                               |   | 14,362  |  
|Non-cash accretion of investment securities                                       |  |                  | (1,054   | ) |                               |   |        |  
|Foreign exchange gain on tax liability, net                                       |  |                  | (687     | ) |                               |   | (2,527  | )
|Gain on repurchase of senior convertible notes, net                               |  |                  |         |   |                               |   | (4,931  | )
|Loss on subleased facilities                                                      |  |                  | 538      |   |                               |   |        |  
|                                                                                  |  |                 
|Changes in operating assets and liabilities:                                      |  |                  |          |   |                               |   |         |  
|Accounts receivable                                                               |  |                  | (5,250   | ) |                               |   | (5,680  | )
|Inventories                                                                       |  |                  | 8,732    |   |                               |   | (3,472  | )
|Prepaid expenses and other current assets                                         |  |                  | (916     | ) |                               |   | 895     |  
|Accounts payable and accrued liabilities                                          |  |                  | (2,843   | ) |                               |   | (6,133  | )
|Deferred income taxes and income taxes payable                                    |  |                  | 3,086    |   |                               |   | (82,381 | )
|Accrued restructuring costs                                                       |  |                  | (919     | ) |                               |   | (2,461  | )
|Deferred income                                                                   |  |                  | (615     | ) |                               |   | 791     |  
|                                                                                  |  |                  |          |   |                               |   |         |  
|Net cash provided by operating activities                                         |  |                  | 43,385   |   |                               |   | 53,141  |  
|                                                                                  |  |                  |          |   |                               |   |         |  
|Cash flows from investing activities:                                             |  |                  |          |   |                               |   |         |  
|Purchases of property and equipment                                               |  |                  | (2,983   | ) |                               |   | (3,369  | )
|Purchase of intangible assets                                                     |  |                  | (1,384   | ) |                               |   | (4,330  | )
|Distributions of short-term investments                                           |  |                  | 170,802  |   |                               |   |        |  
|Disposals of investment securities                                                |  |                  | 1,000    |   |                               |   |        |  
|Purchases of investment securities                                                |  |                  | (145,797 | ) |                               |   |        |  
|                                                                                  |  |                  |          |   |                               |   |         |  
|Net cash provided by (used in) investing activities                               |  |                  | 21,638   |   |                               |   | (7,699  | )
|                                                                                  |  |                  |          |   |                               |   |         |  
|Cash flows from financing activities:                                             |  |                  |          |   |                               |   |         |  
|Repurchase of senior convertible notes                                            |  |                  |         |   |                               |   | (95,491 | )
|Proceeds from issuance of common stock                                            |  |                  | 7,018    |   |                               |   | 8,059   |  
|                                                                                  |  |                  |          |   |                               |   |         |  
|Net cash provided by (used in) financing activities                               |  |                  | 7,018    |   |                               |   | (87,432 | )
|                                                                                  |  |                  |          |   |                               |   |         |  
|Effect of exchange rate changes on cash and cash equivalents                      |  |                  |         |   |                               |   | (658    | )
|Net increase (decrease) in cash and cash equivalents                              |  |                  | 72,041   |   |                               |   | (42,648 | )
|Cash and cash equivalents, beginning of the period                                |  |                  | 97,839   |   |                               |   | 364,922 |  
|                                                                                  |  |                  |          |   |                               |   |         |  
|Cash and cash equivalents, end of the period                                      |  | $                | 169,880  |   |                               | $ | 322,274 |  
|                                                                                  |  |                  |          |   |                               |   |         |  

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 Networking, Wide Area Network Infrastructure, and Access Network
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 two quarters of 2009 and 2008 consisted of 26 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 $10.0 million and $9.3 million at June 28, 2009 and December 28, 2008, respectively) were as follows:



|                 |  |              |        |                  |   |       
|---------------- |  | ------------ | ------ | ---------------- | - | ------
|(in thousands)   |  | June 28,2009 |        | December 28,2008
|Work-in-progress |  | $            | 15,596 |                  | $ | 11,391
|Finished goods   |  |              | 9,926  |                  |   | 22,612
|                 |  |              |        |                  |   |       
|                 |  | $            | 25,522 |                  | $ | 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 June 28, 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 June 28, 2009 and for the same period in the prior year were as follows:



|                                                               |  |                  |       |   |              |   |       |  
|-------------------------------------------------------------- |  | ---------------- | ----- | - | ------------ | - | ----- | -
|                                                               |  | Six Months Ended |      
|(in thousands)                                                 |  | June 28,2009     |       |   | June 29,2008 |  
|Balance, beginning of the period                               |  | $                | 6,031 |   |              | $ | 6,239 |  
|Accrual for new warranties issued                              |  |                  | 678   |   |              |   | 597   |  
|Reduction for payments and product replacements                |  |                  | (466  | ) |              |   | (926  | )
|Adjustments related to changes in estimate of warranty accrual |  |                  | (155  | ) |              |   | 252   |  
|                                                               |  |                  |       |   |              |   |       |  
|Balance, end of the period                                     |  | $                | 6,088 |   |              | $ | 6,162 |  
|                                                               |  |                  |       |   |              |   |       |  

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
under Statement of Financial Accounting Standards (SFAS) No. 5, Accounting for Contingencies, as interpreted by the Financial Accounting Standards Board (FASB) Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. The Company has no history of 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 SFAS
No. 123 (revised 2004), Share-Based Payment, (SFAS 123(R)). SFAS 123(R) requires the Company to measure the cost of services received in exchange for an award of equity instruments based on the grant-date fair value of the
award. The cost of such award will be recognized over the period during which services are provided in exchange for the award, generally the vesting period.

During the three and six months ended June 28, 2009, the Company recognized $5.6 million and $11.1 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

Effective December 29, 2008, the Company retrospectively adopted the Financial
Accounting Standards Board (FASB) issued Staff Position Accounting Principles Board Opinion 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlements),
(APB 14-1), as required, which changed the accounting treatment for the Companys convertible securities, which may settle fully or partially in cash. Under APB 14-1, 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.



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The Companys senior convertible notes (the Notes) with a face value of $225.0 million
were issued in October 2005 and bear interest at a rate of 2.25% per annum. 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 following guidance in Statement of Financial Accounting Standard No. 157, Fair Value Measurements,(SFAS 157) 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 APB 14-1, 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 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 the 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.

The following tables are reconciliations between amounts
reported in previous filings as of the year-ended December 28, 2008 and for the second 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)                                      |  | Restated                    |           |   | 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 EndedJune 29, 2008 |         |   | Six Months EndedJune 29, 2008
|(in thousands, except for per share amounts)                                            |  | Restated                        |         |   | As reported***                |   |         | Restated |  | As reported***
|Condensed Consolidated Statement of Operations:                                         |  |                                 |         |   |                               |   |         |          |  |                |         |  |   |        
|                                                                                        |  |                                 |         |  
|Interest income (expense)                                                               |  | $                               | 113     |   |                               | $ | 1,387   |          |  | $              | 440     |  | $ | 3,621  
|                                                                                        |  |                                 |         |  
|Gain on repurchase of senior convertible notes, net of amortization of debt issue costs |  |                                 | (93     | ) |                               |   | (136    | )        |  |                | 4,693   |  |   | 1,008  
|Net income                                                                              |  | $                               | 135,949 |   |                               | $ | 137,180 |          |  | $              | 115,026 |  | $ | 114,522
|Net income per common share - basic                                                     |  | $                               | 0.62    |   |                               | $ | 0.62    |          |  | $              | 0.52    |  | $ | 0.52   
|Net income per common share - diluted                                                   |  | $                               | 0.60    |   |                               | $ | 0.61    |          |  | $              | 0.52    |  | $ | 0.51   
|                                                                                        |  |                                 |         |  
|Shares used in per share calculation - basic                                            |  |                                 | 221,008 |   |                               |   | 221,008 |          |  |                | 220,470 |  |   | 220,470
|Shares used in per share calculation - diluted                                          |  |                                 | 224,984 |   |                               |   | 224,984 |          |  |                | 222,966 |  |   | 222,966



|*** | Balances are as reported in the Companys Form 10-Q for the quarter ended June 29, 2008.
|--- | ----------------------------------------------------------------------------------------



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|                                                                                  |  |                               |        |   |                |   |        |  
|--------------------------------------------------------------------------------- |  | ----------------------------- | ------ | - | -------------- | - | ------ | -
|(in thousands)                                                                    |  | Six Months EndedJune 29, 2008 |       
|Condensed Consolidated Statements of Cash Flows:                                  |  | Restated                      |        |   | As reported*** |  
|Cash flows from operating activities:                                             |  |                               |        |   |                |   |        |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                               |        |   |                |   |        |  
|Depreciation and amortization                                                     |  | $                             | 29,652 |   |                | $ | 26,576 |  
|Gain on repurchase of senior convertible notes, net                               |  |                               | (4,931 | ) |                |   | (1,351 | )



|*** | Balances are as reported in the Companys Form 10-Q for the quarter ended June 29, 2008.
|--- | ----------------------------------------------------------------------------------------

See Note 7. Long-Term Obligations for required disclosures under APB 14-1.

In December 2007, the FASB
issued Statement of Financial Accounting Standard No. 141 (revised 2007), Business Combinations, (SFAS 141(R)). SFAS 141(R) 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. SFAS 141(R) promotes greater use of fair values in financial reporting. Some of the changes introduce more volatility into earnings.
SFAS 141(R) 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 December 2007, the FASB issued Statement of Financial Accounting Standard No. 160, Noncontrolling Interests in Consolidated Financial
Statements, (SFAS 160), an amendment of Accounting Research Bulletin No. 51. SFAS 160 changes the accounting and reporting for minority interests which are recharacterized as noncontrolling interests and classified as
a component of equity. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008. SFAS 160 requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. There was
no financial reporting impact due to this new standard.

In December 2007, the Emerging Issues Task Force (the Task Force) of
the FASB issued EITF Issue 07-1, Accounting for Collaborative Arrangements, (EITF 07-1). Collaborative arrangements are agreements between parties that participate in some type of joint operating activity. The Task Force provided
indicators to help identify collaborative arrangements and provides for reporting of such arrangements on a gross or net basis pursuant to guidance in existing authoritative literature. The Task Force also expanded disclosure requirements about
collaborative arrangements. Conclusions within EITF 07-1 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.

In September 2006, the FASB issued Statement of Financial Accounting Standard No.157, Fair Value Measurements, which defines fair value,
establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. In
February 2008, the FASB issued FASB Staff Position (FSP) 157-2, Effective Date of FASB Statement No. 157, which delays the effective date of SFAS 157 for certain non-financial assets and liabilities to fiscal years
beginning after November 15, 2008. In October 2008, the FASB issued FSP 157-3, 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 Statement of Financial



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Accounting Standard No. 154, Accounting Changes and Error Corrections, but do not need to provide the disclosures required by that Statement. The
adoption of SFAS 157 related to financial assets and liabilities did not have a material impact on the Condensed Consolidated Financial Statements.

In March 2008, the Statement of Financial Accounting Standard No. 161, Disclosures about Derivative Instruments and Hedging Activities, (SFAS 161), which is 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.
SFAS 161 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 FSP FAS 142-3, Determination of the Useful Life of Intangible Assets(FSP FAS 142-3),
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 under SFAS 142. FSP FAS 142-3 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 Task Force of FASB ratified EITF Issue No. 08-7, Accounting for Defensive Intangible Assets,(EITF
08-7). EITF 08-7 will require 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 April 2009, the FASB issued three FSPs intended to provide
additional application guidance and enhanced disclosures regarding fair value measurements and impairments of securities. FSP No. 157-4, 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 value in accordance with SFAS No. 157, Fair Value Measurements. FSP No. 115-2, 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. FSP No. 115-2 does not amend existing
guidance related to other-than-temporary impairments of equity securities. FSP No. 107-1 and Accounting Principles Board (APB) Opinion No. 28-1, Interim Disclosures about Fair Value of Financial Instruments, increases
the frequency of fair value disclosures. These FSPs are effective for fiscal years and interim periods ended after June 15, 2009. These FSPs were effective for the Company beginning the second quarter of fiscal 2009. There was no material
effect to the Companys financial statements due to the adoption of this standard.

In May 2009, the FASB issued SFAS
No. 165, Subsequent Events. This standard is intended to establish general standards of accounting for and disclosure of events that occur



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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. SFAS No. 165 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
August 5, 2009, the date of issuance of our consolidated financial position and results of operations.

In June 2009, the FASB
issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles. This standard replaces SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles,
and establishes only two levels of U.S. generally accepted accounting principles: authoritative and nonauthoritative. The FASB Accounting Standards Codification (the Codification) will become the source of authoritative, nongovernmental
GAAP, except for rules and interpretive releases of the Securities and Exchange Commission (SEC), which are sources of authoritative GAAP for SEC registrants. All other nongrandfathered, non-SEC accounting literature not included in
the Codification will become nonauthoritative. This standard is effective for financial statements for interim or annual reporting periods ending after September 15, 2009. We will apply the new guidelines and numbering system prescribed by
the Codification in the third quarter of fiscal 2009. As the Codification was not intended to change or alter existing GAAP, it is not expected to change our application of current GAAP.

In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets, an amendment to SFAS No. 140, (SFAS
No. 166). 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. SFAS No. 166 is effective for fiscal years beginning after November 15, 2009. We will adopt SFAS No. 166 in fiscal 2010 and are evaluating the impact it will have on our consolidated financial statements.

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 the Canadian dollar. To minimize the short-term impact of foreign currency fluctuations, the Company
uses currency forward contracts.

At June 28, 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 June 28, the United States dollar notional amount of these contracts was $17.7 million and the contracts had a fair value gain of $1.3 million,
which was recorded in other comprehensive income net of taxes of $0.4 million on the consolidated balance sheet.



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NOTE 3. Fair Value Measurements

On January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements, 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 FSP 157-2, Effective Date of FASB Statement No. 157 that deferred the effective date of SFAS 157 for one year for non-financial assets and liabilities recorded at fair value on
a non-recurring basis. SFAS 157 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. SFAS 157 also specifies a hierarchy of valuation techniques which 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 estimated interest rates used to determine the fair value of the debt component of our 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 SFAS 157 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 June 28, 2009 are summarized
below:



|                                                        |  |                           |         |         |   |         |  |   |       
|------------------------------------------------------- |  | ------------------------- | ------- | ------- | - | ------- |  | - | ------
|                                                        |  | Fair Value, June 28, 2009
|(in thousands)                                          |  | Level 1                   |         | Level 2 |   | Level 3
|Assets:                                                 |  |                           |         |         |   |         |  |   |       
|Money market funds (1)                                  |  | $                         | 159,343 |         | $ |        |  | $ | 38,883
|US Treasury and government agency notes (1)             |  |                           | 68,337  |         |   |        |  |   |      
|Corporate bonds and notes (1)                           |  |                           | 53,859  |         |   |        |  |   |      
|US States and municipal securities                      |  |                           | 15,122  |         |   |        |  |   |      
|Foreign government and agency notes (1)                 |  |                           | 12,854  |         |   |        |  |   |      
|Forward currency contracts (2)                          |  |                           |        |         |   | 1,346   |  |   |      
|                                                        |  |                           |         |         |   |         |  |   |       
|                                                        |  |                           |        
|Total assets                                            |  | $                         | 309,515 |         | $ | 1,346   |  | $ | 38,883
|                                                        |  |                           |         |         |   |         |  |   |       
|Liabilities:                                            |  |                           |         |         |   |         |  |   |       
|2.25% senior convertible notes due October 15, 2025 (3) |  | $                         |        |         | $ | 56,827  |  | $ |      
|                                                        |  |                           |         |         |   |         |  |   |       
|                                                        |  |                           |        
|Total liabilities                                       |  | $                         |        |         | $ | 56,827  |  | $ |      
|                                                        |  |                           |         |         |   |         |  |   |       



|(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.
|--- | -----------------------------

|(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 second 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                     |  | $       | 38,883   |  
|                                             |  |         |          |  

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

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 first three and six months of 2009 and 2008, as follows:



|                                    |  |                    |       |                  |   |              |  |              |        |  |   |       
|----------------------------------- |  | ------------------ | ----- | ---------------- | - | ------------ |  | ------------ | ------ |  | - | ------
|                                    |  | Three Months Ended |       | Six Months Ended
|(in thousands)                      |  | June 28,2009       |       | June 29,2008     |   | June 28,2009 |  | June 29,2008
|Cost of revenues                    |  | $                  | 226   |                  | $ | 410          |  | $            | 431    |  | $ | 725   
|Research and development            |  |                    | 2,062 |                  |   | 3,220        |  |              | 4,393  |  |   | 6,383 
|Selling, general and administrative |  |                    | 3,343 |                  |   | 3,726        |  |              | 6,268  |  |   | 7,254 
|                                    |  |                    |       |                  |   |              |  |              |        |  |   |       
|Total                               |  | $                  | 5,631 |                  | $ | 7,356        |  | $            | 11,092 |  | $ | 14,362
|                                    |  |                    |       |                  |   |              |  |              |        |  |   |       

The Company received cash of $3.0 million and $7.0 million related to the issuance of stock-based
awards during the three and six months ended June 28, 2009, respectively. The Company received cash of $4.2 million and $8.1 million during the three and six months ended June 29, 2008.



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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 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.

Activity under the option plans during the six months ended June 28, 2009 was as follows:



|                               |  |                  |   |  |                                          |       |                                                   |      |                                           |   |           
|------------------------------ |  | ---------------- | - |  | ---------------------------------------- | ----- | ------------------------------------------------- | ---- | ----------------------------------------- | - | ----------
|                               |  | Number ofoptions |   |  | Weighted averageexercise price per share |       | Weighted averageremaining contractualterm (years) |      | Aggregate intrinsic valueat June 28,
2009
|Outstanding, December 28, 2008 |  | 28,195,000       |   |  | $                                        | 9.35  |                                                   |      |                                           |   |           
|Granted                        |  | 3,941,101        |   |  | $                                        | 5.31  |                                                   |      |                                           |   |           
|Exercised                      |  | (973,492         | ) |  | $                                        | 5.50  |                                                   |      |                                           |   |           
|Forfeited                      |  | (2,626,189       | ) |  | $                                        | 12.36 |                                                   |      |                                           |   |           
|Outstanding, June 28, 2009     |  | 28,536,420       |   |  | $                                        | 8.65  |                                                   | 6.79 |                                           | $ | 35,036,338
|                               |  |                  |   |  |                                          |       |                                                   |      |                                           |   |           
|Exercisable, June 28, 2009     |  | 18,538,902       |   |  | $                                        | 9.93  |                                                   | 5.72 |                                           | $ | 16,299,800

No adjustment was required with respect to fully vested options that expired during the three and
six months ended June 28, 2009. During the three and six months ended June 28, 2009, adjustments of $3.5 million and $5.3 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 six months ended
June 28, 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



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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 |   |  | Six Months Ended |  
|                        |  | June 28,2009       |   |  | June 29,2008     |   |  | June 28,2009 |   |  | June 29,2008 |  
|Expected life (years)   |  | 4.4                |   |  | 5.4              |   |  | 4.5          |   |  | 4.6          |  
|Expected volatility     |  | 66                 | % |  | 59               | % |  | 66           | % |  | 57           | %
|Risk-free interest rate |  | 1.7                | % |  | 3.2              | % |  | 1.7          | % |  | 2.6          | %

The weighted average grant-date fair value per stock option granted during the three and six
months ended June 28, 2009, was $3.42 and $2.72 respectively, per stock option. The total intrinsic value of stock options exercised during the three and six months ended June 28, 2009 was $2.1 million and $2.2 million, respectively.

As of June 28, 2009, there was $24.9 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 2.8 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 six months ended June 28, 2009 is as follows:



|                                                                |  |                       |   |  |                                           |  |                                           |           
|--------------------------------------------------------------- |  | --------------------- | - |  | ----------------------------------------- |  | ----------------------------------------- | ----------
|                                                                |  | Restricted StockUnits |   |  | Weighted AverageRemaining ContractualTerm |  | Aggregate intrinsic valueat June 28,
2009
|Unvested shares at December 28, 2008                            |  | 1,862,762             |   |  |                                          |  |                                           |          
|Awarded                                                         |  | 1,062,239             |   |  |                                          |  |                                           |          
|Released                                                        |  | (335,663              | ) |  |                                          |  |                                           |          
|Forfeited                                                       |  | (142,168              | ) |  |                                          |  |                                           |          
|                                                                |  |                       |   |  |                                           |  |                                           |           
|End of Period                                                   |  | 2,447,170             |   |  | 2.04                                      |  | $                                         | 19,283,700
|Restricted Stock Units vested and expected to vestJune 28, 2009 |  | 1,916,657             |   |  | 1.97                                      |  | $                                         | 15,103,258



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As of June 28, 2009, total unrecognized compensation costs, adjusted for estimated forfeitures,
related to unvested RSUs was $11.9 million, which is expected to be recognized over the next 3.2 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 through payroll deductions at a price of 85% of the lower of the fair market value of the Companys stock on the close of the first trading day or last trading day of
the six-month purchase period. Under the ESPP, the number of shares authorized to be available for issuance under the plan 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.

During the first quarter of 2009, 916,383 shares were issued under the ESPP at a weighted average price of $3.96 per share. No ESPP awards were granted
during the three months ended June 28, 2009. As of June 28, 2009, 9,367,773 shares were available for future issuance under the ESPP compared to 8,284,156 as at December 28, 2008.

The weighted average grant-date fair value of per ESPP award granted during the first quarter of 2009 was $1.29.

As of June 28, 2009, total unrecognized compensation costs, adjusted for estimated forfeitures, related to non-vested ESPP awards was $1.1 million,
which is expected to be recognized over the next 0.9 years.



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##### Table of Contents

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 six
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   |   |      |   | 9    |      |  |   |      |   |  |       | 84    |   |  |   | 121    |  
|New charges                  |  |      | 25   |   |      |   | 82   |      |  |   | 450   |   |  |       |      |   |  |   | 557    |  
|Cash payments                |  |      | (210 | ) |      |   | (143 | )    |  |   | (719  | ) |  |       | (518  | ) |  |   | (1,590 | )
|                             |  |      |      |   |      |   |      |      |  |   |       |   |  |       |       |   |  |   |        |  
|                             |  |      |      |   |     
|Balance at June 28, 2009     |  | $    | 673  |   |      | $ | 126  |      |  | $ | 2,779 |   |  | $     | 1,441 |   |  | $ | 5,019  |  
|                             |  |      |      |   |      |   |      |      |  |   |       |   |  |       |       |   |  |   |        |  
|                             |  |      |      |   |     
|Severance costs              |  |      |      |   |      |   |      |      |  |   |       |   |  |       |       |   |  |   |        |  
|                             |  |      |      |   |     
|(in thousands)               |  | 2007 |      |   |      |   |      |      |  |   |       |   |  |       |      
|Balance at December 28, 2008 |  | $    | 7    |   |      |   |      |      |  |   |       |   |  |       |       |   |  |   |        |  
|                             |  |      |      |   |     
|Reversals and adjustments    |  |      | 1    |   |      |   |      |      |  |   |       |   |  |       |       |   |  |   |        |  
|New charges                  |  |      |     |   |      |   |      |      |  |   |       |   |  |       |       |   |  |   |        |  
|Cash payments                |  |      | (8   | ) |      |   |      |      |  |   |       |   |  |       |       |   |  |   |        |  
|                             |  |      |      |   |      |   |      |      |  |   |       |   |  |       |       |   |  |   |        |  
|                             |  |      |      |   |     
|Balance at June 28, 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 $12.3 million in connection with this plan. Payments related
to the excess facilities may extend until 2011.

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
which 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



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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. The Company has made payments of $4.5 million related to the 2006 plan. To date, 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 six months ended June 28, 2009, the Company recorded an additional $0.5 million for excess facilities as the original assumptions regarding
possible sublease of the exited facilities were not realized, and made payments of $0.7 million related to this plan.

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 $14.1 million related to the 2005 plan. All severance costs have been paid out and
payments related to the excess facilities will extend to 2011.

2003 and 2001

In 2003 and 2001, the Company implemented three restructuring plans aimed at focusing development efforts on key projects and reducing operating costs in
response to the severe and prolonged economic downturn in the semiconductor industry. 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.



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The January 2003 restructuring included the termination of 175 employees and the closure of design
centers in Maryland, Ireland and India, and vacating office space in the Santa Clara facility. To date, the Company has recorded restructuring charges of $18.3 million in accordance with SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, including $1.5 million for asset write-downs. These charges related to workforce reduction, lease and contract settlement costs and the write-down of certain property, equipment and software assets whose value was
impaired as a result of this restructuring plan. The Company has disposed of the property improvements and computer equipment and software licenses have been cancelled or are no longer being used. The Company reversed the remaining $0.5 million
accrual for this restructuring plan in 2007, as it completed this portion of the lease obligation at the Santa Clara facility. The Company has paid a total of $12.7 million under this plan.

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 half of 2009, the Company made cash payments of $0.5 million related to this plan,
bringing the total cash payments under the 2001 plan to $178.5 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 June 28, 2009, the
Company had investments of $348.4 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,
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
June 28, 2009 and December 28, 2008:



|                                        |  |                |         |                        |   |                       |  |   |            |   |  |   |        
|--------------------------------------- |  | -------------- | ------- | ---------------------- | - | --------------------- |  | - | ---------- | - |  | - | -------
|                                        |  | June 28, 2009 
|(in thousands)                          |  | Amortized Cost |         | GrossUnrealizedGains * |   | GrossUnrealizedLosses |  |   | Fair Value
|Money market funds                      |  | $              | 198,183 |                        | $ | 43                    |  | $ |           |   |  | $ | 198,226
|US Treasury and Government Agency notes |  |                | 67,783  |                        |   | 622                   |  |   | (68        | ) |  |   | 68,337 
|Corporate bonds and notes               |  |                | 53,296  |                        |   | 681                   |  |   | (118       | ) |  |   | 53,859 
|US States and Municipal securities      |  |                | 15,075  |                        |   | 64                    |  |   | (17        | ) |  |   | 15,122 
|Foreign Government and Agency notes     |  |                | 12,713  |                        |   | 168                   |  |   | (27        | ) |  |   | 12,854 
|                                        |  |                |         |                        |   |                       |  |   |            |   |  |   |        
|Total                                   |  | $              | 347,050 |                        | $ | 1,578                 |  | $ | (230       | ) |  | $ | 348,398
|                                        |  |                |         |                        |   |                       |  |   |            |   |  |   |        



|* | Gross unrealized gains include accrued interest on investments.
|- | ---------------------------------------------------------------





|                   |  |                   |         |                      |   |                       |  |            |   |  |   |        
|------------------ |  | ----------------- | ------- | -------------------- | - | --------------------- |  | ---------- | - |  | - | -------
|                   |  | December 28, 2008
|(in thousands)     |  | Amortized Cost    |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | Fair Value
|Money market funds |  | $                 | 278,949 |                      | $ |                      |  | $          |  |  | $ | 278,949
|                   |  |                   |         |                      |   |                       |  |            |   |  |   |        
|Total              |  | $                 | 278,949 |                      | $ |                      |  | $          |  |  | $ | 278,949
|                   |  |                   |         |                      |   |                       |  |            |   |  |   |        

As of June 28, 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 recognized 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 June 28, 2009, the Company determined that the unrealized losses are temporary in nature
and recorded them as a component of accumulated other comprehensive income.

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



|                                |  |                |         |                   |   |                |  |            |         |  |   |        
|------------------------------- |  | -------------- | ------- | ----------------- | - | -------------- |  | ---------- | ------- |  | - | -------
|                                |  | June 28, 2009  |         | December 28, 2008
|(in thousands)                  |  | Amortized Cost |         | Fair Value        |   | Amortized Cost |  | Fair Value
|Cash and cash equivalents       |  | $              | 163,623 |                   | $ | 163,706        |  | $          | 69,213  |  | $ | 69,213 
|Short-term investments          |  |                | 66,143  |                   |   | 67,453         |  |            | 209,685 |  |   | 209,685
|Long-term investment securities |  |                | 117,284 |                   |   | 117,239        |  |            |        |  |   |       
|                                |  |                |         |                   |   |                |  |            |         |  |   |        
|Total                           |  | $              | 347,050 |                   | $ | 348,398        |  | $          | 278,898 |  | $ | 278,898
|                                |  |                |         |                   |   |                |  |            |         |  |   |        



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$38.9 million of the investments held at June 28, 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 which 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) which 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 which could cause further delay in any redemption of our investments.

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 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.

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



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Holders may convert the Notes into the right to receive the conversion value (i) when the
Companys stock price exceed 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 APB 14-1

See Note 1. Summary
for Significant Accounting Policies for a description of the Companys adoption of FSP APB 14-1. The following table summarizes the effects of this new guidance on the Companys consolidated financial statements as at June 28, 2009.



|                                                     |  |                         |        |  
|---------------------------------------------------- |  | ----------------------- | ------ | -
|(in thousands) Condensed Consolidated Balance Sheets |  | June 28,2009Adjustments |       
|                                                    
|Assets:                                              |  |                         |        |  
|Deferred debt issue costs*                           |  | $                       | 46     |  
|Total assets                                         |  |                         | 46     |  
|                                                     | 
|Liabilities and Stockholders Equity:                |  |                         |        |  
|2.25% senior convertible notes due October 15, 2025  |  |                         | 1,470  |  
|Accumulated deficit                                  |  |                         | (1,424 | )



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



|                                                                                         |  |                                |         |   |                              |   |         |  
|---------------------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ---------------------------- | - | ------- | -
|(in thousands except per share amounts) Condensed Consolidated Statements of Operations  |  | Three Months EndedJune 28,2009 |         |   | Six Months EndedJune 28,2009 |  
|                                                                                         | 
|Gain on repurchase of senior convertible notes, net and amortization of debt issue costs |  | $                              | 23      |   |                              | $ | 46      |  
|Interest income (expense), net                                                           |  |                                | (742    | ) |                              |   | (1,470  | )
|                                                                                         |  |                                |         |   |                              |   |         |  
|Net income                                                                               |  |                                | (719    | ) |                              |   | (1,424  | )
|                                                                                         |  |                                |         |   |                              |   |         |  
|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                                             |  |                                | 224,861 |   |                              |   | 224,353 |  
|Shares used in per share calculation - diluted                                           |  |                                | 227,883 |   |                              |   | 226,327 |  



|                                                                                 |  |                              |        |  
|-------------------------------------------------------------------------------- |  | ---------------------------- | ------ | -
|(in thousands) Condensed Consolidated Statements of Cash Flows:                  |  | Six Months EndedJune 28,2009 |       
|                                                                                
|Cash flows from operating activities:                                            |  |                              |        |  
|Net income                                                                       |  | $                            | (1,424 | )
|Adjustments to reconcile net income to net cash provided by operating activities |  |                              |        |  
|Depreciation and amortization                                                    |  |                              | 1,424  |  

As at June 28, 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 $56.8 million



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(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
$11.5 million (December 28, $12.9 million). The balance of deferred debt issue costs as at June 28, 2009 is $0.7 million (December 28, 2008 - $0.8 million).

The principal amount of the debt is after partial repurchases 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. In accordance with APB 14-1, 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 Condensed 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 Condensed 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.

NOTE 8. Income Taxes

The Company recorded a provision for income taxes of $3.4 million and $5.1 million for the three and six months ended June 28, 2009, respectively,
and a recovery of income taxes of $120.4 million and $81.7 million for the three and six months ended June 29, 2008, respectively.

The Condensed Consolidated Financial Statements for the six months ended June 28, 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 $23.7 million recorded as long-term prepaid expenses as at June 28, 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 six months ended
June 28, 2009 resulting from these transactions was $1.1 million and $2.2 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.



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As at June 28, 2009, the Companys liability for unrecognized tax benefits on a world-wide
consolidated basis was $32.9 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 |        |   | Six Months Ended |                  
|(in thousands)                                |  | June 28,2009       |        |   | June 29, 2008    |                   |         | June 28,2009 |  |   | June 29, 2008 |  
|                                              |  | Restated - Note 1  |        |   |                  | Restated - Note 1 |        
|Net income                                    |  | $                  | 7,849  |   |                  | $                 | 135,949 |              |  | $ | 3,932         |   |  | $ | 115,026 |  
|Other comprehensive income (loss):            |  |                    |        |   |                  |                   |         |              |  |   |               |   |  |   |         |  
|Change in fair value of derivatives           |  |                    | 3,001  |   |                  |                   | (109    | )            |  |   | 4,160         |   |  |   | (2,091  | )
|Change in fair value of investment securities |  |                    | (40    | ) |                  |                   |        |              |  |   | (40           | ) |  |   |        |  
|                                              |  |                    |        |   |                  |                   |         |              |  |   |               |   |  |   |         |  
|Total                                         |  | $                  | 10,810 |   |                  | $                 | 135,840 |              |  | $ | 8,052         |   |  | $ | 112,935 |  
|                                              |  |                    |        |   |                  |                   |         |              |  |   |               |   |  |   |         |  

NOTE 10. Net Income Per Share

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



|                                                       |  |                    |         |                  |                   |              |  |               |         |  |   |        
|------------------------------------------------------ |  | ------------------ | ------- | ---------------- | ----------------- | ------------ |  | ------------- | ------- |  | - | -------
|                                                       |  | Three Months Ended |         | Six Months Ended
|(in thousands, except per share
amounts)               |  | June 28,2009       |         | June 29, 2008    |                   | June 28,2009 |  | June 29, 2008
|                                                       |  | Restated - Note 1  |         |                  | Restated - Note 1
|Numerator:                                             |  |                    |         |                  |                   |              |  |               |         |  |   |        
|Net income                                             |  | $                  | 7,849   |                  | $                 | 135,949      |  | $             | 3,932   |  | $ | 115,026
|                                                       |  |                    |         |                 
|Denominator:                                           |  |                    |         |                  |                   |              |  |               |         |  |   |        
|Basic weighted average common shares outstanding (1)   |  |                    | 224,861 |                  |                   | 221,008      |  |               | 224,353 |  |   | 220,470
|Dilutive effect of employee stock options and awards   |  |                    | 3,022   |                  |                   | 3,976        |  |               | 1,974   |  |   | 2,496  
|Diluted weighted average common shares outstanding (1) |  |                    | 227,883 |                  |                   | 224,984      |  |               | 226,327 |  |   | 222,966
|                                                       |  |                    |         |                  |                   |              |  |               |         |  |   |        
|Basic net income per share                             |  | $                  | 0.03    |                  | $                 | 0.62         |  | $             | 0.02    |  | $ | 0.52   
|                                                       |  |                    |         |                  |                   |              |  |               |         |  |   |        
|Diluted net income per share                           |  | $                  | 0.03    |                  | $                 | 0.60         |  | $             | 0.02    |  | $ | 0.52   
|                                                       |  |                    |         |                  |                   |              |  |               |         |  |   |        



|(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 Beiser and 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.



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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.

On February 26, 2009, the Delaware Chancery Court granted the Companys motion to dismiss plaintiffs books and records demand. This
positive result lifted the stay on the motion to dismiss the second amended complaint in the United States District Court for the Northern District of California which is not, scheduled for hearing at this time.



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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 sufficiency, capital expenditures, interest income and expenses, restructuring activities, cash commitments, our expectation regarding our amortization of purchased intangible assets, our plans to continue to find
further operational efficiencies 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 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; (ii) the Wide Area Network (WAN)
Infrastructure market whereby our wireline and wireless products are used in networking equipment such as multi-service switches, edge routers and optical transport platforms that gather and process signals in different protocols, and then transmit
them to the next destination as quickly and efficiently as possible; and (iii) Access Infrastructure market which aggregates data traffic from enterprises and homes and transmits it to the central offices in the metropolitan area of the network
primarily through passive optical networks.

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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Results of Operations

Second Quarter of 2009 and 2008

Net revenues



|             |  |                |       |      |   |        |  |     |   
|------------ |  | -------------- | ----- | ---- | - | ------ |  | --- | --
|($ millions) |  | Second Quarter |       |      |  
|             |  | 2009           |       | 2008 |   | Change | 
|Net revenues |  | $              | 123.2 |      | $ | 139.8  |  | (12 | )%

Net revenues for the second quarter of 2009 were $123.2 million compared to $139.8 million for the
same period in 2008, a decrease of $16.6 million or 12%. Net revenues generated from the Enterprise Infrastructure market, which is served by our storage solutions and microprocessor-based System-On-Chip (SOC) products decreased by 26%.
Net revenues generated from the Wide Area Network (WAN) Infrastructure market, which is served by our wireline and wireless infrastructure products, increased by 6%. Net revenues generated from the Access Infrastructure market which is
served by our Passive Optical Networking (PON) and remote radio head products decreased by 7%.

The decline in net revenues in
our Enterprise Infrastructure market noted above was mainly due to the working down of inventories by our customers and slower end market demand in the enterprise markets that we serve. These factors were partially offset by an increase in our
storage business primarily due to the production ramp of our 6Gig SAS-2 RAID (Redundant Array of Independent Disks)-on-Chip device during the second quarter of 2009.

We experienced growth in the WAN Infrastructure market mainly due to growth in China attributable to the increasing demand by our Chinese Original Equipment Manufacturer (OEM) customers who supply carriers
building out third generation (3G) wireless networks in China, as well as the increasing demand for aggregation and metro transport equipment which is required to handle the increasing levels of data traffic in that market. There were
lower levels of WAN Infrastructure activity in North America, Europe and the Rest of Asia in the second quarter of 2009 due to consumption of excess inventory and a decline in capital spending on equipment by carriers in those end markets.

The decline in sales to the Access Infrastructure market is mainly due to lower net revenues in Korea as PON deployment slowed and
inventories in this region continued to be worked down during the second quarter of 2009. As a partial offset to this decline in net revenues, we experienced an increase in net revenues in China due to an increase in deployment of Ethernet Passive
Optical Networks (EPON) Fibre-To-The-Home (FTTH) services by a Chinese carrier customer. Net revenues generated in the Access Infrastructure market in Japan were flat quarter over quarter.



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Gross profit



|                           |  |                |      |   |      |   |      |        |  |    |   
|-------------------------- |  | -------------- | ---- | - | ---- | - | ---- | ------ |  | -- | --
|($ millions)               |  | Second Quarter |      |   |      |  
|                           |  | 2009           |      |   | 2008 |   |      | Change | 
|Gross profit               |  | $              | 83.8 |   |      | $ | 90.8 |        |  | (8 | )%
|Percentage of net revenues |  |                | 68   | % |      |   | 65   | %      |  |    |   

Total gross profit decreased $7.0 million in the second quarter of 2009 compared to the same
period in 2008 and gross profit as a percentage of net revenues increased by 3% to 68% from 65% in the second quarters of 2009 as compared to 2008.

Gross profit as a percentage of net revenues increased by three percent. The increase is mainly attributable to product mix, as well as, cost reductions achieved during the second quarter of 2009.

Other costs and expenses



|                                            |  |                |      |   |      |   |      |        |  |    |   
|------------------------------------------- |  | -------------- | ---- | - | ---- | - | ---- | ------ |  | -- | --
|($ millions)                                |  | Second Quarter |      |   |      |  
|                                            |  | 2009           |      |   | 2008 |   |      | Change | 
|Research and development                    |  | $              | 36.4 |   |      | $ | 40.0 |        |  | (9 | )%
|Percentage of net revenues                  |  |                | 30   | % |      |   | 29   | %      |  |    |   
|                                            |  |                |     
|Selling, general and administrative         |  |                | 22.2 |   |      |   | 24.2 |        |  | (8 | )%
|Percentage of net revenues                  |  |                | 18   | % |      |   | 17   | %      |  |    |   
|                                            |  |                |     
|Amortization of purchased intangible assets |  |                | 9.8  |   |      |   | 9.8  |        |  |   | % 
|Percentage of net revenues                  |  |                | 8    | % |      |   | 7    | %      |  |    |   
|                                            |  |                |     
|Restructuring costs and other charges       |  |                | 0.3  |   |      |   | 0.2  |        |  | 50 | % 
|Percentage of net revenues                  |  |                |     | % |      |   |     | %      |  |    |   

Research and Development and Selling, General and Administrative Expenses

Our research and development, or R&D expenses decreased by $3.6 million or 9% in the second quarter of 2009 as compared to the second quarter of 2008.
The main reason for the decrease is the reduction in payroll-related costs due to headcount reductions.

Our selling, general and
administrative, or SG&A expenses decreased by $2.0 million or 8% in the second quarter of 2009 as compared to the second quarter of 2008 due to decreases in payroll-related costs in connection with headcount reductions.

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



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intangible assets acquired from the Storage Semiconductor Business and Passave in the second quarter of 2009 was $4.7 million and $5.1 million, respectively.
Amortization from the Storage Semiconductor Business and Passave in the second 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 Six Months of 2009 and 2008. The activity related to excess facility and severance accruals, under our restructuring plans during the second quarter of 2009, by year of
plan, were as follows:

Excess facility costs



|                          |  |      |     |   |      |   |     |      |  |   |       |   |  |       |       |   |  |   |       |  
|------------------------- |  | ---- | --- | - | ---- | - | --- | ---- |  | - | ----- | - |  | ----- | ----- | - |  | - | ----- | -
|(in thousands)            |  | 2007 |     |   | 2006 |   |     | 2005 |  |   | 2001  |   |  | Total |      
|Balance at March 29, 2009 |  | $    | 716 |   |      | $ | 110 |      |  | $ | 2,961 |   |  | $     | 1,605 |   |  | $ | 5,392 |  
|                          |  |      |     |   |     
|Reversals and adjustments |  |      | 31  |   |      |   | 6   |      |  |   |      |   |  |       | 68    |   |  |   | 105   |  
|New charges               |  |      |    |   |      |   | 62  |      |  |   | 160   |   |  |       |      |   |  |   | 222   |  
|Cash payments             |  |      | (74 | ) |      |   | (52 | )    |  |   | (342  | ) |  |       | (232  | ) |  |   | (700  | )
|                          |  |      |     |   |      |   |     |      |  |   |       |   |  |       |       |   |  |   |       |  
|Balance at June 28, 2009  |  | $    | 673 |   |      | $ | 126 |      |  | $ | 2,779 |   |  | $     | 1,441 |   |  | $ | 5,019 |  
|                          |  |      |     |   |      |   |     |      |  |   |       |   |  |       |       |   |  |   |       |  
|                          |  |      |     |   |     
|Severance costs           |  |      |     |   |      |   |     |      |  |   |       |   |  |       |       |   |  |   |       |  
|                          |  |      |     |   |     
|(in thousands)            |  | 2007 |     |   |      |   |     |      |  |   |       |   |  |       |      
|                          |  |      |     |   |     
|Balance at March 29, 2009 |  | $    | 4   |   |      |   |     |      |  |   |       |   |  |       |       |   |  |   |       |  
|Cash payments             |  |      | (4  | ) |      |   |     |      |  |   |       |   |  |       |       |   |  |   |       |  
|                          |  |      |     |   |      |   |     |      |  |   |       |   |  |       |       |   |  |   |       |  
|Balance at June 28, 2009  |  | $    |    |   |      |   |     |      |  |   |       |   |  |       |       |   |  |   |       |  
|                          |  |      |     |   |      |   |     |      |  |   |       |   |  |       |       |   |  |   |       |  

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



|                                                                                         |  |                |      |    |              |   |       |        |  |      |   
|---------------------------------------------------------------------------------------- |  | -------------- | ---- | -- | ------------ | - | ----- | ------ |  | ---- | --
|                                                                                         |  | Second Quarter |      |    |              |  
|(in millions)                                                                            |  | 2009           |      |    | 2008Restated |   |       | Change | 
|                                                                                         |  |               
|Foreign exchange loss                                                                    |  | $              | (2.9 | )  |              | $ | (1.1  | )      |  | (164 | )%
|Percentage of net revenues                                                               |  |                | (2   | )% |              |   | (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                                                           |  | $              | (0.8 | )  |              | $ | 0.1   |        |  | (900 | )%
|Percentage of net revenues                                                               |  |                | (1   | )% |              |   |      | %      |  |      |   
|                                                                                         |  |                |     
|Recovery of (provision for) income taxes                                                 |  | $              | (3.4 | )  |              | $ | 120.4 |        |  | (103 | )%
|Percentage of net revenues                                                               |  |                | (3   | )% |              |   | 86    | %      |  |      |   



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##### Table of Contents

Foreign exchange 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 $2.9 million in the second quarter of 2009, which was primarily due to a 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 depreciation 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 6%
during the second quarter of 2009 compared to depreciating 2% during the second 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 second quarter of
2009 and the second quarter of 2008, we recognized related deferred debt issue costs of $0.1 million.

Interest income (expense), net

Net interest income decreased by $0.9 million in the second quarter of 2009 compared to the second quarter of 2008 due mainly to lower
investment yields and additional interest expense relating to the accretion of the discount related to the senior convertible notes.

Recovery of (provision for) income taxes

We recorded a provision for income taxes of $3.4 million and a recovery of $120.4
million for the second quarter of 2009 and 2008, respectively. We had an increase in our provision for income taxes due to the product and income mix across our subsidiaries. The financial statements for the six months ended June 28, 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 $23.7 million recorded as long-term prepaid expenses as at June 28, 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 second quarter of 2009 resulting from these transactions was $1.1 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 Six Months of 2009 and 2008

Net revenues



|             |      |                  |       |  |        |       |  |     |   
|------------ | ---- | ---------------- | ----- |  | ------ | ----- |  | --- | --
|($ millions) |      | First Six Months |       |  |       
|             | 2009 |                  | 2008  |  | Change |      
|Net revenues |      | $                | 225.8 |  | $      | 264.9 |  | (15 | )%

Net revenues for the first six months of 2009 were $225.8 million compared to $264.9 million for
the same period in 2008, a decrease of $39.1 million or 15%. Net revenues generated from the Enterprise Infrastructure market, which is served by our storage solutions and microprocessor-based SOC products decreased by 29%. Net revenues generated
from the WAN Infrastructure market, which is served by our wireline and wireless infrastructure products increased by 11%. Net revenues generated from the Access Infrastructure market which is served by our PON and remote radio head products
decreased by 20%.

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.

We experienced growth in the WAN infrastructure market mainly attributable to the increasing 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 which is required to handle the increasing levels of data traffic in that market. There were
lower levels of WAN Infrastructure sales activity in North America, Europe and the Rest of Asia due to lower spending on equipment by carriers in those end markets.

The decline in sales to the Access Infrastructure market is mainly due to the working down of inventories by our customers in the regional markets that we serve.

Gross profit



|                           |      |                  |       |      |  |   |        |   |  |     |   
|-------------------------- | ---- | ---------------- | ----- | ---- |  | - | ------ | - |  | --- | --
|($ millions)               |      | First Six Months |       |      |  |  
|                           | 2009 |                  |       | 2008 |  |   | Change |  
|Gross profit               |      | $                | 149.6 |      |  | $ | 172.5  |   |  | (13 | )%
|Percentage of net revenues |      |                  | 66    | %    |  |   | 65     | % |  |     |   

Total gross profit decreased $22.9 million in the first six 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 second quarters of 2009 as compared to 2008.

The increase in gross profit as a percentage is attributable to product mix, as well as the cost reductions achieved in the first six months of 2009 as compared to the first six months of



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2008. This was offset by an approximate 1% decrease mainly due to having a customer funded application-specific integrated circuit (ASIC) mask
set at zero margin during the first six months of 2009, which we did not have in the first six months of 2008.

Other costs and expenses:



|                                            |  |                  |      |   |      |   |      |        |  |     |   
|------------------------------------------- |  | ---------------- | ---- | - | ---- | - | ---- | ------ |  | --- | --
|($ millions)                                |  | First Six Months |      |   |      |  
|                                            |  | 2009             |      |   | 2008 |   |      | Change | 
|Research and development                    |  | $                | 75.0 |   |      | $ | 77.3 |        |  | (3  | )%
|Percentage of net revenues                  |  |                  | 33   | % |      |   | 29   | %      |  |     |   
|                                            |  |                  |     
|Selling, general and administrative         |  |                  | 44.1 |   |      |   | 48.4 |        |  | (9  | )%
|Percentage of net revenues                  |  |                  | 20   | % |      |   | 18   | %      |  |     |   
|                                            |  |                  |     
|Amortization of purchased intangible assets |  |                  | 19.7 |   |      |   | 19.7 |        |  |    | % 
|Percentage of net revenues                  |  |                  | 9    | % |      |   | 7    | %      |  |     |   
|                                            |  |                  |     
|Restructuring costs and other charges       |  |                  | 0.6  |   |      |   | 1.0  |        |  | (40 | )%
|Percentage of net revenues                  |  |                  |     | % |      |   |     | %      |  |     |   

Research and development and selling, general and administrative expenses

Our research and development, expenses decreased $2.3 million or 3% in the first six months of 2009 compared to the first six months of 2008. Payroll
costs decreased by $4.6 million due to the headcount reduction. Total material costs, including outside consultant services, wafer and photomask costs increased by $2.3 million related to completing more tapeouts on smaller geometries in the first
six months of 2009 than in the same period of 2008. These tapeouts on smaller geometries carry higher costs.

Our selling, general and
administrative, expenses decreased by $4.3 million, or 9%, in the first six months of 2009 compared to the first six months of 2008 due to decreases in payroll-related costs in connection with headcount reductions as well as other cost reduction
activities.

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 six months of 2009 was $9.5 million and $10.2 million, respectively. Amortization from the Storage Semiconductor Business and
Passave in the first six months of 2008 was $9.5 million and $10.2 million, respectively.



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##### Table of Contents

Restructuring costs and other charges

The activity related to excess facility and severance accruals, under our restructuring plans during the first six 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   |   |      |   | 9    |      |  |   |      |   |  |       | 84    |   |  |   | 121    |  
|New charges                  |  |      | 25   |   |      |   | 82   |      |  |   | 450   |   |  |       |      |   |  |   | 557    |  
|Cash payments                |  |      | (210 | ) |      |   | (143 | )    |  |   | (719  | ) |  |       | (518  | ) |  |   | (1,590 | )
|                             |  |      |      |   |      |   |      |      |  |   |       |   |  |       |       |   |  |   |        |  
|                             |  |      |      |   |     
|Balance at June 28, 2009     |  | $    | 673  |   |      | $ | 126  |      |  | $ | 2,779 |   |  | $     | 1,441 |   |  | $ | 5,019  |  
|                             |  |      |      |   |      |   |      |      |  |   |       |   |  |       |       |   |  |   |        |  
|                             |  |      |      |   |     
|Severance costs              |  |      |      |   |      |   |      |      |  |   |       |   |  |       |       |   |  |   |        |  
|                             |  |      |      |   |     
|(in thousands)               |  | 2007 |      |   |      |   |      |      |  |   |       |   |  |       |      
|Balance at December 28, 2008 |  | $    | 7    |   |      |   |      |      |  |   |       |   |  |       |       |   |  |   |        |  
|                             |  |      |      |   |     
|Reversals and adjustments    |  |      | 1    |   |      |   |      |      |  |   |       |   |  |       |       |   |  |   |        |  
|New charges                  |  |      |     |   |      |   |      |      |  |   |       |   |  |       |       |   |  |   |        |  
|Cash payments                |  |      | (8   | ) |      |   |      |      |  |   |       |   |  |       |       |   |  |   |        |  
|                             |  |      |      |   |      |   |      |      |  |   |       |   |  |       |       |   |  |   |        |  
|                             |  |      |      |   |     
|Balance at June 28, 2009     |  | $    |     |   |      |   |      |      |  |   |       |   |  |       |       |   |  |   |        |  
|                             |  |      |      |   |      |   |      |      |  |   |       |   |  |       |       |   |  |   |        |  

During the first six months of 2009, we made payments totaling $1.6 million for severance and
excess facility costs incurred in connection with past restructuring plans. In addition, we recorded an additional $0.6 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



|                                                                                         |  |                  |      |    |      |   |      |        |  |      |   
|---------------------------------------------------------------------------------------- |  | ---------------- | ---- | -- | ---- | - | ---- | ------ |  | ---- | --
|                                                                                         |  | First Six Months |      |    |      |  
|(in millions)                                                                            |  | 2009             |      |    | 2008 |   |      | Change | 
|Foreign exchange gain                                                                    |  | $                | 1.2  |    |      | $ | 2.1  |        |  | (43  | %)
|Percentage of net revenues                                                               |  |                  | 1    | %  |      |   | 1    | %      |  |      |   
|                                                                                         |  |                  |     
|Gain on repurchase of senior convertible notes, net and amortization of debt issue costs |  | $                | (0.1 | )  |      | $ | 4.7  |        |  | (102 | %)
|Percentage of net revenues                                                               |  |                  |     | %  |      |   | 2    | %      |  |      |   
|                                                                                         |  |                  |     
|Loss on subleased facilities                                                             |  | $                | (0.5 | )  |      | $ |     |        |  | (100 | %)
|Percentage of net revenues                                                               |  |                  |     | %  |      |   |     | %      |  |      |   
|                                                                                         |  |                  |     
|Interest income (expense), net                                                           |  | $                | (1.7 | )  |      | $ | 0.4  |        |  | (525 | %)
|Percentage of net revenues                                                               |  |                  | (1   | %) |      |   |     | %      |  |      |   
|                                                                                         |  |                  |     
|Recovery of (provision for) income taxes                                                 |  | $                | (5.1 | )  |      | $ | 81.7 |        |  | (106 | %)
|Percentage of net revenues                                                               |  |                  | (2   | %) |      |   | 31   | %      |  |      |   

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 $1.2 million in the first six months of 2009, which was primarily due to a $0.7 million foreign exchange gain 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 depreciation 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 first six months of 2009 compared to appreciating 2% during the first six months of 2008.

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.



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Loss on subleased facilities

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

Interest income (expense), net

Net
interest income (expensed) decreased by $2.1 million in the first six months of 2009 compared to the first six months of 2008 due mainly to lower investment yields and additional interest expense relating to the accretion of the discount related to
the senior convertible notes.

Recovery of (provision for) income taxes

We recorded a provision for income taxes of $5.1 million and recovery of $81.7 million for the first six months of 2009 and 2008, respectively. We had an
increase in our provision for income taxes due to the product and income mix across our subsidiaries. The financial statements for the first six 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 $23.7 million recorded as long-term prepaid expenses
as at June 28, 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 six months of 2009 resulting from these transactions was $2.2 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.

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:



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Valuation of Goodwill and Intangible Assets

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

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

There were no indications of impairment to goodwill or intangible assets during the first six 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

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

Calculating the fair value of stock-based
compensation awards requires the input of highly subjective assumptions, including the expected life of the awards and expected volatility of 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.

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



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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.

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.



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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-insured corporate notes, foreign government and agency notes, and corporate bonds and notes with minimum ratings of P-3 or A3 by Moodys, or A-3 or A- by Standard and
Poors, or equivalent. At June 28, 2009, these securities had an estimated fair value of $348.4 million.

Beginning in the first
quarter of fiscal 2008, the assessment of fair value is based on the provisions of Statement of Financial Accounting Standard No. 157, Fair Value Measurements. We determined the fair value of our investment securities which include money
market funds, US treasury and government agency notes, FDIC-insured corporate notes, 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 FASB Staff Position FAS 115-1, The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments.

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) in accordance with the fair value hierarchy of SFAS 157 for the shares of the Reserve International Liquidity Fund, Ltd. (the International Fund) and the Reserve Primary Fund
(the Primary Fund, together 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 second quarter 2009, and there were no further impairments.

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.



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Business Outlook

We expect our revenues for the third quarter of 2009 to be approximately $125.0 to $135.0 million.

We
anticipate our third 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 third quarter 2009 research and development, and
selling, general and administrative expenses, to be approximately between $55.6 million to $57.6 million, including stock-based compensation expense of approximately between $4.4 million to $5.4 million.

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

Liquidity & Capital Resources

Our principal sources of liquidity are cash from operations, our 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 June 28, 2009 and December 28, 2008 totaled $354.6 million and $307.5 million, respectively, which are composed of the following:



|                                        |  |               |         |                        |   |                       |  |   |            |   |  |   |        
|--------------------------------------- |  | ------------- | ------- | ---------------------- | - | --------------------- |  | - | ---------- | - |  | - | -------
|                                        |  | June 28, 2009
|(in thousands)                          |  | AmortizedCost |         | GrossUnrealizedGains * |   | GrossUnrealizedLosses |  |   | Fair Value
|Cash                                    |  | $             | 6,174   |                        | $ |                      |  | $ |           |   |  | $ | 6,174  
|Money market funds                      |  |               | 198,183 |                        |   | 43                    |  |   |           |   |  |   | 198,226
|US Treasury and Government Agency notes |  |               | 67,783  |                        |   | 622                   |  |   | (68        | ) |  |   | 68,337 
|Corporate bonds and notes               |  |               | 53,296  |                        |   | 681                   |  |   | (118       | ) |  |   | 53,859 
|US States and Municipal securities      |  |               | 15,075  |                        |   | 64                    |  |   | (17        | ) |  |   | 15,122 
|Foreign Government and Agency notes     |  |               | 12,713  |                        |   | 168                   |  |   | (27        | ) |  |   | 12,854 
|                                        |  |               |         |                        |   |                       |  |   |            |   |  |   |        
|                                        |  |               |         |                       
|Total                                   |  | $             | 353,224 |                        | $ | 1,578                 |  | $ | (230       | ) |  | $ | 354,572
|                                        |  |               |         |                        |   |                       |  |   |            |   |  |   |        



|* | Gross unrealized gains include accrued interest on investments.
|- | ---------------------------------------------------------------



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|                   |  |                   |         |                      |   |                       |  |            |   |  |   |        
|------------------ |  | ----------------- | ------- | -------------------- | - | --------------------- |  | ---------- | - |  | - | -------
|                   |  | December 28, 2008
|(in thousands)     |  | Amortized Cost    |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | Fair Value
|Cash               |  | $                 | 28,575  |                      | $ |                      |  | $          |  |  | $ | 28,575 
|Money market funds |  |                   | 278,949 |                      |   |                      |  |            |  |  |   | 278,949
|                   |  |                   |         |                      |   |                       |  |            |   |  |   |        
|                   |  |                   |         |                     
|Total              |  | $                 | 307,524 |                      | $ |                      |  | $          |  |  | $ | 307,524
|                   |  |                   |         |                      |   |                       |  |            |   |  |   |        

The investments are recognized in the Condensed Consolidated Balance Sheet as follows:



|                                |  |                |         |                   |   |                |  |            |         |  |   |        
|------------------------------- |  | -------------- | ------- | ----------------- | - | -------------- |  | ---------- | ------- |  | - | -------
|                                |  | June 28, 2009  |         | December 28, 2008
|(in thousands)                  |  | Amortized Cost |         | Fair Value        |   | Amortized Cost |  | Fair Value
|Cash and cash equivalents       |  | $              | 169,797 |                   | $ | 169,880        |  | $          | 97,839  |  | $ | 97,839 
|Short-term investments          |  |                | 66,143  |                   |   | 67,453         |  |            | 209,685 |  |   | 209,685
|Long-term investment securities |  |                | 117,284 |                   |   | 117,239        |  |            |        |  |   |       
|                                |  |                |         |                   |   |                |  |            |         |  |   |        
|                                |  |                |         |                  
|Total                           |  | $              | 353,224 |                   | $ | 354,572        |  | $          | 307,524 |  | $ | 307,524
|                                |  |                |         |                   |   |                |  |            |         |  |   |        

As of June 28, 2009 and December 28, 2008, we had $56.8 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 June 28, 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 June 28, 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 Condensed Consolidated Balance Sheets. The Reserve Funds were AAA-rated money market funds which announced



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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. which was downgraded and has filed for Chapter 11 bankruptcy protection. The Primary Fund has received an U.S. Security Exchange Commission order
providing that the SEC will supervise the distribution of assets from the fund.

During the first six 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.

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 six months of 2009, we generated net positive operating cash flows of $43.4 million,
which was $9.7 million lower than the $53.1 million generated in the same period in 2008.

Significant changes in working capital accounts in the first six
months of 2009 included:



| |  |  | a $8.7 million decrease in inventory as inventory turns were higher during the first half of 2009 compared to the comparable period in 2008; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a $5.3 million increase in accounts receivable due to increased sales relative to the second half of fiscal 2008.
| | - |  | -----------------------------------------------------------------------------------------------------------------

Investing Activities  Net cash generated from investing activities of $21.6 million in the first half of fiscal 2009 included distributions of $170.8
million from the Reserve Funds partially offset by the purchase of investments securities of $145.8 million, and $4.4 million for purchases of property, plant and equipment and intellectual property.

Financing activities  Net cash from financing activities of $7.0 million in the first six months of 2009 was from proceeds from the issuance of common
shares under our employee stock plans.



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As of June 28, 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           |  | $     | 22,453  |      | $ | 5,611  |  | $    | 11,981 |      | $ | 4,779 |  | $         | 82    |  | $ |      |  | $ |      
|Estimated Operating Cost Payments |  |       | 7,277   |      |   | 2,068  |  |      | 3,926  |      |   | 1,283 |  |           |      |  |   |      |  |   |      
|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    |  |       | 25,542  |      |   | 18,736 |  |      | 4,201  |      |   | 1,905 |  |           | 700   |  |   |      |  |   |      
|                                  |  |       |         |      |   |        |  |      |        |      |   |       |  |           |       |  |   |       |  |   |       
|                                  |  |       |         |      |   |        | 
|                                  |  | $     | 149,754 |      | $ | 27,953 |  | $    | 21,646 |      | $ | 9,505 |  | $         | 2,320 |  | $ | 1,538 |  | $ | 86,792
|                                  |  |       |         |      |   |        |  |      |        |      |   |       |  |           |       |  |   |       |  |   |       

In addition to the amounts shown in the table above, we have recorded $32.9 million liability for
unrecognized tax benefits in accordance with FASB Interpretation 48 (FIN 48), Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No.109, as of June 28, 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 $14.2 million
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 $5.9 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 government
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-3 or A3 by Moodys, or A-3 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 June 28, 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 $1.1 million, $2.2 million and $3.3 million,
respectively.

Senior Convertible Notes:

At June 28, 2009, $68.3 million in face value of our 2.25% senior convertible notes were outstanding. Because we pay fixed interest coupons on our Notes, market interest rate fluctuations do not impact our debt interest payments.
However, the fair value of our senior convertible notes will fluctuate as a result of changes in the price of our common stock, changes in market interest rates and changes in our credit worthiness.

Our 2.25% senior convertible notes are not listed on any securities exchange or included in any automated quotation system, but are registered for resale
under the Securities Act of 1933. The notes rank equal in right of payment with our other unsecured senior indebtedness and mature on October 15, 2025 unless earlier redeemed by us at our option, or converted or put to us at the option of the
holders. Interest is payable semi-annually in arrears on April 15 and October 15 of each year, commencing on April 15, 2006. We may redeem all or a portion



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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.

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 June 28, 2009 had not fulfilled
their contractual obligations and we were required to purchase Canadian dollars at the spot rate, our operating income for the second quarter would have decreased by $1.3 million.

At June 28, 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 $17.7 million and the contracts had a fair value of $1.3 million.



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We attempt to limit our exposure to foreign exchange rate fluctuations from our foreign currency net
asset or liability positions. In the first six months of 2009, we recorded a $0.7 million foreign exchange gain 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 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.

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 six 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 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.

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 us the motion to dismiss the plaintiffs books and records demand. This positive result lifted the stay on the motion to dismiss the second amended complaint in the United States District Court for the Northern District of
California which is not scheduled for hearing at this time.



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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 in recent months, 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 do so, 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. In the first six months of 2009, we had three end customers that each accounted for more than 10% of our revenues. In the first six months of 2008, we had two end customers that each accounted for
more than 10% of our revenues. In the first six months of 2009, our top ten customers accounted for more than 75% of our revenues. In the first six 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 47%
of our revenues in the second quarter of 2009 compared to 31% in the second 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 Networking and Access
Networks 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.

We have applied the guidance in the FASB issued interpretation No. 48, Accounting for Uncertainty in Income Taxes  An Interpretation of FASB Statement No. 109, in determining our accrued liability for unrecognized tax
benefits. The ultimate resolution of outstanding tax matters could be for amounts in excess of our reserves established in accordance with FIN 48. 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 $2.9 million foreign exchange loss on the revaluation of our income tax liability, net of deferred tax assets, in the second 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.

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.



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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.

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.



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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.

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.



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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.

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.



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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.

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.



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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.

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

We have $56.8 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.



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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.

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
|------- | -----------------------------------------------

We held our Annual
Meeting of Stockholders on April 29, 2009 to elect our directors, and to ratify the appointment of Deloitte & Touche LLP as our Independent Registered Public Accounting Firm for the 2009 fiscal year. A Stockholder proposal regarding
for performance-based stock options was also properly presented.

All nominees for directors were elected, and the appointment of auditors was ratified.
The Shareholder proposal for performance-based stock options was not approved. The voting on each matter is set forth below:

Election of Directors of the
Company.



|                     |  |             |  |           
|-------------------- |  | ----------- |  | ----------
|Nominee              |  | For         |  | Withheld  
|Robert L. Bailey     |  | 191,325,066 |  | 12,851,301
|Richard E. Belluzzo  |  | 198,002,818 |  | 6,173,550 
|James V. Diller, Sr. |  | 191,419,874 |  | 12,756,494
|Michael R. Farese    |  | 200,831,288 |  | 3,345,079 
|Jonathan J. Judge    |  | 198,019,751 |  | 6,156,616 
|William H. Kurtz     |  | 201,574,066 |  | 2,602,301 
|Gregory S. Lang      |  | 192,133,090 |  | 12,043,277
|Frank J. Marshall    |  | 193,870,158 |  | 10,306,209

Proposal to ratify the appointment of Deloitte & Touche LLP as our Independent Registered Public
Accounting firm for the 2009 fiscal year.



|            |  |           |  |        
|----------- |  | --------- |  | -------
|For         |  | Against   |  | Abstain
|195,726,767 |  | 8,335,104 |  | 114,494

Stockholder proposal for performance-based stock options.



|           |  |             |  |          
|---------- |  | ----------- |  | ---------
|For        |  | Against     |  | Abstain  
|77,895,590 |  | 104,277,428 |  | 1,427,228



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

None.



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

Exhibits 



|     |  |                                                                                                                                                                   
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1 |  | Form of notice to Board of Directors regarding acceleration of equity vesting upon a change of control event.                                                     
|     | 
|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: August 4, 2009 |  | /s/    Michael W. Zellner   
|                     |  | Michael W. Zellner          
|                     |  | Vice President,             
|                     |  | Chief Financial Officer and 
|                     |  | Principal Accounting Officer



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