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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 July 1, 2007



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

Large accelerated filer  x                    Accelerated filer ̈Non-accelerated filer ̈

Indicate by check mark 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, 2007  214,335,618



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INDEX



|                               |  |                                                                                       |  |     
|------------------------------ |  | ------------------------------------------------------------------------------------- |  | ----
|                               |  |                                                                                       |  | Page
|PART I - FINANCIAL INFORMATION |  |                                                                                      
|                               |  |                                                                                      
|Item 1.                        |  | Financial Statements (unaudited)                                                      |  |     
|                               |  |                                                                                      
|                               |  | -        Condensed consolidated statements of operations                              |  | 3   
|                               |  |                                                                                      
|                               |  | -        Condensed consolidated balance sheets                                        |  | 4   
|                               |  |                                                                                      
|                               |  | -        Condensed consolidated statements of cash flows                              |  | 5   
|                               |  |                                                                                      
|                               |  | -        Notes to the condensed consolidated financial statements                     |  | 6   
|                               |  |                                                                                      
|Item 2.                        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 22  
|                               |  |                                                                                      
|Item 3.                        |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 39  
|                               |  |                                                                                      
|Item 4.                        |  | Controls and Procedures                                                               |  | 41  
|                               | 
|PART II - OTHER INFORMATION    |  |                                                                                      
|                               |  |                                                                                      
|Item 1.                        |  | Legal Proceedings                                                                     |  | 42  
|                               |  |                                                                                      
|Item 1A.                       |  | Risk Factors                                                                          |  | 43  
|                               |  |                                                                                      
|Item 4.                        |  | Submission Of Matters To A Vote By Stockholders                                       |  | 56  
|                               |  |                                                                                      
|Item 6.                        |  | Exhibits                                                                              |  | 57  
|                               | 
|Signatures                     |  | 58                                                                                   



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Part I - FINANCIAL INFORMATION

Item 1 - Financial Statements

PMC-Sierra, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except for per share amounts)

(unaudited)



|                                                                                           |  |                    |         |   |                  |   |         |             |  |   |             |   |  |   |         |  
|------------------------------------------------------------------------------------------ |  | ------------------ | ------- | - | ---------------- | - | ------- | ----------- |  | - | ----------- | - |  | - | ------- | -
|                                                                                           |  | Three Months Ended |         |   | Six Months Ended |  
|                                                                                           |  | July 1,2007        |         |   | July 2,2006      |   |         | July 1,2007 |  |   | July 2,2006 |  
|Net revenues                                                                               |  | $                  | 104,692 |   |                  | $ | 118,780 |             |  | $ | 208,357     |   |  | $ | 206,561 |  
|Cost of revenues                                                                           |  |                    | 37,650  |   |                  |   | 43,560  |             |  |   | 75,221      |   |  |   | 70,185  |  
|                                                                                           |  |                    |         |   |                  |   |         |             |  |   |             |   |  |   |         |  
|Gross profit                                                                               |  |                    | 67,042  |   |                  |   | 75,220  |             |  |   | 133,136     |   |  |   | 136,376 |  
|Other costs and expenses:                                                                  |  |                    |         |   |                  |   |         |             |  |   |             |   |  |   |         |  
|Research and development                                                                   |  |                    | 41,635  |   |                  |   | 41,587  |             |  |   | 86,159      |   |  |   | 75,336  |  
|Selling, general and administrative                                                        |  |                    | 25,171  |   |                  |   | 27,174  |             |  |   | 51,869      |   |  |   | 46,767  |  
|Amortization of purchased intangible assets                                                |  |                    | 9,836   |   |                  |   | 9,934   |             |  |   | 19,671      |   |  |   | 12,044  |  
|In-process research and development                                                        |  |                    |        |   |                  |   | 20,500  |             |  |   |            |   |  |   | 35,300  |  
|Restructuring costs and other charges                                                      |  |                    | 3,786   |   |                  |   |        |             |  |   | 10,680      |   |  |   | (738    | )
|                                                                                           |  |                    |         |   |                  |   |         |             |  |   |             |   |  |   |         |  
|Loss from operations                                                                       |  |                    | (13,386 | ) |                  |   | (23,975 | )           |  |   | (35,243     | ) |  |   | (32,333 | )
|Other income (expense):                                                                    |  |                    |         |   |                  |   |         |             |  |   |             |   |  |   |         |  
|Interest income, net                                                                       |  |                    | 2,472   |   |                  |   | 1,267   |             |  |   | 4,309       |   |  |   | 4,833   |  
|Foreign exchange loss                                                                      |  |                    | (7,926  | ) |                  |   | (3,378  | )           |  |   | (8,922      | ) |  |   | (3,365  | )
|Amortization of debt issue costs                                                           |  |                    | (242    | ) |                  |   | (242    | )           |  |   | (484        | ) |  |   | (484    | )
|Loss on investments, net                                                                   |  |                    |        |   |                  |   | (3,118  | )           |  |   |            |   |  |   | (1,269  | )
|                                                                                           |  |                    |         |   |                  |   |         |             |  |   |             |   |  |   |         |  
|Loss before recovery of (provision for) income taxes                                       |  |                    | (19,082 | ) |                  |   | (29,446 | )           |  |   | (40,340     | ) |  |   | (32,618 | )
|Recovery of (provision for) income taxes                                                   |  |                    | (3,177  | ) |                  |   | (2,388  | )           |  |   | 2,258       |   |  |   | (13,549 | )
|                                                                                           |  |                    |         |   |                  |   |         |             |  |   |             |   |  |   |         |  
|Net loss                                                                                   |  | $                  | (22,259 | ) |                  | $ | (31,834 | )           |  | $ | (38,082     | ) |  | $ | (46,167 | )
|                                                                                           |  |                    |         |   |                  |   |         |             |  |   |             |   |  |   |         |  
|Net loss per common share - basic and diluted                                              |  | $                  | (0.10   | ) |                  | $ | (0.16   | )           |  | $ | (0.18       | ) |  | $ | (0.24   | )
|Weighted average number of common shares used in per share calculation - basic and diluted |  |                    | 215,688 |   |                  |   | 203,067 |             |  |   | 214,785     |   |  |   | 195,143 |  

See notes to the condensed consolidated financial statements.



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PMC-Sierra, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

(unaudited)



|                                                                                                                 |  |              |           |   |                  |   |           |  
|---------------------------------------------------------------------------------------------------------------- |  | ------------ | --------- | - | ---------------- | - | --------- | -
|                                                                                                                 |  | July 1, 2007 |           |   | December 31,2006 |  
|ASSETS:                                                                                                          |  |              |           |   |                  |   |           |  
|Current assets:                                                                                                  |  |              |           |   |                  |   |           |  
|Cash and cash equivalents                                                                                        |  | $            | 298,274   |   |                  | $ | 258,914   |  
|Accounts receivable, net of allowance for doubtful accounts of $1,768 (2006 - $1,768)                            |  |              | 36,865    |   |                  |   | 37,303    |  
|Inventories, net                                                                                                 |  |              | 28,511    |   |                  |   | 34,505    |  
|Prepaid expenses and other current assets                                                                        |  |              | 17,485    |   |                  |   | 16,186    |  
|Deferred tax assets                                                                                              |  |              | 3,671     |   |                  |   | 978       |  
|                                                                                                                 |  |              |           |   |                  |   |           |  
|Total current assets                                                                                             |  |              | 384,806   |   |                  |   | 347,886   |  
|Investments and other assets                                                                                     |  |              | 12,964    |   |                  |   | 14,653    |  
|Property and equipment, net                                                                                      |  |              | 18,050    |   |                  |   | 18,904    |  
|Deferred tax assets                                                                                              |  |              | 41,402    |   |                  |   | 397       |  
|Goodwill                                                                                                         |  |              | 398,418   |   |                  |   | 395,943   |  
|Intangible assets, net                                                                                           |  |              | 208,143   |   |                  |   | 223,629   |  
|Deposits for wafer fabrication capacity                                                                          |  |              | 5,145     |   |                  |   | 5,145     |  
|                                                                                                                 |  |              |           |   |                  |   |           |  
|                                                                                                                 |  | $            | 1,068,928 |   |                  | $ | 1,006,557 |  
|                                                                                                                 |  |              |           |   |                  |   |           |  
|LIABILITIES AND STOCKHOLDERS EQUITY:                                                                            |  |              |           |   |                  |   |           |  
|Current liabilities:                                                                                             |  |              |           |   |                  |   |           |  
|Accounts payable                                                                                                 |  | $            | 18,479    |   |                  | $ | 19,074    |  
|Accrued liabilities                                                                                              |  |              | 52,969    |   |                  |   | 51,199    |  
|Income taxes payable                                                                                             |  |              |          |   |                  |   | 722       |  
|Deferred income taxes                                                                                            |  |              | 2,792     |   |                  |   | 2,042     |  
|Liability for unrecognized tax benefit                                                                           |  |              | 63,044    |   |                  |   | 58,706    |  
|Accrued restructuring costs                                                                                      |  |              | 14,912    |   |                  |   | 12,657    |  
|Deferred income                                                                                                  |  |              | 15,467    |   |                  |   | 11,340    |  
|                                                                                                                 |  |              |           |   |                  |   |           |  
|Total current liabilities                                                                                        |  |              | 167,663   |   |                  |   | 155,740   |  
|Long term obligations                                                                                            |  |              | 1,065     |   |                  |   |          |  
|2.25% Senior convertible notes due October 15, 2025                                                              |  |              | 225,000   |   |                  |   | 225,000   |  
|Deferred taxes and other tax liabilities                                                                         |  |              | 12,461    |   |                  |   | 10,612    |  
|Liability for unrecognized tax benefit                                                                           |  |              | 87,683    |   |                  |   | 42,045    |  
|                                                                                                                 |  |             
|PMC special shares convertible into 2,099 (2006 - 2,099) shares of common stock                                  |  |              | 2,732     |   |                  |   | 2,732     |  
|                                                                                                                 |  |             
|Stockholders equity:                                                                                            |  |              |           |   |                  |   |           |  
|Common stock, par value $.001: 900,000 shares authorized; 213,994 shares issued and outstanding (2006 - 210,650) |  |              | 234       |   |                  |   | 230       |  
|Additional paid in capital                                                                                       |  |              | 1,360,245 |   |                  |   | 1,327,578 |  
|Accumulated other comprehensive income (loss)                                                                    |  |              | 1,448     |   |                  |   | (1,127    | )
|Accumulated deficit                                                                                              |  |              | (789,603  | ) |                  |   | (756,253  | )
|                                                                                                                 |  |              |           |   |                  |   |           |  
|Total stockholders equity                                                                                       |  |              | 572,324   |   |                  |   | 570,428   |  
|                                                                                                                 |  |              |           |   |                  |   |           |  
|                                                                                                                 |  | $            | 1,068,928 |   |                  | $ | 1,006,557 |  
|                                                                                                                 |  |              |           |   |                  |   |           |  

See notes to the condensed consolidated financial statements.



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PMC-Sierra, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



|                                                                                          |  |                  |         |   |              |   |          |  
|----------------------------------------------------------------------------------------- |  | ---------------- | ------- | - | ------------ | - | -------- | -
|                                                                                          |  | Six Months Ended |        
|                                                                                          |  | July 1,2007      |         |   | July 2, 2006 |  
|Cash flows from operating activities:                                                     |  |                  |         |   |              |   |          |  
|Net loss                                                                                  |  | $                | (38,082 | ) |              | $ | (46,167  | )
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |  |                  |         |   |              |   |          |  
|Depreciation of property and equipment                                                    |  |                  | 6,266   |   |              |   | 5,299    |  
|Amortization of intangible assets                                                         |  |                  | 22,318  |   |              |   | 13,599   |  
|Amortization of deferred income taxes                                                     |  |                  | (1,024  | ) |              |   |         |  
|Amortization of debt issuance costs                                                       |  |                  | 484     |   |              |   | 484      |  
|Stock-based compensation                                                                  |  |                  | 19,062  |   |              |   | 15,924   |  
|Loss on disposal of property and equipment                                                |  |                  | 490     |   |              |   |         |  
|In-process research and development                                                       |  |                  |        |   |              |   | 35,300   |  
|Loss on investments                                                                       |  |                  |        |   |              |   | 1,243    |  
|Changes in operating assets and liabilities, net of the effect of acquisition:            |  |                  |         |   |              |   |          |  
|Accounts receivable                                                                       |  |                  | 438     |   |              |   | (13,151  | )
|Inventories                                                                               |  |                  | 5,994   |   |              |   | (4,988   | )
|Prepaid expenses and other current assets                                                 |  |                  | 478     |   |              |   | (16,588  | )
|Accounts payable and accrued liabilities                                                  |  |                  | 410     |   |              |   | (2,158   | )
|Deferred taxes and income taxes payable                                                   |  |                  | 12,579  |   |              |   | 13,019   |  
|Accrued restructuring costs                                                               |  |                  | 2,406   |   |              |   | (4,428   | )
|Deferred income                                                                           |  |                  | 4,127   |   |              |   | 1,483    |  
|                                                                                          |  |                  |         |   |              |   |          |  
|Net cash provided by (used in) operating activities                                       |  |                  | 35,946  |   |              |   | (1,129   | )
|                                                                                          |  |                  |         |   |              |   |          |  
|Cash flows from investing activities:                                                     |  |                  |         |   |              |   |          |  
|Acquisition of business, net of cash acquired                                             |  |                  |        |   |              |   | (413,781 | )
|Proceeds from sales and maturities of short-term available-for-sale investments           |  |                  |        |   |              |   | 181,450  |  
|Proceeds from sale of investments and other assets                                        |  |                  |        |   |              |   | 5,440    |  
|Purchases of property and equipment                                                       |  |                  | (4,436  | ) |              |   | (5,113   | )
|Purchase of intangible assets                                                             |  |                  | (5,759  | ) |              |   | (1,747   | )
|                                                                                          |  |                  |         |   |              |   |          |  
|Net cash used in investing activities                                                     |  |                  | (10,195 | ) |              |   | (233,751 | )
|                                                                                          |  |                  |         |   |              |   |          |  
|Cash flows from financing activity:                                                       |  |                  |         |   |              |   |          |  
|Proceeds from issuance of common stock                                                    |  |                  | 13,609  |   |              |   | 20,793   |  
|                                                                                          |  |                  |         |   |              |   |          |  
|Net cash provided by financing activity                                                   |  |                  | 13,609  |   |              |   | 20,793   |  
|                                                                                          |  |                  |         |   |              |   |          |  
|Net increase (decrease) in cash and cash equivalents                                      |  |                  | 39,360  |   |              |   | (214,087 | )
|Cash and cash equivalents, beginning of the period                                        |  |                  | 258,914 |   |              |   | 405,566  |  
|                                                                                          |  |                  |         |   |              |   |          |  
|Cash and cash equivalents, end of the period                                              |  | $                | 298,274 |   |              | $ | 191,479  |  
|                                                                                          |  |                  |         |   |              |   |          |  
|Supplemental disclosures of cash flow information:                                        |  |                  |         |   |              |   |          |  
|Cash paid for interest                                                                    |  | $                | 2,531   |   |              | $ | 2,531    |  
|Cash refund of income taxes                                                               |  |                  | (4,970  | ) |              |   |         |  
|Cash paid for income taxes                                                                |  |                  | 910     |   |              |   | 238      |  
|Supplemental disclosures of non-cash investing and financing activities:                  |  |                  |         |   |              |   |          |  
|Conversion of PMC-Sierra special shares into common stock                                 |  | $                |        |   |              | $ | 630      |  
|Issuance of common stock and assumption of vested stock options on acquisition            |  |                  |        |   |              |   | 254,546  |  

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 high-speed
broadband communications semiconductors, storage semiconductors and microprocessors for metro, access, Fiber-To-The-Home, wireless infrastructure, storage, laser printers and fibre access gateway equipment. The Company offers worldwide technical and
sales support through a network of offices in North America, Europe and Asia.

Basis of presentation. The accompanying Condensed Consolidated
Financial Statements have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (SEC) and United States Generally Accepted Accounting Principles. Certain information and footnote
disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules or regulations. The interim 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 financial statements should be read in conjunction with the consolidated financial
statements and accompanying notes in the Companys Annual Report on Form 10-K for the year ended December 31, 2006. The results of operations for the interim periods are not necessarily indicative of results to be expected in future
periods. Fiscal 2007 will consist of 52 weeks and will end on Sunday, December 30. Fiscal 2006 consisted of 52 weeks and ended on Sunday, December 31. The first six months of 2007 and 2006 consisted of 26 weeks.

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

Cash and cash equivalents.At July 1, 2007, Cash and
cash equivalents included $0.8 million (December 31, 2006 - $0.8 million) pledged with a bank as collateral for letters of credit issued as security for leased facilities.

Inventories. Inventories are stated at the lower of cost (first-in, first out) or market (estimated net realizable value). Inventories (net of reserves of $8.0 million and $8.4 million at July 1,
2007 and December 31, 2006, respectively) were as follows:



|                 |  |             |        |                  |        
|---------------- |  | ----------- | ------ | ---------------- | -------
|(in thousands)   |  | July 1,2007 |        | December 31,2006
|Work-in-progress |  | $           | 11,132 |                  | $17,463
|Finished goods   |  |             | 17,379 |                  | 17,042 
|                 |  |             |        |                  |        
|                 |  | $           | 28,511 |                  | $34,505
|                 |  |             |        |                  |        



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Derivatives and Hedging Activities.Fluctuating foreign exchange rates may negatively impact PMCs net income
and cash flows. The Company periodically hedges foreign currency forecasted transactions related to certain operating expenses. All derivatives are recorded in the balance sheet at fair value. For a derivative designated as a fair value hedge,
changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in net income. For a derivative designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative
are recorded in other comprehensive income and are recognized in net income when the hedged item affects net income. Ineffective portions of changes in the fair value of cash flow hedges are recognized in net income. If the derivative used in an
economic hedging relationship is not designated in an accounting hedging relationship or if it becomes ineffective, changes in the fair value of the derivative are recognized in net income. During the quarter ended July 1, 2007, 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
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 31, 2006 to
July 1, 2007 and for the same period in the prior year were as follows:



|                                                               |  |                  |       |   |             |   |       |  
|-------------------------------------------------------------- |  | ---------------- | ----- | - | ----------- | - | ----- | -
|                                                               |  | Six Months Ended |      
|(in thousands)                                                 |  | July 1,2007      |       |   | July 2,2006 |  
|Balance, beginning of the year                                 |  | $                | 4,331 |   |             | $ | 3,997 |  
|Accrual for new warranties issued                              |  |                  | 1,043 |   |             |   | 920   |  
|Reduction for payments (in cash or in kind)                    |  |                  | (238  | ) |             |   | (131  | )
|Adjustments related to changes in estimate of warranty accrual |  |                  | 686   |   |             |   | (306  | )
|                                                               |  |                  |       |   |             |   |       |  
|Balance, end of the period                                     |  | $                | 5,822 |   |             | $ | 4,480 |  
|                                                               |  |                  |       |   |             |   |       |  

Other Indemnifications. From time to time, on a limited basis, PMC 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 SFAS
No. 5, Accounting for Contingencies, as interpreted by FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. The Company
has no history of indemnification claims for such obligations and has not accrued any liabilities related to such indemnifications in the consolidated financial statements.



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

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 for attributing stock-based compensation expense. See Note 3 to the Condensed Consolidated Financial Statements for further information on stock-based compensation.

Recent Accounting Pronouncements. In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements
(SFAS 157). This Statement defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value measurements but rather eliminates inconsistencies
in guidance found in various prior accounting pronouncements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The Company expects that adoption of SFAS 157 will not have a material impact on its financial condition or
results of operations.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for
Financial Assets and Financial LiabilitiesIncluding an amendment of FASB Statement No. 115 (SFAS 159). This statement gives entities the option to measure certain financial assets and liabilities at fair value, with changes in fair
value recorded in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company expects that adoption of SFAS 159 will not have a material impact on its financial condition or results of operations.

NOTE 2. Business Combinations

Storage Semiconductor Business

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

PMC purchased the Storage Semiconductor Business due to its
strategic and product fit with PMC, the market position the Storage Semiconductor Business has in the Fibre Channel controller market, the design capabilities of its engineering team, and the growth opportunities



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for standard semiconductor solutions in the enterprise storage market. The Storage Semiconductor Business was part of Agilents Semiconductor Products
Group (as defined in the Purchase Agreement), which Avago, an entity created by Kohlberg Kravis Roberts & Co. and Silver Lake Partners, acquired in December 2005. Under the terms of the Purchase Agreement, Palau Acquisition Corporation, a
Delaware corporation and direct wholly owned subsidiary of PMC, purchased the Storage Semiconductor Business for the following consideration:



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

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

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



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



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



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

Passave Inc.

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

PMC purchased Passave due to its market share leadership in Passive Optical
Networking solutions. This acquisition fits with PMCs strategic intent to address the high-growth fibre access market and is aligned with PMCs developments in customer premises equipment. PMC purchased Passave for the following
consideration:



|                                            |  |   |        
|------------------------------------------- |  | - | -------
|(in thousands)                              |  |  
|PMC shares                                  |  | $ | 224,411
|Vested Passave stock options assumed by PMC |  |   | 30,135 
|Additional post-closing adjustment          |  |   | 2,275  
|Merger costs                                |  |   | 2,950  
|                                            |  |   |        
|Total consideration                         |  | $ | 259,771
|                                            |  |   |        

The total purchase price has been allocated to the fair value of assets acquired and liabilities assumed, and the
excess of the purchase price over the net assets acquired was recorded as goodwill. The final allocation was determined by management, based on a third-party valuation. Subsequent to the acquisition date, the allocation of purchase price and
residual goodwill were adjusted by $2.3 million for finalization of a legal matter (see Note 11 to the Condensed Consolidated Financial Statements). Merger costs include PMCs estimate of investment banking fees, legal and accounting fees and
other external costs directly related to the merger.



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Net assets acquired consist of the following:



|                                    |  |   |        
|----------------------------------- |  | - | -------
|(in thousands)                      |  |  
|Tangible assets, net of liabilities |  | $ | 10,512 
|Intangible assets                   |  |   | 82,500 
|In-process research and development |  |   | 20,500 
|Goodwill                            |  |   | 146,259
|                                    |  |   |        
|Net assets acquired                 |  | $ | 259,771
|                                    |  |   |        

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



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

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

Estimated future amortization expense for purchased intangible assets from both the acquisitions is as follows:



|               |  |   |        
|-------------- |  | - | -------
|(in thousands) |  |  
|2007           |  | $ | 19,671 
|2008           |  |   | 39,343 
|2009           |  |   | 39,343 
|2010           |  |   | 25,726 
|2011           |  |   | 18,918 
|Thereafter     |  |   | 50,248 
|               |  |   |        
|Total          |  | $ | 193,249
|               |  |   |        



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NOTE 3. Stock-Based Compensation

At July 1, 2007, the Company has two stock-based compensation programs, which are described below. None of the Companys stock-based awards are classified as liabilities. The Company did not capitalize any stock-based compensation
cost, and recorded compensation expense for the three and six months ended July 1, 2007 and July 2, 2006 as follows:



|                                    |  |                    |       |                  |   |             |  |             |        |  |   |       
|----------------------------------- |  | ------------------ | ----- | ---------------- | - | ----------- |  | ----------- | ------ |  | - | ------
|                                    |  | Three Months Ended |       | Six Months Ended
|(in thousands)                      |  | July 1,2007        |       | July 2,2006      |   | July 1,2007 |  | July 2,2006
|Cost of revenues                    |  | $                  | 532   |                  | $ | 489         |  | $           | 1,049  |  | $ | 912   
|Research and development            |  |                    | 4,400 |                  |   | 4,046       |  |             | 8,667  |  |   | 6,540 
|Selling, general and administrative |  |                    | 4,712 |                  |   | 5,488       |  |             | 9,345  |  |   | 8,472 
|                                    |  |                    |       |                  |   |             |  |             |        |  |   |       
|Total                               |  | $                  | 9,644 |                  | $ | 10,023      |  | $           | 19,061 |  | $ | 15,924
|                                    |  |                    |       |                  |   |             |  |             |        |  |   |       

The Company received cash of $6.0 million and $13.6 million on the exercise of stock-based awards during the three
and six months ended July 1, 2007, respectively.

Equity Award Plans

The Company issues its common stock under the provisions of various stock award plans. Stock option awards are granted with an exercise price equal to the closing market price of the Companys common stock at the
grant date. The options generally expire in ten years and vest over four years. In 2001, the Company simplified its plan structure. The 2001 Stock Option Plan (the 2001 Plan) was created to replace a number of stock option plans the
Company had assumed in connection with mergers and acquisitions completed prior to 2001. The number of shares available for issuance under the 1994 Incentive Stock Plan (1994 Plan) were approved by stockholders. New stock options or
other equity incentives may only be issued under the 1994 Plan and the 2001 Plan.

Activity under the option plans during the three months ended
July 1, 2007 was as follows:



|                           |  |                  |   |  |                                          |       |                                                   |      |                                                   |   |     
|-------------------------- |  | ---------------- | - |  | ---------------------------------------- | ----- | ------------------------------------------------- | ---- | ------------------------------------------------- | - | ----
|                           |  | Number ofoptions |   |  | Weighted averageexercise price per share |       | Weighted averageremaining contractualterm (years) |      | Aggregate intrinsicvalue per share atJuly 1, 2007
|Outstanding, April 1, 2007 |  | 34,081,833       |   |  | $                                        | 9.50  |                                                   |      |                                                   |   |     
|Granted                    |  | 540,620          |   |  | $                                        | 7.33  |                                                   |      |                                                   |   |     
|Exercised                  |  | (1,338,357       | ) |  | $                                        | 4.50  |                                                   |      |                                                   |   |     
|Forfeited                  |  | (2,061,198       | ) |  | $                                        | 12.43 |                                                   |      |                                                   |   |     
|Outstanding, July 1, 2007  |  | 31,222,898       |   |  | $                                        | 9.50  |                                                   | 6.96 |                                                   | $ | 0.96
|                           |  |                  |   |  |                                          |       |                                                   |      |                                                   |   |     
|Exercisable, July 1, 2007  |  | 18,718,415       |   |  | $                                        | 10.68 |                                                   | 5.81 |                                                   | $ | 0.93
|                           |  |                  |   |  |                                          |       |                                                   |      |                                                   |   |     

No adjustment was required with respect to fully vested options that expired during the three months ended
July 1, 2007. An adjustment of $1.2 million was recorded for pre-vesting forfeitures associated primarily with restructuring related activities.

The
fair value of the Companys stock option awards granted to employees during the three months ended July 1, 2007 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.



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

The fair values of the Companys
stock option awards were calculated for expense recognition in the three and six months ended July 1, 2007, and for disclosure purposes under SFAS 123 in the three and six months ended July 2, 2006, using an estimated forfeiture rate,
assuming no expected dividends and using the following weighted average assumptions:



|                        |  |                    |   |  |                  |   |  |             |   |  |             |  
|----------------------- |  | ------------------ | - |  | ---------------- | - |  | ----------- | - |  | ----------- | -
|                        |  | Three Months Ended |   |  | Six Months Ended |  
|                        |  | July 1,2007        |   |  | July 2,2006      |   |  | July 1,2007 |   |  | July 2,2006 |  
|Expected life (years)   |  | 5.09               |   |  | 4.00             |   |  | 4.07        |   |  | 3.90        |  
|Expected volatility     |  | 62.10              | % |  | 56.90            | % |  | 62.04       | % |  | 57.30       | %
|Risk-free interest rate |  | 4.57               | % |  | 5.00             | % |  | 4.49        | % |  | 4.80        | %

The weighted average grant-date fair value of stock options granted during the three and six months ended
July 1, 2007 was $4.00 and $3.18, respectively, per stock option. The total intrinsic value of stock options exercised during the three and six months ended July 1, 2007 was $4.0 million and $8.2 million, respectively.

As of July 1, 2007 there was $58.0 million of total unrecognized compensation cost related to nonvested stock-based compensation arrangements granted under the
plan, which is expected to be recognized over an average period of 2.5 years.

Restricted Stock Units

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

A summary of RSU activity during the three months ended July 1, 2007 is as follows:



|                                                               |  |                       |   |  |                                           |  |                          |          
|-------------------------------------------------------------- |  | --------------------- | - |  | ----------------------------------------- |  | ------------------------ | ---------
|                                                               |  | Restricted StockUnits |   |  | Weighted AverageRemaining ContractualTerm |  | Aggregate IntrinsicValue
|Outstanding, April 1, 2007                                     |  |                      |   |  |                                          |  |                          |         
|Granted                                                        |  | 760,735               |   |  |                                          |  |                          |         
|Released                                                       |  |                      |   |  |                                          |  |                          |         
|Forfeited                                                      |  | (11,676               | ) |  |                                          |  |                          |         
|Outstanding, July 1, 2007                                      |  | 749,059               |   |  | 2.44                                      |  | $                        | 5,790,226
|                                                               |  |                       |   |  |                                           |  |                          |          
|Restricted Stock Units vested and expected to vest July 1,2007 |  | 554,223               |   |  | 2.31                                      |  | $                        | 4,284,145
|                                                               |  |                       |   |  |                                           |  |                          |          



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As of July 1, 2007 total unrecognized compensation costs, adjusted for estimated forfeitures, related to non-vested
RSUs was $4.1 million, which is expected to be recognized over the next 3.8 years.

Employee Stock Purchase Plan

In 1991, the Company adopted an Employee Stock Purchase Plan (ESPP) under Section 423 of the Internal Revenue Code. 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 2007, 940,083 shares were issued under the ESPP at a weighted-average price of $4.75 per share. No ESPP awards were granted during the three months ended July 1, 2007. As of July 1, 2007, 8,963,304 shares were
available for future issuance under the ESPP (December 31, 2006 - 7,903,387).

The weighted average grant-date fair value of ESPP awards during the three
months ended April 1, 2007 was $2.50.

NOTE 4. Derivatives Instruments and Hedging Activities

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

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

At July 1, 2007,
the Company had three currency forward contracts outstanding that qualified and were designated as cash flow hedges. The U.S. dollar notional amount of these contracts was $32.5 million and the contracts had a fair value of $2.2 million as of
July 1, 2007. The gain or loss from the ineffective portion of the hedges was not significant.



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NOTE 5. Restructuring costs and other charges

The activity related to excess facility, contract termination, and severance accruals, under the Companys restructuring plans during the six months ended July 1, 2007, by year of plan, were as follows:

Excess facility and contract termination costs



|                             |  |      |       |   |      |   |       |      |  |   |       |   |  |      |     |   |       |   |        |   |  |   |        |  
|---------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | - |  | ---- | --- | - | ----- | - | ------ | - |  | - | ------ | -
|(in thousands)               |  | 2007 |       |   | 2006 |   |       | 2005 |  |   | 2003  |   |  | 2001 |     |   | Total |  
|Balance at December 31, 2006 |  | $    |      |   |      | $ | 2,111 |      |  | $ | 4,268 |   |  | $    | 549 |   |       | $ | 5,096  |   |  | $ | 12,024 |  
|Adjustments                  |  |      |      |   |      |   |      |      |  |   |      |   |  |      | (50 | ) |       |   |       |   |  |   | (50    | )
|New charges                  |  |      | 2,062 |   |      |   |      |      |  |   |      |   |  |      |    |   |       |   |       |   |  |   | 2,062  |  
|Cash payments                |  |      | (236  | ) |      |   | (277  | )    |  |   | (702  | ) |  |      |    |   |       |   | (1,033 | ) |  |   | (2,248 | )
|                             |  |      |       |   |      |   |       |      |  |   |       |   |  |      |     |   |       |   |        |   |  |   |        |  
|Balance at July 1, 2007      |  | $    | 1,826 |   |      | $ | 1,834 |      |  | $ | 3,566 |   |  | $    | 499 |   |       | $ | 4,063  |   |  | $ | 11,788 |  
|                             |  |      |       |   |      |   |       |      |  |   |       |   |  |      |     |   |       |   |        |   |  |   |        |  

Severance costs



|                             |  |      |        |   |      |   |      |      |  |   |       |   |  |   |        |  
|---------------------------- |  | ---- | ------ | - | ---- | - | ---- | ---- |  | - | ----- | - |  | - | ------ | -
|                             |  |      |        |  
|(in thousands)               |  | 2007 |        |   | 2006 |   |      | 2005 |  |   | Total |  
|Balance at December 31, 2006 |  | $    |       |   |      | $ | 536  |      |  | $ | 97    |   |  | $ | 633    |  
|Adjustment                   |  |      |       |   |      |   | (52  | )    |  |   | (59   | ) |  |   | (111   | )
|New charges                  |  |      | 8,180  |   |      |   |     |      |  |   |      |   |  |   | 8,180  |  
|Cash payments                |  |      | (5,414 | ) |      |   | (126 | )    |  |   | (38   | ) |  |   | (5,578 | )
|                             |  |      |        |   |      |   |      |      |  |   |       |   |  |   |        |  
|Balance at July 1, 2007      |  | $    | 2,766  |   |      | $ | 358  |      |  | $ |      |   |  | $ | 3,124  |  
|                             |  |      |        |   |      |   |      |      |  |   |       |   |  |   |        |  

In the six months ended July 1, 2007, the Company has recorded $10.7 million of expense and charges related
to restructuring activities. The primary components of this charge, and a reconciliation to the accrual relating to our 2007 restructuring plan is as follows:



|                                                                      |  |           |        |   |             |   |      |       |  |   |        |  
|--------------------------------------------------------------------- |  | --------- | ------ | - | ----------- | - | ---- | ----- |  | - | ------ | -
|                                                                      |  | 2007 Plan |        |   | Other Plans |   |      | Total | 
|Restructuring charges:                                                |  |           |        |   |             |   |      |       |  |   |        |  
|Severance                                                             |  | $         | 8,180  |   |             | $ |     |       |  | $ | 8,180  |  
|Excess facilities, contract terminations                              |  |           | 2,062  |   |             |   |     |       |  |   | 2,062  |  
|Asset write-offs                                                     |  |           | 600    |   |             |   |     |       |  |   | 600    |  
|Reversal of accruals for restructuring activities that have concluded |  |           |       |   |             |   | (162 | )     |  |   | (162   | )
|                                                                      |  |           |        |   |             |   |      |       |  |   |        |  
|                                                                      |  |           | 10,842 |   |             |   | (162 | )     |  |   | 10,680 |  
|Less items affecting accrual:                                         |  |           |        |   |             |   |      |       |  |   |        |  
|Payments                                                              |  |           | (5,754 | ) |             |   |     |       |  |   | (5,754 | )
|Write-offs applied                                                   |  |           | (600   | ) |             |   |     |       |  |   | (600   | )
|Foreign exchange revaluation                                          |  |           | 104    |   |             |   |     |       |  |   | 104    |  
|                                                                      |  |           |        |   |             |   |      |       |  |   |        |  
|                                                                      |  | $         | 4,592  |   |             | $ | (162 | )     |  | $ | 4,430  |  
|                                                                      |  |           |        |   |             |   |      |       |  |   |        |  

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 facility. To date, the Company has incurred $8.2 million in termination and relocation costs, $2.0 million for excess facilities, $0.6 million in asset impairment charges and $49,000 in contract termination costs.



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The Company has made payments of $5.7 million in connection with this plan. Remaining severance costs will be paid by the
end of 2007. Payments related to facilities may extend until 2011.

2006

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

To date, the Company has made payments relating to these activities of $3.5
million. The remaining severance costs were paid by the end of the first quarter of 2007, and payments related to the excess facilities will extend to 2010.

2005

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

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



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To date, the Company has made payments relating to these activities of $11.3 million. Payments related to the excess
facilities will extend to 2011.

2003 and 2001

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

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

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

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

To date, the Company has made cash payments of $12.7 million and $175.4 million related to the 2003 and 2001 plans, respectively. The Company has completed the
activities contemplated in these restructuring plans, but has not yet terminated the leases on its surplus facilities. Efforts to exit these sites are ongoing, but the payments related to these facilities may extend to 2011.



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NOTE 6. Investments in debt securities

The following table summarizes the Companys investments in debt securities:



|                          |  |             |         |                  |   |        
|------------------------- |  | ----------- | ------- | ---------------- | - | -------
|(in thousands)            |  | July 1,2007 |         | December 31,2006
|Available-for-sale:       |  |             |         |                  |   |        
|Corporate bonds and notes |  | $           | 152,707 |                  | $ | 153,249
|                          |  |             |         |                  |   |        

These debt securities are reported as cash equivalents in the balance sheet as they are highly liquid and have
maturities of less than ninety days.

NOTE 7. Investments and other assets

During the three months ended July 2, 2006, the Company recorded a $3.2 million impairment loss on its investment in a private company, which was its carrying value. This was offset by a $0.1 million gain on sale
of another investment.

During the three months ended April 2, 2006, the Company sold its investment in Ikanos Communications Inc. for proceeds of
$5.1 million and recorded a gain of $3.1 million, included in Gain on investments in the Condensed Consolidated Statement of Operations.

NOTE 8. Income
Taxes

On July 13, 2006, the FASB issued interpretation No. 48, Accounting for Uncertainty in Income Taxes  An Interpretation of FASB
Statement No. 109 (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entitys financial statements in accordance with FASB Statement No. 109, Accounting for Income
Taxes and prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Under FIN 48, the impact of an uncertain income tax position on the
income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of
being sustained. Additionally, FIN 48 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006.

The Company adopted the provisions of FIN 48 on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized a $4.7 million
net decrease in the liability for unrecognized tax benefits which was accounted for as a reduction to the retained deficit and a $3.6 million decrease to the Companys unrecognized tax benefit and a $1.1 million increase to the deferred tax
asset. Included in this opening adjustment was a $6.9 million increase in the liability for unrecognized tax benefits relating to additional uncertain tax positions the Company identified as existing at December 31, 2006.

In addition, the Company had $44.2 million for the payment of interest and penalties accrued at December 31, 2006. Upon adoption of FIN 48 on January 1, 2007,
the Company decreased its accrual for interest and penalties to $32.6 million. In the first six months of 2007, the Company recorded $6.5 million in additional interest expense. The Company recognizes interest and penalties related to income tax
liabilities as a component of income tax expense.



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Further, as part of the implementation of FIN 48, the Company reclassified $57 million from current income taxes payable
to current liability for unrecognized tax benefit and $42 million from long term income taxes payable to long term liability for unrecognized tax benefit. In addition, the Company reclassified $27.5 million of tax benefits to the deferred tax asset
account with a corresponding increase to the unrecognized tax benefit account.

Included in the balance of unrecognized tax benefits at January 1,
2007, are $125 million of tax benefits that, if recognized, would affect the effective tax rate. In the first half of 2007, the Company increased the balance of unrecognized tax benefits by $25.7 million, to bring the total unrecognized tax benefit
at July 1, 2007 to $150.7 million. The Company does not reasonably estimate that the unrecognized tax benefit will change significantly within the next twelve months.

The impact of the Companys adoption of FIN 48 on accumulated deficit is as follows:



|                                         |  |                  |          |  
|---------------------------------------- |  | ---------------- | -------- | -
|                                         |  | Six Months Ended |         
|(in thousands)                           |  | July 1, 2007     |         
|Balance, beginning of the year           |  | $                | (756,253 | )
|Net loss                                 |  |                  | (38,082  | )
|Adjustments related to adoption of FIN48 |  |                  | 4,732    |  
|                                         |  |                  |          |  
|Balance, end of the period               |  | $                | (789,603 | )
|                                         |  |                  |          |  

The Company is currently open to audit under the statute of limitations by the Internal Revenue Service for the
years ending December 31, 2003 to 2006. A subsidiary of the Company is currently open to audit under the statute of limitations or agreement by the Canadian Revenue Agency for the years ending December 31, 2000 to 2006.

NOTE 9. Comprehensive Income (Loss)

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



|                                              |  |                    |         |   |                  |   |         |             |  |   |             |   |  |   |         |  
|--------------------------------------------- |  | ------------------ | ------- | - | ---------------- | - | ------- | ----------- |  | - | ----------- | - |  | - | ------- | -
|                                              |  | Three Months Ended |         |   | Six Months Ended |  
|(in thousands)                                |  | July 1,2007        |         |   | July 2,2006      |   |         | July 1,2007 |  |   | July 2,2006 |  
|Net loss                                      |  | $                  | (22,259 | ) |                  | $ | (31,834 | )           |  | $ | (38,082     | ) |  | $ | (46,167 | )
|Other comprehensive (loss) income:            |  |                    |         |   |                  |   |         |             |  |   |             |   |  |   |         |  
|Change in net unrealized gains on investments |  |                    |        |   |                  |   | 59      |             |  |   |            |   |  |   | (51     | )
|Change in fair value of derivatives           |  |                    | 2,053   |   |                  |   | 205     |             |  |   | 2,575       |   |  |   | (506    | )
|                                              |  |                    |         |   |                  |   |         |             |  |   |             |   |  |   |         |  
|Total                                         |  | $                  | (20,206 | ) |                  | $ | (31,570 | )           |  | $ | (35,507     | ) |  | $ | (46,724 | )
|                                              |  |                    |         |   |                  |   |         |             |  |   |             |   |  |   |         |  



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NOTE 10. Net Loss Per Share

Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. For purposes of computing basic net loss per share, the weighted average number of outstanding shares
of common stock excludes unvested restricted stock awards. Diluted net loss per share is computed by dividing net loss for the period by the weighted average number of common shares outstanding during the period and all dilutive potential common
shares outstanding during the period. Dilutive potential common shares consist of convertible subordinated notes (using the if-converted method) and unvested restricted stock awards, outstanding options and shares issuable under the Companys
employee stock purchase plan (using the treasury stock method).

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



|                                                                 |  |                    |         |   |                  |   |         |             |  |   |             |   |  |   |         |  
|---------------------------------------------------------------- |  | ------------------ | ------- | - | ---------------- | - | ------- | ----------- |  | - | ----------- | - |  | - | ------- | -
|                                                                 |  | Three Months Ended |         |   | Six Months Ended |  
|(in thousands, except per share amounts)                         |  | July 1,2007        |         |   | July 2,2006      |   |         | July 1,2007 |  |   | July 2,2006 |  
|Numerator:                                                       |  |                    |         |   |                  |   |         |             |  |   |             |   |  |   |         |  
|Net loss                                                         |  | $                  | (22,259 | ) |                  | $ | (31,834 | )           |  | $ | (38,082     | ) |  | $ | (46,167 | )
|                                                                 |  |                    |         |   |                  |   |         |             |  |   |             |   |  |   |         |  
|Denominator:                                                     |  |                    |         |   |                  |   |         |             |  |   |             |   |  |   |         |  
|Basic and diluted weighted average common shares outstanding (1) |  |                    | 215,688 |   |                  |   | 203,067 |             |  |   | 214,785     |   |  |   | 195,143 |  
|                                                                 |  |                    |         |   |                  |   |         |             |  |   |             |   |  |   |         |  
|Basic and diluted net loss per share                             |  | $                  | (0.10   | ) |                  | $ | (0.16   | )           |  | $ | (0.18       | ) |  | $ | (0.24   | )
|                                                                 |  |                    |         |   |                  |   |         |             |  |   |             |   |  |   |         |  



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

Since PMC-Sierra had a net loss for the three and six months ended July 1, 2007 and July 2, 2006, there is no difference between basic and diluted net loss per
share. If the Company had recorded net income for the three months ended July 1, 2007 and July 2, 2006, it would have included in the computed dilutive potential common shares totaling approximately 2.4 million and 7.0 million,
respectively, relating to stock options, employee stock purchase plan, and restricted stock units. Common stock equivalents related to the 2.25% Senior Convertible Notes were excluded from diluted net loss per share because they would be
antidilutive.

Note 11. Contingencies

On November 17,
2005, UTStarcom, Inc. filed a suit against Passave in the Santa Clara County Superior Court in California. UTStarcom claimed breach of contract and breach of warranty and requests indemnity associated with the sale of Passaves PAS 5001
products and claimed it incurred fees and expenses in excess of $30 million. In its answer, Passave asserted numerous defenses and a cross-complaint against UTStarcom alleging interference with prospective economic advantage and breach of contract.

On August 7, 2007, the parties agreed to settle their disputes. In exchange for a dismissal of all claims with prejudice, Passave agreed to pay a
cash amount and provide a limited amount of product to UTStarcom over the next three years.



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SEC Informal Inquiry

On
August 18, 2006, PMC received an informal confidential request from the SEC advising that the SEC has commenced an informal inquiry into the Companys historical stock option-granting practices. The Company has produced documents in
response to the SEC request and is continuing to cooperate with the SEC. The Company has engaged outside counsel to represent it in the inquiry. On December 6, 2006, a meeting took place at the SEC in San Francisco during which the Audit
Committee and its special counsel summarized the results of its investigation into the Companys historical option-granting practices. The SEC requested certain documents following this meeting. There have been no further requests from or
communications with the SEC regarding its informal inquiry since the Company made its submissions in February 2007.

Stockholder Derivative Lawsuits

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

The Consolidated Complaint generally alleges that various current and former Company directors and/or officers breached their duty of loyalty and/or duty of care to the
Company and its stockholders, that these purported breaches of fiduciary duties caused harm to the Company, and the plaintiffs seek to recover damages on behalf of the Company. The Consolidated Complaint also alleges violations of federal securities
laws. The Company is a nominal defendant in the case, but any award in the litigation would be paid to the Company, rather than to its stockholders. The defendants have entered into joint defense arrangements. On March 15, 2007, the Company
filed three separate motions aimed at having the federal lawsuit dismissed on various legal grounds. One of these motions was on the basis that plaintiffs 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. On June 20, 2007, the Court heard the motion to dismiss plaintiffs complaint for failure to plead demand futility with
particularity but has not yet issued its ruling.

We have entered into indemnification agreements with each of our present and former directors and
officers that are implicated by the shareholder derivative lawsuits. Under those agreements, the Company is required to indemnify each such director or officer against expenses, including attorneys fees, judgments, fines and settlements,
paid by such individual in connection with the pending litigation (other than liabilities arising from willful misconduct or conduct that is knowingly fraudulent or deliberately dishonest).



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|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 rate, capital resources sufficiency, capital expenditures, interest income,
restructuring activities and expenses.

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

We generate revenues from the sale of
semiconductor devices that we have designed and developed or acquired. Almost all of our revenues in any given year come from the sale of semiconductors that are developed prior to that year. For example, all of our revenues in the first six months
of 2007 came from parts developed or acquired in 2006 and earlier. After an individual product is completed and announced it may take several years before that device generates any significant revenues. Our current revenues are generated by a
portfolio of more than 350 products.

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

Going forward, we plan to continue to aggressively focus on the cost side of our business and find ways to improve on operational efficiencies. As part of this plan, we
implemented a cost reduction plan in the first quarter of 2007 aimed at improving corporate performance and boosting productivity across the organization. We announced a reduction of our workforce by 175 people and the closure of two of our
facilities in Canada. We estimate that the total costs and charges associated with the restructuring will be approximately $12-14 million, of which $10.7 million has been recorded to date.

We have completed the integration of the Storage Semiconductor Business and Passave, which were acquired in 2006. We continue to implement processes aimed at improving
operational efficiencies across the organization.



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Results of Operations

Second Quarters of 2007 and 2006



|                           |  |                |       |      |   |        |  |     |   
|-------------------------- |  | -------------- | ----- | ---- | - | ------ |  | --- | --
|Net Revenues (in millions) |  |                |       |      |  
|                           |  |               
|                           |  | Second Quarter |       |      |  
|                           |  | 2007           |       | 2006 |   | Change | 
|Net revenues               |  | $              | 104.7 |      | $ | 118.8  |  | (12 | %)
|                           |  |                |       |      |   |        |  |     |   

Net revenues for the second quarter of 2007 were $104.7 million compared to $118.8 million for the same period in
2006, a decrease of $14.1 million, or 12%. The decrease was primarily attributable to two factors. In the second quarter of 2007, due to changes in circumstances in how we conduct business with the international entities of a certain distributor, we
changed our method of recording sales to this distributor to a sell-through basis, which is consistent with our existing revenue recognition practice for business conducted in North America with this distributor and is in conformance with our
revenue recognition practices and policy. In addition, revenues from our wireline communications products decreased $19 million compared to the second quarter of 2006. These decreases in revenue were partially offset by increased revenue from our
storage, Fiber-To-The-Home and microprocessor products, of $9.0 million.



|                           |  |                |      |   |      |   |      |        |  |     |   
|-------------------------- |  | -------------- | ---- | - | ---- | - | ---- | ------ |  | --- | --
|Gross Profit (in millions) |  |                |      |   |      |  
|                           |  |               
|                           |  | Second Quarter |      |   |      |  
|                           |  | 2007           |      |   | 2006 |   |      | Change | 
|Gross profit               |  | $              | 67.0 |   |      | $ | 75.2 |        |  | (11 | %)
|                           |  |                |      |   |      |   |      |        |  |     |   
|Percentage of net revenues |  |                | 64   | % |      |   | 63   | %      |  |     |   

Total gross profit decreased $8.2 million, or 11%, in the second quarter of 2007 compared to the same period in
2006. The decrease in gross profit is attributable to the reduction in sales volume of our wireline communications products and the gross margin impact resulting from the deferral of certain distributor revenue. Partially offsetting these factors
was an increase in gross margin attributable to our storage, Fiber-To-The-Home and microprocessor products of $5.4 million.

Gross profit as a percentage
of revenues was 64% in the second quarter of 2007 compared with 63% in the second quarter of 2006. While product mix can influence our gross profit as a percentage of revenue, from quarter to quarter, our underlying gross profit percentage in the
second quarter of 2007 remained constant with that in the second quarter of 2006.



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|                                            |  |                |      |   |      |   |      |        |  |      |   
|------------------------------------------- |  | -------------- | ---- | - | ---- | - | ---- | ------ |  | ---- | --
|Other Costs and Expenses (in millions)      |  |                |      |   |      |  
|                                            |  |               
|                                            |  | Second Quarter |      |   |      |  
|                                            |  | 2007           |      |   | 2006 |   |      | Change | 
|Research and development                    |  | $              | 41.6 |   |      | $ | 41.6 |        |  | 0    | % 
|Percentage of net revenues                  |  |                | 40   | % |      |   | 35   | %      |  |      |   
|Selling, general and administrative         |  | $              | 25.2 |   |      | $ | 27.2 |        |  | (7   | %)
|Percentage of net revenues                  |  |                | 24   | % |      |   | 23   | %      |  |      |   
|Amortization of purchased intangible assets |  | $              | 9.8  |   |      | $ | 9.9  |        |  | (1   | %)
|Percentage of net revenues                  |  |                | 9    | % |      |   | 8    | %      |  |      |   
|In-process research and development         |  | $              |     |   |      | $ | 20.5 |        |  | (100 | %)
|Percentage of net revenues                  |  |                | 0    | % |      |   | 17   | %      |  |      |   
|Restructuring costs and other charges       |  | $              | 3.8  |   |      | $ |     |        |  | 100  | % 
|Percentage of net revenues                  |  |                | 4    | % |      |   | 0    | %      |  |      |   

Research and Development and Selling, General and Administrative Expenses

Our research and development, or R&D, expenses were at the same level in the second quarter of 2007 compared to the second quarter of 2006. Total payroll costs were
lower by $2.1 million due to cost reduction activities undertaken in the first quarter of 2007, and we recorded $0.4 million less in depreciation in the second quarter of 2007 compared to the second quarter of 2006. These decreases in expenses were
offset by increases in material costs and software and hardware costs related to our R&D programs currently underway.

Our selling, general and
administrative, or SG&A, expenses decreased by $2.0 million, or 7%, in the second quarter of 2007 compared to the second quarter of 2006. The primary reasons for the decrease in SG&A expense were a credit of $2.2 million arising from the
favorable settlement of a payroll tax matter with the United Kingdom tax authorities, the receipt of a capital tax refund of $0.5 million, $0.8 million in less stock based compensation in the second quarter of 2007 than the second quarter of 2006,
and reduced spending on marketing-related costs by $0.4 million. Partially offsetting these decreases was a $1.7 million increase in legal fees incurred in relation to a pending litigation matter (refer to Note 11 in the Condensed Consolidated
Financial Statements).

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

In the first and second quarters of 2006, we completed the acquisitions of the Storage Semiconductor Business from Avago, and of Passave, Inc. Amortization of intangible
assets acquired from Passave and the Storage Semiconductor Business in the second quarters of 2007 and 2006 was $5.1 million and $4.7 million, respectively.

A portion of the purchase for Passave was allocated to in-process research and development projects and was expensed in the second quarter of 2006 because technological feasibility had not been established and no future alternative uses
existed. Projects acquired from Passave



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included Ethernet Passive Optical Network (EPON) and Analog Front End (AFE) products, which are based on technology that provides a low-cost method of
deploying optical access lines between a carriers central office and a customer site and which provide further enhancements and functionality to the existing EPON series, and Gigabit Passive Optical Network (GPON) products, which are more
complex and support multiple protocols and provide further enhancements to the GPON series.

At the acquisition date, early revisions of the AFE products
were in the final stage of testing and had been sent out to be manufactured or taped out, with estimated costs to complete of approximately $0.4 million. At the end of the second quarter of 2007, production testing on AFE products was
complete and no further development efforts were required. The EPON products were in the design testing stage, with estimated costs to complete of approximately $1.9 million. By the end of the second quarter of 2007, the EPON 6301 was shipping to
customers and the EPON 5201 was released to production.

GPON products were in the early design and prototype stages at acquisition, with estimated costs
to complete of approximately $4.5 million at the acquisition date. By the end of the second quarter of 2007, one of the products was being tested at customer sites. Another product is now being incorporated with other PMC technology and is part of
larger scope project that is expected to take another ten to twelve months to complete. Remaining efforts for completion include final stages of development, design testing, tape out, and final testing, as well as customer acceptance.

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

At the acquisition date, two of the next-generation Tachyon products had been taped out, with estimated costs to complete of approximately $0.8 million. These products
are now in production.

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



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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
2007 and 2006. The activity related to excess facility, contract termination, and severance accruals, under the Companys restructuring plans during the three months ended July 1, 2007, by year of plan, were as follows:



|                                               |  |      |       |   |      |   |       |      |  |   |       |   |  |      |     |   |       |   |       |   |  |   |        |  
|---------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | - |  | ---- | --- | - | ----- | - | ----- | - |  | - | ------ | -
|Excess facility and contract termination costs |  |      |       |   |      |   |       |      |  |   |       |   |  |      |     |   |       |   |       |   | 
|                                               |  |      |       |   |      |  
|(in thousands)                                 |  | 2007 |       |   | 2006 |   |       | 2005 |  |   | 2003  |   |  | 2001 |     |   | Total |  
|Balance at April 1, 2007                       |  | $    | 1,954 |   |      | $ | 1,919 |      |  | $ | 3,917 |   |  | $    | 549 |   |       | $ | 4,619 |   |  | $ | 12,958 |  
|Adjustments                                    |  |      |      |   |      |   |      |      |  |   |      |   |  |      | (50 | ) |       |   |      |   |  |   | (50    | )
|New charges                                    |  |      | 49    |   |      |   |      |      |  |   |      |   |  |      |    |   |       |   |      |   |  |   | 49     |  
|Cash payments                                  |  |      | (177  | ) |      |   | (85   | )    |  |   | (351  | ) |  |      |    |   |       |   | (556  | ) |  |   | (1,169 | )
|                                               |  |      |       |   |      |   |       |      |  |   |       |   |  |      |     |   |       |   |       |   |  |   |        |  
|Balance at July 1, 2007                        |  | $    | 1,826 |   |      | $ | 1,834 |      |  | $ | 3,566 |   |  | $    | 499 |   |       | $ | 4,063 |   |  | $ | 11,788 |  
|                                               |  |      |       |   |      |   |       |      |  |   |       |   |  |      |     |   |       |   |       |   |  |   |        |  



|                         |  |      |        |   |      |   |     |      |  |   |       |   |  |   |        |  
|------------------------ |  | ---- | ------ | - | ---- | - | --- | ---- |  | - | ----- | - |  | - | ------ | -
|Severance costs          |  |      |        |   |      |   |     |      |  |   |       |   |  |   |        |  
|                         |  |      |        |  
|(in thousands)           |  | 2007 |        |   | 2006 |   |     | 2005 |  |   | Total |  
|Balance at April 1, 2007 |  | $    | 3,639  |   |      | $ | 387 |      |  | $ | 30    |   |  | $ | 4,056  |  
|Adjustment               |  |      |       |   |      |   |    |      |  |   | (30   | ) |  |   | (30    | )
|New charges              |  |      | 3,672  |   |      |   |    |      |  |   |      |   |  |   | 3,672  |  
|Cash payments            |  |      | (4,545 | ) |      |   | (29 | )    |  |   |      |   |  |   | (4,574 | )
|                         |  |      |        |   |      |   |     |      |  |   |       |   |  |   |        |  
|Balance at July 1, 2007  |  | $    | 2,766  |   |      | $ | 358 |      |  | $ |      |   |  | $ | 3,124  |  
|                         |  |      |        |   |      |   |     |      |  |   |       |   |  |   |        |  



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|                                        |  |                |      |   |      |   |      |        |  |     |  
|--------------------------------------- |  | -------------- | ---- | - | ---- | - | ---- | ------ |  | --- | -
|Other Income and Expenses (in millions) |  |                |      |   |      |   |      |        |  |     |  
|                                        |  |               
|                                        |  | Second Quarter |      |   |      |  
|                                        |  | 2007           |      |   | 2006 |   |      | Change | 
|Interest income, net                    |  | $              | 2.5  |   |      | $ | 1.3  |        |  | 92  | %
|Percentage of net revenues              |  |                | 2    | % |      |   | 1    | %      |  |     |  
|Foreign exchange (loss) gain            |  | $              | (7.9 | ) |      | $ | (3.4 | )      |  | 132 | %
|Percentage of net revenues              |  |                | -8   | % |      |   | -3   | %      |  |     |  
|Amortization of debt issue costs        |  | $              | (0.2 | ) |      | $ | (0.2 | )      |  | 0   | %
|Percentage of net revenues              |  |                | 0    | % |      |   | 0    | %      |  |     |  
|Gain (loss) on investments              |  | $              |     |   |      | $ | (3.1 | )      |  | 100 | %
|Percentage of net revenues              |  |                | 0    | % |      |   | -3   | %      |  |     |  

Interest income, net

Net interest income increased by $1.2 million in the second quarter of 2007 compared to the second quarter of 2006 due to holding increasing cash balances and improved yields.

Foreign exchange gain (loss)

We have a significant
design presence outside the United States, especially in Canada. The majority of our operating expense exposures to changes in the value of the Canadian Dollar relative to the United States Dollar have been hedged through the first quarter of 2008.
We do not hedge our accrual for Canadian income taxes against fluctuations in foreign currency exchange rates (see Item 3. Quantitative and Qualitative Disclosures About Market Risk).

Our net foreign exchange loss was $7.9 million in the second quarter of 2007, of which $8.3 million related to the revaluation of our Canadian tax liability that is
denominated in Canadian dollars. In the second quarter of 2006, our foreign exchange loss was $3.4 million, of which a significant portion related to the revaluation of our Canadian tax liability.The foreign exchange rate between US and
Canadian dollars declined 8% in the second quarter of 2007 compared to declining 4% in the second quarter of 2006.

Loss on investments

During the second quarter of 2006, we recorded an impairment loss of $3.2 million on our investment in a private company, which has been included in
(Loss) gain on investments on the Statement of Operations. This was offset by a $0.1 million gain on sale of another investment. No impairment loss was recorded in the second quarter of 2007.

Provision for income taxes

We recorded a provision for income taxes
of $3.2 million in the second quarter of 2007 based on net income, excluding expenses for which we will not receive a tax benefit.

We recorded a provision
for income taxes of $2.4 million in the second quarter of 2006.

First Six Months of 2007 and 2006



|                           |  |                  |       |      |   |        |  |   |  
|-------------------------- |  | ---------------- | ----- | ---- | - | ------ |  | - | -
|Net Revenues (in millions) |  |                  |       |      |   |        |  |   |  
|                           |  |                 
|                           |  | First Six Months |       |      |  
|                           |  | 2007             |       | 2006 |   | Change | 
|Net revenues               |  | $                | 208.4 |      | $ | 206.6  |  | 1 | %
|                           |  |                  |       |      |   |        |  |   |  



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Net revenues for the first six months of 2007 were $208.4 million compared to $206.6 million for the same period in 2006,
an increase of $1.8 million, or 1%. This net increase is primarily attributable to the following factors: a $9.3 million increase in sales of our storage, Fiber-To-The-Home and microprocessor products, a $15 million increase due to the inclusion of
Fiber-To-The-Home product sales for the full six months in 2007 compared to only two months in the first half of 2006, a $16.9 million increase due to the inclusion of Tachyon products for six months in 2007 compared to four months in the first half
of 2006, partially offset by a $35 million decrease in sales of our communications products and $4.2 million of deferred revenue on shipments to a certain distributor in 2007.



|                           |  |                  |       |   |      |   |       |        |  |    |   
|-------------------------- |  | ---------------- | ----- | - | ---- | - | ----- | ------ |  | -- | --
|Gross Profit (in millions) |  |                  |       |   |      |   |       |        |  |    |   
|                           |  |                 
|                           |  | First Six Months |       |   |      |  
|                           |  | 2007             |       |   | 2006 |   |       | Change | 
|Gross profit               |  | $                | 133.1 |   |      | $ | 136.4 |        |  | (2 | %)
|                           |  |                  |       |   |      |   |       |        |  |    |   
|Percentage of net revenues |  |                  | 64    | % |      |   | 66    | %      |  |    |   

Total gross profit decreased $3.3 million, or 2%, in the first six months of 2007 compared to the same period in
2006.

Gross profit as a percentage of revenues decreased to 64% in the first six months of 2007 from 66% in the first six months of 2006. This decrease is
attributable primarily to the following two factors. Firstly, PMCs product mix changed as a result of the acquisitions. Since many of the acquired products sell at overall lower gross margins, particularly the Fiber-To-The-Home products, our
gross profit as a percentage of revenues decreased approximately 1%. If the proportion of revenues from the acquired products increases, we expect this trend to continue.

In addition, the change in method of recording sales to the aforementioned certain distributor resulted to a sell-through basis reduced gross profit by a further 1%.



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|                                             |  |                  |      |   |      |   |      |        |  |       |   
|-------------------------------------------- |  | ---------------- | ---- | - | ---- | - | ---- | ------ |  | ----- | --
|Operating Expenses and Charges (in millions) |  |                  |      |   |      |   |      |        |  |       |   
|                                             |  |                 
|                                             |  | First Six Months |      |   |      |  
|                                             |  | 2007             |      |   | 2006 |   |      | Change | 
|Research and development                     |  | $                | 86.2 |   |      | $ | 75.3 |        |  | 14    | % 
|Percentage of net revenues                   |  |                  | 41   | % |      |   | 36   | %      |  |       |   
|Selling, general and administrative          |  | $                | 51.9 |   |      | $ | 46.8 |        |  | 11    | % 
|Percentage of net revenues                   |  |                  | 25   | % |      |   | 23   | %      |  |       |   
|Amortization of purchased intangible assets  |  | $                | 19.7 |   |      | $ | 12.0 |        |  | 64    | % 
|Percentage of net revenues                   |  |                  | 9    | % |      |   | 6    | %      |  |       |   
|In-process research and development          |  | $                |     |   |      | $ | 35.3 |        |  | (100  | %)
|Percentage of net revenues                   |  |                  | 0    | % |      |   | 17   | %      |  |       |   
|Restructuring costs and other charges        |  | $                | 10.7 |   |      | $ | (0.7 | )      |  | 1,629 | % 
|Percentage of net revenues                   |  |                  | 5    | % |      |   | 0    | %      |  |       |   

Research and Development and Selling, General and Administrative Expenses

Our research and development, or R&D, expenses were $86.2 million, or 14%, higher in the first six months of 2007 compared to the first six months of 2006. Total
payroll costs, were higher in 2007 by $3.1 million, with salary increases and additional headcount from Passave and the Storage Semiconductor Business acquisitions in 2006 adding $5.2 million of costs and the workforce reduction in the first quarter
of 2007 reducing costs by $2.1 million. In addition, we recorded $8.7 million of stock-based compensation expense in the first six months of 2007 compared to $6.5 million in the first six months of 2006. Materials costs were higher by $3.0 million,
hardware and software maintenance costs increased by $1.8 million, office and facilities costs were higher by $0.6 million and training and travel costs also increased by $0.1 million due to the acquisitions. These increases were offset by decreases
in depreciation and professional fees of $0.3 million and $0.1 million, respectively.

Our selling, general and administrative, or SG&A, expenses
increased by $5.1 million, or 11%, in the first six months of 2007 compared to the first six months of 2006. The primary reasons for this net increase in SG&A expenses as a percentage of revenues were incremental payroll, stock based
compensation and facilities costs associated with our 2006 acquisitions of $5.0 million and professional fees increased $2.9 million primarily in connection with legal fees associated with certain litigation matters, partially offset by a credit of
$2.8 million arising from the settlement of a payroll tax matter in the United Kingdom and a capital tax refund.

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

During the six months ended July 2, 2006 we completed the acquisitions of the
Storage Semiconductor Business and Passave for total consideration of approximately $732.0 million. Of the $431.2 million purchase price for the Storage Semiconductor Business, $167.4 million was allocated to identified intangible assets with
estimated useful lives ranging from six months to 10 years. We recorded amortization expense related to these assets of $9.4 million in the first six months of 2007, compared to $7.9 million from February 28, 2006, the date of acquisition, to
July 2, 2006. Of the $304.0 million total consideration for Passave, $82.5 million



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was allocated to identified intangible assets with estimated useful lives ranging from eight months to 4 years. Amortization of these assets from the date of
the acquisition on May 4, 2006 was $3.6 million in the first six months of 2006 and $10.2 million in the first six months of 2007.

In-process
research and development charges of $14.8 million and $20.5 million were recorded during the first six months of 2006 with respect to the acquisitions of the Storage Semiconductor Business and Passave, respectively. For each of the acquisitions, a
portion of the purchase price was allocated to in-process research and development projects, calculated using a discounted cash flow technique. The fair value of these projects was expensed immediately because technological feasibility has not been
established and no future alternative uses exist. The value was calculated using a discounted cash flow technique that estimated the expected future cash flow attributable to the in-process technology over a period of approximately 10 years for the
Storage Semiconductor Business and 6 years for Passave. This methodology involved examining the rights to the projects, their current progress toward completion, evidence of existing and future markets, and remaining technological, engineering, or
regulatory risks.

Restructuring costs and other charges

The activity related to excess facility, contract termination, and severance accruals under these plans during the six months ended July 1, 2007 was as follows:



|                                               |  |      |       |   |      |   |       |      |  |   |       |   |  |      |     |   |       |   |        |   |  |   |        |  
|---------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | - |  | ---- | --- | - | ----- | - | ------ | - |  | - | ------ | -
|Excess facility and contract termination costs |  |      |       |   |      |   |       |      |  |   |       |   |  |      |     |   |       |   |        |   | 
|                                               |  |      |       |   |      |  
|(in thousands)                                 |  | 2007 |       |   | 2006 |   |       | 2005 |  |   | 2003  |   |  | 2001 |     |   | Total |  
|Balance at December 31, 2006                   |  | $    |      |   |      | $ | 2,111 |      |  | $ | 4,268 |   |  | $    | 549 |   |       | $ | 5,096  |   |  | $ | 12,024 |  
|Adjustments                                    |  |      |      |   |      |   |      |      |  |   |      |   |  |      | (50 | ) |       |   |       |   |  |   | (50    | )
|New charges                                    |  |      | 2,062 |   |      |   |      |      |  |   |      |   |  |      |    |   |       |   |       |   |  |   | 2,062  |  
|Cash payments                                  |  |      | (236  | ) |      |   | (277  | )    |  |   | (702  | ) |  |      |    |   |       |   | (1,033 | ) |  |   | (2,248 | )
|                                               |  |      |       |   |      |   |       |      |  |   |       |   |  |      |     |   |       |   |        |   |  |   |        |  
|Balance at July 1, 2007                        |  | $    | 1,826 |   |      | $ | 1,834 |      |  | $ | 3,566 |   |  | $    | 499 |   |       | $ | 4,063  |   |  | $ | 11,788 |  
|                                               |  |      |       |   |      |   |       |      |  |   |       |   |  |      |     |   |       |   |        |   |  |   |        |  



|                             |  |      |        |   |      |   |      |      |  |   |       |   |  |   |        |  
|---------------------------- |  | ---- | ------ | - | ---- | - | ---- | ---- |  | - | ----- | - |  | - | ------ | -
|Severance costs              |  |      |        |   |      |   |      |      |  |   |       |   |  |   |        |  
|                             |  |      |        |  
|(in thousands)               |  | 2007 |        |   | 2006 |   |      | 2005 |  |   | Total |  
|Balance at December 31, 2006 |  | $    |       |   |      | $ | 536  |      |  | $ | 97    |   |  | $ | 633    |  
|Adjustment                   |  |      |       |   |      |   | (52  | )    |  |   | (59   | ) |  |   | (111   | )
|New charges                  |  |      | 8,180  |   |      |   |     |      |  |   |      |   |  |   | 8,180  |  
|Cash payments                |  |      | (5,414 | ) |      |   | (126 | )    |  |   | (38   | ) |  |   | (5,578 | )
|                             |  |      |        |   |      |   |      |      |  |   |       |   |  |   |        |  
|Balance at July 1, 2007      |  | $    | 2,766  |   |      | $ | 358  |      |  | $ |      |   |  | $ | 3,124  |  
|                             |  |      |        |   |      |   |      |      |  |   |       |   |  |   |        |  



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In the six months ended July 1, 2007, the Company has recorded $10.7 million of expense and charges related to
restructuring activities. The primary components of this charge and reconciliation to the accrual relating to our 2007 restructuring plan are as follows:



|                                                                      |  |           |        |   |             |   |      |       |  |   |        |  
|--------------------------------------------------------------------- |  | --------- | ------ | - | ----------- | - | ---- | ----- |  | - | ------ | -
|                                                                      |  | 2007 Plan |        |   | Other Plans |   |      | Total | 
|Restructuring charges:                                                |  |           |        |   |             |   |      |       |  |   |        |  
|Severance                                                             |  | $         | 8,180  |   |             | $ |     |       |  | $ | 8,180  |  
|Excess facilities, contract terminations                              |  |           | 2,062  |   |             |   |     |       |  |   | 2,062  |  
|Asset write-offs                                                     |  |           | 600    |   |             |   |     |       |  |   | 600    |  
|Reversal of accruals for restructuring activities that have concluded |  |           |       |   |             |   | (162 | )     |  |   | (162   | )
|                                                                      |  |           |        |   |             |   |      |       |  |   |        |  
|                                                                      |  |           | 10,842 |   |             |   | (162 | )     |  |   | 10,680 |  
|Less items affecting accrual:                                         |  |           |        |   |             |   |      |       |  |   |        |  
|Payments                                                              |  |           | (5,754 | ) |             |   |     |       |  |   | (5,754 | )
|Write-offs applied                                                   |  |           | (600   | ) |             |   |     |       |  |   | (600   | )
|Foreign exchange revaluation                                          |  |           | 104    |   |             |   |     |       |  |   | 104    |  
|                                                                      |  |           |        |   |             |   |      |       |  |   |        |  
|                                                                      |  | $         | 4,592  |   |             | $ | (162 | )     |  | $ | 4,430  |  
|                                                                      |  |           |        |   |             |   |      |       |  |   |        |  

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 facility. To date, the Company has incurred $ $8.2 million in termination and relocation costs, $2.0 million for excess facilities, $0.6 million in asset impairment charges and $49,000 in contract termination costs.

The Company has made payments of $5.7 million in connection with this plan. Remaining severance costs will be paid by the end of 2007. Payments related to
facilities may extend until 2011.

2006

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

To date, the Company has made payments relating to these activities of $3.5 million. The remaining severance costs
were paid by the end of the first quarter of 2007, and payments related to the excess facilities will extend to 2010.



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2005

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

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

To date, the Company has made payments relating to these activities of $11.3 million. Payments related to the excess facilities will extend to 2011.

2003 and 2001

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

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



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

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

To date, the Company has made cash payments of $12.7 million and $175.4 million related to the 2003 and 2001 plans, respectively. The Company has completed the
activities contemplated in these restructuring plans, but has not yet terminated the leases on its surplus facilities. Efforts to exit these sites are ongoing, but the payments related to these facilities may extend to 2011.



|                                        |  |                  |      |   |      |   |      |        |  |      |   
|--------------------------------------- |  | ---------------- | ---- | - | ---- | - | ---- | ------ |  | ---- | --
|Other Income and Expenses (in millions) |  |                  |      |   |      |   |      |        |  |      |   
|                                        |  |                 
|                                        |  | First Six Months |      |   |      |  
|                                        |  | 2007             |      |   | 2006 |   |      | Change | 
|Interest income, net                    |  | $                | 4.3  |   |      | $ | 4.8  |        |  | (11  | %)
|Percentage of net revenues              |  |                  | 2    | % |      |   | 2    | %      |  |      |   
|Foreign exchange loss                   |  | $                | (8.9 | ) |      | $ | (3.4 | )      |  | 162  | % 
|Percentage of net revenues              |  |                  | -4   | % |      |   | -2   | %      |  |      |   
|Amortization of debt issue costs        |  | $                | (0.5 | ) |      | $ | (0.5 | )      |  |     |   
|Percentage of net revenues              |  |                  | 0    | % |      |   | 0    | %      |  |      |   
|(Loss) gain on investments              |  | $                |     |   |      | $ | (1.3 | )      |  | (100 | %)
|Percentage of net revenues              |  |                  | 0    | % |      |   | -1   | %      |  |      |   

Interest income, net

Interest income was $4.3 million in the first six months of 2007 compared to $4.8 million in the first six months of 2006, a decrease of $0.5 million. In the fourth quarter of 2005, we issued $225.0 million of 2.25%
Senior Convertible Notes resulting in our holding higher cash balances and earning higher interest income until this cash was used to fund the acquisition of the Storage Semiconductor Business in February 2006.

Foreign exchange loss

Our foreign exchange loss was
$8.9 million in the first six months of 2007, primarily related to the revaluation of our Canadian tax liability denominated in Canadian dollars. In the second quarter of 2006, our foreign exchange loss was $3.4 million.The value of the US
dollar relative to the Canadian dollar declined 9% in the first half of 2007 compared to 4% in the first half of 2006.



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Amortization of debt issue costs

In the fourth quarter of 2005, we issued $225.0 million of 2.25% Senior Convertible Notes. As a result, in each of the first six months of 2006 and 2007 we recognized amortization of debt issue costs of $0.5 million.

(Loss) gain on investments

During the
first quarter of 2006, we sold our investment in Ikanos Communications Inc. for proceeds of $5.1 million and recorded a gain of $3.1 million which has been included in Gain on sale of investments on the Statement of Operations. The gain was
partially offset by a $1.3 million loss on sales of other short-term investments that were redeemed prior to maturity to fund the acquisition of the Storage Semiconductor Business.

During the second quarter of 2006, we recorded an impairment loss of $3.2 million on our investment in a private company, which has been included in (Loss) gain on investments on the Statement of Operations. This was
offset by a $0.1 million gain on sale of another investment.

Provision for income taxes

We recorded a recovery of income taxes of $2.3 million in the first six months of 2007 based on net income, excluding expenses for which we will not receive a tax
benefit. Included in this amount is a $4.0 million tax recovery relating to the settlement of prior years tax credits.

We recorded a provision for
income taxes of $13.5 million in the first six months of 2006 based on net income, excluding expenses for which we will not receive a tax benefit. In addition, we recorded $7.1 million tax expense in the first quarter of 2006 for withholding and
other taxes on the repatriation of funds used to purchase the Storage Semiconductor Business.

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 to the Condensed Consolidated Financial Statements in our Annual Report on Form 10-K for the



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period ended December 31, 2006, which also provides commentary on our most critical accounting estimates. The following additional estimates were of
note during the first six months of 2007:

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.

In the second quarter of 2007, we recorded additional goodwill related to the acquisition of Passave, Inc. This adjustment was based on
our estimate of costs to settle a legal matter that existed at the time of acquisition (see Note 11 to the Condensed Consolidated Financial Statements).

There was no impairment to goodwill or intangible assets during the six months ended July 1, 2007. 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 PMCs stock price. Expected volatility is a statistical measure of the amount by which a stock price is expected to fluctuate during a period. Our estimates of expected volatilities are based on a weighted historical and
market-based implied volatility. In order to determine the expected life of the awards, we use historical data to estimate option exercises and employee



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terminations; separate groups of employees that have similar historical exercise behavior, such as directors or executives, are considered separately for
valuation purposes. The expected forfeiture rate applied in calculating stock-based compensation cost is estimated using historical data.

The assumptions
used in calculating the fair value of stock-based awards involve estimates that require management judgment. If factors change and we use different assumptions, our stock-based compensation expense could change significantly in the future. In
addition, if our actual forfeiture rate is different from our estimate, our stock-based compensation could change significantly in the future. See Notes 1 and 3 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.

In the first half of 2007, we recorded charges of $2.0 million for the restructuring of excess facilities in connection with our 2006 restructuring plan.
This estimate represents 100% of the estimated future operating costs and lease obligation for the exited space at our Santa Clara facility.

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

Income Taxes

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

Our operations are conducted in a number of countries with complex tax legislation and regulations pertaining to our activities. We have recorded income tax liabilities based on our estimates and interpretations of
those regulations for the countries we operate in. However our estimates are subject to review and assessment by the tax authorities and the courts of those countries. For example, our estimated tax provision increased at the end of 2006 due to an
increase in our estimated tax liability following receipt in 2007 of a written communication from a tax authority concerning past transfer pricing policies and practices of certain companies within



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the PMC-Sierra group. As a result, we increased our provision for periods prior to 2006 by $29.9 million. The timing of any such review and final assessment
of our liabilities by local authorities is substantially out of our control and is dependent on the actions by those authorities in the countries 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.

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

In the first quarter of 2007, we adopted FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes (FIN 48). We applied the more-likely-than-not threshold to our identified uncertain positions, as prescribed in FIN 48, resulting in a $4.7 million reduction to retained deficit that, in the absence of the adoption provisions of
FIN 48, would have reduced our income tax expense.

Business Outlook

We expect our revenues for the third quarter of 2007 to be in the range of $112 million to $115 million. As in the past, and consistent with business practice in the semiconductor industry, a significant portion of
our revenues are likely to be derived from orders placed and shipped during the same quarter, which we call our turns business. Our revenue outlook for the second quarter of 2007 depends in part on achieving 31% of our revenues from our
turns business to reach the mid-point of the revenue range. Our quarterly revenues may vary considerably as our customers adjust to fluctuating demand for products in their markets.

We anticipate our third quarter 2007 gross margins will remain at approximately 65%, inclusive of $0.5 million stock based compensation expense. As in past quarters this could vary depending on the volumes of products
sold, since many of our costs are fixed. Margins will also vary depending on the mix of products sold.

We expect our third quarter 2007 operating expenses
to be to be approximately $65 million including stock-based compensation expense of approximately $8.1 million to $9.1 million. We anticipate that interest and other income in the third quarter of 2007 will be approximately $2 million.

Liquidity & Capital Resources

Our
principal source of liquidity at July 1, 2007 was our $298.3 million in cash and cash equivalents.

In the first six months of 2007, we generated
$35.9 million of cash in operating activities.

Significant changes in working capital accounts included:



| |  |  | a $6.0 million decrease in inventory, resulting primarily from increasing our inventory turns from 4.3 in the fourth quarter of 2006 to 5.3 in the second quarter of
2007;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | a $12.6 million increase in deferred taxes and income taxes payable due to increased interest accruals on our tax liabilities and revaluation of foreign tax
liabilities;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a $2.4 million net increase in accrued restructuring costs due to additional charges recorded, net of payments made, in the first half of 2007; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a $4.1 million increase in deferred revenue due to changes in circumstances in how we conduct business with a certain distributor.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------

In the first six months of 2007, cash flows from our investment activities included:



| |  |  | investments of $10.2 million for the purchases of property, equipment and intangible assets.
| | - |  | --------------------------------------------------------------------------------------------

In the first six months of 2007, cash flows from our financing activities included:



| |  |  | cash proceeds of $13.6 million from the issuance of common stock under our equity-based compensation plans.
| | - |  | -----------------------------------------------------------------------------------------------------------

As of July 1, 2007, we had cash commitments made up of the following:



|                                  |  |       |         |      |   |        |  |      |        |      |   |        |  |            |        |  |   |        |  |   |        
|--------------------------------- |  | ----- | ------- | ---- | - | ------ |  | ---- | ------ | ---- | - | ------ |  | ---------- | ------ |  | - | ------ |  | - | -------
|(in thousands)                    |  | Total |         | 2007 |   | 2008   |  | 2009 |        | 2010 |   | 2011   |  | After 2011
|Contractual Obligations           |  |       |         |      |   |        |  |      |        |      |   |        |  |            |        |  |   |        |  |   |        
|Operating Lease Obligations:      |  |       |         |      |   |        |  |      |        |      |   |        |  |            |        |  |   |        |  |   |        
|Minimum Rental Payments           |  | $     | 40,508  |      | $ | 6,084  |  | $    | 13,655 |      | $ | 8,309  |  | $          | 7,819  |  | $ | 4,641  |  | $ |       
|Estimated Operating Cost Payments |  |       | 13,842  |      |   | 2,295  |  |      | 4,125  |      |   | 3,041  |  |            | 3,026  |  |   | 1,355  |  |   |       
|Long Term Debt:                   |  |       |         |      |   |        |  |      |        |      |   |        |  |            |        |  |   |        |  |   |        
|Principal Repayment               |  |       | 225,000 |      |   |       |  |      |       |      |   |       |  |            |       |  |   |       |  |   | 225,000
|Interest Payments                 |  |       | 93,658  |      |   | 2,531  |  |      | 5,063  |      |   | 5,063  |  |            | 5,063  |  |   | 5,063  |  |   | 70,875 
|Purchase and other Obligations    |  |       | 21,200  |      |   | 3,781  |  |      | 6,820  |      |   | 8,235  |  |            | 2,364  |  |   |       |  |   |       
|                                  |  |       |         |      |   |        |  |      |        |      |   |        |  |            |        |  |   |        |  |   |        
|                                  |  | $     | 394,208 |      | $ | 14,691 |  | $    | 29,663 |      | $ | 24,648 |  | $          | 18,272 |  | $ | 11,059 |  | $ | 295,875
|                                  |  |       |         |      |   |        |  |      |        |      |   |        |  |            |        |  |   |        |  |   |        

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 $11.0 million at
July 1, 2007 for inventory and other expenses that will be received in the coming 90 days and that will require settlement 30 days thereafter.

We
expect to use approximately $6.2 million of cash in the remainder of 2007 for capital expenditures, including purchased 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, wafer deposit and remaining restructuring requirements through 2007.



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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 and Short-term Investments:

We regularly maintain a short and long term investment portfolio 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 30 months with the majority being within one year. To minimize credit risk, we diversify our investments and select minimum ratings of P-1 or A by Moodys, or A-1 or A by Standard and Poors, or
equivalent. We classify these securities as available-for-sale and they are carried at fair market value.

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

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

Based on a sensitivity analysis performed on the financial instruments in our investment portfolio held at July 1, 2007, 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 each result in a decline, or increase, in portfolio value of approximately $0.1 million or less.

Senior Convertible Notes:

At July 1, 2007, $225
million of our 2.25% senior convertible notes were outstanding. Because we pay fixed interest coupons on our notes, market interest rate fluctuations do not impact our debt interest payments. However, the fair value of our senior convertible notes
will fluctuate as a result of changes in the price of our common stock, changes in market interest rates and changes in our credit worthiness.

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

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



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

Foreign Currency:

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

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

As at July 1, 2007, we had three currency forward contracts outstanding that qualified and were designated as cash flow hedges. The U.S. dollar notional amount of
these contracts was $32.5 million and the contracts had a fair value of $2.2 million.

We attempt to limit our exposure to foreign exchange rate
fluctuations from our Canadian dollar net asset or liability positions. We do not hedge our accruals for Canadian income taxes in the ordinary course of business, and consequently in the first six months of 2007 we recorded a $9.3 million foreign
exchange loss relating to this item. Our operating loss would be materially impacted by a shift in the foreign exchange rates between United States and Canadian currencies. For example, if the value of the United States dollar decreased by an
additional 5% relative to the Canadian dollar, our operating loss would increase by $5.5 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



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that are still in the start-up or development stages. The market for the technologies or products that they have under development is typically in the early
stages, and may never materialize. We could lose our entire investment in these companies and partnerships or may incur an additional expense if we determine that the value of these assets has been impaired. For example, in the second quarter of
2006 we recorded a charge of $3.2 million for impairment of an investment in a private company. We may record 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 three month period ended July 1, 2007 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
|------- | -----------------

UTStarcom

On November 17, 2005, UTStarcom, Inc. filed a suit against Passave in the Santa Clara County Superior Court in California. UTStarcom claimed breach of contract and
breach of warranty and requests indemnity associated with the sale of Passaves PAS 5001 products and claimed it incurred fees and expenses in excess of $30 million. In its answer, Passave asserted numerous defenses and a cross-complaint
against UTStarcom alleging interference with prospective economic advantage and breach of contract.

On August 7, 2007, the parties agreed to settle
their disputes. In exchange for a dismissal of all claims with prejudice, the Passave, Inc. agreed to pay a cash amount and provide a limited amount of product to UTStarcom over the next three years.

Stockholder Derivative Lawsuits

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

The Consolidated Complaint 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 shareholders that these purported breaches of fiduciary duties caused harm to the Company, and the plaintiffs seek to recover damages on behalf of the Company. The
Consolidated Complaint also alleges violations of federal securities laws. The Company is a nominal defendant in the cases, but any recovery in the litigation would be paid to the Company, rather than to its shareholders. The defendants have entered
into joint defense arrangements.

On March 15, 2007, the Company filed three separate motions aimed at having the federal lawsuit dismissed on various
legal grounds. One of these motions was on the basis that plaintiffs 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. On June 20, 2007, the Court heard the motion to dismiss plaintiffs complaint for failure to plead demand futility with particularity but has not yet issued its ruling.



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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. The risk factors set forth below include any material changes to, and supersede the description of, the risk
factors disclosed in Item 1A of the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2006.

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

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

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

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

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

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

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



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

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

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

We depend on a limited number of customers for a major portion of our revenues. Through direct, distributor and subcontractor purchases, Cisco Systems and EMC Corporation each accounted for more than 10% of our
revenues in the second quarter of 2007. We do not have long-term volume purchase commitments from any of our major customers. We sell our products solely on the basis of purchase orders. Those customers could decide to cease purchasing products with
little or no notice and without significant penalties. A number of factors could cause our customers to cancel or defer orders, including interruptions to their operations due to a downturn in their industries, delays in manufacturing their own
product offerings into which our products are incorporated and natural disasters. Accordingly, our future operating results will continue to depend on the success of our largest customers and on our ability to sell existing and new products to these
customers in significant quantities.

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

Product sales
mix may adversely affect our profitability over time.

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

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

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



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

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

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

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

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

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

The Storage Semiconductor Business acquisition may make the Company reliant on a limited number of customers for a major portion of its revenues.

Furthermore, the Company may not receive the expected benefits of the acquisitions, which are based on forecasts, which are subject to numerous assumptions, which may
prove to be inaccurate and could adversely affect PMCs cash flow and results of operations, and as a result, the acquisitions may prove to be dilutive to existing shareholders.



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Changes in the political and economic climate in the countries we do business may have a significant impact on our
profitability.

China represents a significant portion of our net revenues (17% in each of the quarters ended July 1, 2007 and July 2, 2006,
respectively) and a substantial portion of Fiber-To-The-Home revenues in 2007 were derived from sales of its products into Japan and Korea. Our financial condition and results of operations are becoming increasingly dependent on our sales in China
and the majority of our wafer supply comes from Taiwan. China has large organizations with major programs that can start and stop quickly. For example, in 2004 our operating profits were adversely affected by a sudden slowdown in telecom
infrastructure build-out in China. Instability in Chinas economic environment could lead to a contraction of capital spending by our customers. Economic downturns, decreases in demand in these markets for our products and overall negative
market conditions in Asia could have a disproportionate effect on our overall business results. Additional risks to us include economic sanctions imposed by the U.S. government, imposition of tariffs and other potential trade barriers or
regulations, uncertain protection for intellectual property rights and generally longer receivable collection periods.

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

One of our subsidiaries is located in Israel, and employs
approximately 167 people. If regional hostilities resume, a significant number of the subsidiarys employees may be called into active military duty at any time. As a result, while product development schedules have not to date been impacted,
there may be delays in their ability to meet future development schedules. It is not clear if the hostilities will resume, and if so, how many of PMC employees may be called to military duty or otherwise affected by any potential hostilities.

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

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

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



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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.

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



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

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

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

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

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

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

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

We are subject to income taxes in both the United States and international jurisdictions. Significant
judgment is required in determining our worldwide provision for income taxes. In the ordinary course of our business, there are many transactions where the ultimate tax determination is uncertain. Additionally our calculations of income
taxes are based on our interpretations of applicable tax laws in the jurisdictions in which we file. Although we believe our tax estimates are reasonable, there is no assurance that the final determination of our income tax liability will not
be materially different than what is reflected in our income tax provisions and accruals. Should additional taxes be assessed as a result of new legislation, an audit or litigation, if our effective tax rate should change as a result of changes
in federal, international or state and local tax laws, or if we were to change the locations where we operate, there could be a material effect on our income tax provision and net income in the period or



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periods in which that determination is made, and potentially to future periods as well. For instance, we significantly increased our tax provision at the end
of 2006 due to an increase in our estimated tax liability following receipt in 2007 of a written communication from a tax authority examining the historic transfer pricing policies and practices of certain companies within the PMC-Sierra group.

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

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

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

We are exposed to foreign currency rate fluctuations because a significant part of our
development, test, and selling and administrative costs are in Canadian dollars, and our selling costs are incurred in a variety of currencies around the world. The U.S. dollar has devalued significantly compared to the Canadian dollar and this
trend may continue. To protect against reductions in value and the volatility of future cash flows caused by changes in foreign exchange rates, we enter into foreign currency forward contracts. The contracts reduce, but do not eliminate, the impact
of foreign currency exchange rate movements. In addition, this foreign currency risk management policy may not be effective in addressing long-term fluctuations since our contracts do not extend beyond a 12-month maturity.

We regularly limit our exposure to foreign exchange rate fluctuations from our Canadian dollar net asset or liability positions. We do not hedge our accrual for Canadian
income taxes in the ordinary course of business, and consequently in the second quarter of 2007 we recorded a $8.3 million foreign exchange loss relating to this item. Our profitability would be materially impacted by a 5% shift in the foreign
exchange rates between United States and Canadian currencies.

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

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

In addition, a significant
portion of our sales flows through our distribution channel, which generally 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 could be jeopardized.



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

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

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

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

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

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.



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

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

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

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

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

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

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

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

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



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

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

Some of our products are used by customers in conjunction with a number of other components, such as transceivers, microcontrollers and digital signal
processors. If, for any reason, our customers experience a shortage of any component, their ability to produce the forecasted quantity of their product offerings may be affected adversely and our product sales would decline until the shortage is
remedied. Such a situation could harm our operating results, cash flow and financial condition.

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

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

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



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

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

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

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

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 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,



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and we may be unable to accurately assess our level of exposure. These proceedings may result in material charges to our operating results in the future if
our exposure is material and if our ability to assess our exposure becomes clearer.

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

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

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

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

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

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

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

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



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

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

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

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

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

Securities class action litigation has often been instituted against a company following periods of volatility and decline in the market price of their securities. If instituted against us, regardless of the outcome,
such litigation could result in substantial costs and diversion of our managements attention and resources and have a material adverse effect on our business, financial condition and operating results. In addition, we could incur substantial
punitive and other damages relating to this litigation.

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

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

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



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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.



|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 May 8, 2007 to elect our directors and to ratify the appointment of Deloitte & Touche LLP as our Independent Registered Public Accounting Firm for the 2007 fiscal year.

All nominees for directors were elected and the appointment of auditors was ratified. The voting on each matter is set forth below:

Election of the Directors of the Company.



|                     |  |             |  |           
|-------------------- |  | ----------- |  | ----------
|Nominee              |  | For         |  | Withheld  
|Robert L. Bailey     |  | 151,615,606 |  | 35,517,191
|Richard E. Belluzzo  |  | 145,680,582 |  | 41,452,215
|James V. Diller, Sr. |  | 141,945,504 |  | 45,187,293
|Michael R. Farese    |  | 138,881,846 |  | 48,250,951
|Jonathan J. Judge    |  | 136,303,832 |  | 50,828,965
|William H. Kurtz     |  | 150,185,247 |  | 36,947,550
|Frank J. Marshall    |  | 148,472,397 |  | 38,660,400

Proposal to ratify the appointment of Deloitte & Touche LLP as our Independent Registered Public
Accounting Firm for the 2007 fiscal year.

For 183,671,871            Against
2,295,573                    Abstain 1,165,355



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

None.



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

Exhibits 



|     |  |                                                                                                                                           
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------
|11.1 |  | Calculation of net loss per share  included in Note 10 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 9, 2007 |  |  |  | /s/ Michael W. Zellner                                  
|                     |  |  |  | Michael W. Zellner                                      
|                     |  |  |  | Vice President,                                         
|                     |  |  |  | Chief Financial Officer and Principal Accounting Officer



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