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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10 - Q



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

for the quarterly period ended September 28, 2008



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

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

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

Yes   ̈    No  x

Common shares outstanding at October 31st, 2008 - 221,356,037









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##### Table of Contents

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                            |  | 41  
|                               |  |                                                                                      
|Item 4.                        |  | Controls and Procedures                                                               |  | 43  
|                               | 
|PART II - OTHER INFORMATION    |  |                                                                                      
|                               |  |                                                                                      
|Item 1.                        |  | Legal Proceedings                                                                     |  | 44  
|                               |  |                                                                                      
|Item 1A.                       |  | Risk Factors                                                                          |  | 45  
|                               |  |                                                                                      
|Item 2.                        |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 58  
|                               |  |                                                                                      
|Item 3.                        |  | Defaults Upon Senior Securities                                                       |  | 58  
|                               |  |                                                                                      
|Item 4.                        |  | Submission Of Matters To A Vote By Stockholders                                       |  | 58  
|                               |  |                                                                                      
|Item 5.                        |  | Other Information                                                                     |  | 58  
|                               |  |                                                                                      
|Item 6.                        |  | Exhibits                                                                              |  | 58  
|                               | 
|Signatures                     |  | 59                                                                                   



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##### Table of Contents

Part I - FINANCIAL INFORMATION

Item 1 - Financial Statements

PMC-Sierra, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)



|                                                                                             |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|-------------------------------------------------------------------------------------------- |  | ------------------ | ------- | - | ----------------- | - | ------- | ----------------- |  | - | ----------------- | - |  | - | ------- | -
|                                                                                             |  | Three Months Ended |         |   | Nine Months Ended |  
|                                                                                             |  | September 28,2008  |         |   | September 30,2007 |   |         | September 28,2008 |  |   | September 30,2007 |  
|Net revenues                                                                                 |  | $                  | 139,356 |   |                   | $ | 117,455 |                   |  | $ | 404,235           |   |  | $ | 325,812 |  
|Cost of revenues                                                                             |  |                    | 47,373  |   |                   |   | 39,871  |                   |  |   | 139,752           |   |  |   | 115,092 |  
|                                                                                             |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Gross profit                                                                                 |  |                    | 91,983  |   |                   |   | 77,584  |                   |  |   | 264,483           |   |  |   | 210,720 |  
|Other costs and expenses:                                                                    |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Research and development                                                                     |  |                    | 39,688  |   |                   |   | 35,557  |                   |  |   | 116,993           |   |  |   | 121,716 |  
|Selling, general and administrative                                                          |  |                    | 23,565  |   |                   |   | 24,124  |                   |  |   | 71,954            |   |  |   | 75,993  |  
|Amortization of purchased intangible assets                                                  |  |                    | 9,836   |   |                   |   | 9,836   |                   |  |   | 29,508            |   |  |   | 29,507  |  
|Restructuring costs and other charges                                                        |  |                    | (259    | ) |                   |   | 1,564   |                   |  |   | 785               |   |  |   | 12,244  |  
|                                                                                             |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Income (loss) from operations                                                                |  |                    | 19,153  |   |                   |   | 6,503   |                   |  |   | 45,243            |   |  |   | (28,740 | )
|Other income (expense):                                                                      |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Interest income, net                                                                         |  |                    | 1,481   |   |                   |   | 2,728   |                   |  |   | 5,102             |   |  |   | 7,037   |  
|Foreign exchange gain (loss)                                                                 |  |                    | 873     |   |                   |   | (7,052  | )                 |  |   | 2,965             |   |  |   | (15,975 | )
|Loss on investment securities                                                                |  |                    | (11,790 | ) |                   |   |        |                   |  |   | (11,790           | ) |  |   |        |  
|Gain on repurchase of senior convertible notes and amortization of deferred debt issue costs |  |                    | (137    | ) |                   |   | (242    | )                 |  |   | 871               |   |  |   | (726    | )
|Recovery on investment loss                                                                  |  |                    | 400     |   |                   |   |        |                   |  |   | 400               |   |  |   |        |  
|                                                                                             |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Income (loss) before recovery of (provision for) income taxes                                |  |                    | 9,980   |   |                   |   | 1,937   |                   |  |   | 42,791            |   |  |   | (38,404 | )
|(Provision for) recovery of income taxes                                                     |  |                    | (4,266  | ) |                   |   | (7,877  | )                 |  |   | 77,445            |   |  |   | (5,619  | )
|                                                                                             |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Net income (loss)                                                                            |  | $                  | 5,714   |   |                   | $ | (5,940  | )                 |  | $ | 120,236           |   |  | $ | (44,023 | )
|                                                                                             |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Net income (loss) per common share - basic                                                   |  | $                  | 0.03    |   |                   | $ | (0.03   | )                 |  | $ | 0.54              |   |  | $ | (0.20   | )
|Net income (loss) per common share - diluted                                                 |  | $                  | 0.03    |   |                   | $ | (0.03   | )                 |  | $ | 0.54              |   |  | $ | (0.20   | )
|Weighted average number of common shares used in per share calculation - basic               |  |                    | 222,335 |   |                   |   | 216,837 |                   |  |   | 221,091           |   |  |   | 215,469 |  
|Weighted average number of common shares used in per share calculation - diluted             |  |                    | 225,803 |   |                   |   | 216,837 |                   |  |   | 223,573           |   |  |   | 215,469 |  

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)



|                                                                                                                 |  |                   |           |   |                  |   |           |  
|---------------------------------------------------------------------------------------------------------------- |  | ----------------- | --------- | - | ---------------- | - | --------- | -
|                                                                                                                 |  | September 28,2008 |           |   | December 30,2007 |  
|ASSETS:                                                                                                          |  |                   |           |   |                  |   |           |  
|Current assets:                                                                                                  |  |                   |           |   |                  |   |           |  
|Cash and cash equivalents                                                                                        |  | $                 | 219,381   |   |                  | $ | 364,922   |  
|Short-term investments                                                                                           |  |                   | 99,789    |   |                  |   |          |  
|Accounts receivable, net of allowance for doubtful accounts of $1,148 (2007 - $1,768)                            |  |                   | 46,218    |   |                  |   | 39,362    |  
|Inventories, net                                                                                                 |  |                   | 38,361    |   |                  |   | 34,246    |  
|Prepaid expenses and other current assets                                                                        |  |                   | 11,862    |   |                  |   | 16,229    |  
|Income tax receivable                                                                                            |  |                   | 167       |   |                  |   | 2,365     |  
|Deferred tax assets                                                                                              |  |                   | 8,094     |   |                  |   | 37        |  
|                                                                                                                 |  |                   |           |   |                  |   |           |  
|Total current assets                                                                                             |  |                   | 423,872   |   |                  |   | 457,161   |  
|Goodwill                                                                                                         |  |                   | 396,144   |   |                  |   | 398,418   |  
|Intangible assets, net                                                                                           |  |                   | 165,435   |   |                  |   | 187,126   |  
|Investment securities                                                                                            |  |                   | 19,278    |   |                  |   |          |  
|Property and equipment, net                                                                                      |  |                   | 17,287    |   |                  |   | 18,725    |  
|Investments and other assets                                                                                     |  |                   | 5,886     |   |                  |   | 10,747    |  
|Deposits for wafer fabrication capacity                                                                          |  |                   | 5,145     |   |                  |   | 5,145     |  
|Deferred tax assets                                                                                              |  |                   | 2,676     |   |                  |   | 54,676    |  
|                                                                                                                 |  |                   |           |   |                  |   |           |  
|                                                                                                                 |  | $                 | 1,035,723 |   |                  | $ | 1,131,998 |  
|                                                                                                                 |  |                   |           |   |                  |   |           |  
|LIABILITIES AND STOCKHOLDERS EQUITY:                                                                            |  |                   |           |   |                  |   |           |  
|Current liabilities:                                                                                             |  |                   |           |   |                  |   |           |  
|Accounts payable                                                                                                 |  | $                 | 27,340    |   |                  | $ | 24,011    |  
|Accrued liabilities                                                                                              |  |                   | 54,229    |   |                  |   | 53,617    |  
|Deferred income taxes                                                                                            |  |                   | 2,042     |   |                  |   | 2,787     |  
|Liability for unrecognized tax benefit                                                                           |  |                   | 28,582    |   |                  |   | 71,586    |  
|Accrued restructuring costs                                                                                      |  |                   | 6,940     |   |                  |   | 10,911    |  
|Deferred income                                                                                                  |  |                   | 13,962    |   |                  |   | 13,674    |  
|                                                                                                                 |  |                   |           |   |                  |   |           |  
|Total current liabilities                                                                                        |  |                   | 133,095   |   |                  |   | 176,586   |  
|Long term obligations                                                                                            |  |                   | 503       |   |                  |   | 958       |  
|2.25% senior convertible notes due October 15, 2025                                                              |  |                   | 127,000   |   |                  |   | 225,000   |  
|Deferred income taxes                                                                                            |  |                   | 16,608    |   |                  |   | 23,023    |  
|Liability for unrecognized tax benefit                                                                           |  |                   | 5,685     |   |                  |   | 107,764   |  
|PMC special shares convertible into 2,045 (2007 - 2,065) shares of common stock                                  |  |                   | 2,655     |   |                  |   | 2,671     |  
|Stockholders equity:                                                                                            |  |                   |           |   |                  |   |           |  
|Common stock, par value $.001: 900,000 shares authorized; 221,311 shares issued and outstanding (2007 - 217,285) |  |                   | 241       |   |                  |   | 237       |  
|Additional paid in capital                                                                                       |  |                   | 1,431,187 |   |                  |   | 1,394,946 |  
|Accumulated other comprehensive income (loss)                                                                    |  |                   | (863      | ) |                  |   | 1,437     |  
|Accumulated deficit                                                                                              |  |                   | (680,388  | ) |                  |   | (800,624  | )
|                                                                                                                 |  |                   |           |   |                  |   |           |  
|Total stockholders equity                                                                                       |  |                   | 750,177   |   |                  |   | 595,996   |  
|                                                                                                                 |  |                   |           |   |                  |   |           |  
|                                                                                                                 |  | $                 | 1,035,723 |   |                  | $ | 1,131,998 |  
|                                                                                                                 |  |                   |           |   |                  |   |           |  

See notes to the condensed consolidated financial statements.



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PMC-Sierra, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



|                                                                                |  |                   |          |   |                   |   |         |  
|------------------------------------------------------------------------------- |  | ----------------- | -------- | - | ----------------- | - | ------- | -
|                                                                                |  | Nine Months Ended |         
|                                                                                |  | September 28,2008 |          |   | September 30,2007 |  
|Cash flows from operating activities:                                           |  |                   |          |   |                   |   |         |  
|Net income (loss)                                                               |  | $                 | 120,236  |   |                   | $ | (44,023 | )
|Adjustments to reconcile net loss to net cash provided by operating activities: |  |                   |          |   |                   |   |         |  
|Depreciation of property and equipment                                          |  |                   | 7,333    |   |                   |   | 8,677   |  
|Amortization of intangible assets                                               |  |                   | 33,965   |   |                   |   | 34,737  |  
|Amortization of deferred income taxes                                           |  |                   | (1,532   | ) |                   |   | (1,534  | )
|Amortization of debt issuance costs                                             |  |                   | 481      |   |                   |   | 726     |  
|Stock-based compensation                                                        |  |                   | 19,719   |   |                   |   | 27,172  |  
|Foreign exchange (gain) loss on tax liability                                   |  |                   | (3,311   | ) |                   |   | 16,075  |  
|Gain on repurchase of senior convertible notes, net                             |  |                   | (1,351   | ) |                   |   |        |  
|(Gain) loss on disposal of property and equipment                               |  |                   | (32      | ) |                   |   | 496     |  
|Changes in operating assets and liabilities, net of the effect of acquisitions: |  |                   |          |   |                   |   |         |  
|Accounts receivable                                                             |  |                   | (6,856   | ) |                   |   | (4,137  | )
|Inventories                                                                     |  |                   | (3,938   | ) |                   |   | 3,655   |  
|Prepaid expenses and other current assets                                       |  |                   | 4,972    |   |                   |   | 462     |  
|Accounts payable and accrued liabilities                                        |  |                   | (22,069  | ) |                   |   | 5,700   |  
|Deferred income taxes and income taxes payable                                  |  |                   | (79,718  | ) |                   |   | 10,277  |  
|Accrued restructuring costs                                                     |  |                   | (3,971   | ) |                   |   | 223     |  
|Deferred income                                                                 |  |                   | 288      |   |                   |   | 2,154   |  
|                                                                                |  |                   |          |   |                   |   |         |  
|Net cash provided by operating activities                                       |  |                   | 64,216   |   |                   |   | 60,660  |  
|                                                                                |  |                   |          |   |                   |   |         |  
|Cash flows from investing activities:                                           |  |                   |          |   |                   |   |         |  
|Purchases of property and equipment                                             |  |                   | (5,406   | ) |                   |   | (5,781  | )
|Purchase of intangible assets                                                   |  |                   | (5,645   | ) |                   |   | (7,112  | )
|Purchase of short-term investments and investment securities                    |  |                   | (119,067 | ) |                   |   |        |  
|                                                                                |  |                   |          |   |                   |   |         |  
|Net cash used in investing activities                                           |  |                   | (130,118 | ) |                   |   | (12,893 | )
|                                                                                |  |                   |          |   |                   |   |         |  
|Cash flows from financing activity:                                             |  |                   |          |   |                   |   |         |  
|Repurchase of senior convertible notes                                          |  |                   | (95,491  | ) |                   |   |        |  
|Proceeds from issuance of common stock                                          |  |                   | 16,510   |   |                   |   | 20,150  |  
|                                                                                |  |                   |          |   |                   |   |         |  
|Net cash (used in) provided by financing activities                             |  |                   | (78,981  | ) |                   |   | 20,150  |  
|                                                                                |  |                   |          |   |                   |   |         |  
|Effect of exchange rate changes on cash and cash equivalents                    |  |                   | (658     | ) |                   |   | 1,170   |  
|Net (decrease) increase in cash and cash equivalents                            |  |                   | (145,541 | ) |                   |   | 69,087  |  
|Cash and cash equivalents, beginning of the period                              |  |                   | 364,922  |   |                   |   | 258,914 |  
|                                                                                |  |                   |          |   |                   |   |         |  
|Cash and cash equivalents, end of the period                                    |  | $                 | 219,381  |   |                   | $ | 328,001 |  
|                                                                                |  |                   |          |   |                   |   |         |  
|Supplemental disclosures of cash flow information:                              |  |                   |          |   |                   |   |         |  
|Cash paid for interest                                                          |  | $                 | 808      |   |                   | $ | 2,531   |  
|Cash paid for income taxes                                                      |  | $                 | 21,219   |   |                   | $ | 1,157   |  

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 microprocessor-based
System-on-Chips (SOC) for metro, access, fibre-to-the-home, wireless infrastructure, storage, laser printers and customer premise equipment. The Company offers worldwide technical and sales support through a network of offices in North
America, Europe and Asia.

Basis of presentation. The accompanying 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 (GAAP). Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules or regulations. These interim condensed consolidated financial statements are unaudited, but reflect all adjustments that are, in the
opinion of management, necessary to provide a fair statement of results for the interim periods presented. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and
accompanying notes in the Companys Annual Report on Form 10-K for the year ended December 30, 2007. The results of operations for the interim periods are not necessarily indicative of results to be expected in future periods. Fiscal 2008
will consist of 52 weeks and will end on Sunday, December 28. Fiscal 2007 consisted of 52 weeks and ended on Sunday, December 30. The first nine months of 2008 and 2007 consisted of 39 weeks.

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



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Inventories. Inventories are stated at the lower of cost (first-in, first out) or market (estimated net realizable
value). Inventories (net of reserves of $10.3 million and $9.8 million at September 28, 2008 and December 30, 2007, respectively) were as follows:



|                 |  |                   |        |                  |   |       
|---------------- |  | ----------------- | ------ | ---------------- | - | ------
|(in thousands)   |  | September 28,2008 |        | December 30,2007
|Work-in-progress |  | $                 | 14,811 |                  | $ | 13,698
|Finished goods   |  |                   | 23,550 |                  |   | 20,548
|                 |  |                   |        |                  |   |       
|                 |  | $                 | 38,361 |                  | $ | 34,246
|                 |  |                   |        |                  |   |       

Derivatives and Hedging Activities.Fluctuating foreign exchange rates may negatively impact PMCs
operations and cash flows. The Company periodically hedges foreign currency forecasted transactions related to certain operating expenses. All derivatives are recorded in the balance sheet at fair value. For a derivative designated as a fair value
hedge, changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in net income (loss). For a derivative designated as a cash flow hedge, the effective portions of changes in the fair value of
the derivative are recorded in other comprehensive income (loss) and are recognized in net income (loss) when the hedged item affects net income (loss). Ineffective portions of changes in the fair value of cash flow hedges are recognized in net
income (loss). If the derivative used in an economic hedging relationship is not designated in an accounting hedging relationship or if it becomes ineffective, changes in the fair value of the derivative are recognized in net income (loss). During
the quarter ended September 28, 2008, all hedges were designated as cash flow hedges.

Product warranties. The Company provides a limited
warranty on most of its standard products and accrues for the estimated cost at the time of shipment. The Company estimates its warranty costs based on historical failure rates and related repair or replacement costs. The change in the
Companys accrued warranty obligations from December 30, 2007 to September 28, 2008 and for the same period in the prior year were as follows:



|                                                               |  |                   |        |   |                   |   |       |  
|-------------------------------------------------------------- |  | ----------------- | ------ | - | ----------------- | - | ----- | -
|                                                               |  | Nine Months Ended |       
|(in thousands)                                                 |  | September 28,2008 |        |   | September 30,2007 |  
|Balance, beginning of the period                               |  | $                 | 6,239  |   |                   | $ | 4,331 |  
|Accrual for new warranties issued                              |  |                   | 862    |   |                   |   | 1,649 |  
|Reduction for payments and product replacements                |  |                   | (1,369 | ) |                   |   | (403  | )
|Adjustments related to changes in estimate of warranty accrual |  |                   | 358    |   |                   |   | 532   |  
|                                                               |  |                   |        |   |                   |   |       |  
|Balance, end of the period                                     |  | $                 | 6,090  |   |                   | $ | 6,109 |  
|                                                               |  |                   |        |   |                   |   |       |  

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



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Other Indemnifications.From time to time, on a limited basis, the Company indemnifies its customers, as well as
its suppliers, contractors, lessors, and others with whom it enters into contracts, against combinations of loss, expense, or liability arising from various triggering events related to the sale and use of its products, the use of their goods and
services, the use of facilities, the state of assets that the Company sells and other matters covered by such contracts, normally up to a specified maximum amount. The Company evaluates estimated losses for such indemnifications under Statement of
Financial Accounting Standards (SFAS) No. 5, Accounting for Contingencies, as interpreted by the Financial Accounting Standards Board (FASB) Interpretation No. 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. The Company has no history of significant indemnification claims for such obligations.

Stock-based compensation.The Company accounts for its compensation expense for all share-based payment awards in accordance with SFAS No. 123 (revised
2004), Share-Based Payment (SFAS 123(R)). SFAS 123(R) requires the Company to measure the cost of services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost of
such award will be recognized over the period during which services are provided in exchange for the award, generally the vesting period.

During the three
and nine months ended September 28, 2008, the Company recognized $5.4 million and $19.7 million in stock-based compensation expense, respectively. Where a tax deduction for stock-based compensation was available to the Company, a valuation
allowance for the related deferred tax assets was recorded.

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

Recent Accounting Pronouncements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations(SFAS 141(R)). SFAS 141(R) will change
the accounting for acquisitions that close beginning in 2009. More transactions and events will qualify as business combinations and will be accounted for at fair value under the new standard. SFAS 141(R) promotes greater use of fair values in
financial reporting. Some of the changes will introduce more volatility into earnings. SFAS 141(R) is effective for fiscal years beginning on or after December 15, 2008. The Company is currently assessing the potential impact that
SFAS 141(R) may have on its results of operations, financial position and cash flows.

In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial Statements (SFAS 160), an amendment of Accounting Research Bulletin (ARB) No. 51. SFAS 160 will change the accounting and reporting for
minority interests which will be recharacterized as noncontrolling interests and classified as a component of equity. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008. SFAS 160 requires retroactive
adoption of the presentation and disclosure requirements for existing minority interests. The Company does not expect that SFAS 160 will have a material impact on its financial statement disclosure.



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In December 2007, the FASB issued EITF Issue 07-1 Accounting for Collaborative Arrangements (EITF 07-1).
Collaborative arrangements are agreements between parties to participate in some type of joint operating activity. The task force provided indicators to help identify collaborative arrangements and provides for reporting of such arrangements on a
gross or net basis pursuant to guidance in existing authoritative literature. The task force also expanded disclosure requirements about collaborative arrangements. Conclusions within EITF 07-1 are to be applied retrospectively. We are currently
assessing the impact that EITF 07-1 may have on our financial position, results of operations and cash flows.

In September 2006, the FASB issued
SFAS No.157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements.
SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FSP 157-2, Effective Date of FASB Statement No. 157, which delays the effective date of
SFAS 157 for non-financial assets and liabilities to fiscal years beginning after November 15, 2008. The adoption of SFAS 157 related to financial assets and liabilities did not have a material impact on our consolidated financial
statements. We are currently evaluating the impact, if any, that SFAS 157 may have on our future consolidated financial statements related to non-financial assets and liabilities.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities(SFAS 161), which is intended to improve financial reporting about
derivative instruments and hedging activities by requiring enhanced disclosures about the effects of an entitys derivative instruments and hedging activities on its financial position, financial performance, and cash flows. SFAS 161 is
effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company is currently assessing the potential impact that SFAS 161 may have on its financial
statements.

In May 2008, the FASB issued Staff Position Accounting Principles Board Opinion 14-1, Accounting for Convertible Debt Instruments That
May Be Settled in Cash Upon Conversion (Including Partial Cash Settlements) (APB 14-1), which will change the accounting treatment for convertible securities which the issuer may settle fully or partially in cash. Under APB 14-1, cash
settled convertible securities will be separated into their debt and equity components. The value assigned to the debt component will be the estimated fair value, as of the issuance date, of a similar debt instrument without the conversion feature,
and the difference between the proceeds for the convertible debt and the amount reflected as a debt liability will be recorded as additional paid-in-capital. As a result, the debt will be recorded at a discount reflecting its below market coupon
interest rate. The debt will subsequently be accreted to its par value over its expected life, with the rate of interest that reflects the market rate at issuance being reflected on the income statement. This change in methodology will affect the
calculations of net income and earnings per share for many issuers of cash settled convertible securities. APB 14-1 will become effective for our fiscal year beginning 2009. We are currently evaluating the impact of the adoption of APB 14-1 on our
consolidated financial statements.



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NOTE 2. Derivative 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.

At September 28, 2008, the Company had nine contracts outstanding to purchase Canadian dollars, all with
maturities of less than twelve months, which qualified and were designated as cash flow hedges. The U.S. dollar notional amount of these contracts was $45.2 million and the contracts had a fair value of $(1.2) million as of September 28, 2008.
The loss from the ineffective portion of the hedges was not significant.

NOTE 3. Fair Value Measurements

On January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements (SFAS 157), which defines fair value, establishes
guidelines for measuring fair value and expands disclosures on fair value measurements. In February 2008, the FASB issued the related FASB Staff Position 157-2, Effective Date of FASB Statement No. 157 (FSP 157-2) that
deferred the effective date of FAS157 for one year for non-financial assets and liabilities recorded at fair value on a non-recurring basis. SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS 157 also specifies a hierarchy of valuation techniques which
requires an entity to maximize the use of observable inputs that may be used to measure fair value:

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

Level 2  Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; or other inputs that are observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities. The Companys Level 2 liabilities include forward currency contracts whose value is determined using a pricing model with inputs that are observable in the market or corroborated with
observable market data.

Level 3  Pricing inputs include significant inputs that are generally not observable in the marketplace. These inputs may be
used with internally developed methodologies that result in managements best estimate of fair value. At each balance sheet date, the Company performs an analysis of all instruments subject to SFAS 157 and would include in Level 3 all of those
whose fair value is based on significant unobservable inputs. The Companys Level 3 assets include investments in money market funds classified in cash equivalents, short-term investments and long-term investment securities (see Note 6).



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Financial assets and liabilities measured on a recurring basis as of September 28, 2008 are summarized below:



|                               |  |                                |        |         |   |         |  |   |        
|------------------------------ |  | ------------------------------ | ------ | ------- | - | ------- |  | - | -------
|                               |  | Fair value, September 28, 2008
|(in thousands)                 |  | Level 1                        |        | Level 2 |   | Level 3
|Assets:                        |  |                                |        |         |   |         |  |   |        
|Investment securities (1)      |  | $                              | 41,975 |         | $ |        |  | $ | 260,076
|                               |  |                                |        |         |   |         |  |   |        
|Liabilities:                   |  |                                |        |         |   |         |  |   |        
|Forward currency contracts (2) |  | $                              |       |         | $ | 1,242   |  | $ |       
|                               |  |                                |        |         |   |         |  |   |        



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



|(2) | Included in accrued liabilities
|--- | -------------------------------

The following table is a reconciliation
of financial assets and liabilities measured at fair value on a recurring basis classified as Level 3, for the nine months ended September 28, 2008:



|                                                                      |  |         |         |  
|--------------------------------------------------------------------- |  | ------- | ------- | -
|(in thousands)                                                        |  | Level 3 |        
|Balance at December 30, 2007                                          |  | $       |        |  
|Total balance of Reserve Funds reclassified from Level 1 to Level 3   |  |         | 271,866 |  
|Total realized loss included in statements of operations (see Note 6) |  |         | (11,790 | )
|                                                                      |  |         |         |  
|Balance at September 28, 2008                                         |  | $       | 260,076 |  
|                                                                      |  |         |         |  

NOTE 4. Stock-Based Compensation

The Company has two stock-based compensation programs, which are described below. None of the Companys stock-based awards are classified as liabilities. The Company did not capitalize any stock-based
compensation cost, and recorded compensation expense for the three and nine months ended September 28, 2008 and September 30, 2007 as follows:



|                                    |  |                    |       |                   |   |                   |  |                   |        |  |   |       
|----------------------------------- |  | ------------------ | ----- | ----------------- | - | ----------------- |  | ----------------- | ------ |  | - | ------
|                                    |  | Three Months Ended |       | Nine Months Ended
|(in thousands)                      |  | September 28,2008  |       | September 30,2007 |   | September 28,2008 |  | September 30,2007
|Cost of revenues                    |  | $                  | 233   |                   | $ | 298               |  | $                 | 958    |  | $ | 1,347 
|Research and development            |  |                    | 2,424 |                   |   | 3,805             |  |                   | 8,807  |  |   | 12,472
|Selling, general and administrative |  |                    | 2,700 |                   |   | 4,007             |  |                   | 9,954  |  |   | 13,351
|                                    |  |                    |       |                   |   |                   |  |                   |        |  |   |       
|Total                               |  | $                  | 5,357 |                   | $ | 8,110             |  | $                 | 19,719 |  | $ | 27,170
|                                    |  |                    |       |                   |   |                   |  |                   |        |  |   |       

The Company received cash of $8.5 million and $16.5 million on the issuance of stock-based awards during the three
and nine months ended September 28, 2008.

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 within five to ten years and vest over four years.



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In 2001, the Company simplified its plan structure. The Company currently has two option plans in place, the 1994
Incentive Stock Plan (the 1994 Plan) and the 2001 Stock Option Plan (2001 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 1994 Plan is the plan used for ongoing equity awards. The number of shares available for issuance under the (1994 Plan) was approved by stockholders. New stock options or other equity incentives may only be
issued under the 1994 Plan and the 2001 Plan. In 2006, the Company assumed the stock option plans and all outstanding stock options of Passave, Inc. as part of the merger consideration in that business combination.

Activity under the option plans during the nine months ended September 28, 2008 was as follows:



|                                |  |                  |   |  |                                          |       |                                                   |      |                                                |   |           
|------------------------------- |  | ---------------- | - |  | ---------------------------------------- | ----- | ------------------------------------------------- | ---- | ---------------------------------------------- | - | ----------
|                                |  | Number ofoptions |   |  | Weighted averageexercise price per share |       | Weighted averageremaining contractualterm (years) |      | Aggregate intrinsic valueat September 28, 2008
|Outstanding, December 30, 2007  |  | 27,321,505       |   |  | $                                        | 9.74  |                                                   |      |                                                |   |           
|Granted                         |  | 5,342,170        |   |  |                                          | 6.15  |                                                   |      |                                                |   |           
|Exercised                       |  | (2,022,928       | ) |  |                                          | 4.59  |                                                   |      |                                                |   |           
|Forfeited                       |  | (2,430,481       | ) |  |                                          | 10.21 |                                                   |      |                                                |   |           
|Outstanding, September 28, 2008 |  | 28,210,266       |   |  |                                          | 9.39  |                                                   | 6.76 |                                                | $ | 25,330,127
|                                |  |                  |   |  |                                          |       |                                                   |      |                                                |   |           
|Exercisable, September 28, 2008 |  | 17,899,002       |   |  | $                                        | 10.72 |                                                   | 5.66 |                                                | $ | 13,133,158
|                                |  |                  |   |  |                                          |       |                                                   |      |                                                |   |           

No adjustment was required with respect to fully vested options that expired during the three and nine months
ended September 28, 2008. During the three and nine months ended September 28, 2008, adjustments of $2.1 million and $6.8 million, respectively, were recorded for pre-vesting forfeitures associated primarily with restructuring related
activities carried out in 2007,

The fair value of the Companys stock option awards granted to employees during the nine months ended
September 28, 2008, was estimated using a lattice-binomial valuation model. The binomial model considers the contractual term of the option, the probability that the option will be exercised prior to the end of its contractual life, and the
probability of termination or retirement of the option holder in computing the value of the option. The model requires the input of highly subjective assumptions including the expected stock price volatility and expected life.

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



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The fair values of the Companys stock option awards were calculated for expense recognition in the three and nine
months ended September 28, 2008 and in the three and nine months ended September 30, 2007, using an estimated forfeiture rate, assuming no expected dividends and using the following weighted average assumptions:



|                        |  |                    |   |  |                   |   |  |                   |   |  |                   |  
|----------------------- |  | ------------------ | - |  | ----------------- | - |  | ----------------- | - |  | ----------------- | -
|                        |  | Three Months Ended |   |  | Nine Months Ended |  
|                        |  | September 28,2008  |   |  | September 30,2007 |   |  | September 28,2008 |   |  | September 30,2007 |  
|Expected life (years)   |  | 3.71               |   |  | 4.04              |   |  | 4.51              |   |  | 4.07              |  
|Expected volatility     |  | 56.7               | % |  | 57.9              | % |  | 56.7              | % |  | 61.6              | %
|Risk-free interest rate |  | 3.1                | % |  | 4.5               | % |  | 2.6               | % |  | 4.8               | %

The weighted average grant-date fair value per stock option granted during the three and nine months ended
September 28, 2008, was $3.23 and $2.90 respectively, per stock option. The total intrinsic value of stock options exercised during the three and nine months ended September 28, 2008 was $3.0 million and $7.0 million, respectively.

As of September 28, 2008, there was $30.1 million of total unrecognized compensation cost related to nonvested stock-based compensation arrangements
granted under the plans, which is expected to be recognized over an average period of 2.7 years.

Restricted Stock Units

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

A summary of RSU activity during the nine months ended September 28, 2008 is as follows:



|                                                                      |  |                       |   |  |                                           |  |                                                |           
|--------------------------------------------------------------------- |  | --------------------- | - |  | ----------------------------------------- |  | ---------------------------------------------- | ----------
|                                                                      |  | Restricted StockUnits |   |  | Weighted AverageRemaining ContractualTerm |  | Aggregate intrinsic valueat September 28, 2008
|Unvested shares at December 30, 2007                                  |  | 831,751               |   |  |                                          |  |                                                |          
|Awarded                                                               |  | 1,200,426             |   |  |                                          |  |                                                |          
|Released                                                              |  | (128,214              | ) |  |                                          |  |                                                |          
|Forfeited                                                             |  | (102,502              | ) |  |                                          |  |                                                |          
|                                                                      |  |                       |   |  |                                           |  |                                                |           
|End of Period                                                         |  | 1,801,461             |   |  | 2.04                                      |  | $                                              | 13,835,220
|Restricted Stock Units vested and expected to vest September 28, 2008 |  | 1,359,049             |   |  | 1.88                                      |  | $                                              | 10,437,494

As of September 28, 2008, total unrecognized compensation costs, adjusted for estimated forfeitures, related
to non-vested RSUs was $9.0 million, which is expected to be recognized over the next 3.3 years.



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Employee Stock Purchase Plan

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

During the third
quarter of 2008, 967,901 shares were issued under the ESPP at a weighted-average price of $3.92 per share. During the nine months ended September 28, 2008 1,865,784 shares were issued under the ESPP at a weighted average price of $3.92 per
share. As of September 28, 2008, 8,284,156 shares were available for future issuance under the ESPP compared to 8,149,940 as at December 31, 2007.

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



|                        |  |                    |   |  |                   |   |  |                   |   |  |                   |  
|----------------------- |  | ------------------ | - |  | ----------------- | - |  | ----------------- | - |  | ----------------- | -
|                        |  | Three Months Ended |   |  | Nine Months Ended |  
|                        |  | September 28,2008  |   |  | September 30,2007 |   |  | September 28,2008 |   |  | September 30,2007 |  
|Expected life (years)   |  | 1.25               |   |  | 1.25              |   |  | 1.25              |   |  | 1.25              |  
|Expected volatility     |  | 46.6               | % |  | 50.9              | % |  | 48.5              | % |  | 50.0              | %
|Risk-free interest rate |  | 2.2                | % |  | 4.4               | % |  | 2.1               | % |  | 4.7               | %

The weighted average grant-date fair value of per ESPP award granted during the three and nine months ended
September 28, 2008 was $2.87 and $0.60, respectively.

As of September 28, 2008, total unrecognized compensation costs, adjusted for estimated
forfeitures, related to non-vested ESPP awards was $1.6 million, which is expected to be recognized over the next 0.8 years.



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NOTE 5. Restructuring costs and other charges

The activity related to excess facility, contract termination and severance accruals under the Companys restructuring plans during the nine months ended September 28, 2008, by year of plan, were as follows:



|                              |  |      |        |   |      |   |      |      |  |   |        |   |  |       |        |   |  |   |        |  
|----------------------------- |  | ---- | ------ | - | ---- | - | ---- | ---- |  | - | ------ | - |  | ----- | ------ | - |  | - | ------ | -
|(in thousands)                |  | 2007 |        |   | 2006 |   |      | 2005 |  |   | 2001   |   |  | Total |       
|Balance at December 30, 2007  |  | $    | 1,931  |   |      | $ | 589  |      |  | $ | 3,329  |   |  | $     | 3,944  |   |  | $ | 9,793  |  
|Adjustments                   |  |      | (365   | ) |      |   | (20  | )    |  |   |       |   |  |       | (555   | ) |  |   | (940   | )
|New charges                   |  |      | 200    |   |      |   | 130  |      |  |   | 825    |   |  |       |       |   |  |   | 1,155  |  
|Cash payments                 |  |      | (817   | ) |      |   | (379 | )    |  |   | (1,023 | ) |  |       | (1,033 | ) |  |   | (3,252 | )
|                              |  |      |        |   |      |   |      |      |  |   |        |   |  |       |        |   |  |   |        |  
|Balance at September 28, 2008 |  | $    | 949    |   |      | $ | 320  |      |  | $ | 3,131  |   |  | $     | 2,356  |   |  | $ | 6,756  |  
|                              |  |      |        |   |      |   |      |      |  |   |        |   |  |       |        |   |  |   |        |  
|                              |  |      |        |   |     
|Severance costs               |  |      |        |   |      |   |      |      |  |   |        |   |  |       |        |   |  |   |        |  
|                              |  |      |        |   |     
|(in thousands)                |  | 2007 |        |   |      |   |      |      |  |   |        |   |  |       |       
|Balance at December 30, 2007  |  | $    | 1,118  |   |      |   |      |      |  |   |        |   |  |       |        |   |  |   |        |  
|Adjustments                   |  |      | (161   | ) |      |   |      |      |  |   |        |   |  |       |        |   |  |   |        |  
|New charges                   |  |      | 610    |   |      |   |      |      |  |   |        |   |  |       |        |   |  |   |        |  
|Cash payments                 |  |      | (1,383 | ) |      |   |      |      |  |   |        |   |  |       |        |   |  |   |        |  
|                              |  |      |        |   |      |   |      |      |  |   |        |   |  |       |        |   |  |   |        |  
|Balance at September 28, 2008 |  | $    | 184    |   |      |   |      |      |  |   |        |   |  |       |        |   |  |   |        |  
|                              |  |      |        |   |      |   |      |      |  |   |        |   |  |       |        |   |  |   |        |  

2007

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

In 2008, the Company recorded a net reduction of its accrual for excess facilities by $0.2 million, as the Company fulfilled a portion of these obligations, and made
payments of $0.8 million related to the 2007 plan. To date, the Company has incurred $10.5 million in termination and relocation costs, $3.0 million for excess facilities and $2.5 million in asset impairment charges.

The Company has made payments of $11.9 million in connection with this plan. As of September 28, 2008, $0.2 million in severance costs remained to be paid, which
the Company expects to disburse by June 2009, and payments related to the excess facilities may extend until 2011.



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##### Table of Contents

2006

In the third quarter
of 2006, the Company closed its Ottawa, Ontario development site in order to reduce operating expenses and the space was vacated by the end of the fourth quarter of 2006. Approximately 35 positions were eliminated, primarily from research and
development, resulting in the Company recording restructuring charges for termination benefits, relocation costs and accrual for excess facilities. The Company also eliminated 10 positions from research and development in its Portland, Oregon
development site, resulting in restructuring charges for severance, excess facilities, contract termination costs and asset impairment.

In connection with
these two actions, the Company has recorded $2.5 million related to excess facilities and contract termination costs, $3.0 million in severance costs and $0.2 million in asset impairment charges, to date. In 2007, the Company reduced its estimated
severance accrual by $0.3 million and its accrual for excess facilities by $0.4 million, as the Company fulfilled a portion of these obligations. In 2008, the Company incurred additional charges of $0.1 million related to the 2006 plan as the
original assumptions regarding possible sublease of the exited facilities were not realized, and made $0.4 million cash payments relating to the 2007 plan. The Company has made payments of $4.2 million related to the 2006 plan. As of
September 28, 2008, all severance costs have been paid and payments related to the excess facilities will extend to 2010.

2005

During 2005, the Company completed various restructuring activities aimed at streamlining production and reducing operating expenses. In the first quarter of 2005, the
Company terminated 24 employees across all business functions. In the second quarter of 2005, the Company expanded the workforce reduction activities initiated during the first quarter and terminated 63 employees from research and development
located in the Santa Clara facility. In addition, the Company consolidated two manufacturing facilities (Santa Clara and Burnaby) into one facility (Burnaby), which involved the termination of 26 employees from production control, quality assurance,
and product engineering. In the third quarter, the Company consolidated its facilities and vacated excess space in its Santa Clara location.

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

In 2008, the Company recorded an additional $0.8 million for excess facilities and contract termination costs as the original assumptions regarding possible sublease of the exited facilities were not realized, and
made payments of $0.8 million related to the 2005 plan.

To date, the Company has recorded $6.9 million for excess facilities and contract termination
costs, $9.2 million for termination benefits and $0.9 million write-down of equipment and software assets whose assets were impaired as a result of this plan.

As of September 28, 2008, the Company has made payments relating to these activities of $13.0 million and all severance costs have been paid out. Payments related to the excess facilities will extend to 2011.



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##### Table of Contents

2003 and 2001

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

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

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

In the first quarter of 2001, the Company recorded a charge of $19.9 million for a restructuring plan that included the termination of 223 employees
across all business functions, the consolidation of a number of facilities and the curtailment of certain research and development projects. Due to the continued downturn in real estate markets, the Company has recorded additional provisions for
abandoned office facilities totaling $3.9 million since 2004.

In 2008, the Company reduced its accrual for excess facilities by $0.6 million, as the
Company fulfilled a portion of these obligations. In 2008, the Company made payments of $1.0 million relating to the 2003 and 2001 plan.

To date, the
Company has made cash payments of $12.9 million and $177.7 million related to the 2003 and 2001 plans, respectively. In 2008, the Company reduced its accrual for excess facilities by $0.5 million, as the Company fulfilled a portion of these
obligations relating to the 2001 plan. The Company has completed the activities contemplated in these restructuring plans, but has not yet terminated the leases on all of its surplus facilities. Efforts to exit these sites are ongoing, but the
payments related to these facilities could extend to 2011.



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##### Table of Contents

NOTE 6. Investment securities

At September 28, 2008, the Company had investments in money market funds of $302.1 million (December 31, 2007 - $323.8 million), comprised of bank notes, commercial paper, certificates of deposit and floating rate notes.

$260.1 million of the investments held at September 28, 2008 relate to shares of the Reserve International Liquidity Fund, Ltd. (the International Fund)
and the Reserve Primary Fund (the Primary Fund, together the Reserve Funds) for which the Company has outstanding redemption orders. The Reserve Funds were AAA-rated money market funds which announced redemption delays and
suspended trading in September 2008, during the severe disruption in financial markets. The Reserve Funds are in the process of liquidating their portfolio of investments, which included securities of Lehman Brothers Holdings, Inc. (Lehman
Brothers) which were downgraded and have filed for Chapter 11 bankruptcy protection. The Primary Fund has received an United States Security Exchange Commission (SEC) order providing that the SEC will supervise the distribution of
assets from the Primary Fund. The redemptions from the International Fund are subject to pending litigation which could cause further delay in any redemption of our investments.

The Company assessed the fair value of its money market funds, including by consideration of Level 2 and Level 3 inputs (see Note 3) for the Reserve Funds and their underlying securities. Based on this assessment, the
Company recorded an impairment of the Reserve Funds of $11.8 million during the period ended September 28, 2008, incorporating the Reserve Funds valuation at zero for debt securities of Lehman Brothers held, and a net asset value of $0.97
per share communicated by the Primary Fund subsequent to September 28, 2008.

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

In addition, due to the status of the Reserve Funds, the Company reclassified a portion of
these shares from cash and cash equivalents to short-term investments and investment securities, based on the maturity dates of the underlying securities in the Reserve Funds.

The Companys investment in money market funds are classified in the condensed consolidated balance sheet as follows:



|                       |  |                   |       |                  |   |      
|---------------------- |  | ----------------- | ----- | ---------------- | - | -----
|(in millions)          |  | September 28,2008 |       | December 30,2007
|Cash equivalents       |  | $                 | 183.0 |                  | $ | 323.8
|Short-term investments |  |                   | 99.8  |                  |   |     
|Investment securities  |  |                   | 19.3  |                  |   |     
|                       |  |                   |       |                  |   |      
|Total                  |  | $                 | 302.1 |                  | $ | 323.8
|                       |  |                   |       |                  |   |      

Changes in market conditions and the method and timing of the liquidation process of the Reserve Funds could
result in further adjustments to the fair value and classification of these investments, and these changes could be material. Subsequent to September 28, 2008, the Company received $32.6 million as an initial distribution from the Primary Fund.



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NOTE 7. Long-term obligations

On October 26, 2005, the Company issued $225.0 million aggregate principal amount of 2.25% senior convertible notes that are due on October 15, 2025. The Company has recorded these notes as long-term debt and issuance costs of
$6.8 million were deferred and are being amortized over seven years, which is the Companys earliest call date. This approximates the effective interest method.

During the first quarter of 2008, the Company repurchased $98.0 million principal amount of these notes for a total of $94.5 million and expensed $2.2 million of related unamortized debt issue costs and transaction
costs, resulting in a net gain of $1.3 million. The Company also paid $0.8 million of accrued interest as of the repurchase dates. At September 28, 2008, $127.0 million of these notes remained outstanding and $2.2 million of unamortized debt
issue costs were included in investments and other assets.

NOTE 8. Income Taxes

The Company recorded a tax provision of $4.3 million and a tax recovery of $77.4 million for the three and nine months ended September 28, 2008, respectively, and a $7.9 million tax provision and a $5.6 million
tax provision for the three and nine months ended September 30, 2007, respectively.

The tax recovery recognized in the first nine months of 2008 is
primarily attributable to two factors. During the first quarter of 2008, one of the Companys foreign subsidiaries received a written communication from a tax authority pertaining to its 2000 tax year, resulting in an additional accrual of
$26.5 million, including interest, as part of its liability for unrecognized tax benefits. In the second quarter of 2008, this subsidiary settled several ongoing tax matters for less than had been accrued as part of its liability for unrecognized
tax benefits, resulting in the recognition of tax benefits of $124.1 million that were previously included in the liability for unrecognized tax benefits. As a result of this settlement, the Company agreed to pay $18.0 million in cash and utilize
$31.6 million in net investment tax credits.

As at September 28, 2008, our liability for unrecognized tax benefits on a world-wide consolidated basis
was $34.3 million. Recognition of an amount different from this estimate would affect the Companys effective tax rate.

The Company and its
subsidiaries file income tax returns in the U.S. in various states, local and foreign jurisdictions. The preceding three tax years generally remain subject to examination by federal and most state tax authorities. In significant foreign
jurisdictions, the preceding seven tax years generally remain subject to examination by their respective tax authorities.



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NOTE 9. Comprehensive Income (Loss)

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



|                                    |  |                    |       |   |                   |   |        |                   |  |   |                   |   |  |   |         |  
|----------------------------------- |  | ------------------ | ----- | - | ----------------- | - | ------ | ----------------- |  | - | ----------------- | - |  | - | ------- | -
|                                    |  | Three Months Ended |       |   | Nine Months Ended |  
|(in thousands)                      |  | September 28,2008  |       |   | September 30,2007 |   |        | September 28,2008 |  |   | September 30,2007 |  
|Net income (loss)                   |  | $                  | 5,714 |   |                   | $ | (5,940 | )                 |  | $ | 120,236           |   |  | $ | (44,023 | )
|Other comprehensive income (loss):  |  |                    |       |   |                   |   |        |                   |  |   |                   |   |  |   |         |  
|Change in fair value of derivatives |  |                    | (210  | ) |                   |   | 1,330  |                   |  |   | (2,301            | ) |  |   | 3,905   |  
|                                    |  |                    |       |   |                   |   |        |                   |  |   |                   |   |  |   |         |  
|Total                               |  | $                  | 5,504 |   |                   | $ | (4,610 | )                 |  | $ | 117,935           |   |  | $ | (40,118 | )
|                                    |  |                    |       |   |                   |   |        |                   |  |   |                   |   |  |   |         |  

NOTE 10. Net Income (Loss) Per Share

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



|                                                       |  |                    |         |                   |                   |         |                   |  |                   |         |  |   |         |  
|------------------------------------------------------ |  | ------------------ | ------- | ----------------- | ----------------- | ------- | ----------------- |  | ----------------- | ------- |  | - | ------- | -
|                                                       |  | Three Months Ended |         |                   | Nine Months Ended |        
|(in thousands, except per share amounts)               |  | September 28,2008  |         | September 30,2007 |                   |         | September 28,2008 |  | September 30,2007 |        
|Numerator:                                             |  |                    |         |                   |                   |         |                   |  |                   |         |  |   |         |  
|Net income (loss)                                      |  | $                  | 5,714   |                   | $                 | (5,940  | )                 |  | $                 | 120,236 |  | $ | (44,023 | )
|Denominator:                                           |  |                    |         |                   |                   |         |                   |  |                   |         |  |   |         |  
|Basic weighted average common shares outstanding (1)   |  |                    | 222,335 |                   |                   | 216,837 |                   |  |                   | 221,091 |  |   | 215,469 |  
|Dilutive effect of equity award plans                  |  |                    | 3,468   |                   |                   |        |                   |  |                   | 2,482   |  |   |        |  
|Diluted weighted average common shares outstanding (1) |  |                    | 225,803 |                   |                   | 216,837 |                   |  |                   | 223,573 |  |   | 215,469 |  
|                                                       |  |                    |         |                   |                   |         |                   |  |                   |         |  |   |         |  
|Basic net income (loss) per share                      |  | $                  | 0.03    |                   | $                 | (0.03   | )                 |  | $                 | 0.54    |  | $ | (0.20   | )
|                                                       |  |                    |         |                   |                   |         |                   |  |                   |         |  |   |         |  
|Diluted net income (loss) per share                    |  | $                  | 0.03    |                   | $                 | (0.03   | )                 |  | $                 | 0.54    |  | $ | (0.20   | )
|                                                       |  |                    |         |                   |                   |         |                   |  |                   |         |  |   |         |  



|(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 nine months ended September 30, 2007, there is no difference between basic and diluted net loss per share. If the
Company had recorded net income for the three and nine months ended September 30, 2007, it would have included in the computed dilutive potential common shares and common stock equivalents totaling approximately 2.6 million and
2.2 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 any diluted net loss per share
calculation for any of the periods presented because they would have been anti-dilutive.



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##### Table of Contents

Note 11. Contingencies

Stockholder Derivative Lawsuits

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

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

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

On July 15, 2008, Ian Beiser, a named plaintiff in the Beiser/Barone action, filed a complaint in the Delaware Court of
Chancery, and it was served on July 18, 2008, compelling the Company to permit plaintiff to inspect and make copies of the Companys books and records. On August 5, 2008, the plaintiffs moved to stay the Federal Court action pending the
books and records action. The Federal Court granted the motion to stay on August 13, 2008, which removed from the calendar the hearing on defendants motions to dismiss, previously scheduled for August 20, 2008. The matter was fully
briefed on October 29, 2008. It is not yet known whether the Delaware Court of Chancery will schedule a hearing or make a decision based on the pleading and briefs.



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The Company intends to move to dismiss Beisers complaint. Beiser/Barone had previously filed a motion to compel
production of the Companys books and records in the Federal Court, which motion was denied on May 8, 2008.

As at September 28, 2008, the
Company has not accrued costs for potential losses related to the Beiser/Barone action.



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

This Quarterly Report contains forward-looking statements that involve risks and uncertainties. We use words such as anticipates, believes, plans, expects,
future, intends, may, should, estimates, predicts, potential, continue, becoming, transitioning and similar expressions to
identify such forward-looking statements. Our forward-looking statements include statements as to our business outlook, revenues, margins, expenses, tax provision, capital resources sufficiency, capital expenditures, interest income, restructuring
activities, cash commitments, expenses and as to our expectation regarding distribution from certain investments.

Investors are cautioned not to
place undue reliance on these forward-looking statements, which reflect managements analysis only as of the date of this Quarterly Report. We undertake no obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks described under Item 1A. Risk Factors
and elsewhere in this Quarterly Report and our other filings with the SEC.

OVERVIEW

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, 99% of our revenues in the first nine months of 2008 came from parts developed or acquired in 2007 and earlier. After an individual product is released for production and
announced it may take several years before that product generates any significant revenues.

Our current revenues are generated by a portfolio of more than
350 products. Our diverse product portfolio services a number of key end markets: the access area of the wide area network, where data traffic flows between homes and business to central offices of service providers; the metropolitan area of the
network where high-speed communication and data transfer occurs between cities or regional areas; enterprise storage, where institutions and businesses store and access their data or enterprise networking equipment and data management such as
routers, switches, and laser printers.



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We expend a substantial amount every year for the research and development of new semiconductor devices. We determine the
amount to invest in the development of new semiconductors based on our assessment of the future market opportunities for those components, and the estimated return on investment. To compete globally we must invest in businesses and technologies that
are both growing in demand and are cost competitive in the geographic markets that we serve. Going forward, we plan to continue to focus on finding innovative solutions to our customers problems while finding further operational efficiencies.

Update to the Interim Condensed Consolidated Financial Statements Included in Earnings Press Release for the Third Quarter Ended September 28,
2008 Dated October 16, 2008

Based on additional information from the Reserve Funds subsequent to our earnings press release dated October 16,
2008, we recorded an impairment charge of $11.8 million, presented as loss on investment securities in the condensed consolidated statement of operations, related to shares of the Reserve Funds held at September 28, 2008. The impact of the
impairment charge, net of its related tax effect, was a reduction of net income from $16.2 million to $5.7 million and a corresponding decrease in diluted earnings per share from $0.07 to $0.03 for the fiscal quarter ended September 28, 2008,
compared to the amounts presented in our earnings press release. Similarly, net income for the nine month period ended September 28, 2008 was reduced from $130.7 million to $120.2 million and diluted earnings per share decreased from $0.58
to $0.54 compared to the amounts presented in our earnings press release. Further, operating cash flows for the nine month period ended September 28, 2008 changed from $76.0 million to $64.2 million compared to the amounts presented in our
earnings press release.

Results of Operations

Third Quarter of 2008 and 2007



|             |  |               |       |      |   |        |  |    |  
|------------ |  | ------------- | ----- | ---- | - | ------ |  | -- | -
|             |  | Third Quarter |       |      |  
|             |  | 2008          |       | 2007 |   | Change | 
|Net revenues |  | $             | 139.4 |      | $ | 117.5  |  | 19 | %
|             |  |               |       |      |   |        |  |    |  

Net revenues for the third quarter of 2008 were $139.4 million compared to $117.5 million for the same period in
2007, an increase of $21.9 million, or 19%. Revenues generated by our communications markets, which are served by our wide area network (WAN) infrastructure products and fibre-to-the-home products increased by 17% from the third quarter
of 2007. This increase is primarily attributable to the growth of our fibre-to-the-home products in Asia. Revenues generated from our enterprise markets, which are served by our storage and microprocessor-based System-On-Chips (SOC)
products, increased by 20% compared to the third quarter of 2007.



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The growth in our fibre-to-the-home sales year-over-year was driven by an increase in shipments to our Chinese customers
using passive optical (EPON) devices for field trials to the China market. In addition, shipments to Japan and Korea increased as carriers built out their networks. Revenues from our WAN infrastructure products also increased in the
third quarter of 2008, compared to the same quarter in 2007, which was driven by recent growth in Asia and the emerging markets, in particular China. The growth in our enterprise storage sales was attributable to an increase in storage capacity
upgrades and information management solutions expenditures in the third quarter of 2008. This increase was primarily due to our storage devices in 4G Fibre Channel and 3G Serial Attached SCSI (SAS) interconnect going into production in
2008. The sales of microprocessor-based SOC products increased this past quarter primarily due to increased activity in the laser printer market.

Gross
Profit (in millions)



|                           |  |               |      |   |      |   |      |        |  |    |  
|-------------------------- |  | ------------- | ---- | - | ---- | - | ---- | ------ |  | -- | -
|                           |  | Third Quarter |      |   |      |  
|                           |  | 2008          |      |   | 2007 |   |      | Change | 
|Gross profit               |  | $             | 92.0 |   |      | $ | 77.6 |        |  | 19 | %
|                           |  |               |      |   |      |   |      |        |  |    |  
|Percentage of net revenues |  |               | 66   | % |      |   | 66   | %      |  |    |  

Total gross profit increased $14.4 million in the third quarter of 2008 compared to the same period in 2007 and
gross profit was 66% as a percentage of net revenues in both periods.

While product mix can influence our gross profit as a percentage of revenue from
quarter to quarter, our underlying gross profit percentage in the third quarter of 2008 remained consistent with that in the third quarter of 2007 as average selling prices decreased in approximately the same proportion as decreases in manufacturing
costs.

Other Costs and Expenses (in millions)



|                                            |  |               |      |   |      |   |      |        |  |      |   
|------------------------------------------- |  | ------------- | ---- | - | ---- | - | ---- | ------ |  | ---- | --
|                                            |  | Third Quarter |      |   |      |  
|                                            |  | 2008          |      |   | 2007 |   |      | Change | 
|Research and development                    |  | $             | 39.7 |   |      | $ | 35.6 |        |  | 12   | % 
|Percentage of net revenues                  |  |               | 28   | % |      |   | 30   | %      |  |      |   
|Selling, general and administrative         |  | $             | 23.6 |   |      | $ | 24.1 |        |  | (2   | %)
|Percentage of net revenues                  |  |               | 17   | % |      |   | 21   | %      |  |      |   
|Amortization of purchased intangible assets |  | $             | 9.8  |   |      | $ | 9.8  |        |  |     |   
|Percentage of net revenues                  |  |               | 7    | % |      |   | 8    | %      |  |      |   
|Restructuring costs and other charges       |  | $             | (0.3 | ) |      | $ | 1.6  |        |  | (119 | %)
|Percentage of net revenues                  |  |               |     |   |      |   | 1    | %      |  |      |   



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Research and Development and Selling, General and Administrative Expenses

Our research and development, or R&D, expenses increased $4.1 million or 12% in the third quarter of 2008 compared to the third quarter of 2007. Total material costs,
including outside consultant services, wafer and photomask costs increased by $1.6 million due to completing more tapeouts on smaller geometries in the third quarter of 2008 than in the same period of 2007. These tapeouts carry larger costs. In
addition, the IBM RAID R&D programs which began in the first quarter of 2008, added additional costs in the third quarter of 2008. Payroll costs increased by $0.3 million mainly due to increased recruitment activity, which was partially offset
by cost reduction activities undertaken in the first and fourth quarter of 2007. Our infrastructure related expenses also increased by $1.0 million due to increased equipment maintenance costs and design related software tools. In addition, we
received a $1.2 million research and development related government grant in a foreign jurisdiction in the third quarter of 2007 and there was no such grant in 2008.

Our selling, general and administrative, or SG&A, expenses decreased by $0.5 million, or 2%, in the third quarter of 2008 compared to the third quarter of 2007. This decrease is primarily attributable to the
restructuring activity undertaken in the first and fourth quarter of 2007. As a result of those activities, payroll-related costs and facilities-related costs were $0.5 million and $0.6 million lower, respectively. Partially offsetting these
decreases were increases in other costs totaling $0.6 million relating to professional fees, infrastructure related expenses for equipment maintenance costs and software tools and marketing materials.

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., respectively. Amortization of intangible assets acquired from the Storage
Semiconductor Business and Passave in the third quarter of 2008 was $4.7 million and $5.1 million, respectively (amortization from the Storage Semiconductor Business and Passave in the third quarter of 2007 was $4.7 million and $5.1 million,
respectively).



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##### Table of Contents

Restructuring costs and other charges

Please refer to the full description of our various restructuring activities and plans in this Managements Discussion and Analysis under First Nine Months of 2008 and 2007. The activity related to
excess facility, contract termination, and severance accruals, under the our restructuring plans during the three months ended September 28, 2008, by year of plan, were as follows:



|                              |  |      |       |   |      |   |      |      |  |   |       |   |  |       |       |   |  |   |        |  
|----------------------------- |  | ---- | ----- | - | ---- | - | ---- | ---- |  | - | ----- | - |  | ----- | ----- | - |  | - | ------ | -
|(in thousands)                |  | 2007 |       |   | 2006 |   |      | 2005 |  |   | 2001  |   |  | Total |      
|Balance at June 29, 2008      |  | $    | 1,544 |   |      | $ | 424  |      |  | $ | 2,891 |   |  | $     | 3,197 |   |  | $ | 8,056  |  
|Adjustments                   |  |      | (357  | ) |      |   | (3   | )    |  |   |      |   |  |       | (513  | ) |  |   | (873   | )
|New charges                   |  |      |      |   |      |   |     |      |  |   | 575   |   |  |       |      |   |  |   | 575    |  
|Cash payments                 |  |      | (238  | ) |      |   | (101 | )    |  |   | (335  | ) |  |       | (328  | ) |  |   | (1,002 | )
|                              |  |      |       |   |      |   |      |      |  |   |       |   |  |       |       |   |  |   |        |  
|Balance at September 28, 2008 |  | $    | 949   |   |      | $ | 320  |      |  | $ | 3,131 |   |  | $     | 2,356 |   |  | $ | 6,756  |  
|                              |  |      |       |   |      |   |      |      |  |   |       |   |  |       |       |   |  |   |        |  
|                              |  |      |       |   |     
|Severance costs               |  |      |       |   |      |   |      |      |  |   |       |   |  |       |       |   |  |   |        |  
|                              |  |      |       |   |     
|(in thousands)                |  | 2007 |       |   |      |   |      |      |  |   |       |   |  |       |      
|Balance at June 29, 2008      |  | $    | 394   |   |      |   |      |      |  |   |       |   |  |       |       |   |  |   |        |  
|Adjustments                   |  |      | 10    |   |      |   |      |      |  |   |       |   |  |       |       |   |  |   |        |  
|New charges                   |  |      | 16    |   |      |   |      |      |  |   |       |   |  |       |       |   |  |   |        |  
|Cash payments                 |  |      | (236  | ) |      |   |      |      |  |   |       |   |  |       |       |   |  |   |        |  
|                              |  |      |       |   |      |   |      |      |  |   |       |   |  |       |       |   |  |   |        |  
|Balance at September 28, 2008 |  | $    | 184   |   |      |   |      |      |  |   |       |   |  |       |       |   |  |   |        |  
|                              |  |      |       |   |      |   |      |      |  |   |       |   |  |       |       |   |  |   |        |  



|                                 |  |               |      |    |      |   |      |        |  |     |   
|-------------------------------- |  | ------------- | ---- | -- | ---- | - | ---- | ------ |  | --- | --
|Other income (expense)           |  | Third Quarter |      |    |      |  
|(in millions)                    |  | 2008          |      |    | 2007 |   |      | Change | 
|Interest income, net             |  | $             | 1.5  |    |      | $ | 2.7  |        |  | (44 | %)
|Percentage of net revenues       |  |               | 1    | %  |      |   | 2    | %      |  |     |   
|Foreign exchange gain (loss)     |  | $             | 0.9  |    |      | $ | (7.1 | )      |  | 113 | % 
|Percentage of net revenues       |  |               | 1    | %  |      |   | (6   | %)     |  |     |   
|Loss on investment securities    |  | $             | 11.8 |    |      | $ |     |        |  | 100 | % 
|Percentage of net revenues       |  |               | 8    | %  |      |   |     |        |  |     |   
|Amortization of debt issue costs |  | $             | (0.1 | )  |      | $ | (0.2 | )      |  | (50 | %)
|Percentage of net revenues       |  |               |     |    |      |   |     |        |  |     |   
|Recovery on investment loss      |  | $             | 0.4  |    |      | $ |     |        |  | 100 | % 
|Percentage of net revenues       |  |               |     |    |      |   |     |        |  |     |   
|Provision for income taxes       |  | $             | (4.3 | )  |      | $ | (7.9 | )      |  | 46  | % 
|Percentage of net revenues       |  |               | (3   | %) |      |   | (7   | %)     |  |     |   

Interest income, net

Net interest income decreased by $1.2 million or 44% in the third quarter of 2008 compared to the third quarter of 2007 due to declining investment yields.



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##### Table of Contents

Foreign exchange gain (loss)

We have significant design presence outside the United States, especially in Canada. The majority of our operating expense exposures to changes in the value of the Canadian Dollar relative to the United States Dollar have been hedged
through the second quarter of 2009.

Our net foreign exchange gain was $0.9 million in the third quarter of 2008, which was primarily due to a $0.8 million
foreign exchange gain on the revaluation of our net tax liability in a foreign jurisdiction. We do not hedge our income tax accruals against fluctuations in foreign currency exchange rates (see Item 3. Quantitative Disclosures About Market
Risk). The revaluation of this foreign tax liability was required because of appreciation of other currencies against the United States Dollar. The foreign exchange rate between the US dollar and the currencies of countries where we have significant
tax liabilities appreciated 2% in the third quarter of 2008 compared to depreciating 7% in the third quarter of 2007.

Loss on investment securities

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

Amortization of debt issue costs

In connection with
our repurchase of $98.0 million principal amount of our senior convertible notes in the first quarter of 2008, we expensed a portion of the unamortized debt issue costs related to the issuance of these notes. As a result, our ongoing quarterly
amortization expense relating to the remainder of the deferred debt issue costs has decreased from $0.2 million per quarter to $0.1 million per quarter.

Provision for income taxes

We recorded a provision for income taxes of $4.3 million in the third quarter of 2008, compared to a provision
for income taxes of $7.9 million in the third quarter of 2007.



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##### Table of Contents

First Nine Months of 2008 and 2007

Net Revenues (in millions)



|             |  |                   |       |      |   |        |  |    |  
|------------ |  | ----------------- | ----- | ---- | - | ------ |  | -- | -
|             |  | First Nine Months |       |      |  
|             |  | 2008              |       | 2007 |   | Change | 
|Net revenues |  | $                 | 404.2 |      | $ | 325.8  |  | 24 | %
|             |  |                   |       |      |   |        |  |    |  

Net revenues for the first nine months of 2008 were $404.2 million compared to $325.8 million for the same period
in 2007, an increase of $78.4 million, or 24%. Revenue generated from enterprise markets, which are served by our storage and microprocessor-based SOC products increased 27% compared to the same nine month period in 2007. Revenue generated from
communications markets, which are served by our WAN infrastructure products and fibre-to-the-home products increased by 21% compared to the same nine month period in 2007. This increase is primarily attributable to the growth in sales in the Asian
region.

The growth in our enterprise storage sales was attributable to an increase in storage capacity upgrades and information management solutions
expenditures in the first nine months of 2008 compared to the first nine months of 2007. The sales of our microprocessor-based SOC products increased in the first nine months of 2008 compared to the first nine months of 2007 primarily due to
increased activity in the laser printer market. The growth in our fibre-to-the-home sales in the first nine months of 2008 compared to the first nine months of 2007 was driven by an increase in shipments to our Chinese customers using EPON devices
for field trials to the China market. In addition, shipments of our fibre-to-the-home products to Japan and Korea increased as carriers built out their networks. Revenues from our WAN infrastructure products increased in the first nine months of
2008 compared to the first nine months of 2007, which was driven by Asia and the emerging markets, in particular China. A portion of this increase is also attributable to changes in how we conduct business with one of the international entities of a
certain distributor to a sell-through basis, which is consistent with our revenue recognition practice for business conducted in North America with that distributor.

Gross Profit (in millions)



|                           |  |                   |       |   |      |   |       |        |  |    |  
|-------------------------- |  | ----------------- | ----- | - | ---- | - | ----- | ------ |  | -- | -
|                           |  | First Nine Months |       |   |      |  
|                           |  | 2008              |       |   | 2007 |   |       | Change | 
|Gross profit               |  | $                 | 264.5 |   |      | $ | 210.7 |        |  | 26 | %
|                           |  |                   |       |   |      |   |       |        |  |    |  
|Percentage of net revenues |  |                   | 65    | % |      |   | 65    | %      |  |    |  

Total gross profit increased $53.8 million, or 26%, in the first nine months of 2008 compared to the same period
in 2007. Gross profit as a percentage of revenues was 65% in the first nine months of 2008 and in the first nine months of 2007.

While product mix can
influence our gross profit as a percentage of revenue from period to period, our underlying gross profit percentage in the nine months of 2008 remained consistent with that in the third quarter of 2007 as changes in average selling price decreased
in approximately the same proportion as decreases in manufacturing costs.



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Operating Expenses and Charges (in millions)



|                                            |  |                   |       |   |      |   |       |        |  |     |   
|------------------------------------------- |  | ----------------- | ----- | - | ---- | - | ----- | ------ |  | --- | --
|                                            |  | First Nine Months |       |   |      |  
|                                            |  | 2008              |       |   | 2007 |   |       | Change | 
|Research and development                    |  | $                 | 117.0 |   |      | $ | 121.7 |        |  | (4  | %)
|Percentage of net revenues                  |  |                   | 29    | % |      |   | 37    | %      |  |     |   
|Selling, general and administrative         |  | $                 | 72.0  |   |      | $ | 76.0  |        |  | (5  | %)
|Percentage of net revenues                  |  |                   | 18    | % |      |   | 23    | %      |  |     |   
|Amortization of purchased intangible assets |  | $                 | 29.5  |   |      | $ | 29.5  |        |  |    |   
|Percentage of net revenues                  |  |                   | 7     | % |      |   | 9     | %      |  |     |   
|Restructuring costs and other charges       |  | $                 | 0.8   |   |      | $ | 12.2  |        |  | (93 | %)
|Percentage of net revenues                  |  |                   |      |   |      |   | 4     | %      |  |     |   

Research and Development and Selling, General and Administrative Expenses

Our research and development, or R&D, expenses were $117.0 million, or $4.7 million or 4% lower in the first nine months of 2008 compared to the first nine months of
2007. Due to restructuring activities undertaken in the first quarter of 2007, our payroll-related costs decreased $5.2 million. Further in the first nine months of 2008, we incurred $1.0 million less in materials costs due to completing fewer
tapeouts than in the first nine months of 2007. Partially offsetting these decreases was a $1.6 million increase in infrastructure related equipment maintenance costs and software tools.

Our selling, general and administrative, or SG&A, expenses were $72.0 million, or $4.0 million or 5% lower in the first nine months of 2008 compared to the first nine months of 2007. The primary reason for the net
decrease in SG&A expenses is the restructuring activities undertaken in the third quarter of 2007. As a result, payroll-related costs and facilities-related costs were lowered $3.2 million and $2.0 million, respectively. Professional fees were
$1.7 million lower in the first nine months of 2008 compared to the first nine months of 2007, mainly due to settlement of a litigation matter in August 2007. Other SG&A costs were $2.2 million higher in the first nine months of 2008 compared to
the first nine months of 2007. The primary reason for the increase is that we received a credit of $2.8 million arising from the favorable settlements of both a payroll tax matter with the United Kingdom tax authorities and a capital tax refund
during the first nine months of 2007.

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., respectively. Amortization
of intangible assets acquired from the Storage Semiconductor Business and Passave in the first nine months of 2008 was $14.2 million and $15.3 million, respectively (amortization from the Storage Semi-conductor Business and Passave in the first nine
months of 2007 was $14.1 million and $15.3 million, respectively).



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Restructuring costs and other charges

The restructuring activity related to excess facility, contract termination, and severance accruals under these plans during the nine months ended September 28, 2008 was as follows:



|                              |  |      |        |   |      |   |      |      |  |   |        |   |  |       |        |   |  |   |        |  
|----------------------------- |  | ---- | ------ | - | ---- | - | ---- | ---- |  | - | ------ | - |  | ----- | ------ | - |  | - | ------ | -
|(in thousands)                |  | 2007 |        |   | 2006 |   |      | 2005 |  |   | 2001   |   |  | Total |       
|Balance at December 30, 2007  |  | $    | 1,931  |   |      | $ | 589  |      |  | $ | 3,329  |   |  | $     | 3,944  |   |  | $ | 9,793  |  
|Adjustments                   |  |      | (365   | ) |      |   | (20  | )    |  |   |       |   |  |       | (555   | ) |  |   | (940   | )
|New charges                   |  |      | 200    |   |      |   | 130  |      |  |   | 825    |   |  |       |       |   |  |   | 1,155  |  
|Cash payments                 |  |      | (817   | ) |      |   | (379 | )    |  |   | (1,023 | ) |  |       | (1,033 | ) |  |   | (3,252 | )
|                              |  |      |        |   |      |   |      |      |  |   |        |   |  |       |        |   |  |   |        |  
|Balance at September 28, 2008 |  | $    | 949    |   |      | $ | 320  |      |  | $ | 3,131  |   |  | $     | 2,356  |   |  | $ | 6,756  |  
|                              |  |      |        |   |      |   |      |      |  |   |        |   |  |       |        |   |  |   |        |  
|                              |  |      |        |   |     
|Severance costs               |  |      |        |   |      |   |      |      |  |   |        |   |  |       |        |   |  |   |        |  
|                              |  |      |        |   |     
|(in thousands)                |  | 2007 |        |   |      |   |      |      |  |   |        |   |  |       |       
|Balance at December 30, 2007  |  | $    | 1,118  |   |      |   |      |      |  |   |        |   |  |       |        |   |  |   |        |  
|Adjustments                   |  |      | (161   | ) |      |   |      |      |  |   |        |   |  |       |        |   |  |   |        |  
|New charges                   |  |      | 610    |   |      |   |      |      |  |   |        |   |  |       |        |   |  |   |        |  
|Cash payments                 |  |      | (1,383 | ) |      |   |      |      |  |   |        |   |  |       |        |   |  |   |        |  
|                              |  |      |        |   |      |   |      |      |  |   |        |   |  |       |        |   |  |   |        |  
|Balance at September 28, 2008 |  | $    | 184    |   |      |   |      |      |  |   |        |   |  |       |        |   |  |   |        |  
|                              |  |      |        |   |      |   |      |      |  |   |        |   |  |       |        |   |  |   |        |  

2007

In the first
quarter of 2007, we 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. We also vacated excess office space at our
Santa Clara, California facility. We continued to rationalize costs in the fourth quarter of 2007 by reducing headcount by 18 employees primarily at the Burnaby, British Columbia facility.

In 2008, we recorded a net reduction of our accrual for excess facilities by $0.2 million, as we fulfilled a portion of these obligations, and made payments of $0.8
million related to the 2007 plan. To date, we have incurred $10.5 million in termination and relocation costs, $3.0 million for excess facilities and $2.5 million in asset impairment charges.

We have made payments of $11.9 million in connection with this plan. As of September 28, 2008, $0.2 million in severance costs remained to be paid, which we expect
to disburse by June 2009, and payments related to the excess facilities may extend until 2011.

2006

In the third quarter of 2006, we closed our Ottawa, Ontario development site in order to reduce operating expenses and the space was vacated by the end of the fourth
quarter of 2006. Approximately 35 positions were eliminated, primarily from research and development, resulting in recording restructuring charges for termination benefits, relocation costs and accrual for excess facilities. We also eliminated 10
positions from research and development in our Portland, Oregon development site, resulting in restructuring charges for severance, excess facilities, contract termination costs and asset impairment.



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In connection with these two actions, we recorded $2.5 million related to excess facilities and contract termination
costs, $3.0 million in severance costs and $0.2 million in asset impairment charges, to date. In 2007, we reduced our estimated severance accrual by $0.3 million and our accrual for excess facilities by $0.4 million, as we fulfilled a portion of
these obligations. In 2008, we incurred additional charges of $0.1 million related to the 2006 plan as the original assumptions regarding possible sublease of the exited facilities were not realized, and made $0.4 million cash payments relating to
the 2007 plan. We have made payments of $4.2 million related to the 2006 plan. As of September 28, 2008, all severance costs have been paid and payments related to the excess facilities will extend to 2010.

2005

During 2005, we completed various restructuring activities aimed at
streamlining production and reducing operating expenses. In the first quarter of 2005, we terminated 24 employees across all business functions. In the second quarter of 2005, we expanded the workforce reduction activities initiated during the first
quarter and terminated 63 employees from research and development located in the Santa Clara facility. In addition, we consolidated two manufacturing facilities (Santa Clara and Burnaby) into one facility (Burnaby), which involved the termination of
26 employees from production control, quality assurance, and product engineering. In the third quarter, we consolidated our facilities and vacated excess space in the Santa Clara location.

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

In 2008, we recorded an additional $0.8 million for excess facilities and contract termination costs as the original assumptions regarding
possible sublease of the exited facilities were not realized, and made payments of $0.8 million related to the 2005 plan.

To date, we have recorded $6.9
million for excess facilities and contract termination costs, $9.2 million for termination benefits and $0.9 million write-down of equipment and software assets whose assets were impaired as a result of this plan.

As of September 28, 2008, we have made payments relating to these activities of $13.0 million and all severance costs have been paid out. Payments related to the
excess facilities will extend to 2011.

2003 and 2001

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



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

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

In the first quarter of 2001, we
recorded a charge of $19.9 million for a restructuring plan that included the termination of 223 employees across all business functions, the consolidation of a number of facilities and the curtailment of certain research and development projects.
Due to the continued downturn in real estate markets, we have recorded additional provisions for abandoned office facilities totaling $3.9 million since 2004.

In 2008, we reduced our accrual for excess facilities by $0.6 million, as we fulfilled a portion of these obligations. In 2008, we made payments of $1.0 million relating to the 2003 and 2001 plan.

To date, we have made cash payments of $12.9 million and $177.7 million related to the 2003 and 2001 plans, respectively. In 2008, we reduced our accrual for excess
facilities by $0.5 million, as we fulfilled a portion of these obligations relating to the 2001 plan. We have completed the activities contemplated in these restructuring plans, but have not yet terminated the leases on all of the surplus
facilities. Efforts to exit these sites are ongoing, but the payments related to these facilities could extend to 2011.



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Other Income and Expenses (in millions)



|                                                                                    |  |                   |      |   |      |   |       |        |  |       |   
|----------------------------------------------------------------------------------- |  | ----------------- | ---- | - | ---- | - | ----- | ------ |  | ----- | --
|                                                                                    |  | First Nine Months |      |   |      |  
|                                                                                    |  | 2008              |      |   | 2007 |   |       | Change | 
|Interest income, net                                                                |  | $                 | 5.1  |   |      | $ | 7.0   |        |  | (27   | %)
|Percentage of net revenues                                                          |  |                   | 1    | % |      |   | 2     | %      |  |       |   
|Foreign exchange gain (loss)                                                        |  | $                 | 3.0  |   |      | $ | (16.0 | )      |  | 119   | % 
|Percentage of net revenues                                                          |  |                   | 1    | % |      |   | (5    | %)     |  |       |   
|Loss on investment securities                                                       |  | $                 | 11.8 |   |      | $ |      |        |  | (100  | %)
|Percentage of net revenues                                                          |  |                   | 3    | % |      |   |      |        |  |       |   
|Gain on repurchase of senior convertible notes and amortization of debt issue costs |  | $                 | 0.9  |   |      | $ | (0.7  | )      |  | 229   | % 
|Percentage of net revenues                                                          |  |                   |     |   |      |   |      |        |  |       |   
|Recovery on investment loss                                                         |  | $                 | 0.4  |   |      | $ |      |        |  | 100   | % 
|Percentage of net revenues                                                          |  |                   |     |   |      |   |      |        |  |       |   
|Recovery of (provision for) income taxes                                            |  | $                 | 77.4 |   |      | $ | (5.6  | )      |  | 1,482 | % 
|Percentage of net revenues                                                          |  |                   | 19   | % |      |   | (2    | %)     |  |       |   

Interest income, net

Interest income was $5.1 million in the first nine months of 2008 compared to $7.0 million in the first nine months of 2007, a decrease of $1.9 million. This decrease is attributable primarily to lower yields earned on investments in the
first nine months of 2008 compared to the first nine months of 2007, partially offset by a decrease in interest expense incurred on the senior convertible notes due to the partial repurchase of these notes in the first nine months of 2008.

Foreign exchange gain (loss)

Our net foreign exchange
gain was $3.0 million in the first nine months of 2008, which was primarily due to a $3.5 million foreign exchange gain on the revaluation of our net tax liability in a foreign jurisdiction. The revaluation of this foreign tax liability was required
because of depreciation of other currencies against the United States Dollar. In the first nine months of 2007, our foreign exchange loss was $16 million, which was primarily due to a $9.3 million foreign exchange loss on the revaluation of our net
tax liability in a foreign jurisdiction.

The value of the US dollar relative to the Canadian dollar increased 5% in the first nine months of 2008 compared
to declining 15% in the first nine months of 2007.



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Loss on investment securities

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

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

In the first three months of
2008, we repurchased $98.0 million principal amount of our senior convertible notes for $94.5 million and expensed $2.2 million of related unamortized debt issue costs and transaction costs, resulting in a net gain of $1.3 million. We expensed $0.5
million of the remaining unamortized debt issue costs in the first nine months of 2008, compared to $0.7 million in the first nine months of 2007.

Provision for income taxes

We recorded a recovery of income taxes of $77.4 million in the first nine months of 2008. During the first
quarter of 2008, one of our foreign subsidiaries received a written communication from a tax authority pertaining to its 2000 tax year, resulting in an additional accrual of $26.5 million, including interest, as part of its liability for
unrecognized tax benefits. In the second quarter of 2008, this subsidiary settled several ongoing tax matters for less than had been accrued as part of its liability for unrecognized tax benefits, resulting in the recognition of tax benefits of
$124.1 million that were previously included in the liability for unrecognized tax benefits.

We recorded a provision of income taxes of $5.6 million in
the first nine months of 2007, including a $4.0 million tax recovery relating to the settlement of prior years tax credits.

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 year ended December 30, 2007, which also provides commentary on our most critical accounting
estimates. The following estimates are of note:

Valuation of Goodwill and Intangible Assets

The purchase method of accounting for acquisitions requires estimates and assumptions to allocate the purchase price to the fair value of net tangible and intangible
assets acquired, including in-process research and development (IPR&D). 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.



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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 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.

There were no indications of impairment to goodwill or
intangible assets during the nine months ended September 28, 2008. Changes in the estimated fair values of these assets in the future could result in significant impairment charges or changes to our expected amortization.

Stock-Based Compensation

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

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



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

Restructuring Charges - Facilities

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

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

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

Income Taxes

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

Our operations are conducted in a number of countries with complex tax legislation and regulations pertaining to our business activities. We have recorded income tax liabilities based on our estimates and
interpretations of those regulations for the countries in which we operate in. However our estimates are subject to review and assessment by the tax authorities and the courts of those countries. 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 or proposed adjustment of our tax liabilities by tax authorities
may result in adjustments of the income taxes and the assessment of interest and penalties that we pay or refunds that are due to us.



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During the second fiscal quarter, our liability for unrecognized tax benefits decreased by $171.6 million to $33.0
million. This substantial decrease was primarily the result of a foreign subsidiary settling several ongoing tax matters related to prior years for amounts less than were accrued as unrecognized tax benefits.

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 certain foreign deferred tax assets.

Investment in Cash Equivalents, Short Term Investments and Investment Securities

Our cash equivalents, short-term investments and investment securities are comprised solely of money market funds, which include only A1 and P1 or equivalent-rated debt securities. At September 28, 2008, these
securities had an estimated fair value of $302.1 million.

Beginning in the first quarter of fiscal 2008, the assessment of fair value is based on the
provisions of SFAS 157. We determined the fair value of our money market funds using quoted prices from active markets, quoted prices for similar assets from third-party sources and by performing valuation analyses. In determining if and when a
decline in market value below the carrying value of our money market funds is other-than-temporary, we evaluate on an ongoing basis the market conditions, trends of earnings, financial condition and other key measures for our investments. We assess
impairment of our money market fund investments in accordance with FSP FAS 115-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.

During the third quarter of 2008, we assessed the fair value of our money market funds including by consideration of Level 2 and Level 3 inputs in accordance with the fair value hierarchy of SFAS 157 for the Reserve
Funds and their underlying securities. Based on this assessment, we recorded an impairment of the Reserve Funds of $11.8 million during the period ended September 28, 2008, incorporating the Reserve Funds valuation at zero for debt
securities of Lehman Brothers held, and a net asset value of $0.97 per share communicated by the Primary Fund subsequent to September 28, 2008.

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

In addition, due to the status of the
Reserve Funds, we reclassified a portion of these shares from cash and cash equivalents to short-term investments and investment securities, based on the maturity dates of the underlying securities.

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



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Subsequent to September 28, 2008, we received $32.6 million as an initial distribution from the Primary Fund.

Business Outlook

We expect our revenues
for the fourth quarter of 2008 to be in the range of $125.0 million to $135.0 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
received and shipped during the same quarter, which we call our turns business. Our revenue outlook for the fourth quarter of 2008 depends in part on achieving 24% 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
fourth quarter 2008 gross margins to be approximately the same as the third quarter of 2008, inclusive of $0.2 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 fourth quarter 2008 operating expenses before
acquisition-related costs to be approximately $62.0 million to $63.0 million including stock-based compensation expense of approximately $4.4 to $5.4 million. We anticipate that interest and other income in the fourth quarter of 2008 will be
approximately $1.0 million.

Liquidity & Capital Resources

Our principal sources of liquidity are cash from operations, our short term investments and investment securities, as well as our outstanding senior convertible notes. We employ these sources of liquidity to support
ongoing business activities, acquire or invest in critical or complementary technologies, purchase capital equipment, repurchase our senior convertible notes and finance working capital. The combination of cash, cash equivalents, short-term
securities and investment securities at September 28, 2008 and December 30, 2007 totaled $338.4 million and $364.9 million, respectively. As of September 28, 2008 and December 30, 2007, we had $127.0 million and $225.0 million of
senior convertible notes outstanding, respectively.

$260.1 million of the investments held at September 28, 2008 relate to shares of the Reserve
International Liquidity Fund, Ltd. (the International Fund) and the Reserve Primary Fund (the Primary Fund, together the Reserve Funds) for which we have outstanding redemption orders. The Reserve Funds were
AAA-rated money market funds which announced redemption delays and suspended trading in September 2008, during the severe disruption in financial markets. The Reserve Funds are in the process of liquidating their portfolio of investments, which
included securities of Lehman Brothers Holdings, Inc. (Lehman Brothers) which were downgraded and have filed for Chapter 11 bankruptcy protection. The Primary Fund has received an U.S. Security Exchange Commission (the SEC)
order providing that the SEC will supervise the distribution of assets from the fund. The redemptions from the International Fund are subject to pending litigation which could cause further delay in any redemption of our investments.



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Our investments in money market funds are classified in the condensed consolidated balance sheet as follows:



|                       |  |                   |       |                  |   |      
|---------------------- |  | ----------------- | ----- | ---------------- | - | -----
|(in millions)          |  | September 28,2008 |       | December 30,2007
|Cash equivalents       |  | $                 | 183.0 |                  | $ | 172.1
|Short-term investments |  |                   | 99.8  |                  |   |     
|Investment securities  |  |                   | 19.3  |                  |   |     
|                       |  |                   |       |                  |   |      
|Total                  |  | $                 | 302.1 |                  | $ | 172.1
|                       |  |                   |       |                  |   |      

We expect distributions from the Reserve Funds will occur over the following 12 months as the investments held in
the Reserve Funds mature.

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

Subsequent to September 28, 2008, we
received $32.6 million as an initial distribution from the Primary Fund.

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

Operating Activities - During the first nine months of fiscal 2008, we
generated net positive operating cash flows of $64.2 million, which was $3.5 million higher than the $60.7 million generated in the same period in 2007. The positive cash flow from operations generated during the first nine months of 2008 was
primarily from net income, but included an impairment loss of the Reserve Funds of $11.8 million, and non-cash items, which included the add back of stock based compensation expense, depreciation and amortization expense, and the net tax recovery.

Significant changes in working capital accounts in the first nine months of 2008 included:



| |  |  | a $6.8 million increase in accounts receivable, primarily as a result of increased revenues; days sales outstanding during this period were 30, compared to 32 for
the comparable period in 2007.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a $3.9 million increase in inventory due primarily to stocking inventory to meet growing demand of certain products; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | $22.1 million of cash payments that reduced accounts payable and accrued liabilities, including $18.0 million payment related to settlement of a tax matter.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



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Investing Activities - Net cash used in investing activities of $130.1 million during the first nine months of
fiscal 2008 included the reclassification of the available-for-sale securities in the Reserve Funds from cash equivalents to short-term investments and long-term investment securities of $119.1 million, $5.4 million for purchases of property, plant
and equipment, and $5.6 million for purchases of intellectual property. Net cash used in investing activities of $12.8 million during the first nine months of 2007, included $5.8 million for purchases of property, plant and equipment and $7.0
million for purchases of intellectual property.

Financing activities  Net cash used in financing activities in the first nine months of fiscal 2008
included the repurchase of our senior convertible notes for $95.5 million, and proceeds from the issuance of common shares under our stock option plans of $16.5 million.

As of September 28, 2008, we had cash commitments made up of the following:



|                                  |  |       |         |      |   |       |  |      |        |      |   |        |  |            |       |  |   |       |  |   |        
|--------------------------------- |  | ----- | ------- | ---- | - | ----- |  | ---- | ------ | ---- | - | ------ |  | ---------- | ----- |  | - | ----- |  | - | -------
|(in thousands)                    |  | Total |         | 2008 |   | 2009  |  | 2010 |        | 2011 |   | 2012   |  | After 2012
|Contractual Obligations           |  |       |         |      |   |       |  |      |        |      |   |        |  |            |       |  |   |       |  |   |        
|Operating Lease Obligations:      |  |       |         |      |   |       |  |      |        |      |   |        |  |            |       |  |   |       |  |   |        
|Minimum Rental Payments           |  | $     | 29,366  |      | $ | 3,010 |  | $    | 11,240 |      | $ | 10,334 |  | $          | 4,700 |  | $ | 74    |  | $ | 8      
|Estimated Operating Cost Payments |  |       | 9,294   |      |   | 1,061 |  |      | 4,072  |      |   | 2,826  |  |            | 1,333 |  |   | 1     |  |   | 1      
|Long Term Debt:                   |  |       |         |      |   |       |  |      |        |      |   |        |  |            |       |  |   |       |  |   |        
|Principal Repayment               |  |       | 127,000 |      |   |      |  |      |       |      |   |       |  |            |      |  |   |      |  |   | 127,000
|Interest Payments                 |  |       | 50,009  |      |   | 1,429 |  |      | 2,858  |      |   | 2,858  |  |            | 2,858 |  |   | 2,858 |  |   | 37,148 
|Purchase and other Obligations    |  |       | 15,261  |      |   | 4,167 |  |      | 9,060  |      |   | 2,034  |  |            |      |  |   |      |  |   |       
|                                  |  |       |         |      |   |       |  |      |        |      |   |        |  |            |       |  |   |       |  |   |        
|                                  |  | $     | 230,930 |      | $ | 9,667 |  | $    | 27,230 |      | $ | 18,052 |  | $          | 8,891 |  | $ | 2,933 |  | $ | 164,157
|                                  |  |       |         |      |   |       |  |      |        |      |   |        |  |            |       |  |   |       |  |   |        

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 $13.8 million at
September 28, 2008 for inventory and other expenses that will be received within 90 days and that will require settlement 30 days thereafter.

We
expect to use approximately $7.5 million of cash in the remainder of 2008 for capital expenditures and purchases of intellectual property.

During the
first nine months of 2008, we settled several ongoing tax matters with a foreign tax authority. As part of the settlement, we agreed to pay $18.0 million and utilize $31.6 million net investment tax credits. Because we settled these matters for less
than we accrued as unrecognized tax benefits, we reversed $124.1 million of amounts previously accrued in accordance with FIN 48 related to these tax matters.

Based on our current operating prospects, we believe that existing sources of liquidity will satisfy our projected operating, working capital, investing, capital expenditure, and remaining restructuring requirements through 2008.



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|Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

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

Cash Equivalents, Short-term Investments and Investment Securities:

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 36 months with the majority being within one year. To minimize credit risk, we diversify our investments and select minimum ratings of P-1 or 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. Our corporate policies prevent us from holding material amounts of asset-backed commercial paper.

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

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

Senior Convertible Notes:

At September 28, 2008, $127.0 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. We redeemed $98.0 million of the principal of these notes in the first quarter of 2008 at a cost of $95.5
million, including transaction fees and accrued interest. The holders may require that we repurchase the notes on October 15, 2012, 2015 and 2020 respectively.



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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 outside the United States, we incur research and development, sales, customer support and administrative expenses in foreign
currencies. We are exposed, in the normal course of business, to foreign currency risks on these expenditures. In our effort to manage such risks, we have adopted a foreign currency risk management policy intended to reduce the effects of potential
short-term fluctuations on our operating results stemming from our exposure to these risks. As part of this risk management, we enter into foreign exchange forward contracts on behalf of our Canadian subsidiary. These forward contracts offset the
impact of exchange rate fluctuations on forecasted cash flows or firm commitments. We limit the forward contracts operational period to 12 months or less and we do not enter into foreign exchange forward contracts for trading purposes. Because we do
not engage in foreign exchange risk management techniques beyond these periods, our cost structure is subject to long-term changes in foreign exchange rates. In the event that one of the counterparties to our foreign currency forward contracts
failed to complete the terms of their contracts, we would purchase Canadian dollars at the spot rate as of the date the funds were required. If the counterparties to our foreign currency forward contracts that matured in the fiscal quarter ended
September 28, 2008 had not fulfilled their contractual obligations and we were required to purchase Canadian dollars at the spot rate, our operating income for the third quarter would have increased $0.7 million.

At September 28, 2008, we had nine contracts outstanding to purchase Canadian dollars, all with maturities of less than twelve months that qualified and were
designated as cash flow hedges. The U.S. dollar notional amount of these contracts was $45.2 million and the contracts had a fair value of $(1.2) million.

We attempt to limit our exposure to foreign exchange rate fluctuations from our foreign currency net asset or liability positions. We hedge less than twenty percent of our accruals for foreign income taxes in the ordinary course of
business, and consequently in the first nine months of 2008 we recorded a $3.5 million foreign exchange gain relating to this item. The revaluation of



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our foreign income tax liability was required because of fluctuations in the value of the United States dollar against other currencies. Our operating loss
would be materially impacted by a shift in the foreign exchange rates between United States and foreign currencies that are material to our business. For example, if the value of the United States dollar decreased by an additional 5% relative to
foreign currencies material to our business, our income before recovery of income taxes would decrease by approximately $2.0 million.

Other Investments:

Our other investments include strategic investments in privately held companies that are carried on our balance sheet at
cost, net of write-downs for non-temporary declines in market value. We expect to make additional investments like these in the future. These investments are inherently risky, as they typically are comprised of investments in companies and
partnerships that are still in the start-up or development stages. The market for the technologies or products that they have under development is typically in the early stages, and may never materialize. We could lose our entire investment in these
companies and partnerships or may incur an additional expense if we determine that the value of these assets has been impaired. We may record an impairment charge to our operating results should we determine that these funds have incurred a
non-temporary decline in value.



|Item 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

Evaluation of
disclosure controls and procedures

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

Changes in internal control over financial reporting

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act) that occurred during the three month period ended September 28, 2008 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
|------- | -----------------

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

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

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

On
July 15, 2008, Ian Beiser, a named plaintiff in the Beiser/Barone action, filed a complaint in the Delaware Court of Chancery and it was served on July 18, 2008 compelling the Company to permit plaintiff to inspect and make copies of the
Companys books and records. On August 5, 2008, the plaintiffs moved to stay the Federal Court action pending the books and records action. The Federal Court granted the motion to stay on August 13, 2008, which removed from the
calendar the hearing on defendants motions to dismiss, previously scheduled for August 20, 2008. The matter was fully briefed on October 29, 2008. It is not yet known whether the Delaware Court of Chancery will schedule a hearing or
make a decision based on the pleading and briefs.

The Company intends to move to dismiss Beisers complaint. Beiser/Barone had previously filed a
motion to compel production of the Companys books and records in the Federal Court, which motion was denied on May 8, 2008.



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As at September 28, 2008, the Company has not accrued costs for potential losses related to the Beiser/Barone
action.



|Item 1A. | Risk Factors
|-------- | ------------

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

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

Our global growth is subject to a number of economic risks.

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

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

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



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



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



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



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



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



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

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

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

We may fail to meet our forecasts if our customers cancel or delay the purchase of our products or if we are unable to meet their demand.

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

Our customers often shift buying patterns as they manage inventory levels, market different products, or change production schedules. This makes
forecasting their production requirements difficult and can lead to an inventory surplus or shortage of certain of their components. In addition, our products vary in terms of profit margins they generate. If our customers purchase a greater
proportion of our lower margin parts in a particular period, it would adversely impact our results of operations.



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

While backlog is our best estimate of our next quarters revenues, it is industry practice to allow customers to cancel, change or
defer orders with limited advance notice prior to shipment. As such, backlog may be an unreliable indicator of future revenue levels. Because a significant portion of our operating expenses is fixed, even a small revenue shortfall can have a
disproportionately negative effect on our operating results.

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

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

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

We depend on a limited number of customers for large portions of our revenues. Through direct, distributor and subcontractor purchases,
HP Corporation accounted for more than 10% of our revenues in the third quarter of 2008. 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.



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

Changes in our management may cause uncertainty, in or be
disruptive to, our business.

In May 2008, Gregory Lang became our Chief Executive Officer and President upon Robert Baileys
retirement from these positions Mr. Bailey is continuing in the role of Chairman of the Board of Directors. We may experience transition issues among our senior management team and in our operations during the Chief Executive Officer
transition, potentially leading to attrition and loss of productivity.



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

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

Given the depth of our sales and operations in Asia, we face risks that could negatively impact our results of operations, including economic sanctions imposed by the U.S. government, imposition of tariffs and other potential trade barriers
or regulations, uncertain protection for intellectual property rights and generally longer receivable collection periods.

Our results of
operations are increasingly dependent on our sales in China, which accounted for 23% of our revenues in third quarter of 2008. Government agencies in China have broad discretion and authority over all aspects of the telecommunications and
information technology industry in China; accordingly their decisions may impact our ability to do business in China. Therefore, significant changes in Chinas political and economic conditions and governmental policies could have a substantial
impact on our business. The growth of FTTH technology in China has continued to be strong; however, a slowdown in that growth would have an adverse impact on our operating results.

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

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

One of our research and
development facilities is located in Israel, and employs approximately 170 people. On an on-going basis, some of our Israeli employees are periodically called into active military duty. In the event of severe hostilities breaking out, a significant
number of our Israeli employees may be called into active military duty, resulting in delays, including product development schedules.

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

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



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

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

Over the next few years, we expect additional competitors, some of which may also have greater financial and other
resources, to enter 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.



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

Our products generally take
between 12 and 24 months from initial conceptualization to development of a viable prototype, and another 3 to 18 months to be designed into our customers equipment and sold in production quantities. We sell products whose characteristics
include evolving industry standards, short product life spans and new manufacturing and design technologies. Our products often must be redesigned because manufacturing yields on prototypes are unacceptable or customers redefine their products to
meet changing industry standards or customer specifications. As a result, we develop products many years before volume production and may inaccurately anticipate our customers needs. Redesigning our products is expensive and may delay
production of our products. Our products may become obsolete during these delays, resulting in our inability to recoup our initial investments in product development.

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

We are subject to income taxes in both the United States and international jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of our business, there are many
transactions where the ultimate tax determination is uncertain. Additionally our calculations of income taxes are based on our interpretations of applicable tax laws in the jurisdictions in which we file. Although we believe our tax estimates are
reasonable, there is no assurance that the final determination of our income tax liability will not be materially different than what is reflected in our income tax provisions and accruals. Should additional taxes be assessed as a result of new
legislation, an audit or litigation, if our effective tax rate should change as a result of changes in federal, international or state and local tax laws, or if we were to change the locations where we operate, there could be a material effect on
our income tax provision and results of operations in the period or periods in which that determination is made, and potentially to future periods as well. During the second quarter of 2008, the Company and a foreign tax authority settled a dispute
pertaining to the Companys 2000 to 2006 tax years in that jurisdiction. As a result of this settlement, we reversed $124.1 million of our FIN 48 reserve for unrecognized tax benefits.

We have applied the guidance in FIN 48 in determining our accrued liability for unrecognized tax benefits, which totals $34.3 million on a world-wide consolidated basis
as at September 28, 2008. The ultimate resolution of outstanding tax matters could be for amounts in excess of our reserves established in accordance with FIN 48. Such events could have a material adverse effect on our liquidity or cash flows
in the quarter in which an adjustment is recorded or the tax payment is due.



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

We are exposed to foreign currency rate fluctuations because a significant part of our development, test, and selling and administrative costs are
incurred in foreign currencies. The U.S. dollar has 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 foreign net asset or liability positions. Our accrual for foreign income taxes is partially hedged against foreign exchange gains and losses, however, we recorded a net $0.9 million foreign exchange loss on the
revaluation of our income tax liability, net of deferred tax assets, in the third quarter of 2008 because of fluctuations in the United States dollar against foreign currencies. Our profitability would be materially impacted by a 5% shift in the
foreign exchange rates between United States dollar and foreign currencies that are material to our business.

We are exposed to the credit risk of our
customers.

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

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

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

Acquiring products, intellectual property, technologies, and businesses from third parties is a core part of our business strategy. That strategy depends on the availability of suitable acquisition candidates at reasonable prices and our
ability to resolve challenges associated with integrating acquired businesses into our existing business. These challenges include integration of product lines, sales forces, customer lists and manufacturing facilities, development of expertise
outside our existing business, diversion of management time and resources, possible divestitures, inventory write-offs and other charges. We also may be forced to replace key personnel who may leave our Company as a result of an acquisition. We
cannot be certain that we will find suitable acquisition candidates or that we will be able to meet these challenges successfully. Acquisitions could also result in customer dissatisfaction, performance problems with the acquired company,
investment, or technology, the assumption of contingent liabilities, or other unanticipated events or circumstances, any of which could harm our business. Consequently, we might not be successful in integrating any acquired businesses products or
technologies and may not achieve anticipated revenues and costs benefits.



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

From time to time, we license, or acquire, technology from third parties to incorporate into our
products. Incorporating technology into our products may be more costly or more difficult than expected, or require additional management attention to achieve the desired functionality. The complexity of our products could result in unforeseen or
undetected defects or bugs, which could adversely affect the market acceptance of new products and damage our reputation with current or prospective customers.

Our current product road map will, in part, be dependent on successful acquisition and integration of intellectual property cores developed by third parties. If we experience difficulties in obtaining or integrating
intellectual property from these third parties, it could delay or prevent the development of our products in the future.

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

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

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

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



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

We do not own or operate a wafer fabrication facility. In 2007, two outside wafer foundries supplied more than 95% of our semiconductor
wafer requirements. Our wafer foundry suppliers also make products for other companies and some make products for themselves, thus we may not have access to adequate capacity or certain process technologies. We have less control over delivery
schedules, manufacturing yields and costs than competitors with their own fabrication facilities. If the wafer foundries we use are unable or unwilling to manufacture our products in required volumes, or at specified times, we may have to identify
and qualify acceptable additional or alternative foundries. This qualification process could take six months or longer. We may not find sufficient capacity quickly enough, if ever, at an acceptable cost, to satisfy our production requirements.

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

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

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

Due to the amount of time that it usually takes us to qualify assemblers and testers, we could experience significant delays in product shipments if we
are required to find alternative assemblers or testers for our components. Any problems that we may encounter with the delivery, quality or cost of our products could damage our customer relationships and materially and adversely affect our
results of operations. We are continuing to develop relationships with additional third-party subcontractors to assemble and test our products. However, even if we use these new subcontractors, we will continue to be subject to all of the
risks described above.



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

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

Our estimated restructuring accruals may not be adequate.

In 2005, 2006 and 2007, we implemented restructuring plans to streamline production and reduce and reallocate operating costs. In 2001 and 2003, we implemented plans to restructure our operations in response to the decline in demand for our
networking products. We reduced the workforce and consolidated or shut down excess facilities in an effort to bring our expenses into line with our revenue expectations.

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

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

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

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

To compete effectively, we must protect our intellectual property. We rely on a combination of patents, trademarks, copyrights, trade secret laws,
confidentiality procedures and licensing arrangements to protect our intellectual property rights. We hold numerous patents and have a number of pending patent applications. However some of our patents are expiring in 2010, which could have a
negative affect on our ability to prevent competitors from duplicating certain of our products.



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

To protect our product technology, documentation and other proprietary information, we enter into
confidentiality agreements with our employees, customers, consultants and strategic partners. We require our employees to acknowledge their obligation to maintain confidentiality with respect to PMCs products. Despite these efforts, we cannot
guarantee that these parties will maintain the confidentiality of our proprietary information in the course of future employment or working with other business partners. We develop, manufacture and sell our products in Asia and other countries that
may not protect our products or intellectual property rights to the same extent as the laws of the United States. This makes piracy of our technology and products more likely. Steps we take to protect our proprietary information may not be adequate
to prevent theft of our technology. We may not be able to prevent our competitors from independently developing technologies that are similar to or better than ours.

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

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

Patent disputes in the
semiconductor industry are often settled through cross-licensing arrangements. Our portfolio of patents may not have the breadth to enable us to settle an alleged patent infringement claim through a cross-licensing arrangement. We may therefore be
more exposed to third party claims than some of our larger competitors and customers.

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

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



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

We have $127 million of 2.25% senior convertible notes outstanding. Our debt could materially and adversely affect our ability to obtain financing for
working capital, acquisitions or other purposes and could make us vulnerable to industry downturns and competitive pressures. Our ability to meet our debt service obligations will be dependent upon our future performance, which will be subject to
financial, business and other factors affecting our operations, many of which are beyond our control. On October 15, 2025, we are obliged to repay the full remaining principal amount of the notes that have not been converted into our common
stock, but we are also subject to certain triggering events that may cause the notes to be repaid earlier.

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

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

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

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

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

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.



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

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



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

None.



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

None.



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

None.



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

None.



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

Exhibits 



|     |  |                                                                                                                                                    
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------
|11.1 |  | Calculation of net income (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: November 6, 2008 |  |  |  | /s/ Michael W. Zellner                                                  
|                       |  |  |  | Michael W. Zellner                                                      
|                       |  |  |  | Vice President, Chief Financial Officer
and Principal Accounting Officer



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