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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 March 30, 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 April 30th, 2008 - 218,692,094









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INDEX



|                               |  |                                                                                       |  |   
|------------------------------ |  | ------------------------------------------------------------------------------------- |  | --
|                               |  | Page                                                                                 
|PART I - FINANCIAL INFORMATION |  |                                                                                      
|                               |  |                                                                                      
|Item 1.                        |  | Financial Statements (unaudited)                                                      |  |   
|                               |  |                                                                                      
|                               |  | 
Condensed consolidated statements of operations                                     |  | 3 
|                               |  |                                                                                      
|                               |  | 
Condensed consolidated balance sheets                                               |  | 4 
|                               |  |                                                                                      
|                               |  | 
Condensed consolidated statements of cash flows                                     |  | 5 
|                               |  |                                                                                      
|                               |  | 
Notes to the condensed consolidated financial statements                            |  | 6 
|                               |  |                                                                                      
|Item 2.                        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 19
|                               |  |                                                                                      
|Item 3.                        |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 30
|                               |  |                                                                                      
|Item 4.                        |  | Controls and Procedures                                                               |  | 32
|                               | 
|PART II - OTHER INFORMATION    |  |                                                                                      
|                               |  |                                                                                      
|Item 1.                        |  | Legal Proceedings                                                                     |  | 34
|                               |  |                                                                                      
|Item 1A.                       |  | Risk Factors                                                                          |  | 35
|                               |  |                                                                                      
|Item 2.                        |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 46
|                               |  |                                                                                      
|Item 3.                        |  | Defaults Upon Senior Securities                                                       |  | 46
|                               |  |                                                                                      
|Item 4.                        |  | Submission Of Matters To A Vote By Stockholders                                       |  | 47
|                               |  |                                                                                      
|Item 5.                        |  | Other Information                                                                     |  | 47
|                               |  |                                                                                      
|Item 6.                        |  | Exhibits                                                                              |  | 47
|                               | 
|Signatures                     |  | 48                                                                                   



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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 |        
|                                                                                             |  | March 30,2008      |         |   | April 12007 |  
|Net revenues                                                                                 |  | $                  | 125,040 |   |             | $ | 103,665 |  
|Cost of revenues                                                                             |  |                    | 43,306  |   |             |   | 37,571  |  
|                                                                                             |  |                    |         |   |             |   |         |  
|Gross profit                                                                                 |  |                    | 81,734  |   |             |   | 66,094  |  
|Other costs and expenses:                                                                    |  |                    |         |   |             |   |         |  
|Research and development                                                                     |  |                    | 37,310  |   |             |   | 44,524  |  
|Selling, general and administrative                                                          |  |                    | 24,209  |   |             |   | 26,698  |  
|Amortization of purchased intangible assets                                                  |  |                    | 9,836   |   |             |   | 9,835   |  
|Restructuring costs and other charges                                                        |  |                    | 887     |   |             |   | 6,894   |  
|                                                                                             |  |                    |         |   |             |   |         |  
|Income (loss) from operations                                                                |  |                    | 9,492   |   |             |   | (21,857 | )
|Other income (expense):                                                                      |  |                    |         |   |             |   |         |  
|Interest income, net                                                                         |  |                    | 2,234   |   |             |   | 1,837   |  
|Foreign exchange gain (loss)                                                                 |  |                    | 3,158   |   |             |   | (996    | )
|Gain on repurchase of senior convertible notes and amortization of deferred debt issue costs |  |                    | 1,144   |   |             |   | (242    | )
|                                                                                             |  |                    |         |   |             |   |         |  
|Income (loss) before provision for income taxes                                              |  |                    | 16,028  |   |             |   | (21,258 | )
|(Provision for) recovery of income taxes                                                     |  |                    | (38,686 | ) |             |   | 5,435   |  
|                                                                                             |  |                    |         |   |             |   |         |  
|Net loss                                                                                     |  | $                  | (22,658 | ) |             | $ | (15,823 | )
|                                                                                             |  |                    |         |   |             |   |         |  
|Net loss per common share - basic and diluted                                                |  | $                  | (0.10   | ) |             | $ | (0.07   | )
|Weighted average number of common shares used in per share calculation - basic and diluted   |  |                    | 219,931 |   |             |   | 213,881 |  

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)



|                                                                                                                 |  |               |           |   |                  |   |           |  
|---------------------------------------------------------------------------------------------------------------- |  | ------------- | --------- | - | ---------------- | - | --------- | -
|                                                                                                                 |  | March 30,2008 |           |   | December 30,2007 |  
|ASSETS:                                                                                                          |  |               |           |   |                  |   |           |  
|Current assets:                                                                                                  |  |               |           |   |                  |   |           |  
|Cash and cash equivalents                                                                                        |  | $             | 285,624   |   |                  | $ | 364,922   |  
|Accounts receivable, net of allowance fordoubtful accounts of $1,382 (2007$1,546)                               |  |               | 45,670    |   |                  |   | 39,362    |  
|Inventories, net                                                                                                 |  |               | 35,876    |   |                  |   | 34,246    |  
|Prepaid expenses and other current assets                                                                        |  |               | 15,161    |   |                  |   | 16,266    |  
|Income tax receivable                                                                                            |  |               |          |   |                  |   | 2,365     |  
|                                                                                                                 |  |               |           |   |                  |   |           |  
|Total current assets                                                                                             |  |               | 382,331   |   |                  |   | 457,161   |  
|Goodwill                                                                                                         |  |               | 396,144   |   |                  |   | 398,418   |  
|Intangible assets, net                                                                                           |  |               | 185,713   |   |                  |   | 187,126   |  
|Property and equipment, net                                                                                      |  |               | 17,820    |   |                  |   | 18,725    |  
|Investments and other assets                                                                                     |  |               | 7,871     |   |                  |   | 10,747    |  
|Deposits for wafer fabrication capacity                                                                          |  |               | 5,145     |   |                  |   | 5,145     |  
|Deferred tax assets                                                                                              |  |               | 52,541    |   |                  |   | 54,676    |  
|                                                                                                                 |  |               |           |   |                  |   |           |  
|                                                                                                                 |  | $             | 1,047,565 |   |                  | $ | 1,131,998 |  
|                                                                                                                 |  |               |           |   |                  |   |           |  
|LIABILITIES AND STOCKHOLDERS EQUITY:                                                                            |  |               |           |   |                  |   |           |  
|Current liabilities:                                                                                             |  |               |           |   |                  |   |           |  
|Accounts payable                                                                                                 |  | $             | 21,041    |   |                  | $ | 24,011    |  
|Accrued liabilities                                                                                              |  |               | 55,189    |   |                  |   | 53,617    |  
|Income taxes payable                                                                                             |  |               | 421       |   |                  |   |          |  
|Deferred income taxes                                                                                            |  |               | 2,042     |   |                  |   | 2,787     |  
|Liability for unrecognized tax benefit                                                                           |  |               | 76,777    |   |                  |   | 71,586    |  
|Accrued restructuring costs                                                                                      |  |               | 9,693     |   |                  |   | 10,911    |  
|Deferred income                                                                                                  |  |               | 17,373    |   |                  |   | 13,674    |  
|                                                                                                                 |  |               |           |   |                  |   |           |  
|Total current liabilities                                                                                        |  |               | 182,536   |   |                  |   | 176,586   |  
|Long term obligations                                                                                            |  |               | 1,232     |   |                  |   | 958       |  
|2.25% senior convertible notes                                                                                   |  |               | 127,000   |   |                  |   | 225,000   |  
|Deferred income taxes                                                                                            |  |               | 24,001    |   |                  |   | 23,023    |  
|Liability for unrecognized tax benefit                                                                           |  |               | 127,870   |   |                  |   | 107,764   |  
|PMC special shares convertible into 2,065 (2007 - 2,065) shares of common stock                                  |  |               | 2,671     |   |                  |   | 2,671     |  
|Stockholders equity:                                                                                            |  |               |           |   |                  |   |           |  
|Common stock, par value $.001: 900,000 shares authorized; 218,388 shares issued and outstanding (2007 - 217,285) |  |               | 238       |   |                  |   | 237       |  
|Additional paid in capital                                                                                       |  |               | 1,405,842 |   |                  |   | 1,394,946 |  
|Accumulated other comprehensive income (loss)                                                                    |  |               | (543      | ) |                  |   | 1,437     |  
|Accumulated deficit                                                                                              |  |               | (823,282  | ) |                  |   | (800,624  | )
|                                                                                                                 |  |               |           |   |                  |   |           |  
|Total stockholders equity                                                                                       |  |               | 582,255   |   |                  |   | 595,996   |  
|                                                                                                                 |  |               |           |   |                  |   |           |  
|                                                                                                                 |  | $             | 1,047,565 |   |                  | $ | 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)



|                                                                                          |  |                    |         |   |          |   |         |  
|----------------------------------------------------------------------------------------- |  | ------------------ | ------- | - | -------- | - | ------- | -
|                                                                                          |  | Three Months Ended |        
|                                                                                          |  | March 30,          |         |   | April 1, |  
|                                                                                          |  | 2008               |         |   | 2007     |  
|Cash flows from operating activities:                                                     |  |                    |         |   |          |   |         |  
|Net loss                                                                                  |  | $                  | (22,658 | ) |          | $ | (15,823 | )
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |  |                    |         |   |          |   |         |  
|Depreciation of property and equipment                                                    |  |                    | 2,372   |   |          |   | 3,862   |  
|Amortization of intangible assets                                                         |  |                    | 11,088  |   |          |   | 11,374  |  
|Amortization of deferred income taxes                                                     |  |                    | (510    | ) |          |   | (513    | )
|Amortization of debt issuance costs                                                       |  |                    | 207     |   |          |   | 242     |  
|Stock-based compensation                                                                  |  |                    | 7,006   |   |          |   | 9,418   |  
|Foreign exchange loss on tax liability                                                    |  |                    | (3,605  | ) |          |   | 979     |  
|Gain on extinguishment of debt, net                                                       |  |                    | (1,351  | ) |          |   |        |  
|(Gain) loss on disposal of property and equipment                                         |  |                    | (32     | ) |          |   | 484     |  
|Changes in operating assets and liabilities, net of the effect of acquisitions:           |  |                    |         |   |          |   |         |  
|Accounts receivable                                                                       |  |                    | (6,308  | ) |          |   | (1,627  | )
|Inventories                                                                               |  |                    | (1,630  | ) |          |   | 3,904   |  
|Prepaid expenses and other current assets                                                 |  |                    | 711     |   |          |   | 1,159   |  
|Accounts payable and accrued liabilities                                                  |  |                    | (7,464  | ) |          |   | (47     | )
|Deferred taxes and income taxes payable                                                   |  |                    | 38,556  |   |          |   | (1,615  | )
|Accrued restructuring costs                                                               |  |                    | (1,218  | ) |          |   | 4,357   |  
|Deferred income                                                                           |  |                    | 3,699   |   |          |   | 1,682   |  
|                                                                                          |  |                    |         |   |          |   |         |  
|Net cash provided by operating activities                                                 |  |                    | 18,863  |   |          |   | 17,836  |  
|                                                                                          |  |                    |         |   |          |   |         |  
|Cash flows from investing activities:                                                     |  |                    |         |   |          |   |         |  
|Proceeds from sale of investments and other assets                                        |  |                    | 32      |   |          |   |        |  
|Purchases of property and equipment                                                       |  |                    | (1,467  | ) |          |   | (2,257  | )
|Purchase of intangible assets                                                             |  |                    | (4,155  | ) |          |   | (1,388  | )
|                                                                                          |  |                    |         |   |          |   |         |  
|Net cash used in investing activities                                                     |  |                    | (5,590  | ) |          |   | (3,645  | )
|                                                                                          |  |                    |         |   |          |   |         |  
|Cash flows from financing activity:                                                       |  |                    |         |   |          |   |         |  
|Repurchase of convertible subordinated notes                                              |  |                    | (95,491 | ) |          |   |        |  
|Proceeds from issuance of common stock                                                    |  |                    | 3,891   |   |          |   | 7,596   |  
|                                                                                          |  |                    |         |   |          |   |         |  
|Net cash provided by (used in) financing activities                                       |  |                    | (91,600 | ) |          |   | 7,596   |  
|                                                                                          |  |                    |         |   |          |   |         |  
|Effect of exchange rate changes on cash and cash equivalents                              |  |                    | (971    | ) |          |   |        |  
|Net increase (decrease) in cash and cash equivalents                                      |  |                    | (78,327 | ) |          |   | 21,787  |  
|Cash and cash equivalents, beginning of the period                                        |  |                    | 364,922 |   |          |   | 258,914 |  
|                                                                                          |  |                    |         |   |          |   |         |  
|Cash and cash equivalents, end of the period                                              |  | $                  | 285,624 |   |          | $ | 280,701 |  
|                                                                                          |  |                    |         |   |          |   |         |  
|Supplemental disclosures of cash flow information:                                        |  |                    |         |   |          |   |         |  
|Cash paid for interest                                                                    |  | $                  | 808     |   |          | $ |        |  
|Cash paid for income taxes                                                                |  |                    | 956     |   |          |   | 445     |  

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s) for metro, access, Fiber-To-The-Home, wireless infrastructure, storage, laser printers and customer premise equipment.
The Company offers worldwide technical and sales support through a network of offices in North America, Europe and Asia.

Basis of presentation. The
accompanying 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 financial
statements are unaudited, but reflect all adjustments that are, in the opinion of management, necessary to provide a fair statement of results for the interim periods presented. These financial statements should be read in conjunction with the
consolidated financial statements and accompanying notes in the Companys Annual Report on Form 10-K for the year ended December 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 three months of 2008 and 2007 consisted of 13 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 and
contingencies. Actual results could differ materially from these estimates.

Cash and cash equivalents.At March 30, 2008, Cash and cash
equivalents included $0.8 million (December 30, 2007 - $0.8 million) pledged with a bank as collateral for letters of credit issued as security for leased facilities.



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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 $10.2 million and $9.8 million at March 30, 2008 and December 30, 2007, respectively) were as follows:



|                 |  |               |        |                  |   |       
|---------------- |  | ------------- | ------ | ---------------- | - | ------
|(in thousands)   |  | March 30,2008 |        | December 30,2007
|Work-in-progress |  | $             | 18,007 |                  | $ | 13,698
|Finished goods   |  |               | 17,869 |                  |   | 20,548
|                 |  |               |        |                  |   |       
|                 |  | $             | 35,876 |                  | $ | 34,246
|                 |  |               |        |                  |   |       

Derivatives and Hedging Activities.Fluctuating foreign exchange rates may negatively impact PMCs net
loss 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 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 and are recognized in net loss when the hedged item affects net loss. Ineffective portions of changes in the fair value of cash flow hedges are recognized in net 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 loss. During the quarter ended March 30, 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
March 30, 2008 and for the same period in the prior year were as follows:



|                                                               |  |                    |       |   |              |   |       |  
|-------------------------------------------------------------- |  | ------------------ | ----- | - | ------------ | - | ----- | -
|                                                               |  | Three Months Ended |      
|(in thousands)                                                 |  | March 30,2008      |       |   | April 1,2007 |  
|Balance, beginning of the year                                 |  | $                  | 6,239 |   |              | $ | 4,331 |  
|Accrual for new warranties issued                              |  |                    | 273   |   |              |   | 193   |  
|Reduction for payments and product replacements                |  |                    | (529  | ) |              |   | (215  | )
|Adjustments related to changes in estimate of warranty accrual |  |                    | 192   |   |              |   | 175   |  
|                                                               |  |                    |       |   |              |   |       |  
|Balance, end of the period                                     |  | $                  | 6,175 |   |              | $ | 4,484 |  
|                                                               |  |                    |       |   |              |   |       |  

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

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 SFAS
No. 5, Accounting for Contingencies, as interpreted by FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. The Company
has no history of indemnification claims for such obligations and has not accrued any liabilities related to such indemnifications in the Condensed Consolidated Financial Statements.



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Stock-based compensation.The Company accounts for compensation expense for all share-based payment awards in
accordance with Statement of Financial Accounting Standards 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 months ended March 30, 2008, the Company recognized $7 million in stock-based compensation expense. Where a tax deduction for stock-based
compensation was available to the Company, a valuation allowance for the related deferred tax assets was recorded.

The Company uses the straight-line
method for attributing stock-based compensation expense. See Note 4 to the Condensed Consolidated Financial Statements for further information on stock-based compensation.

Recent Accounting Pronouncements.

In December 2007, the FASB issued Statement of Financial Accounting Standards
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 Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial
Statements (SFAS 160), an amendment of 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.

In March, 2008, the FASB issued Statement of Financial
Accounting Standards 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 an 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.



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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 March 30, 2008, the Company had 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 $47.1 million and the contracts had a fair value of $(0.8) million as of March 30, 2008. The
gain or loss from the ineffective portion of the hedges was not significant.

NOTE 3. Fair Value Measurements

On January 1, 2008, the Company adopted Statement of Financial Accounting Standards 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 (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.



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Financial assets and liabilities measured on a recurring basis as of March 30, 2008 are summarized below:



|                                         |  |         |         |         |   |         |  |   |  
|---------------------------------------- |  | ------- | ------- | ------- | - | ------- |  | - | -
|                                         |  | Level 1 |         | Level 2 |   | Level 3
|Assets:                                  |  |         |         |         |   |         |  |   |  
|Government and corporate bonds, notes(1) |  | $       | 256,019 |         | $ |        |  | $ | 
|                                         |  |         |         |         |   |         |  |   |  
|Liabilities:                             |  |         |         |         |   |         |  |   |  
|Forward currency contracts(2)            |  | $       |        |         | $ | 793     |  | $ | 
|                                         |  |         |         |         |   |         |  |   |  



|(1) | Included in cash and cash equivalents
|--- | -------------------------------------



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

NOTE 4. Stock-Based Compensation

At March 30, 2008, 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 months ended March 30, 2008 and
April 1, 2007 as follows:



|                                    |  |                    |       |              |   |      
|----------------------------------- |  | ------------------ | ----- | ------------ | - | -----
|                                    |  | Three Months Ended
|(in thousands)                      |  | March 30,2008      |       | April 1,2007
|Cost of revenues                    |  | $                  | 315   |              | $ | 517  
|Research and development            |  |                    | 3,162 |              |   | 4,268
|Selling, general and administrative |  |                    | 3,529 |              |   | 4,633
|                                    |  |                    |       |              |   |      
|Total                               |  | $                  | 7,006 |              | $ | 9,418
|                                    |  |                    |       |              |   |      

The Company received cash of $3.9 million on the issuance of stock-based awards during the three months ended
March 30, 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.

In 2001, the Company simplified its plan structure. The 2001 Stock Option Plan (2001 Plan) was
created to replace a number of stock option plans the Company had assumed in connection with mergers and acquisitions completed prior to 2001. The number of shares available for issuance under the 1994 Incentive Stock Plan (1994 Plan)
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.



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Activity under the option plans during the three months ended March 30, 2008 was as follows:



|                               |  |                  |   |  |                                         |       |                                                   |      |                                           |   |          
|------------------------------ |  | ---------------- | - |  | --------------------------------------- | ----- | ------------------------------------------------- | ---- | ----------------------------------------- | - | ---------
|                               |  | Number ofoptions |   |  | Weighted averageexercise price pershare |       | Weighted averageremaining contractualterm (years) |      | Aggregate intrinsicvalue at March 30,2008
|Outstanding, December 30, 2007 |  | 27,321,505       |   |  | $                                       | 9.74  |                                                   |      |                                           |   |          
|Granted                        |  | 3,060,837        |   |  | $                                       | 4.80  |                                                   |      |                                           |   |          
|Exercised                      |  | (206,465         | ) |  | $                                       | 1.84  |                                                   |      |                                           |   |          
|Cancelled, forfeited           |  | (1,008,669       | ) |  | $                                       | 9.46  |                                                   |      |                                           |   |          
|Outstanding, March 30, 2008    |  | 29,167,208       |   |  | $                                       | 9.29  |                                                   | 6.93 |                                           | $ | 8,484,414
|                               |  |                  |   |  |                                         |       |                                                   |      |                                           |   |          
|Exercisable, March 30, 2008    |  | 18,180,265       |   |  | $                                       | 10.66 |                                                   | 5.89 |                                           | $ | 4,481,126
|                               |  |                  |   |  |                                         |       |                                                   |      |                                           |   |          

No adjustment was required with respect to fully vested options that expired during the three months ended
March 30, 2008. An adjustment of $1.9 million was 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 three months ended March 30, 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.

The fair values of the Companys stock option awards were calculated for expense recognition in the three months ended March 30, 2008 and April 1, 2007, using an estimated forfeiture rate, assuming no
expected dividends and using the following weighted average assumptions:



|                        |  |               |   |  |              |  
|----------------------- |  | ------------- | - |  | ------------ | -
|                        |  | Options       |  
|                        |  | March 30,2008 |   |  | April 1,2007 |  
|Expected life (years)   |  | 4.06          |   |  | 3.90         |  
|Expected volatility     |  | 55.5          | % |  | 62.0         | %
|Risk-free interest rate |  | 2.2           | % |  | 4.5          | %

The weighted average grant-date fair value per stock option granted during the three months ended March 30,
2008 was $2.04. The total intrinsic value of stock options exercised during the three months ended March 30, 2008 was $0.8 million.



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As of March 30, 2008 there was $37.6 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 2.6 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 three months ended March 30, 2008 is as follows:



|                                                                  |  |                       |   |  |                                           |  |                                           |          
|----------------------------------------------------------------- |  | --------------------- | - |  | ----------------------------------------- |  | ----------------------------------------- | ---------
|                                                                  |  | Restricted StockUnits |   |  | Weighted AverageRemaining ContractualTerm |  | Aggregate intrinsicvalue at March 30,2008
|Unvested shares at December 30, 2007                              |  | 831,751               |   |  |                                          |  |                                           |         
|Awarded                                                           |  | 48,771                |   |  |                                          |  |                                           |         
|Forfeited                                                         |  | (22,118               | ) |  |                                          |  |                                           |         
|End of Period                                                     |  | 858,404               |   |  | 1.83                                      |  | $                                         | 4,807,062
|                                                                  |  |                       |   |  |                                           |  |                                           |          
|Restricted Stock Units vested and expected to vest March 30, 2008 |  | 599,582               |   |  | 1.66                                      |  | $                                         | 3,357,663
|                                                                  |  |                       |   |  |                                           |  |                                           |          

As of March 30, 2008 total unrecognized compensation costs, adjusted for estimated forfeitures, related to
non-vested RSUs was $3.6 million, which is expected to be recognized over the next 3.2 years.

Employee Stock Purchase Plan

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

During the first quarter of 2008, 897,883 shares were issued under the ESPP at a weighted-average price of $3.91 per share. As of March 30, 2008, 7,252,057 shares
were available for future issuance under the ESPP (December 30, 2007  8,149,940).



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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:



|                        |  |               |   |  |              |  
|----------------------- |  | ------------- | - |  | ------------ | -
|                        |  | ESPP          |  
|                        |  | March 30,2008 |   |  | April 1,2007 |  
|Expected life (years)   |  | 1.25          |   |  | 1.25         |  
|Expected volatility     |  | 50.4          | % |  | 49.2         | %
|Risk-free interest rate |  | 2.0           | % |  | 5.0          | %

The weighted average grant-date fair value of per ESPP award granted during the three months ended March 30,
2008 was $0.45.

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 three months ended March 30, 2008, by year of plan, were as follows:

Excess facility and contract termination costs



|                             |  |      |       |   |      |   |      |      |  |   |       |   |  |       |       |   |  |   |        |  
|---------------------------- |  | ---- | ----- | - | ---- | - | ---- | ---- |  | - | ----- | - |  | ----- | ----- | - |  | - | ------ | -
|(in thousands)               |  | 2007 |       |   | 2006 |   |      | 2005 |  |   | 2001  |   |  | Total |      
|Balance at December 30, 2007 |  | $    | 1,931 |   |      | $ | 589  |      |  | $ | 3,329 |   |  | $     | 3,944 |   |  | $ | 9,793  |  
|Adjustments and reversals    |  |      | (10   | ) |      |   | (19  | )    |  |   |      |   |  |       | (50   | ) |  |   | (79    | )
|New charges                  |  |      | 200   |   |      |   | 130  |      |  |   | 250   |   |  |       |      |   |  |   | 580    |  
|Cash payments                |  |      | (264  | ) |      |   | (174 | )    |  |   | (344  | ) |  |       | (335  | ) |  |   | (1,117 | )
|                             |  |      |       |   |      |   |      |      |  |   |       |   |  |       |       |   |  |   |        |  
|Balance at March 30, 2008    |  | $    | 1,857 |   |      | $ | 526  |      |  | $ | 3,235 |   |  | $     | 3,559 |   |  | $ | 9,177  |  
|                             |  |      |       |   |      |   |      |      |  |   |       |   |  |       |       |   |  |   |        |  

Severance costs



|                             |  |      |       |  
|---------------------------- |  | ---- | ----- | -
|(in thousands)               |  | 2007 |      
|Balance at December 30, 2007 |  | $    | 1,118 |  
|Adjustment and reversals     |  |      | (162  | )
|New charges                  |  |      | 429   |  
|Cash payments                |  |      | (868  | )
|                             |  |      |       |  
|Balance at March 30, 2008    |  | $    | 517   |  
|                             |  |      |       |  

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.



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To date, the Company has incurred $10.3 million in termination and relocation costs, $3 million for excess facilities and
$2.5 million in asset impairment charges.

The Company has made payments of $10.9 million in connection with this plan. As of March 30, 2008, $0.5
million in severance costs remained to be paid and payments related to the excess facilities may extend until 2011.

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 our 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 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. The
Company has made payments of $4 million related to the 2006 plan. As of March 30, 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, the Company terminated 24 employees across all business functions. In the second quarter, 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.

To date, the Company has recorded $6.3 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. In 2006, the Company reduced its accrual for termination benefits by $0.4 million as a portion of the Companys obligation was
fulfilled.



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As of March 30, 2008, the Company has made payments relating to these activities of $12.4 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, the Company implemented three restructuring plans aimed at focusing development efforts on key projects and reducing operating costs in response to the
severe and prolonged economic downturn in the semiconductor industry. PMCs assessment of the market demand for its products, and the development efforts necessary to meet this demand, were key factors in the decisions to implement these
restructuring plans. As end markets for the Companys products had contracted, certain projects were curtailed in an effort to cut costs. Cost reductions in all other functional areas were also implemented, as fewer resources were required to
support the reduced level of development and sales activities during these periods.

The January 2003 restructuring included the termination of 175
employees and the closure of design centers in Maryland, Ireland and India, and vacating office space in the Santa Clara facility. To date, PMC has recorded restructuring charges of $18.3 million in accordance with SFAS 146, Accounting for
Costs Associated with Exit or Disposal Activities, including $1.5 million for asset write-downs. These charges related to workforce reduction, lease and contract settlement costs, and the write-down of certain property, equipment and software
assets whose value was impaired as a result of this restructuring plan. PMC has disposed of the property improvements and computer equipment, and software licenses have been cancelled or are no longer being used. In 2006, the Company reversed $2.3
million of this restructuring accrual because certain floors in the Santa Clara facility that had been vacated in 2003 were re-occupied in 2006 due to the addition of personnel that occurred with the acquisition of the Storage Semiconductor
Business. The Company reversed an additional $0.5 million in 2007 as it completed a portion of the lease obligation at this site.

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, PMC 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.

To date, PMC has made cash payments of $12.7 million and $176.9 million related to the 2003 and 2001 plans,
respectively. The Company has completed the activities contemplated in these restructuring plans, but has not yet terminated the leases on 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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NOTE 6. Investments in debt securities

At March 30, 2008, the Company did not hold any investments in debt securities (2007$35.1 million). The investments held in 2007 were comprised of corporate bonds and notes. These securities were classified
as available-for-sales investments and had a maturity of three months or less. These investments are included in cash and cash equivalents in the Condensed Consolidated Balance Sheet.

NOTE 7. Long-term obligations

On October 26, 2005, the Company issued $225 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 have been deferred and will be 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 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 March 30, 2008, $127 million of these notes remained outstanding and $2.5 million of unamortized debt issue costs were included in Investments and other assets.

NOTE 8. Income Taxes

The Company recorded a provision of $38.7 million for the three months ended March 30, 2008.
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 accrual of $26.5 million, including interest, as part of the
liability for unrecognized tax benefits. The Company disagrees with the positions taken by this tax authority and intends to vigorously contest any re-assessment from this tax authority through its appeals process and the courts if necessary. While
the outcome of these matters is not determinable at this time, the Company has applied the guidance in FIN48 in determining its accrual for unrecognized tax benefits reflected in the Condensed Consolidated Financial Statements.

The Company also accrued $4 million of interest related to ongoing uncertain tax positions and the Company recognized a further $2.3 million of tax expense arising from
an inter-company dividend.

The Company recorded a net increase in its liability for unrecognized tax benefits of $25.3 million. As at March 30, 2008,
our liability for unrecognized tax benefits on a world-wide consolidated basis was $204.6 million. Recognition of an amount different from this estimate would affect the Companys effective tax rate. The resolution of these matters with the
foreign tax authority could result in a material change to the Companys unrecognized tax benefits within the next 12 months.



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##### Table of Contents

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.

NOTE 9. Comprehensive (Loss) Income

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



|                                                                                                                  |  |                    |         |   |          |   |         |  
|----------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------- | - | -------- | - | ------- | -
|                                                                                                                  |  | Three Months Ended |        
|                                                                                                                  |  | March 30,          |         |   | April 1, |  
|(in thousands)                                                                                                    |  | 2008               |         |   | 2007     |  
|Net loss                                                                                                          |  | $                  | (22,658 | ) |          | $ | (15,823 | )
|Other comprehensive (loss) income:                                                                                |  |                    |         |   |          |   |         |  
|Change in fair value of derivatives, net of deferred tax recovery of $993 (2007 - deferred tax expense of $1,189) |  |                    | (1,980  | ) |          |   | 522     |  
|                                                                                                                  |  |                    |         |   |          |   |         |  
|Total                                                                                                             |  | $                  | (24,638 | ) |          | $ | (15,301 | )
|                                                                                                                  |  |                    |         |   |          |   |         |  

NOTE 10. Net Loss Per Share

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



|                                                                 |  |                    |         |   |              |   |         |  
|---------------------------------------------------------------- |  | ------------------ | ------- | - | ------------ | - | ------- | -
|                                                                 |  | Three Months Ended |        
|(in thousands, except per share amounts)                         |  | March 30,2008      |         |   | April 1,2007 |  
|Numerator:                                                       |  |                    |         |   |              |   |         |  
|Net loss                                                         |  | $                  | (22,658 | ) |              | $ | (15,823 | )
|                                                                 |  |                    |         |   |              |   |         |  
|Denominator:                                                     |  |                    |         |   |              |   |         |  
|Basic and diluted weighted average common shares outstanding (1) |  |                    | 219,931 |   |              |   | 213,881 |  
|                                                                 |  |                    |         |   |              |   |         |  
|Basic and diluted net loss per share                             |  | $                  | (0.10   | ) |              | $ | (0.07   | )
|                                                                 |  |                    |         |   |              |   |         |  



|(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 months ended March 30, 2008 and April 1, 2007, there is no difference between basic and diluted net loss per
share. If the Company had recorded net income for the three months ended March 30, 2008 and April 1, 2007, it would have included in the computed dilutive potential common shares, common stock equivalents totaling approximately
1 million and 1.2 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 the diluted net
loss per share calculation because they would have been antidilutive.



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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 Case No. 4:06-CV-06473-SBA
(filed October 16, 2006). On November 21, 2006, the Beiser and Barone actions were consolidated into one case. On January 18, 2007, the Santa Clara County Superior Court in California ordered that the Meissner action be
stayed pending the outcome of the consolidated, federal Beiser/Baron action. A consolidated complaint in the Beiser/Baron action was filed on January 29, 2007 (the Consolidated Complaint).

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

On March 15, 2007, the Company filed three separate motions aimed at having the federal lawsuit dismissed on various legal grounds. One of these motions was on
the basis that plaintiffs failed to plead with particularity facts establishing that a litigation demand on the board of directors of the Company would have been futile at the time they commenced the derivative lawsuit. On
June 20, 2007, the Court heard the motion to dismiss plaintiffs complaint for failure to plead demand futility with particularity. The Court ruled on the motion to dismiss on August 22, 2007 finding that the plaintiffs
Consolidated Complaint had not met the pleading burden and gave plaintiffs leave to amend. The plaintiffs filed their Amended Consolidated Complaint on October 2, 2007. While the plaintiffs claims are substantially similar, they have
reduced the scope of their allegations. The Company filed motions to dismiss the Amended Consolidated Complaint consistent with its previous motions which were argued before the Court on January 30, 2008. The Court also took argument on a
motion to compel the production of certain documents filed by the plaintiffs December 26, 2007. The Court has not yet ruled on the motions.

At
March 30, 2008, the Company has not accrued costs for potential losses related to the Amended Consolidated complaint.



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##### Table of Contents

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

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

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

OVERVIEW

We generate revenues from the sale of
semiconductor devices that we have designed and developed or acquired. Almost all of our revenues in any given year come from the sale of semiconductors that are developed prior to that year. For example, 99% of our revenues in the first three
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 device 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 services 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 using network-attached storage (NAS) or storage area networks (SAN); or enterprise networking equipment and data management such as routers, switches, and laser
printers.

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.



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Results of Operations

First Quarter of 2008 and 2007

Net Revenues(in millions)



|             |  |               |       |      |   |        |  |    |  
|------------ |  | ------------- | ----- | ---- | - | ------ |  | -- | -
|             |  | First Quarter |       |      |  
|             |  | 2008          |       | 2007 |   | Change | 
|Net revenues |  | $             | 125.0 |      | $ | 103.7  |  | 21 | %
|             |  |               |       |      |   |        |  |    |  

Net revenues for the first quarter of 2008 were $125 million compared to $103.7 million for the same period in
2007, an increase of $21.3 million, or 21%. This increase is attributable to growth in our enterprise storage, fiber-to-the-home, and laser printer businesses, which had increased revenues of $23.2 million, collectively, compared to the same
quarter a year ago. Revenues from sales of our telecommunications products decreased by $1.9 million compared to the first quarter of 2007.

The growth in
our enterprise storage sales was driven primarily by increased shipments of fiber channel controller disk interconnect products in the first quarter of 2008. Our fiber-to-the-home shipments increased on a year-over-year basis as carriers in Japan
and Korea have been building out their networks. And carriers such as China Telecom in China started conducting field trials based on our passive optical networking (EPON) products. The sales of our products in the microprocessor-based
SOC business increased relative to the first quarter of 2007 as we experienced an increase in end-customer demand for laser-printer related products this past quarter.

Revenues from our telecommunications products decreased in the first quarter of 2008, compared to the same quarter in 2007, as we believe that customers were still consuming the inventory we shipped to them in the
latter part of 2007.

Gross Profit (in millions)



|                           |  |               |      |   |      |   |      |        |  |    |  
|-------------------------- |  | ------------- | ---- | - | ---- | - | ---- | ------ |  | -- | -
|                           |  | First Quarter |      |   |      |  
|                           |  | 2008          |      |   | 2007 |   |      | Change | 
|Gross profit               |  | $             | 81.7 |   |      | $ | 66.1 |        |  | 24 | %
|                           |  |               |      |   |      |   |      |        |  |    |  
|Percentage of net revenues |  |               | 65   | % |      |   | 64   | %      |  |    |  

Total gross profit increased $15.6 million in the first quarter of 2008 compared to the same period in 2007. Gross
profit as a percentage of revenues was 65% in the first quarter of 2008 compared with 64% in the first quarter of 2007.

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



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Other Costs and Expenses (in millions)



|                                            |  |               |      |   |      |   |      |        |  |     |   
|------------------------------------------- |  | ------------- | ---- | - | ---- | - | ---- | ------ |  | --- | --
|                                            |  | First Quarter |      |   |      |  
|                                            |  | 2008          |      |   | 2007 |   |      | Change | 
|Research and development                    |  | $             | 37.3 |   |      | $ | 44.5 |        |  | (16 | %)
|Percentage of net revenues                  |  |               | 30   | % |      |   | 43   | %      |  |     |   
|Selling, general and administrative         |  | $             | 24.2 |   |      | $ | 26.7 |        |  | (9  | %)
|Percentage of net revenues                  |  |               | 19   | % |      |   | 26   | %      |  |     |   
|Amortization of purchased intangible assets |  | $             | 9.8  |   |      | $ | 9.8  |        |  |    |   
|Percentage of net revenues                  |  |               | 8    | % |      |   | 9    | %      |  |     |   
|Restructuring costs and other charges       |  | $             | 0.9  |   |      | $ | 6.9  |        |  | (87 | %)
|Percentage of net revenues                  |  |               | 1    | % |      |   | 7    | %      |  |     |   

Research and Development and Selling, General and Administrative Expenses

Our research and development, or R&D, expenses decreased $7.2 million or 16% in the first quarter of 2008 compared to the first quarter of 2007. Due to the
restructuring action undertaken in the first quarter of 2007, hardware and software costs and payroll-related costs incurred in the first quarter of 2008 were lower by $0.9 million and $5 million, respectively, compared to the first quarter of 2007.
Materials costs, including photomasks, were $1.6 million lower in the first quarter of 2008 compared to the first quarter of 2007 as some tape-outs originally planned for the first quarter were moved to the second quarter.

Our selling, general and administrative, or SG&A, expenses decreased by $2.5 million, or 9%, in the first quarter of 2008 compared to the first quarter of 2007. This
decrease is primarily attributable to the restructuring action undertaken in the first quarter of 2007. As a result of that action, payroll-related costs and facilities-related costs were $1.3 million and $1.2 million lower, respectively.

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 quarter of 2008 was $4.7 million and $5.1 million, respectively.



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##### Table of Contents

Restructuring costs and other charges

The activity related to excess facility, contract termination, and severance accruals, under the Companys restructuring plans during the three months ended
March 30, 2008, by year of plan, were as follows:

Excess facility and contract termination costs



|                             |  |      |       |   |      |   |      |      |  |   |       |   |  |       |       |   |  |   |        |  
|---------------------------- |  | ---- | ----- | - | ---- | - | ---- | ---- |  | - | ----- | - |  | ----- | ----- | - |  | - | ------ | -
|(in thousands)               |  | 2007 |       |   | 2006 |   |      | 2005 |  |   | 2001  |   |  | Total |      
|Balance at December 30, 2007 |  | $    | 1,931 |   |      | $ | 589  |      |  | $ | 3,329 |   |  | $     | 3,944 |   |  | $ | 9,793  |  
|Adjustments and reversals    |  |      | (10   | ) |      |   | (19  | )    |  |   |      |   |  |       | (50   | ) |  |   | (79    | )
|New charges                  |  |      | 200   |   |      |   | 130  |      |  |   | 250   |   |  |       |      |   |  |   | 580    |  
|Cash payments                |  |      | (264  | ) |      |   | (174 | )    |  |   | (344  | ) |  |       | (335  | ) |  |   | (1,117 | )
|                             |  |      |       |   |      |   |      |      |  |   |       |   |  |       |       |   |  |   |        |  
|Balance at March 30, 2008    |  | $    | 1,857 |   |      | $ | 526  |      |  | $ | 3,235 |   |  | $     | 3,559 |   |  | $ | 9,177  |  
|                             |  |      |       |   |      |   |      |      |  |   |       |   |  |       |       |   |  |   |        |  

Severance costs



|                             |  |      |       |  
|---------------------------- |  | ---- | ----- | -
|(in thousands)               |  | 2007 |      
|Balance at December 30, 2007 |  | $    | 1,118 |  
|Adjustment and reversals     |  |      | (162  | )
|New charges                  |  |      | 429   |  
|Cash payments                |  |      | (868  | )
|                             |  |      |       |  
|Balance at March 30, 2008    |  | $    | 517   |  
|                             |  |      |       |  

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 our Burnaby, British Columbia facility.

To date, we have incurred $10.3 million in termination and relocation costs, $3 million for excess facilities and $2.5 million in asset impairment charges.

As of March 30, 2008, we have made payments of $10.9 million in connection with this plan. Also, as of this date, $0.5 million in severance costs remained to be
paid 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 our 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 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. We have made payments of $4 million related to the 2006 plan. As of March 30, 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, we terminated 24 employees across all business functions. In the second quarter, 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 our 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.

To date, we have recorded $6.3 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. In 2006, we reduced our accrual for termination benefits by $0.4 million as we fulfilled a portion of our obligation.

As of March 30, 2008, the Company has made payments relating to these activities of $12.4 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. As end markets for our products had contracted, certain projects were curtailed in
an effort to cut costs. Cost reductions in all other functional areas were also implemented, as fewer resources were required to support the reduced level of development and sales activities during these periods.



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##### Table of Contents

The January 2003 restructuring included the termination of 175 employees and the closure of design centers in Maryland,
Ireland and India, and vacating office space in the Santa Clara facility. To date, we have recorded restructuring charges of $18.3 million in accordance with SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities,
including $1.5 million for asset write-downs. These charges related to workforce reduction, lease and contract settlement costs, and the write-down of certain property, equipment and software assets whose value was impaired as a result of this
restructuring plan. We have disposed of the property improvements and computer equipment, and software licenses have been cancelled or are no longer being used. In 2006, we reversed $2.3 million of this restructuring accrual because certain floors
in the Santa Clara facility that had been vacated in 2003 were re-occupied in 2006 due to the addition of personnel that occurred with the acquisition of the Storage Semiconductor Business. We reversed an additional $0.5 million in 2007 as we
completed a portion of the lease obligation at this site.

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

To date,
PMC has made cash payments of $12.7 million and $176.9 million related to the 2003 and 2001 plans, respectively. We have completed the activities contemplated in these restructuring plans, but have not yet terminated the leases on all of its surplus
facilities. Efforts to exit these sites are ongoing, but the payments related to these facilities could extend to 2011.

Other Income and Expenses
(in millions)



|                                                                                    |  |               |       |    |      |   |      |        |  |      |   
|----------------------------------------------------------------------------------- |  | ------------- | ----- | -- | ---- | - | ---- | ------ |  | ---- | --
|                                                                                    |  | First Quarter |       |    |      |  
|                                                                                    |  | 2008          |       |    | 2007 |   |      | Change | 
|Interest income, net                                                                |  | $             | 2.2   |    |      | $ | 1.8  |        |  | 22   | % 
|Percentage of net revenues                                                          |  |               | 2     | %  |      |   | 2    | %      |  |      |   
|Foreign exchange gain (loss)                                                        |  | $             | 3.2   |    |      | $ | (1.0 | )      |  | (420 | %)
|Percentage of net revenues                                                          |  |               | 3     | %  |      |   | (1   | %)     |  |      |   
|Gain on repurchase of senior convertible notes and amortization of debt issue costs |  | $             | 1.1   |    |      | $ | (0.2 | )      |  | (650 | %)
|Percentage of net revenues                                                          |  |               |      |    |      |   |     |        |  |      |   
|(Provision for) recovery of income taxes                                            |  | $             | (38.7 | )  |      | $ | 5.4  |        |  | (817 | %)
|Percentage of net revenues                                                          |  |               | (31   | %) |      |   | 5    | %      |  |      |   



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##### Table of Contents

Interest income, net

Net interest income increased by $0.4 million or 22% in the first quarter of 2008 compared to the first quarter of 2007 due to holding increased cash balances which were partially offset by a decline in yields.

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 fourth
quarter of 2008. We do not hedge our income tax accruals that are denominated in foreign currencies against fluctuations in foreign currency exchange rates (see Item 3. Quantitative and Qualitative Disclosures About Market Risk).

Our net foreign exchange gain was $3.2 million in the first quarter of 2008, which was primarily due to a $3.6 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. The foreign exchange rate between the US dollar and the currencies
of countries where we have significant tax liabilities improved 4% in the first quarter of 2008 compared to declining 1% in the first quarter of 2007.

In
the first quarter of 2007, our foreign exchange loss was $1 million, which was primarily related to the revaluation of our tax liability in a foreign jurisdiction.

Gain on repurchase of senior convertible notes, net

In the first three months of 2008, we repurchased $98 million
principal amount of our senior convertible notes for $94.5 million and expensed $2.2 million of related unamortized debt issue costs and transactions costs resulting in a net gain of $1.3 million.

(Provision for) recovery of income taxes

We recorded
a provision of $38.7 million for the three months ended March 30, 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
accrual of $26.5 million, including interest, as part of the liability for unrecognized tax benefits. We disagree with the positions taken by this tax authority and intend to vigorously contest any re-assessment from this tax authority through its
appeals process and the courts if necessary. While the outcome of these matters is not determinable at this time, we have applied the guidance in FIN48 in determining its accrual for unrecognized tax benefits reflected in the Condensed Consolidated
Financial Statements.

We also accrued $4 million of interest related to ongoing uncertain tax positions and recognized a further $2.3 million of tax
expense arising from an inter-company dividend.



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##### Table of Contents

We recorded a recovery of income taxes of $5.4 million in the first quarter of 2007 based on net income, excluding
expenses for which we will not receive a tax benefit. Included in this amount is a $4.0 million tax recovery relating to the settlement of prior years tax credits.

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. These estimates were of note during the first three months of 2008:

Valuation of Goodwill and Intangible Assets

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

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

In 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 three months ended March 30, 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.



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##### Table of Contents

Stock-based compensation

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

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

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



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##### Table of Contents

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 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. As at March 30, 2008, our liability for unrecognized tax benefits on a
world-wide consolidated basis was $204.6 million.

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.

Business Outlook

We expect our revenues for the second quarter of 2008 to be in the range of $135 million to $140 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 second quarter of 2008 depends in part on achieving 23% 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 second quarter 2008 gross margins to be approximately the same as the first quarter of 2008, inclusive of $0.4 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 second quarter 2008
operating expenses to be approximately $63.6 million to $64.6 million including stock-based compensation expense of approximately $6.3 to $7.3 million. We anticipate that interest and other income in the second quarter of 2008 will be approximately
$1 million.

In the second quarter of 2008, our Chief Executive Officer and President, Robert Bailey, will retire from these positions. Gregory Lang will
transition to these roles after this quarter report on Form 10-Q for the first quarter of 2008 is filed. Mr. Bailey will continue as Chairman of the Board of Directors.



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##### Table of Contents

Liquidity & Capital Resources

Our principal source of liquidity at March 30, 2008 was our $285.6 million in cash and cash equivalents.

In the first
three months of 2008, we generated $18.9 million of cash in operating activities.

Significant changes in working capital accounts included:



| |  |  | a $6.3 million increase in accounts receivable, as a result of increased revenues.
| | - |  | ----------------------------------------------------------------------------------



| |  |  | a $1.4 million net decrease in accounts payable and accrued liabilities, which included $0.8 million paid for accrued interest relating to our senior convertible
notes, and $3.4 million payroll-related payments; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a $38.6 million increase in deferred taxes, liability for unrecognized tax benefit, and income taxes payable due to an accrual for withholding taxes and increased
interest accruals related to our unrecognized tax benefits, and revaluation of foreign tax liabilities.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In the first three months of
2008, cash flows from our investment activities included:



| |  |  | expenditures of $5.6 million for the purchases of property, equipment and intangible assets.
| | - |  | --------------------------------------------------------------------------------------------

In the first three months of 2008, cash flows from our financing activities included:



| |  |  | $95.5 million, inclusive of accrued interest and transaction fees, paid to repurchase $98 million of our senior convertible notes at a discount; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | cash proceeds of $3.9 million from the issuance of common stock under our equity-based compensation plans.
| | - |  | ----------------------------------------------------------------------------------------------------------

As of March 30, 2007, we had cash commitments made up of the following:



|                                                            |  |       |         |      |   |        |  |      |        |      |   |        |  |           |       |  |   |       |  |   |        
|----------------------------------------------------------- |  | ----- | ------- | ---- | - | ------ |  | ---- | ------ | ---- | - | ------ |  | --------- | ----- |  | - | ----- |  | - | -------
|(in thousands)                                              |  | Total |         | 2008 |   | 2009   |  | 2010 |        | 2011 |   | 2012   |  | After2012
|Contractual Obligations                                     |  |       |         |      |   |        |  |      |        |      |   |        |  |           |       |  |   |       |  |   |        
|Operating Lease Obligations:                                |  |       |         |      |   |        |  |      |        |      |   |        |  |           |       |  |   |       |  |   |        
|Minimum Rental Payments                                     |  | $     | 34,062  |      | $ | 8,914  |  | $    | 12,905 |      | $ | 7,455  |  | $         | 4,690 |  | $ | 82    |  | $ | 16     
|Estimated Operating Cost Payments                           |  |       | 10,677  |      |   | 3,283  |  |      | 3,474  |      |   | 2,542  |  |           | 1,373 |  |   | 4     |  |   | 1      
|Long Term Debt:                                             |  |       |         |      |   |        |  |      |        |      |   |        |  |           |       |  |   |       |  |   |        
|Principal Repayment                                         |  |       | 127,000 |      |   |       |  |      |       |      |   |       |  |           |      |  |   |      |  |   | 127,000
|Interest Payments                                           |  |       | 51,438  |      |   | 2,858  |  |      | 2,858  |      |   | 2,858  |  |           | 2,858 |  |   | 2,858 |  |   | 37,148 
|Purchase and other Obligations                              |  |       | 15,010  |      |   | 5,066  |  |      | 7,910  |      |   | 2,034  |  |           |      |  |   |      |  |   |       
|Liability for Unrecognized Tax Benefit (see comments below) |  |       |         |      |   |        |  |      |        |      |   |        |  |           |       |  |   |       |  |   |        
|                                                            |  |       |         |      |   |        |  |      |        |      |   |        |  |           |       |  |   |       |  |   |        
|                                                            |  | $     | 238,187 |      | $ | 20,121 |  | $    | 27,147 |      | $ | 14,889 |  | $         | 8,921 |  | $ | 2,944 |  | $ | 164,165
|                                                            |  |       |         |      |   |        |  |      |        |      |   |        |  |           |       |  |   |       |  |   |        

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



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##### Table of Contents

obligations are commitments for inventory or other expenses entered into in the normal course of business. We estimate these other commitments to be
approximately $11.3 million at March 30, 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 $18.6 million of cash in the remainder of 2008 for capital expenditures and purchased intellectual property. Based on our current operating prospects, we believe that existing sources of
liquidity will satisfy our projected operating, working capital, investing, capital expenditure, wafer deposit and remaining restructuring requirements through 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 accrual of $26.5 million, including interest, as
part of the liability for unrecognized tax benefits. We disagree with the positions taken by this tax authority and intend to vigorously contest any re-assessment from this tax authority through its appeals process and the courts if necessary. While
the outcome of these matters is not determinable at this time, we have applied the guidance in FIN48 in determining our accrual for unrecognized tax benefits reflected in the Condensed Consolidated Financial Statements. This tax authority has until
July 31, 2008 to issue a re-assessment on these matters or the statue of limitations will bar any reassessment for the 2000 tax year. Upon a formal re-assessment notice being issued, we will be required to post a deposit of 50% of the tax,
interest and penalties assessed, and 100% of any withholding tax and interest and any penalties thereon. We do not believe that the payment of any required deposit will have a material adverse effect on our liquidity or operations.



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

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

Cash Equivalents and Short-term Investments:

We
regularly maintain a short and long term investment portfolio of various types of government and corporate bonds and notes. Our investments are made in accordance with an investment policy approved by our Board of Directors. Maturities of these
instruments are less than 30 months with the majority being within one year. To minimize credit risk, we diversify our investments and select minimum ratings of P-1 or A by Moodys, or A-1 or A by Standard and Poors, or equivalent. We
classify these securities as available-for-sale and they are carried at fair market value. 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.



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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 March 30, 2008, $127 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 million of the principal of these notes in the first quarter of 2008 at a cost of $95.5 million, including transaction fees and accrued interest. The holders may require that we repurchase the notes on
October 15, 2012, 2015 and 2020 respectively.

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

Foreign Currency:

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

Through our operations in Canada and elsewhere outside the United States, we incur research and development, sales, customer
support and administrative expenses in Canadian and other foreign currencies. We are exposed, in the normal course of business, to foreign currency risks



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

At March 30, 2008, we had 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 $47.1 million and the contracts had a fair value of $(0.8) 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 our accruals for foreign income taxes in the ordinary course of business, and consequently in the
first three months of 2008 we recorded a $3.6 million foreign exchange gain relating to this item. The revaluation of 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 loss before provision for income taxes would increase by $6.4 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



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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 March 30, 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
|------- | -----------------

Stockholder Derivative Lawsuits

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

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

On March 15, 2007, the Company filed three separate motions aimed at having the federal lawsuit dismissed on various legal grounds. One of these motions was on
the basis that plaintiffs failed to plead with particularity facts establishing that a litigation demand on the board of directors of the Company would have been futile at the time they commenced the derivative lawsuit. On
June 20, 2007, the Court heard the motion to dismiss plaintiffs complaint for failure to plead demand futility with particularity. The Court ruled on the motion to dismiss on August 22, 2007 finding that the plaintiffs
Consolidated Complaint had not met the pleading burden and gave plaintiffs leave to amend. The plaintiffs filed their Amended Consolidated Complaint on October 2, 2007. While the plaintiffs claims are substantially similar, they have
reduced the scope of their allegations. The Company filed motions to dismiss the Amended Consolidated Complaint consistent with its previous motions which were argued before the Court on January 30, 2008. The Court also took argument on a
motion to compel the production of certain documents filed by the plaintiffs December 26, 2007. The Court has not yet ruled on the motions.

At
March 30, 2008, we have not accrued costs for potential losses related to the Amended Consolidated complaint.



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

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

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

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.



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

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

While backlog is our best estimate
of our next quarters revenues, it is industry practice to allow customers to cancel, change or defer orders with limited advance notice prior to shipment. As such, backlog may be an unreliable indicator of future revenue levels. Because a
significant portion of our operating expenses 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 a major portion of our revenues. Through direct, distributor and subcontractor purchases, Cisco Systems and HP Corporation each accounted for more than 10% of our revenues in the first 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.



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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.

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.

Our Chief Executive Officer is retiring which could adversely affect our operating performance.

In May 2008, our Chief
Executive Officer and President, Robert Bailey, will retire from the positions of President and Chief Executive Officer. His successor, Gregory Lang, was appointed on March 31, 2008 by the Board of Directors to assume office upon
Mr. Baileys retirement. Mr. Bailey will continue 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 transition, potentially leading
to attrition and loss of productivity.

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

Our results of operations are increasingly dependent on our sales in China, which accounted for 24% of our revenues in first
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.

We earned a substantial portion of our FTTH revenues in Japan in 2007. 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 additional risks that could negatively impact our results of operations, including economic sanctions imposed by the U.S.



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government, imposition of tariffs and other potential trade barriers or regulations, uncertain protection for intellectual property rights and generally
longer receivable collection periods.

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

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.

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



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products less competitive, and we may be forced to decrease our prices significantly to win a design. We may lose design opportunities or may experience
overall declines in gross margins as a result of increased price competition.

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

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

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

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

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

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

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



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

We are subject to income taxes in both the United States and international jurisdictions. Significant judgment is required in determining
our worldwide provision for income taxes. In the ordinary course of our business, there are many transactions where the ultimate tax determination is uncertain. Additionally our calculations of income taxes are based on our interpretations of
applicable tax laws in the jurisdictions in which we file. Although we believe our tax estimates are reasonable, there is no assurance that the final determination of our income tax liability will not be materially different than what is reflected
in our income tax provisions and accruals. Should additional taxes be assessed as a result of new legislation, an audit or litigation, if our effective tax rate should change as a result of changes in federal, international or state and local tax
laws, or if we were to change the locations where we operate, there could be a material effect on our income tax provision and results of operations in the period or periods in which that determination is made, and potentially to future periods as
well. For instance, 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 accrual of $26.5 million, including interest, as part of the
liability for unrecognized tax benefits. We disagree with the positions taken by this tax authority and intend to vigorously contest any re-assessment from this tax authority through its appeals process and the courts if necessary. While the outcome
of these matters is not determinable at this time, we have applied the guidance in FIN48 in determining our accrual for unrecognized tax benefits, which totals $204.6 million on a world-wide consolidated basis as at March 30, 2008. The ultimate
resolution of this and other tax matters could be for amounts in excess of our reserves established in accordance with FIN48. Such events could have a material adverse effect on our liquidity or cash flows in the quarter in which an adjustment is
recorded or the tax payment is due.

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

We are exposed to foreign currency rate fluctuations because a significant part of our development, test, and selling and administrative costs are
incurred in foreign currencies. The U.S. dollar has 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 $3.6 million foreign exchange gain on the
revaluation of our income tax liability, net of deferred tax assets, in the first 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.



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

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

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

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

Acquiring products, intellectual property,
technologies, or businesses from third parties is a core part of our business strategy. That strategy depends on the availability of suitable acquisition candidates at reasonable prices and our ability to resolve challenges associated with
integrating acquired businesses into our existing business. These challenges include integration of product lines, sales forces, customer lists and manufacturing facilities, development of expertise outside our existing business, diversion of
management time and resources, 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.

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.



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

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

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

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

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

We do not own or operate a wafer fabrication facility. In 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.



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

We depend on third parties in Asia for assembly 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 house service disruptions, currency fluctuations, or other circumstances in the region could force us to seek additional
or alternative sources of supply or assembly. This could lead to supply constraints or product delivery delays that, in turn, may result in the loss of revenues. Capacity in the assembly industry has become scarce 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, quality assurances, raw material supplies, and costs than competitors that do not outsource these
tasks.

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

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

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

Our estimated restructuring accruals may not be adequate.

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

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



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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.

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.



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

Vigorous protection and pursuit of intellectual
property rights or positions characterize the semiconductor industry. This often results in expensive and lengthy litigation. We, and our customers or suppliers, may be accused of infringing 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.

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.



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

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

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

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

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

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.



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|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 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: May 8, 2008 |  |  |  | /s/ Michael W. Zellner                                  
|                  |  |  |  | Michael W. Zellner                                      
|                  |  |  |  | Vice President,                                         
|                  |  |  |  | Chief Financial Officer and Principal Accounting
Officer



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