PMC SIERRA INC - FORM 10-Q

PMC SIERRA INC - FORM 10-Q - August 5, 2010

Attached files

Attached files

PMC SIERRA INC Reports

file	filename
EXCEL - IDEA: XBRL DOCUMENT - PMC SIERRA INC	Financial_Report.xls
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 - PMC SIERRA INC	dex311.htm
EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906 - PMC SIERRA INC	dex321.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 - PMC SIERRA INC	dex312.htm
EX-32.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 - PMC SIERRA INC	dex322.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10 - Q

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

for the quarterly period ended June 27, 2010

¨	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the Transition Period From to

Commission File Number 0-19084

PMC-Sierra, Inc.

(Exact name of registrant as specified in its charter)

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

3975 Freedom Circle

Santa Clara, CA 95054

(408) 239-8000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes 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):

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 Aug 2, 2010 – 230,122,613

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	23

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	41

Item 4.	Controls and Procedures	44

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	45

Item 1A.	Risk Factors	46

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	60

Item 3.	Defaults Upon Senior Securities	60

Item 4.	[Reserved]	60

Item 5.	Other Information	60

Item 6.	Exhibits	60

Signatures		61

Part I - FINANCIAL INFORMATION

Item 1 - Financial Statements (Unaudited)

PMC-Sierra, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except for per share amounts)


	Three Months Ended						Six Months Ended
	June 27, 2010			June 28, 2009			June 27, 2010			June 28, 2009
Net revenues	$	160,669		$	123,194		$	313,495		$	225,766
Cost of revenues		50,064			39,413			99,069			76,216

Gross profit		110,605			83,781			214,426			149,550

Other costs and expenses:
Research and development		43,646			36,383			85,713			75,011
Selling, general and administrative		25,196			22,222			47,581			44,111
Amortization of purchased intangible assets		6,816			9,836			16,652			19,672
Restructuring costs and other charges		—			303			256			638


Income from operations		34,947			15,037			64,224			10,118

Other (expense) income:
(Loss) gain on investment securities		(429	)		—			(299	)		—
Amortization of debt issue costs		(50	)		(50	)		(100	)		(100	)
Loss on subleased facilities		—			—			—			(538	)
Foreign exchange gain (loss)		74			(2,867	)		(915	)		1,203
Interest expense, net		(25	)		(841	)		(146	)		(1,652	)

Income before provision for income taxes		34,517			11,279			62,764			9,031
Provision for income taxes		(4,411	)		(3,430	)		(5,671	)		(5,099	)

Net income	$	30,106		$	7,849		$	57,093		$	3,932


Net income per common share - basic	$	0.13		$	0.03		$	0.25		$	0.02
Net income per common share - diluted	$	0.13		$	0.03		$	0.24		$	0.02

Shares used in per share calculation - basic		230,997			224,861			230,401			224,353
Shares used in per share calculation - diluted		234,925			227,883			234,289			226,327

See notes to the condensed consolidated financial statements.

- 3 -

PMC-Sierra, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)


	June 27, 2010			December 27, 2009
ASSETS:
Current assets:
Cash and cash equivalents	$	133,995		$	192,841
Short-term investments		128,116			67,928
Accounts receivable, net of allowance for doubtful accounts of $1,866 (2009 - $1,259)		79,831			50,745
Inventories, net		34,872			31,531
Prepaid expenses and other current assets		15,958			14,476
Income taxes receivable		6,941			—
Deferred tax assets		6,834			3,052

Total current assets		406,547			360,573
Property and equipment, net		14,386			13,909
Investment securities		239,352			192,636
Goodwill		398,798			396,144
Intangible assets, net		116,346			110,458
Deferred tax assets		78			250
Prepaid expenses		23,594			26,187
Investments and other assets		13,939			10,175
Deposits for wafer fabrication capacity		5,145			5,145

	$	1,218,185		$	1,115,477

LIABILITIES AND STOCKHOLDERS’ EQUITY:
Current liabilities:
Accounts payable	$	31,914		$	22,266
Accrued liabilities		64,771			52,996
Liability for unrecognized tax benefit		35,463			31,330
Income taxes payable		—			7,261
Deferred income taxes		75			681
Accrued restructuring costs		2,864			3,994
Deferred income		15,336			12,498

Total current liabilities		150,423			131,026

2.25% senior convertible notes due October 15, 2025, net		59,948			58,356
Long-term obligations		8,599			6,211
Deferred income taxes		25,633			22,695
Liability for unrecognized tax benefit		15,565			14,663

PMC special shares convertible into 1,520 (2009 - 1,570) shares of common stock		1,931			2,003

Stockholders’ equity:
Common stock, par value $.001: 900,000 shares authorized; 229,936 shares issued and outstanding (2009 - 227,655)		250			247
Additional paid in capital		1,539,714			1,521,476
Accumulated other comprehensive income		1,393			1,164
Accumulated deficit		(585,271	)		(642,364	)

Total stockholders’ equity		956,086			880,523

	$	1,218,185		$	1,115,477

See notes to the condensed consolidated financial statements.

- 4 -

PMC-Sierra, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


	Six Months Ended
	June 27, 2010			June 28, 2009
Cash flows from operating activities:
Net income	$	57,093		$	3,932
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		25,194			28,289
Stock-based compensation		11,014			11,092
Unrealized foreign exchange loss (gain), net		766			(1,087	)
Net amortization (accretion) of investment premiums/discounts		2,938			(1,054	)
Accrued interest on investment securities		(855	)		—
Loss on disposal of investment securities		298			—
Loss on subleased facilities		—			538
Changes in operating assets and liabilities:
Accounts receivable		(20,805	)		(5,250	)
Inventories		2,162			8,732
Prepaid expenses and other current assets		2,580			(851	)
Accounts payable and accrued liabilities		9,679			(3,790	)
Deferred income taxes and income taxes payable		(11,157	)		3,329
Accrued restructuring costs		(1,139	)		(958	)
Deferred income		2,838			(615	)

Net cash provided by operating activities		80,606			42,307

Cash flows from investing activities:
Acquisition of business		(34,250	)		—
Purchases of property and equipment		(3,566	)		(2,983	)
Purchase of intangible assets		(1,178	)		(1,384	)
Redemption of short-term investments		4,314			170,802
Disposals of investment securities		59,098			1,000
Purchases of investment securities		(171,894	)		(145,797	)

Net cash (used in) provided by investing activities		(147,476	)		21,638

Cash flows from financing activities:
Proceeds from issuance of common stock		7,921			7,018

Net cash provided by financing activities		7,921			7,018

Effect of exchange rate changes on cash and cash equivalents		103			1,078
Net (decrease) increase in cash and cash equivalents		(58,846	)		72,041
Cash and cash equivalents, beginning of period		192,841			97,839

Cash and cash equivalents, end of period	$	133,995		$	169,880

See notes to the condensed consolidated financial statements.

- 5 -

PMC-Sierra, Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1. Summary of Significant Accounting Policies

Description of business. PMC-Sierra, Inc. (the “Company” or “PMC”) designs, develops, markets and supports semiconductor solutions for the Enterprise Infrastructure and Communications Infrastructure end market segments. The Company offers worldwide technical and sales support through a network of offices in North America, Europe and Asia.

Basis of presentation. The accompanying condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) and United States Generally Accepted Accounting Principles (“GAAP”). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules or regulations. These interim condensed consolidated financial statements are unaudited, but reflect all adjustments that are, in the opinion of management, necessary to provide a fair statement of results for the interim periods presented. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes in the Company’s Annual Report on Form 10-K for the year ended December 27, 2009. The results of operations for the interim periods are not necessarily indicative of results to be expected in future periods. Fiscal 2010 will consist of 52 weeks and will end on Sunday, December 26, 2010. Fiscal 2009 consisted of 52 weeks and ended on Sunday, December 27, 2009. The first two quarters of 2010 and 2009 consisted of 26 weeks each.

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

- 6 -

Inventories. Inventories are stated at the lower of cost (first-in, first-out) or market (estimated net realizable value). Inventories (net of reserves of $8.9 million and $6.8 million at June 27, 2010 and December 27, 2009, respectively) were as follows:


*(in thousands)*	June 27, 2010		December 27, 2009
Work-in-progress	$	13,472	$	14,452
Finished goods		21,400		17,079

	$	34,872	$	31,531

Derivatives and Hedging Activities. Fluctuating foreign exchange rates may negatively impact PMC’s operations and cash flows. The Company periodically hedges foreign currency forecasted transactions related to certain operating expenses. All derivatives are recorded in the condensed consolidated balance sheet at fair value. For a derivative designated as a fair value hedge, changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in net income (loss). For a derivative designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive income (loss) and are recognized in net income (loss) when the hedged item affects net income (loss). Ineffective portions of changes in the fair value of cash flow hedges are recognized in net income (loss). If the derivative used in an economic hedging relationship is not designated in an accounting hedging relationship or if it becomes ineffective, changes in the fair value of the derivative are recognized in net income (loss). During the quarter ended June 27, 2010, 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 27, 2009 to June 27, 2010, and for the same period in the prior year were as follows:


	Six Months Ended
*(in thousands)*	June 27, 2010			June 28, 2009
Balance, beginning of the period	$	6,097		$	6,031
Accrual for new warranties issued		1,066			678
Reduction for payments and product replacements		(165	)		(466	)
Adjustments related to changes in estimate of warranty accrual		(580	)		(155	)

Balance, end of the period	$	6,418		$	6,088

The Company’s accrual for warranty obligations is included in accrued liabilities in the condensed consolidated balance sheet.

- 7 -

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

Stock-based compensation. The Company accounts for its compensation expense for all share-based payment awards in accordance with GAAP. GAAP requires the Company to measure the cost of services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost of such award will be recognized over the period during which services are provided in exchange for the award, generally the vesting period.

During the three and six months ended June 27, 2010, the Company recognized $5.7 million and $11.0 million in stock-based compensation expense, respectively. Where a tax deduction for stock-based compensation was available to the Company, a valuation allowance for the related deferred tax assets was recorded.

The Company uses the straight-line method over the requisite service period for attributing stock-based compensation expense. See Note 5. Stock-Based Compensation for further information on stock-based compensation.

Recent Accounting Pronouncements

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

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

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

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

- 8 -

Fair Value Accounting

Effective April 26, 2009, the Company adopted ASC Topic 320-10-35-33, which amends other-than-temporary impairment guidance relating to debt securities. If the fair value of a debt security is less than its amortized cost, the Company assesses whether the impairment is other than temporary. An impairment is considered other than temporary if (i) the Company has the intent to sell the security, (ii) it is more likely than not that the Company will be required to sell the security before recovery of the entire amortized cost basis, or (iii) the Company does not expect to recover the entire amortized cost basis of the security. If an impairment is considered other than temporary based on condition (i) or (ii) described above, the entire difference between the amortized cost and the fair value of the debt security is recognized in earnings. If an impairment is considered other than temporary based on condition (iii), the amount representing credit losses (defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis of the debt security) will be recognized in earnings and the amount relating to all other factors will be recognized in other comprehensive income.

On December 28, 2009, the Company adopted the FASB’s updated guidance related to fair value measurements and disclosures, ASU 2010-06, Improving Disclosures About Fair Value Measurements, which requires a reporting entity to disclose separately the amount of significant transfers in and out of Level 1 and Level 2 fair value measurements and to describe the reasons for the transfers. In addition, in the reconciliation of fair value measurements using significant unobservable inputs, or Level 3, a reporting entity should disclose separately information about purchases, sales, issuances, and settlements (that is, on a gross basis rather than one net number). The updated guidance also requires that an entity should provide fair value measurement disclosures for each class of assets and liabilities and disclosures about valuation techniques and inputs used to measure fair value for both recurring and non-recurring fair value measurements for Level 2 and Level 3 fair value measurements. The guidance is effective for interim and annual financial reporting periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances, and settlements in the roll forward activity in Level 3 fair value measurement, which are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The Company has updated its disclosures to comply with the updated guidance including the early adoption of the requirement for disclosures about purchases, sales, issuances, and settlements in the roll forward activity in Level 3 fair value measurements.

Business Combinations and Noncontrolling Interests

In December 2007, the FASB issued ASC Topic 805, the Business Combinations Topic. ASC Topic 805 changes the accounting for acquisitions that close beginning in 2009. More transactions and events qualify as business combinations and are accounted for at fair value under the new standard. ASC Topic 805 promotes greater use of fair values in financial reporting. Some of the changes introduce more volatility into earnings. ASC Topic 805 is effective for fiscal years beginning on or after December 15, 2008. There was no financial reporting impact due to this new standard. The Company applied this standard for business combinations that occurred after January 1, 2009.

- 9 -

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

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

In June 2009, the FASB issued ASC Topic 810-10-65, as a part of the Consolidation Topic, which replaces the quantitative-based risks and rewards approach with a qualitative approach that focuses on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance. It also requires an ongoing reassessment of whether an entity is the primary beneficiary, and it requires additional disclosures about an enterprise’s involvement in variable interest entities. ASC 810-10-65 was effective for the Company beginning in the first quarter of fiscal 2010. There was no financial reporting impact due to this standard.

Other Accounting Changes

In May 2009, the FASB issued ASC Topic 855, the Subsequent Events Topic. This standard is intended to establish general standards of accounting for and the disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Specifically, this standard sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. ASC Topic 855 is effective for fiscal years and interim periods ended after June 15, 2009, to be applied prospectively. In February 2010, the FASB amended the guidance to remove the requirement for public companies to disclose the date through which subsequent events were evaluated. The requirement still remains for private companies. Adoption of the updated guidance did not have a material impact on the Company’s financial reporting.

- 10 -

NOTE 2. Business Combinations

On June 8, 2010, the Company completed the acquisition of the Channel Storage business from Adaptec, Inc. (“Adaptec”) pursuant to the terms of the Asset Purchase Agreement dated May 8, 2010 and Amendment to Asset Purchase Agreement dated June 8, 2010 between PMC and Adaptec (together the “Purchase Agreement”). Under the terms of the Purchase Agreement, PMC purchased the Channel Storage business for $34.3 million in cash. The Channel Storage business includes Adaptec’s redundant array of independent disks (“RAID”) storage product line, a well-established global value added reseller customer base, board logistics capabilities, and leading solid-state drive (“SSD”) cache performance solutions.

The total purchase price has been allocated on a preliminary basis to the fair values of assets acquired and liabilities assumed. The preliminary purchase price is as follows:


*(in thousands)*
Financial assets	$	8,281
Inventory and other		5,934
Property and equipment		894
Intangible assets (see below)		21,300
Goodwill		2,654
Financial liabilities		(4,813	)

Net assets acquired	$	34,250

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


*(in thousands)*	Estimated fair value		Estimated average remaining useful life
Technology and patents	$	10,100	3 to 9 years
Customer/ Distributor relationships		7,500	2 to 6 years
Trademarks and other		3,700	6 years

Total intangible assets acquired	$	21,300

The Company recognized $1.5 million in acquisition-related costs, which were expensed and recognized during the second quarter of 2010 as selling, general and administrative expense.

NOTE 3. Derivative Instruments

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

- 11 -

As at June 27, 2010, the Company had 17 contracts outstanding to purchase Canadian dollars, all with maturities of less than 12 months, which qualified and were designated as cash flow hedges. As of June 27, 2010, the United States dollar notional amount of these contracts was $21.2 million and the contracts had a fair value gain of $0.3 million, which was recorded in other comprehensive income net of taxes of $0.1 million.

NOTE 4. Fair Value Measurements

ASC Topic 820, the Fair Value Measurements and Disclosures specifies a hierarchy of valuation techniques which requires an entity to maximize the use of observable inputs that may be used to measure fair value:

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

Level 2 – Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. The Company’s Level 2 liabilities include forward currency contracts whose value is determined using an income approach based on the present value of the forward rate less the contract rate multiplied by the nominal amount. Level 2 observable inputs were used in estimating interest rates used to determine the fair value of the debt component of the Company’s senior convertible notes (see Note 8. Long-Term Debt).

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 applicable instruments and would include in Level 3 all of those whose fair value is based on significant unobservable inputs. The Company’s Level 3 assets include investments in money market funds classified in short-term investments (see Note 7. Investment Securities).

- 12 -

Financial assets and liabilities measured on a recurring basis as of June 27, 2010 are summarized below:


	Fair value, June 27, 2010
*(in thousands)*	Level 1		Level 2		Level 3
Assets:
Corporate bonds and notes (1)	$	187,969	$	—	$	—
Money market funds (1)		106,636		—		18,928
United States (“US”) treasury and government agency notes (1)		110,446		—		—
Foreign government and agency notes (1)		39,568		—		—
US state and municipal securities (1)		10,557		—		—
Forward currency contracts (2)		—		265		—


Total assets	$	455,176	$	265	$	18,928

(1)	Included in cash and cash equivalents, short-term investments, and long-term investment securities (see Note 7. Investment Securities).

(2)	Included in prepaid expenses and other current assets.

The following table is a reconciliation of financial assets and liabilities measured at fair value on a recurring basis classified as Level 3 for the second quarter of 2010:


*(in thousands)*	Level 3
Balance at December 27, 2009	$	23,242
Partial distribution from the Reserve Funds		(4,314	)

Balance at June 27, 2010	$	18,928

Subsequent to June 27, 2010, the Company received further partial distribution of $0.3 million from the Primary Fund.

Certain liabilities have been measured at fair value on a non-recurring basis as follows:


*(in thousands)*	Fair value, June 27, 2010 Level 2
Liabilities:
2.25% senior convertible notes due October 15, 2025, net	$	59,948

In October 2005, the Company issued senior convertible notes with a face value of $225.0 million and bearing interest at a rate of 2.25% per annum. At the date of issuance, the Company’s borrowing rate for similar debt instruments without equity conversion features was estimated to be 8.0% per annum. This borrowing rate of 8.0% was estimated using assumptions that market participants would use in pricing the liability component, including market interest rates, credit standing, yield curves, and volatilities, all of which are defined as Level 2 observable inputs. The debt, which is recorded at a discount from its face value at issuance based on this 8.0% rate, is accreted to its face value over a period of seven years, which is the earliest date at which the holders of these Notes may redeem them. See Note 8. Long-Term Debt.

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

- 13 -

NOTE 5. Stock-Based Compensation

The Company has two stock-based compensation programs, which are described below. None of the Company’s stock-based awards under these plans are classified as liabilities. The Company did not capitalize any stock-based compensation cost, and recorded compensation expense for the three and six months ended June 27, 2010 and June 28, 2009, as follows:


	Three Months Ended				Six Months Ended
*(in thousands)*	June 27, 2010		June 28, 2009		June 27, 2010		June 28, 2009
Cost of revenues	$	229	$	226	$	447	$	431
Research and development		2,181		2,062		4,345		4,393
Selling, general and administrative		3,253		3,343		6,222		6,268

Total	$	5,663	$	5,631	$	11,014	$	11,092

The Company received cash of $2.2 million and $7.9 million related to the issuance of stock-based awards during the three and six months ended June 27, 2010, respectively. The Company received cash of $3.0 million and $7.0 million related to the issuance of stock-based awards during the three and six months ended June 28, 2009, respectively.

Equity Award Plans

The Company issues its common stock under the provisions of the 2008 Equity Plan (the “2008 Plan”). Stock option awards are granted with an exercise price equal to the closing market price of the Company’s common stock at the grant date. The options generally expire within 10 years and vest over four years.

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

Activity under the option plans during the six months ended June 27, 2010 was as follows:


	Number of options		Weighted average exercise price per share		Weighted average remaining contractual term (years)	Aggregate intrinsic value at June 27, 2010
Outstanding, December 27, 2009	25,346,469		$	8.80
Granted	4,080,888		$	8.95
Exercised	(702,987	)	$	5.50
Forfeited	(595,610	)	$	23.19

Outstanding, June 27, 2010	28,128,760		$	8.60	6.53	$	25,010,240
Vested & expected to vest, June 27, 2010	26,814,514		$	8.63	6.39	$	24,104,322
Exercisable, June 27, 2010	18,685,151		$	9.30	5.37	$	14,533,369

- 14 -

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying options and the quoted price of the Company’s common stock for the options that were in-the-money at June 27, 2010. No adjustment was required with respect to fully vested options that expired during the six months ended June 27, 2010. During the three and six months ended June 27, 2010, adjustments of $0.7 million and $2.5 million were recorded for pre-vesting forfeitures.

The fair value of the Company’s stock option awards granted to employees during the six months ended June 27, 2010 was estimated using a lattice-binomial valuation model. The binomial model considers the contractual term of the option, the probability that the option will be exercised prior to the end of its contractual life, and the probability of termination or retirement of the option holder in computing the value of the option. The model requires the input of highly subjective assumptions including the expected stock price volatility and expected life.

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

The fair values of the Company’s stock option awards were calculated for expense recognition using an estimated forfeiture rate, assuming no expected dividends and using the following weighted average assumptions:


	Three Months Ended				Six Months Ended
	June 27, 2010		June 28, 2009		June 27, 2010		June 28, 2009
Expected life (years)	4.5		4.4		4.5		4.5
Expected volatility	54	%	66	%	54	%	66	%
Risk-free interest rate	2.5	%	1.7	%	2.4	%	1.7	%

The weighted average grant-date fair value per stock option granted during the three and six months ended June 27, 2010, was $3.91 and $3.89 respectively. The total intrinsic value of stock options exercised during the three and six months ended June 27, 2010 was $1.4 million and $2.4 million, respectively.

As of June 27, 2010, there was $23.0 million of total unrecognized compensation costs related to unvested stock-based compensation arrangements granted under the plans, which is expected to be recognized over an average period of 2.8 years.

- 15 -

Restricted Stock Units

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

A summary of RSU activity during the six months ended June 27, 2010 is as follows:


	Restricted Stock Units		Weighted Average Remaining Contractual Term	Aggregate intrinsic value at June 27, 2010
Unvested shares at December 27, 2009	2,407,011		—		—
Awarded	1,086,437		—		—
Released	(643,796	)	—		—
Forfeited	(116,307	)	—		—

End of Period	2,733,345		1.93	$	21,183,424
Restricted Stock Units vested and expected to vest
June 27, 2010	2,207,195		1.86	$	17,105,761

The intrinsic value of RSUs vested during the three months and six months ended June 27, 2010 was $5.1 million and $5.3 million, respectively. As of June 27, 2010, total unrecognized compensation costs, adjusted for estimated forfeitures, related to unvested RSUs was $13.9 million, which is expected to be recognized over the next 3.0 years.

Employee Stock Purchase Plan

In 1991, the Company adopted an Employee Stock Purchase Plan (“ESPP”) under Section 423 of the Internal Revenue Code. The ESPP allows eligible participants to purchase shares of the Company’s common stock at six-month intervals through payroll deductions at a price of 85% of the lower of the fair market value at specific dates in those six-month intervals (calculated in the manner provided in the plan). Shares of the Company’s common stock are offered under the ESPP through a series of successive offering periods, generally with a maximum duration of 24 months. Under the ESPP, the number of shares authorized to be available for issuance under the plan is increased automatically on January 1 of each year until the expiration of the plan. The increase will be limited to the lesser of (i) 1% of the outstanding shares on January 1 of each year, (ii) 2,000,000 shares (after adjusting for stock dividends), or (iii) an amount to be determined by the Board of Directors.

During the first half of 2010, 983,485 shares were issued under the ESPP at a weighted average price of $4.12 per share. As of June 27, 2010, 9,484,453 shares were available for future issuance under the ESPP compared to 8,467,938 as at December 27, 2009.

The weighted average grant-date fair value per ESPP award granted during the first half of 2010 was $2.49.

As of June 27, 2010, total unrecognized compensation costs, adjusted for estimated forfeitures, related to non-vested ESPP awards was $1.9 million, which is expected to be recognized over the next 0.5 years.

- 16 -

NOTE 6. Restructuring and Other Costs

The activity related to excess facility accruals under the Company’s restructuring plans during the first half of 2010, by year of plan, were as follows:


*(in thousands)*	2007			2006			2005			2001			Total
Balance at December 27, 2009	$	526		$	94		$	2,344		$	1,030		$	3,994
Reversals and adjustments		(14	)		(19	)		(2	)		8			(27	)
New charges		—			—			185			100			285
Cash payments		(157	)		(24	)		(735	)		(472	)		(1,388	)

Balance at June 27, 2010	$	355		$	51		$	1,792		$	666		$	2,864

During the first six months of 2010, the Company recorded an additional $0.3 million for excess facilities as original assumptions regarding possible sublease of exited facilities were not realized. The remaining balance relates only to excess facilities for the remaining plans, namely the 2007, 2006, 2005, and 2001 plans. Payments for excess facilities under these restructuring plans may extend to October 2011. Further details regarding these restructuring plans are available in the Company’s Annual Report on Form 10-K for the year ended December 27, 2009.

NOTE 7. Investment Securities

At June 27, 2010, the Company had investments of $474.1 million (December 27, 2009 - $423.6 million) comprised of money market funds, US treasury and government agency notes including Federal Deposit Insurance Corporation (“FDIC”)-insured corporate notes, US state and municipal securities, foreign government and agency notes, and corporate bonds and notes.

- 17 -

The Company’s available for sale investments, by investment type, consists of the following as at June 27, 2010 and December 27, 2009:


	June 27, 2010
*(in thousands)*	Amortized Cost		Gross Unrealized Gains*		Gross Unrealized Losses *			Fair Value
Cash and cash equivalents:
Money market funds	$	106,624	$	12	$	—		$	106,636


Short-term investments:
Corporate bonds and notes		46,942		1,952		(19	)		48,875
US treasury and government agency notes		42,570		878		—			43,448
Money market funds		18,928		—		—			18,928
Foreign government and agency notes		8,444		386		(14	)		8,816
US states and municipal securities		7,985		65		(1	)		8,049

Total short-term investments		124,869		3,281		(34	)		128,116


Long-term investment securities:
Corporate bonds and notes		138,313		992		(211	)		139,094
US treasury and government agency notes		66,555		504		(61	)		66,998
Foreign government and agency notes		30,566		190		(4	)		30,752
US states and municipal securities		2,513		7		(12	)		2,508

Total long-term investment securities		237,947		1,693		(288	)		239,352

Total	$	469,440	$	4,986	$	(322	)	$	474,104

*	Gross unrealized gains include accrued interest on investments of $3.0 million. The remainder of the gross unrealized gains and losses are included in the condensed consolidated balance sheet as other comprehensive income.


	December 27, 2009
*(in thousands)*	Amortized Cost		Gross Unrealized Gains*		Gross Unrealized Losses *			Fair Value
Cash and cash equivalents:
Money market funds	$	163,068	$	16	$	—		$	163,084


Short-term investments:
Corporate bonds and notes		14,760		1,426		(4	)		16,182
US treasury and government agency notes		20,376		804		(1	)		21,179
Money market funds		23,242		—		—			23,242
US state and municipal securities		7,300		25		—			7,325

Total short-term investments		65,678		2,255		(5	)		67,928


Long-term investment securities:
Corporate bonds and notes		108,102		669		(306	)		108,465
US treasury and government agency notes		52,594		389		(53	)		52,930
Foreign government and agency notes		30,179		123		(82	)		30,220
US state and municipal securities		1,019		2		—			1,021

Total long-term investment securities		191,894		1,183		(441	)		192,636

Total	$	420,640	$	3,454	$	(446	)	$	423,648

*	Gross unrealized gains include accrued interest on investments of $2.1 million. The remainder of the gross unrealized gains and losses is included in the condensed consolidated balance sheet as other comprehensive income.

- 18 -

As of June 27, 2010 and December 27, 2009, the fair value of certain of the Company’s available-for-sale securities was less than their cost basis. Management reviewed various factors in determining whether to recognize an impairment charge related to these unrealized losses, including the current financial and credit market environment, the financial condition, near-term prospects of the issuer of the investment security, the magnitude of the unrealized loss compared to the cost of the investment, length of time the investment has been in a loss position and the Company’s intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery of market value. As of June 27, 2010, the Company determined that the unrealized losses are temporary in nature and recorded them as a component of accumulated other comprehensive income.

$18.9 million of the investments held at June 27, 2010, currently classified as short-term investments, relate to shares of the Reserve International Liquidity Fund, Ltd. (the “International Fund”) and the Reserve Primary Fund (the “Primary Fund”, together the “Reserve Funds”) for which the Company has outstanding redemption orders. The Reserve Funds were AAA-rated money market funds that announced redemption delays and suspended trading in September 2008 during the severe disruption in financial markets. During the second quarter of 2010, the Reserve Funds completed the process of liquidating their portfolio of investments, which included securities of Lehman Brothers Holdings, Inc. (“Lehman Brothers”) that was downgraded and has filed for Chapter 11 bankruptcy protection. The Primary Fund has received a United States Security Exchange Commission order providing that the SEC will supervise the distribution of assets from the Primary Fund. The redemptions from the International Fund are subject to pending litigation that could cause further delay in any redemption of the Company’s investments.

The Company assessed the fair value of its money market funds, including by consideration of Level 2 and Level 3 inputs (see Note 4. Fair Value Measurements) for the Reserve Funds and their underlying securities. Based on this assessment, the Company recorded an impairment of the Reserve Funds of $11.8 million during the third quarter of 2008, incorporating the Reserve Funds’ valuation at zero for debt securities of Lehman Brothers held, and a net asset value of $0.97 per share communicated by the Primary Fund.

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

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

- 19 -

NOTE 8. Long-Term Debt

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

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

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

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

In October 2005, the Company issued the Notes with a face value of $225.0 million and bearing interest at a rate of 2.25% per annum. At the date of issuance, the Company’s borrowing rate for similar debt instruments without any equity conversion features was estimated to be 8.0% per annum. The borrowing rate of 8.0% was estimated using assumptions that market participants would use in pricing the liability component, including market interest rates, credit standing, yield curves, and volatilities; all of which are defined as Level 2 observable inputs (see Note 4. Fair Value Measurements).

- 20 -

As at June 27, 2010, the carrying amount of the equity component is $35.2 million (December 27, 2009 - $35.2 million) and the carrying of the debt component is $59.9 million (December 27, 2009 - $58.4 million), which is the principal amount of $68.3 million (December 27, 2009 - $68.3 million) net of the unamortized discount of $8.4 million (December 27, 2009 - $9.9 million). The balance of deferred debt issue costs as at June 27, 2010 is $0.5 million (December 27, 2009 - $0.6 million).

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

NOTE 9. Income Taxes

The Company recorded a provision for income taxes of $4.4 million and $5.7 million for the three and six months ended June 27, 2010 respectively, and a provision for income taxes of $3.4 million and $5.1 million for the three and six months ended June 28, 2009, respectively.

The Company’s effective tax rate was 13% and 9% for the three and six months ended June 27, 2010, and 30% and 56%, for the three and six months ended June 28, 2009, respectively. The Company’s effective tax rate decreased primarily due to income before provision for income taxes increasing over three times and seven times compared to the three and six months ended June 28, 2009, respectively. These increases were driven primarily by higher revenues across all jurisdictions. In addition to a portion of the income being generated in lower-tax jurisdictions, the Company continues to benefit from available loss carryforwards and investment tax credits earned, resulting in a significantly lower effective tax rate for the three and six months ended June 27, 2010, partially offset by the effect of foreign currency translation of a foreign subsidiary.

The condensed consolidated financial statements for the six months ended June 27, 2010 include the tax effects associated with the sale of certain assets between wholly-owned subsidiaries of the Company. GAAP requires the tax expense associated with gains on such inter-company transactions to be recognized over the estimated life of the related assets. Accordingly, the $23.6 million recorded as long-term prepaid expenses as at June 27, 2010 represents the remaining tax expense to be recognized over periods of up to six years, with corresponding amounts recorded as current and deferred income taxes payable and as liability for unrecognized tax benefits.

As at June 27, 2010, the Company’s liability for unrecognized tax benefits on a world-wide consolidated basis was $51.0 million. Recognition of an amount different from this estimate would affect the Company’s effective tax rate.

- 21 -

NOTE 10. Comprehensive Income

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


	Three Months Ended						Six Months Ended
*(in thousands)*	June 27, 2010			June 28, 2009			June 27, 2010			June 28, 2009
*(in thousands)*	June 27, 2010			June 28, 2009			June 27, 2010			June 28, 2009
Net income	$	30,106		$	7,849		$	57,093		$	3,932
Other comprehensive (loss) income:
Change in fair value of derivatives		(365	)		3,001			(359	)		4,160
Change in fair value of investment securities		254			(40	)		588			(40	)

Total	$	29,995		$	10,810		$	57,322		$	8,052

NOTE 11. Net Income Per Share

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


	Three Months Ended				Six Months Ended
*(in thousands, except per share amounts)*	June 27, 2010		June 28, 2009		June 27, 2010		June 28, 2009
Numerator:
Net income	$	30,106	$	7,849	$	57,093	$	3,932
Denominator:
Basic weighted average common shares outstanding ⁽¹⁾		230,997		224,861		230,401		224,353
Dilutive effect of employee stock options and awards		3,928		3,022		3,889		1,975
Diluted weighted average common shares outstanding ⁽¹⁾		234,925		227,883		234,289		226,327

Basic net income per share	$	0.13	$	0.03	$	0.25	$	0.02
Diluted net income per share	$	0.13	$	0.03	$	0.24	$	0.02

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

NOTE 12. Contingencies

Stockholder Derivative Lawsuits

On April 29, 2010, the United States District Court for the Northern District of California issued a Final Judgment and Order of Dismissal with Prejudice which approved the settlement and dismissal of the consolidated action In re PMC-Sierra, Inc. Derivative Litigation, Master File No. C-06-05330-RS. As a result of the settlement, the Meissner v. Bailey, et al., Santa Clara Superior Court Case No. 1-06-CV-071329 will also be dismissed.

The plaintiffs in these actions had 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 in connection with improperly dating certain employee stock option grants and that these purported breaches of fiduciary duties caused harm to the Company. Under the approved settlement, the Company expressly denied any wrong doing but, in the interest of settlement, agreed to adopt certain corporate governance reforms and to maintain, for a period of three years, these and other reforms put in place while the litigation was pending. Under the approved settlement, plaintiffs’ counsel received $1.6 million in attorneys’ fees, half paid by the Company and the other half paid by the Company’s insurance carrier. The Company accrued costs of $800,000 in the second quarter of 2009 to reflect its share of the attorneys’ fees which were paid during the second quarter of 2010.

- 22 -

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

This Quarterly Report contains forward-looking statements that involve risks and uncertainties. We use words such as “anticipates”, “believes”, “plans”, “expects”, “future”, “intends”, “may”, “should”, “estimates”, “predicts”, “potential”, “continue”, “becoming”, “transitioning” and similar expressions to identify such forward-looking statements. Our forward-looking statements include statements as to our business outlook, revenues, margins, expenses, tax provision, capital resources and liquidity sufficiency, sources of liquidity, capital expenditures, interest income and expenses, restructuring activities, cash commitments, purchase commitments, use of cash, our expectation regarding our amortization of purchased intangible assets, our expectations regarding our acquisition of the Channel Storage business from Adaptec, Inc. (“Adaptec”) and as to our expectation regarding distribution from certain investments. Such statements, particularly in the “Business Outlook” section, are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this filing. (See also “Risk Factors” Part II, Item 1A. and our other filings with the Security Exchange Commission (“SEC”)). Our actual results may differ materially, and these forward-looking statements do not reflect the potential impact of any divestitures, mergers, acquisitions, or other business combinations that had not been completed as of the filing date of this Quarterly Report.

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.

OVERVIEW

Our current revenues are generated by a portfolio of more than 450 products, which we have designed and developed or acquired. Our diverse product portfolio services a number of key end market segments: (i) the Enterprise Infrastructure products which include our products and solutions that enable the high-speed interconnection of servers, switches, and storage devices that comprise these systems thus allowing large quantities of data to be stored, managed, and moved securely; as well as microprocessors for laser printers and enterprise equipment and (ii) the Communications Infrastructure products which include wired, wireless, and Passive Optical Networking (“PON”) devices used in access, aggregation, and transport equipment such as optical transport platforms, edge routers, multi-service switches, and wireless base stations and backhaul equipment that gather and process signals in different protocols, and transmit them to the next destinations.

We invest a substantial amount every year in the research and development of new semiconductor devices. We determine the amount to invest in each semiconductor development 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 technologies, products, and businesses that are both growing in demand and are cost competitive in the geographic markets that we serve. Going forward, we plan to continue to focus on finding innovative solutions to our customers’ needs while maintaining our operational efficiencies.

- 23 -

On June 8, 2010, we completed the acquisition of the Channel Storage business from Adaptec pursuant to the terms of the Asset Purchase Agreement dated May 8, 2010 and Amendment to Asset Purchase Agreement dated June 8, 2010 between us and Adaptec. (together the “Purchase Agreement”) for $34.3 million in cash. The Channel Storage business includes Adaptec’s redundant array of independent disks (“RAID”) storage product line, a well-established global value added reseller customer base, board logistics capabilities, and leading solid-state drive (“SSD”) cache performance solutions, and the Adaptec brand. We purchased the Channel Storage business from Adaptec because of its strategic and product fit with our existing enterprise storage products, and we expect the acquisition will accelerate our access to storage channel customers worldwide.

Results of Operations

Second Quarter of 2010 and 2009

Net revenues


*($ millions)*	Second Quarter				Change
*($ millions)*	2010		2009		Change
Net revenues	$	160.7	$	123.2	30	%

Net revenues for the second quarter of 2010 were $160.7 million compared to $123.2 million for the same period in 2009, an increase of $37.5 million or 30%, primarily due to volume. On a year-over-year basis, net revenues generated from our Enterprise Infrastructure products increased by 87%. The Enterprise Infrastructure products include our storage and microprocessor-based system-on-chip (“SOC”) products. On a year-over-year basis, revenues related to the Communications Infrastructure products, which include our wireline, wireless, and PON devices, decreased by 4%.

The growth in net revenues from our Enterprise Infrastructure products was primarily due to improvements in net revenues from our enterprise storage products and our microprocessor products. On a year-over-year basis, we experienced broad-based market recovery and corresponding positive enterprise and corporate information technology spending environment. In addition, net revenues from our enterprise storage products increased due to sales of our 6 Gb Serial Attached SCS (“SAS”) RAID-on-Chip, which began shipping in production volumes in the second quarter of 2009, as well as increased demand for our 4Gb and 8Gb Fibre Channel products and our 3Gb and 6Gb SAS devices. Our net revenues generated from our 6Gb RAID-on-Chip products increased due to the performance and success of one of our customers, namely Hewlett-Packard. We experienced the increase in our 6Gb SAS devices due to top tier customers ramping up their new 6Gb SAS platforms. We also had additional net revenues from Adaptec, Inc.’s Channel Storage business which we acquired during the second quarter of 2010.

The net revenues from our Communications Infrastructure products decreased by 4%. We experienced a decline in net revenues year-over-year primarily from China, partially offset by growth in the North American and European geographies.

- 24 -

Sequentially, we experienced an increase in net revenues from our Enterprise Infrastructure products representing the majority of our sequential growth, due to continued broad-based economic recovery and growth in information technology spending on storage systems and servers, as well as a small amount of net revenues from the Adaptec Channel Storage business acquired during the second quarter of 2010. We also experienced a sequential increase in net revenues from the Communications Infrastructure products with improvement in PON/ FTTX deployments as well as wireless infrastructure requirements.

Gross profit


*($ millions)*	Second Quarter						Change
*($ millions)*	2010			2009			Change
Gross profit	$	110.6		$	83.8		32	%
Percentage of net revenues		69	%		68	%

Total gross profit increased $26.8 million in the second quarter of 2010 compared to the same period in 2009 and gross profit as a percentage of net revenues increased 1% to 69% in the second quarter of 2010 as compared to the same period in 2009.

On a year-over-year basis, we experienced a 1% increase in gross profit as a percentage of net revenues, which is primarily attributable to changes in product mix, applying fixed costs over higher sales volumes, partially offset by acquisition related costs.

Sequentially, gross profit as a percentage of net revenues was 1% higher as compared to the prior quarter due to changes in product mix and applying fixed costs over higher sales volume, partially offset by the addition of integration costs related to acquisition activity.

Other costs and expenses


*($ millions)*	Second Quarter						Change
*($ millions)*	2010			2009			Change
Research and development	$	43.6		$	36.4		20	%
Percentage of net revenues		27	%		30	%

Selling, general and administrative	$	25.2		$	22.2		14	%
Percentage of net revenues		16	%		18	%

Amortization of purchased intangible assets	$	6.8		$	9.8		(31	)%
Restructuring costs and other charges	$	—		$	0.3		(100	)%

- 25 -

Research and Development and Selling, General and Administrative Expenses

Our research and development (“R&D”) expenses increased by $7.2 million or 20% in the second quarter of 2010 as compared to the second quarter of 2009. On a year-over-year basis, the increase relates primarily to a combination of completion of planned hiring and other payroll related costs, higher tape-out related expenses, and the effect of foreign exchange on our foreign operations. Costs also increased due to the additional headcount from the acquisition of Adaptec’s Channel Storage business.

Our selling, general and administrative, or SG&A expenses increased by $3.0 million, or 14% in the second quarter of 2010 as compared to the second quarter of 2009, primarily as a result of $1.5 million in costs for the acquisition of the Channel Storage business from Adaptec in the second quarter of 2010, the effect of foreign exchange on our foreign operations, and other payroll related costs. In addition, operating costs also increased due to the additional headcount from the acquisition of Adaptec’s Channel Storage business.

Amortization of purchased intangible assets

Amortization expense for acquired intangible assets related to developed technology, customer relationships, trademarks and backlog decreased by $3.0 million in the second quarter of 2010 compared to the same period in 2009. The decrease was the result of intangibles related to the acquisition of Passave, Inc. becoming fully amortized early in the second quarter of 2010.

Amortization expense for the second quarter does include $0.3 million amortization related to the intangible assets identified in the preliminary purchase price allocation for our acquisition of the Channel Storage business from Adaptec.

Restructuring costs and other charges

The activity related to excess facility accruals under our restructuring plans during the second quarter of 2010, by year of plan, were as follows:


*(in thousands)*	2007			2006			2005			2001			Total
Balance at March 28, 2010	$	439		$	70		$	2,171		$	928		$	3,608
Reversals and adjustments		—			(1	)		—			(5	)		(6	)
Cash payments		(84	)		(18	)		(379	)		(257	)		(738	)

Balance at June 27, 2010	$	355		$	51		$	1,792		$	666		$	2,864

The remaining balance relates only to excess facilities for the remaining plans, namely the 2007, 2006, 2005, and 2001 plans. Payments for excess facilities under these restructuring plans may extend to October 2011. Further details regarding these restructuring plans are available in our Annual Report on Form 10-K for the year ended December 27, 2009.

- 26 -

Other expense and Provision for income taxes


*($ in millions)*	Second Quarter
*($ in millions)*	2010			2009			Change
Loss on sale of investment securities	$	(0.4	)	$	—		(100	)%

Amortization of debt issue costs	$	(0.1	)	$	(0.1	)	—	%

Foreign exchange gain (loss)	$	0.1		$	(2.9	)	103	%

Interest expense, net	$	—		$	(0.8	)	100	%

Provision for income taxes	$	(4.4	)	$	(3.4	)	(29	)%

Loss on sale of investment securities

In the second quarter of 2010, we realized a loss of $0.4 million related to disposition of investment securities.

Amortization of debt issue costs

In connection with our senior convertible notes during the second quarter of 2010, we recorded amortization related to deferred debt issue costs of $0.1 million, as in the second quarter of 2009.

Foreign exchange gain (loss)

We have significant design presence outside the United States, especially in Canada. The majority of our operating expense exposures to changes in the value of the Canadian Dollar relative to the United States Dollar have been hedged in accordance with our general practice of hedging approximately three quarters in advance.

Our net foreign exchange gain was $0.1 million in the second quarter of 2010, which was primarily due to foreign exchange gain on the revaluation of our foreign denominated assets and liabilities. The foreign exchange rate between the United States Dollar and the currencies of countries where we have significant tax liabilities appreciated 1% during the second quarter of 2010 compared to depreciating 6% during the second quarter of 2009.

Interest expense, net

Net interest expense decreased by $0.8 million in the second quarter of 2010 compared to the second quarter of 2009 due mainly to an increase in both cash balances and investment yields.

- 27 -

Provision for income taxes

We recorded a provision for income taxes of $4.4 million and $3.4 million for the three months ended June 27, 2010 and June 28, 2009, respectively. Our effective tax rate was 13% and 30% the three months ended June 27, 2010 and June 28, 2009, respectively. Our effective tax rate decreased primarily due to income before provision for income taxes increasing over three times compared to the three months ended June 28, 2009. This increase was driven primarily by higher revenues across all jurisdictions. In addition to a portion of the income being generated in lower-tax jurisdictions, we continue to benefit from available loss carryforwards and investment tax credits earned, resulting in a significantly lower effective tax rate for the three months ended June 27, 2010, partially offset by the effect of foreign currency translation of a foreign subsidiary.

The condensed consolidated financial statements for the three months ended June 27, 2010 and June 28, 2009 include the tax effects associated with the sale of certain assets between wholly-owned subsidiaries. GAAP requires the tax expense associated with gains on such inter-company transactions to be recognized over the estimated life of the related assets. Accordingly, the $23.6 million recorded as long-term prepaid expenses as at June 27, 2010 represents the remaining tax expense to be recognized over periods of up to six years, with corresponding amounts recorded as current and deferred income taxes payable and as liability for unrecognized tax benefits.

First Six Months of 2010 and 2009

Net revenues


*($ millions)*	First Six Months				Change
*($ millions)*	2010		2009		Change
Net revenues	$	313.5	$	225.8	39	%

Net revenues for the first six months of 2010 were $313.5 million compared to $225.8 million for the same period in 2009, an increase of $87.7 million or 39%. Net revenues generated from the Enterprise Infrastructure products, which include our storage solutions and microprocessor-based SOC products increased by 92%. Net revenues generated from the Communications Infrastructure products, which include our wireline and wireless infrastructure products increased by 5%.

The growth in net revenues from our Enterprise Infrastructure products was due to improvements in net revenues from both our enterprise storage products and our microprocessor products. We experienced broad-based market recovery and corresponding positive enterprise and corporate information technology spending environment. In addition, net revenues for our enterprise storage products increased due to sales of our 6 Gb/SAS RAID-on-Chip, which began shipping in production volumes in the second quarter of 2009, as well as increased demand for our 4Gb and 8Gb Fibre Channel products, and our 3Gb and 6Gb SAS devices. Our net revenues generated from our 6Gb RAID-on-Chip products increased due to the performance and success of one of our customers, namely Hewlett Packard. We experienced the increase in our 6Gb SAS devices due to top tier customers ramping up their new 6Gb SAS platforms. We also had additional net revenues from Adaptec’s Channel Storage business which we acquired during the second quarter of 2010.

We experienced growth in net revenues from our Communications Infrastructure products, which include wireline and wireless products, as well as PON/FTTX products. On a year-over-year basis, net revenues from China were lower in the second quarter of 2010, partially offset by growth in the North American and European geographies.

- 28 -

Gross profit


*($ millions)*	First Six Months
*($ millions)*	2010			2009			Change
Gross profit	$	214.4		$	149.6		43	%
Percentage of net revenues		68	%		66	%

Total gross profit increased by $64.8 million in the first six months of 2010 compared to the same period in 2009 while gross profit as a percentage of net revenues increased by 2% to 68% from 66% in the first half of 2010 as compared to the first half of 2009. We experienced an increase in gross profit as a percentage primarily due to product mix and applying fixed costs over higher sales volumes.

Other costs and expenses:


*($ millions)*	First Six Months
*($ millions)*	2010			2009			Change
Research and development	$	85.7		$	75.0		14	%
Percentage of net revenues		27	%		33	%

Selling, general and administrative	$	47.6		$	44.1		8	%
Percentage of net revenues		15	%		20	%

Amortization of purchased intangible assets	$	16.7		$	19.7		(15	)%
Restructuring costs and other charges	$	—		$	0.6		(100	)%

Research and development and selling, general and administrative expenses

Our research and development, or R&D expenses increased $10.7 million or 14% in the first six months of 2010 compared to the first six months of 2009. The increase relates primarily to a combination of completion of planned hiring and other payroll related costs, higher tapeout related expenses, and the effect of foreign exchange on our foreign operations. Costs also increased due to additional headcount from the acquisition of Adaptec’s Channel Storage business.

Our selling, general and administrative, or SG&A expenses increased by $3.5 million, or 8% in the first six months of 2010 as compared to the first six months of 2009, primarily as a result of $1.5 million in costs related to the acquisition of the Channel Storage business from Adaptec which occurred in the second quarter of 2010, the effect of foreign exchange on our foreign operations, and other payroll related costs. In addition, operating costs also increased due to the additional headcount from the acquisition of Adaptec’s Channel Storage business.

- 29 -

Amortization of purchased intangible assets

Amortization expense for acquired intangible assets related to developed technology, customer relationships, trademarks and backlog decreased by $3.0 million in the first six months of 2010 compared to the same period in 2009. The decrease was the result of intangibles related to the acquisition of Passave, Inc. becoming fully amortized early in the second quarter of 2010.

Amortization expense for the first six months does include $0.3 million amortization related to the intangible assets identified in the preliminary purchase price allocation for our acquisition of the Channel Storage business from Adaptec.

Restructuring costs and other charges

The activity related to excess facility accruals under our restructuring plans during the first six months of 2010, by year of plan, were as follows:


*(in thousands)*	2007			2006			2005			2001			Total
Balance at December 27, 2009	$	526		$	94		$	2,344		$	1,030		$	3,994
Reversals and adjustments		(14	)		(19	)		(2	)		8			(27	)
New charges		—			—			185			100			285
Cash payments		(157	)		(24	)		(735	)		(472	)		(1,388	)

Balance at June 27, 2010	$	355		$	51		$	1,792		$	666		$	2,864

During the first six months of 2010, we made payments totaling $1.4 million for excess facilities costs incurred in connection with past restructuring plans. In addition, we recorded an additional $0.3 million for excess facilities as original assumptions regarding possible sublease on exited facilities were not realized.

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

Further details regarding each of the restructuring plans noted in the above table are available in our Annual Report on Form 10-K for the year ended December 27, 2009.

- 30 -

Other expense and Provision for income taxes


*($ in millions)*	First Six Months
*($ in millions)*	2010			2009			Change
Loss on sale of investment securities	$	(0.3	)	$	—		(100	)%

Amortization of debt issue costs	$	(0.1	)	$	(0.1	)	—	%

Loss on subleased facilities	$	—		$	(0.5	)	100	%

Foreign exchange (loss) gain	$	(0.9	)	$	1.2		(175	)%

Interest expense, net	$	(0.1	)	$	(1.7	)	94	%

Provision for income taxes	$	(5.7	)	$	(5.1	)	(12	)%

Loss on sale of investment securities

In the first six months of 2010, we realized a loss of $0.3 million related to the disposition of investment securities.

Amortization of debt issue costs

In connection with our senior convertible notes during the first six months of 2010, we recorded amortization related to deferred debt issue costs of $0.1 million, as in the first six months of 2009.

Loss on subleased facilities

We recorded a $0.5 million loss on subleased facilities in the first six months of 2009. No such amounts were incurred in the first six months of 2010.

Foreign exchange (loss) gain

Our net foreign exchange loss was $0.9 million in the first six months of 2010, which was primarily due to a $1.0 million foreign exchange loss on the revaluation of our net foreign tax liabilities. We do not hedge our income tax accruals against fluctuations in foreign currency exchange rates (see Item 3. Quantitative and Qualitative Disclosures About Market Risk). The revaluation of this foreign tax liability was required because of depreciation of other currencies against the United States Dollar. The foreign exchange rate between the United States Dollar and the currencies of countries where we have significant tax liabilities depreciated 1% during the first six months of 2010 compared to depreciating 5% during the first six months of 2009.

- 31 -

Interest expense, net

Net Interest expense decreased by $1.6 million in the first six months of 2010 compared to the first six months of 2009 due mainly to an increase in both cash balances and investment yields.

Provision for income taxes

We recorded a provision for income taxes of $5.7 million and a provision of $5.1 million for the first six months of 2010 and 2009, respectively. Our effective tax rate was 9% and 56% for the six months ended June 27, 2010 and June 28, 2009, respectively. Our effective tax rate decreased primarily due to income before provision for income taxes increasing over seven times compared to the six months ended June 28, 2009. This increase was driven primarily by higher revenues across all jurisdictions. In addition to a portion of the income being generated in lower-tax jurisdictions, the we continue to benefit from available loss carryforwards and investment tax credits earned, resulting in a significantly lower effective tax rate for the six months ended June 27, 2010, partially offset by the effect of foreign currency translation of a foreign subsidiary.

The condensed consolidated financial statements for the first half of 2010 and fiscal 2009 include tax effects associated with the sale of certain assets between wholly-owned subsidiaries. GAAP requires the tax expense associated with gains on such inter-company transactions to be recognized over the estimated life of the related assets. Accordingly, the $23.6 million recorded as long-term prepaid expenses as at June 27, 2010 represents the remaining tax expense to be recognized over periods of up to six years, with corresponding amounts recorded as current and deferred income taxes payable and as liability for unrecognized tax benefits.

- 32 -

Critical Accounting Estimates

General

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect our reported assets, liabilities, revenue and expenses, and related disclosure of our contingent assets and liabilities. Our significant accounting policies are outlined in Note 1. Summary of Significant Accounting Policies to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 27, 2009, which also provides commentary on our most critical accounting estimates. The following estimates are of note:

Valuation of Goodwill and Intangible Assets

The purchase method of accounting for acquisitions requires estimates and assumptions to allocate the purchase price to the fair value of net tangible and intangible assets acquired, including in-process research and development (“IPR&D”). Prior to 2009, the amounts allocated to IPR&D were expensed immediately. The amounts allocated to, and the useful lives estimated for other intangible assets affect future amortization. There are a number of generally accepted valuation methods used to estimate fair value of intangible assets, and we use primarily a discounted cash flow method, which requires significant management judgment to forecast the future operating results and to estimate the discount factors used in the analysis. If assumptions and estimates used to allocate the purchase price prove to be inaccurate based on actual results, future asset impairment charges could be required.

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

Goodwill and intangible assets determined to have indefinite lives are not amortized, but are subject to an annual impairment test in the fourth quarter or more frequently if we believe indicators of impairment exist. To determine any goodwill impairment, we perform a two-step process on an annual basis, or more frequently if necessary, to determine 1) whether the fair value of the relevant reporting unit exceeds carrying value and 2) to measure the amount of an impairment loss, if any. We review our intangible assets for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. Measurement of an impairment loss is based on the fair value of the asset compared to carrying value. In the process of our annual impairment review, we primarily use the income approach methodology of valuation that includes the discounted cash flow method to determine the fair value of our intangible assets. Significant management judgment is required in the forecasts of future operating results and discount rates used in the discounted cash flow method of valuation. It is possible, however, that the plans may change and estimates used may prove to be inaccurate. If our actual results, or the plans and estimates used in future impairment analyses, are lower than the original estimates used to assess the recoverability of these assets, we could incur additional impairment charges.

- 33 -

There were no indications of impairment to goodwill or intangible assets during the first six months of 2010. Changes in the estimated fair values of these assets in the future could result in significant impairment charges or changes to our expected amortization.

Stock-Based Compensation

Since January 1, 2006, we have recognized compensation expense for all share-based payment awards. Under ASC Topic 718, Compensation – Stock Compensation, we measure the fair value of awards of equity instruments and recognize the cost, net of an estimated forfeiture rate, on a straight-line basis over the period during which services are provided in exchange for the award, generally the vesting period.

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

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.

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.

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 or operating costs until the termination, or the amounts and timing of offsetting

- 34 -

sublease revenues may turn out to be incorrect and our actual cost may be materially different from our estimates. If our actual costs exceed our estimates, we would incur additional expenses in future periods.

Income Taxes

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

Our operations are conducted in a number of countries with complex tax legislation and regulations pertaining to our activities. We have recorded income tax liabilities based on our estimates and interpretations of those regulations for the countries in which we operate. However, our estimates are subject to review and assessment by the tax authorities and the courts of those countries. For example, our estimated tax provision rate decreased significantly during 2008 due to one of our foreign subsidiaries settling several ongoing tax matters for tax years 2000-2006. As a result, we recognized tax benefits of $124.1 million that was previously included in the liability for unrecognized tax benefits. The timing of any such review and final assessment of our liabilities by local authorities is substantially out of our control and is dependent on the actions by those authorities in the countries in which we operate. Any re-assessment of our tax liabilities by tax authorities may result in adjustments of the income taxes we pay or refunds that are due to us.

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

Our cash equivalents, short-term investments and long-term investment securities are comprised of corporate bonds and notes, money market funds, United States (“US”) treasury and government agency notes including Federal Deposit Insurance Corporation (“FDIC”) – insured corporate notes, foreign government and agency notes, and United States state and municipal securities with minimum ratings of P-1 or A3 by Moody’s, or A-1 or A- by Standard and Poor’s, or equivalent. At June 27, 2010, these securities had an estimated fair value of $474.1 million.

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

- 35 -

During 2008, we assessed the fair value of certain of our investment securities by giving consideration to Level 2 and Level 3 inputs (see Note 4. Fair Value Measurements) for the shares of the Reserve International Liquidity Fund, Ltd. and the Reserve Primary Fund (the “Primary Fund”) (together the “Reserve Funds”) and their underlying securities. Based on this assessment, we recorded an impairment of the Reserve Funds of $11.8 million during the third quarter of 2008, incorporating the Reserve Funds’ valuation at zero for debt securities of Lehman Brothers held, and a net asset value of $0.97 per share communicated by the Reserve Funds’ Primary Fund. We reassessed the fair value of our investments in money market funds during the first six months of 2010, and we determined there were no further impairments.

In the second quarter of 2009, we reclassified our investment in shares of the Reserve Funds from Level 1 to Level 3 of the fair value hierarchy due to the inherent subjectivity and significant judgment related to the fair value of the shares of the Reserve Funds and their underlying securities. Accordingly, we changed the valuation method from a market approach to an income approach.

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

Business Outlook

We expect our revenues for the third quarter of 2010 to be approximately $169 million to $177 million.

We anticipate our third quarter 2010 gross margin percentage to be 68% plus or minus 50 basis points, including approximately of $0.2 million stock-based compensation expense. As in past quarters this could vary depending on the volume of products sold, since many of our costs are fixed. Margins may also vary depending on the mix of products sold.

We expect our third quarter 2010 research and development, and selling, general and administrative expenses, to be approximately $70.5 million to $72.5 million, including stock-based compensation expense of approximately $4.5 million to $5.5 million.

We expect that we will continue to incur significant amortization of purchased intangible assets related to our acquisitions in the third quarter of 2010.

Liquidity & Capital Resources

Our principal sources of liquidity are cash from operations, short-term investments and long-term investment securities. We employ these sources of liquidity to support ongoing business activities, acquire or invest in critical or complementary technologies, purchase capital

- 36 -

equipment, repurchase our senior convertible notes, and finance working capital. The combination of cash, cash equivalents, short-term investments, and long-term investment securities at June 27, 2010 and December 27, 2009 totaled $501.5 million and $453.4 million, respectively, which are composed of the following:


	June 27, 2010
*(in thousands)*	Amortized Cost		Gross Unrealized Gains*		Gross Unrealized Losses *			Fair Value
Cash and cash equivalents:
Cash	$	27,359	$	—	$	—		$	27,359
Money market funds		106,624		12		—			106,636

Total cash and cash equivalents		133,983		12		—			133,995


Short-term investments:
Corporate bonds and notes		46,942		1,952		(19	)		48,875
US treasury and government agency notes		42,570		878		—			43,448
Money market funds		18,928		—		—			18,928
Foreign government and agency notes		8,444		386		(14	)		8,816
US state and municipal securities		7,985		65		(1	)		8,049

Total short-term investments		124,869		3,281		(34	)		128,116


Long-term investment securities:
Corporate bonds and notes		138,313		992		(211	)		139,094
US treasury and government agency notes		66,555		504		(61	)		66,998
Foreign government and agency notes		30,566		190		(4	)		30,752
US state and municipal securities		2,513		7		(12	)		2,508

Total long-term investment securities		237,947		1,693		(288	)		239,352


Total	$	496,799	$	4,986	$	(322	)	$	501,463

*	Gross unrealized gains include accrued interest on investments of $3.0 million. The remainder of the gross unrealized gains and losses is included in the condensed consolidated balance sheet as other comprehensive income.

- 37 -


	December 27, 2009
*(in thousands)*	Amortized Cost		Gross Unrealized Gains*		Gross Unrealized Losses *			Fair Value
Cash and cash equivalents:
Cash	$	29,757	$	—	$	—			29,757
Money market funds		163,068		16		—			163,084

Total cash and cash equivalents		192,825		16		—			192,841


Short-term investments:
Corporate bonds and notes		14,760		1,426		(4	)		16,182
US treasury and government agency notes		20,376		804		(1	)		21,179
Money market funds		23,242		—		—			23,242
US state and municipal securities		7,300		25		—			7,325

Total short-term investments		65,678		2,255		(5	)		67,928


Long-term investment securities:
Corporate bonds and notes		108,102		669		(306	)		108,465
US treasury and government agency notes		52,594		389		(53	)		52,930
Foreign government and agency notes		30,179		123		(82	)		30,220
US state and municipal securities		1,019		2		—			1,021

Total long-term investment securities		191,894		1,183		(441	)		192,636


Total	$	450,397	$	3,454	$	(446	)	$	453,405

*	Gross unrealized gains include accrued interest on investments of $2.1 million. The remainder of the gross unrealized gains and losses is included in the condensed consolidated balance sheet as other comprehensive income.

As of June 27, 2010 and December 27, 2009, we had $59.9 million and $58.4 million of senior convertible notes outstanding, respectively, recorded on our condensed consolidated balance sheets. The face value of the senior convertible notes as at both June 27, 2010 and December 27, 2009 was $68.3 million. We continue to expect that our cash from operations, short-term investments and long-term investment securities, including distributions from the Reserve Funds, to be our primary sources of liquidity.

As of June 27, 2010 and December 27, 2009, we had $18.9 million and $23.2 million, respectively, of our short-term investments in shares of the Reserve Funds for which we have outstanding redemption orders recorded on our condensed consolidated balance sheets. The Reserve Funds were AAA-rated money market funds that announced redemption delays and suspended trading in September 2008 during the severe disruption in financial markets. The Reserve Funds are in the process of liquidating their portfolio of investments, which included securities of Lehman Brothers Holdings, Inc. that was downgraded and has filed for Chapter 11 bankruptcy protection.

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

- 38 -

Operating Activities

During the first six months of 2010, we generated net positive operating cash flows of $80.6 million, which was $38.3 million higher than the $42.3 million generated during the first six months of 2009. The positive cash flow from operations in both periods was primarily from net income, net of addbacks of non-cash expenses. Net revenues and net income in the first six months of 2010 were substantially higher than the same period last year, and were the key drivers of the increase in operating cash flows year over year. Comparatively, in the first six months of 2010, the increase in accounts receivables based on revenue growth and increased days sales outstanding, and the payment of tax installments in the amount of $12.6 million were the most significant working capital changes off-setting net income to arrive at operating cash flows. The fluctuations in our working capital accounts are attributable to timing of transactions rather than particular events or trends.

Investing Activities

We used net cash of $147.5 million for investing activities in the first six months of 2010, which included $171.9 million for the purchase of investment securities, $34.3 million to purchase the Channel Storage business of Adaptec, and $4.7 million for the purchase of property, equipment and intellectual property, offset by the receipt of $59.1 million proceeds from the disposal of investment securities and $4.3 million in partial distributions received from the Reserve Funds.

Net cash provided by investing activities was $21.6 million in the first six months of 2009, which included $170.8 million in partial distributions from the Reserve Funds, and $1.0 million in proceeds from the disposal of investment securities, offset by $145.8 million for the purchase of investment securities, and $4.4 million for the purchase of property and equipment and intellectual property.

Financing Activities

In the first six months of 2010, we generated $7.9 million from the issuance of common shares under our employee stock option plans. In the first half of 2009, we generated $7.0 million from the issuance of common shares under our employee stock option plans.

- 39 -

As of June 27, 2010, we had cash commitments made up of the following:


*(in thousands)*	Total		2010		2011		2012		2013		2014		After 2014
Contractual obligations

Operating lease obligations:
Minimum rental payments	$	23,270	$	5,023	$	7,221	$	3,096	$	2,581	$	2,273	$	3,076
Estimated operating cost payments		10,053		2,055		2,763		1,336		1,121		1,010		1,768
Long term debt:
Principal repayment		68,340		—		—		—		—		—		68,340
Interest payments		23,836		769		1,538		1,538		1,538		1,538		16,915
Purchase and other obligations		19,744		5,814		7,721		6,201		8		—		—

	$	145,243	$	13,661	$	19,243	$	12,171	$	5,248	$	4,821	$	90,099

In addition to the amounts shown in the table above, we have recorded a $51.0 million liability for unrecognized tax benefits as of June 27, 2010 and we are uncertain as to if or when such amounts may be realized.

Purchase obligations as noted in the above table are comprised of commitments to purchase design tools and software for use in product development. Excluded from these purchase obligations are commitments for inventory or other expenses entered into in the normal course of business. We estimate these other commitments to be approximately $27.1 million at July 23, 2010 for inventory and other expenses that will be received within 90 days and that will require settlement 30 days thereafter.

Also, in addition to the amounts shown in the table above, we expect to use approximately $10.5 million of cash in the remainder of 2010 for property and equipment and purchases of intellectual property.

Based on our current operating prospects, we believe that existing sources of liquidity will satisfy our projected operating, working capital, investing, capital expenditure, and remaining restructuring requirements through 2010.

- 40 -

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

We regularly maintain a portfolio of short- and long-term investments comprised of various types of money market funds, United States treasury and government agency notes including FDIC-insured corporate notes, United States state and municipal securities, foreign government and agency notes, and corporate bonds and notes. Our investments are made in accordance with an investment policy approved by our Board of Directors. Our investment policy sets guidelines for diversification and maturities that intend to preserve principal, while meeting liquidity needs. Maturities of these instruments are 36 months or less. To minimize credit risk, we diversify our investments and select minimum ratings of P-1 or A3 by Moody’s, or A-1 or A- by Standard and Poor’s, or equivalent. We classify these securities as available-for-sale and they are carried at fair market value. Our corporate policies prevent us from holding material amounts of asset-backed commercial paper.

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

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

Based on a sensitivity analysis performed on the financial instruments held at June 27, 2010, the impact to the fair value of our investment portfolio by a shift in the yield curve of plus, or minus, 50, 100, or 150 basis points would result in a decline, or increase, in portfolio value of approximately $2.3 million, $4.6 million, and $6.9 million, respectively.

Senior Convertible Notes:

At June 27, 2010, $68.3 million in face value of our 2.25% senior convertible notes were outstanding. Because we pay fixed interest coupons on our senior convertible notes, market interest rate fluctuations do not impact our debt interest payments. However, the fair value of our senior convertible notes will fluctuate as a result of changes in the price of our common stock, changes in market interest rates, and changes in our credit worthiness.

- 41 -

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 $156.7 million of the principal of these notes in 2008 at a cost of $138.3 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 and adversely affected by changes in these or other factors.

- 42 -

Through our operations in Canada and elsewhere outside of the United States, we incur research and development, sales, customer support and administrative expenses in foreign currencies. We are exposed, in the normal course of business, to foreign currency risks on these expenditures, particularly in Canada. In our effort to manage such risks, we have adopted a foreign currency risk management policy intended to reduce the effects of potential short-term fluctuations on our operating results stemming from our exposure to these risks. As part of this risk management, we enter into foreign exchange forward contracts on behalf of our Canadian subsidiary. These forward contracts offset the impact of exchange rate fluctuations on forecasted cash flows or firm commitments. We limit the forward contracts operational period to 12 months or less and we do not enter into foreign exchange forward contracts for trading purposes. Because we do not engage in foreign exchange risk management techniques beyond these periods, our cost structure is subject to long-term changes in foreign exchange rates. In the event that one of the counterparties to our foreign currency forward contracts failed to complete the terms of their contracts, we would purchase Canadian dollars at the spot rate as of the date the funds were required. If the counterparties to our foreign currency forward contracts that matured in the fiscal quarter ended June 27, 2010 had not fulfilled their contractual obligations and we were required to purchase Canadian dollars at the spot rate, our operating income for the first six months of 2010 would have increased by $0.3 million.

At June 27, 2010, we had 17 contracts outstanding to purchase Canadian dollars, all with maturities of less than 12 months that qualified and were designated as cash flow hedges. The U.S. dollar notional amount of these contracts was $21.2 million and the contracts had a fair value of $0.3 million.

We attempt to limit our exposure to foreign exchange rate fluctuations from our foreign currency net asset or liability positions. In the first six months of 2010, we recorded a $1.0 million foreign exchange loss on the revaluation of our net tax liabilities in a foreign jurisdiction. The revaluation of our foreign income tax liabilities was required because of fluctuations in the value of the United States dollar against other currencies. Our operating income would be materially impacted by a shift in the foreign exchange rates between United States and foreign currencies that are material to our business. For example, a five percent shift in the foreign exchange rates between United States dollar and Canadian dollar would impact our pre-tax income by approximately $2.3 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.

- 43 -

Item 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

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

Changes in internal control over financial reporting

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act) that occurred during the first six months of 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

- 44 -

Part II – OTHER INFORMATION

Item 1. Legal Proceedings

Stockholder Derivative Lawsuits

The plaintiffs in these actions had 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 in connection with improperly dating certain employee stock option grants and that these purported breaches of fiduciary duties caused harm to the Company. Under the approved settlement, the Company expressly denied any wrong doing but, in the interest of settlement, agreed to adopt certain corporate governance reforms and to maintain, for a period of three years, these and other reforms put in place while the litigation was pending. Under the approved settlement, plaintiffs’ counsel received $1.6 million in attorneys’ fees, half paid by the Company and the other half by the Company’s insurance carrier. The Company accrued costs of $800,000 in the second quarter of 2009 to reflect its share of the attorneys’ fees, which were paid during the second quarter of 2010.

- 45 -

Item 1A. RISK FACTORS.

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

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

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

Over the past two years, financial markets in the United States, Europe and Asia experienced extreme disruption, including among other things, extreme volatility in security prices, severely diminished liquidity and credit availability, rating downgrades of certain investments and declining valuations of others. Governments took unprecedented actions intended to address extreme market conditions that include severely restricted credit and declines in real estate values. We have experienced delays in redemptions of our money market funds and we have recognized an $11.8 million loss on investment securities on our shares of the Reserve International Liquidity Fund, Ltd. and the Reserve Primary Fund during 2008. As of June 27, 2010, the original underlying securities held by the Reserve Funds had matured, and with the exception of Lehman Brothers’ securities, the balances were held by the Reserve Funds in the form of overnight agency notes. Changes in market conditions and the method and timing of the liquidation process of the Reserve Funds could result in further adjustments to the fair value and classification of these investments (classified as short-term investments as at June 27, 2010), and these changes could be material.

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

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

- 46 -

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

•

variations in our turns business;

•

short order lead time;

•

customer inventory levels;

•

production schedules; and

•

fluctuations in demand.

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

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

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

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

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

- 47 -

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 components. In addition, our products vary in terms of the 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 expectations of revenues, it is industry practice to allow customers to cancel, change or defer orders with limited advance notice prior to shipment. As such, backlog may be an unreliable indicator of future revenue levels. Because a significant portion of our operating expenses are fixed, even a small revenue shortfall can have a disproportionately negative effect on our operating results.

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

We depend on a limited number of customers for large portions of our revenues. During the rolling twelve month period ended June 27, 2010 and June 28, 2009, we had one end customer that accounted for more than 10% of our net revenues, namely Hewlett-Packard Company. In the first six months of 2010, our top ten customers accounted for more than 70% of our revenues. In the first six months of 2009, our top ten customers accounted for more than 75% of our revenues. We do not have long-term volume purchase commitments from any of our major customers. We sell our products solely on the basis of purchase orders. Those customers could decide to cease purchasing products with little or no notice and without significant penalties. A number of factors could cause our customers to cancel or defer orders, including interruptions to their operations due to a downturn in their industries, delays in manufacturing their own product offerings into which our products are incorporated, and natural disasters. Accordingly, our future operating results will continue to depend on the success of our largest customers and on our ability to sell existing and new products to these customers in significant quantities.

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

- 48 -

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.

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

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

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

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

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

Given the depth of our sales and operations in Asia, we face risks that could negatively impact our results of operations, including economic sanctions imposed by the U.S. government, imposition of tariffs and other potential trade barriers or regulations, uncertain protection for intellectual property rights and generally longer receivable collection periods. In addition, fluctuations in foreign currency exchange rates could adversely affect the revenues, net income, earnings per share and cash flow of our operations in affected markets. Similarly, fluctuations in exchange rates may affect demand for our products in foreign markets or our cost competitiveness and may adversely affect our profitability.

Our results of operations are increasingly dependent on our sales in China, which on a bill-to basis, accounted for 36% of our revenues in the second quarter of 2010 compared to 47% in second quarter of 2009. Government agencies in China have broad discretion and authority over all aspects of the telecommunications and information technology industry in China;

- 49 -

accordingly their decisions may impact our ability to do business in China. Therefore, significant changes in China’s political and economic conditions and governmental policies could have a substantial negative impact on our business. While the growth of Fiber-To-The-Home technology in China has continued to be strong, a slowdown in that growth would have an adverse impact on our operating results.

In addition to selling our products in a number of countries, an increasing portion of our research and development and manufacturing is conducted outside North America, in particular, in 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.

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

We are experiencing significantly greater competition in the markets in which we participate. We are expanding into markets, such as the Enterprise Infrastructure and Communications Infrastructure markets, which have established incumbents with substantial financial and technological resources. We expect more intense competition than that which we have traditionally faced as some of these incumbents derive a majority of their earnings from these markets.

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

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

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

- 50 -

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.

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

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

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.

- 51 -

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

We are subject to income taxes in both the United States and international jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of our business, there are many transactions where the ultimate tax determination is uncertain. Additionally, our calculations of income taxes are based on our interpretations of applicable tax laws in the jurisdictions in which we file. Although we believe our tax estimates are reasonable, there is no assurance that the final determination of our income tax liability will not be materially different than what is reflected in our income tax provisions and accruals. Should additional taxes be assessed as a result of new legislation, an audit or litigation, if our effective tax rate should change as a result of changes in federal, international or state and local tax laws, or if we were to change the locations where we operate, there could be a material effect on our income tax provision and results of operations in the period or periods in which that determination is made, and potentially to future periods as well. During the second quarter of 2008, one of our foreign subsidiaries settled several ongoing tax matters for less than had been accrued as part of its liability for unrecognized tax benefits, resulting in the recognition of tax benefits of $124.1 million. As a result of this settlement, we agreed to pay $18.0 million in cash and utilize $31.6 million in investment tax credits.

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

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

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

We regularly limit our exposure to foreign exchange rate fluctuations from our foreign net asset or liability positions. We recorded a net $1.0 million foreign exchange loss on the revaluation of our income tax liability, net of deferred tax assets, in the first six months of 2010 because of the fluctuations in the U.S. dollar against certain foreign currencies. A five percent shift in the foreign exchange rates between the U.S. and Canadian dollar would cause an approximately $2.3 million impact to our pre-tax net income.

- 52 -

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

Our 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.

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

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

- 53 -

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

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

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

Industry consolidation may lead to increased competition and may harm our operating results.

There has been a trend toward industry consolidation in our markets for several years. We expect this trend to continue as companies attempt to improve the leverage of growing research and development costs, strengthen or hold their market positions in an evolving industry and as companies are acquired or are unable to continue operations. Companies that are strategic alliance partners in some areas of our business may acquire or form alliances with our competitors, thereby reducing their business with us. We believe that industry consolidation may result in stronger competitors that are better able to compete as sole-source vendors for customers. This could lead to more variability in our operating results and could have a material adverse effect on our business, operating results and financial condition.

- 54 -

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 the first six months of 2010, two outside wafer foundries supplied more than 95% of our semiconductor wafer requirements. Our wafer foundry suppliers also make products for other companies and some make products for themselves, thus we may not have access to adequate capacity or certain process technologies. We have less control over delivery schedules, manufacturing yields and costs than competitors with their own fabrication facilities. If the wafer foundries we use are unable or unwilling to manufacture our products in required volumes, or at specified times, we may have to identify and qualify acceptable additional or alternative foundries. This qualification process could take six months or longer. We may not find sufficient capacity quickly enough, if ever, at an acceptable cost, to satisfy our production requirements.

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

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

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

- 55 -

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

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

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

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

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

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

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.

- 56 -

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 business.

To compete effectively, we must protect our intellectual property. We rely on a combination of patents, trademarks, copyrights, trade secret laws, confidentiality procedures and licensing arrangements to protect our intellectual property rights. We hold numerous patents and have a number of pending patent applications. However, our portfolio of patents includes some that expired in 2009 and are expiring in subsequent years, which could have a negative effect on our ability to prevent competitors from duplicating certain of our products.

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

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

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

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

- 57 -

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 $59.9 million carrying value ($68.3 million of face value) of our 2.25% senior convertible notes outstanding. Our debt could materially and adversely affect our ability to obtain financing for working capital, acquisitions or other purposes, and could make us vulnerable to industry downturns and competitive pressures. Our ability to meet our debt service obligations will be dependent upon our future performance, which will be subject to financial, business and other factors affecting our operations, many of which are beyond our control. On October 15, 2025, we are obliged to repay the full remaining principal amount of the notes that have not been converted into our common stock, but we are also subject to certain triggering events that may cause the notes to be repaid earlier.

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

We may decide to raise additional funds through public or private debt or equity financing. If we raise funds by issuing equity securities, the percentage ownership of current stockholders will be reduced and the new equity securities may have priority rights over your investment. We may not be able to 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.

- 58 -

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

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

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

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

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

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

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

- 59 -

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

[Reserved]

Item 5.

Other Information

None.

Item 6.

Exhibits

Exhibits –


•	11.1	Calculation of net income per share – included in Note 11. Net Income Per Share of the financial statements included in Item I of Part I of this Quarterly Report.

•	31.1	Certification of Chief Executive Officer pursuant to Section 302 (a) of the Sarbanes-Oxley Act of 2002

•	31.2	Certification of Chief Financial Officer pursuant to Section 302 (a) of the Sarbanes-Oxley Act of 2002

•	32.1	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer)

•	32.2	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer)

•	101.INS	XBRL Instance Document (filed herewith).

•	101.SCH	XBRL Taxonomy Extension Schema (filed herewith).

•	101.CAL	XBRL Taxonomy Extension Calculation Linkbase (filed herewith).

•	101.DEF	XBRL Taxonomy Extension Definition Linkbase (filed herewith).

•	101.LAB	XBRL Taxonomy Extension Label Linkbase (filed herewith).

•	101.PRE	XBRL Taxonomy Extension Presentation Linkbase (filed herewith).

- 60 -

SIGNATURES

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


		PMC-SIERRA, INC.
		(Registrant)

Date: August 5, 2010		/s/ Michael W. Zellner
		Michael W. Zellner
		Vice President,
		Chief Financial Officer and
		Principal Accounting Officer

- 61 -

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company