UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10 - Q

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

for the quarterly period ended September 27, 2009

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

For the Transition Period From              to             

Commission File Number 0-19084

PMC-Sierra, Inc.

(Exact name of registrant as specified in its charter)

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

3975 Freedom Circle

Santa Clara, CA 95054

(408) 239-8000

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Common shares outstanding at November 2, 2009 – 227,493,259

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	31
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	50
Item 4.	Controls and Procedures	53
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	54
Item 1A.	Risk Factors	56
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	72
Item 3.	Defaults Upon Senior Securities	72
Item 4.	Submission Of Matters To A Vote By Stockholders	72
Item 5.	Other Information	72
Item 6.	Exhibits	72
Signatures		73

Part I - FINANCIAL INFORMATION

Item 1 - Financial Statements (Unaudited)

PMC-Sierra, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except for per share amounts)

	Three Months Ended						Nine Months Ended
	September 27, 2009			September 28, 2008 As adjusted - Note 1			September 27, 2009			September 28, 2008 As adjusted - Note 1
Net revenues	$	130,876		$	139,356		$	356,642		$	404,235
Cost of revenues		44,432			47,373			120,648			139,752
Gross profit		86,444			91,983			235,994			264,483
Other costs and expenses:
Research and development		35,823			39,688			110,834			116,993
Selling, general and administrative		19,743			23,565			63,854			71,954
Amortization of purchased intangible assets		9,836			9,836			29,508			29,508
Restructuring costs and other charges		175			(259	)		813			785
Income from operations		20,867			19,153			30,985			45,243
Other income (expense):
Foreign exchange gain (loss)		(1,094	)		873			109			2,965
Gain on repurchase of senior convertible notes, net and amortization of debt issue costs		(50	)		(94	)		(150	)		4,599
Loss on subleased facilities		—			—			(538	)		—
Interest income (expense), net		(487	)		181			(2,139	)		622
Recovery on investments		—			400			—			400
Loss on investment securities		—			(11,790	)		—			(11,790	)
Income before provision for income taxes		19,236			8,723			28,267			42,039
Recovery of (provision for) income taxes		8,583			(4,266	)		3,484			77,445
Net income	$	27,819		$	4,457		$	31,751		$	119,484
Net income per common share - basic	$	0.12		$	0.02		$	0.14		$	0.54
Net income per common share - diluted	$	0.12		$	0.02		$	0.14		$	0.53
Shares used in per share calculation - basic		227,123			222,335			225,276			221,091
Shares used in per share calculation - diluted		231,863			225,803			228,172			223,573

See notes to the condensed consolidated financial statements.

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PMC-Sierra, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except par value)

	September 27, 2009			December 28, 2008 As adjusted - Note 1
ASSETS:
Current assets:
Cash and cash equivalents	$	181,044		$	97,839
Short-term investments		94,019			209,685
Accounts receivable, net of allowance for doubtful accounts of $1,226 (2008 - $1,148)		48,261			40,191
Inventories, net		26,259			34,003
Prepaid expenses and other current assets		14,501			9,683
Deferred tax assets		3,994			3,949
Total current assets		368,078			395,350
Goodwill		396,144			396,144
Intangible assets, net		121,626			153,956
Investment securities		144,519			—
Prepaid expenses		22,751			—
Property and equipment, net		14,253			15,858
Investments and other assets		8,753			3,512
Deposits for wafer fabrication capacity		5,145			5,145
	$	1,081,269		$	969,965
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Current liabilities:
Accounts payable	$	26,175		$	17,066
Accrued liabilities		53,139			51,390
Liability for unrecognized tax benefit		28,565			23,398
Income taxes payable		3,807			—
Deferred income taxes		1,767			2,042
Accrued restructuring costs		4,565			5,938
Deferred income		11,958			11,200
Total current liabilities		129,976			111,034
2.25% senior convertible notes due October 15, 2025		57,584			55,357
Long-term obligations		4,578			503
Deferred taxes		21,598			17,806
Liability for unrecognized tax benefit		8,664			3,352
PMC special shares convertible into 1,648 (2008 - 2,045) shares of common stock		2,115			2,655
Contingencies (Note 11)
Stockholders’ equity:
Common stock, par value $.001: 900,000 shares authorized; 226,985 shares issued and outstanding (2008 - 221,335)		247			241
Additional paid in capital		1,512,218			1,471,476
Accumulated other comprehensive income (loss)		1,779			(3,218	)
Accumulated deficit		(657,490	)		(689,241	)
Total stockholders’ equity		856,754			779,258
	$	1,081,269		$	969,965

See notes to the condensed consolidated financial statements.

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PMC-Sierra, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

	Nine Months Ended
	September 27, 2009			September 28, 2008 As adjusted - Note 1
Cash flows from operating activities:
Net income	$	31,751		$	119,484
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		42,437			44,521
Stock-based compensation		16,212			19,719
Non-cash accretion of investment securities		(419	)		—
Foreign exchange gain on tax liability, net		292			(3,311	)
Gain on repurchase of senior convertible notes, net		—			(4,873	)
Loss on subleased facilities		538			—
Changes in operating assets and liabilities:
Accounts receivable		(8,070	)		(6,856	)
Inventories		7,995			(3,938	)
Prepaid expenses and other current assets		2,403			4,972
Accounts payable and accrued liabilities		6,598			(22,101	)
Deferred income taxes and income taxes payable		(6,893	)		(79,718	)
Accrued restructuring costs		(1,373	)		(3,971	)
Deferred income		758			288
Net cash provided by operating activities		92,229			64,216
Cash flows from investing activities:
Purchases of property and equipment		(4,570	)		(5,406	)
Purchase of intangible assets		(1,398	)		(5,645	)
Distributions of short-term investments		170,802			—
Disposals of investment securities		11,142			—
Purchases of investment securities		(209,311	)		(119,067	)
Net cash used in investing activities		(33,335	)		(130,118	)
Cash flows from financing activities:
Repurchase of senior convertible notes		—			(95,491	)
Proceeds from issuance of common stock		24,311			16,510
Net cash provided by (used in) financing activities		24,311			(78,981	)
Effect of exchange rate changes on cash and cash equivalents		—			(658	)
Net increase (decrease) in cash and cash equivalents		83,205			(145,541	)
Cash and cash equivalents, beginning of the period		97,839			364,922
Cash and cash equivalents, end of the period	$	181,044		$	219,381

See notes to the condensed consolidated financial statements.

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PMC-Sierra, Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1. Summary of Significant Accounting Policies

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

Basis of presentation. The accompanying Condensed Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) and United States Generally Accepted Accounting Principles (“GAAP”). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules or regulations. These interim Condensed Consolidated Financial Statements are unaudited, but reflect all adjustments that are, in the opinion of management, necessary to provide a fair statement of results for the interim periods presented. These Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and accompanying notes in the Company’s Annual Report on Form 10-K for the year ended December 28, 2008. The results of operations for the interim periods are not necessarily indicative of results to be expected in future periods. Fiscal 2009 will consist of 52 weeks and will end on Sunday, December 27, 2009. Fiscal 2008 consisted of 52 weeks and ended on Sunday, December 28, 2008. The first three quarters of 2009 and 2008 consisted of 39 weeks each.

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

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Inventories. Inventories are stated at the lower of cost (first-in, first-out) or market (estimated net realizable value). Inventories (net of reserves of $9.4 million and $9.3 million at September 27, 2009 and December 28, 2008, respectively) were as follows:

(in thousands)	September 27,    2009		December 28,   2008
Work-in-progress	$	14,628	$	11,391
Finished goods		11,631		22,612
	$	26,259	$	34,003

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

Product warranties. The Company provides a limited warranty on most of its standard products and accrues for the estimated cost at the time of shipment. The Company estimates its warranty costs based on historical failure rates and related repair or replacement costs. The change in the Company’s accrued warranty obligations from December 28, 2008 to September 27, 2009 and for the same period in the prior year were as follows:

	Nine Months Ended
(in thousands)	September 27,   2009			September 28, 2008
Balance, beginning of the period	$	6,031		$	6,239
Accrual for new warranties issued		1,074			862
Reduction for payments and product replacements		(642	)		(1,369	)
Adjustments related to changes in estimate of warranty accrual		(423	)		358
Balance, end of the period	$	6,040		$	6,090

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

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Other Indemnifications. From time to time, on a limited basis, the Company indemnifies its customers, as well as its suppliers, contractors, lessors, and others with whom it enters into contracts, against combinations of loss, expense, or liability arising from various triggering events related to the sale and use of its products, the use of their goods and services, the use of facilities, the state of assets that the Company sells and other matters covered by such contracts, normally up to a specified maximum amount. The Company evaluates estimated losses for such indemnifications. 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 nine months ended September 27, 2009, the Company recognized $5.1 million and $16.2 million in stock-based compensation expense, respectively. Where a tax deduction for stock-based compensation was available to the Company, a valuation allowance for the related deferred tax assets was recorded.

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

Recent Accounting Pronouncements

FASB Establishes Accounting Standards Codification

In July 2009, the Financial Accounting Standards Board (“FASB”) 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 superceded. 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.

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

Impact of ASC Topic 470

Effective December 29, 2008, the Company retrospectively adopted the ASC Topic 470, the Debt Topic for the accounting of convertible debt instruments that may be settled in cash upon conversion (including partial settlements), as required, which changed the treatment for the Company’s convertible securities, which may be settled fully or partially in cash. Under ASC Topic 470, cash settled convertible securities are separated into their debt and equity components. The value assigned to the debt component is the estimated fair value, as of the issuance date, of a similar debt instrument without the conversion feature, and the difference between the proceeds for the convertible debt and the amount reflected as debt, is recorded as equity. As a result, the debt component is recorded at a discount from its face value, reflecting its below market coupon interest rate. The debt is subsequently accreted to its face value over its expected term, with the accretion being reflected as additional interest expense in the consolidated statement of operations.

The Company issued senior convertible notes (the “Notes”) with a face value of $225.0 million and bearing interest at a rate of 2.25% per annum in October 2005. At the date of issuance, the Company’s borrowing rate for similar debt instruments without any equity conversion features was estimated to be 8.0% per annum. This borrowing rate of 8.0% was estimated using assumptions that market participants would use in pricing the liability component, including market interest rates, credit standing, yield curves and volatilities; all of which are defined as Level 2 observable inputs. Under ASC Topic 470, at the issuance date, the debt and equity components would have been $155.6 million and $69.4 million, respectively, before considering related issuance costs. The debt, which is recorded at a discount from its face value at issuance, is accreted to its face value over seven years, which is the earliest date at which the holders of these Notes may redeem them, with accretion being reflected as additional interest expense in the consolidated statement of operations.

The Company recorded issuance costs of $6.8 million of which $4.7 million were deferred and are being amortized over seven years, which is the earliest date at which the holders of these Notes may redeem them, which approximates the effective interest method. The remaining $2.1 million was recorded as equity.

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The following tables are reconciliations between amounts reported in previous filings as of the year ended December 28, 2008 and for the third quarter of 2008 to the amounts reported in the current filing for these same periods to reflect retroactive adjustments:

							Year Ended December 28, 2008
(in thousands)							As adjusted			As reported**
Assets:
Deferred debt issue costs*							$	774		$	1,127
Total assets								969,965			970,318
Liabilities and Stockholders’ Equity:
2.25% senior convertible notes due October 15, 2025								55,357			68,340
Additional paid in capital								1,471,476			1,436,306
Accumulated deficit								(689,241	)		(666,701	)
Total liabilities and stockholders’ equity								969,965			970,318
*       Deferred debt issue costs are included in the Condensed Consolidated Balance Sheets as Investments and other assets. **     Balances are as reported in the Company’s Annual Report on Form 10-K for the year ended December 28, 2008.
	Three Months Ended September 28, 2008						Nine Months Ended September 28, 2008
(in thousands, except for per share amounts)	As adjusted			As reported***			As adjusted			As reported***
Condensed Consolidated Statement of Operations:
Interest income (expense)	$	181		$	1,481		$	622		$	5,102
Gain on repurchase of senior convertible notes, net of amortization of debt issue costs		(94	)		(137	)		4,599			871
Net income	$	4,457		$	5,714		$	119,484		$	120,236
Net income per common share - basic	$	0.02		$	0.03		$	0.54		$	0.54
Net income per common share - diluted	$	0.02		$	0.03		$	0.53		$	0.54
Shares used in per share calculation - basic		222,335			222,335			221,091			221,091
Shares used in per share calculation - diluted		225,803			225,803			223,573			223,573
***     Balances are as reported in the Company’s Form 10-Q for the quarter ended September 28, 2008.
							Nine Months Ended September 28, 2008
(in thousands)							As adjusted			As reported***
Condensed Consolidated Statements of Cash Flows:
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization							$	44,521		$	40,247
Gain on repurchase of senior convertible notes, net								(4,873	)		(1,351	)

*** Balances are as reported in the Company’s Form 10-Q for the quarter ended September 28, 2008.

See Note 7. Long-Term Obligations for required disclosures.

Fair Value Accounting

In September 2006, the FASB issued ASC Topic 820, the Fair Value Measurements and Disclosures Topic, which defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value

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measurements. ASC Topic 820 is effective for financial statements issued for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued ASC Topic 820-10-15-1A, which delayed the effective date of ASC Topic 820 for certain non-financial assets and liabilities to fiscal years beginning after November 15, 2008. In October 2008, the FASB issued within ASC Topic 820, guidance for determining the fair value of a financial asset when the market for that asset is not active, whereby entities must account for revisions to fair value estimates resulting from the change in accounting estimate under ASC Topic 250, the Accounting Changes and Error Corrections Topic, but do not need to provide the disclosures required by that topic. The adoption of ASC Topic 820 did not have a material impact on the Company’s condensed consolidated financial statements.

In April 2009, the FASB issued three updates that provide additional application guidance and enhanced disclosures regarding fair value measurements and impairments of securities:

• ASC Topic 820-10-65, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, provides additional guidelines for estimating fair values when there is no active market or where the price inputs being used represent distressed sales. It reaffirms the need to exercise judgment to ascertain if a formerly active market has become inactive and in determining fair values when markets have become inactive.

• ASC Topic 320-10-65 includes two updates. The first, Recognition and Presentation of Other-Than-Temporary Impairments, provides additional guidance related to the disclosure of impairment losses on securities and the accounting for impairment losses on debt securities. It does not amend existing guidance related to other-than-temporary impairments of equity securities. The second update, Interim Disclosures about Fair Value of Financial Instruments, increases the frequency of fair value disclosures. ASC Topic 320-10-65 is effective for fiscal years and interim periods ended after June 15, 2009.

These updates were effective for the Company beginning the second quarter of fiscal 2009. There was no financial reporting impact due to the adoption of this standard.

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In August 2009, FASB issued ASU No. 2009-05, which amends Fair Value Measurements and Disclosures – Overall (ASC Topic 820-10) to provide guidance on the fair value measurement of liabilities. This update requires clarification for circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the following techniques: 1) a valuation technique that uses either the quoted price of the identical liability when traded as an asset or quoted prices for similar liabilities or similar liabilities when traded as an asset; or 2) another valuation technique that is consistent with the principles in ASC Topic 820 such as the income or market approach to valuation. The amendments in this update also clarify that when estimating the fair value of a liability, a reporting entity is not required to include a separate import or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. This update further clarifies that if the fair value of a liability is determined by reference to a quoted price in an active market for an identical liability, the price would be considered a Level 1 measurement in the fair value hierarchy. Similarly, if the identical liability has a quoted price when traded as an asset in an active market, it is also a Level 1 fair value measurement if no adjustments to the quoted price of the asset are required. This update is effective for the Company’s fourth fiscal quarter of 2009.

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 will apply this new standard on any future business combinations.

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 will apply this new standard on any future business combinations.

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.

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Revenue Recognition

In October 2009, the FASB issued the following ASUs:

• ASU No. 2009-13, Revenue Recognition (ASC Topic 605) – Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging Issues Task Force;

• ASU No. 2009-14, Software (ASC Topic 985) – Certain Revenue Arrangements That Income Software Elements, a consensus of the FASB Emerging Issues Task Force.

ASU No. 2009-13: This guidance modifies the fair value requirements of ASC subtopic 605-25, Revenue Recognition-Multiple Element Arrangements by allowing the use of the “best estimate of selling price” in addition to Vendor Specific Objective Evidence (“VSOE”) and Vendor Objective Evidence (“VOE”) (now referred to as third party evidence or “TPE”) for determining the selling price of a deliverable. A vendor is now required to use its best estimate of the selling price when VSOE or TPE of the selling price cannot be determined. In addition, the residual method of allocating arrangement consideration is no longer permitted.

ASU No. 2009-14: This guidance modifies the scope of ASC subtopic 985-605, Software-Revenue Recognition to exclude from its requirements (a) non-software components of tangible products and (b) software components of tangible products that are sold, licensed, or leased with tangible products when software components and nonsoftware components of the tangible product function together to deliver the tangible product’s essential functionality.

These updates require expanded qualitative and quantitative disclosure and are effective for fiscal years beginning on or after June 15, 2010. However, companies may elect to adopt as early as interim periods ended September 30, 2009. These updates may be applied either prospectively from the beginning of the fiscal year for new or materially modified arrangements or retrospectively. The Company is currently evaluating the impact of adopting these updates on the consolidated financial statements.

Other Accounting Changes

In December 2007, the FASB issued ASC Topic 808, the Collaborative Arrangements Topic. Collaborative arrangements are agreements between parties that participate in some type of joint operating activity. The guidance provided indicators to help identify collaborative arrangements and provides for the reporting of such arrangements on a gross or net basis pursuant to guidance in existing authoritative literature. The guidance also expanded disclosure requirements about collaborative arrangements. Conclusions within ASC Topic 808 are effective for fiscal years beginning December 15, 2008 and are to be applied retrospectively. There was no financial reporting impact due to this standard.

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In March 2008, the FASB issued additional guidance within ASC Topic 815-50, the Derivatives and Hedging Topic, intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures about the effects of an entity’s derivative instruments and hedging activities on its financial position, financial performance, and cash flows. The new guidance is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. There was no financial reporting impact due to the adoption of this standard.

In April 2008, the FASB issued ASC Topic 350-30-65-1, the Intangible – Goodwill and Other Topic, which amends the guidance about estimating the useful lives of recognized intangible assets and requires additional disclosures related to renewing or extending the terms of recognized intangible assets. This new guidance is effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2008. There was no financial reporting impact due to the adoption of this standard.

In November 2008, the FASB issued new guidance within ASC Topic 350, the Intangible – Goodwill and Other Topic for the accounting for defensive intangible assets, which requires entities to account for a defensive intangible asset as a separate unit of accounting at the time of acquisition, not combined with the acquirer’s existing recognized or unrecognized intangible assets. This consensus is effective for fiscal years, and interim reporting periods within those fiscal years, beginning on or after December 15, 2008, and will impact the accounting for intangible assets acquired after the effective date. There was no financial reporting impact due to the adoption of this standard.

In May 2009, the FASB issued FASB ASC Topic 855, the Subsequent Events Topic. This standard is intended to establish general standards of accounting for and the disclosure 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. There was no financial reporting impact due to the adoption of this standard. The Company has evaluated subsequent events through November 5, 2009, the date of issuance of the Condensed Consolidated Financial Position and Results of Operations.

In June 2009, the FASB issued ASC Topic 810, Accounting for Transfers of Financial Assets, an amendment to SFAS No. 140. The new standard eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures in order to enhance information reported to users of financial statements by providing greater transparency about transfers of financial assets, including securitization transactions, and an entity’s continuing involvement in and exposure to the risks related to transferred financial assets. ASC Topic 810 is effective for fiscal years beginning after November 15, 2009. The Company will adopt ASC Topic 810 in fiscal 2010 and is evaluating the impact it will have on the Company’s consolidated financial statements.

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NOTE 2. Derivative Instruments and Hedging Activities

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

As at September 27, 2009, the Company had 12 contracts outstanding to purchase Canadian dollars, all with maturities of less than 12 months, which qualified and were designated as cash flow hedges. As of September 27, 2009, the United States dollar notional amount of these contracts was $16.4 million and the contracts had a fair value gain of $1.5 million, which was recorded in other comprehensive income net of taxes of $0.4 million on the consolidated balance sheet.

NOTE 3. Fair Value Measurements

On January 1, 2008, the Company adopted ASC Topic 820, the Fair Value Measurements Topic, which defines fair value, establishes guidelines for measuring fair value and expands disclosures on fair value measurements. In February 2008, the FASB issued the related ASC Topic 820-10-15-1A that deferred the effective date of ASC Topic 820 for one year for non-financial assets and liabilities recorded at fair value on a non-recurring basis. ASC Topic 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC Topic 820 also specifies a hierarchy of valuation techniques that requires an entity to maximize the use of observable inputs that may be used to measure fair value:

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

Level 2 – Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. The Company’s Level 2 liabilities include forward currency contracts whose value is determined using a pricing model with inputs that are observable in the market or corroborated with observable market data. Level 2 observable inputs were used in estimating interest rates used to determine the fair value of the debt component the Company’s senior convertible notes (see Note 1. Summary of Significant Accounting Policies and Note 7. Long-Term Obligations).

Level 3 – Pricing inputs include significant inputs that are generally not observable in the marketplace. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value. At each balance sheet date, the Company performs an analysis of all instruments subject to ASC Topic 820 and would include in Level 3 all of those whose fair value is based on significant unobservable inputs. The Company’s Level 3 assets include investments in money market funds classified in short-term investments (see Note 6. Investment Securities).

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Financial assets and liabilities measured on a recurring basis as of September 27, 2009 are summarized below:

(in thousands)	Fair value, September 27, 2009
	Level 1		Level 2		Level 3
Assets:
Money market funds (1)	$	155,658	$	—	$	38,883
US Treasury and Government Agency Notes (1)		85,676		—		—
Corporate bonds and notes (1)		80,104		—		—
US State and Municipal securities		19,678		—		—
Foreign government and agency notes (1)		16,521		—		—
Forward currency contracts (2)		—		1,490		—
Total assets	$	357,637	$	1,490	$	38,883
Liabilities:
2.25% senior convertible notes due October 15, 2025 (3)	$	—	$	57,584	$	—
Total liabilities	$	—	$	57,584	$	—

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

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

(3) See Note 7. Long-Term Obligations.

The following table is a reconciliation of financial assets and liabilities measured at fair value on a recurring basis classified as Level 3 for the third quarter of 2009:

(in thousands)	Level 3
Balance at December 28, 2008	$	209,685
Partial distributions from the Reserve Funds		(139,143	)
Balance at March 29, 2009		70,542
Partial distributions from the Reserve Funds		(31,659	)
Balance at June 28, 2009 and September 27, 2009	$	38,883

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

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NOTE 4. Stock-Based Compensation

The Company has two stock-based compensation programs, which are described below. None of the Company’s stock-based awards under these plans are classified as liabilities. The Company did not capitalize any stock-based compensation cost, and recorded compensation expense for the three and nine months ended September 27, 2009 and September 28, 2008, as follows:

(in thousands)	Three Months Ended				Nine Months Ended
	September 27, 2009		September 28, 2008		September 27, 2009		September 28, 2008
Cost of revenues	$	149	$	233	$	580	$	958
Research and development		2,173		2,424		6,566		8,807
Selling, general and administrative		2,798		2,700		9,066		9,954
Total	$	5,120	$	5,357	$	16,212	$	19,719

The Company received cash of $17.3 million and $24.3 million related to the issuance of stock-based awards during the three and nine months ended September 27, 2009, respectively. The Company received cash of $8.5 million and $16.5 million during the three and nine months ended September 28, 2008, 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.

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Activity under the option plans during the nine months ended September 27, 2009 was as follows:

	Number of options		Weighted average exercise price per share		Weighted average remaining contractual term (years)	Aggregate intrinsic value at September 27, 2009
Outstanding, December 28, 2008	28,195,000		$	9.35
Granted	4,025,298		$	5.37
Exercised	(3,098,243	)	$	5.51
Forfeited	(3,071,760	)	$	12.59
Outstanding, September 27, 2009	26,050,295		$	8.81	6.64	$	61,207,224
Exercisable, September 27, 2009	17,033,455		$	10.23	5.59	$	29,450,912

No adjustment was required with respect to fully vested options that expired during the three and nine months ended September 27, 2009. During the three and nine months ended September 27, 2009, adjustments of $2.5 million and $7.8 million, respectively, were recorded for pre-vesting forfeitures associated primarily with restructuring related activities carried out in 2007.

The fair value of the Company’s stock option awards granted to employees during the nine months ended September 27, 2009 was estimated using a lattice-binomial valuation model. The binomial model considers the contractual term of the option, the probability that the option will be exercised prior to the end of its contractual life, and the probability of termination or retirement of the option holder in computing the value of the option. The model requires the input of highly subjective assumptions including the expected stock price volatility and expected life.

The Company’s estimates of expected volatilities are based on a weighted historical and market-based implied volatility. The Company uses historical data to estimate option exercises and employee terminations within the valuation model; separate groups of employees that have 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				Nine Months Ended
	September 27, 2009		September 28, 2008		September 27, 2009		September 28, 2008
Expected life (years)	3.8		3.7		4.5		4.5
Expected volatility	62	%	57	%	66	%	57	%
Risk-free interest rate	2.1	%	3.1	%	1.8	%	2.6	%

The weighted average grant-date fair value per stock option granted during the three and nine months ended September 27, 2009, was $3.84 and $2.74, respectively. The total intrinsic value of stock options exercised during the three and nine months ended September 27, 2009 was $7.8 million and $10.0 million, respectively.

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As of September 27, 2009, there was $20.8 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 2.7 years.

Restricted Stock Units

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

A summary of RSU activity during the nine months ended September 27, 2009 is as follows:

	Restricted Stock Units		Weighted Average Remaining Contractual Term	Aggregate intrinsic value at September 27, 2009
Unvested shares at December 28, 2008	1,862,762		—	—
Awarded	1,100,224		—	—
Released	(386,697	)	—	—
Forfeited	(174,906	)	—	—
End of Period	2,401,383		1.82	23,005,249
Restricted Stock Units vested and expected to vest September 27, 2009	1,931,537		1.77	18,504,127

As of September 27, 2009, total unrecognized compensation costs, adjusted for estimated forfeitures, related to unvested RSUs was $11.0 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.

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During the third quarter of 2009, 899,835 shares were issued under the ESPP at a weighted average price of $4.01 per share. During the nine months ended September 27, 2009 1,816,218 shares were issued under the ESPP at a weighted average price of $3.99. As of September 27, 2009, 8,467,938 shares were available for future issuance under the ESPP compared to 8,284,156 as at December 28, 2008.

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

	Three Months Ended				Nine Months Ended
	September 27, 2009		September 28, 2008		September 27, 2009		September 28, 2008
Expected life (years)	1.3		1.3		1.3		1.3
Expected volatility	55	%	47	%	59	%	49	%
Risk-free interest rate	0.6	%	2.2	%	0.7	%	2.1	%

The weighted average grant-date fair value of per ESPP award granted during the three and nine months ended September 27, 2009 was $3.40 and $2.08, respectively.

As of September 27, 2009, total unrecognized compensation costs, adjusted for estimated forfeitures, related to non-vested ESPP awards was $1.2 million, which is expected to be recognized over the next 0.9 years.

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NOTE 5. Restructuring Costs and Other Charges

The activity related to excess facility, contract termination and severance accruals under the Company’s restructuring plans during the first nine months of 2009, by year of plan, were as follows:

Excess facility costs

(in thousands)	2007			2006			2005			2001			Total
Balance at December 28, 2008	$	830		$	178		$	3,048		$	1,875		$	5,931
Reversals and adjustments		28			11			—			114			153
New charges		25			82			625			—			732
Cash payments		(284	)		(181	)		(1,062	)		(724	)		(2,251	)
Balance at September 27, 2009	$	599		$	90		$	2,611		$	1,265		$	4,565
Severance costs
(in thousands)	2007
Balance at December 28, 2008	$	7
Reversals and adjustments		1
Cash payments		(8	)
Balance at September 27, 2009	$	—

2007

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

In connection with this plan, the Company has recorded $10.5 million in termination and relocation costs, $3.0 million for excess facilities and $2.5 million in asset impairment charges to date. The Company has made payments of $12.4 million in connection with this plan. Payments related to the excess facilities may extend until 2011.

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The Company initially expected to save approximately $16 million in payroll-related costs on an annualized basis. The Company achieved its prorated portion of these expected cost savings in 2007. The Company continued to contain costs in accordance with its 2007 restructuring plan; however it also initiated new R&D programs in 2008 that resulted in increases in payroll-related costs of approximately $4.9 million that partially offset the cost savings anticipated by the 2007 restructuring plan.

2006

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

In connection with these two actions in 2006, the Company has recorded $2.6 million in excess facilities and contract termination costs, $3.0 million in severance costs and $0.2 million in asset impairment charges, to date. To date, the Company has made payments of $4.5 million related to the 2006 plan. All severance costs under these two actions have been paid and payments related to the excess facilities will extend to 2010.

2005

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

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

In the nine months ended September 27, 2009, the Company recorded an additional $0.6 million for excess facilities as the original assumptions regarding possible sublease of the exited facilities were not realized. The Company also made payments of $1.1 million related to this plan.

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In connection with this plan, the Company has recorded $8.0 million for excess facilities and contract termination costs, $7.9 million for termination benefits and $0.9 million write-down of equipment and software assets whose assets were impaired to date. The Company has made payments relating to these activities of $14.4 million related to the 2005 plan. All severance costs have been paid out and payments related to the excess facilities will extend to 2011.

2001

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

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

In the first quarter of 2001, the Company recorded a charge of $19.9 million for a restructuring plan that included the termination of 223 employees across all business functions, the consolidation of a number of facilities and the curtailment of certain research and development projects. Due to the continued downturn in real estate markets, the Company has recorded additional provisions for abandoned office facilities totaling $3.9 million since 2004. In the first nine months of 2009, the Company made cash payments of $0.7 million related to this plan, bringing the total cash payments under the 2001 plan to $178.7 million.

The Company has completed the activities contemplated in these restructuring plans, but has not yet terminated the leases on all of its surplus facilities. Efforts to exit these sites are ongoing, but the payments related to these facilities could extend to 2011.

NOTE 6. Investment Securities

At September 27, 2009, the Company had investments of $396.5 million (December 28, 2008 - $278.9 million) comprised of money market funds, United States Treasury and Government Agency notes, Federal Deposit Insurance Corporation (“FDIC”)-insured corporate notes, United States State and Municipal Securities, foreign government and agency notes, and corporate bonds and notes.

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The Company’s available for sale investments, by investment type, consist of the following as at September 27, 2009 and December 28, 2008:

(in thousands)	September 27, 2009
	Amortized Cost		Gross Unrealized Gains*		Gross Unrealized Losses			Fair Value
Money market funds	$	194,517	$	24	$	—		$	194,541
US Treasury and Government Agency notes		84,720		956		—			85,676
Corporate bonds and notes		78,806		1,330		(32	)		80,104
US State and Municipal securities		19,657		28		(7	)		19,678
Foreign government and agency notes		16,262		259		—			16,521
Total	$	393,962	$	2,597	$	(39	)	$	396,520
*  Gross unrealized gains include accrued interest on investments.
(in thousands)	December 28, 2008
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Money market funds	$	278,898	$	—	$	—		$	278,898
Total	$	278,898	$	—	$	—		$	278,898

As of September 27, 2009 and December 28, 2008, the fair value of certain of the Company’s available-for-sale securities was less than their cost basis. Management reviewed various factors in determining whether to recognize an impairment charge related to these unrealized losses, including the current financial and credit market environment, the financial condition and near-term prospects of the issuer of the investment security, the magnitude of the unrealized loss compared to the cost of the investment, length of time the investment has been in a loss position and the Company’s intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery of market value. As of September 27, 2009, the Company determined that the unrealized losses are temporary in nature and recorded them as a component of accumulated other comprehensive income (loss).

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The Company’s investments are classified in the Condensed Consolidated Balance Sheet as at September 27, 2009 and December 28, 2008, as follows:

(in thousands)	September 27, 2009				December 28, 2008
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Cash and cash equivalents	$	157,959	$	157,982	$	69,213	$	69,213
Short-term investments		92,476		94,019		209,685		209,685
Long-term investment securities		143,527		144,519		—		—
Total	$	393,962	$	396,520	$	278,898	$	278,898

$38.9 million of the investments held at September 27, 2009 relate to shares of the Reserve International Liquidity Fund, Ltd. (the “International Fund”) and the Reserve Primary Fund (the “Primary Fund”, together the “Reserve Funds”) for which the Company has outstanding redemption orders. The Reserve Funds were AAA-rated money market funds 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. (“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. In October 2009, the Company received a partial distribution from the Primary Fund in the amount of $1.3 million.

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

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

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

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NOTE 7. Long-Term Obligations

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

The 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 and after October 20, 2012. The holders may require that the Company 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 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.

Impact of Adoption of ASC Topic 470 Debt

See Note 1. Summary for Significant Accounting Policies for a description of the Company’s adoption of ASC Topic 470. The following table summarizes the effects of this new guidance on the Company’s consolidated financial statements as at September 27, 2009.

(in thousands)	September 27, 2009 Adjustments
Condensed Consolidated Balance Sheets
Assets:
Deferred debt issue costs*	$	69
Total assets		69
Liabilities and Stockholders’ Equity:
2.25% senior convertible notes due October 15, 2025		2,227
Accumulated deficit		(2,158	)

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

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(in thousands, except for per share amounts)	Three Months Ended September 27, 2009			Nine Months Ended September 27, 2009
Condensed Consolidated Statements of Operations
Gain on repurchase of senior convertible notes, net and amortization of debt issue costs	$	23		$	69
Interest income (expense), net		(757	)		(2,227	)
Net income		(734	)		(2,158	)
Net income per basic share	$	(0.00	)	$	(0.01	)
Net income per diluted share	$	(0.00	)	$	(0.01	)
Shares used in per share calculation - basic		227,123			225,276
Shares used in per share calculation - diluted		231,863			228,172
(in thousands)				Nine Months Ended September 27, 2009
Condensed Consolidated Statements of Cash Flows:
Cash flows from operating activities:
Net income				$	(2,158	)
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization					2,158

As at September 27, 2009, the carrying amount of the equity component is $35.2 million (December 28, 2008 - $35.2 million), and the carrying of the debt component is $57.6 million (December 28, 2008 - $55.4 million), which is the principal amount of $68.3 million (December 28, 2008 - $68.3 million) net of the unamortized discount of $10.7 million (December 28, 2008 - $12.9 million). The balance of deferred debt issue costs as at September 27, 2009 is $0.6 million (December 28, 2008 - $0.8 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, in the consolidated statement of operations, and recorded gains related to the equity components on these repurchases of $5.4 million and $10.8 million, respectively, in the 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.

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NOTE 8. Income Taxes

The Company recorded a recovery of income taxes of $8.6 million and $3.5 million for the three and nine months ended September 27, 2009, respectively, and a provision of income taxes of $4.3 million and a recovery of income taxes of $77.4 million for the three and nine months ended September 28, 2008, respectively. The majority of the reduction in the provision for income taxes was due to the effect of the foreign exchange translation of a foreign subsidiary in the third quarter of 2009 compared to the same period in 2008.

The condensed consolidated financial statements for the nine months ended September 27, 2009 include the tax effects associated with the sale of certain assets between wholly-owned subsidiaries of the Company. GAAP requires the tax expense associated with gains on such inter-company transactions to be recognized over the estimated life of the related assets. Accordingly, the $22.8 million recorded as long-term prepaid expenses as at September 27, 2009 represents the remaining tax expense to be recognized over periods of up to six years, with corresponding amounts recorded as current and deferred income taxes payable and as liability for unrecognized tax benefits. The tax expense in the three and nine months ended September 27, 2009 resulting from these transactions was $0.9 million and $3.1 million, respectively.

During the first half of 2008, one of the Company’s foreign subsidiaries received a written communication from a tax authority resulting in an accrual of $26.5 million, including interest, as part of the liability for unrecognized tax benefits. In the second quarter of 2008, this and certain other tax matters related to the 2000-2006 tax years were settled for less than had been accrued as part of the Company’s liability for unrecognized tax benefits, resulting in the recognition of tax benefits of $124.1 million that were previously included in the liability for unrecognized tax benefits. As a result of this settlement, the Company agreed to pay $18.0 million in cash and utilized $31.6 million in net investment tax credits. In addition, in the first quarter of 2008, the Company recognized a further $2.3 million of tax expense arising from an inter-company dividend.

As at September 27, 2009, the Company’s liability for unrecognized tax benefits on a world-wide consolidated basis was $37.2 million. Recognition of an amount different from this estimate would affect the Company’s effective tax rate.

NOTE 9. Comprehensive Income

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

	Three Months Ended					Nine Months Ended
(in thousands)	September 27, 2009		September 28, 2008 As adjusted - Note 1			September 27, 2009		September 28, 2008 As adjusted - Note 1
Net income	$	27,819	$	4,457		$	31,751	$	119,484
Other comprehensive income:
Change in fair value of derivatives		363		(209	)		4,523		(2,300	)
Change in fair value of investment securities		514		—			474		—
Total	$	28,696	$	4,248		$	36,748	$	117,184

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NOTE 10. Net Income Per Share

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

	Three Months Ended				Nine Months Ended
(in thousands, except per share amounts)	September 27, 2009		September 28, 2008 As adjusted - Note 1		September 27, 2009		September 28, 2008 As adjusted - Note 1
Numerator:
Net income	$	27,819	$	4,457	$	31,751	$	119,484
Denominator:
Basic weighted average common shares outstanding (1)		227,123		222,335		225,276		221,091
Dilutive effect of employee stock options and awards		4,740		3,468		2,896		2,482
Diluted weighted average common shares outstanding (1)		231,863		225,803		228,172		223,573
Basic net income per share	$	0.12	$	0.02	$	0.14	$	0.54
Diluted net income per share	$	0.12	$	0.02	$	0.14	$	0.53

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

Note 11. Contingencies

Stockholder Derivative Lawsuits

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

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

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

On July 15, 2008, Ian Beiser, a named plaintiff in the Beiser/Barone action, filed a complaint in the Delaware Court of Chancery, and it was served on July 18, 2008, compelling the Company to permit plaintiff to inspect and make copies of the Company’s books and records. On August 5, 2008, the plaintiffs moved to stay the Federal Court action pending the books and records action. The Federal Court granted the motion to stay on August 13, 2008, which removed from the calendar the hearing on defendants’ motions to dismiss, previously scheduled for August 20, 2008.

On February 26, 2009, the Delaware Chancery Court granted the Company’s motion to dismiss plaintiff’s books and records demand. This result has lifted the stay on the motion to dismiss the second amended complaint in the Federal Court.

While the briefing on defendants’ motions was under way, the parties engaged in mediation and on November 5, 2009 entered into a stipulation of settlement under which the parties have agreed, subject to court approval, to resolve both the Beiser/Barone action and the Meissner action. Under the stipulation of settlement, the Company has agreed to adopt certain corporate governance reforms and to maintain these and other reforms put in place while the litigation was pending for a period of three years. The Company has agreed, subject to court approval, to pay plaintiffs’ counsel $1.6 million in attorneys’ fees, half of which will be paid by the Company and the other half by the Company’s insurance carrier. In light of the stipulated settlement, the parties have agreed to suspend the briefing on defendants’ renewed motions to dismiss the Beiser/Barone action. The parties plan to file papers with the Federal Court as soon as practicable seeking preliminary approval of the settlement and requesting that the Federal Court approve a schedule and process for providing notice to shareholders and set a date for considering a motion for final approval of the settlement.

The Company has accrued costs of $800,000 to reflect its share of the attorneys’ fees to be paid to plaintiffs’ counsel pursuant to the settlement. As with the rest of the settlement, the agreement to pay attorneys’ fees and the amount of fees to be paid remain subject to approval by the Federal Court.

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

This Quarterly Report contains forward-looking statements that involve risks and uncertainties. We use words such as “anticipates”, “believes”, “plans”, “expects”, “future”, “intends”, “may”, “should”, “estimates”, “predicts”, “potential”, “continue”, “becoming”, “transitioning” and similar expressions to identify such forward-looking statements. Our forward-looking statements include statements as to our business outlook, revenues, margins, expenses, tax provision, 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 and as to our expectation regarding distribution from certain investments.

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

OVERVIEW

Our current revenues are generated by a portfolio of more than 350 products, which we have designed and developed or acquired. Our diverse product portfolio services a number of key end markets: (i) the Enterprise Infrastructure market, which includes our products and solutions that enable the high-speed interconnection of servers, switches and storage devices that comprise these systems so that large quantities of data can be stored, managed and moved securely, as well as microprocessor-based System-on-Chip (“SOC”) products for laser printers and enterprise networking; and (ii) the Wide Area Network (“WAN”) Infrastructure market whereby our wireline, wireless and Passive Optical Networking (“PON”) devices are used in access and transport equipment such as routers, optical transport platforms and wireless base stations that aggregate and process signals in different protocols from enterprises and homes, and then transmit them to the next destination.

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

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Results of Operations

Third Quarter of 2009 and 2008

Net revenues

($ millions)	Third Quarter				Change
	2009		2008
Net revenues	$	130.9	$	139.4	(6	)%

Net revenues for the third quarter of 2009 were $130.9 million compared to $139.4 million for the same period in 2008, a decrease of $8.5 million or 6%. Net revenues generated from the Enterprise Infrastructure market, which is served by our storage solutions and microprocessor-based System-On-Chip (“SOC”) products, increased by 16%. Net revenues generated from the Wide Area Network (“WAN”) Infrastructure market, which is served by our wireline and wireless infrastructure products, decreased by 24%.

The growth in net revenues in our Enterprise Infrastructure market noted above was mainly driven by a ramp in production of the 6Gig SAS (“Serial Attached SCSI”) -2 RAID (“Redundant Array of Independent Disks”)-on-Chip device at Hewlett-Packard (“HP”). We also experienced an increase in sales in our 3Gig and 6Gig SAS expander products. These increases were offset by decreased net revenues in our other enterprise storage markets, microprocessor business, laser printers and enterprise networking mainly due to the working down of inventories by our customers and the effects of the general economic slowdown on enterprise spending.

We experienced decline in the WAN Infrastructure market mainly due to consumption of excess inventory in the third quarter of 2009 and lower levels of capital spending on equipment by carriers in those end markets. As a partial offset to this decline in net revenues, we experienced some increased activity in China and Korea due to increased deployment of Ethernet Passive Optical Networks (“EPON”) Fibre-To-The-Home (“FTTH”) services.

Gross profit

($ millions)	Third Quarter						Change
	2009			2008
Gross profit	$	86.4		$	92.0		(6	)%
Percentage of net revenues		66	%		66	%

Total gross profit decreased $5.6 million in the third quarter of 2009 compared to the same period in 2008 and gross profit as a percentage of net revenues remained consistent in the third quarter of 2009 as compared to the same period in 2008.

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During the third quarter of 2009, we had a 1% decrease in gross margin as a percentage of net revenues due to having customer funded application-specific integrated circuit (“ASIC”) mask sets at zero margin, which we did not have in the third quarter of 2008. This was offset by an increase of 1% attributable to product mix, as well as the cost reductions achieved during the third quarter of 2009 as compared to the same period in 2008.

Other costs and expenses

($ millions)	Third Quarter						Change
	2009			2008
Research and development	$	35.8		$	39.7		(10	)%
Percentage of net revenues		27	%		28	%
Selling, general and administrative		19.7			23.6		(17	)%
Percentage of net revenues		15	%		17	%
Amortization of purchased intangible assets		9.8			9.8		—	%
Percentage of net revenues		7	%		7	%
Restructuring costs and other charges		0.2			(0.3	)	167	%
Percentage of net revenues		—	%		—	%

Research and Development and Selling, General and Administrative Expenses

Our research and development, or R&D expenses decreased by $3.9 million or 10% in the third quarter of 2009 as compared to the third quarter of 2008. Payroll-related costs decreased by $3.3 million mainly due to the effect of foreign exchange rates on the payroll-related costs in our foreign operations. This decrease was partially offset by an increase in headcount. Total material costs, including outside consultant services, wafer and photomask costs increased by $1.6 million, mainly due to the additional costs related to the RAID R&D programs. Our infrastructure related expenses decreased by $1.1 million, mainly due to the decrease in depreciation expenditures. We also received a $0.7 million research and development related government grant in a foreign jurisdiction in the third quarter of 2009 and there was no such grant in 2008. The remaining decrease in expense of $0.4 million is due to the decrease in other expenses mainly due to the decrease in training and travel expenditures due to cost reduction activities.

Our selling, general and administrative, or SG&A expenses decreased by $3.9 million, or 17% in the third quarter of 2009 as compared to the third quarter of 2008. Payroll-related costs decreased by $2.5 million mainly due to the effect of foreign exchange rates on the payroll-related costs in our foreign operations and headcount reductions. The other expenditures including infrastructure related expenses, training and travel decreased by $1.4 million mainly due to cost reduction activities.

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Amortization of purchased intangible assets

In the first and second quarters of 2006, we completed the acquisitions of the Storage Semiconductor Business from Avago, and of Passave, Inc., respectively. Amortization of intangible assets acquired from the Storage Semiconductor Business and Passave in the third quarter of 2009 was $4.7 million and $5.1 million, respectively. Amortization from the Storage Semiconductor Business and Passave in the third quarter of 2008 was $4.7 million and $5.1 million, respectively.

Restructuring costs and other charges

Please refer to the full description of our various restructuring activities and plans in this Management’s Discussion and Analysis under “First Nine Months of 2009 and 2008.” The activity related to excess facility and severance accruals under our restructuring plans during the third quarter of 2009, by year of plan, were as follows:

Excess facility costs

(in thousands)	2007			2006			2005			2001			Total
Balance at June 28, 2009	$	673		$	126		$	2,779		$	1,441		$	5,019
Reversals and adjustments		—			2			—			30			32
New charges		—			—			175			—			175
Cash payments		(74	)		(38	)		(343	)		(206	)		(661	)
Balance at September 27, 2009	$	599		$	90		$	2,611		$	1,265		$	4,565
Severance costs
(in thousands)	2007
Balance at June 28, 2009	$	4
Cash payments		(4	)
Balance at September 27, 2009	$	—

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

($ in millions)	Third Quarter						Change
	2009			2008 As adjusted
Foreign exchange gain (loss)	$	(1.1	)	$	0.9		(222	)%
Percentage of net revenues		(1	)%		1	%
Gain on repurchase of senior convertible notes, net and amortization of debt issue costs	$	(0.1	)	$	(0.1	)	—	%
Percentage of net revenues		—	%		—	%
Interest income (expense), net	$	(0.5	)	$	0.2		(350	)%
Percentage of net revenues		—	%		—	%
Recovery on investments, net	$	—		$	0.4		(100	)%
Percentage of net revenues		—	%		—	%
Loss on investment securities	$	—		$	(11.8	)	100	%
Percentage of net revenues		—	%		(8	)%
Recovery of (provision for) income taxes	$	8.6		$	(4.3	)	300	%
Percentage of net revenues		7	%		(3	)%

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 loss was $1.1 million in the third quarter of 2009, which was primarily due to foreign exchange loss on the revaluation of our net foreign tax liability. We do not hedge our income tax accruals against fluctuations in foreign currency exchange rates (see Item 3. Quantitative and Qualitative Disclosures About Market Risk). The revaluation of this foreign tax liability was required because of the foreign exchange rate fluctuations of other currencies against the United States Dollar. The foreign exchange rate between the United States Dollar and the currencies of countries where we have significant tax liabilities depreciated 5% during the third quarter of 2009 compared to appreciating 3% during the third quarter of 2008.

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

In connection with our senior convertible notes in the third quarter of 2009, we recognized related deferred debt issue costs of $0.1 million.

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Interest income (expense), net

Net interest income decreased by $0.7 million in the third quarter of 2009 compared to the third quarter of 2008 due mainly to lower investment yields and this was partially offset by the reduction in interest expense relating to the accretion of the discount related to the senior convertible notes.

Recovery on investments, net

In the third quarter of 2008, we received $0.4 million as recovery on a previously booked investment loss related to our past investment in a private company.

Loss on investments

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

Recovery of (provision for) income taxes

We recorded recovery of income taxes of $8.6 million and a provision for income taxes of $4.3 million for the third quarter of 2009 and 2008, respectively. During the three months ended September 27, 2009, we experienced a decrease in our provision for income taxes due to the product and income mix across our subsidiaries and the effects of foreign exchange translation of a foreign subsidiary when comparing to the same period in 2008. The majority of the reduction in the provision for income taxes was due to the effect of the foreign exchange translation of a foreign subsidiary in the third quarter of 2009 compared to the same period in 2008.

The financial statements for the nine months ended September 27, 2009 include the tax effects associated with the sale of certain assets between wholly-owned subsidiaries of the Company. GAAP requires the tax expense associated with gains on such inter-company transactions to be recognized over the estimated life of the related assets. Accordingly, the $22.8 million recorded as long-term prepaid expenses as at September 27, 2009, represents the remaining tax expense to be recognized over periods of up to six years, with corresponding amounts recorded as current and deferred income taxes payable and as liability for unrecognized tax benefits. The tax expense in the third quarter of 2009 resulting from these transactions was $0.9 million.

During the second quarter of 2008, one of our foreign subsidiaries settled several ongoing tax matters for less than had been accrued as part of its liability for unrecognized tax benefits resulting in the recognition of tax benefits of $124.1 million that were previously included in the liability for unrecognized tax benefits.

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First Nine Months of 2009 and 2008

Net revenues

($ millions)	First Nine Months				Change
	2009		2008
Net revenues	$	356.6	$	404.2	(12	)%

Net revenues for the first nine months of 2009 were $356.6 million compared to $404.2 million for the same period in 2008, a decrease of $47.6 million or 12%. Net revenues generated from the Enterprise Infrastructure market, which is served by our storage solutions and microprocessor-based SOC products, decreased by 15%. Net revenues generated from the WAN Infrastructure market, which is served by our wireline and wireless infrastructure products, decreased by 9%.

The decline in net revenues noted above in the Enterprise Infrastructure market was mainly due to the working down of inventories by our customers and the effects of the general economic slowdown on enterprise spending. This decline was partially offset by an increase in sales of our 6Gig SAS-2 RAID-on-Chip device, which began shipping in production volumes in the second quarter of 2009. In addition, we experienced increased net revenues due to the increased demand for our 3Gig SAS and 6Gig SAS expander products.

We experienced a decline in the WAN infrastructure market mainly due to consumption of excess inventory in the first nine months of 2009 and lower levels of capital spending by carriers in those end markets. As a partial offset to this decline in net revenues, we experienced come increased activity in China due to an increase in demand by our Chinese OEM customers who supply carriers building out 3G wireless networks in China, as well as the increasing demand for aggregation and metro transport equipment that is required to handle the increasing levels of data traffic in that market.

Gross profit

($ millions)	First Nine Months						Change
	2009			2008
Gross profit	$	236.0		$	264.5		(11	)%
Percentage of net revenues		66	%		65	%

Total gross profit decreased $28.5 million in the first nine months of 2009 compared to the same period in 2008 while gross profit as a percentage of net revenues increased by 1% to 66% from 65% in the first nine months of 2009 as compared to the same period in 2008.

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The increase in gross profit as a percentage is attributable to product mix, as well as the cost reductions achieved in the first nine months of 2009 as compared to the first nine months of 2008. This was offset by an approximately 1% decrease mainly due to having customer funded ASIC masks set at zero margin during the first nine months of 2009, which we did not have in the first nine months of 2008.

Other costs and expenses:

($ millions)	First Nine Months						Change
	2009			2008
Research and development	$	110.8		$	117.0		(5	)%
Percentage of net revenues		31	%		29	%
Selling, general and administrative		63.9			72.0		(11	)%
Percentage of net revenues		18	%		18	%
Amortization of purchased intangible assets		29.5			29.5		—	%
Percentage of net revenues		8	%		7	%
Restructuring costs and other charges		0.8			0.8		—	%
Percentage of net revenues		—	%		—	%

Research and development and selling, general and administrative expenses

Our research and development expenses decreased $6.2 million or 5% in the first nine months of 2009 compared to the first nine months of 2008. Payroll costs decreased by $7.8 million mainly due to the effect of foreign exchange rates on payroll-related costs in our foreign operations, which were partially offset by an increase in headcount. Total material costs, including outside consultant services, wafer and photomask costs increased by $2.8 million mainly due to the addition costs related to the RAID R&D programs, which were partially offset by a decrease in costs related to completing less tapeouts during the first nine months of 2009 compared to the same period in 2008. The remaining $1.2 million reduction in expenses relates to the reduction in other expenses including training, travel and infrastructure related expenditures due to cost reduction activities.

Our selling, general and administrative, expenses decreased by $8.1 million, or 11%, in the first nine months of 2009 compared to the first nine months of 2008. Payroll costs decreased by $7.0 million mainly due to the effect of foreign exchange rates on payroll-related costs in our foreign operations and headcount reductions. The remaining $1.1 million reduction in expenses relates to the reduction in other expenses including training, travel, marketing and infrastructure related expenditures due to cost reduction activities.

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Amortization of purchased intangible assets

In the first and second quarters of 2006, we completed the acquisitions of the Storage Semiconductor Business from Avago and of Passave, Inc., respectively. Amortization of intangible assets acquired from the Storage Semiconductor Business and Passave in the first nine months of 2009 was $14.2 million and $15.3 million, respectively. Amortization from the Storage Semiconductor Business and Passave in the first nine months of 2008 was $14.2 million and $15.3 million, respectively.

Restructuring costs and other charges

The activity related to excess facility and severance accruals, under our restructuring plans during the first nine months of 2009, by year of plan, were as follows:

Excess facility costs

(in thousands)	2007			2006			2005			2001			Total
Balance at December 28, 2008	$	830		$	178		$	3,048		$	1,875		$	5,931
Reversals and adjustments		28			11			—			114			153
New charges		25			82			625			—			732
Cash payments		(284	)		(181	)		(1,062	)		(724	)		(2,251	)
Balance at September 27, 2009	$	599		$	90		$	2,611		$	1,265		$	4,565
Severance costs
(in thousands)	2007
Balance at December 28, 2008	$	7
Reversals and adjustments		1
New charges		—
Cash payments		(8	)
Balance at September 27, 2009	$	—

During the first nine months of 2009, we made payments totaling $2.3 million for severance and excess facility costs incurred in connection with past restructuring plans. In addition, we recorded an additional $0.7 million for excess facilities as original assumptions regarding possible sublease on exited facilities were not realized.

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

Further details regarding each of the restructuring plans noted in the above table are available in our Annual Report on Form 10-K for the year ended December 28, 2008.

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

($ in millions)	First Nine Months						Change
	2009			2008 As adjusted
Foreign exchange gain	$	0.1		$	3.0		(97	)%
Percentage of net revenues		—	%		1	%
Gain on repurchase of senior convertible notes, net and amortization of debt issue costs	$	(0.2	)	$	4.6		(104	)%
Percentage of net revenues		—	%		1	%
Loss on subleased facilities	$	(0.5	)	$	—		(100	)%
Percentage of net revenues		—	%		—	%
Interest income (expense), net	$	(2.1	)	$	0.6		(450	)%
Percentage of net revenues		(1	)%		—	%
Recovery on investments, net	$	—		$	0.4		(100	)%
Percentage of net revenues		—	%		—	%
Loss on investment securities	$	—		$	(11.8	)	100	%
Percentage of net revenues		—	%		(3	)%
Recovery of (provision for) income taxes	$	3.5		$	77.4		(95	)%
Percentage of net revenues		1	%		19	%

Foreign exchange gain

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

Our net foreign exchange gain was $0.1 million in the first nine months of 2009, which was primarily due to a $0.3 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 the fluctuations 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 11% during the first nine months of 2009 compared to appreciating 5% during the first nine months of 2008.

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

In connection with our repurchase of $98.0 million principal amount of our senior convertible notes in the first quarter of 2008, we recognized a gain of $4.9 million which is net of the related debt issue costs and transaction costs expensed. We recognized the related amortization of debt issue costs of $0.2 million, and $0.3 million in the first nine months of 2009, and 2008, respectively.

Loss on subleased facilities

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

Interest income (expense), net

Net interest income decreased by $2.7 million in the first nine months of 2009 compared to the first nine months of 2008 due mainly to lower investment yields partially offset by the decrease in interest expense relating to the accretion of the discount related to the senior convertible notes.

Recovery on investments, net

In the third quarter of 2008, we received $0.4 million as recovery on a previously booked investment loss related to our past investment in a private company.

Loss on investments

Included in the results of the third quarter of 2008 is an impairment of $11.8 million in the fair values of our investments in money market funds held by the Reserve Fund. For additional information, see Critical Accounting Estimates – Investment in Cash Equivalents, Short-Term Investments and Long-Term Investment Securities and Liquidity & Capital Resources included in this Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Recovery of (provision for) income taxes

We recorded a recovery of income taxes of $3.5 million and recovery of income taxes of $77.4 million for the first nine months of 2009 and 2008, respectively. The recovery in the first nine months of 2009 was primarily due to the effect of foreign exchange translation of a foreign subsidiary, partially offset by tax expense related to certain inter-company transactions described below. The recovery in the first nine months of 2008 was due to a tax settlement by a foreign subsidiary further described below.

The financial statements for the first nine months of 2009 include the tax effects associated with the sale of certain assets between wholly-owned subsidiaries of the Company. GAAP requires the tax expense associated with gains on such inter-company transactions to be recognized over the estimated life of the related assets. Accordingly, the $22.8 million recorded as long-term prepaid expenses as at September 27, 2009 represents the remaining tax expense to be recognized over periods of up to six years, with corresponding amounts recorded as current and deferred income taxes payable and as liability for unrecognized tax benefits. The tax expense in the first nine months of 2009 resulting from these transactions was $3.1 million.

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

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Critical Accounting Estimates

General

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our Condensed Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect our reported assets, liabilities, revenue and expenses, and related disclosure of our contingent assets and liabilities. Our significant accounting policies are outlined in Note 1. Summary of Significant Accounting Policies to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 28, 2008, which also provides commentary on our most critical accounting estimates. The following estimates are of note:

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.

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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.

There were no indications of impairment to goodwill or intangible assets during the first nine months 2009. Changes in the estimated fair values of these assets in the future could result in significant impairment charges or changes to our expected amortization.

Stock-Based Compensation

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.

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

Restructuring Charges - Facilities

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

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

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

Income Taxes

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

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

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

Our cash equivalents, short-term investments and long-term investment securities are comprised of money market funds, United States Treasury and Government Agency notes, Federal Deposit Insurance Corporation (“FDIC”)-insured corporate notes, United States State and Municipal Securities, foreign government and agency notes, and corporate bonds and notes with minimum ratings of P-1 or A3 by Moody’s, or A-1 or A- by Standard and Poor’s, or equivalent. At September 27, 2009, these securities had an estimated fair value of $396.5 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 money market funds, United States Treasury and Government Agency Notes, FDIC-insured corporate notes, United States State and Municipal Securities, foreign government and agency notes, and corporate bonds and notes, using quoted prices from active markets, quoted prices for similar assets from third-party sources and by performing valuation analyses. In determining if and when a decline in market value below the carrying value of our investment securities is other-than-temporary, we evaluate on an ongoing basis the market conditions, trends of earnings, financial condition and other key measures for our investments. We assess impairment of our investment securities in accordance with GAAP.

During 2008, we assessed the fair value of certain of our investment securities by giving consideration to Level 2 and Level 3 inputs (see Note 3. Fair Value Measurements), for the shares of the Reserve Funds and their underlying securities. Based on this assessment, we recorded an impairment of the Reserve Funds of $11.8 million during the third quarter of 2008, incorporating the Reserve Funds’ valuation at zero for debt securities of Lehman Brothers held, and a net asset value of $0.97 per share communicated by the Reserve Funds’ Primary Fund. We reassessed the fair value of our investments in money market funds for the third quarter 2009, and there were no further impairments.

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

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

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

Business Outlook

We expect our revenues for the fourth quarter of 2009 to be approximately $132 to $140 million.

We anticipate our fourth quarter 2009 gross margin percentage to be 65% to 66% including approximately $0.2 million stock-based compensation expense. As in past quarters this could vary depending on the volume of products sold, since many of our costs are fixed. Margins may also vary depending on the mix of products sold.

We expect our fourth quarter 2009 research and development, and selling, general and administrative expenses, to be approximately between $57.5 million and $59.5 million, including stock-based compensation expense of approximately between $4.5 million and $5.5 million.

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

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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 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 September 27, 2009 and December 28, 2008 totaled $419.6 million and $307.5 million, respectively, which are composed of the following:

	September 27, 2009
(in thousands)	Amortized Cost		Gross Unrealized Gains*		Gross Unrealized Losses			Fair Value
Cash	$	23,062	$	—	$	—		$	23,062
Money market funds		194,517		24		—			194,541
US Treasury and Government Agency notes		84,720		956		—			85,676
Corporate bonds and notes		78,806		1,330		(32	)		80,104
US States and Municipal securities		19,657		28		(7	)		19,678
Foreign government and agency notes		16,262		259		—			16,521
Total	$	417,024	$	2,597	$	(39	)	$	419,582
*  Gross unrealized gains include accrued interest on investments.
	December 28, 2008
	Amortized Cost		Gross Unrealized		Gross Unrealized			Fair Value
Cash	$	28,626	$	—	$	—		$	28,626
Money market funds		278,898		—		—			278,898
Total	$	307,524	$	—	$	—		$	307,524
The investments are recognized in the Condensed Consolidated Balance Sheet as follows:
	September 27, 2009				December 28, 2008
(in thousands)	Amortized Cost		Fair Value		Amortized Cost			Fair Value
Cash and cash equivalents	$	181,021	$	181,044	$	97,839		$	97,839
Short-term investments		92,476		94,019		209,685			209,685
Long-term investment securities		143,527		144,519		—			—
Total	$	417,024	$	419,582	$	307,524		$	307,524

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As of September 27, 2009 and December 28, 2008, we had $57.6 million and $55.4 million of senior convertible notes outstanding, respectively, recorded on our Condensed Consolidated Balance Sheets. The face value of the senior convertible notes as at September 27, 2009 and December 28, 2008 was $68.3 million. In the future, we expect our cash from operations, short-term investments and long-term investment securities, including distributions from the Reserve Funds, to be our sources of liquidity.

As of September 27, 2009 and December 28, 2008, we had $38.9 million and $209.7 million of our short-term investments relate to shares of the Reserve Funds for which we have outstanding redemption orders, respectively, recorded on our 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. The Primary Fund has received an SEC order providing that the SEC will supervise the distribution of assets from the fund.

During the first nine months of 2009, we received distributions of $170.8 million from the Reserve Funds and expect the remainder of this investment to be distributed by the end of fiscal 2009. Subsequent to September 27, 2009, we received $1.3 million as a partial distribution from the Primary Fund.

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

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

Operating Activities – During the first nine months of 2009, we generated net positive operating cash flows of $92.2 million. The main drivers for this were primarily our $31.8 million net income and the add backs of $59.1 million non-cash operating expenses.

Investing Activities – We used $33.3 million for investing activities in the first nine months of fiscal 2009, including $209.3 million for the purchase of investment securities, and $6.0 for the purchase of property, plant and equipment and intellectual property, net of $11.1 million received for the disposal of investments securities and $170.8 million in distributions from the Reserve Funds.

Financing activities – Net cash from financing activities of $24.3 million in the first nine months of 2009 was generated from the issuance of common shares under our employee stock plans.

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As of September 27, 2009, we had cash commitments made up of the following:

(in thousands)	Total		2009		2010		2011		2012		2013		After 2013
Contractual Obligations
Operating Lease Obligations:
Minimum Rental Payments	$	32,007	$	2,893	$	10,725	$	7,408	$	2,658	$	2,550	$	5,773
Estimated Operating Cost Payments		12,060		959		3,639		2,362		1,074		1,074		2,952
Long Term Debt:
Principal Repayment		68,340		—		—		—		—		—		68,340
Interest Payments		26,142		1,538		1,538		1,538		1,538		1,538		18,452
Purchase and other Obligations		15,768		2,637		6,341		6,047		743		—		—
	$	154,317	$	8,027	$	22,243	$	17,355	$	6,013	$	5,162	$	95,517

In addition to the amounts shown in the table above, we have recorded $37.2 million liability for unrecognized tax benefits, as of September 27, 2009 and we are uncertain as to if or when such amounts may be realized.

Purchase obligations as noted in the above table are comprised of commitments to purchase design tools and software for use in product development. Excluded from these purchase obligations are commitments for inventory or other expenses entered into in the normal course of business. We estimate these other commitments to be approximately $16.0 million at October 26, 2009 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 $3.5 million of cash in the remainder of 2009 for capital expenditures and purchases of intellectual property.

Based on our current operating prospects, we believe that existing sources of liquidity will satisfy our projected operating, working capital, investing, capital expenditure, and remaining restructuring requirements through 2009.

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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

We regularly maintain a portfolio of short- and long-term investments comprised of various types of money market funds, United States Treasury and Government Agency notes, 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. Maturities of these instruments are less than 36 months with the majority being within one year. To minimize credit risk, we diversify our investments and select minimum ratings of P-1 or 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 September 27, 2009, the impact to the fair value of our investment portfolio by a shift in the yield curve of plus, or minus, 50, 100 or 150 basis points would result in a decline, or increase, in portfolio value of approximately $1.4 million, $2.8 million and $4.2 million, respectively.

Senior Convertible Notes:

At September 27, 2009, $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.

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Our 2.25% senior convertible notes are not listed on any securities exchange or included in any automated quotation system, but are registered for resale under the Securities Act of 1933. The notes rank equal in right of payment with our other unsecured senior indebtedness and mature on October 15, 2025 unless earlier redeemed by us at our option, or converted or put to us at the option of the holders. Interest is payable semi-annually in arrears on April 15 and October 15 of each year, commencing on April 15, 2006. We may redeem all or a portion of the notes at par on and after October 20, 2012. We redeemed $98.0 million of the principal of these notes in the first quarter of 2008 at a cost of $95.5 million, including transaction fees and accrued interest. The holders may require that we repurchase the notes on October 15, 2012, 2015 and 2020 respectively.

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

Foreign Currency:

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

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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 September 27, 2009 had not fulfilled their contractual obligations and we were required to purchase Canadian dollars at the spot rate, our operating income for the third quarter would have decreased by $1.5 million.

At September 27, 2009, we had 12 contracts outstanding to purchase Canadian dollars, all with maturities of less than 12 months that qualified and were designated as cash flow hedges. The U.S. dollar notional amount of these contracts was $16.4 million and the contracts had a fair value of $1.5 million.

We attempt to limit our exposure to foreign exchange rate fluctuations from our foreign currency net asset or liability positions. In the first nine months of 2009, we recorded a $0.3 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 $2.0 million.

Other Investments:

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

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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 nine months of 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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Part II – OTHER INFORMATION

Item 1. Legal Proceedings

Stockholder Derivative Lawsuits

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

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

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

On July 15, 2008, Ian Beiser, a named plaintiff in the Beiser/Barone action, filed a complaint in the Delaware Court of Chancery, and it was served on July 18, 2008, compelling the Company to permit plaintiff to inspect and make copies of the Company’s books and records. On August 5, 2008, the plaintiffs moved to stay the Federal Court action pending the books and records action. The Federal Court granted the motion to stay on August 13, 2008, which removed from the calendar the hearing on defendants’ motions to dismiss, previously scheduled for August 20, 2008.

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On February 26, 2009, the Delaware Chancery Court granted the Company’s motion to dismiss the plaintiff’s books and records demand. This result has lifted the stay on the motion to dismiss the second amended complaint in the Federal Court.

While the briefing on defendants’ motions was under way, the parties engaged in mediation and on November 5, 2009 entered into a stipulation of settlement under which the parties have agreed, subject to court approval, to resolve both the Beiser/Barone action and the Meissner action. Under the stipulation of settlement, the Company has agreed to adopt certain corporate governance reforms and to maintain these and other reforms put in place while the litigation was pending for a period of three years. The Company has agreed, subject to court approval, to pay plaintiffs’ counsel $1.6 million in attorneys’ fees, half of which will be paid by the Company and the other half by the Company’s insurance carrier. In light of the stipulated settlement, the parties have agreed to suspend the briefing on defendants’ renewed motions to dismiss the Beiser/Barone action. The parties plan to file papers with the Federal Court as soon as practicable seeking preliminary approval of the settlement and requesting that the Federal Court approve a schedule and process for providing notice to shareholders and set a date for considering a motion for final approval of the settlement.

The Company has accrued costs of $800,000 to reflect its share of the attorneys’ fees to be paid to plaintiffs’ counsel pursuant to the settlement. As with the rest of the settlement, the agreement to pay attorneys’ fees and the amount of fees to be paid remain subject to approval by the Federal Court.

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ITEM 1A. Risk Factors.

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

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

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

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

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

Finally, our ability to access the capital markets may be severely restricted at a time when we would like, or need, to 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.

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

• variations in our turns business;

• short order lead time;

• customer inventory levels;

• production schedules; and

• fluctuations in demand.

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

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

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

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

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

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

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

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

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

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

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

We depend on a limited number of customers for large portions of our revenues. During the rolling twelve month period ended September 27, 2009, we had two end customers that accounted for more than 10% of our revenues, namely HP and Huawei. In the first nine months of 2009, our top ten customers accounted for more than 75% of our revenues. In the first nine months of 2008, our top ten customers accounted for more than 65% of our revenues. We do not have long-term volume purchase commitments from any of our major customers. We sell our products solely on the basis of purchase orders. Those customers could decide to cease purchasing products with little or no notice and without significant penalties. A number of factors could cause our customers to cancel or defer orders, including interruptions to their operations due to a downturn in their industries, delays in manufacturing their own product offerings into which our products are incorporated, and natural disasters. Accordingly, our future operating results will continue to depend on the success of our largest customers and on our ability to sell existing and new products to these customers in significant quantities.

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

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

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

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

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Our results of operations are increasingly dependent on our sales in China, which on a bill-to basis, accounted for 36% of our revenues in the third quarter of 2009 compared to 30% in the third quarter of 2008. Government agencies in China have broad discretion and authority over all aspects of the telecommunications and information technology industry in China; accordingly their decisions may impact our ability to do business in China. Therefore, significant changes in China’s political and economic conditions and governmental policies could have a substantial negative impact on our business. The growth of Fibre-To-The-Home technology in China has continued to be strong, however, a slowdown in that growth would have an adverse impact on our operating results.

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

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

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

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

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

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

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

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

We are experiencing significantly greater competition in the markets in which we participate. We are expanding into markets, such as the Enterprise Infrastructure and WAN 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 market segments in which we participate. These circumstances may make some of our products less competitive, and we may be forced to decrease our prices significantly to win a design. We may lose design opportunities or may experience overall declines in gross margins as a result of increased price competition.

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

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

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

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

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

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

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

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

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

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 third quarter of 2009 because of the fluctuations in the U.S. dollar against foreign currencies. A five percent shift in the foreign exchange rates between the U.S. and Canadian dollar would cause an approximately $2.0 million impact to our pre-tax net income.

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

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

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

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

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

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

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

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

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

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

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

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

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

We do not own or operate a wafer fabrication facility. In 2008, two outside wafer foundries supplied more than 95% of our semiconductor wafer requirements. Our wafer foundry suppliers also make products for other companies and some make products for themselves, thus we may not have access to adequate capacity or certain process technologies. We have less control over delivery schedules, manufacturing yields and costs than competitors with their own fabrication facilities. If the wafer foundries we use are unable or unwilling to manufacture our products in required volumes, or at specified times, we may have to identify and qualify acceptable additional or alternative foundries. This qualification process could take six months or longer. We may not find sufficient capacity quickly enough, if ever, at an acceptable cost, to satisfy our production requirements.

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

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

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

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

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

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

Our estimated restructuring accruals may not be adequate.

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

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

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

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

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

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

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

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.

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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.

In preparing our financial statements, we make good faith estimates and judgments that may differ materially from actual results.

In preparing our financial statements in conformity with accounting principles generally accepted in the United States, we must make estimates and judgments in applying our most critical accounting policies. Those estimates and judgments have a significant impact on the results we report in our consolidated financial statements. Estimates are used for, but not limited to, stock-based compensation, purchase accounting assumptions including those used to calculate the fair value of intangible assets and goodwill, the valuation of investments, allowance for doubtful accounts, inventory reserves, depreciation and amortization, asset impairments, sales returns, warranty costs, income taxes including uncertain tax positions, restructuring costs, assumptions used to measure the fair value of the debt component of our senior convertible notes, and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We also have other key accounting policies that are not as subjective, and therefore their application would not require us to make estimates or judgments that are as significant, but which nevertheless could significantly affect our financial reporting. Actual results may differ materially from these estimates. If these estimates or their related assumptions change, our operating results for the periods in which we revise our estimates or assumptions could be adversely materially affected.

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

We have $57.6 million carrying value ($68.3 million of face value) of our 2.25% senior convertible notes outstanding. Our debt could materially and adversely affect our ability to obtain financing for working capital, acquisitions or other purposes, and could make us vulnerable to industry downturns and competitive pressures. Our ability to meet our debt service obligations will be dependent upon our future performance, which will be subject to financial, business and other factors affecting our operations, many of which are beyond our control. On October 15, 2025, we are obliged to repay the full remaining principal amount of the notes that have not been converted into our common stock, but we are also subject to certain triggering events that may cause the notes to be repaid earlier.

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

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

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.

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

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

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

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

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission Of Matters To A Vote By Stockholders

None.

Item 5. Other Information

None.

Item 6. Exhibits

Exhibits –

•        11.1	Calculation of net income per share – included in Note 10. Net Income Per Share of the financial statements included in Item I of Part I of this Quarterly Report.
•        31.1	Certification of Chief Executive Officer pursuant to Section 302 (a) of the Sarbanes-Oxley Act of 2002
•        31.2	Certification of Chief Financial Officer pursuant to Section 302 (a) of the Sarbanes-Oxley Act of 2002
•        32.1	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer)
•        32.2	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer)

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SIGNATURE

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

	PMC-SIERRA, INC.
	(Registrant)
Date: November 6, 2009	/s/    Michael W. Zellner
	Michael W. Zellner
	Vice President,
	Chief Financial Officer and
	Principal Accounting Officer

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