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

Investors are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date of this Quarterly Report. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

OVERVIEW

PMC is a semiconductor innovator transforming networks that connect, move and store digital content. Building on a track record of technology leadership, we are driving innovation across storage, optical and mobile networks. Our highly integrated solutions increase performance and enable next generation services to accelerate the network transformation.

Our current revenues are generated by a portfolio of approximately 700 products which we have designed and developed or acquired. PMC's diverse product portfolio enables many different types of communications network infrastructure equipment in three market segments: Storage, Mobile and Optical networks.

1. Our Storage network products enable high-speed communication servers, switches and storage devices to store, manage and move large quantities of data securely;

2. Our Optical network products are used in optical transport platforms, multi-services provisioning platforms, and edge routers where they gather, process and transmit disparate traffic to their next destination in the network; and

3. Our Mobile network products are used in wireless base stations, mobile backhaul, and aggregation equipment.

The following discussion of the financial condition and results of our operations should be read in conjunction with the interim condensed consolidated financial statements and notes thereto included in this Form 10-Q.

Results of Operations

Second Quarter of 2012 and 2011

Net revenues

Second Quarter ($ millions) 2012 2011 Change Net revenues $ 137.8 $ 171.0 (19 )%

Overall net revenues for the second quarter of 2012 were $137.8 million, a decrease of $33.2 million compared to the second quarter of 2012. This 19% year-over-year decrease was mainly attributable to the tsunami in Japan which prompted our customers to over-buy and secure extra supply in Q2 and Q3 of 2011, and then working down their extra inventory during the beginning of 2012. In addition, macro-economic uncertainty has customers delaying investments in network infrastructure.

Storage represented 62% of our net revenues in the second quarter of 2012 compared to 58% in the same period of 2011. The Storage net revenues decreased by 14% compared to the same quarter in 2011. This was due mainly to some of our large OEM customers working through excess inventories purchased in prior quarters to secure additional supply in reaction to the tsunami in Japan in 2011 discussed above. Also impacting this was customers transitioning from first generation to second generation RAID-On-Chip ("ROC") controllers.

Optical represented 23% of our net revenues in the second quarter of 2012 compared to 26% in the same period of 2011. The Optical net revenues decreased by 29% compared to the same quarter in 2011. Our Optical net revenues were impacted by the overall macro-economic uncertainty and renewed recessionary factors in Europe, North America and Asia, which is driving carriers to delay investment in packet-based technologies to address growth in video and mobile data.

Mobile represented 15% our net revenues for the second quarter of 2012 compared to 16% in the same period of 2011. The Mobile net revenues decreased by 23% compared to the same quarter in 2011. This decrease is attributable to the overall macro-economic uncertainty and renewed recessionary conditions in Europe, North America and Asia, which is driving carriers to delay investments in network infrastructure.

On a sequential basis, our net revenues were 4% higher than in the first quarter of 2012. The increase is due mainly to higher volumes of our Optical products, including some one time orders of legacy products, partially offset by lower volumes sold of our Storage products due to slower than expected transition by our customers to Intel's new Romley platform, for which we supply our ROC controllers.

Gross profit

                                            Second Quarter
             ($ millions)                  2012        2011         Change
             Gross profit                 $ 96.5      $ 118.4           (18 )%
             Percentage of net revenues       70 %         69 %

Total gross profit decreased by $21.9 million in the second quarter of 2012 on lower net revenues compared to the same period in 2011. Gross profit as a percentage of net revenues increased 1%. This increase is mainly due to product
mix. Sequentially, gross profit as a percentage of net revenues remained at 69%.

On year-over-year basis and sequentially, we were able to offset the negative effect on gross margin percentage of fixed costs over the lower net revenues in the second quarter of 2012 through cost saving initiatives.

Operating expenses

                                                     Second Quarter
     ($ millions)                                   2012         2011       Change
     Research and development                      $  56.7      $ 56.4            1 %
     Percentage of net revenues                         41 %        33 %

     Selling, general and administrative           $  29.3      $ 29.4           -  %
     Percentage of net revenues                         21 %        17 %

     Amortization of purchased intangible assets   $  11.6      $ 11.0            5 %
     Percentage of net revenues                          8 %         6 %

Research and Development and Selling, General and Administrative Expenses

Our research and development ("R&D") expense remained consistent in the second quarter of 2012 compared to the same period last year. On a sequential basis, R&D expenses were $2.4 million lower in the second quarter of 2012 as compared to the first quarter of 2012 mainly due to the reduction of payroll-related costs, which were partially offset by higher product related tape-out costs.

Selling, general and administrative ("SG&A") expenses remained consistent in the second quarter of 2012 compared to the same period last year as well as on a sequential basis.

Amortization of purchased intangible assets

Amortization of acquired intangible assets related to developed technology, in-process research and development, customer relationships, and trademarks increased by $0.6 million in the second quarter of 2012 compared to the same period in 2011. The increase was primarily the result of additional intangible asset amortization related to the November 2010 acquisition of Wintegra.

Other expense and Recovery of (provision for) income taxes

                                                   Second Quarter
      ($ millions)                                2012         2011        Change
      Gain on investment securities and other    $   0.5      $  0.2           150 %
      Amortization of debt issue costs           $  (0.1 )    $ (0.1 )          -  %
      Foreign exchange gain (loss)               $   1.6      $ (0.6 )         367 %
      Interest expense, net                      $  (0.6 )    $ (0.6 )          -  %
      Recovery of (provision for) income taxes   $  26.1      $ (3.7 )         805 %

Gain on investment securities and other

We recorded a gain on sale of investment securities of $0.5 million and $0.2 million, related to the disposition of investment securities in the second quarter of 2012 and 2011, respectively.

Amortization of debt issue costs

We recorded amortization of debt issue costs of $0.1 million in the second quarter of 2012 and 2011, relating to our senior convertible notes.

Foreign exchange gain (loss)

We recognized a net foreign exchange gain of $1.6 million in the second quarter of 2012 compared to a net foreign exchange loss of $0.6 million in the second quarter of 2011. This was primarily due to foreign exchange gain and loss on the revaluation of our foreign denominated assets and liabilities. This was driven by the United States Dollar appreciating by approximately 2% during the second quarter of 2012 compared to appreciating by approximately 1% during the second quarter of 2011, against currencies applicable to our foreign operations.

Interest expense, net

Net interest expense was unchanged at $0.6 million in the second quarter of 2012 compared to the second quarter of 2011.

Provision for income taxes

See Part I - Financial Information. Item 1. Financial Statements - Note 10. Income Taxes.

First Six Months of 2012 and 2011

Net revenues

First Six Months ($ millions) 2012 2011 Change Net revenues $ 269.9 $ 328.5 (18 )%

Net revenues for the first half of 2012 were $269.9 million compared to $328.5 million for the same period of 2011. This 18% decrease was mainly attributable to the tsunami in Japan which prompted our customers to over-buy and secure extra supply in Q2 and Q3 of 2011, and then working down their extra inventory during the beginning of 2012. In addition, macro-economic uncertainty has customers delaying investments in network infrastructure.

Storage represented 64% of our net revenues in the first half of 2012 compared to 58% in the same period of 2011. Storage net revenues decreased by 8% compared to the first half of 2011. This was due mainly to some of our large OEM customers working through excess inventories purchased in prior quarters to secure additional supply in reaction to the Japan tsunami in early 2011, discussed above. Also impacting this was customers transitioning from first generation to second generation ROC controllers.

Optical represented 21% of our net revenues in the first half of 2012 compared to 26% in the same period of 2011. The Optical net revenues decreased by 33% compared to the first half of 2011. Our Optical net revenues were impacted by the overall macro-economic uncertainty and renewed recessionary factors in Europe, North America and Asia, which is driving carriers to delay investment in packet-based technologies to address growth in video and mobile data.

Mobile represented 15% of our net revenues in the first half of 2012 compared to 16% in the same period in 2011. The Mobile net revenues decreased by 27% compared to the first half of 2011. This decrease is attributable to the overall macro-economic uncertainty and renewed recessionary conditions in Europe, North America and Asia, which is driving carriers to delay investments in network infrastructure.

Gross profit

                                           First Six Months
            ($ millions)                   2012         2011         Change
            Gross profit                 $  187.6      $ 216.6           (13 )%
            Percentage of net revenues         70 %         66 %

Total gross profit decreased by $29 million in the first half of 2012 on lower net revenues compared to the same period in 2011. Gross profit as a percentage of net revenues increased 4%. This increase is mainly due to $9 million of expense related to our acquisition of Wintegra in November 2010, specifically, the effect of fair value adjustments related to inventory acquired from Wintegra and sold during the first half of 2011. As a result, gross profit as a percentage of net revenues would have been 69% had it not been for this fair value adjustment. The remainder of the change is mainly due to product mix. We were able to offset the negative effect on gross margin percentage of fixed costs over the lower net revenues in the first half of 2012 through cost saving initiatives.

Operating expenses

                                                    First Six Months
    ($ millions)                                    2012         2011        Change
    Research and development                      $  115.8      $ 110.9            4 %
    Percentage of net revenues                          43 %         34 %

    Selling, general and administrative           $   58.3      $  61.6           (5 )%
    Percentage of net revenues                          22 %         19 %

    Amortization of purchased intangible assets   $   22.9      $  22.1            4 %
    Percentage of net revenues                           8 %          7 %

Research and Development and Selling, General and Administrative Expenses

Our R&D expense increased by $4.9 million or 4% in the first half of 2012 compared to the same period in 2011.

This was primarily the result of higher payroll-related costs associated with planned hiring, higher product related tape-out costs, and $1.7 million in termination costs incurred in the first half of 2012, partially offset by lower outside services due to the timing of projects.

Selling, general and administrative ("SG&A") expenses decreased by $3.3 million or 5% in the first half of 2012 compared to the same period in 2011, mainly due to the reduction in lease exit costs and acquisition-related costs incurred in 2011.

Amortization of purchased intangible assets

Amortization of acquired intangible assets related to developed technology, in-process research and development, customer relationships, and trademarks increased by $0.8 million in the first half of 2012 compared to the same period in 2011. The increase was primarily the result of additional intangible asset amortization related to the November 2010 acquisition of Wintegra.

Other expense and provision for income taxes

                                                  First Six Months
      ($ millions)                                2012          2011       Change
      Gain on investment securities and other   $     0.6      $  0.3          100 %
      Amortization of debt issue costs          $    (0.1 )    $ (0.1 )         -  %
      Foreign exchange gain (loss)              $     0.5      $ (2.1 )        124 %
      Interest expense, net                     $    (0.7 )    $ (1.5 )         53 %
      Provision for income taxes                $   (60.7 )    $ (9.6 )       (532 )%

Gain on investment securities and other

We recorded a gain on sale of investment securities of $0.6 million and $0.3 million, related to the disposition of investment securities in the first six months of 2012 and 2011, respectively.

Amortization of debt issue costs

We recorded amortization of debt issue costs of $0.1 million in the first six months of 2012 and 2011, relating to our senior convertible notes.

Foreign exchange gain (loss)

We recognized a net foreign exchange gain of $0.5 million in the first six months of 2012 compared to a net foreign exchange loss of $2.1 million in the first six months of 2011. This was primarily due to foreign exchange gain and loss on the revaluation of our foreign denominated assets and liabilities. This was driven by the United States Dollar appreciating by approximately 1% during the first half of 2012 compared to depreciating by approximately 2% during the first half of 2011, against currencies applicable to our foreign operations.

Interest expense, net

Net interest expense decreased by $0.8 million in the first six months of 2012 compared to first six months of 2011.

Provision for income taxes

See Part I - Financial Information. Item 1. Financial Statements - Note 10. Income Taxes.

Critical Accounting Estimates

General

Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our interim 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. For a full discussion of our accounting estimates and assumptions that we have identified as critical in the preparation of our interim condensed consolidated financial statements, refer to our Annual Report on Form 10-K for the year ended December 31, 2011, which also provides commentary on our most critical accounting estimates.

As discussed more fully in our Form 10-K for the year ended December 31, 2011 in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in the Critical Accounting Policies and Estimates section and Item 8. Financial Statements and Supplementary Data, in Note 1. Summary of Significant Accounting Policies, goodwill is reviewed for impairment annually and more frequently if an event occurs or circumstances change that could reduce the fair value below its carrying value.

There were no indications of impairment to acquisition related goodwill or intangible assets during the first six months of 2012. Changes in the estimated fair values of these assets in the future could result in impairment charges or changes to our expected amortization, which could be material.

Business Outlook

We expect our net revenues for the third quarter of 2012 to be approximately $130 million to $138 million. As in the past, and consistent with business practice in the semiconductor industry, a portion of our revenue is likely to be derived from orders placed and shipped during the same quarter, which we call our "turns business." Our turns business varies from quarter to quarter. We expect the turns business percentage from the beginning of the third quarter of 2012 to be approximately 25%. A number of factors such as volatile macroeconomic conditions could impact achieving our revenue outlook.

We anticipate our third quarter 2012 gross margin percentage to be in the range of 69.3% to 70.3%, which includes approximately $0.3 million stock-based compensation expense. This could vary depending on the volumes of products sold, since many of our costs are fixed. The gross margin percentage will also vary depending on the mix of products sold.

In the third quarter of 2012, we expect operating expenses to be approximately $74.5 million to $75.5 million plus stock-based compensation expense of approximately $5.3 million to $6.3 million, and amortization of purchased intangible assets related to our past acquisitions of $11.6 million.

We anticipate that net interest expense will be approximately $0.7 million in the third quarter of 2012, consisting of income earned from our cash and cash equivalents, short-term investments and long-term investment securities, partially offset by interest expense related to our outstanding senior convertible notes.

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, repay any short-term indebtedness, and finance working capital. Currently, our primary objective for use of discretionary cash has been to repurchase and retire a portion of our

common stock. The combination of cash and cash equivalents, short-term investments, and long-term investment securities at July 1, 2012 totaled $340.4 million and is comprised of the following:

                                                                    July 1, 2012
                                                              Gross            Gross
                                            Amortized       Unrealized      Unrealized
(in thousands)                                 Cost           Gains*          Losses*         Fair Value
Cash and cash equivalents:
Cash                                        $   76,461     $         -      $        -       $     76,461
Money market funds                              24,564               -               -             24,564

Total cash and cash equivalents                101,025               -               -            101,025


Short-term investments:
Corporate bonds and notes                       60,684            1,532              (2 )          62,214
US Treasury and Government Agency notes          3,322              123              -              3,445
Foreign Government and Agency notes              1,000               36              -              1,036
US States and Municipal securities               1,720               22              -              1,742

Total short-term investments                    66,726            1,713              (2 )          68,437


Long-term investment securities:
Corporate bonds and notes                      116,345              565            (106 )         116,804
US Treasury and Government Agency notes         46,753               56             (22 )          46,787
Foreign Government and Agency notes              7,298               56              -              7,354

Total long-term investment securities          170,396              677            (128 )         170,945

Total                                       $  338,147     $      2,390     $      (130 )    $    340,407

* Gross unrealized gains include accrued interest on investments of $1.5 million. The remainder of the gross unrealized gains and losses are included in the interim Condensed Consolidated Balance Sheet as Accumulated other comprehensive income (loss).

Most of our cash and cash equivalents, short-term investments, and long-term investment securities balances at July 1, 2012 were held by our United States parent company.

As of July 1, 2012, we had $67 million of senior convertible notes outstanding, recorded on our interim Condensed Consolidated Balance Sheet. The face value of the senior convertible notes at July 1, 2012 was $68.3 million.

Operating Activities

Cash generated from operations was $40 million, less a $20 million payment of withholding taxes related to an intercompany dividend paid to fund our stock buyback program. The primary adjustments to net income to arrive at operating cash flow are: $32 million of depreciation and amortization, $13.9 million stock based compensation expense, and $60.9 million taxes relating to intercompany funding of the accelerated share repurchase program. The changes in other working capital accounts were primarily due to normal variation in timing of receipts and payments.

Investing Activities

We had a net inflow of cash of $55.2 million from investing activities in the first six months of 2012, an increase of $65.7 million over the same period in 2011.

We generated $148.4 million from the disposal of short- and long-term investments, in part to fund the share repurchases conducted in the second quarter of 2012, and also in the normal course of business. We expended $59.2 million on purchases of these short-and long-term investments. We also expended $34 million on property and equipment, intangible assets, and an acquisition in the six months ended July 1, 2012.

Financing Activities

On May 2, 2012, the Company entered into an Accelerated Stock Buyback ("ASB") program with Goldman, Sachs & Co. ("Goldman") to repurchase an aggregate of $160 million of our common stock. During the three months ended July 1, 2012, we repurchased 22.2 million shares under the ASB and a further 885,820 shares on the open market as authorized by our Board of Directors. To date, in 2012, we have paid $165.6 million in connection with the Company's stock buyback program. For additional information regarding the ASB, including the ASB Agreements, refer to Note 12. Stock Repurchase Program and Accelerated Stock Buyback, of the Notes to the Condensed Consolidated Financial Statements in the Quarterly Report on Form 10-Q.

Proceeds from employee related stock issuances in the first six months of 2012 were $8.9 million.

Contractual Obligations

As of July 1, 2012, we had cash commitments made up of the following:



                                                                      Payments due in:
                                                             Less                                         More
                                                            than 1                                       than 5
(in thousands)                                 Total         year        1-3 years       3-5 years       years
Operating Lease Obligations:
Minimum Rental Payments                      $  46,344     $  4,867     $    16,048     $    12,438     $ 12,991
Estimated Operating Cost Payments               14,505        1,755           5,504           4,266        2,980
. . .