##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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Form 10 - Q



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



For the quarterly period ended July 3, 2005



| ̈ | 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



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PMC-Sierra, Inc.

(Exact name of registrant as specified in its charter)



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

3975 Freedom Circle

Santa Clara, CA 95054

(408) 239-8000



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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 period that the
registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ̈



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the
Act).    Yes  x    No ̈



Common shares outstanding at July 31, 2005  182,242,787



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##### Table of Contents

INDEX



|                               |  |                                                                                       |  |     
|------------------------------ |  | ------------------------------------------------------------------------------------- |  | ----
|                               |  |                                                                                       |  | Page
|PART I - FINANCIAL INFORMATION |  | 3                                                                                    
|                               |  |                                                                                      
|Item 1.                        |  | Financial Statements (unaudited)                                                      |  | 3   
|                               |  |                                                                                      
|                               |  | -        
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 |  | 14  
|                               |  |                                                                                      
|Item 3.                        |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 38  
|                               |  |                                                                                      
|Item 4.                        |  | Controls and Procedures                                                               |  | 39  
|                               | 
|PART II - OTHER INFORMATION    |  | 40                                                                                   
|                               |  |                                                                                      
|Item 4.                        |  | Submission Of Matters To A Vote By Stockholders                                       |  | 40  
|                               |  |                                                                                      
|Item 6.                        |  | Exhibits                                                                              |  | 41  
|                               | 
|Signatures                     |  | 41                                                                                   



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##### Table of Contents

Part I - FINANCIAL INFORMATION

Item 1 - Financial Statements



PMC-Sierra, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except for per share amounts)

(unaudited)



|                                                                                  |  |                    |         |   |                  |   |         |             |  |   |             |   |  |   |         |  
|--------------------------------------------------------------------------------- |  | ------------------ | ------- | - | ---------------- | - | ------- | ----------- |  | - | ----------- | - |  | - | ------- | -
|                                                                                  |  | Three Months Ended |         |   | Six Months Ended |  
|                                                                                  |  | Jul 3, 2005        |         |   | Jun 27,2004      |   |         | Jul 3, 2005 |  |   | Jun 27,2004 |  
|Net revenues                                                                      |  | $                  | 71,541  |   |                  | $ | 85,703  |             |  | $ | 137,652     |   |  | $ | 164,363 |  
|Cost of revenues                                                                  |  |                    | 21,372  |   |                  |   | 23,843  |             |  |   | 40,993      |   |  |   | 47,600  |  
|                                                                                  |  |                    |         |   |                  |   |         |             |  |   |             |   |  |   |         |  
|Gross profit                                                                      |  |                    | 50,169  |   |                  |   | 61,860  |             |  |   | 96,659      |   |  |   | 116,763 |  
|                                                                                  |  |                    |         |  
|Other costs and expenses:                                                         |  |                    |         |   |                  |   |         |             |  |   |             |   |  |   |         |  
|Research and development                                                          |  |                    | 29,456  |   |                  |   | 30,689  |             |  |   | 60,872      |   |  |   | 59,491  |  
|Marketing, general and administrative                                             |  |                    | 13,251  |   |                  |   | 12,203  |             |  |   | 26,255      |   |  |   | 24,128  |  
|Amortization of deferred stock compensation:Marketing, general and administrative |  |                    | 215     |   |                  |   |        |             |  |   | 215         |   |  |   | 697     |  
|Restructuring costs                                                               |  |                    | 7,606   |   |                  |   |        |             |  |   | 8,474       |   |  |   |        |  
|                                                                                  |  |                    |         |   |                  |   |         |             |  |   |             |   |  |   |         |  
|Income (loss) from operations                                                     |  |                    | (359    | ) |                  |   | 18,968  |             |  |   | 843         |   |  |   | 32,447  |  
|                                                                                  |  |                    |         |  
|Other income:                                                                     |  |                    |         |   |                  |   |         |             |  |   |             |   |  |   |         |  
|Interest income, net                                                              |  |                    | 2,502   |   |                  |   | 1,055   |             |  |   | 5,187       |   |  |   | 2,011   |  
|Foreign exchange gain (loss)                                                      |  |                    | 512     |   |                  |   | 20      |             |  |   | (78         | ) |  |   | (13     | )
|Loss on debt extinguishment and amortization of debt issue costs                  |  |                    |        |   |                  |   | (97     | )           |  |   | (1,634      | ) |  |   | (2,039  | )
|Gain on sale of property and investments                                          |  |                    |        |   |                  |   |        |             |  |   | 1,439       |   |  |   | 8,587   |  
|                                                                                  |  |                    |         |   |                  |   |         |             |  |   |             |   |  |   |         |  
|Income before provision for income taxes                                          |  |                    | 2,655   |   |                  |   | 19,946  |             |  |   | 5,757       |   |  |   | 40,993  |  
|                                                                                  |  |                    |         |  
|Provision for income taxes                                                        |  |                    | (2,126  | ) |                  |   | (4,537  | )           |  |   | (1,951      | ) |  |   | (8,737  | )
|                                                                                  |  |                    |         |   |                  |   |         |             |  |   |             |   |  |   |         |  
|Net income                                                                        |  | $                  | 529     |   |                  | $ | 15,409  |             |  | $ | 3,806       |   |  | $ | 32,256  |  
|                                                                                  |  |                    |         |   |                  |   |         |             |  |   |             |   |  |   |         |  
|Net income per common share - basic                                               |  | $                  | 0.00    |   |                  | $ | 0.09    |             |  | $ | 0.02        |   |  | $ | 0.18    |  
|Net income per common share - diluted                                             |  | $                  | 0.00    |   |                  | $ | 0.08    |             |  | $ | 0.02        |   |  | $ | 0.17    |  
|                                                                                  |  |                    |         |  
|Shares used in per share calculation - basic                                      |  |                    | 183,386 |   |                  |   | 179,570 |             |  |   | 182,789     |   |  |   | 178,989 |  
|Shares used in per share calculation - diluted                                    |  |                    | 188,305 |   |                  |   | 190,136 |             |  |   | 188,492     |   |  |   | 191,218 |  



See
notes to the condensed consolidated financial statements.



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##### Table of Contents

PMC-Sierra, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

(unaudited)



|                                                                                                                                                |  |             |          |   |             |   |          |  
|----------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | -------- | - | ----------- | - | -------- | -
|                                                                                                                                                |  | Jul 3, 2005 |          |   | Dec 26,2004 |  
|ASSETS:                                                                                                                                         |  |             |          |   |             |   |          |  
|Current assets:                                                                                                                                 |  |             |          |   |             |   |          |  
|Cash and cash equivalents                                                                                                                       |  | $           | 162,981  |   |             | $ | 121,276  |  
|Short-term investments                                                                                                                          |  |             | 143,755  |   |             |   | 153,410  |  
|Accounts receivable, net of allowance for doubtful accounts of $1,765 (2004 - $2,665)                                                           |  |             | 25,086   |   |             |   | 19,931   |  
|Inventories, net                                                                                                                                |  |             | 14,712   |   |             |   | 15,823   |  
|Prepaid expenses and other current assets                                                                                                       |  |             | 16,688   |   |             |   | 17,042   |  
|                                                                                                                                                |  |             |          |   |             |   |          |  
|Total current assets                                                                                                                            |  |             | 363,222  |   |             |   | 327,482  |  
|                                                                                                                                                |  |            
|Investment in bonds and notes                                                                                                                   |  |             | 55,189   |   |             |   | 139,111  |  
|Other investments and assets                                                                                                                    |  |             | 4,639    |   |             |   | 4,565    |  
|Property and equipment, net                                                                                                                     |  |             | 14,219   |   |             |   | 16,177   |  
|Goodwill                                                                                                                                        |  |             | 7,907    |   |             |   | 7,907    |  
|Other intangible assets, net                                                                                                                    |  |             | 4,853    |   |             |   | 5,003    |  
|Deposits for wafer fabrication capacity                                                                                                         |  |             | 5,145    |   |             |   | 6,779    |  
|                                                                                                                                                |  |             |          |   |             |   |          |  
|                                                                                                                                                |  | $           | 455,174  |   |             | $ | 507,024  |  
|                                                                                                                                                |  |             |          |   |             |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY:                                                                                                           |  |             |          |   |             |   |          |  
|Current liabilities:                                                                                                                            |  |             |          |   |             |   |          |  
|Accounts payable                                                                                                                                |  | $           | 16,462   |   |             | $ | 16,598   |  
|Accrued liabilities                                                                                                                             |  |             | 36,796   |   |             |   | 40,195   |  
|Income taxes payable                                                                                                                            |  |             | 30,128   |   |             |   | 28,931   |  
|Accrued restructuring costs                                                                                                                     |  |             | 15,928   |   |             |   | 13,735   |  
|Deferred income                                                                                                                                 |  |             | 8,079    |   |             |   | 7,646    |  
|Current portion of long-term debt                                                                                                               |  |             |         |   |             |   | 68,071   |  
|                                                                                                                                                |  |             |          |   |             |   |          |  
|Total current liabilities                                                                                                                       |  |             | 107,393  |   |             |   | 175,176  |  
|                                                                                                                                                |  |            
|Deferred taxes and other tax liabilities                                                                                                        |  |             | 28,077   |   |             |   | 28,077   |  
|                                                                                                                                                |  |            
|PMC special shares convertible into 2,677 (2004 - 2,897) shares of common stock                                                                 |  |             | 3,636    |   |             |   | 4,434    |  
|                                                                                                                                                |  |            
|Stockholders equity                                                                                                                            |  |             |          |   |             |   |          |  
|Common stock and additional paid in capital, par value $.001: 900,000 shares authorized; 181,230 shares issued and outstanding (2004 -
178,510) |  |             | 907,432  |   |             |   | 893,704  |  
|Accumulated other comprehensive income (loss)                                                                                                   |  |             | (453     | ) |             |   | 350      |  
|Accumulated deficit                                                                                                                             |  |             | (590,911 | ) |             |   | (594,717 | )
|                                                                                                                                                |  |             |          |   |             |   |          |  
|Total stockholders equity                                                                                                                      |  |             | 316,068  |   |             |   | 299,337  |  
|                                                                                                                                                |  |             |          |   |             |   |          |  
|                                                                                                                                                |  | $           | 455,174  |   |             | $ | 507,024  |  
|                                                                                                                                                |  |             |          |   |             |   |          |  



See notes to the condensed
consolidated financial statements.



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PMC-Sierra, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



|                                                                                                  |  |                  |         |   |              |   |          |  
|------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | - | ------------ | - | -------- | -
|                                                                                                  |  | Six Months Ended |        
|                                                                                                  |  | Jul 3, 2005      |         |   | Jun 27, 2004 |  
|Cash flows from operating activities:                                                             |  |                  |         |   |              |   |          |  
|Net income                                                                                        |  | $                | 3,806   |   |              | $ | 32,256   |  
|Adjustments to reconcile net income to net cash provided by operating activities:                 |  |                  |         |   |              |   |          |  
|Depreciation of property and equipment                                                            |  |                  | 4,432   |   |              |   | 7,550    |  
|Amortization of other intangibles                                                                 |  |                  | 1,142   |   |              |   | 253      |  
|Amortization of deferred stock compensation                                                       |  |                  | 215     |   |              |   | 697      |  
|Amortization of debt issuance costs                                                               |  |                  | 16      |   |              |   | 194      |  
|Gain on disposal of property and equipment                                                        |  |                  | (184    | ) |              |   |         |  
|Impairment of purchased intangible assets                                                         |  |                  | 538     |   |              |   |         |  
|Loss on extinguishment of debt                                                                    |  |                  | 1,618   |   |              |   | 1,845    |  
|Gain on sale of investments and other assets                                                      |  |                  | (1,255  | ) |              |   | (8,587   | )
|Reversal of write-down of excess inventory                                                        |  |                  |        |   |              |   | (651     | )
|Changes in operating assets and liabilities:                                                      |  |                  |         |   |              |   |          |  
|Accounts receivable                                                                               |  |                  | (5,155  | ) |              |   | (7,316   | )
|Inventories                                                                                       |  |                  | 1,111   |   |              |   | 1,626    |  
|Prepaid expenses and other current assets                                                         |  |                  | (1,070  | ) |              |   | (3,616   | )
|Accounts payable and accrued liabilities                                                          |  |                  | (2,452  | ) |              |   | (8,638   | )
|Income taxes payable                                                                              |  |                  | 1,780   |   |              |   | 8,600    |  
|Accrued restructuring costs                                                                       |  |                  | 2,193   |   |              |   | (4,016   | )
|Deferred income                                                                                   |  |                  | 432     |   |              |   | 2,213    |  
|                                                                                                  |  |                  |         |   |              |   |          |  
|Net cash provided by operating activities                                                         |  |                  | 7,167   |   |              |   | 22,410   |  
|                                                                                                  |  |                  |         |   |              |   |          |  
|Cash flows from investing activities:                                                             |  |                  |         |   |              |   |          |  
|Purchases of short term available-for-sale investments                                            |  |                  | (82,389 | ) |              |   | (288     | )
|Proceeds from sales and maturities of short-term available-for-sale investments                   |  |                  | 141,084 |   |              |   | 60,373   |  
|Purchases of long-term available-for-sale investments in bonds and notes                          |  |                  | (10,231 | ) |              |   | (177,991 | )
|Proceeds from sales and maturities of long-term available-for-sale investments in bonds and notes |  |                  | 44,760  |   |              |   | 111,291  |  
|Purchases of investments and other assets                                                         |  |                  | (2,000  | ) |              |   | (5,905   | )
|Proceeds from sale of investments and other assets                                                |  |                  | 734     |   |              |   | 10,094   |  
|Proceeds from sale of property                                                                    |  |                  | 2,604   |   |              |   |         |  
|Proceeds from refund of wafer fabrication deposits                                                |  |                  | 1,634   |   |              |   |         |  
|Purchases of property and equipment                                                               |  |                  | (2,666  | ) |              |   | (5,220   | )
|Purchase of intangible assets                                                                     |  |                  | (1,530  | ) |              |   | (2,354   | )
|                                                                                                  |  |                  |         |   |              |   |          |  
|Net cash provided by (used in) investing activities                                               |  |                  | 92,000  |   |              |   | (10,000  | )
|                                                                                                  |  |                  |         |   |              |   |          |  
|Cash flows from financing activities:                                                             |  |                  |         |   |              |   |          |  
|Repurchase of convertible subordinated notes                                                      |  |                  | (70,177 | ) |              |   | (106,929 | )
|Proceeds from issuance of common stock                                                            |  |                  | 12,715  |   |              |   | 13,304   |  
|                                                                                                  |  |                  |         |   |              |   |          |  
|Net cash used in financing activities                                                             |  |                  | (57,462 | ) |              |   | (93,625  | )
|                                                                                                  |  |                  |         |   |              |   |          |  
|Net increase (decrease) in cash and cash equivalents                                              |  |                  | 41,705  |   |              |   | (81,215  | )
|Cash and cash equivalents, beginning of the period                                                |  |                  | 121,276 |   |              |   | 225,959  |  
|                                                                                                  |  |                  |         |   |              |   |          |  
|Cash and cash equivalents, end of the period                                                      |  | $                | 162,981 |   |              | $ | 144,744  |  
|                                                                                                  |  |                  |         |   |              |   |          |  
|Supplemental disclosures of cash flow information:                                                |  |                  |         |   |              |   |          |  
|Cash paid for interest                                                                            |  | $                | 1,085   |   |              | $ | 2,858    |  
|Cash refund of income taxes                                                                       |  |                  | 2,516   |   |              |   |         |  
|Cash paid for income taxes                                                                        |  |                  | 2,870   |   |              |   |         |  
|Supplemental disclosures of non-cash investing and financing activities:                          |  |                  |         |   |              |   |          |  
|Conversion of PMC-Sierra special shares into common stock                                         |  | $                | 798     |   |              | $ | 85       |  



See notes to the condensed
consolidated financial statements.



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##### Table of Contents

PMC-Sierra, Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



NOTE 1. Summary of Significant Accounting Policies



Description of business. PMC-Sierra, Inc (the Company or PMC) designs, develops, markets and supports high-speed broadband communications
and storage semiconductors and MIPS-based microprocessors for service provider, enterprise, storage, and wireless networking equipment. The Company offers worldwide technical and sales support through a network of offices in North America, Europe
and Asia.



Basis of presentation. The accompanying Condensed
Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules or regulations. The interim financial statements are unaudited, but reflect all adjustments that are, in the
opinion of management, necessary to provide a fair statement of results for the interim periods presented. These financial statements should be read in conjunction with the consolidated financial statements and accompanying notes in the
Companys Annual Report on Form 10-K for the year ended December 26, 2004. The results of operations for the interim periods are not necessarily indicative of results to be expected in future periods. In order to align our fiscal year end with
the calendar year end, fiscal 2005 will consist of 53 weeks compared to 52 weeks in 2004. The first fiscal period of 2005 consisted of 14 weeks compared to 13 in the first quarter of 2004 and therefore the first six months of 2005 consisted of 27
weeks compared to 26 weeks in the first six months of 2004.



Estimates.The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America 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, the accounting for doubtful accounts, inventory reserves, depreciation and amortization, asset impairments, sales returns, warranty costs, income taxes,
restructuring costs and contingencies. Actual results could differ from these estimates.



Cash and cash equivalents.At July 3, 2005, Cash and cash equivalents included $1.3 million (December 26, 2004$1.3 million) pledged with a bank as collateral for letters of credit issued as security for
leased facilities.



Inventories. Inventories are stated at the lower of
cost (first-in, first out) or market (estimated net realizable value). Inventories (net of reserves of $10.3 million and $12.2 million at July 3, 2005 and December 26, 2004, respectively) were as follows:



|                 |  |            |        |             |   |       
|---------------- |  | ---------- | ------ | ----------- | - | ------
|(in thousands)   |  | Jul 3,2005 |        | Dec 26,2004
|Work-in-progress |  | $          | 9,970  |             | $ | 7,369 
|Finished goods   |  |            | 4,742  |             |   | 8,454 
|                 |  |            |        |             |   |       
|                 |  | $          | 14,712 |             | $ | 15,823
|                 |  |            |        |             |   |       



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Product warranties. The Company provides a one-year, limited warranty on most of its standard products and accrues
for the 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 26, 2004 to July 3,
2005 was as follows:



|                                            |  |                              |       |  
|------------------------------------------- |  | ---------------------------- | ----- | -
|(in thousands)                              |  | Six Months Ended Jul 3, 2005 |      
|Beginning balance, December 26, 2004        |  | $                            | 3,492 |  
|Accrual for new warranties issued           |  |                              | 143   |  
|Reduction for payments (in cash or in kind) |  |                              | (7    | )
|                                            |  |                              |       |  
|Ending balance, July 3, 2005                |  | $                            | 3,628 |  
|                                            |  |                              |       |  



Other Indemnifications.From
time to time, on a limited basis, PMC 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, up to a specified maximum amount.



Derivatives and Hedging Activities.PMCs net income and cash flows may be
negatively impacted by fluctuating foreign exchange rates. The Company periodically hedges foreign currency forecasted transactions related to certain operating expenses. All derivatives are recorded in the balance sheet at fair value. For a
derivative designated as a fair value hedge, changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in net income. For a derivative designated as a cash flow hedge, the effective portions of
changes in the fair value of the derivative are recorded in other comprehensive income and are recognized in net income when the hedged item affects net income. Ineffective portions of changes in the fair value of cash flow hedges are recognized in
net income. 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. During the quarter
ended July 3, 2005, all hedges were designated as cash flow hedges.



Stock-based compensation.The Company accounts for stock-based compensation in accordance with the intrinsic value method prescribed by APB Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees. Under APB 25,
compensation is measured as the amount by which the market price of the underlying stock exceeds the exercise price of the option on the date of grant; this compensation is amortized over the vesting period.



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The following table summarizes the activity under all of the Companys stock option plans for the first six months
of 2005:



|                                         |  |                             |   |  |                             |   |  |                                          |      
|---------------------------------------- |  | --------------------------- | - |  | --------------------------- | - |  | ---------------------------------------- | -----
|(in thousands, except per share amounts) |  | Shares Availablefor Options |   |  | Number ofOptionsOutstanding |   |  | Weighted AverageExercise Price Per Share
|Balance at December 26, 2004             |  | 35,857                      |   |  | 25,515                      |   |  | $                                        | 10.40
|Granted                                  |  | (6,160                      | ) |  | 6,160                       |   |  | $                                        | 7.90 
|Exercised                                |  |                            |   |  | (1,620                      | ) |  | $                                        | 5.37 
|Cancelled or expired                     |  | 1,645                       |   |  | (1,645                      | ) |  | $                                        | 13.22
|                                         |  |                             |   |  |                             |   |  |                                          |      
|Balance at July 3, 2005                  |  | 31,342                      |   |  | 28,410                      |   |  | $                                        | 9.99 
|                                         |  |                             |   |  |                             |   |  |                                          |      



On April 18, 2005, the Company granted
options to purchase approximately 5.9 million shares of common stock with an exercise price of $7.87, which was the closing price of the Companys stock on the grant date.



Pro forma information regarding net income (loss) and net income (loss) per share is required by SFAS 123, Accounting for Stock-Based
Compensation for awards granted or modified after December 31, 1994 as if the Company had accounted for its stock-based awards to employees under the fair value method of SFAS 123. During the quarter ended July 3, 2005, the Company estimated
the fair value of the Companys stock-based awards using a binomial valuation model. The fair value of the Companys stock-based awards to employees was previously estimated using a Black-Scholes option pricing model which was developed
for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. The Company believes that the binomial model provides a better estimate of the fair value of stock-based awards because it 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. Both models
require the input of highly subjective assumptions including the expected stock price volatility. Because changes in the subjective input assumptions can materially affect the fair value estimate, in managements opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its stock-based awards to employees. The fair values of the Companys stock-based awards were estimated using the multiple option approach, recognizing forfeitures as they
occur, assuming no expected dividends and using the following weighted average assumptions:



|                        |  |                    |   |  |                  |   |  |             |   |  |              |  
|----------------------- |  | ------------------ | - |  | ---------------- | - |  | ----------- | - |  | ------------ | -
|                        |  | Three Months Ended |   |  | Six Months Ended |  
|                        |  | Options            |   |  | Options          |  
|                        |  | Jul 3, 2005        |   |  | Jun 27, 2004     |   |  | Jul 3, 2005 |   |  | Jun 27, 2004 |  
|Expected life (years)   |  | 3.8                |   |  | 2.6              |   |  | 3.8         |   |  | 2.8          |  
|Expected volatility     |  | 61                 | % |  | 99               | % |  | 61          | % |  | 100          | %
|Risk-free interest rate |  | 3.9                | % |  | 2.7              | % |  | 3.9         | % |  | 2.1          | %



During the first quarter of 2005,
management re-examined certain assumptions related to the level of expected volatility used in the Companys option pricing model. As a result, volatility for



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the quarter ended July 3, 2005 was calculated using a weighted historical and market-based implied volatility. For the quarter ended June 27, 2004,
volatility was calculated using 5-year historical volatility.



The
weighted-average estimated fair values of stock options granted for the three months ended July 3, 2005 and June 27, 2004 were $3.30 and $7.54 per share, respectively. The weighted-average estimated fair values of stock options granted for the six
months ended July 3, 2005 and June 27, 2004 were $3.34 and $11.77 per share, respectively.



If the Company had accounted for stock-based compensation in accordance with the fair value method as prescribed by SFAS 123, net income (loss) and net income (loss) per share would have been:



|                                                                                                  |  |                    |        |   |                  |   |         |             |  |   |             |   |  |   |         |  
|------------------------------------------------------------------------------------------------- |  | ------------------ | ------ | - | ---------------- | - | ------- | ----------- |  | - | ----------- | - |  | - | ------- | -
|                                                                                                  |  | Three Months Ended |        |   | Six Months Ended |  
|(in thousands, except per share amounts)                                                          |  | Jul 3,2005         |        |   | Jun 27,2004      |   |         | Jul 3, 2005 |  |   | Jun 27,2004 |  
|Net income, as reported                                                                           |  | $                  | 529    |   |                  | $ | 15,409  |             |  | $ | 3,806       |   |  | $ | 32,256  |  
|Adjustments:                                                                                      |  |                    |        |   |                  |   |         |             |  |   |             |   |  |   |         |  
|Stock-based employee compensation expense included in net income                                  |  |                    | 215    |   |                  |   |        |             |  |   | 215         |   |  |   | 697     |  
|Additional stock-based employee compensation expense under fair value based method for all awards |  |                    | (6,774 | ) |                  |   | (13,318 | )           |  |   | (17,553     | ) |  |   | (32,962 | )
|                                                                                                  |  |                    |        |   |                  |   |         |             |  |   |             |   |  |   |         |  
|Net income (loss), adjusted                                                                       |  | $                  | (6,030 | ) |                  | $ | 2,091   |             |  | $ | (13,532     | ) |  | $ | (9      | )
|                                                                                                  |  |                    |        |   |                  |   |         |             |  |   |             |   |  |   |         |  
|Basic net income per share, as reported                                                           |  | $                  | 0.00   |   |                  | $ | 0.09    |             |  | $ | 0.02        |   |  | $ | 0.18    |  
|                                                                                                  |  |                    |        |   |                  |   |         |             |  |   |             |   |  |   |         |  
|Diluted net income per share, as reported                                                         |  | $                  | 0.00   |   |                  | $ | 0.08    |             |  | $ | 0.02        |   |  | $ | 0.17    |  
|                                                                                                  |  |                    |        |   |                  |   |         |             |  |   |             |   |  |   |         |  
|Basic net income (loss) per share, adjusted                                                       |  | $                  | (0.03  | ) |                  | $ | 0.01    |             |  | $ | (0.07       | ) |  | $ | 0.00    |  
|                                                                                                  |  |                    |        |   |                  |   |         |             |  |   |             |   |  |   |         |  
|Diluted net income (loss) per share, adjusted                                                     |  | $                  | (0.03  | ) |                  | $ | 0.01    |             |  | $ | (0.07       | ) |  | $ | 0.00    |  
|                                                                                                  |  |                    |        |   |                  |   |         |             |  |   |             |   |  |   |         |  



Recent Accounting Pronouncements.In December 2004, the Financial Accounting Standard Board (FASB) issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (SFAS 123R). SFAS 123R addresses the requirements of an
entity 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 an option holder is required to
provide services in exchange for the award. The Company will adopt the provisions of SFAS 123R on a prospective basis in the first quarter of fiscal 2006.



In March 2005, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 107 (SAB 107). The interpretations in SAB 107 express the views of the
SEC staff regarding the interaction between SFAS 123R and certain SEC rules and regulations and provide the staffs views regarding the valuation of share-based payment arrangements for public companies. The Company will apply the principles of
SAB 107 in connection with its adoption of SFAS 123R.



In June 2005, the FASB
issued Statement of Financial Accounting Standards No. 154, Accounting Changes and Error Corrections (SFAS 154). SFAS 154 replaces APB Opinion No. 20, Accounting Changes and FAS No. 3, Reporting Accounting Changes in
Interim Financial



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Statements. SFAS 154 requires retrospective application to prior periods financial statements of changes in accounting principle. It carries
forward without change the guidance from Opinion 20 for reporting the correction of an error in previously issued financial statements and the accounting for changes in estimate. The provisions of SFAS 154 will be effective for the Company in the
first quarter of fiscal 2006 and are not expected to have a current impact on the Companys financial position or results of operations.



NOTE 2. Derivatives Instruments and Hedging Activities



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



Currency forward contracts that are used to hedge exposures to variability in forecasted foreign currency cash flows are designated as cash flow hedges. The maturities of these instruments are less than twelve months.
For these derivatives, the gain or loss from the effective portion of the hedge is initially reported as a component of other comprehensive income in stockholders equity and subsequently reclassified to earnings in the same period in which the
hedged transaction affects earnings. The gain or loss from the ineffective portion of the hedge is recognized immediately as interest income or expense in Interest income, net on the Statement of Operations.



At July 3, 2005, the Company had eight currency forward contracts outstanding that qualified
and were designated as cash flow hedges. The U.S. dollar notional amount of these contracts was $62.9 million and the contracts had a fair value of $1.2 million as of July 3, 2005. The gain or loss from the ineffective portion of the hedges had no
impact on earnings.



NOTE 3. Restructuring Costs



Restructurings - 2005



On June 24, 2005, the Company expanded the workforce reduction plans that were initiated during the first quarter of 2005 aimed at
streamlining production and reducing and re-allocating operating expenses. The plans involved the termination of 26 employees from production control, quality assurance, and product engineering as a result of consolidation of the Companys two
manufacturing facilities (Santa Clara, California and Burnaby, British Columbia) into one facility (Burnaby) and the termination of 63 employees from research and development. As a result the Company recorded second quarter restructuring charges of
$7.6 million including $6.6 million for termination benefits, $3.0 of which were paid out during the quarter, and a $1.0 million write-down of equipment and software assets whose value was impaired as a result of these plans. The Company expects to
pay the remaining $3.6 million of severance costs by the end of the third quarter of 2005.



In the first quarter of 2005, the Company recorded restructuring charges of $0.9 million in termination benefits related to the termination of 24 employees across all business functions. All of this amount has been
paid as of July 3, 2005.



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Restructurings  2003 and 2001



In 2003 and 2001, the Company implemented three restructuring plans aimed at focusing development efforts on key projects and reducing
operating costs in response to the severe and prolonged economic downturn in the semiconductor industry. PMCs assessment of the market demand for its products, and the development efforts necessary to meet this demand, were key factors in its
decisions to implement these restructuring plans. As end markets for the Companys products had contracted, certain projects were curtailed in an effort to cut costs. Cost reductions in all other functional areas were also implemented, as fewer
resources were required to support the reduced level of development and sales activities during these periods.The Company has completed the activities contemplated in these restructuring plans, but has not yet terminated the leases on its
surplus facilities. Efforts to exit these sites are ongoing, but the payments related to these facilities could extend until 2006 to 2010. The activity under these plans during the six months ended July 3, 2005 was as follows:



Excess facility costs



|                             |  |             |       |   |             |   |        |           |  |   |       |   |  |   |        |  
|---------------------------- |  | ----------- | ----- | - | ----------- | - | ------ | --------- |  | - | ----- | - |  | - | ------ | -
|(in thousands)               |  | January2003 |       |   | October2001 |   |        | March2001 |  |   | Total |  
|Balance at December 26, 2004 |  | $           | 3,895 |   |             | $ | 6,458  |           |  | $ | 3,382 |   |  | $ | 13,735 |  
|                             |  |             |       |  
|Cash payments                |  |             | (363  | ) |             |   | (1,264 | )         |  |   | (743  | ) |  |   | (2,370 | )
|                             |  |             |       |   |             |   |        |           |  |   |       |   |  |   |        |  
|Balance at July 3, 2005      |  | $           | 3,532 |   |             | $ | 5,194  |           |  | $ | 2,639 |   |  | $ | 11,365 |  
|                             |  |             |       |   |             |   |        |           |  |   |       |   |  |   |        |  



The January 2003 restructuring
included the termination of 175 employees and the closure of design centers in Maryland, Ireland and India. To date, PMC has recorded a restructuring charge of $18.3 million in accordance with SFAS 146, Accounting for Costs Associated with
Exit or Disposal Activities, including $1.5 million for asset write-downs. These charges related to workforce reduction, lease and contract settlement costs, and the write-down of certain property, equipment and software assets whose value was
impaired as a result of this restructuring plan. The Company has disposed of the property improvements and computer equipment, and software licenses have been cancelled or are no longer being used. Cash payments made to date under this plan have
been $12.3 million. A $0.9 million reversal of excess restructure provision relating primarily to workforce reduction was recorded in 2003.



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. To date, the Company has made cash payments under this plan of $153.9 million, including the purchase and sale of Mission
Towers Two in Santa Clara, CA, for $133 million and $33 million, respectively, in the third quarter of 2003. To date, PMC has reversed $5.3 million of excess restructure provision, primarily related to Mission Towers Two. Due to the continued
downturn in real estate markets, the facilities costs are expected to be higher than anticipated in the original plan and as a result, 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. To date, the Company has
made cash payments of $18.7 million under this plan. Due



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to the continued downturn in real estate markets, the Company expects these costs to be higher than anticipated in the original plan. As a result, PMC
recorded additional provisions for abandoned office facilities of $3.1 million in the third quarter of 2003 and $2.2 million in the fourth quarter of 2004.



NOTE 4. Debt Investments



The following tables summarize the Companys investments in debt securities:



|                                        |  |             |         |              |   |        
|--------------------------------------- |  | ----------- | ------- | ------------ | - | -------
|(in thousands)                          |  | Jul 3, 2005 |         | Dec 26, 2004
|Available-for-sale:                     |  |             |         |              |   |        
|US Government Treasury and Agency notes |  | $           | 104,394 |              | $ | 104,722
|Corporate bonds and notes               |  |             | 162,507 |              |   | 187,799
|                                        |  |             |         |              |   |        
|                                        |  | $           | 266,901 |              | $ | 292,521
|                                        |  |             |         |              |   |        
|Reported as:                            |  |             |         |              |   |        
|Cash equivalents                        |  | $           | 67,957  |              | $ |       
|Short-term investments                  |  |             | 143,755 |              |   | 153,410
|Investments in bonds and notes          |  |             | 55,189  |              |   | 139,111
|                                        |  |             |         |              |   |        
|                                        |  | $           | 266,901 |              | $ | 292,521
|                                        |  |             |         |              |   |        



NOTE 5. Investments and Other
Assets



In March 2005, the Company received $2.2 million as final
satisfaction of the mortgage owed to the Company for a property it sold in 2003. As part of the agreement the Company surrendered an option to purchase the property. The difference between the proceeds and the carrying value of the mortgage
receivable was recorded as a gain of $0.6 million, included in Gain on sale of property and investments on the Statement of Operations.



In February 2005, the Company received $0.7 million that had been in escrow for one year pending final settlement of the sale of its investment in a private technology
company. As a result the Company recorded a gain for this amount, which has been included in Gain on sale of property and investments on the Statement of Operations. In February 2004, the Company recorded a gain of $8.6 million from this sale,
excluding the deferred portion of the proceeds.



On January 7, 2005 the Company
invested $2 million in a private technology company. The investment is carried at cost and is included in Other investments and assets.



NOTE 6. Convertible Subordinated Notes



On January 18, 2005, the Company redeemed its remaining outstanding 3.75% Convertible Subordinated Notes for a total of $70.2 million in cash, which included $1.1 million
in accrued interest and a $1.0 million call premium. In the first quarter of 2005, the Company expensed the



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remaining unamortized debt issue costs of $0.6 million, resulting in an aggregate loss of $1.6 million. The aggregate principal amount of the Notes
outstanding was $68.1 million at December 26, 2004.



NOTE 7. Comprehensive
Income



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



|                                              |  |                    |       |             |                  |        |             |  |   |             |   |  |   |        |  
|--------------------------------------------- |  | ------------------ | ----- | ----------- | ---------------- | ------ | ----------- |  | - | ----------- | - |  | - | ------ | -
|                                              |  | Three Months Ended |       |             | Six Months Ended |       
|(in thousands)                                |  | Jul 3,2005         |       | Jun 27,2004 |                  |        | Jul 3, 2005 |  |   | Jun 27,2004 |  
|Net income                                    |  | $                  | 529   |             | $                | 15,409 |             |  | $ | 3,806       |   |  | $ | 32,256 |  
|Other comprehensive income:                   |  |                    |       |             |                  |        |             |  |   |             |   |  |   |        |  
|Change in net unrealized gains on investments |  |                    | 315   |             |                  | (1,280 | )           |  |   | (281        | ) |  |   | (1,582 | )
|Change in fair value of derivatives           |  |                    | 160   |             |                  | (536   | )           |  |   | (522        | ) |  |   | (1,140 | )
|                                              |  |                    |       |             |                  |        |             |  |   |             |   |  |   |        |  
|Total                                         |  | $                  | 1,004 |             | $                | 13,593 |             |  | $ | 3,003       |   |  | $ | 29,534 |  
|                                              |  |                    |       |             |                  |        |             |  |   |             |   |  |   |        |  



NOTE 8. Net Income Per Share



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



|                                                                 |  |                    |         |                  |   |             |  |             |         |  |   |        
|---------------------------------------------------------------- |  | ------------------ | ------- | ---------------- | - | ----------- |  | ----------- | ------- |  | - | -------
|                                                                 |  | Three Months Ended |         | Six Months Ended
|(in thousands, except per share amounts)                         |  | Jul 3, 2005        |         | Jun 27,2004      |   | Jul 3, 2005 |  | Jun 27,2004
|Numerator:                                                       |  |                    |         |                  |   |             |  |             |         |  |   |        
|Net income                                                       |  | $                  | 529     |                  | $ | 15,409      |  | $           | 3,806   |  | $ | 32,256 
|                                                                 |  |                    |         |                  |   |             |  |             |         |  |   |        
|Denominator:                                                     |  |                    |         |                  |   |             |  |             |         |  |   |        
|Basic weighted average common shares outstanding (1)             |  |                    | 183,386 |                  |   | 179,570     |  |             | 182,789 |  |   | 178,989
|Effect of dilutive securities:                                   |  |                    |         |                  |   |             |  |             |         |  |   |        
|Stock options                                                    |  |                    | 4,919   |                  |   | 10,566      |  |             | 5,703   |  |   | 12,229 
|Basic and diluted weighted average common shares outstanding (1) |  |                    | 188,305 |                  |   | 190,136     |  |             | 188,492 |  |   | 191,218
|                                                                 |  |                    |         |                  |   |             |  |             |         |  |   |        
|Basic net income per share                                       |  | $                  | 0.00    |                  | $ | 0.09        |  | $           | 0.02    |  | $ | 0.18   
|                                                                 |  |                    |         |                  |   |             |  |             |         |  |   |        
|Diluted net income per share                                     |  | $                  | 0.00    |                  | $ | 0.08        |  | $           | 0.02    |  | $ | 0.17   
|                                                                 |  |                    |         |                  |   |             |  |             |         |  |   |        

---

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



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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 rate, capital resources
sufficiency, capital expenditures, interest income, restructuring activities and expenses.



These forward-looking statements apply 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 Factors That You Should Consider Before Investing in
PMC-Sierra and elsewhere in 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 hereof.



We generate revenues from the sale of semiconductor devices that we have designed and
developed. Almost all of our revenues in any given year come from the sale of semiconductors that are developed prior to that year. For example, the majority of our revenues in the first quarter of 2005 came from parts developed in 2004 and earlier.
After an individual product is completed and announced it may take several years before that device generates any significant revenues. Our current revenue is generated by a portfolio of more than 230 products.



In addition to incurring costs for the marketing, sales, and administration of selling
existing products, we expend a substantial amount every year for the 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 cost competitive in the geographic markets that we serve.



In order to align our fiscal year end with the calendar year end, the first fiscal period of
2005 consisted of 14 weeks compared to 13 in the first quarter of 2004. Therefore, the first six months of 2005 consisted of 27 weeks compared to 26 weeks in the first six months of 2004.



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Results of Operations



Second Quarters of 2005 and 2004



Net Revenues(in millions)



|             |  |                |      |        |   |      |  |     |   
|------------ |  | -------------- | ---- | ------ | - | ---- |  | --- | --
|             |  | Second Quarter |      | Change |  
|             |  | 2005           |      | 2004   |  
|Net revenues |  | $              | 71.5 |        | $ | 85.7 |  | (17 | )%
|             |  |                |      |        |   |      |  |     |   



Net revenues for the second quarter of
2005 were $71.5 million compared to $85.7 million for the same period in 2004, a decrease of $14.2 million, or 17%. Although revenues were lower in the second quarter of 2005 than the same period in 2004 due primarily to a lower volume of units
sold, revenues increased by 8% from the first quarter of 2005. This was driven by reduced levels of inventories at end customers leading to stronger orders, a continuing increase in telecom-related capital spending in our end markets, especially in
the Metro Transport area, and product cycles in the Enterprise Storage markets which favor the Companys product offering.



Gross Profit (in millions)



|                           |  |                |      |   |        |   |      |   |  |     |   
|-------------------------- |  | -------------- | ---- | - | ------ | - | ---- | - |  | --- | --
|                           |  | Second Quarter |      |   | Change |  
|                           |  | 2005           |      |   | 2004   |   |     
|Gross profit               |  | $              | 50.2 |   |        | $ | 61.9 |   |  | (19 | )%
|                           |  |                |      |   |        |   |      |   |  |     |   
|Percentage of net revenues |  |                | 70   | % |        |   | 72   | % |  |     |   



Total gross profit decreased $11.7
million, or 19%, in the second quarter of 2005 compared to the same period in 2004. This decrease is primarily due to a lower volume of units sold.



Gross profit as a percentage of revenues was 70% in the second quarter of 2005 compared with 72% in the second quarter of 2004. This resulted from fixed manufacturing
costs being allocated over a lower volume of shipments in the second quarter of 2005, reducing gross profit by approximately one percentage point, and from selling a slightly lower portion of higher margin products, which reduced gross profit by
approximately one percentage point.



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Operating Expenses and Charges (in millions)



|                                             |  |                |      |   |      |   |      |        |  |     |   
|-------------------------------------------- |  | -------------- | ---- | - | ---- | - | ---- | ------ |  | --- | --
|                                             |  | Second Quarter |      |   |      |  
|                                             |  | 2005           |      |   | 2004 |   |      | Change | 
|Research and development                     |  | $              | 29.5 |   |      | $ | 30.7 |        |  | (4  | )%
|Percentage of net revenues                   |  |                | 41   | % |      |   | 36   | %      |  |     |   
|                                             |  |                |     
|Marketing, general and administrative        |  | $              | 13.3 |   |      | $ | 12.2 |        |  | 9   | % 
|Percentage of net revenues                   |  |                | 19   | % |      |   | 14   | %      |  |     |   
|                                             |  |                |     
|Amortization of deferred stock compensation: |  |                |      |   |      |   |      |        |  |     |   
|Marketing, general and administrative        |  | $              | 0.2  |   |      | $ |     |        |  | 100 | % 
|Percentage of net revenues                   |  |                | 0    | % |      |   | 0    | %      |  |     |   
|                                             |  |                |     
|Restructuring costs                          |  | $              | 7.6  |   |      | $ |     |        |  | 100 | % 
|Percentage of net revenues                   |  |                | 11   | % |      |   | 0    | %      |  |     |   



Research and
Development and Marketing, General and Administrative Expenses



Our
research and development, or R&D, expenses were $1.2 million, or 4%, lower in the second quarter of 2005 compared to the second quarter of 2004 due primarily to $1.8 million lower development costs due to the timing of design completions and
$0.2 million lower depreciation expense. These decreases were offset by amortization of purchased intellectual property, which was $0.4 million higher than in the same period a year ago due to an increase in purchases of intellectual property in the
second half of 2004. In addition, payroll costs were higher by $0.4 million due to compensation adjustments.



Our marketing, general and administrative, or MG&A, expenses increased by $1.1 million, or 9%, in the second quarter of 2005 compared to the second quarter of 2004. This was primarily attributable to $1.1 million
in higher payroll costs due to compensation adjustments. In addition, our professional fees increased by $0.6 million due to incremental tax consulting and internal audit costs, and our facilities expenses were higher by $0.1 million. These
increases were offset by a $0.9 million reversal of a provision for doubtful accounts receivable because of a customer acquisition by a more creditworthy entity, and other decreases of $0.2 million.



Restructuring



On June 24, 2005, we expanded the workforce reduction plans that we initiated during the
first quarter of 2005 aimed at streamlining production and reducing and re-allocating operating expenses. The plans involved the termination of 26 employees from production control, quality assurance, and product engineering as a result of
consolidation of our two manufacturing facilities (Santa Clara, California and Burnaby, British Columbia) into one facility (Burnaby) and the termination of 63 employees from research and development. As a result we recorded restructuring charges of
$7.6 million including $6.6 million for termination benefits, $3.0 of which were paid out during the quarter, and a $1.0 million write-down of equipment and software assets whose value was impaired as a result of these plans. We expect to pay the
remaining $3.6 million of severance costs by the end of the third quarter of 2005. On completion of these plans we expect to achieve annual savings in this area of approximately $10 million.



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In the first quarter of 2005, we recorded restructuring charges of $0.9 million in termination benefits related to the
termination of 24 employees across all business functions. As of the end of the second quarter of 2005, all of this amount has been paid.



Restructuring  2003 and 2001



In 2003 and 2001, we implemented three restructuring plans aimed at focusing development efforts on key projects and reducing operating costs in response to the severe
and prolonged economic downturn in the semiconductor industry. Our assessment of the market demand for our products, and the development efforts necessary to meet this demand, were key factors in our decisions to implement these restructuring plans.
As end markets for our products had contracted, certain projects were curtailed in an effort to cut costs. Cost reductions in all other functional areas were also implemented, as fewer resources were required to support the reduced level of
development and sales activities during these periods.We have completed substantially all of the activities contemplated in these restructuring plans, but as of July 3, 2005 have not yet terminated the leases on our surplus facilities.
Efforts to exit these sites are ongoing, but the payments related to these facilities could extend until 2006 to 2010. Upon the final disposition of our surplus leased facilities, we expect to achieve annualized savings of approximately $15.9
million, $67.6 million, and $28.2 million in cost of revenues and operating expenses based on the expenditure levels at the time of the respective January 2003, October 2001 and March 2001 restructurings. The activity under these plans during the
three months ended July 3, 2005 was as follows:



Excess facility costs



|                         |  |              |       |   |              |   |       |            |  |   |       |   |  |   |        |  
|------------------------ |  | ------------ | ----- | - | ------------ | - | ----- | ---------- |  | - | ----- | - |  | - | ------ | -
|(in thousands)           |  | January 2003 |       |   | October 2001 |   |       | March 2001 |  |   | Total |  
|Balance at April 3, 2005 |  | $            | 3,788 |   |              | $ | 5,804 |            |  | $ | 2,994 |   |  | $ | 12,586 |  
|                         |  |              |       |  
|Cash payments            |  |              | (256  | ) |              |   | (610  | )          |  |   | (355  | ) |  |   | (1,221 | )
|                         |  |              |       |   |              |   |       |            |  |   |       |   |  |   |        |  
|Balance at July 3, 2005  |  | $            | 3,532 |   |              | $ | 5,194 |            |  | $ | 2,639 |   |  | $ | 11,365 |  
|                         |  |              |       |   |              |   |       |            |  |   |       |   |  |   |        |  



The January 2003 restructuring
included the termination of 175 employees and the closure of design centers in Maryland, Ireland and India. To date, we have recorded a restructuring charge of $18.3 million, including $1.5 million for asset write-downs. These charges related to
workforce reduction, lease and contract settlement costs, and the write-down of certain property, equipment and software assets whose value was impaired as a result of this restructuring plan. We have disposed of the property improvements and
computer equipment, and software licenses have been cancelled or are no longer being used. Cash payments made to date under this plan have been $12.3 million. A $0.9 million reversal of excess restructure provision relating primarily to workforce
reduction was recorded in 2003.



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. To date,
we have made cash payments under this plan of $153.9 million, including



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the purchase and sale of Mission Towers Two in Santa Clara, CA, for $133 million and $33 million, respectively, in the third quarter of 2003. To date, we
have reversed $5.3 million of excess restructure provision, primarily related to Mission Towers Two. Due to the continued downturn in real estate markets, the facilities costs are expected to be higher than anticipated in the original plan and as a
result, we recorded additional provisions for abandoned office facilities of $1.3 million in the fourth quarter of 2004.



In the first quarter of 2001, we recorded a charge of $19.9 million for a restructuring plan that included the termination of 223 employees across all business functions,
the consolidation of a number of facilities and the curtailment of certain research and development projects. To date, we have made cash payments of $18.7 million under this plan. Due to the continued downturn in real estate markets, we expect these
costs to be higher than anticipated in the original plan. As a result, we recorded additional provisions for abandoned office facilities of $3.1 million in the third quarter of 2003 and $2.2 million in the fourth quarter of 2004.



Other Income and Expenses (in millions)



|                           |  |                |     |   |      |   |     |        |  |     |  
|-------------------------- |  | -------------- | --- | - | ---- | - | --- | ------ |  | --- | -
|                           |  | Second Quarter |     |   |      |  
|                           |  | 2005           |     |   | 2004 |   |     | Change | 
|Interest income, net       |  | $              | 2.5 |   |      | $ | 1.1 |        |  | 137 | %
|Percentage of net revenues |  |                | 3   | % |      |   | 1   | %      |  |     |  
|                           |  |                |    
|Foreign exchange gain      |  | $              | 0.5 |   |      | $ | 0.0 |        |  | 100 | %
|Percentage of net revenues |  |                | 1   | % |      |   | 0   | %      |  |     |  



Interest income,
net



Interest income, net was $2.5 million in the second quarter of 2005
compared to $1.1 million in the second quarter of 2004. Our net interest income increased by $1.4 million compared to the second quarter of 2004 as a result of interest and amortization of debt issue cost savings of $0.7 million from the repurchase
of our 3.75% Convertible Subordinated Notes, increases in our average cash balances, net of debt, and improved investment yields.



Foreign exchange gain



Our foreign exchange gain was $0.5 million in the second quarter of 2005 compared to nil in the second quarter of 2004.



We have a significant design presence outside the United States, especially in Canada. The
majority of our operating expense exposures to changes in the value of the Canadian Dollar relative to the United States Dollar have been hedged through March 2006. The foreign exchange gain from the second quarter of 2005 relates primarily to the
re-measurement of accrued income tax amounts in our Canadian subsidiary. We do not hedge our accrual for Canadian income taxes against fluctuations in foreign currency exchange rates (see Item 3. Quantitative and Qualitative Disclosures About Market
Risk).



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Provision for income taxes



We recorded a provision for income taxes of $2.1 million in the second quarter of 2005 based on net income excluding expenses for which we
will not receive a tax benefit such as restructuring charges and stock-based compensation expense, multiplied by an expected annual effective tax rate of 20%. We reduced our effective tax rate from 25% to 20% in the first quarter of 2005 based on a
sensitivity analysis that considered tax credits available to offset forecast levels of net income, which illustrated that 20% was a more realistic rate for PMC.



First Six Months of 2005 and 2004



Net Revenues(in millions)



|             |  |                  |       |      |   |        |  |     |   
|------------ |  | ---------------- | ----- | ---- | - | ------ |  | --- | --
|             |  | First Six Months |       |      |  
|             |  | 2005             |       | 2004 |   | Change | 
|Net revenues |  | $                | 137.7 |      | $ | 164.4  |  | (16 | )%
|             |  |                  |       |      |   |        |  |     |   



Net revenues decreased by 16% in the
first six months of 2005 compared to the same period a year ago. Although revenues were lower than in the same period of 2004 due primarily to a lower volume of units sold, revenues increased from the level of revenue in the second half of 2004.
This increase was driven by reduced levels of inventories at end customers leading to stronger orders, a continuing increase in telecom-related capital spending in our end markets, especially in the Metro Transport area, and product cycles in the
Enterprise Storage markets which favor the Companys product offering. In addition, the percentage of revenues from Asia grew in the first and second quarters of 2005 compared to the fourth quarter of 2004. Revenues generated during the extra
week of the first quarter (the 14thweek), were approximately $2 million.



Gross Profit(in millions)



|                           |  |                  |      |   |      |   |       |        |  |     |   
|-------------------------- |  | ---------------- | ---- | - | ---- | - | ----- | ------ |  | --- | --
|                           |  | First Six Months |      |   |      |  
|                           |  | 2005             |      |   | 2004 |   |       | Change | 
|Gross profit               |  | $                | 96.7 |   |      | $ | 116.8 |        |  | (17 | )%
|                           |  |                  |      |   |      |   |       |        |  |     |   
|Percentage of net revenues |  |                  | 70   | % |      |   | 71    | %      |  |     |   



Total gross profit decreased $20.1
million, or 17%, in the first six months of 2005 compared to the same period a year ago.



Gross profit as a percentage of revenues decreased a percentage point from 71% in the first six months of 2004 to 70% in the first six months of 2005. This decrease resulted from the allocation of fixed manufacturing
costs over a lower volume of shipments.



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Operating Expenses and Charges(in millions)



|                                             |  |                  |      |   |      |   |      |        |  |     |   
|-------------------------------------------- |  | ---------------- | ---- | - | ---- | - | ---- | ------ |  | --- | --
|                                             |  | First Six Months |      |   |      |  
|                                             |  | 2005             |      |   | 2004 |   |      | Change | 
|Research and development                     |  | $                | 60.9 |   |      | $ | 59.5 |        |  | 2   | % 
|Percentage of net revenues                   |  |                  | 44   | % |      |   | 36   | %      |  |     |   
|                                             |  |                  |     
|Marketing, general and administrative        |  | $                | 26.3 |   |      | $ | 24.1 |        |  | 9   | % 
|Percentage of net revenues                   |  |                  | 19   | % |      |   | 15   | %      |  |     |   
|                                             |  |                  |     
|Amortization of deferred stock compensation: |  |                  |      |   |      |   |      |        |  |     |   
|Marketing, general and administrative        |  | $                | 0.2  |   |      | $ | 0.7  |        |  | (71 | )%
|Percentage of net revenues                   |  |                  | 0    | % |      |   | 0    | %      |  |     |   
|                                             |  |                  |     
|Restructuring costs                          |  | $                | 8.5  |   |      | $ |     |        |  | 100 | % 
|Percentage of net revenues                   |  |                  | 6    | % |      |   | 0    | %      |  |     |   



Research and
Development and Marketing, General and Administrative Expenses



Our
research and development, or R&D, expenses increased by $1.4 million, or 2%, in the first six months of 2005 compared to the same period a year ago driven primarily by $1.9 million higher personnel costs resulting from the incremental week in
the first quarter and compensation adjustments. Amortization of intellectual property was $0.8 million higher than in the same period a year ago due to an increase in purchases of intellectual property in the second half of 2004. These increases
were offset by a $1.0 million reduction in development costs due to the timing of design completions and $0.3 million lower depreciation expense as equipment and development tools became fully depreciated and were not replaced.



Our marketing, general and administrative, or MG&A, expenses increased by $2.2 million,
or 9%, in the first six months of 2005 compared to the same period a year ago. Our MG&A personnel and related costs increased by $2.4 million due to the incremental week in the first quarter and compensation adjustments. In addition, our
professional fees increased by $0.6 million due to higher tax consulting and internal audit costs, and our facilities expenses were higher by $0.4 million. These increases were offset by the $0.9 reversal of provision for doubtful accounts
receivable based on the completion of an analysis of the credit status of a significant customer and a $0.3 million reduction in depreciation expense.



Restructuring



On June 24, 2005, we expanded the workforce reduction plans that we initiated during the first quarter of 2005 aimed at streamlining production and reducing and
re-allocating operating expenses. The plans involved the termination of 26 employees from production control, quality assurance, and product engineering as a result of consolidation of our two manufacturing facilities (Santa Clara, California and
Burnaby, British Columbia) into one facility (Burnaby) and the termination of 63 employees from research and development. As a result we recorded second quarter restructuring charges of $7.6 million including $6.6 million for termination benefits,
$3.0 of which were paid out during the quarter, and a $1.0 million write-down of



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equipment and software assets whose value was impaired as a result of these plans. We expect to pay the remaining $3.6 million of severance costs by the end
of the third quarter of 2005. On completion of the plans we expect to achieve annual savings in this area of approximately $10 million.



In the first quarter of 2005, we recorded restructuring charges of $0.9 million in termination benefits related to the termination of 24 employees across all business
functions. As of the end of the second quarter of 2005, all of this amount has been paid.



Restructuring  2003 and 2001



In 2003
and 2001, we implemented three restructuring plans aimed at focusing development efforts on key projects and reducing operating costs in response to the severe and prolonged economic downturn in the semiconductor industry. Our assessment of the
market demand for our products, and the development efforts necessary to meet this demand, were key factors in our decisions to implement these restructuring plans. As end markets for our products had contracted, certain projects were curtailed in
an effort to cut costs. Cost reductions in all other functional areas were also implemented, as fewer resources were required to support the reduced level of development and sales activities during these periods.We have completed
substantially all of the activities contemplated in these restructuring plans, but as of July 3, 2005 have not yet terminated the leases on our surplus facilities. Efforts to exit these sites are ongoing, but the payments related to these facilities
could extend until 2006 to 2010. Upon the final disposition of our surplus leased facilities, we expect to achieve annualized savings of approximately $15.9 million, $67.6 million, and $28.2 million in cost of revenues and operating expenses based
on the expenditure levels at the time of the respective January 2003, October 2001 and March 2001 restructurings. The activity under these plans during the six months ended July 3, 2005 was as follows:



Excess facility costs



|                             |  |             |       |   |             |   |        |           |  |   |       |   |  |   |        |  
|---------------------------- |  | ----------- | ----- | - | ----------- | - | ------ | --------- |  | - | ----- | - |  | - | ------ | -
|(in thousands)               |  | January2003 |       |   | October2001 |   |        | March2001 |  |   | Total |  
|Balance at December 26, 2004 |  | $           | 3,895 |   |             | $ | 6,458  |           |  | $ | 3,382 |   |  | $ | 13,735 |  
|                             |  |             |       |  
|Cash payments                |  |             | (363  | ) |             |   | (1,264 | )         |  |   | (743  | ) |  |   | (2,370 | )
|                             |  |             |       |   |             |   |        |           |  |   |       |   |  |   |        |  
|Balance at July 3, 2005      |  | $           | 3,532 |   |             | $ | 5,194  |           |  | $ | 2,639 |   |  | $ | 11,365 |  
|                             |  |             |       |   |             |   |        |           |  |   |       |   |  |   |        |  



The January 2003 restructuring
included the termination of 175 employees and the closure of design centers in Maryland, Ireland and India. To date, we have recorded a restructuring charge of $18.3 million, including $1.5 million for asset write-downs. These charges related to
workforce reduction, lease and contract settlement costs, and the write-down of certain property, equipment and software assets whose value was impaired as a result of this restructuring plan. We have disposed of the property improvements and
computer equipment, and software licenses have been cancelled or are no longer being used. Cash payments made to date under this plan were $12.3 million. A $0.9 million reversal of excess restructure provision relating primarily to workforce
reduction was recorded in 2003.



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##### Table of Contents

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. To date, we have made cash payments under this plan of $153.9 million, including
the purchase and sale of Mission Towers Two in Santa Clara, CA, for $133 million and $33 million, respectively, in the third quarter of 2003. To date, we have reversed $5.3 million of excess restructure provision, primarily related to Mission Towers
Two. Due to the continued downturn in real estate markets, the facilities costs are expected to be higher than anticipated in the original plan and as a result, we recorded additional provisions for abandoned office facilities of $1.3 million in the
fourth quarter of 2004.



In the first quarter of 2001, we recorded a charge of
$19.9 million for a restructuring plan that included the termination of 223 employees across all business functions, the consolidation of a number of facilities and the curtailment of certain research and development projects. To date, we have made
cash payments of $18.7 million under this plan. Due to the continued downturn in real estate markets, we expect these costs to be higher than anticipated in the original plan. As a result, we recorded additional provisions for abandoned office
facilities of $3.1 million in the third quarter of 2003 and $2.2 million in the fourth quarter of 2004.



Other Income and Expenses(in millions)



|                                                                    |  |                  |      |   |      |   |      |        |  |     |   
|------------------------------------------------------------------- |  | ---------------- | ---- | - | ---- | - | ---- | ------ |  | --- | --
|                                                                    |  | First Six Months |      |   |      |  
|                                                                    |  | 2005             |      |   | 2004 |   |      | Change | 
|Interest income, net                                                |  | $                | 5.2  |   |      | $ | 2.0  |        |  | 160 | % 
|Percentage of net revenues                                          |  |                  | 7    | % |      |   | 2    | %      |  |     |   
|                                                                    |  |                  |     
|Loss on extinguishment of debt and amortization of debt issue costs |  | $                | (1.6 | ) |      | $ | (2.0 | )      |  | (20 | )%
|Percentage of net revenues                                          |  |                  | -2   | % |      |   | -2   | %      |  |     |   
|                                                                    |  |                  |     
|Gain on property and investments                                    |  | $                | 1.4  |   |      | $ | 8.6  |        |  | (84 | )%
|Percentage of net revenues                                          |  |                  | 1    | % |      |   | 5    | %      |  |     |   



Interest income,
net



Interest income was $5.2 million in the first six months of 2005
compared to $2.0 million in the first six months of 2004, an increase of $3.2 million. The increase was the result of interest and amortization of debt issue cost savings of $1.2 million from the repurchase of our 3.75% Convertible Subordinated
Notes, and $0.5 million interest received as part of a tax settlement. The remaining increase is due to increases in our average cash balances, net of debt, improved investment yields and an additional week in the first quarter of 2005 compared to
the first quarter of 2004.



Loss on extinguishment of debt
and amortization of debt issue costs



On January 18, 2005, we redeemed our
remaining outstanding 3.75% Convertible Subordinated Notes for a total of $70.2 million in cash, which included $1.1 million in accrued interest and a $1.0 million call premium. We expensed the remaining unamortized debt issue costs of $0.6 million,
resulting in an aggregate net loss on redemption of $1.6 million.



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In the first quarter of 2004, we repurchased $106.9 million face value of our convertible subordinated notes at par and
wrote off $1.5 million of related unamortized debt issue costs. We also incurred transaction related costs of $0.3 million resulting in an aggregate net loss on the repurchase of $1.8 million.



Gain on sale of property and investments



In February 2005, we received $0.7 million that had been in escrow for one year pending
final settlement of the sale of our investment in a private technology company. As a result we recorded a gain for this amount, which has been included in Gain on sale of property and investments on the Statement of Operations. In February 2004 we
recorded a gain of $8.6 million from this sale, which excluded this deferred portion of the proceeds.



In March 2005, we received $2.2 million as final satisfaction of the mortgage owed to us for a property we sold in 2003. As part of the agreement we surrendered an option to purchase the property. The difference
between the proceeds and the carrying value of the mortgage receivable was recorded as a gain of $0.6 million on the Statement of Operations.



Provision for income taxes



We recorded a provision for income taxes of $2.0 million in the first six months of 2005. Our provision for income taxes was affected by two factors. First, we decreased
our expected annual effective tax rate from 25% to 20% based on a sensitivity analysis that considered tax credits available to offset forecast levels of net income, which illustrated that 20% was a more realistic rate for PMC. Second, in the first
quarter of 2005 we reversed a $0.9 million accrual for state taxes based on the completion of a tax audit.



Critical Accounting Estimates



General



Managements Discussion
and Analysis of Financial Condition and Results of Operations is based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these
financial statements requires us to make estimates and assumptions that affect our reported assets, liabilities, revenue and expenses, and related disclosure of our contingent assets and liabilities. Our significant accounting policies are outlined
in Note 1 to the Consolidated Financial Statements in our Annual Report on Form 10-K for the period ended December 26, 2004, which also provides commentary on our most critical accounting estimates. The following additional estimates were of note
during the first six months of 2005:



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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.



During 2001, we recorded total charges of $155 million for the restructuring of excess facilities as part of restructuring plans implemented that year. The total remaining estimate of $7.8 million related to the 2001 restructuring plans
represents 100% of the estimated total future operating costs and lease obligations for the effected sites.



In the first quarter of 2003, we announced a further restructuring of our operations, which resulted in the closing of an additional four product development sites and the recording of $9.6 million charge related to
these facilities. The total remaining estimate of $3.5 million related to the closing of all four sites represents just over 55% of the estimated total future operating costs and lease obligations for these sites.



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



Income Taxes



In estimating our annual effective tax rate we review our forecasted net income for the year by geographic area and apply the appropriate tax rates. We also consider the
income tax credits available in each tax jurisdiction. Based on the analysis performed in the first quarter of 2005 we reduced our effective tax rate from 25% to 20%.



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 we operate in. However our estimates are subject to review and assessment by the tax authorities and the courts of those countries. The
timing of any such review and final assessment of our liabilities by local authorities is substantially out of our control and is dependent on the actions by those authorities in the countries we operate in. 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.



In certain jurisdictions we have incurred losses and other costs that can be applied against future taxable earnings to reduce our tax liability on those earnings. As we are uncertain of realizing the future benefit
of those losses and expenditures, we have taken a valuation allowance against all domestic and foreign deferred tax assets.



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##### Table of Contents

Business Outlook



We expect our revenues for the third quarter of 2005 to be in the range of $76 to $79 million. As in the past, and consistent with business
practice in the semiconductor industry, a significant portion of our revenues are likely to be derived from orders placed and shipped during the same quarter, which we call our turns business. Our revenue forecast depends in part on
achieving a 26% to 29% rate of turns business. This revenue outlook considers an opening backlog position that is 12% greater than in the prior quarter, but also allows for some uncertainty in the turns rate business available to us during the
summer quarter. Our quarterly revenues may vary considerably as our customers adjust to fluctuating demand for products in their markets and continue to manage their inventory levels.



We anticipate our third quarter 2005 gross margins will be approximately 71% to 72%, but as in past quarters this could vary depending on
the volumes of products sold, since many of our costs are fixed. Margins could also vary depending on the mix of products sold.



We expect our third quarter of 2005 operating expenses to be approximately consistent with or lower than the prior quarter.



We anticipate that interest and other income in the third quarter of 2005 will be
approximately $2.5 million, and our income tax provision rate will be 20%.



Liquidity & Capital Resources



Our principal
source of liquidity at July 3, 2005 was $361.9 million in cash and investments, which included $306.7 million in cash and cash equivalents and short-term investments and $55.2 million of long-term investments in bonds and notes.



In the first six months of 2005, we generated $7.2 million of cash from operating activities.
Significant changes in working capital accounts included:



| |  |  | a $5.2 million increase in accounts receivable, primarily due to increased revenues, an increase in the number of days outstanding from 29 days at the end of 2004 to 32 days at the
end of the second quarter, and a reversal of $0.9 million of our allowance for doubtful accounts;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a $2.5 million decrease in accounts payable and accrued liabilities due primarily to a $1.0 million reduction in accrued payroll due to the timing of salary payments and a $1.1
million payment of accrued interest in the first quarter;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a $2.2 million increase in accrued restructuring costs which includes an increase of $8.5 million for workforce reduction initiatives undertaken in the first and second quarters of
2005, net of $6.3 million in payments related to all remaining plans;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a $1.8 million increase in our provision for income taxes as our provision for income taxes increased in line with our profitability; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a $1.1 million reduction in inventory as a result of higher sales and an increase in the number of times our inventory turned over on an annualized basis from 4.8 at the end of 2004
to 5.8 at the end of the second quarter of 2005.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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In the first six months of 2005, cash flows from our investment activities included:



| |  |  | cash proceeds of $185.8 million from the sale or maturity of short and long-term debt investments;
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | cash used for the purchase of $92.6 million of long and short-term debt investments;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | cash proceeds of $3.3 million from the sale of investments, property and other assets;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | an investment of $2.0 million in a private technology company;
| | - |  | --------------------------------------------------------------



| |  |  | cash proceeds of $1.6 million from the refund of wafer fabrication deposits; and
| | - |  | --------------------------------------------------------------------------------



| |  |  | an investment of $4.2 million for the purchases of property, equipment and intangible assets.
| | - |  | ---------------------------------------------------------------------------------------------



In the first six months of 2005, cash flows from our financing activities included:



| |  |  | $70.2 million used to redeem our remaining outstanding 3.75% Convertible Subordinated Notes; and
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | cash proceeds of $12.7 million from the issuance of common stock under our equity-based compensation plans.
| | - |  | -----------------------------------------------------------------------------------------------------------



As of July 3, 2005, we had cash commitments made up of the following:



(in thousands)



|                                  |  |       |        |      |   |        |  |      |        |      |   |        |  |           |        |  |   |       |  |   |       
|--------------------------------- |  | ----- | ------ | ---- | - | ------ |  | ---- | ------ | ---- | - | ------ |  | --------- | ------ |  | - | ----- |  | - | ------
|Contractual Obligations           |  | Total |        | 2005 |   | 2006   |  | 2007 |        | 2008 |   | 2009   |  | After2009
|Operating Lease Obligations:      |  |       |        |      |   |        |  |      |        |      |   |        |  |           |        |  |   |       |  |   |       
|Minimum Rental Payments           |  | $     | 52,857 |      | $ | 4,967  |  | $    | 9,555  |      | $ | 9,615  |  | $         | 11,001 |  | $ | 6,649 |  | $ | 11,070
|Estimated Operating Cost Payments |  |       | 20,934 |      |   | 2,108  |  |      | 3,971  |      |   | 3,822  |  |           | 3,620  |  |   | 2,920 |  |   | 4,493 
|                                  |  |       |        |      |   |        | 
|Purchase and other Obligations    |  |       | 3,531  |      |   | 3,036  |  |      | 474    |      |   | 21     |  |           |       |  |   |      |  |   |      
|                                  |  |       |        |      |   |        |  |      |        |      |   |        |  |           |        |  |   |       |  |   |       
|                                  |  | $     | 77,322 |      | $ | 10,111 |  | $    | 14,000 |      | $ | 13,458 |  | $         | 14,621 |  | $ | 9,569 |  | $ | 15,563
|                                  |  |       |        |      |   |        |  |      |        |      |   |        |  |           |        |  |   |       |  |   |       



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 $7.2 million at July 3, 2005 for inventory and other expenses that will be received in the coming 90 days and that will require settlement 30 days thereafter.



We have a line of credit with a bank that allows us to borrow up to $1.5 million provided we
maintain eligible investments with the bank equal to the amount drawn on the line of credit. At July 3, 2005 we had committed $1.3 million under letters of credit as security for office leases.



We expect to use approximately $11.8 million of cash in the remainder of 2005 for capital
expenditures, including purchased intellectual property. Based on our current operating prospects, we believe that existing sources of liquidity will satisfy our projected operating, working capital, venture investing, capital expenditure, wafer
deposit and remaining restructuring requirements through the end of 2006.



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While we believe our current sources of liquidity will satisfy our long-term needs for capital, we operate in an industry
that is subject to the rapid technological and economic changes. In addition, we contemplate mergers and acquisitions of other companies or assets as part of our business strategy. Consequently in the future we may determine that our sources of
liquidity are insufficient, and we may proceed with financing or other activities, which may dilute your investment or impact our liquidity and operating results.



FACTORS THAT YOU SHOULD CONSIDER BEFORE
INVESTING IN PMC-SIERRA



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.



We are subject to rapid changes in
demand for our products due to customer inventory levels, production schedules, fluctuations in demand for networking equipment and our customer concentration.



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



We have very limited revenue visibility.



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 quarter to quarter. Although we have seen a steady improvement in our turns business during the past several quarters, uncertainty in our customers end markets and
our customers increased focus on cash management may cause our customers to delay product orders and reduce delivery lead-time expectations, which reduces our ability to project revenues beyond the current quarter.



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



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. In addition, 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 of certain of their components.



We may be unable to deliver products to customers when they require them if we incorrectly
estimate future demand, and this may lead to higher fluctuations in shipments of our products. We may also experience an increase in the proportion of our revenues in future periods that will be from orders placed and fulfilled within the same
period, which would further decrease our ability to accurately forecast operating results. As most of our costs are fixed in the short term, a reduction in demand for our products may cause a proportionately greater decline in our operating results.



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Changes in the political and economic climate in China and Taiwan may have a significant impact on
our profitability.



China represents a significant portion of our net
revenues (17% and 18% for each of the quarters ended July 3, 2005 and June 27, 2004, respectively). Our financial condition and results of operations are becoming increasingly dependent on our sales in China and the majority of our wafer supply
comes from Taiwan. China has large organizations with major programs that can start and stop quickly. For example, in 2004 our operating profits were adversely affected by a sudden slowdown in telecom infrastructure build-out in China. Any
instability in Chinas economic environment could lead to a contraction of capital spending by our customers. Additional risks to us include 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.



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.



We depend on a limited number of customers for a major
portion of our revenues. Through direct, distributor and subcontractor purchases, Cisco Systems accounted for more than 10% of our revenues in the second quarter of 2005. We do not have long-term volume purchase commitments from any of our major
customers. 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.



Product sales mix may adversely affect our profitability over time.



Our products range widely in terms of the margins they generate. A change in product sales mix could impact our operating results
materially.



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



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



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Increasing competition can make it more difficult to achieve design wins.



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 more 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.



We face significant competition from two major fronts. First, we compete against established peer-group semiconductor companies that focus on the communications semiconductor business. These companies include Agere
Systems, Applied Micro Circuits Corporation, Broadcom, Exar Corporation, Conexant Systems, Marvell Technology Group, Multilink Technology Corporation, Silicon Image, Transwitch and Vitesse Semiconductor. These companies are well financed, have
significant communications semiconductor technology assets, have established sales channels, and are dependent on the market in which we participate for the bulk of their revenues.



Other competitors include major domestic and international semiconductor companies, such as Agilent, Cypress Semiconductor, Intel, IBM,
Infineon, Integrated Device Technology, Maxim Integrated Products, Motorola, NEC, Texas Instruments and Toshiba. These companies are concentrating an increasing amount of their substantial financial and other resources on the markets in which we
participate. This represents a serious competitive threat to us.



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



We may have to redesign our
products to meet evolving industry standards and customer specifications, which may prevent or delay future revenue growth.



We sell products to customers whose characteristics include evolving industry standards, short product lifespans, and new manufacturing and design technologies. Many of
the standards and protocols for our products are based on networking technologies that may not have been widely adopted or ratified by one or more of the standard-setting bodies in our customers industries. Our customers may delay or alter
their design demands during this standard-setting process. In response, we must redesign our products to suit these changing demands. Redesign is expensive and usually delays the production of our products. Our products may become obsolete during
these delays.



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



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



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



Many of our new products are designed to take advantage of new manufacturing processes offering smaller manufacturing 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 geometries is critical for us to remain competitive. We could experience difficulties in migrating to future geometries or manufacturing processes, which would result in the delay of the production of our products. Our
products may become obsolete during these delays, or allow competitors parts to be chosen by customers during the design process.



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



Our
products generally take between 12 and 24 months from initial conceptualization to development of a viable prototype, and another 3 to 18 months to be designed into our customers equipment and sold in production quantities. 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.



Our
strategy includes broadening our business into the Enterprise, Storage and Consumer markets. We may not be successful in achieving significant sales in these new markets.



The Enterprise, Storage and Consumer markets are already serviced by incumbent suppliers who have established relationships with customers.
We may be unsuccessful in displacing these suppliers, or having our products designed into products for different market needs. In order to compete against incumbents, we may need to lower our prices to win new business, which could lower our gross
margin. We may incur increased research, development and sales costs to address these new markets.



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Our strategy of expansion in new markets may cause our profit margins to decline.



Our business strategy contemplates expansion of our product offerings in relatively high
volume target markets, such as storage and consumer applications. These markets typically are characterized by stronger price competition and, consequently, lower per unit profit margins. If we are successful in these markets, our overall profit
margins could decline, as lower margin products may comprise a greater portion of our revenues.



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



In addition to selling our products in a number of countries, a significant portion of our
research and development and manufacturing is conducted outside the United States. The geographic diversity of our business operations could hinder our ability to coordinate design 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.



We are exposed to the credit risk of some of our customers, and we may have difficulty collecting receivables from customers based in foreign
countries.



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 networking equipment customers, who generally 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 represent a higher credit risk. Should these companies enter into bankruptcy proceedings or breach their debt covenants, our revenues could decrease, and collection of our significant accounts receivables
with these companies could be jeopardized.



We may lose
our ability to design or produce products, could face additional unforeseen costs or could lose access to key customers if any of the nations in which we conduct business impose trade barriers or new communications standards.



We may have difficulty obtaining export licenses for certain technology produced for us
outside the United States. If a foreign country imposes new taxes, tariffs, quotas, and other trade barriers and restrictions or the United States and a foreign country develop hostilities or change diplomatic and trade relationships, we may not be
able to continue manufacturing or sub-assembly of our products in that country and may have fewer sales in that country. We may also have fewer sales in a country that imposes new communications standards or technologies. This could inhibit our
ability to meet our customers demand for our products and lower our revenues.



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



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



We regularly limit our exposure to foreign exchange rate fluctuations from our Canadian
dollar net asset or liability positions. We do not hedge our accrual for Canadian income taxes in the ordinary course of business, and consequently in the second quarter of 2005 we recorded a $0.5 million foreign exchange gain relating to this item.
Our profitability would be materially impacted by a 5% shift in the foreign exchange rates between United States and Canadian currencies.



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



Acquiring products, technologies, or businesses from third parties is part of
our business strategy. Management may be diverted from our operations while they identify and negotiate these acquisitions and integrate an acquired entity into our operations. Also, we may be forced to develop expertise outside our existing
businesses, and replace key personnel who leave due to an acquisition.



An
acquisition could absorb substantial cash resources, require us to incur or assume debt obligations, or issue additional equity. If we issue more equity, we may dilute our common stock with securities that have an equal or a senior interest in our
Company.



Acquired entities also may have unknown liabilities, and the combined
entity may not achieve the results that were anticipated at the time of the acquisition.



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 result in 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.



Although we, our customers and our suppliers 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



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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 2005 restructuring activities will increase our dependence on microprocessor cores licensed from third parties.



In June 2005, we implemented a workforce reduction plan that eliminated 63 positions from research and development in our Santa Clara design
center. A significant portion of our revenues is derived from sales of microprocessors which have been developed at this location. In the future, our microprocessor road map will be dependent on successful acquisition and integration of
microprocessor 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 microprocessor based products in the future.



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



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



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



We may not be able to meet customer demand for our products if we do not
accurately predict demand or if we fail to secure adequate wafer fabrication or assembly parts and capacity.



We currently do not have the ability to accurately predict what products our customers will need in the future. Anticipating demand is difficult because our customers
face volatile pricing and demand for their end-user networking equipment, our customers are focusing more on cash preservation and tighter inventory management, and because we supply a large number of products to a variety of customers and contract
manufacturers who have many equipment programs for which they purchase our products. Our customers are frequently requesting



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shipment of our products earlier than our normal lead times. If we do not accurately predict what mix of products our customers may order, we may not be able
to meet our customers demand in a timely manner or we may be left with unwanted inventory, which could adversely affect our future operating results.



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. Three outside wafer foundries supply
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, 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, 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 in Asia for assembly of our semiconductor
products that could delay and limit our product shipments.



Subcontractors in Asia assemble all of our semiconductor products into a variety of packages. Raw material shortages, political and social instability, assembly house service disruptions, currency fluctuations, or other circumstances in the
region could force us to seek additional or alternative sources of supply or assembly. This could lead to supply constraints or product delivery delays that, in turn, may result in the loss of revenues. We have less control over delivery schedules,
assembly processes, quality assurances and costs than competitors that do not outsource these tasks.



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



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



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Our estimated restructuring accruals may not be adequate.



In 2005, 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 reduced revenue expectations.



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



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



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



If we cannot protect our proprietary technology, we may not be able to prevent
competitors from copying 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.



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.



We develop, manufacture and sell our products in Asian and other countries that may not
protect our products or intellectual property rights to the same extent as the laws of the United States. This makes piracy of our technology and products more likely. Steps we take to protect our proprietary information may not be adequate to
prevent theft of our technology. We may not be able to prevent our competitors from independently developing technologies that are similar to or better than ours.



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



Vigorous protection and pursuit of intellectual property rights or positions characterize the semiconductor industry. This often results in expensive and lengthy litigation. Although we have neither received any
material claims relating to the infringement of patents or other intellectual property rights owned by third parties nor are we aware of any such potential claims, we, and our customers or suppliers, may be accused of infringing on 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.



Patent disputes in the semiconductor industry are often settled through cross-licensing
arrangements. Because we currently do not have a substantial portfolio of patents compared to our larger competitors, we may not be able to settle an alleged patent infringement claim through a cross-licensing arrangement. We are therefore 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.



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.



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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 this litigation.



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



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



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



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



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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 Investments in Bonds and Notes:



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



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 July 3, 2005, 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 $0.8 million, $1.6 million and $2.3 million, respectively.



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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Foreign Currency:



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



Through our operations in Canada and elsewhere outside the United States, we incur research
and development, customer support costs and administrative expenses in Canadian and other 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.



As at July 3, 2005, we had eight currency
forward contracts outstanding that qualified and were designated as cash flow hedges. The U.S. dollar notional amount of these contracts was $62.9 million and the contracts had a fair value of $1.2 million.



We attempt to limit our exposure to foreign exchange rate fluctuations from our Canadian
dollar net asset or liability positions. We do not hedge our accruals for Canadian income taxes in the ordinary course of business, and consequently in the second quarter of 2005 we recorded a $0.5 million foreign exchange gain relating to this
item. Our profitability would be materially impacted by a shift in the foreign exchange rates between United States and Canadian currencies. For example, if the value of the United States dollar decreased by 5% relative to the Canadian dollar, our
profitability would decrease by $2.7 million.



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 recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.



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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 period covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



Part II  OTHER INFORMATION



Item 4. SUBMISSION OF MATTERS TO A VOTE BY STOCKHOLDERS



We held our Annual Meeting of Stockholders on May 25, 2005 to elect our directors and to ratify the appointment of Deloitte & Touche LLP as our independent auditors for the 2005 fiscal year.



All nominees for directors were elected and the appointment of auditors was ratified. The
voting on each matter is set forth below:



Election of the Directors of the
Company.



|                 |  |             |  |           
|---------------- |  | ----------- |  | ----------
|Nominee          |  | For         |  | Withheld  
|Robert Bailey    |  | 152,725,310 |  | 9,243,083 
|Richard Belluzzo |  | 150,235,643 |  | 11,732,750
|James Diller     |  | 127,761,410 |  | 34,206,983
|Jonathan Judge   |  | 134,162,559 |  | 27,805,834
|William Kurtz    |  | 150,236,269 |  | 11,372,124
|Frank Marshall   |  | 155,833,866 |  | 6,134,527 



Proposal to ratify the appointment of
Deloitte & Touche LLP as our independent auditors for the 2005 fiscal year.



|                |  |                    |  |                
|--------------- |  | ------------------ |  | ---------------
|For 146,732,685 |  | Against 14,355,032 |  | Abstain 880,676



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---

##### Table of Contents

Item 6. EXHIBITS



|Exhibits | 
|-------- | -



|     |  |                                                                                                                                            
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------
|11.1 |  | Calculation of net income per share  included in Note 8 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)                                          



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: July 26, 2005 |  | /s/ Alan F. Krock           
|                    |  | Alan F. Krock               
|                    |  | Vice President, Finance     
|                    |  | Chief Financial Officer and 
|                    |  | Principal Accounting Officer



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