##### 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 October 2, 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 ̈



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



Common shares outstanding at November 2, 2005  183,240,526



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##### Table of Contents

INDEX



|                               |  |                                                                                       |  |   
|------------------------------ |  | ------------------------------------------------------------------------------------- |  | --
|                               |  | Page                                                                                 
|PART I -
FINANCIAL INFORMATION |  |                                                                                      
|                               |  |                                                                                      
|Item 1.                        |  | Financial Statements (unaudited)                                                      |  |   
|                               |  |                                                                                      
|                               |  | -        
Condensed consolidated statements of operations                             |  | 3 
|                               |  |                                                                                      
|                               |  | -        
Condensed consolidated balance sheets                                       |  | 4 
|                               |  |                                                                                      
|                               |  | -        
Condensed consolidated statements of cash flows                             |  | 5 
|                               |  |                                                                                      
|                               |  | -        
Notes to the condensed consolidated financial statements                    |  | 6 
|                               |  |                                                                                      
|Item 2.                        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 15
|                               |  |                                                                                      
|Item 3.                        |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 41
|                               |  |                                                                                      
|Item 4.                        |  | Controls and Procedures                                                               |  | 42
|                               | 
|PART II -
OTHER INFORMATION    |  |                                                                                      
|                               |  |                                                                                      
|Item 6.                        |  | Exhibits                                                                              |  | 43
|                               | 
|Signatures                     |  | 43                                                                                   



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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 |         |   | Nine Months Ended |  
|                                                                 |  | Oct 2,2005         |         |   | Sep 26,2004       |   |         | Oct 2,2005 |  |   | Sep 26,2004 |  
|Net revenues                                                     |  | $                  | 76,203  |   |                   | $ | 71,173  |            |  | $ | 213,855     |   |  | $ | 235,536 |  
|Cost of revenues                                                 |  |                    | 20,131  |   |                   |   | 21,024  |            |  |   | 61,124      |   |  |   | 68,624  |  
|                                                                 |  |                    |         |   |                   |   |         |            |  |   |             |   |  |   |         |  
|Gross profit                                                     |  |                    | 56,072  |   |                   |   | 50,149  |            |  |   | 152,731     |   |  |   | 166,912 |  
|                                                                 |  |                    |         |  
|Other costs and expenses:                                        |  |                    |         |   |                   |   |         |            |  |   |             |   |  |   |         |  
|Research and development                                         |  |                    | 27,205  |   |                   |   | 30,168  |            |  |   | 88,077      |   |  |   | 89,659  |  
|Marketing, general and administrative                            |  |                    | 14,839  |   |                   |   | 12,148  |            |  |   | 41,094      |   |  |   | 36,276  |  
|Amortization of deferred stock compensation:                     |  |                    |         |   |                   |   |         |            |  |   |             |   |  |   |         |  
|Marketing, general and administrative                            |  |                    |        |   |                   |   |        |            |  |   | 215         |   |  |   | 697     |  
|Acquisition costs                                                |  |                    |        |   |                   |   | 1,212   |            |  |   |            |   |  |   | 1,212   |  
|Restructuring costs and other charges                            |  |                    | 5,359   |   |                   |   |        |            |  |   | 13,833      |   |  |   |        |  
|                                                                 |  |                    |         |   |                   |   |         |            |  |   |             |   |  |   |         |  
|Income (loss) from operations                                    |  |                    | 8,669   |   |                   |   | 6,621   |            |  |   | 9,512       |   |  |   | 39,068  |  
|                                                                 |  |                    |         |  
|Other income and expense:                                        |  |                    |         |   |                   |   |         |            |  |   |             |   |  |   |         |  
|Interest income, net                                             |  |                    | 2,874   |   |                   |   | 1,319   |            |  |   | 8,061       |   |  |   | 3,330   |  
|Foreign exchange gain (loss)                                     |  |                    | (3,378  | ) |                   |   | 98      |            |  |   | (3,456      | ) |  |   | 85      |  
|Loss on debt extinguishment and amortization of debt issue costs |  |                    |        |   |                   |   | (97     | )          |  |   | (1,634      | ) |  |   | (2,136  | )
|Gain on sale of property and investments                         |  |                    |        |   |                   |   | 655     |            |  |   | 1,439       |   |  |   | 9,242   |  
|                                                                 |  |                    |         |   |                   |   |         |            |  |   |             |   |  |   |         |  
|Income before provision for income taxes                         |  |                    | 8,165   |   |                   |   | 8,596   |            |  |   | 13,922      |   |  |   | 49,589  |  
|Provision for income taxes                                       |  |                    | (2,230  | ) |                   |   | (2,288  | )          |  |   | (4,181      | ) |  |   | (11,025 | )
|                                                                 |  |                    |         |   |                   |   |         |            |  |   |             |   |  |   |         |  
|Net income                                                       |  | $                  | 5,935   |   |                   | $ | 6,308   |            |  | $ | 9,741       |   |  | $ | 38,564  |  
|                                                                 |  |                    |         |   |                   |   |         |            |  |   |             |   |  |   |         |  
|                                                                 |  |                    |         |   |                   |   |         |            |  |   |             |   |  |   |         |  
|Net income per common share - basic                              |  | $                  | 0.03    |   |                   | $ | 0.03    |            |  | $ | 0.05        |   |  | $ | 0.21    |  
|Net income per common share - diluted                            |  | $                  | 0.03    |   |                   | $ | 0.03    |            |  | $ | 0.05        |   |  | $ | 0.20    |  
|                                                                 |  |                    |         |  
|Shares used in per share calculation - basic                     |  |                    | 185,110 |   |                   |   | 180,280 |            |  |   | 183,563     |   |  |   | 179,420 |  
|Shares used in per share calculation - diluted                   |  |                    | 190,739 |   |                   |   | 187,968 |            |  |   | 189,241     |   |  |   | 190,135 |  



See notes to the condensed
consolidated financial statements.



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PMC-Sierra, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

(unaudited)



|                                                                                      |  |             |          |   |             |   |          |  
|------------------------------------------------------------------------------------- |  | ----------- | -------- | - | ----------- | - | -------- | -
|                                                                                      |  | Oct 2, 2005 |          |   | Dec 26,2004 |  
|ASSETS:                                                                               |  |             |          |   |             |   |          |  
|Current assets:                                                                       |  |             |          |   |             |   |          |  
|Cash and cash equivalents                                                             |  | $           | 143,472  |   |             | $ | 121,276  |  
|Short-term investments                                                                |  |             | 232,390  |   |             |   | 153,410  |  
|Accounts receivable, net of allowance for doubtful accounts of $1,765 (2004 - $2,665) |  |             | 37,789   |   |             |   | 19,931   |  
|Inventories, net                                                                      |  |             | 13,010   |   |             |   | 15,823   |  
|Prepaid expenses and other current assets                                             |  |             | 16,448   |   |             |   | 17,042   |  
|                                                                                      |  |             |          |   |             |   |          |  
|Total current assets                                                                  |  |             | 443,109  |   |             |   | 327,482  |  
|                                                                                      |  |            
|Investment in bonds and notes                                                         |  |             | 9,831    |   |             |   | 139,111  |  
|Other investments and assets                                                          |  |             | 5,511    |   |             |   | 4,565    |  
|Property and equipment, net                                                           |  |             | 11,609   |   |             |   | 16,177   |  
|Goodwill                                                                              |  |             | 7,907    |   |             |   | 7,907    |  
|Other intangible assets, net                                                          |  |             | 4,905    |   |             |   | 5,003    |  
|Deposits for wafer fabrication capacity                                               |  |             | 5,145    |   |             |   | 6,779    |  
|                                                                                      |  |             |          |   |             |   |          |  
|                                                                                      |  | $           | 488,017  |   |             | $ | 507,024  |  
|                                                                                      |  |             |          |   |             |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY:                                                 |  |             |          |   |             |   |          |  
|Current liabilities:                                                                  |  |             |          |   |             |   |          |  
|Accounts payable                                                                      |  | $           | 18,580   |   |             | $ | 16,598   |  
|Accrued liabilities                                                                   |  |             | 38,480   |   |             |   | 40,195   |  
|Income taxes payable                                                                  |  |             | 36,646   |   |             |   | 28,931   |  
|Accrued restructuring costs                                                           |  |             | 16,533   |   |             |   | 13,735   |  
|Deferred income                                                                       |  |             | 11,451   |   |             |   | 7,646    |  
|Current portion of long-term debt                                                     |  |             |         |   |             |   | 68,071   |  
|                                                                                      |  |             |          |   |             |   |          |  
|Total current liabilities                                                             |  |             | 121,690  |   |             |   | 175,176  |  
|                                                                                      |  |            
|Deferred taxes and other tax liabilities                                              |  |             | 28,077   |   |             |   | 28,077   |  
|                                                                                      |  |            
|PMC special shares convertible into 2,469 (2004 - 2,897) shares of common stock       |  |             | 3,370    |   |             |   | 4,434    |  
|                                                                                      |  |            
|Stockholders equity                                                                  |  |             |          |   |             |   |          |  
|Common stock and additional paid in capital, par value $.001:                         |  |             |          |   |             |   |          |  
|900,000 shares authorized; 183,143 shares issued and outstanding (2004 - 178,510)     |  |             | 918,161  |   |             |   | 893,704  |  
|Accumulated other comprehensive income                                                |  |             | 1,695    |   |             |   | 350      |  
|Accumulated deficit                                                                   |  |             | (584,976 | ) |             |   | (594,717 | )
|                                                                                      |  |             |          |   |             |   |          |  
|Total stockholders equity                                                            |  |             | 334,880  |   |             |   | 299,337  |  
|                                                                                      |  |             |          |   |             |   |          |  
|                                                                                      |  | $           | 488,017  |   |             | $ | 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)



|                                                                                                  |  |                   |          |   |              |   |          |  
|------------------------------------------------------------------------------------------------- |  | ----------------- | -------- | - | ------------ | - | -------- | -
|                                                                                                  |  | Nine Months Ended |         
|                                                                                                  |  | Oct 2, 2005       |          |   | Sep 26, 2004 |  
|Cash flows from operating activities:                                                             |  |                   |          |   |              |   |          |  
|Net income                                                                                        |  | $                 | 9,741    |   |              | $ | 38,564   |  
|Adjustments to reconcile net income to net cash provided by operating activities:                 |  |                   |          |   |              |   |          |  
|Depreciation of property and equipment                                                            |  |                   | 7,271    |   |              |   | 10,849   |  
|Amortization of other intangibles                                                                 |  |                   | 1,689    |   |              |   | 558      |  
|Amortization of deferred stock compensation                                                       |  |                   | 215      |   |              |   | 697      |  
|Amortization of debt issuance costs                                                               |  |                   | 16       |   |              |   | 338      |  
|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   | ) |              |   | (9,242   | )
|Reversal of write-down of excess inventory                                                        |  |                   |         |   |              |   | (651     | )
|Changes in operating assets and liabilities:                                                      |  |                   |          |   |              |   |          |  
|Accounts receivable                                                                               |  |                   | (17,858  | ) |              |   | 1,129    |  
|Inventories                                                                                       |  |                   | 2,813    |   |              |   | 1,179    |  
|Prepaid expenses and other current assets                                                         |  |                   | 1,570    |   |              |   | (2,139   | )
|Accounts payable and accrued liabilities                                                          |  |                   | 1,349    |   |              |   | (17,648  | )
|Income taxes payable                                                                              |  |                   | 7,313    |   |              |   | 12,256   |  
|Accrued restructuring costs                                                                       |  |                   | 3,395    |   |              |   | (5,169   | )
|Deferred income                                                                                   |  |                   | 3,804    |   |              |   | (6,143   | )
|                                                                                                  |  |                   |          |   |              |   |          |  
|Net cash provided by operating activities                                                         |  |                   | 22,035   |   |              |   | 26,423   |  
|                                                                                                  |  |                   |          |   |              |   |          |  
|Cash flows from investing activities:                                                             |  |                   |          |   |              |   |          |  
|Purchases of short term available-for-sale investments                                            |  |                   | (138,759 | ) |              |   | (8,525   | )
|Proceeds from sales and maturities of short-term available-for-sale investments                   |  |                   | 153,084  |   |              |   | 13,521   |  
|Purchases of long-term available-for-sale investments in bonds and notes                          |  |                   | (35,231  | ) |              |   | (211,980 | )
|Proceeds from sales and maturities of long-term available-for-sale investments in bonds and notes |  |                   | 70,678   |   |              |   | 113,378  |  
|Purchases of investments and other assets                                                         |  |                   | (2,000   | ) |              |   | (5,991   | )
|Proceeds from sale of investments and other assets                                                |  |                   | 772      |   |              |   | 20,067   |  
|Proceeds from sale of property                                                                    |  |                   | 2,604    |   |              |   |         |  
|Proceeds from refund of wafer fabrication deposits                                                |  |                   | 1,634    |   |              |   |         |  
|Purchases of property and equipment                                                               |  |                   | (3,492   | ) |              |   | (6,907   | )
|Purchase of intangible assets                                                                     |  |                   | (2,130   | ) |              |   | (5,675   | )
|                                                                                                  |  |                   |          |   |              |   |          |  
|Net cash provided by (used in) investing activities                                               |  |                   | 47,160   |   |              |   | (92,112  | )
|                                                                                                  |  |                   |          |   |              |   |          |  
|Cash flows from financing activities:                                                             |  |                   |          |   |              |   |          |  
|Repurchase of convertible subordinated notes                                                      |  |                   | (70,177  | ) |              |   | (106,929 | )
|Proceeds from issuance of common stock                                                            |  |                   | 23,178   |   |              |   | 19,426   |  
|                                                                                                  |  |                   |          |   |              |   |          |  
|Net cash used in financing activities                                                             |  |                   | (46,999  | ) |              |   | (87,503  | )
|                                                                                                  |  |                   |          |   |              |   |          |  
|Net increase (decrease) in cash and cash equivalents                                              |  |                   | 22,196   |   |              |   | (153,192 | )
|Cash and cash equivalents, beginning of the period                                                |  |                   | 121,276  |   |              |   | 292,811  |  
|                                                                                                  |  |                   |          |   |              |   |          |  
|Cash and cash equivalents, end of the period                                                      |  | $                 | 143,472  |   |              | $ | 139,619  |  
|                                                                                                  |  |                   |          |   |              |   |          |  
|Supplemental disclosures of cash flow information:                                                |  |                   |          |   |              |   |          |  
|Cash paid for interest                                                                            |  | $                 | 1,085    |   |              | $ | 4,134    |  
|Cash refund of income taxes                                                                       |  |                   | 2,516    |   |              |   | 18       |  
|Cash paid for income taxes                                                                        |  |                   | 2,906    |   |              |   | 90       |  
|Supplemental disclosures of non-cash investing and financing activities:                          |  |                   |          |   |              |   |          |  
|Conversion of PMC-Sierra special shares into common stock                                         |  | $                 | 1,064    |   |              | $ | 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 nine months of 2005 consisted of
40 weeks compared to 39 weeks in the first nine 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 October 2, 2005, Cash and cash equivalents included $1.4 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 $9.7 million and $12.2 million at October 2, 2005 and December 26, 2004, respectively) were as follows:



|                 |  |             |        |              |   |       
|---------------- |  | ----------- | ------ | ------------ | - | ------
|(in thousands)   |  | Oct 2, 2005 |        | Dec 26, 2004
|Work-in-progress |  | $           | 7,513  |              | $ | 7,369 
|Finished goods   |  |             | 5,497  |              |   | 8,454 
|                 |  |             |        |              |   |       
|                 |  | $           | 13,010 |              | $ | 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
October 2, 2005 was as follows:





|                                            |  |                              |       |  
|------------------------------------------- |  | ---------------------------- | ----- | -
|(in thousands)                              |  | Nine Months EndedOct 2, 2005 |      
|Beginning balance, December 26, 2004        |  | $                            | 3,492 |  
|Accrual for new warranties issued           |  |                              | 322   |  
|Reduction for payments (in cash or in kind) |  |                              | (8    | )
|                                            |  |                              |       |  
|Ending balance, October 2, 2005             |  | $                            | 3,806 |  
|                                            |  |                              |       |  



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.Fluctuating foreign exchange rates may negatively
impact PMCs net income and cash flows. The Company periodically hedges foreign currency forecasted transactions related to certain operating expenses. All derivatives are recorded in the balance sheet at fair value. For a derivative designated
as a fair value hedge, changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in net 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
October 2, 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 nine 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                                  |  | (7,394                      | ) |  | 7,394                       |   |  | $                                        | 8.03 
|Exercised                                |  |                            |   |  | (2,903                      | ) |  | $                                        | 5.46 
|Cancelled or expired                     |  | 2,090                       |   |  | (2,090                      | ) |  | $                                        | 13.71
|                                         |  |                             |   |  |                             |   |  |                                          |      
|Balance at October 2, 2005               |  | 30,554                      |   |  | 27,915                      |   |  | $                                        | 10.04
|                                         |  |                             |   |  |                             |   |  |                                          |      



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 option awards to
employees under the fair value method of SFAS 123. Beginning with the quarter ended July 3, 2005, the Company estimated the fair value of the Companys stock option awards using a binomial valuation model. The fair value of the
Companys stock option 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 option 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. The fair values of share purchases in the first and third quarters through the Companys employee share
purchase plan (ESPP) were calculated using the Black-Scholes option pricing model for all periods presented. 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 option and ESPP awards were estimated using the multiple option approach, recognizing forfeitures as they occur, assuming no expected dividends and using the following weighted average assumptions:



Stock Options:



|                        |  |                    |   |  |                   |   |  |            |   |  |             |  
|----------------------- |  | ------------------ | - |  | ----------------- | - |  | ---------- | - |  | ----------- | -
|                        |  | Three Months Ended |   |  | Nine Months Ended |  
|                        |  | Oct 2,2005         |   |  | Sep 26,2004       |   |  | Oct 2,2005 |   |  | Sep 26,2004 |  
|Expected life (years)   |  | 3.9                |   |  | 2.7               |   |  | 3.8        |   |  | 2.8         |  
|Expected volatility     |  | 56                 | % |  | 99                | % |  | 60         | % |  | 100         | %
|Risk-free interest rate |  | 3.9                | % |  | 2.7               | % |  | 3.9        | % |  | 2.2         | %



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Employee Share Purchase Plan:



|                        |  |                    |   |  |                   |   |  |            |   |  |             |  
|----------------------- |  | ------------------ | - |  | ----------------- | - |  | ---------- | - |  | ----------- | -
|                        |  | Three Months Ended |   |  | Nine Months Ended |  
|                        |  | Oct 2,2005         |   |  | Sep 26,2004       |   |  | Oct 2,2005 |   |  | Sep 26,2004 |  
|Expected life (years)   |  | 1.3                |   |  | 1.6               |   |  | 1.3        |   |  | 1.5         |  
|Expected volatility     |  | 43                 | % |  | 97                | % |  | 53         | % |  | 99          | %
|Risk-free interest rate |  | 3.9                | % |  | 1.8               | % |  | 3.5        | % |  | 1.6         | %



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 the quarter ended October 2, 2005 was calculated using a weighted historical and
market-based implied volatility. For the quarter ended September 26, 2004, volatility was calculated using 5-year historical volatility.



The weighted-average estimated fair values of stock options granted for the three months ended October 2, 2005 and September 26, 2004 were $3.44 and $4.92 per
share, respectively. The weighted-average estimated fair values of stock options granted for the nine months ended October 2, 2005 and September 26, 2004 were $3.35 and $11.27 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 loss and net loss per share would have been:



|                                                                                                  |  |                    |        |   |                   |   |         |            |  |   |             |   |  |   |         |  
|------------------------------------------------------------------------------------------------- |  | ------------------ | ------ | - | ----------------- | - | ------- | ---------- |  | - | ----------- | - |  | - | ------- | -
|                                                                                                  |  | Three Months Ended |        |   | Nine Months Ended |  
|(in thousands, except per share amounts)                                                          |  | Oct 2,2005         |        |   | Sep 26,2004       |   |         | Oct 2,2005 |  |   | Sep 26,2004 |  
|Net income, as reported                                                                           |  | $                  | 5,935  |   |                   | $ | 6,308   |            |  | $ | 9,741       |   |  | $ | 38,564  |  
|Adjustments:                                                                                      |  |                    |        |   |                   |   |         |            |  |   |             |   |  |   |         |  
|Stock-based employee compensation expense included in net income                                  |  |                    |       |   |                   |   |        |            |  |   | 215         |   |  |   | 697     |  
|Additional stock-based employee compensation expense under fair value based method for all awards |  |                    | (6,639 | ) |                   |   | (13,850 | )          |  |   | (24,191     | ) |  |   | (46,812 | )
|                                                                                                  |  |                    |        |   |                   |   |         |            |  |   |             |   |  |   |         |  
|Net loss, adjusted                                                                                |  | $                  | (704   | ) |                   | $ | (7,542  | )          |  | $ | (14,235     | ) |  | $ | (7,551  | )
|                                                                                                  |  |                    |        |   |                   |   |         |            |  |   |             |   |  |   |         |  
|Basic net income per share, as reported                                                           |  | $                  | 0.03   |   |                   | $ | 0.03    |            |  | $ | 0.05        |   |  | $ | 0.21    |  
|                                                                                                  |  |                    |        |   |                   |   |         |            |  |   |             |   |  |   |         |  
|Diluted net income per share, as reported                                                         |  | $                  | 0.03   |   |                   | $ | 0.03    |            |  | $ | 0.05        |   |  | $ | 0.20    |  
|                                                                                                  |  |                    |        |   |                   |   |         |            |  |   |             |   |  |   |         |  
|Basic net income (loss) per share, adjusted                                                       |  | $                  | 0.00   |   |                   | $ | (0.04   | )          |  | $ | (0.08       | ) |  | $ | (0.04   | )
|                                                                                                  |  |                    |        |   |                   |   |         |            |  |   |             |   |  |   |         |  
|Diluted net income (loss) per share, adjusted                                                     |  | $                  | 0.00   |   |                   | $ | (0.04   | )          |  | $ | (0.08       | ) |  | $ | (0.04   | )
|                                                                                                  |  |                    |        |   |                   |   |         |            |  |   |             |   |  |   |         |  



On October 28, 2005, the Board of
Directors of the Company approved an acceleration of vesting of the Companys stock options granted on December 29, 2003 to employees and executive officers under the Companys 1994 Incentive Stock Plan and its 2001 Stock Option Plan
that have an exercise price per share of $20.13 (the Acceleration). As a result of the Acceleration, options to purchase approximately 2.4 million shares of the Companys common stock will become immediately exercisable, of
which options to purchase 0.8 million shares were held by executive officers.



Recent Accounting Pronouncements.In December 2004, the Financial Accounting Standards 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



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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 modified 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 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 October 2, 2005, the Company had seven currency forward contracts outstanding that qualified and were designated as cash flow hedges. The U.S. dollar notional amount of these contracts was $47.9 million and
the contracts had a fair value of $3.5 million as of October 2, 2005. The gain or loss from the ineffective portion of the hedges had an immaterial impact on earnings.



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NOTE 3. Restructuring Costs



Restructurings - 2005



In the third quarter of 2005, the Company consolidated its facilities and vacated excess office space in the Santa Clara location as a
result of the workforce reduction activities initiated in the first and second quarters of 2005, and recorded a restructuring charge of $5.3 million. Payments related to the facility will extend to 2011. In addition, the Company recorded additional
severance costs of $0.1 million. 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 and a $1.0
million write-down of equipment and software assets whose value was impaired as a result of these plans. As of October 2, 2005, the software assets have been disposed of and the Company expects to pay the remaining $0.6 million of severance
costs by the end 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. As of October 2, 2005, this entire amount has been paid.



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 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 $12.5 million. A $0.7 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 $154.1 million,



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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 $17.3 million under this plan. Due 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.



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 to 2011. The activity related
to excess facility costs under these plans during the nine months ended October 2, 2005 was as follows:



Excess facility costs



|                             |  |               |       |   |             |   |       |             |  |   |           |   |  |       |       |   |  |   |        |  
|---------------------------- |  | ------------- | ----- | - | ----------- | - | ----- | ----------- |  | - | --------- | - |  | ----- | ----- | - |  | - | ------ | -
|(in thousands)               |  | September2005 |       |   | January2003 |   |       | October2001 |  |   | March2001 |   |  | Total |      
|Balance at December 26, 2004 |  | $             |      |   |             | $ | 3,895 |             |  | $ | 6,458     |   |  | $     | 3,382 |   |  | $ | 13,735 |  
|                             |  |               |       |   |            
|Additional charges           |  |               | 5,288 |   |             |   |      |             |  |   |          |   |  |       |      |   |  |   | 5,288  |  
|Cash payments                |  |               | (104  | ) |             |   | (624  | )           |  |   | (1,472    | ) |  |       | (889  | ) |  |   | (3,089 | )
|                             |  |               |       |   |             |   |       |             |  |   |           |   |  |       |       |   |  |   |        |  
|Balance at October 2, 2005   |  | $             | 5,184 |   |             | $ | 3,271 |             |  | $ | 4,986     |   |  | $     | 2,493 |   |  | $ | 15,934 |  
|                             |  |               |       |   |             |   |       |             |  |   |           |   |  |       |       |   |  |   |        |  



NOTE 4. Debt Investments



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



|                                        |  |            |         |             |   |        
|--------------------------------------- |  | ---------- | ------- | ----------- | - | -------
|(in thousands)                          |  | Oct 2,2005 |         | Dec 26,2004
|Available-for-sale:                     |  |            |         |             |   |        
|US Government Treasury and Agency notes |  | $          | 129,610 |             | $ | 104,722
|Corporate bonds and notes               |  |            | 159,774 |             |   | 187,799
|                                        |  |            |         |             |   |        
|                                        |  | $          | 289,384 |             | $ | 292,521
|                                        |  |            |         |             |   |        
|Reported as:                            |  |            |         |             |   |        
|Cash equivalents                        |  | $          | 47,162  |             | $ |       
|Short-term investments                  |  |            | 232,390 |             |   | 153,410
|Investments in bonds and notes          |  |            | 9,831   |             |   | 139,111
|                                        |  |            |         |             |   |        
|                                        |  | $          | 289,384 |             | $ | 292,521
|                                        |  |            |         |             |   |        



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NOTE 5. Investments and Other Assets



During the quarter ended October 2, 2005, one of the Companys investees, Ikanos Communications Inc. (Ikanos),
completed an initial public offering (IPO) of its common stock. In connection with the IPO, the Companys non-voting preferred shares of Ikanos were exchanged for 0.25 million shares of common stock of Ikanos, which represented
less than 2% of Ikanos outstanding common stock. These shares are not tradeable until at least the first quarter of 2006, and are subject to regulatory trading restrictions thereafter. The Company accounts for its investment in Ikanos under
the cost method of accounting with unrealized gains and losses recorded as Other Comprehensive Income.



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. Asset Acquisition



In August 2004, the Company purchased assets and intellectual property from a privately held
company for cash of $1.0 million and assumption of liabilities of $2.7 million. Transaction costs of $1.2 million, consisting of accounting, legal and other professional fees relating to the purchase have been included in operating expenses. The
total consideration of $3.7 million was allocated based on the estimated fair values of the net assets acquired, $0.4 million to tangible assets and $3.3 million to intangible assets, which is being amortized on a straight-line basis over its
expected useful life of three years.



NOTE 7. 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 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.



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NOTE 8. Comprehensive Income



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



|                                              |  |                    |       |                   |   |            |  |             |        |  |   |        |  
|--------------------------------------------- |  | ------------------ | ----- | ----------------- | - | ---------- |  | ----------- | ------ |  | - | ------ | -
|                                              |  | Three Months Ended |       | Nine Months Ended |  
|(in thousands)                                |  | Oct 2,2005         |       | Sep 26,2004       |   | Oct 2,2005 |  | Sep 26,2004 |       
|Net income                                    |  | $                  | 5,935 |                   | $ | 6,308      |  | $           | 9,741  |  | $ | 38,564 |  
|Other comprehensive income:                   |  |                    |       |                   |   |            |  |             |        |  |   |        |  
|Change in net unrealized gains on investments |  |                    | 598   |                   |   | 510        |  |             | 317    |  |   | (1,072 | )
|Change in fair value of derivatives           |  |                    | 1,550 |                   |   | 1,089      |  |             | 1,028  |  |   | (51    | )
|                                              |  |                    |       |                   |   |            |  |             |        |  |   |        |  
|Total                                         |  | $                  | 8,083 |                   | $ | 7,907      |  | $           | 11,086 |  | $ | 37,441 |  
|                                              |  |                    |       |                   |   |            |  |             |        |  |   |        |  



NOTE 9. Net Income Per Share



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



|                                                                 |  |                    |         |                   |   |             |  |              |         |  |   |        
|---------------------------------------------------------------- |  | ------------------ | ------- | ----------------- | - | ----------- |  | ------------ | ------- |  | - | -------
|                                                                 |  | Three Months Ended |         | Nine Months Ended
|(in thousands, except per share amounts)                         |  | Oct 2, 2005        |         | Sep 26, 2004      |   | Oct 2, 2005 |  | Sep 26, 2004
|                                                                 |  |                    |        
|Numerator:                                                       |  |                    |         |                   |   |             |  |              |         |  |   |        
|Net income                                                       |  | $                  | 5,935   |                   | $ | 6,308       |  | $            | 9,741   |  | $ | 38,564 
|                                                                 |  |                    |         |                   |   |             |  |              |         |  |   |        
|Denominator:                                                     |  |                    |         |                   |   |             |  |              |         |  |   |        
|Basic weighted average common shares outstanding (1)             |  |                    | 185,110 |                   |   | 180,280     |  |              | 183,563 |  |   | 179,420
|Effect of dilutive securities:                                   |  |                    |         |                   |   |             |  |              |         |  |   |        
|Stock options                                                    |  |                    | 5,629   |                   |   | 7,688       |  |              | 5,678   |  |   | 10,715 
|                                                                 |  |                    |         |                  
|Basic and diluted weighted average common shares outstanding (1) |  |                    | 190,739 |                   |   | 187,968     |  |              | 189,241 |  |   | 190,135
|                                                                 |  |                    |         |                   |   |             |  |              |         |  |   |        
|Basic net income per share                                       |  | $                  | 0.03    |                   | $ | 0.03        |  | $            | 0.05    |  | $ | 0.21   
|                                                                 |  |                    |         |                   |   |             |  |              |         |  |   |        
|Diluted net income per share                                     |  | $                  | 0.03    |                   | $ | 0.03        |  | $            | 0.05    |  | $ | 0.20   
|                                                                 |  |                    |         |                   |   |             |  |              |         |  |   |        

---

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



NOTE 10. Subsequent Events



On October 26, 2005, the Company issued $225 million aggregate principal amount of
2.25% senior convertible notes due 2025. The Company granted the initial purchasers of the notes an overallotment option to purchase up to an additional $25 million aggregate principal amount of the notes, which has not been exercised.



On October 28, 2005, the Company entered into a Purchase and Sale Agreement with
Avago Technologies Pte. Limited (formerly Argos Acquisition Pte. Ltd.) (Avago) to acquire the storage semiconductor business of Agilent Technologies, Inc. for approximately $425 million in cash. The storage semiconductor business is part
of Agilents Semiconductor Products Group, which Avago is in the process of acquiring. The acquisition is expected to close in January of 2006.



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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.



Investors are cautioned not to place undue reliance on these forward-looking statements, which reflect managements analysis only as of the date of this Quarterly Report. We undertake no obligation to publicly
update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including
the risks described under Factors That You Should Consider Before Investing in PMC-Sierra and elsewhere in this Quarterly Report and our other filings with the SEC, including the risks associated with our purchase of Aglients
Storage Semiconductor Business disclosed in our Form 8-K filed with the SEC on November 3, 2005.



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 nine months 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 250 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.



On
October 26, 2005, we issued $225 million aggregate principal amount of 2.25% senior convertible notes due 2025. On October 28, 2005, we entered into a Purchase and Sale Agreement with Avago Technologies Pte. Limited (formerly Argos
Acquisition Pte. Ltd.) (Avago) to acquire the storage semiconductor business of Agilent Technologies, Inc. for approximately $425 million in cash. The acquisition is expected to close in January of 2006.



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 nine months of 2005 consisted of 40 weeks compared to 39 weeks in the first nine months of 2004.



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Results of Operations



Third Quarters of 2005 and 2004



Net Revenues (in millions)



|             |  |               |      |      |   |        |  |   |  
|------------ |  | ------------- | ---- | ---- | - | ------ |  | - | -
|             |  | Third Quarter |      |      |  
|             |  | 2005          |      | 2004 |   | Change | 
|Net revenues |  | $             | 76.2 |      | $ | 71.2   |  | 7 | %
|             |  |               |      |      |   |        |  |   |  



Net revenues for the third quarter of
2005 were $76.2 million compared to $71.2 million for the same period in 2004, an increase of $5.0 million, or 7%. The increase was driven by stronger orders and improved activity levels in the areas of Metro Transport, Enterprise Storage systems,
and Wireless Infrastructure. Our sales in Asia increased from 39% of total revenues in the third quarter of 2004 to 50% in the third quarter of 2005.



In the third quarter of 2004, we approved a routine request from one of our distributors to dispose of certain slow moving inventory, and we completed a specific
inventory reduction program, which resulted in net revenue of $5.4 million. Companies in the semiconductor industry periodically undertake such initiatives to reduce slow moving inventory in sales channels so that customers maintain a mix of
inventory suitable for current market demand. All criteria for revenue recognition were met as the inventory was delivered, title was transferred, payment was received and the price became fixed at the time the inventory was disposed of. All of the
economic incentives offered to the distributor were included in our 2004 third quarter results of operations as revenue reductions.



Gross Profit (in millions)



|                           |  |               |      |   |      |   |      |        |  |    |  
|-------------------------- |  | ------------- | ---- | - | ---- | - | ---- | ------ |  | -- | -
|                           |  | Third Quarter |      |   |      |  
|                           |  | 2005          |      |   | 2004 |   |      | Change | 
|Gross profit               |  | $             | 56.1 |   |      | $ | 50.1 |        |  | 12 | %
|                           |  |               |      |   |      |   |      |        |  |    |  
|Percentage of net revenues |  |               | 73.6 | % |      |   | 70.4 | %      |  |    |  



Total gross profit increased $6.0
million, or 12%, in the third quarter of 2005 compared to the same period in 2004. This increase is primarily due to a higher volume of units sold.



Gross profit as a percentage of revenues was approximately 74% in the third quarter of 2005 compared with approximately 70% in the third quarter of 2004. The improvement
in gross profit as a percentage of revenues was driven primarily by a reduction in fixed manufacturing costs from our second quarter restructuring. These reduced costs were allocated over a higher volume of shipments, improving gross profit by
approximately 2%. We also experienced yield improvements and procurement cost reductions, which increased gross profit by approximately 1%.



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Operating Expenses and Charges (in millions)



|                                      |  |               |      |   |      |   |      |        |  |      |   
|------------------------------------- |  | ------------- | ---- | - | ---- | - | ---- | ------ |  | ---- | --
|                                      |  | Third Quarter |      |   |      |  
|                                      |  | 2005          |      |   | 2004 |   |      | Change | 
|Research and development              |  | $             | 27.2 |   |      | $ | 30.2 |        |  | (10  | )%
|Percentage of net revenues            |  |               | 36   | % |      |   | 42   | %      |  |      |   
|                                      |  |               |     
|Marketing, general and administrative |  | $             | 14.8 |   |      | $ | 12.1 |        |  | 22   | % 
|Percentage of net revenues            |  |               | 19   | % |      |   | 17   | %      |  |      |   
|                                      |  |               |     
|Restructuring costs and other charges |  | $             | 5.4  |   |      | $ |     |        |  | 100  | % 
|Percentage of net revenues            |  |               | 7    | % |      |   | 0    | %      |  |      |   
|                                      |  |               |     
|Acquisition costs                     |  | $             |     |   |      | $ | 1.2  |        |  | (100 | )%
|Percentage of net revenues            |  |               | 0    | % |      |   | 0    | %      |  |      |   



Research and
Development and Marketing, General and Administrative Expenses



Our
research and development, or R&D, expenses were $3.0 million, or 10%, lower in the third quarter of 2005 compared to the third quarter of 2004. The primary reason for the decrease was $1.2 million of reduced personnel costs, resulting mainly
from the workforce reduction activities initiated in 2005. In addition, development costs were $7.1 million lower due to the timing of design completions. These decreases were offset by increased depreciation of $1.7 million and increased hardware
and software maintenance costs of $3.1 million. Amortization of intellectual property was higher by $0.3 million due to purchases of intellectual property in the second half of 2004, and facilities costs were higher by $0.2 million.



Our marketing, general and administrative, or MG&A, expenses increased by $2.7 million,
or 22%, in the third quarter of 2005 compared to the third quarter of 2004. This was primarily attributable to $1.5 million higher personnel costs due to increases in recruitment, relocation, and training activities. Commissions increased by $0.3
million as a result of higher sales, and marketing expenses were higher by $0.2 million. Of the remaining increase, $0.2 was due to higher professional fees from incremental tax consulting and internal audit, $0.2 million was attributable to higher
facilities costs, and other costs increased by $0.3 million.



Restructuring



In the third quarter of 2005, we consolidated
our facilities and vacated excess office space in the Santa Clara location as a result of the workforce reduction activities we initiated in the first and second quarters of 2005, and recorded a restructuring charge of $5.3 million. Payments related
to the facility will extend to 2011. In addition, we recorded additional severance costs of $0.1 million. 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, and



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a $1.0 million write-down of equipment and software assets whose value was impaired as a result of these plans. As of
October 2, 2005, the software assets have been disposed of, and we expect to pay the remaining $0.6 million accrued severance costs by the end of 2005. On completion of these 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 third quarter of 2005, this entire 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. 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 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 $12.5 million. A $0.7 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 $154.1 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



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number of facilities and the curtailment of certain research and development projects. To date, we have made cash
payments of $17.3 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.



We have completed the activities contemplated in these restructuring plans, but 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 to 2011. The activity related to excess facility costs under these plans during the three months ended October 2, 2005 was as follows:



Excess facility costs



|                           |  |               |       |   |             |   |       |             |  |   |           |   |  |       |       |   |  |   |        |  
|-------------------------- |  | ------------- | ----- | - | ----------- | - | ----- | ----------- |  | - | --------- | - |  | ----- | ----- | - |  | - | ------ | -
|(in thousands)             |  | September2005 |       |   | January2003 |   |       | October2001 |  |   | March2001 |   |  | Total |      
|Balance at July 3, 2005    |  | $             |      |   |             | $ | 3,532 |             |  | $ | 5,194     |   |  | $     | 2,639 |   |  | $ | 11,365 |  
|                           |  |               |       |   |            
|Additional charges         |  |               | 5,288 |   |             |   |      |             |  |   |          |   |  |       |      |   |  |   | 5,288  |  
|Cash payments              |  |               | (104  | ) |             |   | (261  | )           |  |   | (208      | ) |  |       | (146  | ) |  |   | (719   | )
|                           |  |               |       |   |             |   |       |             |  |   |           |   |  |       |       |   |  |   |        |  
|Balance at October 2, 2005 |  | $             | 5,184 |   |             | $ | 3,271 |             |  | $ | 4,986     |   |  | $     | 2,493 |   |  | $ | 15,934 |  
|                           |  |               |       |   |             |   |       |             |  |   |           |   |  |       |       |   |  |   |        |  



Acquisition costs



In the third quarter of 2004, we purchased assets and intellectual
property from a privately held company for cash of $1.0 million and assumption of liabilities of $2.7 million. Included in operating expenses were transaction costs of $1.2 million, consisting of accounting, legal and other professional fees
relating to the purchase.



Other income and Expenses (in millions)



|                             |  |               |      |   |      |   |     |        |  |     |  
|---------------------------- |  | ------------- | ---- | - | ---- | - | --- | ------ |  | --- | -
|                             |  | Third Quarter |      |   |      |  
|                             |  | 2005          |      |   | 2004 |   |     | Change | 
|Interest income, net         |  | $             | 2.9  |   |      | $ | 1.3 |        |  | 123 | %
|Percentage of net revenues   |  |               | 4    | % |      |   | 2   | %      |  |     |  
|                             |  |               |     
|Foreign exchange (loss) gain |  | $             | (3.4 | ) |      | $ | 0.1 |        |  |     |  
|Percentage of net revenues   |  |               | -4   | % |      |   | 0   | %      |  |     |  



Interest income,
net



Interest income, net was $2.9 million in the third quarter of 2005
compared to $1.3 million in the third quarter of 2004. Our net interest income increased by $1.6 million compared to the third 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.



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Foreign exchange gain (loss)



Our foreign exchange loss was $3.4 million in the third quarter of 2005 compared to a $0.1 million gain in the third 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 June 2006. The foreign exchange loss from the third 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).



Gain on sale of property
and investments



During the third quarter of 2004, we sold our interests
in three professionally managed venture funds for net proceeds of $10 million, resulting in a net gain of $0.7 million.



Provision for income taxes



We recorded a provision for income taxes of $2.2 million in the third quarter of 2005 based on net income, excluding expenses for which we will not receive a tax benefit
such as restructuring charges, 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 Nine Months of 2005 and 2004



Net Revenues(in millions)



|             |  |                   |       |      |   |        |  |    |   
|------------ |  | ----------------- | ----- | ---- | - | ------ |  | -- | --
|             |  | First Nine Months |       |      |  
|             |  | 2005              |       | 2004 |   | Change | 
|Net revenues |  | $                 | 213.9 |      | $ | 235.5  |  | (9 | )%
|             |  |                   |       |      |   |        |  |    |   



Net revenues decreased by 9% in the
first nine months of 2005 compared to the same period a year ago. Revenues were lower than in the same period of 2004 due to a lower volume of units sold in the first half of 2005 and an inventory rebalancing by our customers that began in the third
quarter of 2004 and carried into 2005. Quarterly revenues have increased sequentially since the fourth quarter of 2004 but are still below levels recorded in the first half of 2004. Stronger orders and improved activity levels in the areas of Metro
Transport, Enterprise Storage systems, and Wireless Infrastructure drove an increase in the third quarter of 2005. In addition, the percentage of revenues from Asia grew in the first three quarters of 2005 compared to the third quarter of 2004.
Revenues generated during the extra week of the first quarter (the 14thweek), were approximately $2 million.



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Gross Profit(in millions)



|                           |  |                   |       |   |        |   |       |   |  |    |   
|-------------------------- |  | ----------------- | ----- | - | ------ | - | ----- | - |  | -- | --
|                           |  | First Nine Months |       |   | Change |  
|                           |  | 2005              |       |   | 2004   |   |      
|Gross profit               |  | $                 | 152.7 |   |        | $ | 166.9 |   |  | (8 | )%
|                           |  |                   |       |   |        |   |       |   |  |    |   
|Percentage of net revenues |  |                   | 71.4  | % |        |   | 70.9  | % |  |    |   



Total gross profit decreased $14.2
million, or 8%, in the first nine months of 2005 compared to the same period a year ago due to lower sales volumes.



Gross profit as a percentage of revenues in the first nine months of 2005 was consistent with the first nine months of 2004. Cost reductions realized in the third quarter
of 2005 as a result of restructuring activities increased gross profit by approximately one percentage point. Fixed costs were allocated over a lower volume of shipments in the first nine months of 2005, reducing gross profit by approximately one
percentage point.



Operating Expenses and
Charges(in millions)



|                                      |  |                   |      |   |        |   |      |   |  |     |   
|------------------------------------- |  | ----------------- | ---- | - | ------ | - | ---- | - |  | --- | --
|                                      |  | First Nine Months |      |   | Change |  
|                                      |  | 2005              |      |   | 2004   |   |     
|Research and development              |  | $                 | 88.1 |   |        | $ | 89.7 |   |  | (2  | )%
|Percentage of net revenues            |  |                   | 41   | % |        |   | 38   | % |  |     |   
|                                      |  |                   |     
|Marketing, general and administrative |  | $                 | 41.1 |   |        | $ | 36.3 |   |  | 13  | % 
|Percentage of net revenues            |  |                   | 19   | % |        |   | 15   | % |  |     |   
|                                      |  |                   |     
|Acquisition costs                     |  | $                 |     |   |        | $ | 1.2  |   |  | 100 | % 
|Percentage of net revenues            |  |                   | 0    | % |        |   | 0    | % |  |     |   
|                                      |  |                   |     
|Restructuring costs                   |  | $                 | 13.8 |   |        | $ |     |   |  | 100 | % 
|Percentage of net revenues            |  |                   | 6    | % |        |   | 0    | % |  |     |   



Research and
Development and Marketing, General and Administrative Expenses



Our
research and development, or R&D, expenses decreased by $1.6 million, or 2%, in the first nine months of 2005 compared to the same period a year ago. The decrease was driven primarily by $2.7 million lower personnel costs resulting from the
workforce reduction activities initiated in the first nine months of 2005, which was partially offset by the incremental week in the first quarter and compensation adjustments. In addition, development costs were lower by $2.5 million due to the
timing of design completions. These decreases were offset by increased depreciation of $1.4 million and increased hardware and software maintenance costs of $3.1 million. Amortization of intellectual property was higher by $0.6 million due to
purchases of intellectual property in the second half of 2004 and facilities costs were higher by $0.3 million.



Our marketing, general and administrative, or MG&A, expenses increased by $4.8 million, or 13%, in the first nine months of 2005 compared to the same period a year
ago. Our MG&A personnel and related costs increased by $4.6 million due to the incremental week in the first quarter, compensation adjustments, and increased recruitment, travel and training activities. Of



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the remaining increase, $0.8 was due to higher professional fees from incremental tax consulting and internal audit, $0.4
million was attributable to higher commissions, and other expenses increased by $0.3 million. These increases were offset by a $0.9 million reversal of provision for doubtful accounts receivable based on the completion of an analysis of the credit
status of a significant customer and a $0.4 million reduction in depreciation expense.



Restructuring



In the third quarter of
2005, we consolidated our facilities and vacated excess office space in the Santa Clara location as a result of the workforce reduction activities we initiated in the first and second quarters of 2005, and recorded a restructuring charge of $5.3
million. Payments related to the facility will extend to 2011. In addition, we recorded additional severance costs of $0.1 million. 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, and a $1.0 million write-down of equipment and software assets whose value was impaired as a result of these plans. As of October 2, 2005, the software assets have been disposed of, and
we expect to pay the remaining $0.6 million accrued severance costs by the end 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 third quarter of 2005, this entire 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.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 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



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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 $12.5 million. A $0.7 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 $154.1 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 $17.3 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.



We have completed the activities contemplated in these restructuring plans, but 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 to 2011. The activity related to excess facility costs under these plans during the nine months ended
October 2, 2005 was as follows:



Excess facility costs



|                             |  |               |       |   |             |   |       |             |  |   |           |   |  |       |       |   |  |   |        |  
|---------------------------- |  | ------------- | ----- | - | ----------- | - | ----- | ----------- |  | - | --------- | - |  | ----- | ----- | - |  | - | ------ | -
|(in thousands)               |  | September2005 |       |   | January2003 |   |       | October2001 |  |   | March2001 |   |  | Total |      
|Balance at December 26, 2004 |  | $             |      |   |             | $ | 3,895 |             |  | $ | 6,458     |   |  | $     | 3,382 |   |  | $ | 13,735 |  
|                             |  |               |       |   |            
|Additional charges           |  |               | 5,288 |   |             |   |      |             |  |   |          |   |  |       |      |   |  |   | 5,288  |  
|Cash payments                |  |               | (104  | ) |             |   | (624  | )           |  |   | (1,472    | ) |  |       | (889  | ) |  |   | (3,089 | )
|                             |  |               |       |   |             |   |       |             |  |   |           |   |  |       |       |   |  |   |        |  
|Balance at October 2, 2005   |  | $             | 5,184 |   |             | $ | 3,271 |             |  | $ | 4,986     |   |  | $     | 2,493 |   |  | $ | 15,934 |  
|                             |  |               |       |   |             |   |       |             |  |   |           |   |  |       |       |   |  |   |        |  



Acquisition costs



In the third quarter of 2004, we purchased assets and intellectual
property from a privately held company for cash of $1.0 million and assumption of liabilities of $2.7 million. Included in operating expenses were transaction costs of $1.2 million, consisting of accounting, legal and other professional fees
relating to the purchase.



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Other Income and Expenses(in millions)



|                                                                    |  |                   |      |   |      |   |      |        |  |     |   
|------------------------------------------------------------------- |  | ----------------- | ---- | - | ---- | - | ---- | ------ |  | --- | --
|                                                                    |  | First Nine Months |      |   |      |  
|                                                                    |  | 2005              |      |   | 2004 |   |      | Change | 
|Interest income, net                                                |  | $                 | 8.1  |   |      | $ | 3.3  |        |  | 142 | % 
|Percentage of net revenues                                          |  |                   | 4    | % |      |   | 1    | %      |  |     |   
|                                                                    |  |                   |     
|Foreign exchange loss                                               |  | $                 | (3.5 | ) |      | $ | 0.1  |        |  |     |   
|Percentage of net revenues                                          |  |                   | -2   | % |      |   | 0    | %      |  |     |   
|                                                                    |  |                   |     
|Loss on extinguishment of debt and amortization of debt issue costs |  | $                 | (1.6 | ) |      | $ | (2.1 | )      |  | (24 | )%
|Percentage of net revenues                                          |  |                   | -1   | % |      |   | -1   | %      |  |     |   
|                                                                    |  |                   |     
|Gain on sale of property and investments                            |  | $                 | 1.4  |   |      | $ | 9.2  |        |  | (84 | )%
|Percentage of net revenues                                          |  |                   | 1    | % |      |   | 4    | %      |  |     |   



Interest income,
net



Interest income was $8.1 million in the first nine months of 2005
compared to $3.3 million in the first nine months of 2004, an increase of $4.8 million. The increase was the result of interest and amortization of debt issue cost savings of $2.2 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 of $2.0 million 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 $1.0 million
call premium and the remaining unamortized debt issue costs of $0.6 million, resulting in an aggregate net loss on redemption of $1.6 million.



In the first nine months of 2004, we repurchased $106.9 million face value of our 3.75% Convertible Subordinated Notes at par and expensed $1.5 million of related
unamortized debt issue costs. We incurred transaction related costs of $0.3 million resulting in an aggregate net loss on the repurchase of $1.8 million. In addition, during the first nine months of 2004 we recorded amortization of debt issue costs
of $0.3 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.



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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.



During the third quarter of 2004, the Company sold its interests in three professionally
managed venture funds for net proceeds of $10 million, resulting in a net gain of $0.7 million.



Provision for income taxes



We recorded a provision for income taxes of $4.2 million in the first nine months of 2005 based on net income excluding expenses for which we will not receive a tax
benefit such as restructuring charges and stock compensation, 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.



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 nine months of 2005:



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 $7.5 million related to the 2001 restructuring plans represents 100% of the estimated total
future operating costs and lease obligations for the effected sites.



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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 $3.3 million related to the closing of all four sites represents approximately 87% of the estimated total
future operating costs and lease obligations for these sites.



In the third
quarter of 2005, we recorded charges of $5.3 million for the restructuring of excess facilities in connection with the restructuring plans implemented in 2005. The total remaining estimate of $5.2 million represents 100% of the estimated total
future operating costs and lease obligations for the site.



We believe our
estimates of the obligations for the closing of sites remain sufficient to cover anticipated settlement costs. However, our assumptions on either the lease termination payments, 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.



Business Outlook



We expect our revenues for the fourth quarter of 2005 to be in the range of $77 million to
$80 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 average quarterly turns business is approximately 30%, and in the third quarter of 2005, our completed turns business was approximately 26% of sales. Our revenue outlook for the fourth quarter considers an



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opening backlog position that is approximately consistent with the third quarter, and therefore our revenue forecast
depends in part on achieving a higher rate of turns business percentage in the fourth quarter of 2005. Our quarterly revenues may vary considerably as our customers adjust to fluctuating demand for products in their markets.



We anticipate our fourth quarter 2005 gross margins will be approximately 72% to 73%, 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 fourth quarter of 2005 research and development and marketing, general and administrative expenses to be slightly higher than
the prior quarter.



We anticipate that interest and other income in the fourth
quarter of 2005 will be approximately $3.0 million, and our income tax provision rate will be 20%.



Liquidity & Capital Resources



Our principal source of liquidity at October 2, 2005 was $385.7 million in cash and investments, which included $375.9 million in cash and cash equivalents and short-term investments and $9.8 million of long-term
investments in bonds and notes.



In the first nine months of 2005, we generated
$22 million of cash from operating activities. Significant changes in working capital accounts included:



| |  |  | a $17.9 million increase in accounts receivable, which increased our calculated number of days outstanding at the end of the third quarter of 2005 to 45 compared to 29 at the end of
2004, primarily due to: greater levels of shipments in the third month of the quarter to our major distributor, which was acquired by another entity and as a result of the integration had been placing limited orders earlier in the quarter; generally
higher shipment volumes at the end of the quarter due to lengthening vendor lead times and the availability of products from subcontractors; and a reversal of $0.9 million of our allowance for doubtful accounts in the second quarter of 2005;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a $7.3 million increase in our provision for income taxes in line with our profitability;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | a $3.8 million increase in deferred income due to greater levels of shipments in the third month of the quarter to our major distributor, which had been acquired by another entity
and as a result of the integration had been placing limited orders earlier in the quarter;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a $3.4 million increase in accrued restructuring costs due the additional cash charges of $12.8 million in the first nine months of 2005, offset by $10.0 million in payments made
related to all restructuring plans for severance and rent;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a $2.8 million decrease in inventory, resulting from higher shipments at the end of the third quarter of 2005, which increased the calculated number of times our inventory turned
over on an annualized basis from 4.8 at the end of 2004 to 6.2 at the end of the third quarter of 2005;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a $1.6 million increase in prepaid expenses due to software maintenance renewals; and
| | - |  | -------------------------------------------------------------------------------------



| |  |  | a $1.3 million decrease in accounts payable and accrued liabilities due primarily to a $1.1 million payment of accrued interest in the first quarter, a $0.7 million reduction in
accrued payroll due to a $2.0 million purchase under the employee stock purchase plan, offset by increases in other accrued payroll costs, and a $0.5 million increase in trade accounts payable due to timing of payments.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | cash proceeds of $223.8 million from the sale or maturity of short and long-term debt investments;
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | cash used for the purchase of $174.0 million of long and short-term debt investments;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | cash proceeds of $3.4 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 $5.6 million for the purchases of property, equipment and intangible assets.
| | - |  | ---------------------------------------------------------------------------------------------



In the first nine 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 $23.2 million from the issuance of common stock under our equity-based compensation plans.
| | - |  | -----------------------------------------------------------------------------------------------------------



As of October 2, 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           |  | $     | 52,100 |      | $ | 2,564 |  | $    | 10,352 |      | $ | 9,987  |  | $         | 11,311 |  | $ | 6,733 |  | $ | 11,153
|Estimated Operating Cost Payments |  |       | 19,800 |      |   | 939   |  |      | 3,811  |      |   | 3,936  |  |           | 3,703  |  |   | 2,944 |  |   | 4,467 
|                                  |  |       |        |      |   |       | 
|Purchase and other Obligations    |  |       | 3,203  |      |   | 2,707 |  |      | 475    |      |   | 21     |  |           |       |  |   |      |  |   |      
|                                  |  |       |        |      |   |       |  |      |        |      |   |        |  |           |        |  |   |       |  |   |       
|                                  |  | $     | 75,103 |      | $ | 6,210 |  | $    | 14,638 |      | $ | 13,944 |  | $         | 15,014 |  | $ | 9,677 |  | $ | 15,620
|                                  |  |       |        |      |   |       |  |      |        |      |   |        |  |           |        |  |   |       |  |   |       



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 $8.8 million at October 2, 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 October 2, 2005 we had committed $1.3 million under letters of credit as security for office leases.



We expect to use approximately $7.0 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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On October 26, 2005, we issued $225 million aggregate principal amount of senior convertible notes due 2025. The
securities will bear interest at 2.25% per year and will mature on October 15, 2025. Interest on the Securities will be payable on April 15 and October 15 of each year, beginning on April 15, 2006. The notes provide for a
net share settlement and, under certain circumstances, may be convertible into cash (up to the principal amount of the notes) and, with respect to any excess conversion value, into cash, shares of our common stock or a combination of cash and shares
of common stock our option. We granted the initial purchasers of the notes an overallotment option to purchase up to an additional $25 million aggregate principal amount of the notes, which has not been exercised.



On October 28, 2005, we entered into a Purchase and Sale Agreement with Avago
Technologies Pte. Limited (formerly Argos Acquisition Pte. Ltd) (Avago) to acquire the storage semiconductor business of Agilent Technologies, Inc. for approximately $425 million in cash. The acquisition is expected to close in January
of 2006. If we complete the purchase of the Agilent storage semiconductor business, we expect to use available cash, plus a portion of the net proceeds of the debt offering, to purchase that business.



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, (including the risks associated with our purchase of Agilents storage semiconductor business disclosed in our Form 8-K filed with the SEC on November 3, 2005) 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 the following 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.



Our revenues and profits may fluctuate because of
factors that are beyond our control.



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. 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.



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



Our customers are subject to their own business cycles, most of which are unpredictable in commencement, depth and duration. We cannot accurately predict the continued demand of our customers products and the
demands of our customers for our products. As a result of this uncertainty, our past operating results may not be indicative of our future operating results. It is possible that, in future periods, our results may be below the expectations of public
market analysts and investors. This could cause the market price of our common stock to decline.



We 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. Because a significant portion of our operating expenses are fixed, even a small revenue shortfall can have a disproportionately negative effect on our operating results.



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 (22% and 10% for each of the quarters ended October 2, 2005 and September 26, 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 third 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.



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



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.



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 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, 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.



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Other competitors include major domestic and international semiconductor companies, such as Agilent, Cypress
Semiconductor, Freescale, IBM, Infineon, Integrated Device Technology, Intel, 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.



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



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



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



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



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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.



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.



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.



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



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.



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 U.S.
dollar has devalued significantly compared to the Canadian dollar and this trend may continue. To protect against reductions in value and the volatility of future cash flows caused by changes in foreign exchange rates, we enter into foreign currency
forward contracts. The contracts reduce, but do not eliminate, the impact of foreign currency exchange rate movements. In addition, this foreign currency risk management policy may not be effective in addressing long-term fluctuations since our
contracts do not extend beyond a 12-month maturity.



We regularly limit our
exposure to foreign exchange rate fluctuations from our 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 third quarter of 2005 we
recorded a $3.4 million foreign exchange loss 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, intellectual property, technologies, or businesses from third parties is a core part of our business strategy. That strategy depends on the availability of suitable acquisition candidates at reasonable prices and our
ability to resolve challenges associated with integrating acquired businesses into our existing business. These challenges include integration of product lines, sales forces, customer lists and manufacturing facilities, development of expertise
outside our existing business, diversion of management time and resources, and possible divestitures, inventory write-offs and other charges. We also may be forced to replace key personnel who may leave our Company as a result of the acquisition. We
cannot be certain that we will find suitable acquisition candidates or that we will be able to meet these challenges successfully.



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



In addition, the combined entity
may have lower revenues or higher expenses and therefore may not achieve the results that we anticipated at the time of the acquisition. Acquired entities also may be highly leveraged or dilutive to our earnings per share, or may have unknown
liabilities.



We have identified a semiconductor business that is consistent
with our business strategy, and, if acquired, could significantly increase our consolidated assets and revenues. That potential acquisition or another acquisition could introduce other risks that we cannot currently foresee or may not be able to
foresee at the time we make 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 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



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research and development in our Santa Clara design center. A significant portion of our revenues is derived from sales of
microprocessors that 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 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, or at specified
times, we may have to identify and qualify acceptable additional or alternative foundries. This qualification process could take six months or longer. We may not find sufficient capacity quickly enough, if ever, at an acceptable cost, to satisfy our
production requirements.



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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.



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 the results of our exiting negotiations differ from our assumptions, we may have to record additional charges, which could materially affect our results of operations, financial position and cash
flow.



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



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



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



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.



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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.



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.



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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 October 2, 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 $2.4 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, sales, customer support and administrative expenses in Canadian and other foreign currencies. We are exposed, in the normal course of business, to foreign currency risks 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 October 2, 2005, we had seven
currency forward contracts outstanding that qualified and were designated as cash flow hedges. The U.S. dollar notional amount of these contracts was $47.9 million and the contracts had a fair value of $3.5 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 third quarter of 2005 we recorded a $3.4 million foreign exchange loss 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 an additional 5% relative to the Canadian
dollar, our profitability would decrease by $3.5 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 6. EXHIBITS



Exhibits 



|  |  |      |  |                                                                                                                                                                                                                 
|- |  | ---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 2.1  |  | Purchase and Sale Agreement dated October 28, 2005, between PMC-Sierra, Inc. and Avago Technologies Pte. Limited (Previously filed as an exhibit to PMCs Current Report on
Form 8-K filed on November 3, 2005).
|  |  |     
| |  | 2.2  |  | Indenture Agreement dated October 26, 2005, between the Company and U.S. Bank National Association, as trustee (Previously filed as an exhibit to PMCs Current Report on Form 8-K
filed on October 26, 2005).  
|  |  |     
| |  | 11.1 |  | Calculation of net income per share  included in Note 9 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: November 3, 2005 |  | /s/ Alan F. Krock           
|                       |  | Alan F. Krock               
|                       |  | Vice President,             
|                       |  | Chief Financial Officer and 
|                       |  | Principal Accounting Officer



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