UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10 - Q

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

for the quarterly period ended June 27, 2004

o Transition report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.

For the Transition Period From to

Commission File Number 0-19084

PMC-Sierra, Inc.

(Exact name of registrant as specified in its charter)

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

3975 Freedom Circle
Santa Clara, CA 95054
(408) 239-8000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such 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 ý

No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

Yes ý

No o

Common shares outstanding at July 28, 2004 – 176,938,085

INDEX

PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements

	-	Condensed consolidated statements of operations

	-	Condensed consolidated balance sheets

	-	Condensed consolidated statements of cash flows

	-	Notes to the condensed consolidated financial statements

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3.	Quantitative and Qualitative Disclosures About Market Risk

Item 4.	Controls and Procedures

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings

Item 4.	Submission of matters to a vote by stockholders

Item 5.	Other Information

Item 6.	Exhibits and Reports on Form 8 - K

Signatures

Part I - FINANCIAL INFORMATION

Item 1 - Financial Statements

PMC-Sierra, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except for per share amounts)
(unaudited)

	Three Months Ended					Six Months Ended
	Jun 27, 2004		Jun 29, 2003			Jun 27, 2004			Jun 29, 2003

Net revenues	$	85,703	60,378			164,363			115,764

Cost of revenues	23,843		21,301			47,600			43,186
Gross profit	61,860		39,077			116,763			72,578

Other costs and expenses:
Research and development	30,689		32,173			59,491			63,121
Marketing, general and administrative	12,203		12,151			24,128			24,767
Amortization of deferred stock compensation:
Research and development	—		(82		)	—			317
Marketing, general and administrative	—		95			697			108
Restructuring costs	—		7,260			—			13,904

Income (loss) from operations	18,968		(12,520		)	32,447			(29,639		)

Interest and other income (expense), net	978		(106		)	1,804			442
Loss on extinguishment of debt	—		—			(1,845		)	—
Gain on investments	—		1,962			8,587			2,493

Income (loss) before provision for income taxes	19,946		(10,664		)	40,993			(26,704		)

Provision for (recovery of) income taxes	4,537		(1,499		)	8,737			(6,024		)
Net income (loss)	$	15,409	$	(9,165	)	$	32,256		$	(20,680	)

Net income (loss) per common share - basic	$	0.09	$	(0.05	)	$	0.18		$	(0.12	)
Net income (loss) per common share - diluted	$	0.08	$	(0.05	)	$	0.17		$	(0.12	)

Shares used in per share calculation - basic	179,570		172,289			178,989			171,846
Shares used in per share calculation - diluted	190,136		172,289			191,218			171,846

See notes to the condensed consolidated financial statements.

PMC-Sierra, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)
(unaudited)

	Jun 27, 2004			Dec 28, 2003

ASSETS:
Current assets:
Cash and cash equivalents	$	164,744		$	292,811
Short-term investments	59,560			119,117
Accounts receivable, net of allowance for doubtful accounts of $2,851 (2003 - $2,849)	28,961			21,645
Inventories	17,300			18,275
Prepaid expenses and other current assets	14,335			12,547

Total current assets	284,900			464,395

Investment in bonds and notes	151,914			41,569
Other investments and assets	13,969			11,336
Property and equipment, net	18,273			20,750
Goodwill and other intangible assets, net	10,228			8,127
Deposits for wafer fabrication capacity	6,779			6,779
Deferred tax assets	659			—
	$	486,722		$	552,956

LIABILITIES AND STOCKHOLDERS’ EQUITY:
Current liabilities:
Accounts payable	$	22,524		$	27,356
Accrued liabilities	46,708			50,240
Income taxes payable	44,771			36,171
Accrued restructuring costs	12,250			16,413
Deferred income	17,933			15,720
Deferred tax liabilities	40			1,051
Total current liabilities	144,226			146,951

Convertible subordinated notes	68,071			175,000
Deferred tax liabilities	74			189

PMC special shares convertible into 2,897 (2003 - 2,921) shares of common stock	4,434			4,519

Stockholders’ equity
Common stock and additional paid in capital, par value $.001: 900,000 shares authorized; 176,845 shares issued and outstanding (2003 - 174,289)	884,943			870,857
Accumulated other comprehensive income (loss)	(884		)	1,838
Accumulated deficit	(614,142		)	(646,398		)
Total stockholders’ equity	269,917			226,297
	$	486,722		$	552,956

See notes to the condensed consolidated financial statements.

PMC-Sierra, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)
(unaudited)

	Six Months Ended
	Jun 27, 2004			Jun 29, 2003
Cash flows from operating activities:
Net income (loss)	$	32,256		$	(20,680	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation of property and equipment	7,550			15,031
Amortization of other intangibles	253			474
Amortization of deferred stock compensation	697			425
Amortization of debt issuance costs	194			782
Impairment of other investments	—			3,500
Noncash restructuring costs	—			1,311
Loss on extinguishment of debt	1,845			—
Gain on sale of investments and other assets	(8,587		)	(5,980		)
Reversal of write-down of excess inventory	(651		)	—
Changes in operating assets and liabilities:
Accounts receivable	(7,316		)	(4,106		)
Inventories	1,626			4,363
Prepaid expenses and other current assets	(3,616		)	(1,037		)
Accounts payable and accrued liabilities	(5,008		)	(3,410		)
Income taxes payable	8,600			(5,948		)
Accrued restructuring costs	(4,016		)	(8,698		)
Deferred income	2,213			(980		)
Net cash provided by (used in) operating activities	26,040			(24,953		)

Cash flows from investing activities:
Purchases of short-term held-to-maturity investments	—			(16,538		)
Purchases of short term available-for-sale investments	(288		)	(54,701		)
Proceeds from sales and maturities of short-term held-to-maturity investments	—			105,364
Proceeds from sales and maturities of short-term available-for-sale investments	13,521			139,005
Purchases of long-term held-to-maturity investments in bonds and notes	—			(95,874		)
Purchases of long-term available-for-sale investments in bonds and notes	(177,991		)	—
Proceeds from sales and maturities of long-term held-to-maturity investments in bonds and notes	—			155,225
Proceeds from sales and maturities of long-term available-for-sale investments in bonds and notes	111,291			—
Purchases of investments and other assets	(5,905		)	(704		)
Proceeds from sale of investments and other assets	10,094			8,406
Proceeds from refund of wafer fabrication deposits	—			8,066
Purchases of property and equipment	(5,220		)	(2,346		)
Purchase of intangible assets	(2,354		)	—
Net cash provided by (used in) investing activities	(56,852		)	245,903

Cash flows from financing activities:
Repurchase of convertible subordinated notes	(106,929		)	—
Proceeds from issuance of common stock	9,674			9,450
Net cash provided by (used in) financing activities	(97,255		)	9,450

Net increase (decrease) in cash and cash equivalents	(128,067		)	230,400
Cash and cash equivalents, beginning of the period	292,811			75,833
Cash and cash equivalents, end of the period	$	164,744		$	306,233

Supplemental disclosures of cash flow information:
Cash paid for interest	$	2,858		$	5,156
Supplemental disclosures of non-cash investing and financing activities:
Common shares issued under employee share purchase plan	3,630			2,260

See notes to the condensed consolidated financial statements.

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 processors 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 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 related notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 28, 2003. The results of operations for the interim periods are not necessarily indicative of results to be expected in future periods.

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 June 27, 2004, Cash and cash equivalents included $2.5 million (December 28, 2003 - $2.5 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 $15.4 million and $16.2 million at June 27, 2004 and December 28, 2003, respectively) were as follows:

(in thousands)	Jun 27, 2004		Dec 28, 2003

Work-in-progress	$	9,239	$	6,734
Finished goods	8,061		11,541
	$	17,300	$	18,275

Product warranties. The Company provides a one-year limited warranty on most of its standard products and accrues for the cost of this warranty at the time of shipment. The Company estimates its warranty costs based on historical failure rates and related repair or replacement

costs. The change in the Company’s accrued warranty obligations from December 28, 2003 to June 27, 2004 was as follows:

(in thousands)	Six Months Ended Jun 27, 2004
Beginning balance, December 28, 2003	$	3,054
Accrual for new warranties issued	358
Reduction for payments (in cash or in kind)	(27		)
Adjustments related to changes in estimate of warranty accrual	(160		)
Ending balance, June 27, 2004	$	3,225

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, usually up to a specified maximum amount.

Derivatives and Hedging Activities. PMC’s net income and cash flows may be negatively impacted by fluctuating foreign exchange rates. The Company periodically hedges foreign currency forecasted transactions related to certain operating expenses. All derivatives are recorded in the balance sheet at fair value. For a derivative designated as a fair value hedge, changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in net income. For a derivative designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive income and are recognized in net income when the hedged item affects net income. Ineffective portions of changes in the fair value of cash flow hedges are recognized in net income. If the derivative used in an economic hedging relationship is not designated in an accounting hedging relationship or if it becomes ineffective, changes in the fair value of the derivative are recognized in net income.

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.

Pro forma information regarding net income (loss) and net income (loss) per share is required by SFAS 123, “ Accounting for Stock-Based Compensation” for awards granted or modified after December 31, 1994 as if the Company had accounted for its stock-based awards to employees under the fair value method of SFAS 123. The fair value of the Company’s stock-based awards to employees was estimated using a Black-Scholes option pricing model. The Black-Scholes model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, the Black-Scholes model requires the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s stock-based awards to employees have characteristics significantly different from those of traded options, and 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 value of the Company’s stock-based awards to employees was estimated using both the single and multiple option approach, recognizing forfeitures as they occur, assuming no expected dividends and using the following weighted average assumptions:

	Three Months Ended
	Options				ESPP
	Jun 27, 2004		Jun 29, 2003		Jun 27, 2004		Jun 29, 2003
Expected life (years)	2.6		2.6		1.7		1.2
Expected volatility	99	%	102	%	106	%	105	%
Risk-free interest rate	2.7	%	1.6	%	1.6	%	1.5	%

	Six Months Ended
	Options				ESPP
	Jun 27, 2004		Jun 29, 2003		Jun 27, 2004		Jun 29, 2003
Expected life (years)	2.8		2.8		1.5		1.1
Expected volatility	100	%	101	%	105	%	107	%
Risk-free interest rate	2.1	%	1.8	%	1.5	%	1.5	%

The weighted-average estimated fair values of employee stock options granted for the three months ended June 27, 2004 and June 29, 2003 were $7.54 and $4.99 per share, respectively. The weighted-average estimated fair values of employee stock options granted for the six months ended June 27, 2004 and June 29, 2003 were $11.77 and $3.64 per share, respectively

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

	Three Months Ended						Six Months Ended
(in thousands, except per share amounts)	Jun 27, 2004			Jun 29, 2003			Jun 27, 2004			Jun 29, 2003

Net income (loss), as reported	$	15,409		$	(9,165	)	$	32,256		$	(20,680	)
Adjustments:
Additional stock-based employee compensation expense under fair value based method for all awards	(13,318		)	(13,232		)	(32,265		)	(35,764		)
Net income (loss), adjusted	$	2,091		$	(22,397	)	$	(9	)	$	(56,444	)

Basic net income (loss) per share, as reported	$	0.09		$	(0.05	)	$	0.18		$	(0.12	)

Diluted net income (loss) per share, as reported	$	0.08		$	(0.05	)	$	0.17		$	(0.12	)

Basic net income (loss) per share, adjusted	$	0.01		$	(0.13	)	$	—		$	(0.33	)

Diluted net income (loss) per share, adjusted	$	0.01		$	(0.13	)	$	—		$	(0.33	)

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 in interest and other expense immediately.

At June 27, 2004, the Company had four currency forward contracts outstanding that qualified and were designated as cash flow hedges. The U.S. dollar notional amount of these contracts was $42.9 million and the contracts had a fair value of $0.1 million as of June 27, 2004. The gain or loss from the ineffective portion of the hedges had an insignificant impact on earnings.

NOTE 3. Restructuring and Other Costs

In response to the severe economic downturn in the semiconductor industry, PMC implemented two restructuring plans in 2001 aimed at focusing development efforts on key projects and reducing operating costs. In the first quarter of 2003, the Company was still operating in a challenging economic climate, making it necessary to again streamline operations and announce a further restructuring. 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 this period.

PMC has completed substantially all of the activities contemplated in the original restructuring plans, but as of June 27, 2004 had not yet disposed of all its surplus leased facilities.

Restructuring – March 26, 2001

PMC completed the restructuring activities contemplated in its March 2001 restructuring plan by June 2002. However, the Company still has ongoing rental commitments for office space abandoned 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 an additional provision for abandoned office facilities of $3.1 million in the third quarter of 2003. Cash payments under this plan since the third quarter of 2003 were $1.6 million.

The activity under this plan in the six months ended June 27, 2004 was as follows:

(in thousands)	Balance at Dec 28, 2003		Cash Payments			Balance at Jun 27, 2004

Excess facility costs	$	2,295	$	(832	)	$	1,463

Restructuring – October 18, 2001

PMC implemented a restructuring plan in the fourth quarter of 2001 to reduce its operating cost structure. This restructuring plan included the termination of 341 employees, the consolidation of excess facilities, and the curtailment of certain research and development projects. As a result, the Company recorded a restructuring charge of $175.3 million in the fourth quarter of 2001, including $12.2 million of asset write-downs. To date, the Company has made cash payments under this plan of $151.6 million, including the purchase and sale of Mission Towers Two in Santa Clara, CA, for $133 million and $33 million, respectively, in the third quarter of 2003. To date, PMC has reversed $5.3 million of excess restructure provision, primarily related to Mission Towers Two. While the Company has completed restructuring activities, it still has ongoing rental commitments for office space abandoned under this plan.

The activity under this plan in the six months ended June 27, 2004 was as follows:

(in thousands)	Balance at Dec 28, 2003		Cash Payments			Balance at Jun 27, 2004

Excess facility and contract settlement costs	$	7,379	$	(1,218	)	$	6,161

Restructuring – January 16, 2003

As a result of the prolonged economic downturn in the semiconductor industry, the Company implemented another corporate restructuring aimed at further reducing operating expenses in the first quarter of 2003. The 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. Cash payments made to date under this plan were $11.3 million. A $0.9 million reversal of excess restructure provision relating primarily to workforce reduction was recorded in 2003.

The activity under this plan in the six months ended June 27, 2004 was as follows:

(in thousands)	Balance at Dec 28, 2003		Cash Payments			Adjustments			Balance at Jun 27, 2004

Workforce reduction	$	400	$	(175	)	$	(27	)	$	198
Excess facility and contract settlement costs	6,338		(1,791		)	(119		)	4,428

Total	$	6,738	$	(1,966	)	$	(146	)	$	4,626

NOTE 4. Debt Investments

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

(in thousands)	Jun 27, 2004		Dec 28, 2003

Available-for-sale:
US Government Treasury and Agency notes	$	104,605	$	60,495
Corporate bonds and notes	126,874		100,191
	$	231,479	$	160,686

Reported as:
Cash equivalents	$	20,005	$	—
Short-term investments	59,560		119,117
Investments in bonds and notes	151,914		41,569
	$	231,479	$	160,686

NOTE 5. Investment in Non-Public Entities

On February 3, 2004, the Company sold its investment in a private technology company for total proceeds of $10.6 million, with $0.7 million remaining in escrow for one year. The Company recorded a gain of $8.6 million, excluding the escrowed portion of the proceeds. In 2002, the Company invested $7.5 million in cash in this company. After performing an annual review of its investment portfolio in non-public entities in December 2002, the Company determined that an other-than-temporary decline in the value of the investment had occurred and wrote the investment down to $1.3 million.

NOTE 6. Convertible Subordinated Notes

In August 2001, the Company issued $275 million of convertible subordinated notes maturing on August 15, 2006. The Company repurchased $100 million principal amount of the notes in the third quarter of 2003 at a discount, and, in the first quarter of 2004, repurchased a further $106.9 million principal amount of these notes at par. In the first quarter of 2004, the Company wrote off $1.5 million of related unamortized debt issue costs and incurred transaction related costs of $0.3 million, resulting in a loss of $1.8 million. As of June 27, 2004, $68.1 million of the convertible subordinated notes remained outstanding.

These notes bear interest at 3.75% payable semi-annually and are convertible into an aggregate of approximately 1.6 million shares of PMC’s common stock at any time prior to maturity at a conversion price of approximately $42.43 per share. The Company may redeem the notes at a premium at any time after August 19, 2004. In addition, a holder may require the Company to repurchase the notes if a change of control occurs, as defined in the indenture relating to the notes. These notes also become payable upon events of bankruptcy, insolvency or reorganization, or if the Company fails to pay amounts due on the notes or any other indebtedness of at least $40 million, or if the Company fails to perform various procedural covenants detailed in the indenture. Under the terms of the indenture relating to the notes, the Company may not merge into another entity, permit another entity to merge into the Company,

sell substantially all of the Company’s assets to another entity, or purchase substantially all of the assets of another entity, unless the entity formed by the merger, sale or purchase is a company, partnership or trust formed in the United States, and the surviving entity assumes our obligations under the indenture, including the payment of principal and interest on the notes and, no event of default has occurred and is continuing.

NOTE 7. Segment Information

Since adopting Statement of Financial Accounting Standards No. 131 (SFAS 131), “Disclosures about Segments of an Enterprise and Related Information” in 1998, the Company has operated in two operating segments: networking and non-networking products. The networking segment consists of semiconductor devices and related technical service and support to equipment manufacturers for use in service provider, enterprise, and storage area networking equipment. The non-networking segment consists of a single custom user interface product. The Company has supported the non-networking products for existing customers, but has decided not to develop any further products of this type.

The Company evaluates performance based on net revenues and gross profits from operations of its segments. In the fourth quarter of 2003, the Company shipped final orders of its non-networking product and does not anticipate further orders of this product in the future.

	Three Months Ended				Six Months Ended
(in thousands)	Jun 27, 2004		Jun 29, 2003		Jun 27, 2004		Jun 29, 2003

Net revenues

Networking	$	85,703	$	59,610	$	164,363	$	114,996
Non-networking	—		768		—		768
Total	$	85,703	$	60,378	$	164,363	$	115,764

Gross profit

Networking	$	61,860	$	38,748	$	116,763	$	72,249
Non-networking	—		329		—		329
Total	$	61,860	$	39,077	$	116,763	$	72,578

NOTE 8. Comprehensive Income (Loss)

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

	Three Months Ended						Six Months Ended
(in thousands)	Jun 27, 2004			Jun 29, 2003			Jun 27, 2004			Jun 29, 2003

Net income (loss)	$	15,409		$	(9,165	)	$	32,256		$	(20,680	)
Other comprehensive income (loss):
Change in net unrealized gains on investments	(1,280		)	(2,668		)	(1,582		)	(3,926		)
Change in fair value of derivatives	(536		)	55			(1,140		)	55
Total	$	13,593		$	(11,778	)	$	29,534		$	(24,551	)

NOTE 9. Net Income (Loss) Per Share

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

	Three Months Ended					Six Months Ended
(in thousands, except per share amounts)	Jun 27, 2004		Jun 29, 2003			Jun 27, 2004		Jun 29, 2003
Numerator:
Net income (loss)	$	15,409	$	(9,165	)	$	32,256	$	(20,680	)

Denominator:
Basic weighted average common shares outstanding(1)	179,570		172,289			178,989		171,846
Effect of dilutive securities:
Stock options	10,566		—			12,229		—

Basic and diluted weighted average common shares outstanding(1)	190,136		172,289			191,218		171,846

Basic net income (loss) per share	$	0.09	$	(0.05	)	$	0.18	$	(0.12	)

Diluted net income (loss) per share	$	0.08	$	(0.05	)	$	0.17	$	(0.12	)

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

The Company had approximately 9 million common stock equivalents outstanding at June 29, 2003 that were not included in diluted net loss per share because they would be antidilutive.

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”, “will”, “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, capital resources sufficiency, capital expenditures, restructuring activities and expenses.

These forward-looking statements apply only as of the date of this Quarterly Report. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks we face as described under “Factors That You Should Consider Before Investing in PMC-Sierra” and elsewhere in this Quarterly Report. Investors are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof.

We generate revenues from the sale of semiconductor devices that we have designed and developed. Almost all of our revenues in any given year come from the sale of semiconductors that are developed prior to that year. For example, more than 99% of our revenues in 2003 came from parts developed in 2002 and earlier. After an individual part is completed and announced it may take several years before that device generates any significant revenues. A portfolio of more than 180 products generates our current revenue.

In addition to incurring costs for the marketing, sales and administration of the sale of existing products, we expend a substantial amount every year for the development of new semiconductors. We decide on the amount to expend on the development of new semiconductors based on our assessment of the future market opportunities for those components, and the estimated return those parts will generate. For the past three years, we have expended more on the development of new parts than we generate in operating profit from the sale of our existing parts. Throughout this period, we have reduced our research and development spending to a level that we believe matches current market opportunities. If demand for our products in the end markets that we serve continues to improve, then we would expect profitability to increase.

Results of Operations

Second Quarters of 2004 and 2003

Net Revenues ($000,000)

	Second Quarter
	2004		2003		Change

Networking products	$	85.7	$	59.6	44	%
Non-networking products	—		0.8		(100	)%
Total net revenues	$	85.7	$	60.4	42	%

Net revenues for the second quarter of 2004 were $85.7 million compared to $60.4 million for the second quarter of 2003. The 42% increase in our revenues was attributable to a continued recovery in the markets for our telecommunication service provider products, particularly for Asymmetric Digital Subscriber Line, or ADSL, wireless, and wireline infrastructure applications in China and North America, improving demand for equipment that incorporates our Metro Optical Transport products and relatively low levels of supply chain inventories, resulting in new orders for both new and older PMC products.

We had only networking revenues in the second quarter of 2004 and do not expect to generate non-networking revenues in the future.

Gross Profit ($000,000)

	Second Quarter
	2004			2003			Change

Networking products	$	61.9		$	38.7		60	%
Non-networking products	—			0.3			(100	)%
Total gross profit	$	61.9		$	39.0		59	%
Percentage of net revenues	72		%	65		%

Total gross profit increased $22.9 million, or 59%, in the second quarter of 2004 compared to the same quarter a year ago. The increase is primarily due to increased unit sales of our products.

Gross profit as a percentage of revenues increased 7 percentage points, from 65% in the second quarter of 2003 to 72% in the second quarter of 2004. This increase resulted from the following factors:

• Fixed manufacturing costs were allocated over a higher volume of shipments, improving gross profit by approximately 4 percentage points.

• A greater portion of our sales were from our higher margin products, which increased gross profit by approximately 2 percentage points.

• $0.7 million of inventory reserves associated with inventory sold during the quarter were reversed, improving gross profit by approximately 1 percentage point.

Operating Expenses and Charges ($000,000)

	Second Quarter
	2004			2003			Change

Research and development	$	30.7		$	32.2		(5	)%
Percentage of net revenues	36		%	53		%

Marketing, general and administrative	$	12.2		$	12.2		0	%
Percentage of net revenues	14		%	20		%

Restructuring costs	$	—		$	7.3		100	%

Research and Development and Marketing, General and Administrative Expenses:

Our research and development, or R&D, expenses were $1.5 million, or 5%, lower in the second quarter of 2004 compared to the same quarter a year ago due primarily to a $2.1 million reduction in depreciation expense as equipment and development tools became fully depreciated and were not replaced. In addition, a $2.5 million increase in personnel and contractor costs was partially offset by a $1.9 million decrease in development costs due to the timing of design completions.

Our marketing, general and administrative, or MG&A, expenses were flat in the second quarter of 2004 compared to the same quarter a year ago. Increases in our MG&A personnel and related costs of $1.2 million were offset by lower depreciation of $0.5 million due to the slow replacement of fully depreciated assets and a decrease in other MG&A expenses of $0.7 million from cost reduction initiatives.

Restructuring

We have completed substantially all of the activities contemplated in our restructuring plans, but as of June 27, 2004 have not yet disposed of all our surplus leased facilities.

With respect to the restructuring plan we implemented in March 2001, we had recorded an additional $3.1 million in the third quarter of 2003 as our rental commitments were expected to be higher than originally anticipated. Cash payments under this plan since the third quarter of 2003 were $1.6 million, with cash payments of $0.4 million occurring in the second quarter of 2004. Efforts to exit these sites are ongoing, but the payments related to these facilities could extend to 2010.

Cash payments in the second quarter of 2004 were $0.7 million under the October 2001 restructuring plan and $1.3 million under the January 2003 restructuring plan. We continue our efforts to exit the remaining sites, but payments relating to these facilities could extend to 2009 and 2006, respectively.

Interest and other income

Interest and other income was $1.0 million in the second quarter of 2004 compared to interest expense of $0.1 million in the second quarter of 2003. Interest and other income increased as

the interest expense savings gained by repurchasing $206.9 million of our 3.75% convertible subordinated debt exceeded our lower interest income that resulted from reduced cash balances and declining reinvestment yields on our maturing longer term investments.

Gain (loss) on investments

In the second quarter of 2004 we recorded neither a loss or gain on investments. In the second quarter of 2003, we recorded a gain on investments of $2.0 million comprised of a $5.5 million gain on sale of our remaining investment in Sierra Wireless, Inc., a public company, and a $3.5 million charge for the impairment of our investments in non-public companies.

Provision for income taxes

We recorded a provision for income taxes of $4.5 million in the second quarter of 2004 relating to income generated in Canada. We reduced our effective tax rate from 28% to 25%. Our current quarter provision includes an adjustment of $0.5 million related to our first quarter provision.

First Six Months of 2004 and 2003

Net Revenues ($ 000,000)

	First Six Months
	2004		2003		Change

Networking products	$	164.4	$	115.0	43	%
Non-networking products	—		0.8		(100	)%
Total net revenues	$	164.4	$	115.8	42	%

Net revenues increased by 42% in the first six months of 2004 compared to the same period a year ago.

The increase in our revenues was attributable to a continued recovery in the markets for our telecommunication service provider products, particularly for ADSL, wireless, and wireline infrastructure applications in China and North America, improving demand for equipment that incorporates our Metro Optical Transport products and relatively low levels of supply chain inventories, resulting in new orders for both new and older PMC products.

We had only networking revenues in the first six months of 2004 and do not expect to generate non-networking revenues in the future.

Gross Profit ($000,000)

	First Six Months
	2004			2003			Change

Networking products	$	116.8		$	72.3		62	%
Non-networking products	—			0.3			(100	)%
Total gross profit	$	116.8		$	72.6		61	%
Percentage of net revenues	71		%	63		%

Total gross profit increased $44.2 million, or 61%, in the first six months of 2004 compared to the same period a year ago.

Gross profit as a percentage of revenues increased 8 percentage points from 63% in the first six months of 2003 to 71% in the first six months of 2004. This increase resulted from the following factors:

• Fixed manufacturing costs were allocated over a higher volume of shipments, improving gross profit by approximately 5 percentage points.

• A greater portion of our sales were from our higher margin products, increasing gross profit by approximately 3 percentage points.

Operating Expenses and Charges ($000,000)

	First Six Months
	2004			2003			Change

Research and development	$	59.5		$	63.1		(6	)%
Percentage of net revenues	36		%	55		%

Marketing, general and administrative	$	24.1		$	24.8		(3	)%
Percentage of net revenues	15		%	21		%

Restructuring costs	$	—		$	13.9		100	%

Research and Development and Marketing, General and Administrative Expenses:

Our research and development, or R&D, expenses decreased by $3.6 million, or 6%, in the first six months of 2004 compared to the same period a year ago due primarily to a $5.0 million reduction in depreciation expense as equipment and development tools became fully depreciated and were not replaced. Our R&D personnel and contractor costs increased by $2.0 million as we increased our R&D headcount and our use of contractors during this past quarter, more than a year after our last restructuring and cost reduction programs were implemented. Due to the timing of design completions, we incurred $0.7 million less in development costs.

Our marketing, general and administrative, or MG&A, expenses decreased by $0.7 million, or 3%, in the first six months of 2004 compared to the same period a year ago. Increases in our MG&A personnel and related costs of $1.7 million were more than offset by lower depreciation expense of $1.1 million due to the slow replacement of fully depreciated assets and by decreases in our other MG&A expenses of $1.3 million due to continued cost reduction initiatives.

Restructuring

We have completed substantially all of the activities contemplated in our restructuring plans, but as of June 27, 2004 have not yet disposed of all our surplus leased facilities.

With respect to the restructuring plan we implemented in March 2001, we had recorded an additional $3.1 million in the third quarter of 2003 as our rental commitments were expected to be higher than originally anticipated. Cash payments under this plan since the third quarter of 2003 were $1.6 million, with cash payments of $0.8 million occurring in the first six months of 2004. Efforts to exit these sites are ongoing, but the payments related to these facilities could extend to 2010.

Cash payments in the first six months of 2004 were $1.2 million under the October 2001 restructuring plan and $2 million under the January 2003 restructuring plan. We continue our efforts to exit the remaining sites, but payments relating to these facilities could extend to 2009 and 2006, respectively.

Interest and other income, net

Net interest and other income was $1.8 million in the first six months of 2004 compared to income of $0.4 million in the first six months of 2003. Interest and other income increased as the interest expense savings gained by repurchasing $206.9 million of our 3.75% convertible subordinated debt exceeded our lower interest income that resulted from reduced cash balances and declining reinvestment yields on our maturing longer term investments.

Gain (loss) on extinguishment of debt

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

Net gain on investments

In the first six months of 2004, we sold our investment in a private technology company for total proceeds of $10.6 million. We recorded a gain on sale of $8.6 million, which excluded $0.7 million remaining in escrow for one year subject to the terms and conditions of the sale agreement. We will record this amount as additional gain on sale of this investment when such proceeds are received.

In the same period a year ago, we recorded a net gain of $2.5 million, which was comprised of a gain of $6.0 million on the sale of our remaining investment in Sierra Wireless Inc., a public company, and a $3.5 million charge for the impairment of a portion of our investment in non-public companies.

Provision for income taxes

We recorded a tax provision of $8.7 million in the first six months of 2004 relating to income generated in Canada. We reduced our effective tax rate for 2004 from 28% to 25%. The change in estimate reduced our year-to-date provision by $1.0 million.

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 28, 2003, which also provides commentary on our most critical accounting estimates. The following estimates were of note during the first six months of 2004:

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 $7.6 million related to the 2001 restructuring plans represents 66% of the estimated total future operating costs and lease obligations for the effected sites.

In the first quarter of 2003, we announced a further restructuring of our operations, which resulted in the closing of an additional four product development sites and the recording of $9.6 million charge related to these facilities. The total remaining estimate of $4.3 million related to the closing of all four sites represents just over 58% of the estimated total future operating costs and lease obligations for these sites.

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

Income Taxes

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.

Our operations are conducted in a number of countries with complex tax regulations. Interpretation of regulations, and legislation pertaining to our activities, and those regulations are continually subject to change. During the quarter, we have recorded additional income taxes payable based on our estimate and interpretation of those regulations for the countries we operate in and the profits generated in each country. The estimate of taxes payable is subject to review and assessment by the tax authorities of those countries. The timing of the review and assessment of our income tax returns by local authorities is substantially out of our control and is dependent on the actions by those authorities in the countries we operate in. Reviews by tax authorities may result in adjustment of the income taxes we pay or that are refunded.

Business Outlook

We expect our revenues for the third quarter of 2004 to be in the range of $86 to $92 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 turns business varies from quarter to quarter. We have based our revenue estimate for the third quarter on an expectation of a slightly higher level of turns business due to a slower order booking rate around the beginning of the third quarter. Beyond the third quarter of 2004, it is currently not possible to conclusively determine if, or the rate at which improved revenue momentum will continue. Our customers continue to resist placing backlog for as long as possible, and our quarterly revenues may vary considerably as our customers adjust levels of inventories carried and adjust to fluctuating demand for products in their markets.

We anticipate our third quarter 2004 gross margins will remain relatively consistent with the second quarter of 2004, at slightly above 70%, but this could vary depending on the volumes and mix of products sold.

We remain focused on cost control and expect our operating expenses in the third quarter of 2004 to be consistent with the second quarter of 2004 at approximately $42 to $43 million.

We anticipate that interest and other income in the third quarter of 2004 will approximate $1.1 million, and our income tax provision rate will be 25%.

We believe factors that impact our operating performance, such as service provider infrastructure spending, enterprise network capital spending, communications component inventories, and general economic performance in North America and Asia, have improved. While we are unable to ascertain the extent to which these factors will affect our operating results, given our broad product and customer range and the complexity of the markets we serve, we believe these trends are positive for our market opportunity over the years to come.

Liquidity & Capital Resources

Our principal source of liquidity at June 27, 2004 was $376.2 million in cash and investments, which included $224.3 million in cash and cash equivalents, short-term investments and restricted cash and $151.9 million of long-term investments in bonds and notes, which mature within the next 12 to 28 months.

In the first six months of 2004, we generated $26.0 million of cash from operating activities. Changes in working capital accounts included:

• an $8.6 million increase in income taxes payable, as our provision for income taxes increased in line with our profitability;

• a $7.3 million increase in accounts receivable, primarily due to increased revenues;

• a $5.0 million decrease in accounts payable and accrued liabilities, primarily due to the payment of a specific large invoice included in our 2003 fiscal year end balance;

• a $4.0 million decrease in accrued restructuring costs, due to cash payments under the restructuring plans;

• a $3.6 million increase in prepaid expenses and other assets, principally due to payment of annual software rentals and software maintenance contracts in the first quarter; and

• a $2.2 million increase in deferred income, as PMC product shipments to our major distributor exceeded PMC product shipments by our major distributor.

In the first six months of 2004 cash flows from our investment activities included:

• cash used for the purchase of $178.3 million of long and short-term debt investments;

• cash proceeds of $124.8 million from the sale or maturity of short and long-term debt investments;

• cash proceeds of $9.9 million from the sale of our investment in a private technology company; and

• cash used in the investment of $5.2 million for the purchases of property and equipment.

In the first six months of 2004 cash flows from our financing activities included:

• $106.9 million used to repurchase our convertible subordinated notes at par; and

• cash proceeds of $9.7 million from the issuance of common stock under our equity-based compensation plans.

As of June 27, 2004, we had cash commitments made up of the following:

(in thousands)

Contractual Obligations	Total		Remaining 2004		2005		2006		2007		2008		After 2008

Operating Lease Obligations:
Minimum Rental Payments	$	61,146	$	5,390	$	9,671	$	8,980	$	9,022	$	11,085	$	16,998
Estimated Operating Cost Payments	23,877		2,003		3,894		3,624		3,606		3,456		7,294
Long Term Debt:
Principal Repayment	68,071		—		—		68,071		—		—		—
Interest Payments	6,382		1,276		2,553		2,553		—		—		—
Purchase Obligations	3,218		1,742		1,248		228		—		—		—
	162,694		$	10,411	$	17,366	$	83,456	$	12,628	$	14,541	$	24,292
Venture Investment Commitments (see below)	15,264
Total Contractual Cash Obligations	$	177,958

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 $12 million at June 27, 2004 for inventory and other expenses that will be received in the coming 90 days and that will require settlement 30 days thereafter.

In 1999 and 2000 we established passive investments, like many of our peers, in four professionally managed venture funds. These investments help us monitor technological and market developments in the rapidly evolving market in which we participate. From time to time these funds request additional capital. We have committed to invest an additional $15.3 million into these funds, which may be requested by the fund managers at any time over the next six years.

We have a line of credit with a bank that allows us to borrow up to $5.3 million provided we maintain eligible investments with the bank equal to the amount drawn on the line of credit. At June 27, 2004 we had committed $2.5 million under letters of credit as security for office leases.

We are committed to semi-annual interest payments of approximately $1.3 million to holders of our convertible notes. These interest payments are due on February 15 and August 15 of each year, and the last payment of interest and $68.1 million in principal is due on August 15, 2006. We may redeem the notes at a premium at any time after August 19, 2004.

We have completed substantially all of our planned financial and operating restructuring expenditures and we have repurchased all but $68.1 million of our convertible subordinated notes. We expect to use approximately $8.9 million of cash in the remainder of 2004 for capital expenditures. We cannot estimate what our direct investments in venture-backed startups will be for the remainder of 2004. Based on our current operating prospects, we believe that existing sources of liquidity will satisfy our projected operating, working capital, venture investing, debt interest, capital expenditure, wafer deposit and remaining restructuring requirements through the end of 2005.

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

FACTORS THAT YOU SHOULD CONSIDER BEFORE INVESTING IN PMC-SIERRA

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

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

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

We have very limited revenue visibility.

Our ability to project revenues is limited because a significant portion of our quarterly revenues may be derived from orders placed and shipped in the same quarter, which we call our “turns business.” Our turns business varies widely quarter to quarter. We have based our revenue estimate for the third quarter on an expectation of a slightly higher level of turns business due to a slower order booking rate around the beginning of the third quarter. We can neither assure you that this trend will continue nor that our estimated turns business will be achieved. Customers order only based on identifiable needs and often request short lead times between order and shipment, which reduces our ability to project revenues. Based on discussions with some of our customers, we believe that supply chain inventories are at relatively low levels, but our estimate may be incorrect. Accordingly we do not project revenues beyond the current quarter, and our projection depends on our estimated turns business for the quarter.

Recent improvements in our revenues may not continue.

Our revenues largely depend on end-user demand for networking equipment, particularly demand by telecommunications service providers, as our OEM customers have increasingly manufactured their products only when they have firm orders to fulfill. Many of our customers have forecast only modest growth in 2004. While some of our customers have reported that demand for some of their products has improved, demand may fluctuate from current levels depending on their customers’ specific needs. Many service providers have limited capital expenditure budgets, and are cautious of their continued roll out of new and existing equipment. Many platforms in which our products are designed have been cancelled as our customers cancel or restructure product development initiatives. Further growth of our revenues may be delayed or adversely impacted if these conditions continue or worsen.

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. This makes forecasting their production requirements difficult and can lead to an inventory surplus of certain of their components.

Our customers often shift buying patterns as they manage inventory levels, market different products, or change production schedules. In addition, we believe that uncertainty in our customers’ end markets and our customers’ increased focus on cash management has caused our customers to delay product orders and reduce delivery lead-time expectations.

We may be unable to deliver products to customers when they require them if we incorrectly estimate future demand, and this may lead to higher fluctuations in shipments of our products.

We may also experience an increase in the proportion of our revenues in future periods that will be from orders placed and fulfilled within the same period, which would further decrease our ability to accurately forecast operating results. As most of our costs are fixed in the short term, a reduction in demand for our products may cause a proportionately greater decline in our operating results.

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 first six months of 2004. We do not have long-term volume purchase commitments from any of our major customers. Accordingly, our future operating results will continue to depend on the success of our largest customers and on our ability to sell existing and new products to these customers in significant quantities.

The loss of our 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.

Competition may adversely affect our profitability over time.

We expect the average selling prices of our products to decline as they mature and as competition increases. To maintain profit margins, we must reduce our costs sufficiently to offset declines in average selling prices, or successfully sell proportionately more new products with higher average selling prices. Yield or other production problems, or shortages of supply may preclude us from lowering or maintaining current operating costs.

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

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

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.

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 revenue, the amount of revenue 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 2 years to generate meaningful revenue.

Our estimated restructuring accruals may not be adequate.

In 2001 and 2003, we announced and implemented plans to restructure our operations in response to the decline in demand for our networking products. We reduced the work force and consolidated or shut down excess facilities in an effort to bring our expenses into line with our reduced revenue expectations.

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

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, 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.

All of our competitors pose the following threats to us:

Increasing competition will 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.

We face significant competition from two major fronts. First, we compete against established peer-group semiconductor companies that focus on the communications semiconductor business. These companies include Agere Systems, Applied Micro Circuits Corporation,

Broadcom, Exar Corporation, Conexant Systems, Marvell Technology Group, Multilink Technology Corporation, Silicon Image, Transwitch and Vitesse Semiconductor. These companies are well financed, have significant communications semiconductor technology assets, have established sales channels, and are dependent on the market in which we participate for the bulk of their revenues.

Other competitors include major domestic and international semiconductor companies, such as Agilent, Cypress Semiconductor, Intel, IBM, Infineon, Integrated Device Technology, Maxim Integrated Products, Motorola, NEC, Nortel Networks, 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 high-speed networking technologies that may not have been widely adopted or ratified by one or more of the standard-setting bodies in our customers’ industry. 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 usually delays the production of our products. Our products may become obsolete during these delays.

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 into production. 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.

We are subject to the risks of conducting business outside the United States to a greater extent than companies that operate their businesses mostly in 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.

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

We are exposed to foreign currency rate fluctuations because a significant part of our development, test, marketing and administrative costs are in Canadian dollars, and our selling costs are incurred in a variety of currencies around the world. The US dollar has and may continue to devalue compared to the Canadian dollar. 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.

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

China represents a significant portion of our net revenues (25% and 30% for each of the six months ended June 27, 2004 and June 29, 2003, respectively, based on ship to location). Our financial condition and results of operations are becoming increasingly dependent on our sales 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, implications with regard to travel and trade resulting from the SARS (severe acute respiratory syndrome) outbreak, government regulation of exports, imposition of tariffs and other potential trade barriers, uncertain protection for intellectual property rights and generally longer receivable collection periods.

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

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

In addition, international debt rating agencies have significantly downgraded the bond ratings on a number of our larger customers, which had traditionally been considered financially stable.

Should these companies enter into bankruptcy proceedings or breach their debt covenants, 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 we account for employee stock options using the fair value method, it could significantly reduce our net income.

There has been ongoing public debate whether stock options granted to employees should be treated as compensation expense and, if so, how to properly value such charges. On March 31, 2004, the Financial Accounting Standard Board (FASB) issued an Exposure Draft, Share-Based Payment: an amendment of FASB statements No. 123 and 95, which would require a company to recognize, as an expense, the fair value of stock options and other stock-based compensation to employees beginning in 2005 and subsequent reporting periods. If we elect or are required to record an expense for our stock-based compensation plans using the fair value method as described in the Exposure Draft, we could have significant and ongoing accounting charges.

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.

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

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

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

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

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

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

From time to time, we license, or acquire, technology from third parties to incorporate into our products. Incorporating technology into our products may be more costly, or result in additional management attention to achieve the desired functionality.

The loss of personnel could preclude 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, we may have to identify and qualify acceptable additional or alternative foundries. This qualification process could take six months or longer. We may not find sufficient capacity quickly enough, if ever, to satisfy our production requirements.

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

We depend on third parties in Asia for assembly of our semiconductor products that could delay and limit our product shipments.

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

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

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

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 attaining 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 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. This has happened in the past. An adverse result in any litigation could force us to pay substantial damages, stop manufacturing, using and selling the infringing products, spend significant resources to develop non-infringing technology, discontinue using certain processes or obtain licenses to the infringing technology. In addition, we may not be able to develop non-infringing technology, or find appropriate licenses on reasonable terms.

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

The majority of our customers are required to obtain licenses from and pay royalties to third parties for the sale of systems incorporating our semiconductor devices. Customers may also make claims against us with respect to infringement.

Furthermore, we may initiate claims or litigation against third parties for infringing our proprietary rights or to establish the validity of our proprietary rights. This could consume significant resources and divert the efforts of our technical and management personnel, regardless of the litigation’s outcome.

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

Approximately $68.1 million of our 3.75% convertible subordinated notes are outstanding. Our debt could materially and adversely affect our ability to obtain financing for working capital, acquisitions or other purposes and could make us more vulnerable to industry downturns and competitive pressures. Our ability to meet our debt service obligations will be dependent upon our future performance, which will be subject to financial, business and other factors affecting our operations, many of which are beyond our control. On August 15, 2006, we are obliged to repay the full remaining principal amount of the notes that have not been converted into our common stock.

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.

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.

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 held at fair market value.

Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate and credit rating 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. In addition, the value of all types of securities may be impaired if bond rating agencies decrease the credit ratings of the entities which issue those securities. 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 or a decrease in credit ratings.

We do not use derivative financial instruments to reduce or eliminate our exposure to changes in interest rates or credit ratings.

Based on a sensitivity analysis performed on the financial instruments held at June 27, 2004, the impact to the fair value of our investment portfolio by an immediate hypothetical parallel shift in the yield curve of plus or minus 50, 100 or 150 basis points would result in a decline or increase in portfolio value of approximately $1.6 million, $3.2 million and $4.8 million respectively.

Other Investments:

Our other investments also include numerous strategic investments in privately held companies or venture funds 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 have 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.

Foreign Currency

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

Through our operations in Canada and elsewhere outside the United States, we incur research and development, customer support costs and administrative expenses in Canadian and other foreign currencies. We are exposed, in the normal course of business, to foreign currency risks on these expenditures. 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 foreign subsidiaries. These forward contracts offset the impact of U.S. dollar currency 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.

At June 27, 2004, the Company had four currency forward contracts outstanding that qualified and were designated as cash flow hedges. The U.S. dollar notional amount of these contracts was $42.9 million and the contracts had a fair value of $0.1 million as of June 27, 2004. A 10% shift in foreign exchange rates would not have materially impacted our other income because our foreign currency net asset position was immaterial.

Item 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

Our chief executive officer and our chief financial officer evaluated our “disclosure controls and procedures” (as defined in Rule 13a-14(c) of the Securities Exchange Act of 1934 (the “Exchange Act”) as of of the end of the period covered by this quarterly report. They concluded that as of the evaluation date, our disclosure controls and procedures are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.

Changes in internal controls

There was no change in our internal control over financial reporting 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 1 . LEGAL PROCEEDINGS

On February 11, 2004, we filed a lawsuit against Programmable Microelectronics Corporation (“Programmable”) in the United States District Court, Northern District of California (Case No. C04 00582) for trademark and trade name infringement, trademark dilution, cancellation of trademark registration and unfair competition due to Programmable’s use of the Company’s “PMC” mark. Programmable filed counterclaims in April for trademark and trade name infringement and unfair competition. We believe these counterclaims are without merit.

Item 4. SUBMISSION OF MATTERS TO A VOTE BY STOCKHOLDERS

We held our Annual Meeting of Stockholders on May 14, 2004 to elect our directors and to ratify the appointment of Deloitte & Touche LLP as our independent auditors for the 2004 fiscal year.

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

Election of the Directors of the Company.

Nominee	For	Withheld

Robert Bailey	157,479,981	2,273,634
Alexandre Balkanski	153,967,721	5,785,894
Richard Belluzzo	150,511,124	9,242,491
James Diller	118,628,397	41,125,218
Jonathan Judge	151,650,579	8,103,036
William Kurtz	150,517,518	9,236,097
Frank Marshall	157,012,620	2,740,995
Lewis Wilks	150,493,287	9,260,328

Proposal to ratify the appointment of Deloitte & Touche LLP as our independent auditors for the 2004 fiscal year.

For	Against	Abstain

143,465,649	15,573,359	714,607

Item 5. Other Information

Stock Option Plans

Our equity-based compensation program is a broad-based, long-term retention program intended to attract, motivate, and retain talented employees as well as align stockholder and employee interests. We currently grant stock options from two plans: 1994 Incentive Stock Plan and 2001 Stock Option Plan. The majority of options granted under these plans generally vest over four years and have a maximum term of ten years.

The following table summarizes the activity under all of our stock option plans for the first six months of 2004:

(in thousands, except per share amounts)	Shares Available for Options		Number of Options Outstanding		Weighted Average Exercise Price Per Share

Balance at December 28, 2003	33,285		22,108		$	7.51
Additional shares reserved(1)	8,717		—		—
Granted(2)	(6,059	)	6,059		$	19.65
Exercised	—		(1,775	)	$	5.45
Expired	(119	)	—		—
Cancelled and available for regrant	852		(852	)	$	12.85
Balance at June 27, 2004	36,676		25,540		$	10.35

(1) On January 1, 2004, 8.7 million shares were automatically authorized for issuance under the 1994 Incentive Stock Plan.

(2) On December 29, 2003 we granted options to purchase approximately 5.5 million shares of common stock with an exercise price of $20.13, which was the closing price of our stock on the grant date. In the first 6 months of 2004, we also granted options to purchase approximately 0.6 million shares, primarily to new employees.

Item 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits –

•	3.2	Amended and Restated By-Laws of the Company dated July 21, 2004

•	11.1	Calculation of income (loss) 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)

(b) Reports on Form 8-K –

• On April 15, 2004, we filed a report on Form 8-K relating to the results of our first fiscal quarter ended March 28, 2004. Under the Form 8-K, we furnished (not filed) pursuant to Item 12 under Item 7 the press release entitled “PMC-Sierra Reports First Quarter 2004 Results” relating to the results of our first fiscal quarter and related non-GAAP financial information.

SIGNATURE

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

		PMC-SIERRA, INC.
		(Registrant)


Date:	July 30, 2004	/s/ Alan F. Krock
		Alan F. Krock
		Vice President, Finance
		Chief Financial Officer and
		Principal Accounting Officer

PART I - FINANCIAL INFORMATION

Interest and other income

Gain (loss) on investments

Provision for income taxes

Interest and other income, net

Gain (loss) on extinguishment of debt

Net gain on investments

Provision for income taxes