PMC-Sierra, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except for per share amounts)

(unaudited)

	Three Months Ended
	Apr 3, 2005			Mar 28, 2004

Net revenues	$	66,111		$	78,660

Cost of revenues	19,621			23,757
Gross profit	46,490			54,903

Other costs and expenses:
Research and development	31,416			28,802
Marketing, general and administrative	13,004			11,925
Amortization of deferred stock compensation:
Marketing, general and administrative	—			697
Restructuring costs	868			—

Income from operations	1,202			13,479

Other income:
Interest income, net	2,685			956
Foreign exchange loss	(590		)	(33		)
Loss on debt extinguishment and amortization of debt issue costs	(1,634		)	(1,942		)
Gain on sale of property and investments	1,439			8,587

Income before provision for income taxes	3,102			21,047

Recovery of (provision for) income taxes	175			(4,200		)
Net income	$	3,277		$	16,847

Net income per common share - basic	$	0.02		$	0.09
Net income per common share - diluted	$	0.02		$	0.09

Shares used in per share calculation - basic	182,192			178,409
Shares used in per share calculation - diluted	188,678			192,300

See notes to the condensed consolidated financial statements.

PMC-Sierra, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

(unaudited)

	Apr 3, 2005			Dec 26, 2004

ASSETS:
Current assets:
Cash and cash equivalents	$	153,970		$	121,276
Short-term investments	70,259			153,410
Accounts receivable, net of allowance for doubtful accounts of $2,665 (2004 - $2,665)	23,946			19,931
Inventories	15,803			15,823
Prepaid expenses and other current assets	17,977			17,042
Total current assets	281,955			327,482

Investment in bonds and notes	130,881			139,111
Other investments and assets	5,169			4,565
Property and equipment, net	14,382			16,177
Goodwill	7,907			7,907
Other intangible assets, net	4,818			5,003
Deposits for wafer fabrication capacity	5,145			6,779
	$	450,257		$	507,024

LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable	$	18,628		$	16,598
Accrued liabilities	39,110			40,195
Income taxes payable	29,321			28,931
Accrued restructuring costs	12,739			13,735
Deferred income	8,413			7,646
Current portion of long-term debt	—			68,071
Total current liabilities	108,211			175,176

Deferred taxes and other tax liabilities	28,077			28,077

PMC special shares convertible into 2,815 (2004 - 2,897) shares of common stock	4,139			4,434

Stockholders’ equity
Common stock and additional paid in capital, par value $.001: 900,000 shares authorized; 180,230 shares issued and outstanding (2004 - 178,510)	902,198			893,704
Accumulated other comprehensive income	(928		)	350
Accumulated deficit	(591,440		)	(594,717		)
Total stockholders’ equity	309,830			299,337
	$	450,257		$	507,024

See notes to the condensed consolidated financial statements.

PMC-Sierra, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Three Months Ended
	Apr 3, 2005			Mar 28, 2004
Cash flows from operating activities:
Net income	$	3,277		$	16,847
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of property and equipment	2,688			4,027
Amortization of other intangibles	520			77
Amortization of deferred stock compensation	—			697
Amortization of debt issuance costs	16			97
Gain on disposal of property and equipment	(184		)
Loss on extinguishment of debt	1,618			1,845
Gain on sale of investments and other assets	(1,255		)	(8,587		)
Changes in operating assets and liabilities:
Accounts receivable	(4,015		)	(7,283		)
Inventories	20			1,394
Prepaid expenses and other current assets	(2,607		)	(5,721		)
Accounts payable and accrued liabilities	2,028			(4,335		)
Income taxes payable	769			4,127
Accrued restructuring costs	(996		)	(1,661		)
Deferred income	766			2,138
Net cash provided by operating activities	2,645			3,662

Cash flows from investing activities:
Purchases of short term available-for-sale investments	(66,950		)	—
Proceeds from sales and maturities of short-term available-for-sale investments	141,084			20,323
Purchases of long-term available-for-sale investments in bonds and notes	—			(37,788		)
Proceeds from sales and maturities of long-term available-for-sale investments in bonds and notes	16,396			51,935
Purchases of investments and other assets	(2,000		)	(800		)
Proceeds from sale of investments and other assets	680			9,916
Proceeds from sale of property	2,604			—
Proceeds from refund of wafer fabrication deposits	1,634			—
Purchases of property and equipment	(1,085		)	(3,713		)
Purchase of intangible assets	(335		)	(663		)
Net cash provided by investing activities	92,028			39,210

Cash flows from financing activities:
Repurchase of convertible subordinated notes	(70,177		)	(106,929		)
Proceeds from issuance of common stock	8,198			11,180
Net cash used in financing activities	(61,979		)	(95,749		)

Net increase (decrease) in cash and cash equivalents	32,694			(52,877		)
Cash and cash equivalents, beginning of the period	121,276			225,959
Cash and cash equivalents, end of the period	$	153,970		$	173,082

Supplemental disclosures of cash flow information:
Cash paid for interest	$	1,085		$	2,858
Cash refund of income taxes	2,507			—
Cash paid for income taxes	2,251			—

Supplemental disclosures of non-cash investing and financing activities:
Conversion of PMC-Sierra special shares into common stock	$	295		—

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 microprocessors for service provider, enterprise, storage, and wireless networking equipment. The Company offers worldwide technical and sales support through a network of offices in North America, Europe and Asia.

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

Estimates. The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Estimates are used for, but not limited to, the accounting for doubtful accounts, inventory reserves, depreciation and amortization, asset impairments, sales returns, warranty costs, income taxes, restructuring costs and contingencies. Actual results could differ from these estimates.

Cash and cash equivalents. At April 3, 2005, Cash and cash equivalents included $1.3 million (December 28, 2004 - $1.3 million) pledged with a bank as collateral for letters of credit issued as security for leased facilities.

Inventories. Inventories are stated at the lower of cost (first-in, first out) or market (estimated net realizable value). Inventories (net of reserves of $11.4 million and $12.2 million at April 3, 2005 and December 28, 2004, respectively) were as follows:

(in thousands)	Apr 3, 2005		Dec 28, 2004

Work-in-progress	$	8,766	$	7,369
Finished goods	7,037		8,454
	$	15,803	$	15,823

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 26, 2004 to April 3, 2005 was as follows:

(in thousands)	Three Months Ended April 3, 2005

Beginning balance	$	3,492
Accruals for new warranties issued	87
Adjustments related to changes in estimate of warranty accrual	(3		)
Ending balance, April 3, 2005	$	3,576

Other Indemnifications. From time to time, on a limited basis, PMC indemnifies its customers, as well as its suppliers, contractors, lessors, and others with whom it enters into contracts, against combinations of loss, expense, or liability arising from various triggering events related to the sale and use of its products, the use of their goods and services, the use of facilities, the state of assets that the Company sells and other matters covered by such contracts, up to a specified maximum amount.

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

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.

The following table summarizes the activity under all of our stock option plans for the first three months of 2005:

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

Balance at December 26, 2004	35,857		25,515		$	10.40
Granted	(60	)	60		$	10.49
Exercised	—		(789	)	$	5.30
Cancelled or expired	528		(528	)	$	15.12
Balance at April 3, 2005	36,325		24,258		$	10.47

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

Pro forma information regarding net income (loss) and net income (loss) per share is required by SFAS 123, “Accounting for Stock-Based Compensation” for awards granted or modified after December 31, 1994 as if the Company had accounted for its stock-based awards to employees under the fair value method of SFAS 123. 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 option participants 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
	Apr 3, 2005		Mar 28, 2004		Apr 3, 2005		Mar 28, 2004
Expected life (years)	6.4		2.9		1.4		1.5
Expected volatility	64	%	100	%	63	%	105	%
Risk-free interest rate	4.3	%	2.1	%	3.0	%	1.5	%

During the first quarter of 2005, management re-examined certain assumptions related to the level of expected volatility used in the Company’s option pricing model. As a result, volatility for the quarter ended April 3, 2005 was calculated using a weighted historical and market-based implied volatility. For the quarter ended March 28, 2004, volatility was calculated using 5-year historical volatility. In addition, stock options were granted to Directors only in the first quarter of 2005, therefore the weighted average expected life increased in order to reflect historical exercise patterns.

The weighted-average estimated fair values of stock options granted for the three months ended April 3, 2005 and March 28, 2004 were $6.66 and $12.02 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
(in thousands, except per share amounts)	April 3, 2005			Mar 28, 2004

Net income, as reported	$	3,277		$	16,847
Adjustments:
Additional stock-based employee compensation expense under fair value based method for all awards	(10,779		)	(18,948		)

Net loss, adjusted	$	(7,502	)	$	(2,101	)

Basic and diluted net income (loss) per share, as reported	$	0.02		$	0.09

Basic and diluted net income (loss) per share, adjusted	$	(0.04	)	$	(0.01	)

Recent Accounting Pronouncements. In December 2004, the Financial Accounting Standard Board (“FASB”) issued Statement of Financial Accounting Standard 123 (revised 2004), “Shared-Based Payment” (SFAS 123R). SFAS 123R addresses the requirements of an entity to measure the cost of services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost of such award will be recognized over the period during which an option holder is required to provide services in exchange for the award. The provisions of this Standard will be effective for the Company in the first quarter of fiscal 2006. The Company is evaluating the impact that this pronouncement will have on its financial position and results of operations.

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

NOTE 2. Derivative 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 April 3, 2005, the Company had five currency forward contracts outstanding that qualified and were designated as cash flow hedges. The U.S. dollar notional amount of these contracts was $50.3 million and the contracts had a fair value of $0.9 million as of April 3, 2005. The gain or loss from the ineffective portion of the hedges had no impact on earnings.

NOTE 3. Restructuring Costs

Restructurings - 2005

In the first quarter of 2005 the Company implemented two workforce reduction initiatives aimed at streamlining operations and reducing operating expenses.

The first initiative included termination of 24 employees across all business functions in the first quarter, which resulted in the Company recording a restructuring charge of $0.9 million in accordance with SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities”. All but $0.1 million of this amount was paid in the first quarter.

The second initiative included an announcement of the planned termination of 26 employees from production control, quality assurance, and product engineering as a result of consolidation of the Company’s two manufacturing facilities (Santa Clara, California and Burnaby, Canada) into one facility (Burnaby) in the second and third quarters of 2005. The Company expects to expense approximately $2.2 million in termination costs related to the second initiative during 2005 and to have substantially completed this initiative by the fourth quarter of 2005.

Restructurings – 2003 and 2001

In 2003 and 2001, the Company implemented three restructuring plans aimed at focusing development efforts on key projects and reducing operating costs in response to the severe and prolonged economic downturn in the semiconductor industry. PMC’s assessment of the market demand for its products, and the development efforts necessary to meet this demand, were key factors in its decisions to implement these restructuring plans. As end markets for the Company’s products had contracted, certain projects were curtailed in an effort to cut costs. Cost reductions in all other functional areas were also implemented, as fewer resources were required to support the reduced level of development and sales activities during these periods. The Company has completed substantially all of the activities contemplated in these restructuring plans, but as of April 3, 2005 had not yet terminated the leases on its surplus facilities.

January 16, 2003

The January 2003 restructuring included the termination of 175 employees and the closure of design centers in Maryland, Ireland and India. To date, PMC has recorded a restructuring charge of $18.3 million in accordance with SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities”, including $1.5 million for asset write-downs. These charges related

to workforce reduction, lease and contract settlement costs, and the write-down of certain property, equipment and software assets whose value was impaired as a result of this restructuring plan. The Company has disposed of the property improvements and computer equipment, and software licenses have been cancelled or are no longer being used. Cash payments made to date under this plan were $12.0 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 three months ended April 3, 2005 was as follows:

(in thousands)	Balance at Dec 26, 2004		Cash Payments			Balance at Apr 3, 2005
Excess facility and contract settlement costs	$	3,895	$	(107	)	$	3,788

October 18, 2001

The October 2001 restructuring plan included the termination of 341 employees, the consolidation of excess facilities, and the curtailment of certain research and development projects, resulting in a restructuring charge of $175.3 million, including $12.2 million of asset write-downs. To date, the Company has made cash payments under this plan of $153.3 million, including the purchase and sale of Mission Towers Two in Santa Clara, CA, for $133 million and $33 million, respectively, in the third quarter of 2003. To date, PMC has reversed $5.3 million of excess restructure provision, primarily related to Mission Towers Two. Due to the continued downturn in real estate markets, the facilities costs are expected to be higher than anticipated in the original plan and as a result, PMC recorded additional provisions for abandoned office facilities of $1.3 million in the fourth quarter of 2004.

The activity under this plan in the three months ended April 3, 2005 was as follows:

(in thousands)	Balance at Dec 26, 2004		Cash Payments			Balance at Apr 3, 2005

Excess facility and contract settlement costs	$	6,458	$	(654	)	$	5,804

March 26, 2001

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

The activity under this plan in the three months ended April 3, 2005 was as follows:

(in thousands)	Balance at Dec 26, 2004		Cash Payments			Balance at Apr 3, 2005

Excess facility costs	$	3,382	$	(388	)	$	2,994

NOTE 4. Debt Investments

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

(in thousands)	Apr 3, 2005		Dec 31, 2004

Available-for-sale:
US Government Treasury and Agency notes	$	104,261	$	104,722
Corporate bonds and notes	138,021		187,799
	$	242,282	$	292,521

Reported as:
Cash equivalents	$	41,142	$	—
Short-term investments	70,259		153,410
Investments in bonds and notes	130,881		139,111
	$	242,282	$	292,521

NOTE 5. Investments and Other Assets

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

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

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

NOTE 6. Convertible Subordinated Notes

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

million. The aggregate principal amount of the Notes outstanding was $68.1 million at December 26, 2004.

NOTE 7. Comprehensive Income

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

	Three Months Ended
(in thousands)	Apr 3, 2005			Mar 28, 2004

Net income	$	3,277		$	16,847
Other comprehensive income:
Change in net unrealized gains on investments	(596		)	(302		)
Change in fair value of derivatives	(682		)	(604		)
Total	$	1,999		$	15,941

NOTE 8. Net Income Per Share

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

	Three Months Ended
(in thousands, except per share amounts)	Apr 3, 2005		Mar 28, 2004
Numerator:
Net income	$	3,277	$	16,847
Denominator:
Basic weighted average common shares outstanding (1)	182,192		178,409
Effect of dilutive securities:
Stock options	6,486		13,891

Basic and diluted weighted average common shares outstanding (1)	188,678		192,300

Basic net income per share	$	0.02	$	0.09

Diluted net income per share	$	0.02	$	0.09

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

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, margins, expenses, tax provision rate, 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 described under “Factors That You Should Consider Before Investing in PMC-Sierra” and elsewhere in this Quarterly Report. Investors are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof.

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

In addition to incurring costs for the marketing, sales and administration of the sale of existing products, we expend a substantial amount every year for the development of new semiconductor devices. We determine the amount to invest in the development of new semiconductors based on our assessment of the future market opportunities for those components, and the estimated return on investment.

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

Results of Operations

First Quarters of 2005 and 2004

Net Revenues (in millions)

	First Quarter
	2005		2004		Change

Net revenues	$	66.1	$	78.7	(16	)%

Net revenues for the first quarter of 2005 were $66.1 million compared to $78.7 million for the same period in 2004, a decrease of $12.6 million, or 16%. Although revenues were lower than

the first quarter of 2004, revenues increased in the first quarter of 2005 from the level of revenue in the fourth quarter of 2004. The recovery in the first quarter of 2005 when compared to the fourth quarter of 2004 was due to reduced levels of inventory at end customers, improved activity levels in a number of end-user markets, including Enterprise Routing and Multi-Service Switching, Storage, Laser Printers, and Wireless Infrastructure. In addition, the percentage of revenues from Asia grew significantly this quarter compared to the fourth quarter of 2004. Revenue generated during the extra week of the first quarter (the 14^th week), was approximately $2 million.

Gross Profit (in millions)

	First Quarter
	2005			2004			Change

Gross profit	$	46.5		$	54.9		(15	)%
Percentage of net revenues	70		%	70		%

Total gross profit decreased $8.4 million, or 15%, in the first quarter of 2005 compared to the same quarter of 2004. The decrease is due to lower unit sales.

Gross profit as a percentage of revenues was consistent at 70% in the first quarter of 2005 and the same period in 2004. This resulted from a combination of the following factors:

• fixed manufacturing costs were allocated over a lower volume of shipments, reducing gross profit by approximately 1 percentage point; and

• a greater portion of our sales were from our higher margin products, which increased gross profit by approximately 1 percentage point.

Operating Expenses and Charges (in millions)

	First Quarter
	2005			2004			Change

Research and development	$	31.4		$	28.8		9	%
Percentage of net revenues	48		%	37		%

Marketing, general and administrative	$	13.0		$	11.9		9	%
Percentage of net revenues	20		%	15		%

Amortization of deferred stock compensation:
Marketing, general and administrative	—			0.7
	$	—		$	0.7		(100	)%
Percentage of net revenues	0		%	1		%

Restructuring costs	$	0.9		$	—		100	%
Percentage of net revenues	1		%	0		%

Research and Development and Marketing, General and Administrative Expenses

Our research and development, or R&D, expenses were $2.6 million, or 9%, higher in the first quarter of 2005 compared to the first quarter of 2004 due primarily to the incremental week in the first quarter of 2005, which increased payroll-related costs by $2.1 and facilities expenses by $0.1 million. Development costs in the first quarter of 2005 were $0.2 million higher than the first quarter of 2004 due to the timing of design completions. In addition, amortization of intellectual property was higher by $0.4 million due to an increase in purchases of intellectual property in the second half of 2004. These increases were offset by a $0.2 reduction in depreciation expense for equipment and development tools that became fully depreciated and were not replaced.

Our marketing, general and administrative, or MG&A, expenses increased by $1.1 million, or 9%, in the first quarter of 2005 compared to the same quarter of 2004. This increase was primarily attributable to the incremental week in the first quarter of 2005, which increased payroll-related costs by $1.3 million. This increase was offset by a $0.2 million reduction in depreciation expense for assets that became fully depreciated and were not replaced.

Restructuring

In the first quarter of 2005 we implemented two workforce reduction initiatives aimed at streamlining operations and reducing operating expenses.

The first initiative included termination of 24 employees across all business functions in the first quarter, which resulted in a restructuring charge of $0.9 million. Of this amount, all but $0.1 million has been paid.

costs of approximately $2.2 million related to this second initiative during 2005 and to have substantially completed this initiative by the fourth quarter of 2005.

Restructuring – 2003 and 2001

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

January 16, 2003

The January 2003 restructuring included the termination of 175 employees and the closure of design centers in Maryland, Ireland and India. To date, we have recorded a restructuring charge of $18.3 million, including $1.5 million for asset write-downs. These charges related to workforce reduction, lease and contract settlement costs, and the write-down of certain property, equipment and software assets whose value was impaired as a result of this restructuring plan. We have disposed of the property improvements and computer equipment, and software licenses have been cancelled or are no longer being used. Cash payments made to date under this plan were $12.0 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 three months ended April 3, 2005 was as follows:

(in thousands)	Balance at Dec 26, 2004		Cash Payments			Balance at Apr 3, 2005
Excess facility and contract settlement costs	$	3,895	$	(107	)	$	3,788

October 18, 2001

excess restructure provision, primarily related to Mission Towers Two. Due to the continued downturn in real estate markets, the facilities costs are expected to be higher than anticipated in the original plan and as a result, we recorded additional provisions for abandoned office facilities of $1.3 million in the fourth quarter of 2004.

The activity under this plan in the three months ended April 3, 2005 was as follows:

(in thousands)	Balance at Dec 26, 2004		Cash Payments			Balance at Apr 3, 2005

Excess facility and contract settlement costs	$	6,458	$	(654	)	$	5,804

March 26, 2001

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

The activity under this plan in the three months ended April 3, 2005 was as follows:

(in thousands)	Balance at Dec 26, 2004		Cash Payments			Balance at Apr 3, 2005

Excess facility costs	$	3,382	$	(388	)	$	2,994

Other Income and Expenses (in millions)

	First Quarter
	2005			2004			Change

Interest income, net	$	2.7		$	1.0		169	%
Percentage of net revenues	4		%	1		%

Foreign exchange loss	$	(0.6	)	$	—		100	%
Percentage of net revenues	-1		%	0		%

Loss on extinguishment of debt and amortization of debt issue costs	$	(1.6	)	$	(1.9	)	16	%
Percentage of net revenues	-2		%	-2		%

Gain on property and investments	$	1.4		$	8.6		(83	)%
Percentage of net revenues	2		%	11		%

Interest income, net

Interest income was $2.7 million in the first quarter of 2005 compared to $1.0 million in the first quarter of 2004. Our net interest income increased in the first quarter of 2005 by $1.7 million compared to the first quarter of 2004 as a result of interest expense savings of $0.6 million from the repurchase of our 3.75% Convertible Subordinated Notes, and $0.5 million interest received as part of a tax settlement. The remaining increase is due to increases in our average cash balances, net of debt, improved investment yields and an additional week in the first quarter of 2005 compared to the first quarter of 2004.

Foreign exchange loss

Foreign exchange loss increased to $0.6 million in the first quarter of 2005 compared to nil in the first quarter of 2004.

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

Loss on extinguishment of debt and amortization of debt issue costs

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

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

Gain on sale of property and investments

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

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

Recovery of income taxes

We recorded a recovery of income taxes of $0.2 million in the first quarter of 2005. Our provision for income taxes was affected by two factors. First, we decreased our expected annual effective tax rate from 25% to 20% based on a sensitivity analysis that considered tax credits available to offset forecast levels of net income, which illustrated that 20% was a more realistic rate for PMC. Second, we reversed a $0.9 million accrual for state taxes based on the completion of a tax audit.

Critical Accounting Estimates

General

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

Restructuring charges - Facilities

In calculating the cost to dispose of our excess facilities, we had to estimate the amount to be paid in lease termination payments, the future lease and operating costs to be paid until the lease is terminated, and the amount, if any, of sublease revenues for each location. This

required us to estimate the timing and costs of each lease to be terminated, the amount of operating costs for the affected facilities, and the timing and rate at which we might be able to sublease or complete negotiations of a lease termination agreement for each site. To form our estimates for these costs we performed an assessment of the affected facilities and considered the current market conditions for each site.

During 2001, we recorded total charges of $155 million for the restructuring of excess facilities as part of restructuring plans implemented that year. The total remaining estimate of $8.8 million related to the 2001 restructuring plans represents 90% of the estimated total future operating costs and lease obligations for the effected sites.

In the first quarter of 2003, we announced a further restructuring of our operations, which resulted in the closing of an additional four product development sites and the recording of $9.6 million charge related to these facilities. The total remaining estimate of $3.8 million related to the closing of all four sites represents just over 57% of the estimated total future operating costs and lease obligations for these sites.

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

Income Taxes

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

Our operations are conducted in a number of countries with complex tax legislation and regulations pertaining to our activities. We have recorded income tax liabilities based on our estimates and interpretations of those regulations for the countries we operate in. However our estimates are subject to review and assessment by the tax authorities and the courts of those countries. The timing of any such review and final assessment of our liabilities by local authorities is substantially out of our control and is dependent on the actions by those authorities in the countries we operate in. Any re-assessment of our tax liabilities by tax authorities may result in adjustments of the income taxes we pay or refunds that are due to us.

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

Business Outlook

We expect our revenues for the second quarter of 2005 to be in the range of $70 to $72 million. As in the past, and consistent with business practice in the semiconductor industry, a significant portion of our revenues are likely to be derived from orders placed and shipped during the same quarter, which we call our “turns business”. Our revenue forecast depends in part on returning to PMC’s normal rate of turns business. In Q1 2005, net orders booked and shipped within the quarter (or net turns completed) was approximately $16 million or approximately 24% of quarterly sales. Our average turns business is about 30% of total quarterly sales. We believe that given the steady increase in levels of turns business over the past three quarters along with a reduction of customer inventory levels, our turns business will return to approximately a normalized rate during the second quarter of 2005. Our quarterly revenues may vary considerably as our customers adjust to fluctuating demand for products in their markets and continue to manage their inventory levels.

We anticipate our second quarter 2005 gross margins will be approximately 70%, but as in past quarters this could vary depending on the volumes of products sold, since many of our costs are fixed. Margins could also vary depending on the mix of products sold.

We expect our second quarter of 2005 operating expenses to be consistent with the first quarter. The first half of each calendar year brings additional expenses such as salary increases, and additional employer taxes and retirement plan contributions.

We anticipate that interest and other income in the second quarter of 2005 will be approximately $2.3 million, and our income tax provision rate will be 20%.

Liquidity & Capital Resources

Our principal source of liquidity at April 3, 2005 was $355.1 million in cash and investments, which included $224.2 million in cash and cash equivalents and short-term investments and $130.9 million of long-term investments in bonds and notes.

In the first three months of 2005, we generated $2.6 million of cash from operating activities. Significant changes in working capital accounts included:

• a $4.0 million increase in accounts receivable, primarily due to increased revenues and the timing of payments near the end of our fiscal period;

• a $2.6 million increase in prepaid expenses and other assets, principally due to the renewal of software maintenance contracts; and

• a $2.0 million increase in accounts payable and accrued liabilities, primarily due to the receipt of a large invoice from a supplier at the end of the quarter.

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

• cash proceeds of $157.5 million from the sale or maturity of short and long-term debt investments;

• cash used for the purchase of $67.0 million of long and short-term debt investments;

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

• an investment of $2.0 million in a private technology company;

• cash proceeds of $1.6 million from the refund of wafer fabrication deposits; and

• an investment of $1.4 million for the purchases of property, equipment and intangible assets.

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

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

• cash proceeds of $8.2 million from the issuance of common stock under our equity-based compensation plans.

As of April 03, 2005, we had cash commitments made up of the following:

(in thousands) Contractual Obligations	Total		2005		2006		2007		2008		2009		After 2009

Operating Lease Obligations:
Minimum Rental Payments	$	56,306	$	7,647	$	9,840	$	9,981	$	11,092	$	6,663	$	11,083
Estimated Operating Cost Payments	22,096		3,125		3,941		3,921		3,676		2,930		4,503
Purchase and other Obligations	4,265		3,812		453		—		—		—		—
	$	82,667	$	14,584	$	14,234	$	13,902	$	14,768	$	9,593	$	15,586

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 $5.3 million at April 3, 2005 for inventory and other expenses that will be received in the coming 90 days and that will require settlement 30 days thereafter.

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

We expect to use approximately $16.0 million of cash in the remainder of 2005 for capital expenditures. Based on our current operating prospects, we believe that existing sources of liquidity will satisfy our projected operating, working capital, venture investing, capital expenditure, wafer deposit and remaining restructuring requirements through the end of 2006.

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

FACTORS THAT YOU SHOULD CONSIDER BEFORE INVESTING IN PMC-SIERRA

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

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

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

We have very limited revenue visibility.

Our ability to project revenues is limited because a significant portion of our quarterly revenues may be derived from orders placed and shipped in the same quarter, which we call our “turns business.” Our turns business varies widely quarter to quarter. Although we have seen a steady improvement in our turns business during the past three quarters, uncertainty in our customers’ end markets and our customers’ increased focus on cash management may cause our customers to delay product orders and reduce delivery lead-time expectations, which reduces our ability to project revenues beyond the current quarter.

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

Many of our customers have numerous product lines, numerous component requirements for each product, sizeable and complex supplier structures, and typically engage contract manufacturers for additional manufacturing capacity. In addition, our customers often shift buying patterns as they manage inventory levels, market different products, or change production schedules. This makes forecasting their production requirements difficult and can lead to an inventory surplus of certain of their components.

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

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

China represents a significant portion of our net revenues (17% and 13% for each of the quarters ended April 3, 2005 and March 28, 2004, respectively). Our financial condition and results of operations are becoming increasingly dependent on our sales in China and the

majority of our wafer supply comes from Taiwan. China has large organizations with major programs that can start and stop quickly. For example, in 2004 our operating profits were adversely affected by a sudden change in telecom infrastructure build-out in China. Any instability in China’s economic environment could lead to a contraction of capital spending by our customers. Additional risks to us include economic sanctions imposed by the U.S. government, imposition of tariffs and other potential trade barriers or regulations, uncertain protection for intellectual property rights and generally longer receivable collection periods.

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

We depend on a limited number of customers for a major portion of our revenues. Through direct, distributor and subcontractor purchases, Cisco Systems accounted for more than 10% of our revenues in the first quarter of 2005. We do not have long-term volume purchase commitments from any of our major customers. Accordingly, our future operating results will continue to depend on the success of our largest customers and on our ability to sell existing and new products to these customers in significant quantities.

The loss of 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.

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

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

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

We typically face competition at the design stage, where customers evaluate alternative design approaches requiring integrated circuits. The markets for our products are intensely competitive and subject to rapid technological advancement in design tools, wafer manufacturing techniques, process tools and alternate networking technologies. We may not be able to develop new products at competitive pricing and performance levels. Even if we are able to do so, we may not complete a new product and introduce it to market in a timely manner. Our customers may substitute use of our products in their next generation equipment with those of current or future competitors, reducing our future revenues. With the shortening product life and design-in cycles in many of our customers’ products, our competitors may have more opportunities to supplant our products in next generation systems.

Our customers are increasingly price conscious, as semiconductors sourced from third party suppliers comprise a greater portion of the total materials cost in networking equipment. We continue to experience more aggressive price competition from competitors that wish to enter into the market segments in which we participate. These circumstances may make some of our

products less competitive and we may be forced to decrease our prices significantly to win a design. We may lose design opportunities or may experience overall declines in gross margins as a result of increased price competition.

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

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

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

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

We sell products to customers whose characteristics include evolving industry standards, short product lifespans, and new manufacturing and design technologies. Many of the standards and protocols for our products are based on networking technologies that may not have been widely adopted or ratified by one or more of the standard-setting bodies in our customers’ 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 is expensive and usually delays the production of our products. Our products may become obsolete during these delays.

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

From time to time, we announce new products and design wins for existing and new products. While some industry analysts may use design wins as a metric for future revenues, many design wins have not, and will not generate any revenues for us, as customer projects are cancelled or unsuccessful in their end market. In the event a design win generates 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 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, which may impair our sales, development or manufacturing of our products.

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

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

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

In addition, a significant portion of our sales flows through our distribution channel, which generally represents a higher credit risk. Should these companies enter into bankruptcy proceedings or breach their debt covenants, our revenues could decrease and collection of our significant accounts receivables with these companies could be jeopardized.

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

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

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

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

We regularly limit our exposure to foreign exchange rate fluctuations from our Canadian dollar net asset or liability positions. We do not hedge our accrual for Canadian income taxes in the ordinary course of business, and consequently in the first quarter of 2005 we incurred a $0.7 million foreign exchange loss relating to this item. Our profitability would be materially impacted by a 5% shift in the foreign exchange rates between United States and Canadian currencies.

Our 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.

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.

Product sales mix may adversely affect our profitability over time.

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

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

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

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

Our products generally take between 12 and 24 months from initial conceptualization to development of a viable prototype, and another 3 to 18 months to be designed into our customers’ equipment and sold in production quantities. Our products often must be redesigned because manufacturing yields on prototypes are unacceptable or customers redefine their products to meet changing industry standards or customer specifications. As a result, we develop products many years before volume production and may inaccurately anticipate our customers’ needs.

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.

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

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

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

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

We currently do not have the ability to accurately predict what products our customers will need in the future. Anticipating demand is difficult because our customers face volatile pricing and demand for their end-user networking equipment, our customers are focusing more on cash preservation and tighter inventory management, and because we supply a large number of products to a variety of customers and contract manufacturers who have many equipment programs for which they purchase our products. Our customers are frequently requesting shipment of our products earlier than our normal lead times. If we do not accurately predict what mix of products our customers may order, we may not be able to meet our customers’ demand in a timely manner or we may be left with unwanted inventory, which could adversely affect our future operating results.

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

We do not own or operate a wafer fabrication facility. Three outside wafer foundries supply more than 95% of our semiconductor wafer requirements. Our wafer foundry suppliers also make products for other companies and some make products for themselves, thus we may not have access to adequate capacity or certain process technologies. We have less control over delivery schedules, manufacturing yields and costs than competitors with their own fabrication facilities. If the wafer foundries we use are unable or unwilling to manufacture our products in required volumes, 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.

Our estimated restructuring accruals may not be adequate.

In 2005 we implemented a restructuring plan to streamline operations and reduce operating costs. In 2001 and 2003, we implemented plans to restructure our operations in response to the decline in demand for our networking products. We reduced the 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.

When we account for employee stock options using the fair value method, it could significantly reduce our net income.

In December 2004, the Financial Accounting Standard Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) 123 (revised 2004), “Shared-Based Payment” which will require us to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost of such award will be recognized over the period during which an employee is required to provide services in exchange for the award. We will be required to adopt this Statement in the first quarter of fiscal

2006. We are currently evaluating the impact that this pronouncement will have on our financial position and results of operations but expect that it will result in significant and ongoing accounting charges.

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 intellectual property and the proprietary rights of third parties, which may expose us to litigation and prevent us from selling our products.

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

force us to pay substantial damages, stop manufacturing, using and selling the infringing products, spend significant resources to develop non-infringing technology, discontinue using certain processes or obtain licenses to the infringing technology. In addition, we may not be able to develop non-infringing technology, or find appropriate licenses on reasonable terms.

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

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

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

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

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

Our stock price has been and may continue to be volatile.

We expect that the price of our common stock will continue to fluctuate significantly, as it has in the past. In particular, fluctuations in our stock price and our price-to-earnings multiple may have made our stock attractive to momentum, hedge or day-trading investors who often shift funds into and out of stocks rapidly, exacerbating price fluctuations in either direction particularly when viewed on a quarterly basis.

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.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Cash Equivalents, Short-term Investments and Investments in Bonds and Notes:

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

Investments in instruments with both fixed and floating rates carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted because of a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations because of changes in interest rates, or we may suffer losses in principal if we were to sell securities that have declined in market value because of changes in interest rates.

We do not attempt to reduce or eliminate our exposure to interest rate risk through the use of derivative financial instruments.

Based on a sensitivity analysis performed on the financial instruments held at April 3, 2005, the impact to the fair value of our investment portfolio by a shift in the yield curve of plus or minus 50, 100 or 150 basis points would result in a decline or increase in portfolio value of approximately $0.9 million, $1.8 million and $2.7 million respectively.

Other Investments:

Our other investments include strategic investments in privately held companies that are carried on our balance sheet at cost, net of write-downs for non-temporary declines in market value. We expect to make additional investments like these in the future. These investments are inherently risky, as they typically are comprised of investments in companies and partnerships that are still in the start-up or development stages. The market for the technologies or products that they have under development is typically in the early stages, and may never materialize. We could lose our entire investment in these companies and partnerships or may incur an additional expense if we determine that the value of these assets 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 denominated primarily in United States dollars. We generate a significant portion of our revenues from sales to customers located outside the United States including Canada, Europe, the Middle East and Asia. We are subject to risks typical of an international business including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions and foreign exchange rate volatility. Accordingly, our future results could be materially adversely affected by changes in these or other factors.

Through our operations in Canada and elsewhere outside the United States, we incur research and development, customer support costs and administrative expenses in Canadian and other foreign currencies. We are exposed, in the normal course of business, to foreign currency risks on these expenditures, particularly in Canada. In our effort to manage such risks, we have adopted a foreign currency risk management policy intended to reduce the effects of potential short-term fluctuations on our operating results stemming from our exposure to these risks. As part of this risk management, we enter into foreign exchange forward contracts on behalf of our Canadian subsidiary. These forward contracts offset the impact of exchange rate fluctuations on forecasted cash flows or firm commitments. We limit the forward contracts operational period to 12 months or less and we do not enter into foreign exchange forward contracts for trading purposes. Because we do not engage in foreign exchange risk management techniques beyond these periods, our cost structure is subject to long-term changes in foreign exchange rates.

As at April 3, 2005, we had five currency forward contracts outstanding that qualified and were designated as cash flow hedges. The U.S. dollar notional amount of these contracts was $50.3 million and the contracts had a fair value of $0.9 million.

We attempt to limit our exposure to foreign exchange rate fluctuations from our Canadian dollar net asset or liability positions. We do not hedge our accruals for Canadian income taxes in the ordinary course of business, and consequently in the first quarter of 2005 we incurred a $0.7 million foreign exchange loss relating to this item. Our profitability would be materially impacted by a shift in the foreign exchange rates between United States and Canadian currencies. For example, if the value of the United States dollar decreased by 5% relative to the Canadian dollar, our profitability would decrease by $2.7 million.

Item 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

Our management evaluated, with the participation of our chief executive officer and our chief financial officer, our disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on this evaluation, our chief executive officer and our chief financial officer concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.

Changes in internal controls

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act) that occurred during the period covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II – OTHER INFORMATION

Item 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. In April 2004 Programmable filed counterclaims for trademark and trade name infringement and unfair competition. In April 2005 we settled this matter with Programmable for an immaterial amount.

Item 5. OTHER INFORMATION

In the first quarter of 2005, executive officer Alan Krock entered into an individual Rule 10b5-1 trading plan pursuant to which stock of the Company will be sold from his account from time to time in accordance with the provisions of the plan without any further action or involvement by him.

Item 6. EXHIBITS

Exhibits –

•	11.1	Calculation of net income per share – included in Note 8 of the financial statements included in Item I of Part I of this Quarterly Report.

•	31.1	Certification of Chief Executive Officer pursuant to Section 302 (a) of the Sarbanes-Oxley Act of 2002

•	31.2	Certification of Chief Financial Officer pursuant to Section 302 (a) of the Sarbanes-Oxley Act of 2002

•	32.1	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer)

PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)

	-	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 5.	Other Information

Item 6.	Exhibits

Signatures

		PMC-SIERRA, INC.
		(Registrant)


Date:	May 3, 2005	/s/ Alan F. Krock
		Alan F. Krock
		Vice President, Finance Chief Financial Officer and Principal Accounting Officer

PART I - FINANCIAL INFORMATION

Item 1.

Financial Statements (unaudited)

Item 2.

Recovery of income taxes

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Item 4. CONTROLS AND PROCEDURES