PMC SIERRA INC
10-Q/A, 1999-02-10
SEMICONDUCTORS & RELATED DEVICES
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                 ----------------------------------------------

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549
                                Form 10 - Q/A - 1

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

                for the quarterly period ended September 27, 1998

                    [ ] 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

                              105-8555 BAXTER PLACE
                       BURNABY, BRITISH COLUMBIA, V5A 4V7
                                     CANADA

                            Telephone (604) 415-6000

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such period that the  registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.

                             Yes ___X____ No _______


          Common shares outstanding at September 27, 1998 - 30,918,031
             ------------------------------------------------------


<PAGE>


This Amendment on Form 10-Q/A amends the  Registrant's  Quarterly Report on Form
10-Q, as filed by the Registrant for the quarter ending  September 27, 1998, and
is  being  filed  to  reflect  the  restatement  of the  Registrant's  condensed
consolidated  financial  statements.  See  "Restatement  of Quarterly  Financial
Statements" in Notes to the Condensed  Consolidated  Financial  Statements for a
discussion of the basis for such restatement.

                                      INDEX


                                                                        Page

PART I - FINANCIAL INFORMATION

Item 1.         Financial Statements

         -      Consolidated statements of operations (restated)       

         -      Consolidated balance sheets (restated)                 

         -      Consolidated statements of cash flows (restated)       

         -      Notes to consolidated financial statements (restated)  

Item 2.  Management's Discussion and Analysis of Financial
         Condition and Results of Operations (restated)                


PART II - OTHER  INFORMATION


Item 6.  Exhibits and Reports on Form 8 - K                 





<PAGE>


                         Part I - FINANCIAL INFORMATION
                          Item 1 - Financial Statements

<TABLE>
                                       PMC-Sierra, Inc.
                             CONSOLIDATED STATEMENTS OF OPERATIONS
                          (in thousands, except for per share amounts)
                                         (unaudited)
<CAPTION>
                                                                Three Months Ended             Nine Months Ended
                                                           ----------------------------   ---------------------------
                                                              Sep 27,        Sep 30,         Sep 27,        Sep 30,
                                                                1998           1997            1998           1997
                                                           (restated -                    (restated -
                                                            see note 2)                    see note 2)
<S>                                                          <C>            <C>             <C>           <C>       
Net revenues                                                 $   42,105     $   27,815      $  116,375    $   95,453

Cost of revenues                                                 10,035          6,058          28,138        25,522
                                                           -------------  -------------   ------------- -------------
   Gross profit                                                  32,070         21,757          88,237        69,931

Other costs and expenses:
   Research and development                                       9,739          5,136          23,575        16,485
   Marketing, general and administrative                          7,549          5,735          21,106        18,650
   Acquisition of in process research and development                 -              -          39,176             -
   Impairment of intangible assets                                4,311              -           4,311             -
                                                           -------------  -------------   ------------- -------------
Income from operations                                           10,471         10,886              69        34,796

Interest income, net                                                566            331           2,140           488
                                                           -------------  -------------   ------------- -------------
Income before provision for income taxes                         11,037         11,217           2,209        35,284

Provision for income taxes                                        5,632          3,926          16,468        10,582
                                                           -------------  -------------   ------------- -------------

Net income (loss)                                            $    5,405     $    7,291      $  (14,259)   $    24,702
                                                           =============  =============   ============= =============

Basic net income (loss) per share                            $     0.17     $     0.23      $    (0.45)   $     0.80
                                                           =============  =============   ============= =============

Diluted net income (loss) per share                          $     0.16     $     0.22      $    (0.45)   $     0.76
                                                           =============  =============   ============= =============

Shares used to calculate:
  Basic net income (loss) per share                              32,193         31,146          31,849        30,946
  Diluted net income (loss) per share                            34,394         33,188          31,849        32,486

See notes to consolidated financial statements.

</TABLE>




<PAGE>


                                PMC-Sierra, Inc.
                           CONSOLIDATED BALANCE SHEETS
                                 (in thousands)

                                                          Sep 27,       Dec 28,
                                                            1998          1997
                                                        (unaudited)
                                                        (restated -
                                                         see note 2)
ASSETS:
Current assets:
  Cash and cash equivalents                               $  13,770   $  27,906
  Short-term investments                                     50,198      41,334
  Accounts receivable, net                                   19,653      15,103
  Inventories                                                 4,157       3,199
  Prepaid expenses and other current assets                   3,569       1,958
  Short-term deposits for wafer fabrication capacity              -       4,000
                                                        ------------ -----------
    Total current assets                                     91,347      93,500

Property and equipment, net                                  30,965      19,699
Goodwill and other intangible assets,  net                   20,852       8,635
Investments and other assets                                  4,503       4,424
Deposits for wafer fabrication capacity                      23,120      23,120
                                                        ------------ -----------
                                                          $ 170,787   $ 149,378
                                                        ============ ===========

LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
  Accounts payable                                        $   4,901   $   7,421
  Accrued liabilities                                        21,017      13,751
  Accrued income taxes                                        9,658       8,780
  Current portion of obligations under capital leases
    and long-term debt                                        4,996       4,652
  Net liabilities of discontinued operations                      -         301
                                                        ------------ -----------
    Total current liabilities                                40,572      34,905

Deferred income taxes                                         3,925       4,023
Noncurrent obligations under capital leases
  and long-term debt                                          6,448       9,092

Special shares convertible into PMC common stock              8,690      10,793

Shareholders' equity:
  Common stock, par value $0.001                                 31          30
  Additional paid in capital                                177,998     143,153
  Accumulated deficit                                       (66,877)    (52,618)
                                                        ------------ -----------
    Total shareholders' equity                              111,152      90,565
                                                        ------------ -----------
                                                          $ 170,787   $ 149,378
                                                        ============ ===========

See notes to consolidated financial statements.




<PAGE>


<TABLE>
                                PMC-Sierra, Inc.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
                                   (unaudited)
<CAPTION>
                                                                             Nine Months Ended
                                                                          ------------------------
                                                                             Sep 27,      Sep 30,
                                                                               1998         1997
                                                                          (restated - 
                                                                           see note 2)
<S>                                                                        <C>          <C>      
Cash flows from operating activities:
  Net income (loss)                                                        $ (14,259)   $  24,702
  Adjustments to reconcile net income to net cash
  provided by operating activities:
    Depreciation and amortization                                              9,649        6,280
    Acquisition of in process research and development                        39,176            -
    Impairment of intangible assets                                            4,311            -
    Changes in assets and liabilities
      Accounts receivable                                                     (3,287)       3,637
      Inventories                                                               (403)       6,562
      Prepaid expenses and other                                              (1,315)        (341)
      Accounts payable and accrued expenses                                    2,426         (411)
      Accrued restructuring costs                                                  -      (10,616)
      Net assets/liabilities associated with discontinued operations            (301)        (513)
                                                                          -----------  -----------
        Net cash provided by operating activities                             35,997       29,300
                                                                          -----------  -----------

Cash flows from investing activities:
  Proceeds from sales/maturities of short-term investments                    43,442       19,926
  Purchases of short-term investments                                        (52,306)     (57,604)
  Proceeds from refund of wafer fabrication deposits                           4,000            -
  Investments in other companies                                                   -       (3,000)
  Payment for purchase of Integrated Telecom Technology, Inc.,
    net of cash acquired                                                     (27,165)           -
  Purchase of other in process research and development                       (1,419)           -
  Proceeds from sale of equipment                                                  -        2,515
  Purchases of plant and equipment                                           (17,336)      (4,826)
                                                                          -----------  -----------
        Net cash used in investing activities                                (50,784)     (42,989)
                                                                          -----------  -----------

Cash flows from financing activities:
  Repayment of notes payable and long-term debt                                 (136)      (2,446)
  Proceeds from sale/leaseback of equipment                                        -        1,107
  Principal payments under capital lease obligations                          (3,735)      (3,214)
  Proceeds from issuance of common stock                                       4,522        5,562
                                                                          -----------  -----------
        Net cash provided by financing activities                                651        1,009
                                                                          -----------  -----------

Net decrease in cash and cash equivalents                                    (14,136)     (12,680)
Cash and cash equivalents, beginning of the period                            27,906       35,038
                                                                          -----------  -----------
Cash and cash equivalents, end of the period                                $ 13,770    $  22,358
                                                                          ===========  ===========

See notes to consolidated financial statements.
</TABLE>



<PAGE>


                                PMC-SIERRA, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   Basis of Presentation

     The accompanying  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 which are, in the opinion of management,  necessary
     to present a fair statement of results for the interim  periods  presented.
     These financial statements should be read in conjunction with the financial
     statements  and the notes  thereto in the  Company's  Annual Report on Form
     10-K for the year ended  December 28, 1997.  The results of operations  for
     the three and nine months  ended  September  27,  1998 are not  necessarily
     indicative of results to be expected in future periods.


2.   Restatement of Quarterly Financial Statements

     Subsequent to the issuance of the Company's September 27, 1998 consolidated
     financial  statements,  the Company  received the  Securities  and Exchange
     Commission's  (`SEC') new guidance  related to the  valuation of in process
     research and development  (`IPR&D') in purchase  transactions.  The Company
     has  considered  the  impact  of this  new  guidance  on the  valuation  of
     purchased  IPR&D and other  intangibles  acquired  in  connection  with the
     acquisition of Integrated  Telecom  Technology,  Inc.  (`IGT') in May, 1998
     (see note 3).

     The Company's  initial  calculations to value the acquired IPR&D were based
     upon a methodology that focused on the after-tax cash flows attributable to
     the technology on an overall basis,  without regard for stage of completion
     of individual projects,  and the selection of an appropriate rate of return
     to  reflect  the risk  associated  with  the  stage  of  completion  of the
     technology.  This methodology  conformed to generally  accepted  accounting
     principles applied in accordance with then established industry practice.

     Based on a revaluation  performed  using the  methodology  set forth in the
     SEC's September 1998 letter to the American  Institute of Certified  Public
     Accountants  (`AICPA'),  the  Company has  adjusted  the amount of purchase
     price allocated to IPR&D. As a result of the revised valuation,  the charge
     for IPR&D was decreased by $11.7 to $37.8 million,  the amount  ascribed to
     other   intangible   assets  increased  from  $6.4  to  $18.1  million  and
     amortization increased by $160,000 for the quarter.

     The Company has also  adjusted its third  quarter  financial  statements to
     reflect a $4.3  million  impairment  of the  additional  $11.7  million  of
     intangible assets  recognized in the second quarter  adjustment and a total
     charge of  $453,000  for  additional  amortization  on these  assets.  This
     impairment  resulted from the determination  that one of the three projects
     in  progress  at the  acquisition  date was not  technologically  feasible.
     Management  determined  that the developed and core  technology  related to
     this project has no alternative future use and all development work on this
     project was terminated.
<PAGE>

     The  restatement   resulted  in  the  following  impact  on  the  Company's
     previously  reported  results  of  operations  for the three and nine month
     periods ended September 27, 1998.

                      (in thousands except per share data)

Statement of Operations:
                                                       Three Months  Nine Months
                                                          Ended         Ended
                                                          Sep 27,      Sep 27,
                                                           1998         1998

Net income (loss)
As previously reported                                  $   10,009    $ (21,165)
Adjustment related to acquired in-process R&D
  and intangible amortization                                    -       11,670
Adjustment related to impairment of intangible assets       (4,311)      (4,311)
Adjustment related to additional amortization of
  intangible assets                                           (293)        (453)
                                                       ------------  -----------
Restated                                                $    5,405    $ (14,259)
                                                       ============  ===========

Net income (loss) per share - diluted
As previously reported                                  $     0.29    $   (0.66)
Adjustment related to acquired in-process R&D
  and intangible amortization                           $        -    $    0.37
Adjustment related to impairment of intangible assets   $    (0.12)   $   (0.14)
Adjustment related to additional amortization of 
 intangible assets                                      $    (0.01)   $   (0.02)
                                                       ------------  -----------
Restated                                                $     0.16    $   (0.45)
                                                       ============  ===========


Balance Sheet:                                               June 28, 1998
                                                       -------------------------
                                                           (as       (previously
                                                          restated)   reported)
Goodwill and other intangible assets,  net                  20,852       13,946
Total assets                                               170,787      163,881
Total shareholders' equity                                 111,152      104,246


3.   Acquisition of Integrated Telecom Technology

     On May 20, 1998, the Company acquired Integrated Telecom  Technology,  Inc.
     ("IGT") in exchange for total  consideration of $55.0 million consisting of
     cash paid to IGT stockholders of $17.8 million,  cash paid to IGT creditors
     of $9.0 million and the issuance of approximately  415,000 shares of common
     stock and options to purchase approximately 214,000 shares of common stock.
     The purchase price includes professional fees and other direct costs of the
     acquisition  totaling  $850,000.  IGT is a  fabless  semiconductor  company
     headquartered in Gaithersburg,  MD with a development site in San Jose, CA.
     IGT makes Asynchronous Transfer Mode (ATM) switching chipsets for wide area
     network applications as well as ATM  Segmentation-and-Reassembly  and other
     telecommunication  chips.  Upon  consumation  of the  transaction,  IGT was
     merged with a wholly owned subsidiary of the Company.


<PAGE>

     The  acquisition  was recorded under the purchase  method of accounting and
     the final allocation  among tangible and intangible  assets and liabilities
     is as follows:


              Tangible assets                          $   4,598

              Intangible assets:
                     Developed and core technology         7,830
                     Assembled workforce                   1,050
                     Goodwill                              9,284

              In process technology                       37,757

              Liabilities                                 (4,669)
                                                     ------------

                                                       $  55,850
                                                     ============


     The revised valuation was based on management's  estimates of the after tax
     net cash flows and gives explicit consideration to the SEC's views on IPR&D
     in purchase  transactions.  In making the allocation of purchase price, the
     Company  considered the present value of cash flows and income,  the status
     of projects,  completion costs and project risk. Specifically,  the Company
     considered  (1) the value of core  technology and ensured that the relative
     allocations to core  technology and in process  technology  were consistent
     with the relative contributions of each of the final products and (2) stage
     of  completion  of the  individual  projects  and  ensured  that the  value
     considered only the efforts completed as of the transaction date.

     The revised  amount  allocated to IPR&D of $37.8  million was expensed upon
     acquisition,  as it was  determined  that the  underlying  projects had not
     reached  technological  feasibility,  had no  alternative  future  use  and
     successful development was uncertain.

     As at the acquisition date, IGT had three  development  projects which were
     in  process.  These  projects  included  an ATM  switching  chipset and two
     different types of  segmentation  and reassembly  chips  ("SARs").  IGT had
     developed  SARs in the past and  appropriate  recognition  was given in the
     valuation  to the  developed  and  core  technology  underpinning  the  SAR
     development  projects.  The SARs were estimated to be 66% and 83% developed
     at the time of the acquisition.  The ATM switching  chipset was an entirely
     new development  effort and was estimated to be 78% complete at the time of
     purchase.  During the third  quarter,  development  work on the SAR project
     which was 66% complete at the time of the acquisition was terminated, as it
     was  determined  not  to  be  technologically   feasible  and  to  have  no
     alternative  future use. As a result,  the Company recognized an impairment
     of $4.3  million of the  related  intangible  assets,  including a pro rata
     allocation  of  goodwill.  The Company will only benefit from the IPR&D and
     intangible  assets  related  to the other  two  projects  when  they  begin
     shipping products to customers.  Failure to reach successful  completion of
     these  projects  could result in impairment of the  associated  capitalized
     intangible  assets and could  require  the Company to  accelerate  the time
     period over which the intangibles are being  amortized,  which could have a
     material and adverse affect on the Company's results of operations.
<PAGE>

     The  operating  results  of IGT  have  been  included  in the  consolidated
     statements since the date of acquisition.  The following table presents the
     unaudited  pro forma  results  of  operations  for  informational  purposes
     assuming that the Company had acquired IGT at the beginning of the 1998 and
     1997 fiscal years.  This  information  may not necessarily be indicative of
     the future combined results of operations of the Company.

                                                        Nine Months Ended
                                                   ---------------------------
                                                      Sep 27,        Sep 30,
                                                        1998           1997
(in thousands, except for per share amounts)        (restated -    (restated -
                                                     see note 2)   see note 2)

Net revenues                                         $ 120,684     $ 104,676

Net income                                           $  24,068     $  19,458

Basic net income per share:                          $    0.75     $    0.62

Diluted net income per share:                        $    0.70     $    0.59


     The pro forma  results of  operations  give effect to certain  adjustments,
     including  amortization of purchased  intangibles  and goodwill.  The $37.8
     million  charge for  purchased in process  technology  and the $4.3 million
     impairment  of  intangible  assets  have been  excluded  from the pro forma
     results, as they are material non-recurring charges.

3.   On May 1, 1998 a subsidiary of the Company acquired certain  technology for
     cash  consideration  of $1.4  million.  This  technology  has  not  reached
     technological  feasibility and has no alternative future use.  Accordingly,
     this amount is included in the in process research and development expensed
     in the three months ended June 28, 1998.

4.   The components of inventories are as follows (in thousands):


                                      Sep 28,       Dec 28,
                                        1998          1997
                                    (unaudited) 
                                                
        Work-in-progress               $ 1,174       $ 2,316
        Finished goods                   2,983           883
                                    -----------  ------------
                                       $ 4,157       $ 3,199
                                    ===========  ============
                                       



<PAGE>


5.   Recently Issued Accounting Standards

- -    Effective  January 1, 1998,  the Company  adopted  Statement  of  Financial
     Accounting  Standards ("SFAS") No. 130, "Reporting  Comprehensive  Income".
     SFAS No. 130 requires disclosure of comprehensive income in interim periods
     and additional  disclosures of the components of comprehensive income on an
     annual basis.  Comprehensive income includes all changes in equity during a
     period except those resulting from investments by and  distributions to the
     Company's  shareholders.  For the  quarters  ended  September  27, 1998 and
     September  30,  1997,  there  were  no  material  differences  between  the
     Company's comprehensive income and net income.

- -    In June 1997, the Financial  Accounting  Standards  Board  ("FASB")  issued
     Statement of Financial  Accounting  Standards No. 131,  "Disclosures  about
     Segments of an  Enterprise  and  Related  Information",  which  establishes
     annual  and  interim  reporting  standards  for  an  enterprise's  business
     segments and related disclosures about its products,  services,  geographic
     areas and major  customers.  Adoption of this statement will not impact the
     Company's  consolidated  financial position,  results of operations or cash
     flows.  The Company will adopt this  statement in its financial  statements
     for the year ending December 27, 1998.

- -    In June 1998, the FASB issued Statement of Financial  Accounting  Standards
     No. 133  "Accounting for Derivative and Similar  Financial  Instruments and
     for Hedging Activities".  This new standard defines  derivatives,  requires
     that all  derivatives  be carried at fair  market  value and  provides  for
     hedging  accounting when certain conditions are met. Based upon the hedging
     strategies  currently used and the level of activity  related to derivative
     instruments, the Company does not anticipate the effect of adoption to have
     a material impact on the Company's consolidated financial position, results
     of operations or cash flows.  The Company will adopt this  statement in its
     financial statements for the year ending December 2000.


<PAGE>


Item 2.        MANAGEMENT'S DISCUSSION AND ANALYSIS OF
              FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The  following  discussion  should  be read in  conjunction  with the  unaudited
consolidated  financial statements and notes thereto included in Part I - Item 1
of this Quarterly Report and the audited  consolidated  financial statements and
notes thereto and  Management's  Discussion  and Analysis in the Company's  1997
Annual Report to Shareholders.  Reference to the Company includes its subsidiary
PMC-Sierra Ltd., a Canadian corporation and its other subsidiaries.

During the second quarter,  the Company acquired  Integrated Telecom Technology,
Inc. ("IGT") in exchange for total  consideration of $55.0 million consisting of
cash paid to IGT  shareholders  of $17.8 million,  cash paid to IGT creditors of
$9.0 million,  the issuance of approximately  415,000 shares of common stock and
options to purchase  approximately  214,000 shares of common stock. The purchase
price includes  professional  fees and other direct costs of the  acquisition of
$850,000.  IGT is a fabless semiconductor company headquartered in Gaithersburg,
MD  with a  development  site in San  Jose,  CA.  The  Company  assumed  current
liabilities totaling $3.1 million,  interest-bearing  obligations in the form of
capital  leases of $1.6  million and  received  tangible  assets of $4.6 million
resulting in tangible net liabilities of $0.1 million.

Subsequent  to the issuance of the  Company's  September  27, 1998  consolidated
financial   statements,   the  Company  received  the  Securities  and  Exchange
Commission's  (`SEC')  new  guidance  related  to the  valuation  of in  process
research and  development  (`IPR&D') in purchase  transactions.  The Company has
considered  the impact of this new guidance on the valuation of purchased  IPR&D
and other intangibles  acquired in connection with the acquisition of Integrated
Telecom  Technology,  Inc.  (`IGT')  in May,  1998 (see  note 3 to  Consolidated
Financial  Statements).  Based  on a  revaluation  performed  using  the new SEC
methodology,  the Company has adjusted the amount of purchase price allocated to
IPR&D. As a result of the revised valuation,  the charge for IPR&D was decreased
by $11.7 to $37.8  million,  the  amount  ascribed  to other  intangible  assets
increased from $6.4 to $18.1 million and amortization  increased by $160,000 for
the quarter.

The  revised  amount  allocated  to IPR&D of $37.8  million  was  expensed  upon
acquisition,  as it was determined that the underlying  products had not reached
technological  feasibility,   had  no  alternative  future  use  and  successful
development was uncertain.  The Company will begin to benefit from the IPR&D and
intangible  assets  related  to these  projects  only when they  begin  shipping
products to customers.  Failure to reach successful completion of these products
could result in impairment of the associated  capitalized  intangible assets and
could  require  the  Company  to  accelerate  the time  period  over  which  the
intangibles are being amortized,  which could have a material and adverse affect
on the Company's results of operations.

Subsequent to the filing of the Company's  second  quarter  report,  development
work on one of three  projects  in  process at the time of the  acquisition  was
terminated (See Operating  Expenses and Charges).  As a result,  the Company has
also adjusted its third quarter  financial  statements to reflect a $4.3 million
impairment of the additional  $11.7 million of intangible  assets  recognized in
the  second   quarter  and  recorded  an  additional   charge  of  $453,000  for
amortization of intangible assets recognized in the second quarter adjustment.

Certain statements in this Report constitute "forward-looking statements" within
the meaning of the federal securities laws. The actual results,  performance, or
achievements of the Company may be materially  different from those expressed or
implied  by such  forward-looking  statements.  The  forward-looking  statements
include  projections  relating  to trends  in  markets,  revenues,  particularly
expectations  of long-term  revenues,  gross  margins,  future  expenditures  on
research and development,  marketing, general and administrative expense and the
year 2000 issue.  The Company  undertakes no obligation to release  revisions to
forward-looking statements to reflect subsequent events.

<PAGE>

Results of Operations

Third Quarters of 1998 and 1997

Net Revenues ($000,000)
- -----------------------
                                    Third Quarter
                               -----------------------
                                   1998        1997          Change

Networking products                 $36.3       $24.0          51%
User Interface                        5.8         3.8          53%
                               -----------  ----------
Total net revenues                  $42.1       $27.8          51%
                               ===========  ==========


Third quarter  networking  product revenue  increased 51% over last year's third
quarter.  The growth in  revenues of the  Company's  ATM,  SONET/SDH,  T1/E1 and
DS3/E3 integrated  circuits accounted for the majority of third quarter increase
compared to the prior year's third quarter. During the third quarter the Company
announced the  availability of its gigabit ethernet  semiconductors  for general
sampling.  Revenues from gigabit  ethernet sales are not expected to be material
in 1998.

The  Company's  third  quarter user  interface  revenue  increased  53% over the
comparable  period in 1997 but are  expected  to  decline  significantly  in the
fourth  quarter  of 1998.  No  investment  has been made in R&D  related to user
interface  products since the third quarter 1996 strategic  decision to focus on
networking products.

Gross Profit ($000,000)
- -----------------------
                                           Third Quarter
                                      ----------------------
                                          1998       1997        Change

Gross profit                               $32.1      $21.8        47%
   Percentage of net revenues                76%        78%

Gross profit  increased in dollars and decreased as a percentage of sales in the
third  quarter  compared to the prior  year's  third  quarter.  The  increase in
dollars compared to the prior year is primarily a function of the  substantially
increased  volume of semiconductor  sales. The lower gross profit  percentage of
sales is the result of a number of  factors,  the most  significant  of which is
price reductions contracted by the Company with its customers.  Price reductions
on the Company's products occur from both normal competitive  pressures and from
customers moving into higher volume price brackets.



<PAGE>



Operating Expenses and Charges ($000,000)
- -----------------------------------------

                                             Third Quarter
                                         ---------------------
                                            1998      1997        Change

Research and development                      $9.7      $5.1        90%
Percentage of net revenues                     23%       18%

Marketing, general & administrative           $7.5      $5.7        32%
Percentage of net revenues                     18%       21%

Impairment of Intangible Assets               $4.3        -


Research and development  ("R&D")  spending of $9.7 million in the third quarter
of 1998 is up significantly over last year's third quarter,  both in dollars and
as a percentage of net revenues. The Company increased its R&D spending in order
to  respond  to the  array  of  opportunities  presented  by the  growth  of the
internet, data networking and the convergence of voice and data communications.

The Company incurs R&D expenditures in order to attain technological  leadership
from a multi-year perspective.  Such funding has resulted in fluctuations in R&D
spending  from  period  to  period  in  the  past.  The  Company   expects  such
fluctuations,  particularly  when measured as a percentage  of net revenues,  to
occur in the future,  primarily due to the timing of expenditures and changes in
the level of net revenues.

Marketing,  general and administrative expenses were higher in the third quarter
of 1998 than the  comparable  period in 1997,  but lower as a percentage  of net
revenues.  A  substantial  portion  of  the  Company's  marketing,  general  and
administrative  expense is fixed in the short  term.  While it is the  Company's
long term goal to reduce  these costs as a  percentage  of net  revenues  during
periods of rising  sales,  a decline in net sales  could  cause  these  costs to
increase as a percentage of net revenues.

The  impairment  of intangible  assets of $4.3 million  recorded in this amended
third quarter  filing  recognizes  the  impairment  due to the  termination of a
development  project  acquired in the purchase of IGT. The impaired  assets were
recognized  as part of the second  quarter  adjustment of $11.7 million to IPR&D
and related  intangible assets (See Operating  Expenses and Charges - first nine
months).

The terminated project related to ongoing  development of a type of segmentation
and reassembly chip used to convert data packets to  asynchronous  transfer mode
data  cells.  The  product  was  terminated  and  the  few  customers  of  IGT's
predecessor  chip were notified of the termination of all future  development of
this  technology.  The technology was specialized and has no alternative  future
use.


<PAGE>


Interest Income (Expense), Net 
- ------------------------------ 

Net interest income  increased to $0.6 million in the third quarter of 1998 from
$0.3 million in last year's third quarter  primarily due to higher cash balances
available  to invest and earn  interest  and reduced  interest  expense due to a
lower level of capital leases.


Provision for Income Taxes
- --------------------------

The provision for income taxes consists primarily of estimated taxes on Canadian
and other foreign operations.


First Nine Months of 1998 and 1997

Net Revenues ($000,000)
- -----------------------

                                   First nine months
                                -------------------------
                                     1998         1997         Change

Networking products                   $96.8        $60.8        59%
User Interface                         19.6         34.7       (44%)
                                ------------  -----------
Total net revenues                   $116.4        $95.5        22%
                                ============  ===========


The  increase  in net  revenues  from  networking  products  reflects  growth in
broadband  networking  markets due to the current trend toward standard products
such as those the Company develops and away from application specific integrated
circuits ("ASIC's")  developed for the use of a single company, and sales of the
products  acquired with the  acquisition  of IGT in May of 1998. The decrease in
net revenues from user  interface  product is the result of the third quarter of
1996 decision to focus on networking products and to discontinue  development of
user interface products.

Gross Profit ($000,000)
- -----------------------
                                          First nine months
                                      -------------------------
                                          1998        1997        Change

Gross profit                               $88.2       $69.9        26%
   Percentage of net revenues                76%         73%

Gross profit  increased  in both dollars and as a percentage  of net revenues in
the first nine months of 1998  compared  to the same  period in 1997.  Increased
sales of higher gross margin networking products more than offset the decline in
gross  profit  due to lower  net  revenues  from the  Company's  User  Interface
products.


<PAGE>



Operating Expenses and Charges ($000,000)
- -----------------------------------------

                                              First nine months
                                          --------------------------
                                              1998        1997         Change

Research and development                       $23.6       $16.5         43%
Percentage of net revenues                       20%         17%

Marketing, general & administrative            $21.1       $18.7         13%
Percentage of net revenues                       18%         20%

In process research and development            $39.2           -

Impairment of Intangible Assets                 $4.3           -

R&D expenses  increased  in both dollars and as a percentage  of net revenues in
the first nine months of 1998 compared to the same period in 1997.  R&D spending
in both  years has been  focused  only on  networking  products.  The  growth in
spending on R&D has  tracked,  and is  expected to continue to track,  much more
closely to networking product revenue rather than total revenue.

Marketing, general and administrative expense increased in dollars and decreased
as a percentage  of sales for the first nine months of 1998 compared to the same
period in 1997.  During the first two quarters of 1997 certain of the marketing,
general and administrative expenses related to the Company's modem products that
were fully disposed of at mid year 1997.

In process  research and development  expenses of $39.2 million were recorded in
the second quarter of 1998 with $37.8 million  related to the acquisition of IGT
and $1.4 million related to the acquisition of technology  which has not reached
technological  feasibility  and has no alternative  future use. In the Company's
original  second quarter  report on Form 10Q, the Company  recorded a charge for
purchased  IPR&D of $49.4 million in connection with the acquisition of IGT. The
revised charge gives explicit  consideration  to the valuation  methodology  set
forth in the SEC's September 1998 letter to the AICPA.

The $37.8 million charge for IPR&D in the IGT acquisition is an allocation based
on the  estimated  fair value of the  risk-adjusted  cash flows related to three
incomplete development projects. At the date of acquisition,  these projects had
not yet reached  technological  feasibility,  had no alternative  future use and
successful development was uncertain.  Accordingly, these costs were expensed as
of the  acquisition  date and were recorded as a one-time  charge to earnings in
the second quarter of 1998.

As at the  acquisition  date, IGT had three  development  projects which were in
process.  These  projects  included an ATM  switching  chipset and two different
types of segmentation and reassembly  chips ("SARs").  IGT had developed SARs in
the past and appropriate recognition was given in the valuation to the developed
and core technology  underpinning  the SAR development  projects.  The SARs were
estimated to be 66% and 83%  developed at the time of the  acquisition.  The ATM
switching chipset was an entirely new development effort and was estimated to be
78% complete at the time of purchase. During the third quarter, development work
on the SAR project  which was 66%  complete at the time of the  acquisition  was
terminated,  as it was determined not to be technologically feasible and to have
no alternative  future use. As a result, the Company recognized an impairment of
$4.3 million of the related intangible  assets,  including a pro rata allocation
of goodwill.  The Company will only benefit from the IPR&D and intangible assets
related  to the  other  two  projects  when  they  begin  shipping  products  to
customers. Failure to reach successful completion of these projects could result
in impairment of the associated  capitalized intangible assets and could require
the Company to accelerate the time period over which the  intangibles  are being
amortized,  which  could have a material  and  adverse  affect on the  Company's
results of operations.
<PAGE>

Liquidity and Capital Resources

The Company's cash and cash equivalents and short term investments declined from
$69.2  million on December  28, 1997 to $64.0  million on  September  27,  1998.
During the first nine months of 1998 the Company's operating activities provided
$36.0 million in cash.  Significant  investing activities included $27.2 million
related to the  Company's  purchase of IGT,  $17.3 million of purchases of plant
and  equipment  and $1.4  million  related to the  purchase  of other in process
research and development.  The Company also received a refund of $4.0 million of
foundry  deposits  based  on its  1997  wafer  purchases.  Financing  activities
included  $3.7 million of principal  payments on capital lease  obligations  and
$4.5 million in proceeds from issuance of common stock.

As of September 27, 1998, the Company's  principal sources of liquidity included
cash and cash equivalents of $64.0 million and a $15.0 million  revolving credit
facility.  The  Company  believes  that  existing  cash  and  cash  equivalents,
anticipated  funds from  operations  and access to its revolving  line of credit
will satisfy the Company's projected working capital  requirements,  anticipated
capital  expenditures and capital lease payments for the foreseeable future. The
Company expects to purchase,  or arrange capital leases for approximately $3 - 5
million of new capital expenditures over the balance of 1998.

The  Company's  future  capital   requirements  will  depend  on  many  factors,
including,  among others,  product development and acquisitions of complementary
businesses,  products or technologies. To the extent that existing resources and
the funds  generated by future  earnings are  insufficient to fund the Company's
operations,  the Company may need to raise  additional  funds through  public or
private debt or equity  financing.  If additional  funds are raised  through the
issuance of equity securities,  the percentage ownership of current stockholders
will be reduced and such  equity  securities  may have  rights,  preferences  or
privileges  senior to those of the holders of the  Company's  Common  Stock.  No
assurance can be given that  additional  financing will be available or that, if
available,  it can be  obtained  on  terms  favorable  to the  Company  and  its
stockholders.  If adequate funds are not available,  the Company may be required
to delay, limit or eliminate some or all of its proposed operations.


FACTORS THAT MAY AFFECT FUTURE PERFORMANCE

THE  COMPANY'S  BUSINESS,  FINANCIAL  CONDITION  AND RESULTS OF  OPERATIONS  ARE
SUBJECT TO A NUMBER OF RISKS,  SOME OF WHICH ARE DESCRIBED  BELOW. THE FACT THAT
SOME OF THE RISK  FACTORS  MAY BE THE SAME OR SIMILAR TO THOSE IN THE  COMPANY'S
PAST SEC FILINGS MEANS ONLY THAT THE RISKS ARE PRESENT IN MULTIPLE PERIODS.  THE
COMPANY BELIEVES THAT MANY OF THE RISKS DETAILED HERE AND IN THE COMPANY'S OTHER
SEC FILINGS ARE PART OF DOING BUSINESS IN THE FABLESS  NETWORKING  SEMICONDUCTOR
INDUSTRY  AND WILL  LIKELY BE PRESENT  IN ALL  PERIODS  REPORTED.  THE FACT THAT
CERTAIN  RISKS ARE ENDEMIC TO THE INDUSTRY DOES NOT LESSEN THE  SIGNIFICANCE  OF
THE RISK.
<PAGE>

FLUCTUATIONS IN OPERATING RESULTS

The Company's quarterly and annual operating results may vary due to a number of
factors,  including,  among  others,  the timing of new  product  introductions,
decreased  demand or average selling prices for products,  market  acceptance of
products, demand for products of the Company's customers, the general conditions
of the networking industry,  the introduction of products or technologies by the
Company's  competitors,  competitive  pressure on product pricing, the Company's
and  its  customers'  inventory  levels  of  the  Company's  products,   product
availability from outside foundries,  variations in manufacturing yields for the
Company's products,  expenditures for new product and process  development,  the
acquisition  of wafer  fabrication  and other  manufacturing  capacity,  and the
acquisition of  businesses,  products or  technologies.  At various times in the
past,  the Company's  foundry and other  suppliers have  experienced  lower than
anticipated  yields that have adversely affected  production and,  consequently,
the Company.  There can be no assurance  that the  Company's  existing or future
foundry and other suppliers will not experience  irregularities which could have
a material  adverse  effect on the  Company.  The Company  from time to time may
order in advance of anticipated  customer  demand from its suppliers in response
to anticipated  long lead times to obtain  inventory and materials,  which might
result in excess  inventory  levels if expected  orders fail to  materialize  or
other  factors  render the  Company's  product or its  customer's  products less
marketable.  The  Company's  ability to forecast  sales of  networking  chips is
limited  due to  customer  uncertainty  regarding  future  demand  for  end-user
networking  equipment  and  price  competition  in  the  market  for  networking
equipment.  Any delay or  cancellation  of  existing  orders,  or any decline in
projected  future  orders,  by the  Company's  customers  could  have a material
adverse  effect on the Company.  Margins will vary  depending on product mix. In
the longer  term,  the  Company  may  experience  declining  gross  profits as a
percentage  of total net revenues if  anticipated  decreases in average  selling
prices of existing networking products are not offset by commensurate reductions
in product costs, or by an offsetting increase in gross profit contribution from
new, higher gross margin,  networking products.  The Company is also affected by
the state and  direction  of the  electronics  industry  and the  economy in the
United States and other markets the Company serves.  Although industry observers
expect continued growth in sales of networking and telecommunications equipment,
worldwide  capital  spending  overall is expected to slow.  This could adversely
affect sales of products  based on the  Company's  devices,  which in turn could
slow the rate of growth in the  Company's  sales.  The  occurrence of any of the
foregoing or other factors could have a material  adverse effect on the Company.
Due to these factors, past results may not be indicative of future results.



<PAGE>


TECHNOLOGICAL CHANGE

The markets for the Company's  products are  characterized by evolving  industry
standards,  rapid technological change and product  obsolescence.  Technological
change  may  be   particularly   pronounced  in  the   developing   markets  for
communications  semiconductor devices used in high-speed networks. The Company's
future  success  will  be  highly  dependent  upon  the  timely  completion  and
introduction of new products at competitive  price and performance  levels.  The
success  of new  products  depends  on a number  of  factors,  including  proper
definition  of such  products,  successful  and  timely  completion  of  product
development and introduction to market, correct judgment with respect to product
demand,  market  acceptance  of  the  Company's  and  its  customers'  products,
fabrication  yields by the  Company's  independent  foundries  and the continued
ability of the Company to offer  innovative new products at competitive  prices.
Many of these  factors are outside the control of the  Company.  There can be no
assurance  that the Company will be able to identify  new product  opportunities
successfully,  develop and bring to market new products,  achieve design wins or
be  able  to  respond  effectively  to  new  technological  changes  or  product
announcements  by others.  A failure in any of these areas would have a material
and adverse affect on the Company.

The Company's  current  strategy is focused on high-speed  networking  interface
chips. Products for telecommunications and data communications  applications are
based on industry standards that are continually evolving. Future transitions in
customer  preferences  could quickly make the  Company's  products  obsolete.  A
material part of the Company's  products are in the ATM  telecommunications  and
networking market, which is in an early stage of development.  The emergence and
adoption of new industry  standards  that compete with ATM or maintenance by the
industry  of  existing  standards  in lieu of new  standards  could  render  the
Company's ATM products  unmarketable  or obsolete.  The market for ATM equipment
has  not  developed  as  rapidly  as  industry  observers  have  predicted,  and
alternative  networking  technologies  such  as  "fast  ethernet"  and  "gigabit
ethernet" have developed to meet consumer requirements. A substantial portion of
the Company's  development efforts are focused on ATM and related products.  Net
revenues  derived from sales of ATM, T1/E1,  DS3/E3 and SONET/SDH based products
amounted to 67% and 33% of the  Company's  total net  revenues in 1997 and 1996,
respectively.  As a result of the Company's  1996  restructuring,  revenues from
non-networking products have declined significantly over the last several years,
making the Company's results depend primarily on networking products.

The Company has developed a gigabit Ethernet chipset which is currently sampling
to  customers.  This is a new  product  area for the Company and there can be no
assurance that these products will have correctly  anticipated  the needs of the
networking  industry or that they will receive sufficient design wins to achieve
commercial success.

Many of the  Company's  products  under  development  are complex  semiconductor
devices that  require  extensive  design and testing  before  prototypes  can be
manufactured.  The integration of a number of functions in a single chip or in a
chipset  requires the use of advanced  semiconductor  manufacturing  techniques.
This can  result  in chip  redesigns  if the  initial  design  does  not  permit
acceptable  manufacturing  yields. The Company's products are often designed for
customers  who in many  instances  have not yet  fully  defined  their  hardware
products.  Design  delays or  redesigns by these  customers  could in turn delay
completion or require redesign of the semiconductor devices needed for the final
hardware product.  In this regard,  many of the relevant standards and protocols
for products based on high speed  networking  technologies  have not been widely
adopted or ratified by the relevant standard-setting bodies. Redesigns or design
delays often are required for both the hardware  manufacturer's products and the
Company's  chips  as  industry  and  customer  standards,  protocols  or  design
specifications  are  determined.  Any resulting  delay in the  production of the
Company's products could have a material adverse effect on the Company.
<PAGE>

COMPETITION

The  semiconductor  industry is intensely  competitive and is  characterized  by
rapid technological  change and by price erosion. The industry consists of major
domestic  and  international   semiconductor  companies,   many  of  which  have
substantially  greater financial and other resources than the Company.  Emerging
companies  also  provide   significant   competition  in  this  segment  of  the
semiconductor   market.  The  Company  believes  that  its  ability  to  compete
successfully  in this market  depends on a number of factors,  including,  among
others, the price, quality and performance of the Company's and its competitors'
products,  the timing and success of new product  introductions  by the Company,
its  customers  and  its  competitors,  the  emergence  of  new  standards,  the
development   of  technical   innovations,   the  ability  to  obtain   adequate
manufacturing  capacity,  the  efficiency of  production,  the rate at which the
Company's  customers  design the  Company's  products into their  products,  the
number and nature of the Company's  competitors in a given market, the assertion
of the Company's and its competitors'  intellectual  property rights and general
market and economic conditions.

The  Company's  competitors  in  this  market  include,  among  others,  Cypress
Semiconductor,  Dallas  Semiconductor,  Galileo  Technology,  Integrated  Device
Technology,  Level  One  Communications,   Lucent  Technologies,  MMC  Networks,
Rockwell International,  Siemens, Texas Instruments,  and Transwitch. The number
of  competitors  in this  market and the  technology  platforms  on which  their
products will compete may change in the future.  It is likely that over the next
few years  additional  competitors  will  enter the  market  with new  products.
Manufacturers  of more  traditional  semiconductor  devices  are  attempting  to
penetrate the markets for  networking  and  telecommunication  chips.  These new
competitors may have  substantially  greater  financial and other resources than
the Company.  Others may be startups with a narrow but highly focused  marketing
and engineering  plan,  which could result in strong  competition in segments of
the Company's product line.  Competition  among  manufacturers of semiconductors
like the Company's  products  typically  occurs at the design  stage,  where the
customer  evaluates   alternative  design  approaches  that  require  integrated
circuits.  Because of the growth of  broadband  data  networking  and  design-in
cycles in certain of the Company's customers products, the Company's competitors
have frequent  opportunities to achieve design wins in next generation  systems.
Any success by the Company's  competitors in supplanting the Company's  products
would have a material adverse effect on the Company.

Historically, average selling prices ("ASPs") in the semiconductor industry have
decreased  over  the  life  of  the  particular  product.   The  willingness  of
prospective  customers  to design the  Company's  products  into their  products
depends to a  significant  extent  upon the  ability of the Company to price its
products at a level that is cost effective for such customers. If the Company is
unable to reduce its costs  sufficiently to offset declines in ASPs or is unable
to introduce new higher performance products with higher ASPs, the Company would
be materially and adversely  affected.  Any yield or other production  problems,
shortages of supply that increase the Company's  manufacturing costs, or failure
to reduce  manufacturing  costs,  would  have a material  adverse  effect on the
Company.



<PAGE>


ACCESS TO WAFER FABRICATION AND OTHER MANUFACTURING CAPACITY

The Company does not own or operate a wafer fabrication facility, and all of its
semiconductor   device   requirements   are   supplied  by  outside   foundries.
Substantially  all  of  the  Company's   semiconductor  products  are  currently
manufactured by third party foundry  suppliers.  The Company's foundry suppliers
fabricate products for other companies and produce products of their own design.
The  Company's  reliance on  independent  foundries  involves a number of risks,
including  the  absence  of  adequate   capacity,   the   unavailability  of  or
interruptions in access to certain process technologies and reduced control over
delivery  schedules,  manufacturing  yields and  costs.  In the event that these
foundries  are unable or  unwilling  to continue to  manufacture  the  Company's
products in required  volumes,  the  Company  will have to identify  and qualify
acceptable additional or alternative foundries. This qualification process could
take six months or longer.  No assurance can be given that any such source would
become  available  to the Company or that any such source would be in a position
to satisfy the Company's  production  requirements on a timely basis, if at all.
Any  significant  interruption  in the supply of  semiconductors  to the Company
would result in the  allocation  of products to  customers,  which in turn could
have a material adverse effect on the Company.

All of the Company's  semiconductor  products are assembled by sub-assemblers in
Asia. Shortages of raw materials, political and social instability,  disruptions
in the  provision  of  services  by  the  Company's  assembly  houses  or  other
circumstances  that would require the Company to seek  additional or alternative
sources of supply or assembly could lead to supply  constraints or delays in the
delivery of the Company's products. Such constraints or delays may result in the
loss of  customers  or other  adverse  effects  on the  Company.  The  Company's
reliance  on  independent  assembly  houses  involves  a number of other  risks,
including reduced control over delivery schedules, quality assurances and costs,
the  possible   discontinuance  of  such  contractors'  assembly  processes  and
fluctuations of regional economies.  Any supply or other problems resulting from
such risks would have a material adverse effect on the Company.

CUSTOMER CONCENTRATION

The Company has no long-term  volume purchase  commitments from any of its major
customers. The Company has only one customer that accounted for more than 10% of
its 1997  revenues,  but depends on a limited  number of  customers  for a major
portion of its revenues.

The  reduction,  delay or  cancellation  of orders from one or more  significant
customers  could have a material and adverse  affect on the Company.  Due to the
relatively  short  product  life  cycles  in  the  telecommunications  and  data
communications  markets,  the Company would be materially and adversely affected
if one or more of its significant  customers were to select devices manufactured
by one of the Company's competitors for inclusion in future product generations.
There can be no assurance that the Company's  current customers will continue to
place orders with the Company,  that orders by existing  customers will continue
at the levels of previous  periods,  or that the Company  will be able to obtain
orders  from  new  customers.  Loss  of one or  more  of the  Company's  current
customers or a disruption in the Company's sales and distribution channels could
have a material and adverse effect on the Company.
<PAGE>

INTERNATIONAL OPERATIONS

In  fiscal  years  1997,  1996  and  1995,  international  sales  accounted  for
approximately 30%, 53% and 39% of the Company's net revenues,  respectively. The
Company's networking products must accommodate numerous worldwide communications
standards and sales to United States based customers are often for products that
they in turn export worldwide. The Company expects that international sales will
continue to represent a significant  portion of the Company's and its customers'
net  revenues  for  the  foreseeable  future.  The  majority  of  the  Company's
development,  test,  marketing and administrative  functions occur in Canada. In
addition,   substantially  all  of  the  Company's  products  are  manufactured,
assembled and tested by  independent  third parties in Asia. Due to its reliance
on  international  sales and operations,  the Company is subject to the risks of
conducting business outside of the United States. These risks include unexpected
changes in, or impositions of, legislative or regulatory requirements and policy
changes affecting the telecommunications and data communications markets, delays
resulting from difficulty in obtaining  export licenses for certain  technology,
tariffs,  quotas,  exchange  rates and other trade  barriers  and  restrictions,
longer payment cycles,  greater  difficulty in accounts  receivable  collection,
potentially  adverse  taxes,  the burdens of complying with a variety of foreign
laws and other factors beyond the Company's control. The Company is also subject
to general  geopolitical risks in connection with its international  operations,
such as political,  social and economic  instability,  potential hostilities and
changes in diplomatic and trade relationships. Sales of the Company's networking
products are  denominated  in United States  dollars as are costs related to the
manufacture  and assembly of products by the Company's  Asian  suppliers.  Costs
related to the  majority  of the  Company's  development,  test,  marketing  and
administrative  functions are denominated in Canadian dollars. Selling costs are
denominated in a variety of currencies.  As a result,  the Company is subject to
the risks of currency  fluctuations.  There can be no assurance that one or more
of the foregoing factors will not have a material adverse effect on the Company.

DEPENDENCE ON KEY PERSONNEL

The  Company's  success  depends  to a  significant  extent  upon the  continued
services of its key technical  personnel,  particularly  those highly skilled at
the  design  and  test  functions  involved  in the  development  of high  speed
networking products and related software.  The competition for such employees is
intense.  The  Company  has no  employment  agreements  in place  with these key
personnel.  However, the Company from time to time issues shares of Common Stock
or options to purchase  Common Stock of the Company  subject to vesting.  To the
extent  shares  purchased  from or options  granted by the Company have economic
value,  these  securities  could create  retention  incentives.  The loss of the
services of one or more of these key personnel, and any difficulties the Company
may  experience  in hiring  qualified  replacements,  would have a material  and
adverse affect on the Company.

PATENTS AND PROPRIETARY RIGHTS

The  Company's  ability to compete is  affected  by its  ability to protect  its
proprietary  information.  The  Company  relies  on a  combination  of  patents,
trademarks,  copyrights,  trade  secret  laws,  confidentiality  procedures  and
licensing  arrangements to protect its intellectual property rights. The Company
currently holds several patents and has a number of pending patent applications.
There can be no assurance  that patents will be issued from any of the Company's
pending  applications or that any claims allowed will be of sufficient  scope or
strength,  or be issued in all  countries  where the  Company's  products can be
sold,  to provide  meaningful  protection  or any  commercial  advantage  to the
Company.  In addition,  competitors  of the Company may be able to design around
the  Company's  patents.  The laws of  certain  foreign  countries  in which the
Company's  products are or may be  developed,  manufactured  or sold,  including
various   countries  in  Asia,  may  not  protect  the  Company's   products  or
intellectual  property  rights to the same  extent as do the laws of the  United
States and thus make the  possibility of piracy of the Company's  technology and
products  more  likely.  There can be no  assurance  that the steps taken by the
Company to protect  its  proprietary  information  will be  adequate  to prevent
misappropriation  of its technology or that the Company's  competitors  will not
independently develop technologies that are substantially equivalent or superior
to the Company's technology.
<PAGE>

The semiconductor  industry is characterized by vigorous  protection and pursuit
of intellectual property rights or positions, which have resulted in significant
and often protracted and expensive  litigation.  The Company or its customers or
foundries have in the past, and may from time to time in the future, be notified
of claims  that the  Company  may be  infringing  patents or other  intellectual
property  rights owned by third  parties.  If it is necessary or desirable,  the
Company may seek licenses under patents or intellectual  property rights.  There
can be no  assurance  that  licenses  will be available or that the terms of any
offered  license will be acceptable to the Company.  Failure to obtain a license
from a third party for technology used by the Company could cause the Company to
incur substantial  liabilities and to suspend the manufacture of products or the
use by the Company's  foundry suppliers  requiring the technology.  In the past,
the  Company's  customers  have been  required to obtain  licenses  from and pay
royalties to third parties for the sale of systems  incorporating  the Company's
semiconductor  devices. If this occurs in the future, the customers'  businesses
may be materially  and adversely  affected,  which in turn would have a material
and adverse  affect on the Company.  The Company has provided its customers with
indemnity up to the dollar  amount of their  purchases  of any Company  products
found to be  infringing  on  technology  owned by third  parties.  Although  the
Company  discontinued  the practice of indemnifying its customers in December of
1997,  third party or customer claims may still be made against the Company with
respect to the infringement of the technology of third parties. Furthermore, the
Company may initiate claims or litigation against third parties for infringement
of  the  Company's  proprietary  rights  or to  establish  the  validity  of the
Company's proprietary rights.  Litigation by or against the Company could result
in  significant  expense to the Company and divert the efforts of the  Company's
technical and management personnel,  whether or not such litigation results in a
favorable  determination  for the Company.  In the event of an adverse result in
any such litigation,  the Company could be required to pay substantial  damages,
cease the manufacture,  use and sale of infringing  products,  spend significant
resources to develop non-infringing  technology,  discontinue the use of certain
processes  or obtain  licenses  to the  infringing  technology.  There can be no
assurance that the Company would be successful in such  development or that such
licenses  would  be  available  on  reasonable  terms,  or at all,  and any such
development or license could require  expenditures by the Company of substantial
time and other  resources.  Patent disputes in the  semiconductor  industry have
often been settled  through  cross-licensing  arrangements.  Because the Company
currently does not have a substantial  portfolio of patents, the Company may not
be able to settle an alleged patent infringement claim through a cross-licensing
arrangement.  Any  successful  third  party  claim  against  the  Company or its
customers for patent or intellectual property infringement could have a material
adverse effect on the Company.
<PAGE>

ACQUISITIONS

The  Company's  strategy  may  involve,  in  part,   acquisitions  of  products,
technologies or businesses from third parties. Identifying and negotiating these
acquisitions  may divert  substantial  management  time away from the  Company's
operations.  An  acquisition  could absorb  substantial  cash  resources,  could
require the Company to incur or assume debt  obligations,  or could  involve the
issuance  of  additional  equity  securities  of the  Company.  The  issuance of
additional  equity  securities  would  dilute,  and could  represent an interest
senior to the rights of, then outstanding PMC common stock. An acquisition which
is accounted for as a purchase,  like the acquisition of the networking business
in 1994, the  acquisition of certain  assets of Bipolar  Integrated  Technology,
("Bit") in September  1996,  and the recent  acquisition  of Integrated  Telecom
Technology,  Inc.  could  involve  significant  one-time  write-offs,  and could
involve  the  amortization  of  goodwill  over a number  of years,  which  would
adversely affect earnings in those years. Any acquisition will require attention
from  the  Company's  management  to  integrate  the  acquired  entity  into the
Company's  operations,  may require the Company to develop expertise outside its
existing  businesses  and may result in departures of management of the acquired
entity.  An acquired entity may have unknown  liabilities,  and its business may
not achieve the results anticipated at the time of the acquisition.

FUTURE CAPITAL NEEDS

The  Company  must  continue to make  significant  investments  in research  and
development  as well as  capital  equipment  and  expansion  of  facilities  for
networking  products.  The Company's future capital  requirements will depend on
many factors,  including,  among others,  product  development,  investments  in
working  capital,  and  acquisitions of  complementary  businesses,  products or
technologies.  To the extent that  existing  resources  and future  earnings are
insufficient  to fund the  Company's  operations,  the Company may need to raise
additional  funds  through  public  or  private  debt or  equity  financing.  If
additional  funds are raised  through  the  issuance of equity  securities,  the
percentage  ownership  of current  stockholders  will be reduced and such equity
securities  may have rights,  preferences  or privileges  senior to those of the
holders of the Company's Common Stock. No assurance can be given that additional
financing  will be available or that, if available,  it can be obtained on terms
favorable  to the  Company  and its  stockholders.  If  adequate  funds  are not
available,  the Company may be required to delay, limit or eliminate some or all
of its proposed  operations,  which could have a material  adverse effect on the
Company.

VOLATILITY OF STOCK PRICE

Factors such as announcements of the introduction of new products by the Company
or its competitors, quarterly fluctuations in the Company's financial results or
the financial  results of other  semiconductor  companies or of companies in the
networking   or  personal   computer   industry,   general   conditions  in  the
semiconductor  industry and conditions in the worldwide  financial markets have,
in the  past,  caused  the  price of the  Company's  Common  Stock to  fluctuate
substantially,  and  may do so in the  future.  In  addition,  increases  in the
Company's stock price and expansion of its  price-to-earnings  multiple may have
made it  attractive  to so-called  momentum  investors.  Momentum  investors are
generally  thought to shift funds into and out of stocks  rapidly,  exacerbating
price  fluctuations  in either  direction.  The price of the Company's stock may
also be impacted by investor  sentiment toward  technology  stocks,  in general,
which often is unrelated to the operating performance of a specific company.
<PAGE>

YEAR 2000 COMPUTER SYSTEMS ISSUES

The  Company  is  aware  of  issues  associated  with  the  limitations  of  the
programming code in many existing computer systems, whereby the computer systems
may not properly  recognize  date sensitive  information as the next  millennium
(year 2000) approaches.  Systems that do not properly recognize such information
could  generate  erroneous  data  or  cause  a  system  to  fail,  resulting  in
disruptions of the Company's operations.  The Company has identified significant
applications that will require modification to ensure year 2000 compliance.  The
Company uses commercially available standard software for its critical operating
and financial applications.  One vendor of critical software used by the Company
has provided a program update, which is intended to rectify the year 2000 issues
related to this  software.  This update was  installed in the second  quarter of
1998 and testing to date has not found any  significant  errors in the  updates.
Updates for the  Company's  other  non-critical  software  are  available at the
current time and, if new versions of the software are not already purchased, are
planned for  installation  in 1999.  If the  Company's  vendors'  updates do not
successfully rectify the year 2000 issues related to their software, the Company
could be forced to purchase a competing  system that is year 2000  compliant and
incur installation and other costs in order to mitigate the Year 2000 Issue. The
installation of a replacement  system for those  applications that are currently
not year 2000  compliant  is not  anticipated  to be material  to the  Company's
financial position or results of operations in any given year. In the event that
the current systems need to be entirely replaced,  the Company estimates that it
would cost  approximately  $3 million to acquire and implement new systems.  Any
new systems would be capitalized and subsequently depreciated.

The Company's  suppliers and customers are generally  much larger  organizations
than the Company with a greater  number of suppliers and customers of their own.
The Company believes that many of its suppliers and customers have not completed
their own  systems  modification  to be year 2000  compliant.  The  Company  has
received  written  communication  from its  critical  suppliers  that  they have
developed  an action  plan to address the issues  related to the year 2000.  The
failure of significant suppliers or customers of the Company to become year 2000
compliant could have a material effect on the Company.  Those consequences could
include  the  inability  to  receive  product  in a timely  manner or lost sales
opportunities  either  of  which  could  result  in a  material  decline  in the
Company's revenues and profits.



<PAGE>


PART II - OTHER  INFORMATION

Item 6.       EXHIBITS AND REPORTS ON FORM 8-K

              (a)  Exhibits -

                   11.1    Calculation of earnings per share

                   27      Financial Data Schedule





SIGNATURES

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:    February 10, 1999              /S/ JOHN W. SULLIVAN          
         -----------------              ------------------------------
                                        John W. Sullivan
                                        Vice President, Finance
                                        (Duly Authorized Officer)
                                        Chief Financial Officer
                                        (Principal Accounting Officer)






                                PMC-Sierra, Inc.
                        CALCULATION OF EARNINGS PER SHARE
                  (in thousands, except for per share amounts)
                                   (unaudited)

                                                          Three Months Ended
                                                        ------------------------
                                                           Sep 27,     Sept 30,
                                                             1998         1997
                                                         (restated)
Numerator:
Net income                                                  $ 5,405     $ 7,291
                                                        ============ ===========

Denominator:
Basic weighted average common shares outstanding (1)         32,193      31,146
                                                        ------------ -----------

Effect of dilutive securities:
Stock options                                                 2,182       2,025
Stock warrants                                                   19          17
                                                        ------------ -----------
Shares used in calculation of net income per share           34,394      33,188
                                                        ============ ===========

Basic net income per share                                   $ 0.17      $ 0.23

Diluted net income per share                                 $ 0.16      $ 0.22


(1) PMC-Sierra, Ltd. Special Shares are included in the calculation of basic net
income per share.


<TABLE> <S> <C>


<ARTICLE>                     5
<LEGEND>
     THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
     FORM  10-Q  FILED  FOR THE  QUARTER  ENDED  SEPTEMBER  27,  1998 AND IS
     QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER>                                   1,000
       
<S>                                            <C>
<PERIOD-TYPE>                                  9-MOS
<FISCAL-YEAR-END>                              DEC-27-1998
<PERIOD-START>                                 DEC-29-1997
<PERIOD-END>                                   SEP-27-1998
<CASH>                                              13,770 
<SECURITIES>                                        50,198 
<RECEIVABLES>                                       19,653 
<ALLOWANCES>                                             0 
<INVENTORY>                                          4,157 
<CURRENT-ASSETS>                                    91,347 
<PP&E>                                              54,042 
<DEPRECIATION>                                     (23,077)
<TOTAL-ASSETS>                                     170,787 
<CURRENT-LIABILITIES>                               40,572 
<BONDS>                                                  0 
                                    0 
                                              0 
<COMMON>                                                31 
<OTHER-SE>                                         111,121 
<TOTAL-LIABILITY-AND-EQUITY>                       170,787 
<SALES>                                            116,375 
<TOTAL-REVENUES>                                   116,375 
<CGS>                                               28,138 
<TOTAL-COSTS>                                       28,138 
<OTHER-EXPENSES>                                    88,168 
<LOSS-PROVISION>                                         0 
<INTEREST-EXPENSE>                                     744 
<INCOME-PRETAX>                                      2,209 
<INCOME-TAX>                                        16,468 
<INCOME-CONTINUING>                                (14,259)
<DISCONTINUED>                                           0 
<EXTRAORDINARY>                                          0 
<CHANGES>                                                0 
<NET-INCOME>                                       (14,259)
<EPS-PRIMARY>                                        (0.45)
<EPS-DILUTED>                                        (0.45)
                                                        
                                               

</TABLE>


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