A strained channel transistor is provided. The strained channel transistor comprises a substrate formed of a first material. A source region comprised of a second material is formed in a first recess in the substrate, and a drain region comprised of the second material is formed in a second recess in the substrate. A strained channel region formed of the first material is intermediate the source and drain region. A gate stack formed over the channel region includes a gate electrode overlying a gate dielectric. A gate spacer formed along a sidewall of the gate electrode overlies a portion of at least one of said source region and said drain region. A cap layer may be formed over the second material, and the source and drain regions may be silicided.