Back to GetFilings.com



http://www.zarlink.com

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the fiscal year ended March 28, 2003

Commission File Number 1-8139

ZARLINK SEMICONDUCTOR INC.
(Exact name of registrant as specified in its charter)


Canada Not Applicable
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

400 March Road, Ottawa, Ontario, Canada K2K 3H4
- ----------------------------------------- ------------------------------------
(Address of principal executive offices) (Zip or Postal Code)

Registrant's telephone number, including area code: (613) 592-0200

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common shares, no par value New York Stock Exchange
The Toronto Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

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 shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

Indicate by checkmark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes No ____

At May 30, 2003, 127,273,649 common shares of the registrant were issued
and outstanding. Non-affiliates of the registrant held 110,752,553 common
shares having an aggregate market value of $237,010,463 based upon the
closing price of the common shares on the New York Stock Exchange
(September 27, 2002, being the last day of the Company's most recently
completed second quarter) of $2.14.

Common shares held by shareholders holding more than 5% of the outstanding
common shares and by each executive officer and director of Zarlink have
been excluded from the non-affiliated common share total in that such
persons may be deemed to be affiliates of Zarlink. Exclusion of such
common shares is not necessarily a conclusive determination of the
affiliate status of any holder thereof for any other purpose.

Documents incorporated by reference: None.



Table of Contents

Page No.
--------


PART I.........................................................................1

Item 1. Business............................................................1
Introduction.............................................................1
Overview.................................................................1
Financial Information....................................................1
Business Strategy........................................................2
Industry.................................................................2
Products and Customers...................................................3
Network Communications Segment........................................4
TDM Switching.........................................................4
Timing and Synchronization............................................4
Consumer Communications Segment.......................................6
Ultra Low-Power Communications Segment................................7
Sales, Marketing and Distribution........................................7
Competition..............................................................8
Manufacturing............................................................9
Research and Development................................................10
Employees...............................................................10
Proprietary Rights......................................................11
Forward-Looking Statements and Risk Factors.............................11

Item 2. Properties.........................................................15

Item 3. Legal Proceedings..................................................16

Item 4. Submission of Matters to a Vote of Security Holders................16

PART II.......................................................................17

Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters................................................17
PRINCIPAL MARKETS.......................................................17
SHAREHOLDERS............................................................17
DIVIDEND POLICY.........................................................17

Item 6. Selected Financial Data............................................18

Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................19
BUSINESS OVERVIEW.......................................................19
RESULTS OF OPERATIONS...................................................20
GEOGRAPHIC REVENUE......................................................22
Asia/Pacific.........................................................23
Europe...............................................................23
United States........................................................23
Canada...............................................................23
Other Regions........................................................23
GROSS MARGIN............................................................24
OPERATING EXPENSES......................................................24



Research and Development (R&D) .........................................24
Selling and Administrative .............................................25
Stock Compensation Expense..............................................26
Special Charges.........................................................26
Loss (Recovery) on Sale of Business.....................................27
Amortization of Acquired Intangibles....................................27
OTHER INCOME (EXPENSE)..................................................28
INTEREST EXPENSE........................................................28
INCOME TAXES............................................................28
BACKLOG.................................................................29
DISCONTINUED OPERATIONS.................................................29
NET LOSS................................................................29
LIQUIDITY AND CAPITAL RESOURCES.........................................30
COMMITMENTS AND GUARANTEES..............................................31
OTHER...................................................................32
Critical Accounting Policies and Significant Estimates...............32
Foreign Currency Translation.........................................33
Recently Issued Accounting Standards.................................34
Forward-Looking Statements...........................................35

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.......35

Item 8. Financial Statements and Supplementary Data........................36

Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...........................................65

PART III......................................................................66

Item 10. Directors and Executive Officers of the Registrant...............66
Directors...............................................................66
Statement of Corporate Governance Practices.............................67
Executive Officers......................................................68

Item 11. Executive Compensation...........................................70
Summary Compensation Table...........................................70
Employee Share Ownership Plan........................................71
Director, CEO and Executive Share Ownership..........................72
1991 Stock Option Plan for Key Employees and Non-Employee
Directors..........................................................73

Option Grants During Fiscal 2003..............................................75
Year-End Option Values Table.........................................75
Employment Agreements................................................76
Compensation of Non-Employee Directors...............................79
Option Information For Non-Employee Directors........................80
Directors' and Officers' Liability Insurance.........................80
Indebtedness of Directors, Executive Officers and Senior Officers....80

Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.......................80

Item 13. Certain Relationships and Related Transactions...................82



Item 14. Controls and Procedures..........................................83
Changes in Internal Controls............................................83

Item 15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.......................................................84

Signatures....................................................................87

Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to
Section 302 (a) of the Sarbanes-Oxley Act of 2002.............................88

Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to
Section 302 (a) of the Sarbanes-Oxley Act of 2002.............................89



PART I

Business

Introduction

Unless the context indicates otherwise, "Zarlink" and the "Company" refer to
Zarlink Semiconductor Inc. and its consolidated subsidiaries.

The Company reports its financial accounts in U.S. dollars. All financial
information and references to "$" and "dollars" are expressed in millions of
U.S. dollars unless otherwise stated or unless the context otherwise indicates.

Zarlink was incorporated in Canada in 1971 and continued under the Canada
Business Corporations Act in 1976. The registered office and the principal
executive offices of Zarlink are located at 400 March Road, Ottawa, Ontario,
Canada K2K 3H4 and its telephone number at that address is (613) 592-0200. The
Company trades under the symbol "ZL" on the New York Stock Exchange and The
Toronto Stock Exchange.

Our website is located at www.zarlink.com. We have made available free of charge
through our website (by following the links for "Company Information -- Investor
Relations," and then the link for "Financials") our annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as soon as reasonably practicable after such
material was electronically filed with, or furnished to, the United States
Securities and Exchange Commission (the SEC). The information on our website is
not part of this Annual Report.

Overview

The Company operates in three principal business segments in the communications
industry: Network Communications, Consumer Communications, and Ultra Low-Power
Communications.

For almost 30 years, Zarlink Semiconductor has delivered the integrated circuit
(IC) building blocks that drive the capabilities of voice, enterprise, broadband
and wireless communications. ICs are silicon chips, known as semiconductors,
etched with interconnected electronic switches that process information.
Zarlink's products provide technology solutions for the communications and
health care industries. Management believes that the Company's success is built
on its technology strengths encompassing voice and data networks, consumer and
ultra low-power communications, and high-performance analog. Zarlink's mission
is to provide the most compelling products for the network, consumer and ultra
low-power communications markets, ahead of competition, thereby earning a
superior return for our shareholders.

The primary markets for Zarlink's products are the network, consumer, and ultra
low-power communications markets, including healthcare device applications. Each
of these markets is expected to grow economically and evolve technologically
over the next several years, which management believes should provide revenue
growth opportunities. The increased requirements of end users, coupled with new
opportunities, should drive long-term demand for network communications
equipment and infrastructure. The deregulation of telecommunications services in
many parts of the world has resulted in increased competition and demand for new
services. In addition, the increasing penetration of telephone service in
emerging countries is a strong driver for wired and wireless communications.
Management believes that these developments represent significant market
opportunities for Zarlink over the next several years.

Zarlink sells its products through both direct and indirect channels of
distribution. The principal customers for Zarlink's semiconductors are customer
premise and network communication equipment manufacturers. Zarlink's products
are also marketed to data communications suppliers as the integration of
computing and telecommunications continues.

Financial Information

Financial information about industry segments and about foreign and domestic
operations and export sales is provided under Item 7, Management's Discussion
and Analysis of Financial Condition and Results of Operations, and under Item 8
in Note 22 of the notes to the consolidated financial statements appearing
elsewhere in this



Annual Report on Form 10-K. Financial information about Research and Development
is described in Management's Discussion and Analysis of Financial Condition and
Results of Operations.

Business Strategy

Zarlink's strategy is to exploit the following major developments that
management believes are underway in the communications industry:

o Convergence of voice onto packet-based data networks requiring superior
Quality of Service (QoS) voice functionality;

o Emergence of broadband connectivity as a fundamental requirement for high
value multimedia networking;

o Increasing requirement for analog and mixed-signal IC technologies in
high-speed applications; and

o Increasing use of ultra low-power microelectronics in a wide variety of
communications and healthcare applications.

Management believes the Company's competitive advantages include system design
knowledge, high-frequency, high-performance analog/mixed-signal IC design and
optoelectronics design capability for wired, wireless and optical applications,
and ultra low-power design techniques for applications spanning healthcare and
communications. Optoelectronic components are electrical components used in
optical networking equipment, and Synochronous Optical Network (SONET),
Synochronous Digital Hierarchy (SDH) and Ethernet are the primary optical data
transport standards in the telecommunications industry.

The key elements of Zarlink's business strategy include the following:

o Provide the most compelling products, ahead of the competition, for
network, consumer, and ultra low-power communications;

o Focus on microelectronic solutions that integrate voice with high QoS in
packet-based networks;

o Exploit its ultra low-power design capability and analog and mixed-signal
design skills in the communications market; and

o Remain fabless (using independent manufacturers instead of manufacturing
in-house) for complementary metal oxide semiconductor (known in the
industry as CMOS) processes and maintain fabrication capability
specializing in high-performance bipolar and optical technology for
strategic advantage in these areas.

Management believes the Company is well positioned to implement its business
strategy by reason of its strong core technologies for signaling, transporting
and switching voice and data; its strong position in radio frequency (commonly
referred to as RF) technology for consumer communications applications, and its
advanced optoelectronic devices for high-speed applications. Its ultra low-power
design capability enables the Company to maintain a major position in healthcare
device applications and penetrate other communications applications. See
"Business-Products and Customers."

Industry

The global communications industry has been characterized by rapid structural
change and economic growth caused by technological innovation, economic factors,
and changes in government policies that encourage competition and increase
choice. Further, the communications industry is driven by the need to enhance
competitive advantage through access to information, anytime, anywhere. This, in
turn, is driving technology convergence, mobility, and high bandwidth access.
The evidence for these changes includes the impact of the Internet,
deregulation, optical networking technology, convergence, broadband
connectivity, home entertainment, wireless and mobile communications, and demand
by enterprises for cost-effective, multi-functional networks and applications.

The impact of the factors described above, particularly customer demand for
increasingly complex networks, resulted in a rapid expansion by networking
equipment companies in the late 1990's and the first half of calendar 2000. This
helped to fuel the growth of component suppliers who were providing products to
meet the expected continued growth in demand. By the end of 2000, however, the
general economy began to slow down and capital


-2-


markets retrenched. With this, network capital spending plans were reduced
across the market resulting in swelled inventories held by equipment
manufacturers, distributors, and component suppliers, that far exceeded
immediate requirements. This trend continued through calendar 2001 and calendar
2002 across the communications industry. Many communications semiconductor
sector companies, including Zarlink, announced inventory write-downs and
restructurings to reduce operating costs during this prolonged downturn.

Despite the recent downturn, management believes the opportunity for
communications semiconductors is immense. Information, whether it is visual,
audible, or in data form, is communicated globally every day, everywhere, and by
everyone. It is pervasive in all aspects of life, both in business and at a
personal level. A worldwide telephone network with an installed equipment base
of approximately one trillion dollars evidences the communications industry's
presence in every day life. Communications and information are critical to
competing in today's global market. As a result, management believes that demand
will continue for innovative, new technological applications that effectively
and efficiently deliver high value, content-rich multimedia information
anywhere, anytime.

The bulk of the telecommunications infrastructure today is based on Time
Division Multiplex (TDM) technology. TDM is a time-interleaving technique for
combining many streams of voice, data and video traffic for transport over
copper, coaxial or fiber cable. Management believes the most important
development that will occur during the next two decades is the evolution from a
TDM network to a packet network (based on asynchronous transfer mode, or ATM,
and internet protocol, or IP, technology). Packet technology involves the
conversion of traditional voice and data traffic to packets for transport over
Ethernet/IP networks The revolutionary swap-out of the TDM network in favor of
an all packet-based network, which was the message of the late 1990s, has not
happened. Global and local carriers are now preparing for substantial spending
under a more evolutionary approach that will enable TDM-based voice and data
traffic to be routed over packet-based Ethernet/IP networks. Voice/data/video
equipment companies are re-directing their research and development (R&D)
spending in line with this trend, and the semiconductor companies supplying
these systems companies are focusing their R&D efforts to capitalize on these
significant growth opportunities.

Management believes that the evolution to packet-based networks and the
convergence of services over IP networks will help to invigorate demand over the
next several years. Management anticipates that significant industry growth
areas will include wired, wireless and optical networks in the enterprise and
access portions of the network. New services will be provided over existing
infrastructure and content-rich applications will drive the need for more
bandwidth and the technologies that provide it. For example, management believes
that consumer demand for entertainment services, such as digital TV and high
definition TV, will fuel the growth of set top-boxes (STBs) in the home. In
addition, management believes an increasingly mobile population will drive
demand for new wireless services.

Communications technology is now becoming pervasive in many other new
applications. For example, healthcare applications are emerging that combine
ultra low-power technology with RF technology for medical telemetry and
diagnostic applications. Management believes that Zarlink's technology employed
in its pacemaker and hearing aid products and Zarlink's RF technology employed
in its wireless business uniquely positions the Company in the emerging ultra
low-power communications market.

Products and Customers

Zarlink's integrated circuits are microelectronic component parts that offer
high feature integration, low-power consumption and low physical space required
for the design of advanced systems. These products are designed to provide
advanced features and control functions for a wide variety of electronic
products and systems. Zarlink's semiconductor products are primarily
non-commodity, specialized products that are proprietary in design and used by
multiple customers.

Application Specific Standard Products (ASSP) rely on an original design and
sell primarily on function and performance. Such products have a long useful
life as they generally remain as a key component in the end product for the
duration of its life cycle. ASSP products are proprietary products that have
been designed to meet the specific requirements of a class of customers.
Zarlink's products are mostly ASSPs. Accordingly,


-3-


management believes that once designed into a customer's product, Zarlink's
products form an integral part of the customer's system and are difficult to
replace, as replacement requires some redesign of the system.

The microelectronics market for communications is large - comprising local area
networking, wide area and enterprise networking, optical communications,
cellular, STBs, and communications processors, among others. Within this diverse
market, the Company focuses on providing a range of semiconductor solutions
targeted at the consumer, customer premise, enterprise, and edge access portions
of wired, wireless, and optical networks. The Company's business is grouped in
three segments: (i) Network Communications, (ii) Consumer Communications, and
(iii) Ultra Low-Power Communications.

Network Communications segment revenue accounted for 60%, 52% and 58% of the
Company's total revenue from continuing operations in Fiscal 2003, 2002, and
2001, respectively. Consumer Communications segment revenue accounted for 25%,
33% and 35% of the Company's total revenue from continuing operations in Fiscal
2003, 2002, and 2001, respectively. Ultra Low-Power Communications segment
revenue accounted for the balance in each respective year.

Zarlink has a diverse and established base of over 400 customers in a wide
spectrum of end markets, including leading manufacturers in the
telecommunications, data communications, and healthcare sectors. In Fiscal 2003,
Zarlink had revenues from one independent distributor (the Memec group of
companies), which exceeded 10% of total sales. Sales to this distributor in
Fiscal 2003 amounted to $39.0, or 20% of sales from continuing operations
(Fiscal 2002 - $27.1, or 12%; Fiscal 2001 - $64.6, or 14% of sales). The
increased sales to this distributor resulted from consolidating sales previously
made directly to end customers.

Network Communications Segment

In the Network Communications market, Zarlink specializes in microelectronic
solutions for broadband connectivity over wired and optical media. The product
line enables voice and data convergence for high-speed Internet systems,
switching systems, and subscriber access systems. Management believes that
Zarlink is a world leader in TDM switching, network timing and synchronization,
packet switching, packet and voice processing, high-performance analog and
optical discrete components and modules.

TDM Switching

The Company's research shows that Zarlink holds the number one industry position
in TDM switching solutions, with the world's most comprehensive line of TDM
voice/data switching chips. TDM remains the basis of the global
telecommunications network, and Zarlink is continuing to develop the complete
range of products that customers require to maximize the efficiency of their
systems - from feature-rich small switches to large non-blocking switches.
Recent products include such innovations as on-chip PLL (phase locked-loop)
circuitry for timing and synchronization functions. Digital switches are used in
a wide variety of applications, including central offices, private branch
exchanges (generally known as PBX's), wireless base stations, routers,
multi-service provisioning platforms, remote access servers and concentrators,
media gateways, and integrated access devices (IADs).

Timing and Synchronization

Management believes that Zarlink is an industry leader in timing and
synchronization solutions. These products facilitate highly reliable voice and
data connections across telecommunications networks by generating and
distributing high-accuracy clocks across networks, even when source clocks are
interrupted. Products include a broad portfolio of digital PLL devices for T1/E1
equipment and the Company is developing digital PLLs and high-speed, low-jitter
analog PLL devices for SONET and SDH applications. In addition, the Company is
expanding into a new segment of the timing market by offering fully featured
timing modules for Optical Carrier level 3 (OC-3) line cards used in SONET/SDH
equipment. Digital and analog PLLs and timing modules are used extensively in a
wide range of communications equipment, including, central offices, private
branch exchanges (generally known as PBXs), wireless base stations, and routers.


-4-


Packet Switching

Zarlink provides layer two Ethernet switches that offer a high level of QoS
features to ensure delivery of time-sensitive voice and data with very low
latency. Supported by network management software and system reference designs,
Zarlink's multi-port Ethernet switching devices provide advanced QoS features
that allow carriers to cost-effectively tailor services to customer needs.

Products include 16- to 24-port Fast Ethernet switches with Gigabit uplinks, and
a family of fully featured Gigabit Ethernet switching devices. These devices are
used in metro access equipment, including media gateways, edge routers, and
passive optical networks, and are also targeted for very high-speed digital
subscriber line (VDSL) digital subscriber line access multiplexers (DSLAMs), and
LAN workgroup switches.

Packet Processing

Management believes that an important networking trend is the drive to cut costs
and increase network flexibility by routing TDM/ATM traffic over packet
backbones and IP/Ethernet metropolitan area networks (known as MANs). The
Company is developing specialized ICs, called packet processors, which perform
this routing function. Zarlink currently offers a family of high-capacity packet
processors that enable the delivery of TDM voice/data services over standard IP
and Ethernet packet networks. These products allow service providers to
transport profitable TDM access services, such as T1/E1 leased lines, over
lower-cost IP/Ethernet networks with the same high quality as TDM/ATM networks.

Voice Processing

As wireless and packet networks are fundamentally prone to delay, there is a
growing need for low- and high-density Voice Echo Cancellers (VECs) that
cost-effectively deliver carrier- or toll-quality voice. Zarlink offers a range
of multi-channel VECs that management believes provide significant price,
density, and performance advantages compared to VEC modules or solutions based
on software-intensive digital signal processors (DSPs). Zarlink's VECs have
passed rigorous performance and qualification tests with leading international
service providers, and are fully compliant with the latest industry standards.

Zarlink offers products ranging from low-density 2- to 32-channel devices, to
high-density 288-channel solutions. These products are used in wireless base
stations, T1/E1 echo cancellation pools, and voice over IP (VoIP), voice over
frame relay (VoFR), voice over ATM (VoA), and voice over DSL (VoDSL) access
equipment.

High Performance Analog

Management believes that its expertise in analog design, coupled with its highly
differentiated complementary silicon bipolar process technology, offers an
opportunity for Zarlink to benefit from the strong demand for high-speed analog
communications chips with exceptional performance characteristics. Since forming
its High-Performance Analog group in mid-2002, Zarlink has introduced 17 analog
products for broadband communications. The product offering includes broadband
voltage-feedback amplifiers for DSL modems and video applications,
current-feedback amplifiers for low-power video applications; and high-frequency
prescaler/dividers operating at up to 13 GHz. Management believes that these
products, fabricated in Zarlink's bipolar process, offer advantages over similar
components manufactured using higher-cost technologies such as gallium arsenide
(GaAs).

Other Network Communications

Zarlink provides single- and multi-port, feature-rich T1/E1/J1
transceiver/framer products that meet the latest recommendations and standards
from Telcordia, the American National Standards Institute (ANSI), the European
Telecommunications Standards Institute (ETSI) and the International
Telecommunication Union-Telecommunications (ITU-T).

Zarlink offers a wide range of exchange and subscriber solutions, including
silicon and hybrid subscriber line integrated circuits (SLICs), digital
subscriber Interfaces, data access arrangements (DAAs), dual tone


-5-


multifrequency (DTMF) receivers and transceivers, central office interface
circuits (COICs), calling number identification circuits (CNICs), coder/decoder
ICs, and integrated digital phone ICs.

Optical Communications

Zarlink offers a variety of optical components for communications equipment,
including VCSELs (vertical cavity surface emitting lasers), LEDS (light emitting
diodes) and PIN (positive-intrinsic-negative) diodes. The Company also offers a
range of very short reach (VSR) parallel fiber optic modules for optical
interconnection.

In optical components, management believes that Zarlink has an established
presence as a value-added supplier. For example, the Company recently introduced
850-nanometer, oxide-confined VCSELs that improve the performance of optical
equipment by generating an extremely stable light beam, thus overcoming the
effects of current and temperature. In addition, Zarlink's newest fiber-optic
receiver integrates a PIN photodiode, a low-noise amplifier, and a photo current
monitor into one compact component, thereby reducing the cost and complexity of
optical equipment.

Zarlink's range of parallel fiber optic modules is designed for use in
high-speed backplanes and inter-system connections in core network switches and
routers, SONET/SDH transport equipment, and dense wavelength division
multiplexing (DWDM) systems. Products include 12-channel, pluggable, parallel
fiber optic transmitter/receiver modules with an aggregate capacity of
32.4-gigabits per second (Gb/s), for transporting massive volumes of traffic in
optical networking equipment.

Consumer Communications Segment

Digital Television

Zarlink provides highly integrated tuners for digital satellite, cable, and
terrestrial set-top boxes and TVs, and low-power demodulators for digital
terrestrial and satellite STBs and TVs. Management believes that Zarlink is one
of the world's prime suppliers of RF front-end components, such as
mixer-oscillators, broadband converters, tuners with integrated PLLs, and
downconverters that are suitable for use in both analog and digital receivers,
STBs, cable modems, and other home entertainment products. Management expects
that the migration to integrated RF front ends with multiple tuners to support
advanced functionality such as picture-in-picture and watch-and-record will
offer continued growth opportunities.

Management also believes that the growth of the Digital Video
Broadcasting-Terrestrial (DVB-T) standard for broadcasting digital TV channels
that are received via rooftop antennae, offers Zarlink significant revenue
opportunities. Accordingly, Zarlink recently launched a new family of
system-on-a-chip (SoC) digital TV processors, complete with supporting reference
designs and software, for the global DVB-T market. The Company's ZL10310/311
devices are believed by Management to be the first to integrate the terrestrial
demodulator, MPEG-2 video/audio, and high-speed processing functions on a single
device. Zarlink's ZL10320/311 chips are believed by Management to be the
industry's first fully integrated processing chips for use in terrestrial
digital TV personal video recorders (PVRs). PVRs are a category of digital STBs
that allow viewers to simultaneously receive, record to hard disk, and
manipulate two digital TV channels, and offer features such as multi-channel
record and replay, and live-broadcast pause and resume.

Digital Cellular Telephony

Zarlink is building on the success of its earlier analog chipsets by developing
new products to address emerging,multi-mode digital cellular standards. The
current portfolio for high-volume digital cellular telephones includes both RF
and mixed-signal, transmitter/receiver components for time-division multiple
access (TDMA) handsets, and the growing 2.5 generation GAIT (GSM ANSI-136
Interoperability Team), general packet radio services (GPRS), and enhanced data
for GSM environment (EDGE) markets. These ICs are multi-band and multi-mode,
offering a high level of integration and performance. For example, Zarlink
recently introduced what Management believes is the industry's first single-chip
radio transceivers to support both 2G TDMA/AMPS/GSM networks, and 2.5G GPRS/EDGE
high-speed data platforms. The 2.5G transceiver is the first commercial cell
phone radio to handle two-way, or full-duplex, data services at 384 kilobits per
second (Kb/s) without using


-6-


external circuitry. Zarlink's devices are designed into the products of many of
the world's leading handset manufacturers.

Management anticipates that the deployment of 3G networks will continue and
Zarlink plans to participate in this market with a multi-band, multi-mode 3G
radio targeted at the emerging wideband code division multiple access (W-CDMA)
market. Management believes that the Company has developed the world's most
integrated 3G radios that support W-CDMA, GSM, and EDGE applications.

Ultra Low-Power Communications Segment

Management believes that Zarlink has a core competence in ultra low-power IC
design and is a major supplier of components for healthcare applications,
including ICs used in cardiac pacemakers and other implantable healthcare
electronics, as well as CODEC and digital signal processor (DSP) chips for
hearing aids. Zarlink's expertise in ultra low-power, high-reliability IC design
enables the Company to fabricate healthcare devices with high performance and
exceptionally long battery life. In addition, Zarlink's silicon solutions meet
the rigorous standards of equipment makers and customers in the healthcare
field.

Increasingly, the Company's ultra low-power technology, combined with its
communications technology, is now finding uses in other markets as the demand
for integrated personal electronics and communications grows. A diverse range of
applications - from cell phones to healthcare and related products - require ICs
that combine ultra low-power and communications functionality. Many of these
applications represent fast-growing markets that management believes provide
Zarlink with significant sales opportunities.

Sales, Marketing and Distribution

The principal customers for Zarlink's semiconductors are customer premise and
network communication equipment manufacturers. Zarlink's products are also
marketed to data communications suppliers as the integration of computing and
telecommunications continues.

Zarlink sells its products through both direct and indirect channels of
distribution. Factors affecting the choice of channel include, among others,
end-customer type, the stage of product introduction, geographic presence and
location of markets, and volume levels. Zarlink sells its products in over 40
countries, through local Zarlink sales offices and through its distributor
network. Zarlink has implemented a strategic account program focusing on the
development of business with the key customers in all the market segments
Zarlink serves. Direct sales personnel from each of Zarlink's sales regions
collaborate to manage business with multinational enterprises.

The primary markets for Zarlink's products are technologically driven
industries. The telecommunications equipment, router and access equipment,
including cell phones and STBs, and healthcare device industries represent major
end markets for Zarlink. Management believes Zarlink's revenue growth over the
long term will be supported by various factors that drive demand for
telecommunications equipment and infrastructure [See "Business - Overview" and
"- Industry"]. The increasing penetration of telephone service in emerging
countries is also a strong driver for both wireless and wired communications,
which management believes increases demand for the Company's integrated circuits
for communications applications.

The Company believes that one of its competitive advantages is the expertise of
its applications groups, which are located in the United Kingdom, the United
States, Canada, Singapore and Japan to serve customers in all parts of the
world. The applications groups assist original equipment manufacturers (OEMs) in
designing their next generation products using Zarlink components. Zarlink has a
strong record of soliciting customers with design ideas and obtaining design
wins. The design win cycle starts when Zarlink and/or its representatives
identify a need for one of its standard communications products that meet
certain specifications in a customer's equipment design. Once Zarlink's product
is selected for a design, the Company generally is assured of providing the
semiconductor for the product until the product is no longer manufactured.


-7-


Asia/Pacific

The Asia/Pacific area is a major geographical market for Zarlink's semiconductor
products, with China, Korea, Japan, Taiwan and Malaysia being the largest
markets. Zarlink's semiconductor products are also sold in Australia, Hong Kong,
Thailand, New Zealand, Singapore and the Philippines. The Company is expanding
into other emerging markets in Asia/Pacific, such as India.

Zarlink maintains regional headquarters in Singapore and offices in Japan,
Taiwan, Korea and China for semiconductor products. Over 70% of sales in these
areas are achieved through distributors. The sales offices provide a service
linking customers and applications support groups that assist OEMs in designing
products with Zarlink components.

Americas

Until recently, Zarlink's semiconductor products (other than ultra low-power
communications) were primarily sold through representatives of manufacturers and
distributors. Zarlink's sales representatives, who dealt directly with the end
customer, assisted with the design of systems incorporating Zarlink products.
These products were then supplied through Zarlink's distributors. Beginning late
in Fiscal 2002, the Company decreased its reliance on representatives and moved
to a mostly direct selling model in order to enhance customer relationships. The
direct sales force includes major account teams that target specific large
customers for standard product designs. Distributors also continue to form an
integral part of the Company's sales strategy. The regional headquarters are
located in San Jose, California and Boston, Massachusetts.

Europe

Sales of Zarlink semiconductor components in Europe have been made primarily
through its direct sales channel. Distributors also play an important role in
the European region and management believes that their share of the overall
business will increase over the next year due to the desire of many customers to
consolidate their logistical demands. The Company maintains technically
qualified sales teams across the entire region and supports them with a team of
highly skilled applications engineers. The headquarters of the sales operation
is in Paris, France.

Competition

Competition in the semiconductor market is intense, with new entrants
continually coming into the industry. Rapid technological change,
ever-increasing functionality due to integration, a focus on price performance,
and evolving standards characterize the markets for Zarlink's products.
Competition is based principally on design and system expertise, customer
relationship, service and support. Management believes Zarlink compares
favorably through its focus on proprietary designs, its intellectual property
and large patent portfolio for the network access and user access markets and
the healthcare markets and its sales and support network.

In the communications market, Zarlink focuses on the convergence of real time
traffic with data. Management believes Zarlink has substantial intellectual
property associated with networking real time traffic such as voice. Converged
voice networking requires competencies in regulatory policies, analog and mixed
signal design, specialty processes, and voice quality. Zarlink primarily designs
and markets proprietary products that are sold to many customers in the wired,
wireless, and optoelectronic segments of the communications market rather than
competing with commodity products. Proprietary designs generally provide longer
product life cycles with customers than commodity products and present a
significant barrier to entry.

Management believes that Zarlink's sales channels and applications support
compare favorably to those of its competitors by providing worldwide coverage
and extended support to assist customers in getting their products to market
quickly.


-8-


Within the Network Communications segment, Conexant Systems, Inc. (Conexant),
PMC-Sierra, Inc., Agere Systems, Inc., Infineon Technologies AG (Infineon),
Integrated Device Technology, Inc. (IDT), Silicon Laboratories, Inc.
(SiliconLabs), Semtech Corporation (Semtech), Broadcom Corporation (Broadcom)
and Motorola, Inc. (Motorola) are the Company's main global competitors in one
or more product lines. Management believes that Zarlink competes favorably in
Network Communications based on the Company's extensive intellectual property
rights in converged networks and in QoS while meeting regulatory and industry
standards.

In the optoelectronic area of Network Communications, competitors in the LED and
PIN diode business sectors include Agilent Technologies Inc., Honeywell Inc.,
Epitaxx Inc. and Tyco Electronics in North America and Infineon in Germany. In
this area, management believes that Zarlink competes primarily on product
specification, quality and customization capability. In the single channel VCSEL
(vertical cavity surface emitting laser) market, Zarlink enjoys a shared
leadership position with Honeywell. In the VCSEL array market, Zarlink was first
to market to establish a leadership position and competes via sales support and
price performance. In respect of the VSR SMART OSA transceiver, Zarlink competes
mainly with Infineon and EMCORE Corporation, Agilent Technologies Inc., and
PicoLight. Management believes that Zarlink's patented technology and higher
reliability provide the Company with a competitive advantage.

Within the Consumer Communications segment, Philips International BV, Infineon,
Toshiba Corporation, Motorola, Broadcom, Conexant, Maxim Integrated Products,
Inc., ST Microelectronics, Inc., RF Micro Devices, Microtune Inc. and LSI Logic
are Zarlink's main global competitors in one or more product lines. In this
market, management believes Zarlink competes favorably using products designed
on its bipolar processes and by using innovative design techniques on SiGe
BiCmos and standard CMOS technologies.

In the Ultra Low-Power Communications segment, Zarlink competes mainly with
American Microsystems, Inc., Medtronic, Inc., Microsemi Inc., system OEMs and
smaller ASIC design houses using "pure play" foundries. Zarlink sells to five of
the top seven healthcare OEMs worldwide. Management believes that with the
Company's concentration of application knowledge, world-class ultra low-power
design skills and a developing portfolio of key intellectual property, in
conjunction with its comprehensive and certified quality system and long
experience with key customers in the highly regulated healthcare device
industry, Zarlink competes favorably against its competitors.

Manufacturing

The selection of manufacturing sites or suppliers is dependent on the type of
semiconductor to be manufactured and the required process and technology.

Approximately 75% of the Company's products are sourced from approximately five
independent foundries that supply the necessary wafers and process technologies.
Of these independent foundries, the Company has wafer supply agreements with
three independent foundries, which expire at various times from 2005 to 2007.
Zarlink's remaining products are manufactured at the Company's own facilities.

The Company's silicon fab is located in Swindon in the United Kingdom. The
Swindon facility uses bipolar technology for RF applications. IC probe and
finished goods testing is done out of the Company's facilities in Ottawa, Canada
and in Swindon and Plymouth in the United Kingdom. Zarlink's optical fab and
assembly is located in Jarfalla, Sweden. Optoelectronic components and modules
are produced at the Jarfalla, Sweden facility using gallium arsenide and indium
phosphide processes. Hybrid assembly and testing is performed in Caldicot,
United Kingdom.

Zarlink's foundry operation serves a growing base of customers in the United
States and Europe by performing sub-contract manufacturing of silicon wafers
using its bipolar processes. Zarlink views the foundry business as a means of
enhancing its manufacturing facilities to perform at or near full capacity with
a diversified set of applications, and of hedging against market trends in any
one segment.

Zarlink's semiconductor manufacturing facilities and their quality management
systems are certified to the strict standards established by the International
Organization for Standardization.


-9-


Research and Development

Zarlink's current R&D programs are primarily directed at developing intellectual
property in the areas of IC and Optical process development, communications ICs,
optoelectronic components, and ultra low-power semiconductors.

Zarlink's process development efforts are focused on mixed signal processes and
yield improvements in bipolar processes. R&D programs include development of
intellectual property in the areas of ATM, line cards, network timing and
synchronization functions, wide area network (WAN) chips, switching and voice
processing functions, the TDMA, Edge, GPRS 2.5G and 3G wireless standards,
set-top box communications chips and high performance analog ICs.
Optoelectronics R&D activity is focused on Optical GaAlAs/InP process
development, Zarlink's patented Smart OSA packaging technology for VSR
applications, and on laser technology for short and medium range applications.

In addition, research and development efforts are focused on ultra low-power,
high quality, high reliability solutions for healthcare applications. Zarlink is
focused on developing ultra low-power RF integrated circuits supporting
short-range communications for health monitoring and other applications,
including in-vivo systems. The Company is also developing high performance,
ultra low-power audio data converters with technology that is also developed for
use in digital hearing aids, for high growth communications and entertainment
applications.

The Company intends to leverage its core competence in ultra low-power audio
processing and ultra low-power wireless technology with its world-class ultra
low-power integrated circuit engineering capability, to deliver compelling
standard integrated circuit products, particularly for those applications
spanning communications and healthcare.

Zarlink maintains product design centers in Ottawa, Canada; Jarfalla, Sweden;
San Diego and Irvine in California, United States; Caldicot, Swindon, Plymouth,
Lincoln and Borehamwood in the United Kingdom; and Rotterdam in the Netherlands.

As at March 28, 2003, Zarlink employed 444 research and development personnel
primarily based in the United Kingdom, Canada, Sweden, and the United States.

Employees

As at March 28, the Company employed 1,278 persons. Approximately 52% of the
Company's employees are located in the United Kingdom, 23% in Canada, 7% in the
United States, and 18% in the rest of the world. Zarlink considers the
relationship with its employees to be good.

Certain of the Company's employees are covered by collective bargaining
agreements or are members of a labor union.

In the United Kingdom, approximately 36 employees of Zarlink's Swindon
operations are unionized. The unions representing the employees include the
Amalgamated Electrical and Engineering Union, the Manufacturing Science and
Finance Union and the Transport and General Workers Union. Negotiations are held
annually in July. Management considers the Company's relationship with the
unions in the United Kingdom to be satisfactory.

In Sweden, three unions represent approximately 125 employees. The Metall
Industriarbetarforbundet union represents approximately 14 production employees;
the Svenska Industriarbetarforbundet union represents approximately 70 office
professional employees; and the Civilingenjorsforbundet union represents
approximately 41 other professional employees. It is common practice in Sweden
for the national unions to negotiate minimum standards with the employer
association, supplemented by additional terms negotiated by the local branches.
Each agreement is for a term of three years and the current agreement expires on
March 31, 2004. Management considers the Company's relationship with the unions
in Sweden to be satisfactory.


-10-


Proprietary Rights

The Company owns many patents and has made numerous applications for patents
relating to communications and semiconductor and optoelectronic technologies.
Management believes that the ownership of patents is an important factor in
exploiting associated inventions and for providing protection for its patentable
technology in the areas referred to above.

The "ZARLINK" trademark and the Zarlink corporate logo are registered in Canada
and the United States and have been registered in certain other countries where
Zarlink conducts business. Most of the Company's other trademarks are registered
or applications for registration have been filed in various countries where
management has determined such registration to be advisable. Management believes
that the Company's trademarks are valuable assets and generally supports
applications for registration for marks in countries where the assessment of
potential business related to the sale of products or services associated with
such marks justifies such action.

The Company also owns other intellectual property rights for which registration
has not been pursued. In addition to applying for statutory protection for
certain intellectual property rights, the Company takes various measures to
protect such rights, including maintaining internal security programs and
requiring certain nondisclosure and other provisions in contracts.

As is the case with many companies doing business in the telecommunications
industry, it is necessary or desirable from time to time for the Company to
obtain licenses from third parties relating to technology for Zarlink's products
and processes. No current license is considered by management to be material to
the Company's business, financial condition or results of operations.

Forward-Looking Statements and Risk Factors

Certain statements in this section and in other sections of this Annual Report
on Form 10-K contain forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 that are based on current
expectations, estimates and projections about the industries in which the
Company operates, management's beliefs and assumptions made by management. Words
such as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates" and variations of such words and similar expressions are intended to
identify such forward-looking statements. These statements are not guarantees of
future performance and involve certain risks, uncertainties and assumptions,
which are difficult to predict. Therefore, actual outcomes and results may
differ materially from results forecast or suggested in such forward-looking
statements. The Company undertakes no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise.

Such risks, uncertainties and assumptions include, among others, the following:

The failure of the Company's products to keep pace with rapidly changing
technology and evolving industry standards could have a material adverse effect
on the Company's business, financial condition and results of operations.

The markets for the Company's products are characterized by rapidly changing
technology and evolving and competing industry standards, changes in customers,
emerging competition, frequent new product introductions and evolving methods
used by carriers and business enterprises to manage communications networks. The
Company's future success will depend, in part, on its ability to use leading
technologies effectively, to continue to develop its technical expertise, to
maintain close working relationships with its key customers, to develop new
products that meet changing customer needs, to advertise and market its products
and to influence and respond to changing industry standards and other
technological changes on a timely and cost-effective basis.

There can be no assurance that the Company will be successful in effectively
developing or using new technologies, developing new products or enhancing its
existing products on a timely basis or that such new technologies or
enhancements will achieve market acceptance. The Company's pursuit of necessary
technological advances may require substantial time and expense and there can be
no assurance that the Company will succeed in adapting its products or business
to alternate technologies. Failure of the Company, for


-11-


technological or other reasons, to develop and introduce new or enhanced
products that are compatible with industry standards and that satisfy customer
price and performance requirements would have a material adverse effect on the
Company's business, financial condition and results of operations.

In addition, the Company's competitors may offer enhancements to existing
products or offer new products based upon new technologies, industry standards
or customer requirements, that have the potential to replace or provide lower
cost alternatives to the Company's products, which could render the Company's
existing and future products obsolete, unmarketable or inoperable. There can be
no assurance that the Company will be able to develop new products to compete
with new technologies on a timely basis or in a cost-effective manner. See
"Business - Research and Development".

Most of the Company's products are sourced from approximately five independent
foundries and the Company has concentrated supply arrangements for wafers and
process technologies. Elimination or disruption of either of these arrangements
could adversely affect the timing of product shipments.

Approximately, 75% of the Company's products are sourced from approximately five
independent foundries that supply the necessary wafers and process technologies.
Of these independent foundries, the Company has wafer supply agreements with
three independent foundries, which expire from 2005 to 2007. These suppliers are
obligated to provide certain quantities of wafers per year under these
agreements. These independent foundries also produce products for other
companies. As a result, we may not have access to adequate capacity or certain
process technologies as capacity and technologies may be allocated to their
other customers. If these independent foundries were unable or unwilling to
manufacture the Company's products in required volumes, then it would be
necessary to identify and qualify acceptable additional or alternative
foundries. This qualification process could take six months or longer. It is
possible that sufficient capacity may not be found quickly enough, if ever, to
satisfy production requirements.

The Company operates in the highly competitive high technology industry.
Increased competition may result in price reductions, reduced gross margins and
loss of market share, any of which would have a material adverse effect on the
Company's business, financial condition and results of operations.

The markets for the Company's products are characterized by intense competition.
Competition could further increase if new companies enter the market or if
existing competitors expand their product lines or upgrade existing products to
accommodate new technologies and features. Many of the Company's current and
potential competitors have a longer operating history and greater technical,
manufacturing, financial and marketing resources than the Company and, as a
result, may be able to adapt more quickly or devote greater resources to
changing technological requirements, customer demands and market trends.
Increased competition may result in price reductions, reduced gross margins and
loss of market share, any of which would have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
believes that its ability to compete successfully depends upon elements both
within and outside its control, including successful and timely development of
new products and manufacturing processes, product performance and quality,
manufacturing yields and product availability, customer services, pricing,
industry trends and general economic trends. There can be no assurance that the
Company will compete successfully as to these factors. See "Business -
Competition".

The Company's loss of key personnel could have a material adverse effect on its
business, financial condition or results of operations.

The Company's future success depends to a significant extent on the continued
service of its key technical and management personnel and on its ability to
continue to attract and retain qualified employees, particularly those highly
skilled design, process and test engineers involved in the development of mixed
signal products and processes. The competition for such personnel is intense.
The loss of the services of the Company's employees or the Company's failure to
attract, retain and motivate qualified personnel could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company has employment agreements with five executive officers, including
Patrick J. Brockett, its President and Chief Executive Officer.


-12-


The Company's success is dependent on its intellectual property. The inability
of, or any failure by, the Company to protect its intellectual property could
have a material adverse effect on its business, financial condition and results
of operations.

The Company's success and future revenue growth will depend, in part, on its
ability to protect its intellectual property. The Company relies primarily on
patent, copyright, trademark and trade secret laws, as well as nondisclosure
agreements and other methods to protect its proprietary technologies and
processes. There can be no assurance that such measures will provide meaningful
protection for the Company's proprietary technologies and processes. The Company
has been issued many patents, principally in the United States, Canada and the
United Kingdom, and has filed numerous patent applications in such
jurisdictions. There can be no assurance that any patent will issue from these
applications or future applications or, if issued, that any claims allowed will
be sufficiently broad to protect the Company's technology. In addition, there
can be no assurance that any existing or future patents will not be challenged,
invalidated or circumvented or that any right granted there under would provide
meaningful protection or a competitive advantage to the Company. The failure of
any patents to provide protection to the Company's technology would make it
easier for the Company's competitors to offer similar products. The Company also
generally enters into confidentiality agreements with its employees and
strategic partners and generally controls access to and distribution of its
product documentation and other proprietary information. Despite these
precautions, it may be possible for a third party to copy or otherwise obtain
and use the Company's products, services or technology without authorization,
develop similar technology independently or design around the Company's patents.
In addition, effective copyright, trademark and trade secret protection may be
unavailable or limited in certain foreign countries. Certain of the Company's
customers have entered into agreements with the Company pursuant to which such
customers have the right to use the Company's proprietary technology in the
event the Company defaults in its contractual obligations, including product
supply obligations, and fails to cure the default within a specified period of
time. Moreover, the Company often incorporates the intellectual property of its
strategic customers into its design and the Company has certain obligations with
respect to the non-use and non-disclosure of such intellectual property. There
can be no assurance that the steps taken by the Company to prevent
misappropriation or infringement of the intellectual property of the Company or
its customers will be successful. Moreover, litigation may be necessary in the
future to enforce the Company's intellectual property rights, to protect the
Company's trade secrets or to determine the validity and scope of the
proprietary rights of others, including its customers. Such litigation could
result in substantial costs to the Company and diversion of the Company's
resources and could have a material adverse effect on the Company's business,
financial condition and results of operations.

The Company may in the future be notified of claims that the products or
services offered and sold by it are subject to patents or proprietary rights of
third parties. Any such claim, whether or not it has merit, would be time
consuming to evaluate and defend, and could result in substantial expense to the
Company. An adverse determination of such claims could prevent the Company from
making, using or selling certain of its products and subject the Company to
damage assessments, all of which could have a material adverse effect on the
Company's business, financial condition and results of operations.

The segment of the semiconductor market that includes the Company's products has
been characterized by extensive litigation regarding patents and other
intellectual property rights. As is common in the semiconductor industry, the
Company has been in the past and may in the future be notified of claims that
its products or services are subject to patents or other proprietary rights of
third parties. Although the Company attempts to ensure that its products and
processes do not infringe such third-party patents or proprietary rights, there
can be no assurance that infringement or invalidity claims (or claims for
indemnification resulting from infringement claims) will not be asserted or
prosecuted against the Company. Periodically, the Company negotiates with third
parties to establish patent license or cross-license agreements. There can be no
assurance that current or future negotiations will result in the Company
obtaining a license on satisfactory terms or at all. Moreover, license
agreements with third parties may not include all intellectual property rights
that may be issued to or owned by the licensors and thus future disputes with
these companies are possible. In the event an intellectual property dispute is
not settled through a license, litigation could result. Any litigation or
interference proceedings could result in substantial expense to the Company and
significant diversion of effort by the Company's technical and managerial
personnel. An adverse determination in such litigation or proceeding could
prevent the Company from making, using or selling certain of its products and
subject the Company to damage assessments, all of


-13-


which could have a material adverse effect on the Company's business, financial
condition and results of operations.

The business of the Company could be disrupted if it is unable to successfully
integrate any businesses, technologies, product lines or services that are
acquired in the future.

The Company may make strategic acquisitions and investments or enter into joint
ventures or strategic alliances with other companies. Such transactions entail
many risks, including the following: inability to integrate successfully such
companies' personnel and businesses; inability to realize anticipated synergies,
economies of scale or other value associated with such transactions; diversion
of management's attention and disruption of the Company's ongoing business;
inability to retain key technical and managerial personnel; inability to
establish and maintain uniform standards, controls, procedures and policies; and
impairment of relationships with employees and customers as a result of the
integration of new personnel. In addition, future acquisitions or investments by
the Company may result in the issuance of additional equity or debt securities,
significant borrowings, significant one-time write-offs and the creation of
goodwill or other intangible assets. Failure to avoid these or other risks
associated with such business combinations, investments, joint ventures or
strategic alliances could have a material adverse effect on the Company's
business, financial condition and results of operations.

There are risks inherent in the Company's international operations which may
have a material adverse effect on its business, financial condition and results
of operations.

Approximately 80% of the Company's sales in Fiscal 2003 were derived from sales
in markets outside the United States and 74% outside North America. The Company
expects sales from foreign markets to continue to represent a significant
portion of total sales. The Company operates three manufacturing facilities as
well as sales and technical support service centers in Europe and Asia. Certain
risks are inherent in international operations, including exposure to currency
exchange rate fluctuations, political and economic conditions, unexpected
changes in regulatory requirements, exposure to different legal standards,
particularly with respect to intellectual property, future import and export
restrictions, difficulties in staffing and managing operations, difficulties in
collecting receivables and potentially adverse tax consequences. There can be no
assurance that the above factors will not have a material adverse effect on the
Company's business, financial condition and results of operations.

The Company's competitive position may be affected by exchange rate
fluctuations. Changes in currency exchange rates and in the financial standings
of the institutions that are counterparties to the Company's financial
instruments could have a material adverse effect on the Company's business,
financial condition and results of operations.

Subsequent to the end of Fiscal 2003 and on March 29, 2003, the Company changed
the functional currencies in the parent company and its subsidiaries to the U.S.
dollar (see Note 26 to the Consolidated Financial Statements). However,
significant portions of the Company's costs of sales and other expenses are
denominated in Canadian dollars, U.K. pounds sterling, and several other
currencies. As such, the Company's results of operations are subject to the
effects of exchange rate fluctuations of those currencies relative to the U.S.
dollar, the parent company's functional currency going forward. Changes in
currency exchange rates may also affect the relative prices at which the Company
and its competitors sell their products in the same markets, although the
markets are primarily conducted in U.S. dollars. The Company uses financial
instruments, principally forward exchange contracts, in its management of
foreign currency exposures on estimated net foreign currency cash requirements,
principally local payrolls, and on certain significant transactions, over the
ensuing 12 months. All foreign exchange contracts are carried at fair value and,
to the extent these contracts qualify as effective hedges, the resulting
unrealized gains and losses are deferred and included in the measurement of the
related transactions when they occur. These contracts primarily require the
Company to purchase and sell certain foreign currencies with or for U.S. dollars
at contractual rates. To further understand the impact of these risks, refer to
Other Income (Expense), included in Item 7 Management's Discussion and Analysis
of Financial Condition and Results of Operations, and Item 7A Quantitative and
Qualitative Disclosures About Market Risk.

Several major financial institutions are counterparties to the Company's
financial instruments. It is the Company's practice to monitor the financial
standing of the counterparties and limit the amount of exposure to any one


-14-


institution. The counterparties to these contracts may expose the Company to a
credit loss in the event of nonperformance. With respect to accounts receivable,
concentration of credit risk is limited due to the diverse areas covered by the
Company's operations. The Company has credit evaluation, approval and monitoring
processes intended to mitigate potential credit risks. Anticipated bad debt loss
has been provided for in the allowance for doubtful accounts.

The Company's operations could be adversely affected if it is unable to guard
against currency and credit risks in the future. There can be no assurance that
foreign currency fluctuations or credit risk will not have a material adverse
effect on the Company's business, financial condition and results of operations.

The failure of the Company to comply with present or future environmental
regulations, or to control the use, disposal or storage of or adequately
restrict the discharge of, hazardous substances could subject the Company to
future liabilities and could have a material adverse effect on its business,
financial condition and results of operations.

The Company is subject to a variety of federal, state and local laws, rules and
regulations related to the discharge or disposal of toxic, volatile or other
hazardous chemicals used in its manufacturing process. Although the Company
believes that it has complied with these laws, rules and regulations in all
material respects and to date has not been required to take any action to
correct any noncompliance, the failure to comply with present or future
regulations could result in fines being imposed on the Company, suspension of
production or a cessation of operations. Such regulations could require the
Company to acquire significant equipment or to incur substantial other expenses
to comply with environmental regulations. Any failure by the Company to control
the use, disposal or storage of or adequately restrict the discharge of,
hazardous substances could subject the Company to future liabilities and could
have a material adverse effect on the Company's business, financial condition
and results of operations.

Other Factors

The Company cautions that the factors referred to above and those referred to as
part of particular forward-looking statements may not be exhaustive and that new
risk factors emerge from time to time in its rapidly changing business.

Item 2. Properties

The Company owns one facility in Swindon, United Kingdom totaling 167,700 square
feet (sf) used for wafer fabrication, design, sales and administration. The
Company also owns a 333,000 sf facility in Jarfalla, Sweden, that is used for
semiconductor manufacturing, R&D and administration, of which 27,000 sf is
vacant and is available to be sub-leased.

The Company occupies 209,000 sf of leased space in Ottawa, Canada. The Ottawa
leased space consists of two interconnected buildings used for design, sales,
administration, and integrated circuit design and testing. Approximately 38,000
sf of the space is sub-let to two tenants with lease periods expiring in
December 2003 and June 2007, respectively.

The Company occupies 49,000 sf of leased space in Portskewett, Wales, United
Kingdom that is used for hybrid modules, manufacturing and administration.

The Company also leases and operates 25 regional facilities, totaling 133,000
sf, primarily dedicated to design and sales. A geographical breakdown of these
facilities is as follows: nine locations in the United States totaling 45,100
sf, of which 10,800 sf is sub-leased; six locations in the United Kingdom
totaling 69,300 sf, of which 6,300 sf is sub-leased; three locations in Europe
totaling 6,130 sf (France, Germany, Holland); and, seven locations in the
Asia/Pacific region (China, Japan, Korea, Singapore, Taiwan, and Malaysia)
totaling 14,670 sf.

See "Business-Manufacturing" for additional information concerning the Company's
manufacturing facilities.

Management believes the Company's facilities are adequate for its business needs
for the foreseeable future.


-15-


Item 3. Legal Proceedings

Zarlink is a defendant in a number of lawsuits and party to a number of other
proceedings that have arisen in the normal course of its business. In the
opinion of the Company's in-house legal counsel, any monetary liability or
financial impact of such lawsuits and proceedings to which Zarlink might be
subject after final adjudication would not be material to the consolidated
financial position of the Company or the results of its operations.

Item 4. Submission of Matters to a Vote of Security Holders

None.


-16-


PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

PRINCIPAL MARKETS

The New York Stock Exchange and The Toronto Stock Exchange are the principal
markets on which the Company's shares are traded. The Company's shares were
first listed on the New York Stock Exchange on May 18, 1981 and on The Toronto
Stock Exchange on August 13, 1979. The stock symbol of the Company's shares is
ZL. The following table sets forth the high and low sales prices for the common
shares for each quarter of the last two fiscal years.

New York Stock Exchange
(U.S. Dollars)

2003 2002
-------------------------- ------------------------
High Low High Low
-------------------------- ------------------------
1st Quarter 10.00 4.65 10.19 6.99
2nd Quarter 5.43 1.97 10.25 6.34
3rd Quarter 3.96 1.31 12.05 7.22
4th Quarter 3.65 2.26 12.60 9.17


Toronto Stock Exchange
(Canadian Dollars)

2003 2002
-------------------------- ------------------------
High Low High Low
-------------------------- ------------------------
1st Quarter 15.90 7.05 15.54 11.00
2nd Quarter 8.48 3.15 15.69 10.05
3rd Quarter 6.25 2.16 18.89 11.30
4th Quarter 5.69 3.53 20.00 14.55

SHAREHOLDERS

There were 4,832 common shareholders of record as at May 30, 2003.

DIVIDEND POLICY

The Company has not declared or paid any dividends on its common shares and the
Board of Directors anticipates that, with the exception of preferred share
dividend requirements, all available funds will be applied in the foreseeable
future to finance growth and improve the Company's competitive position and
profitability.

Pursuant to the terms of the Cdn$2.00 Cumulative Redeemable Convertible
Preferred Shares, 1983 R&D Series (Preferred Shares - R&D Series), the Company
will not be permitted to pay any dividends on common shares unless all dividends
accrued on the preferred shares have been declared and paid or set apart for
payment.

Dividends paid by the Company to common shareholders not resident in Canada
would generally be subject to Canadian withholding tax at the rate of 25% or
such lower rate as may be provided under applicable tax treaties. Under the
Canada - United States tax treaty, the rate of withholding tax applicable to
such dividends paid to residents of the United States would generally be 5%.


-17-


Item 6. Selected Financial Data

(in millions of U.S. dollars, except per share amounts)

The following table is derived from the consolidated financial statements
included elsewhere herein, which have been prepared in accordance with
accounting principles generally accepted in the United States (U.S. GAAP) and
the requirements of the U.S. Securities and Exchange Commission (SEC).

Fiscal Year Ended
(at the end of fiscal year for balance sheet data)




----------------------------------------------------
U.S. GAAP and SEC Requirements 2003 2002 2001 2000 1999
----------------------------------------------------

Income Statement Data:
Revenue $ 193.8 $ 222.1 $ 450.2 $ 409.9 $ 371.2
Gross margin percentage 47% 30% 50% 46% 43%
Gross research and development expense 88.8 83.5 93.9 70.3 68.7
Net income (loss) from continuing operations (60.3) (120.8) (278.4) 34.2 (0.5)
Net income (loss) (57.9) (120.8) (270.8) 50.2 (6.4)
Net income (loss) per common share from continuing
operations
Basic (0.49) (0.98) (2.32) 0.28 (0.02)
Diluted (0.49) (0.98) (2.32) 0.27 (0.02)
Net income (loss) per common share
Basic (0.47) (0.98) (2.25) 0.42 (0.07)
Diluted (0.47) (0.98) (2.25) 0.41 (0.07)
Balance Sheet Data:
Working capital $ 118.9 $ 160.9 $ 225.9 $ 267.5 $ 217.8
Total assets 247.6 321.1 463.6 835.2 848.8
Long-term debt 0.2 0.7 4.8 149.6 183.5
Redeemable preferred shares 18.9 20.6 21.4 23.5 22.8
Shareholders' equity
Common shares 768.3 767.6 762.7 546.0 552.2
Additional paid in capital 2.1 4.1 1.7 - 1.8
Deferred stock compensation - (0.8) (6.8) - -
Deficit (582.8) (522.9) (400.2) (127.4) (161.7)
Accumulated other comprehensive loss (32.5) (45.9) (42.6) (13.7) (6.4)


See note 19 to the consolidated financial statements for a discussion
regarding the effect of the discontinued operations on Fiscal 2003, 2002
and 2001 results.


-18-


SUPPLEMENTARY FINANCIAL INFORMATION
(in millions of U.S. dollars, except per share amounts)
(Unaudited)


Selected Quarterly Financial Data
(in accordance with U.S. GAAP)




FISCAL 2003 First Second Third Fourth Full
(Unaudited) Quarter Quarter Quarter Quarter Year
---------------------------------------------------------

Revenue $ 48.0 $ 46.2 $ 46.8 $ 52.8 $ 193.8
Gross margin 22.1 20.7 21.2 26.4 90.4
Gross margin percentage 46% 45% 45% 50% 47%
Net loss (8.7) (11.9) (13.7) (23.6) (57.9)
Net loss per common share - basic (0.07) (0.10) (0.11) (0.19) (0.47)


FISCAL 2002 First Second Third Fourth Full
(Unaudited) Quarter Quarter Quarter Quarter Year
---------------------------------------------------------
Revenue $ 67.8 $ 50.5 $ 51.7 $ 52.1 $ 222.1
Gross margin 5.1 16.6 20.9 23.1 65.7
Gross margin percentage 8% 33% 40% 44% 30%
Net loss (60.5) (19.7) (18.3) (22.3) (120.8)
Net loss per common share - basic (0.49) (0.16) (0.15) (0.18) (0.98)


Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

(in millions of U.S. dollars, except per share amounts)

This section should be read in combination with the accompanying audited
consolidated financial statements prepared in accordance with United States
generally accepted accounting principles (GAAP). All dollar amounts in this
Management's Discussion and Analysis of Financial Conditions and Results of
Operations (other than per share amounts) are in millions of United States
dollars unless otherwise stated. Certain statements in this section and in other
sections of this Annual Report on Form 10-K contain forward-looking statements
that are based on current expectations, estimates and projections about the
industries in which the Company operates, management's beliefs and assumptions
made by management. These statements are not guarantees of future performance
and involve certain risks, uncertainties and assumptions, which are difficult to
predict. These risks, uncertainties and other factors include, among others,
those identified under "Forward-Looking Statements and Risk Factors" elsewhere
in this Form 10-K. Accordingly, actual outcomes and results may differ
materially from results forecasted or suggested in such forward-looking
statements. The Company undertakes no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise.

BUSINESS OVERVIEW

For almost 30 years, Zarlink Semiconductor has delivered the integrated circuit
(IC) building blocks that drive the capabilities of voice, enterprise, broadband
and wireless communications. Management believes that the Company's success is
built on its technology strengths encompassing voice and data networks, consumer
and ultra low-power communications, and high-performance analog. At March 28,
2003, the Company employed 1,278 people worldwide, including 444 designers.

The Company segments its business as Network Communications, Consumer
Communications and Ultra Low-Power Communications. The Company previously
reported its business segments as Communications and


-19-


Medical. The change in segments resulted from the evolution of the Company's
business model and growth strategies along the lines of these three segments.

Network Communications was previously known as Network Access and was part of
the Communications segment. Consumer Communications was previously known as User
Access and was also part of the Communications segment. The Ultra Low-Power
Communications segment, previously known as Medical, now better reflects the
expanded opportunities arising in healthcare and communications from the
Company's ultra low-power expertise.

The following discussion and analysis explains trends in Zarlink's financial
condition and results of operations for the fiscal year ended March 28, 2003,
compared with the two previous fiscal years. This discussion is intended to help
shareholders and other readers understand the dynamics of Zarlink's business and
the key factors underlying its financial results. The consolidated financial
statements, notes to the consolidated financial statements and supplementary
information constitute an integral part of, and should be read in conjunction
with, this Management's Discussion and Analysis.

RESULTS OF OPERATIONS

Summary of Results from Operations




(millions of U.S. dollars, except per share amounts) 2003 2002 2001
------------------------------

Consolidated revenue: $ 193.8 $ 222.1 $ 450.2
Network Communications 115.8 114.5 259.9
Consumer Communications 49.1 72.7 157.5
Ultra Low-Power Communications 28.9 34.9 32.8

Operating income (loss) from continuing operations: (41.7) (128.5) (258.1)
Network Communications (20.0) (73.6) (27.5)
Consumer Communications (21.1) (8.8) 9.9
Ultra Low-Power Communications (4.5) 8.8 0.9
Unallocated income (costs) 3.9 (54.9) (241.4)

Net loss from continuing operations (60.3) (120.8) (278.4)
Net loss per common share from
continuing operations - Basic (0.49) (0.98) (2.32)
Net loss (57.9) (120.8) (270.8)
Net loss per common share - Basic (0.47) (0.98) (2.25)
Weighted average common shares outstanding - millions 127.1 125.6 121.1



Fiscal 2003 revenue decreased by $28.3, or 13%, from Fiscal 2002. The decrease
in revenue was due to lower sales volumes, caused by the continued downturn in
the semiconductor industry, in the Consumer Communications segment, principally
in cellular wireless, and in the audiologic component market within the Ultra
Low-Power Communications segment. Higher channel inventory levels and lower
end-customer demand continued to keep sales levels suppressed during the year,
however increased customer bookings are beginning to show an indication of
improved inventory positions with customers. Revenue in Fiscal 2002 decreased by
$228.1, or 51%, from revenue in Fiscal 2001. The decrease in Fiscal 2002 from
Fiscal 2001 was due to lower network and consumer communication semiconductor
sales volumes caused by a prolonged slump that was widely recognized as the
sharpest downturn in the history of the semiconductor industry.

In Fiscal 2003, the Company recorded a net loss from continuing operations of
$60.3, or $0.49 per share. This compares to a net loss from continuing
operations of $120.8, or $0.98 per share, in Fiscal 2002. The Fiscal 2003 net
loss included a recovery of stock compensation expense of $1.4, as well as an
$11.5 non-cash write-down of its investment in Mitel Networks and the $6.6
impact of settling a defined benefit pension plan in the United Kingdom. The
Company also incurred $5.1 of mostly non-cash foreign exchange charges,
principally related to


-20-


holding significant US dollar cash balances in the Canadian parent company. This
was partially offset by reductions in accruals related to prior years' exit
activities amounting to $5.0 and by a cash settlement gain of $3.7 on the early
termination of a lease by a tenant. The Fiscal 2002 net loss included a special
inventory write-down of $29.1, special charges of $41.1 related to restructuring
and asset impairments, stock compensation expense of $8.4, a $5.4 loss on the
sale of the Bromont foundry, amortization of acquired intangibles of $4.4, and a
write-off of $3.5 related to the Company's investment in Optenia, Inc. which
ceased to operate. In Fiscal 2001, the net loss from continuing operations was
$278.4, or $2.32 per share, after the amortization of acquired intangibles of
$65.3 and a pre-tax charge for the impairment of goodwill and its fabrication
facilities totaling $237.6.

Zarlink's operations are comprised of three reportable business segments -
Network Communications, Consumer Communications, and Ultra Low-Power
Communications. Zarlink's Network Communications segment specializes in voice
and data network products, while the Consumer Communications segment offers
semiconductor solutions for wireless handsets and digital set-top boxes.
Zarlink's Ultra Low-Power Communications business provides ASIC and ASSP
solutions for applications such as pacemakers, hearing aids, portable
instruments, and personal area communication devices. Zarlink sells its products
through both direct and indirect channels of distribution. Factors affecting the
choice of distribution include, among others, end-customer type, the level of
product complexity, the stage of product introduction, geographic presence and
location of markets, and volume levels.

Network Communications
(millions of U.S. dollars) 2003 2002 2001
------ ------ ------
Revenue: $115.8 $114.5 $259.9
====== ====== ======
As a % of total revenue 60% 51% 58%

Operating loss $(20.0) $(73.6) $(27.5)
====== ====== ======

Zarlink's Network Communications products provide connectivity to the enterprise
and metropolitan markets through feeder, aggregation and transmission
applications and products that address the multi-protocol physical and network
layers. In simple terms, Network Communications semiconductor products connect
network equipment together.

Revenue for Fiscal 2003 totaled $115.8, up 1% from $114.5 in Fiscal 2002 and
down 55% from $259.9 in Fiscal 2001. Revenue continued to be adversely affected
by customer and channel inventory adjustments, a trend that began during the
second half of Fiscal 2001 and continued through Fiscal 2003. The revenue growth
in Fiscal 2003 was partially offset by the loss of foundry revenue resulting
from the disposal of two complementary metal oxide semiconductor (CMOS)
fabrication facilities in the fourth quarter of Fiscal 2002.

The segment's operating loss improved to $20.0 in Fiscal 2003 from an operating
loss of $73.6 in Fiscal 2002, and down from an operating loss of $27.5 in Fiscal
2001. The Fiscal 2002 results of the Network Communications segment were
adversely affected by an excess inventory charge of $23.4 to cost of sales for
inventories estimated to be beyond its needs for the following 12 months. This
write-down was necessary in light of the downturn in the communications
semiconductor industry.

In addition to the above market conditions, the Network Communications results
were reduced by the Company's continuing significant investment in research and
development to develop and launch new products. The impact of new products on
revenue in the year of introduction is not normally significant. However,
management believes that new product introductions are critical to supporting
future revenue growth. During Fiscal 2003, the Company continued to secure
design wins and introduced 53 new products to the market, up from 25 new
products introduced in Fiscal 2002 and eight in Fiscal 2001.


-21-


Consumer Communications
(millions of U.S. dollars) 2003 2002 2001
------ ----- ------
Revenue: $ 49.1 $72.7 $157.5
====== ===== ======
As a % of total revenue 25% 33% 35%

Operating income (loss) $(21.1) $(8.8) $ 9.9
====== ===== ======

Zarlink's Consumer Communications products allow users to connect to the
network. These products include wireless (for example, cellular chipsets) and
infotainment applications (for example, set-top boxes and digital TV).

Revenue for Fiscal 2003 totaled $49.1, down 32% from $72.7 in Fiscal 2002 and
down 69% from $157.5 in Fiscal 2001. The adverse business conditions described
above for Network Communications also had a similar negative impact on the
Consumer Communications business in Fiscal 2003.

The segment's operating loss increased to $21.1 in Fiscal 2003 from an operating
loss of $8.8 in Fiscal 2002 and down from operating income of $9.9 in Fiscal
2001. The Fiscal 2002 results were adversely affected by an excess inventory
charge of $5.7 to cost of sales for inventories estimated to be beyond its needs
for the following 12 months. This write-down resulted from the downturn in the
communications semiconductor industry.

Despite lower sales volumes and margins, the Consumer Communications segment
continues to invest in research and development to expand its new product
portfolio of wireless and set-top box semiconductor solutions. During Fiscal
2003, the Company continued to secure design wins and introduced ten new
products to the market, up from nine new products introduced in Fiscal 2002 and
six in Fiscal 2001.

Ultra Low-Power Communications
(millions of U.S. dollars) 2003 2002 2001
----- ----- -----
Revenue: $28.9 $34.9 $32.8
===== ===== =====
As a % of total revenue 15% 16% 7%

Operating income (loss) $(4.5) $ 8.8 $ 0.9
===== ===== =====

Zarlink's Ultra Low-Power Communications business provides ASIC and ASSP
solutions for applications such as pacemakers, hearing aids, portable
instruments and personal area communications devices.

Fiscal 2003 Ultra Low-Power Communications sales of $28.9 were down 17% from
$34.9 in Fiscal 2002 and down 12% from $32.8 in Fiscal 2001 due to higher
customer inventories and reduced demand in the analog audiologic business. The
Ultra Low-Power Communications operating results declined when compared with
Fiscal 2002 and Fiscal 2001 results due to lower revenues combined with a weaker
product mix which produced lower gross margins. During Fiscal 2003, the Ultra
Low-Power Communications group introduced seven new products in addition to the
seven new products introduced in Fiscal 2002 and the two new products introduced
in Fiscal 2001.

GEOGRAPHIC REVENUE

Revenue from continuing operations, based on the geographic location of
customers, was distributed as follows:


-22-





(millions of U.S. dollars) 2003 % of Total 2002 % of Total 2001 % of Total
------------------------------------------------------------------------

Asia Pacific $ 75.5 39% $ 56.7 25% $113.1 25%
Europe 62.5 32 82.5 37 138.9 31
United States 39.6 20 63.5 29 176.5 39
Canada 11.2 6 15.6 7 14.5 3
Other Regions 5.0 3 3.8 2 7.2 2
------ ---- ------ ---- ------ ----
Total $193.8 100% $222.1 100% $450.2 100%
====== ==== ====== ==== ====== ====


For the year ended March 28, 2003, the net movement in exchange rates from
Fiscal 2002 favorably impacted total revenue from continuing operations by 5%
($8.9). For the year ended March 29, 2002, the net movement in exchange rates
from Fiscal 2001 favorably impacted total revenue from continuing operations by
0.4% ($0.8).

Asia/Pacific

Asia/Pacific sales represented 39% of the Company's total sales in Fiscal 2003,
and increased by 33% compared to Fiscal 2002 due to higher product sales within
the Network Communications and Consumer Communications segments. Ultra Low-Power
Communications sales in Asia/Pacific decreased in Fiscal 2003, as compared to
Fiscal 2002.

Sales in the Asia/Pacific region decreased by 50% in Fiscal 2002 compared to
Fiscal 2001. The decrease was due to lower demand for the Company's Network
Communications and Consumer Communications products.

Europe

European sales decreased by 24% in Fiscal 2003 from Fiscal 2002 due to lower
Network Communications and Consumer Communications product sales. Ultra
Low-Power Communications sales in Europe showed a minor increase over sales in
Fiscal 2002.

Fiscal 2002 sales into Europe decreased by 41% from Fiscal 2001 due to lower
sales of Network Communications and Consumer Communications products.

United States

Sales into the United States decreased by 38% in Fiscal 2003 from Fiscal 2002.
The decrease was due to lower product sales, predominantly in the Consumer
Communications segment and also in the Ultra Low-Power Communications segments.

Sales decreased by 64% in the United States in Fiscal 2002 from Fiscal 2001. The
decrease was due to lower sales of Network Communications and Consumer
Communications products.

Canada

Canadian sales decreased by 28% in Fiscal 2003 from Fiscal 2002 due to lower
Network Communications sales in Canada.

Sales in Canada increased from Fiscal 2001 to Fiscal 2002 by 8%, mostly due to
the inclusion of sales to Mitel Networks Corporation, successor to the Systems
business that was sold on February 16, 2001. Mitel Networks Corporation ceased
its affiliation with Zarlink on February 16, 2001.

Other Regions

Sales into other regions increased by $1.2 in Fiscal 2003 compared with Fiscal
2002, and decreased by $2.2 as compared to Fiscal 2001.


-23-


GROSS MARGIN

(millions of U.S. dollars) 2003 2002 2001
------------------------------------
Gross margin $ 90.4 $ 65.7 $ 224.0
As a % of total revenue 47% 30% 50%

The Company's gross margin as a percentage of revenue was 47% for the year ended
March 28, 2003, compared to 30% in Fiscal 2002 when the Company recorded an
inventory obsolescence charge of $29.1. The gross margin improvements in Fiscal
2003 compared to Fiscal 2002 were attributable to lower overall manufacturing
costs, and a favorable product mix in the Network Communications and Consumer
Communications segments. The Fiscal 2003 gross margin was favorably impacted by
one percentage point principally due to selling previously written-down Network
Communications inventory. The improvement was partially offset by severance
costs of $1.0 related to cost reductions undertaken within the operations group.

The lower gross margin in Fiscal 2002 compared to Fiscal 2001 was principally
attributable to the $29.1 excess inventory charge to cost of sales for
inventories estimated to be beyond its needs for the following 12 months.
Margins were also lower due to the declining sales volumes of Network
Communications and Consumer Communications products in Fiscal 2002 and the
associated negative manufacturing variances resulting from lower plant
utilization.

OPERATING EXPENSES

Research and Development (R&D)

(millions of U.S. dollars) 2003 2002 2001
------------------------------------
R&D expenses $ 88.8 $ 83.5 $ 93.9
As a % of total revenue 46% 38% 21%

R&D expenses increased by 6%, or $5.3, in Fiscal 2003 from Fiscal 2002,
primarily due to new product development, increased headcount in certain R&D
projects to accelerate time to market initiatives and certain severance costs
associated with project cancellations. In Fiscal 2003, the Company recorded R&D
severance costs of $2.8, which were mainly related to the Company's decision in
the third quarter of Fiscal 2003 to cease product development in the VDSL (Very
high rate Digital Subscriber Line) market in order to concentrate its R&D
resources on higher and more immediate growth opportunities. Management decided
to cease its VDSL product development due to revised expectations of
unacceptably long time-to-revenue and volume deployment.

Fiscal 2002 R&D decreased by 11%, or $10.4, relative to Fiscal 2001 R&D due to
restructuring and the consolidation of R&D activities.

Investments are being made in high-growth areas such as Network Communications,
Consumer Communications, and in Ultra Low-Power Communications devices.

In the Network Communications product line, R&D activities focused on the
following areas:

o Time Division Multiplex (TDM) switch development to set new industry
standards in terms of channel density, levels of integration, feature sets
and power density;

o Development of Voice Processing products for today's emerging Carrier Class
Gateways and Voice over IP (Internet Protocol) Networks for mobile
telephony, addressing the problem of voice echo cancellation in the system.
New products will include Zarlink technology to improve convergence time
and voice quality thereby allowing the product to consume even less power
and also enable better power consumption for voice transmitted through the
mobile network;


-24-


o Planned development of higher speed Phase Lock Loops (PLL) for Network
Timing & Synchronization. These high speed PLLs will be used to provide the
timing for transporting information over SONET/SDH links that operate up to
622 Mbits/s;

o Meeting convergence with TDM/IP Processing in Packet Processing, and
Ethernet Switching for backplanes, linecard, edge/metro and Virtual Private
Network (VPN) switches in Packet Switching;

o Utilization of its Radio Frequency (RF) expertise for Timing, Synthesizers,
Interface drivers, and Amplifiers for its High Performance Analog product
development; and

o Very Short Reach (VSR) parallel optical solutions targeted at terabit
speeds and higher.

In the Consumer Communications product line, R&D activities focused on the
following areas:

o Providing a multi-mode cellular phone radio transceiver chip, compliant
with 2/2.5G standards for Time Division Multiple Access (TDMA)/Global
System for Mobile communications (GSM)/Enhanced Data rates for GSM
Evolution (EDGE)/General Packet Radio Service (GPRS)/Advanced Mobile Phone
Service/System (AMPS), and developing a 2-chip radio solution for 3rd
generation GSM/Wide and Code Division Multiple Access (WCDMA) cellular
phones;

o Providing tuner, demodulator and peripheral chips for satellite, cable and
terrestrial digital set-top boxes, integrated digital televisions and
adapter boxes; and

o Development of the most highly integrated system-on-a-chip solution for
integrated Digital Terrestrial Televisions, Digital Terrestrial Set-top
boxes, adapter boxes and media centers, compliant with the Digital Video
Broadcasting - Terrestrial (DVB-T) standard.

In the Ultra Low-Power Communications business segment, R&D activities focused
on semiconductor solutions and technologies for a variety of in-vivo and
audiological applications, including:

o High performance custom Coder/Decoders (CODECs) and digital signal
processing (DSP) chips for major hearing aid companies;

o Application-specific standard products (ASSPs) as opposed to custom ASICs;

o Surge protection chips used in implantable pacemakers and defibrillators
for cardiac rhythm management;

o High performance, ultra low-power audio converters (CODECs), technology
also used in digital hearing aids, for high growth communications and
entertainment applications; and

o Ultra low-power integrated circuits supporting short-range wireless
communications for healthcare and other applications, including implantable
and in-vivo systems.

Selling and Administrative (S&A)

(millions of U.S. dollars) 2003 2002 2001
------------------------------------
S&A expenses $ 47.2 $ 51.4 $ 81.5
As a % of total revenue 24% 23% 18%

S&A expenses decreased in Fiscal 2003 by $4.2, or 8% from Fiscal 2002,
principally as a result of cost reductions implemented in Fiscal 2002 in
response to the industry downturn. During Fiscal 2003, the Company continued to
implement cost reduction strategies within the sales and marketing organizations
and various general administration functions across all geographic regions.
Severance costs of $3.0 were recorded in S&A operating costs during Fiscal 2003.


-25-


In Fiscal 2002, S&A expenses decreased by $30.1, or 37%, from Fiscal 2001 as a
result of cost reductions implemented during that year in response to the
industry downturn. Management expects that S&A expenses will remain relatively
flat in Fiscal 2004 as compared to Fiscal 2003

Stock Compensation Expense

The Company records stock compensation expense or recovery arising from
retention conditions associated with the stock awarded to certain employees of
Vertex Networks, Inc. (Vertex), which was acquired in July 2000, and from
certain stock options subjected to option exchange programs. The Company
recorded $0.5 of stock compensation expense in Fiscal 2003 due to the vesting of
restricted stock awarded to certain employees of Vertex as compared to expense
of $6.0 in Fiscal 2002 and $3.3 in Fiscal 2001. No further stock compensation
expense will be recorded against these formerly restricted shares.

During Fiscal 2003, the Company recorded a net stock compensation recovery of
$1.4, as compared to a stock compensation expense of $8.4 in Fiscal 2002 and
$3.8 in Fiscal 2001. The compensation recovery in Fiscal 2003 was the result of
the decrease in market price of the underlying common stock in Fiscal 2003. The
reduced market price resulted in a recovery of previously recorded stock
compensation expense on outstanding unvested options.

Special Charges

Special Charge Recorded in Fiscal 2002

During Fiscal 2002, the Company recorded a special charge of $41.1 related to
restructuring and certain asset impairments.

In response to the industry downturn, the Company announced on May 10, 2001 that
it had implemented a cost-containment plan in order to preserve cash resources.
The cost-containment plan included a workforce reduction of approximately 17% of
the Company's total employee base or 439 employees globally. The workforce
resizing was in addition to a 5% workforce reduction that was completed in the
fourth quarter of Fiscal 2001. Accordingly, the Company recorded a pre-tax
special charge of $34.6 related to that program in the quarter ended June 29,
2001. The special charge was comprised of a workforce reduction charge of
approximately $26.7 primarily relating to the cost of severance and benefits for
the termination of 439 employees throughout the world in Fiscal 2002, and a
charge of approximately $7.9 relating to the cost of lease and contract
settlements.

During the fourth quarter of Fiscal 2002, the Company took additional measures
to reduce its operating costs by increasing its workforce reduction program and
providing for excess office space. Prior to March 29, 2002, the Company incurred
additional severance and benefit costs of $1.1 related to the termination of 32
employees throughout the world. In addition, the special charge in the fourth
quarter included the cost of excess space in Ottawa, Canada of approximately
$1.8.

The Company also reviewed the carrying value of certain manufacturing assets in
the year ended March 29, 2002. Based on an analysis of estimated future
undiscounted cash flows resulting from changes in the expected use of these
fixed assets, the Company determined that the carrying value of these fixed
assets was impaired and recorded a write down of $4.6. The Company also recorded
a write-down of $2.1 in the year ended March 29, 2002 related to the economic
uncertainty of certain long-term investments held at cost.

The fourth quarter special charge was net of a reversal of $3.1 from the first
quarter restructuring provision that was no longer required. The reversal was
due to savings on the workforce reduction program and to the subsequent
sub-letting of vacant space in Irvine, California just after the close of Fiscal
2002.

Special Charge Recorded in Fiscal 2001

The Company recorded an impairment charge, before taxes, of $237.6 in the fourth
quarter of Fiscal 2001 in respect of certain capital assets. The basis for the
impairment charge is described below.


-26-


The industry slowdown was one of the key factors that led to a review of the
Company's carrying value of acquired intangible assets related to Vertex.
Management believed the unfavorable market conditions would continue, for the
foreseeable future, to negatively affect the timing of expected future cash
flows resulting from the acquired technology. Management believes the technology
itself is sound and is a critical element in the Company's focus on IP-based
products.

Accordingly, the Company reviewed the carrying value of the acquired intangible
assets associated with Vertex in the fourth quarter ended March 30, 2001. Based
on an analysis of undiscounted estimated future cash flows and current and
expected adverse market conditions, the Company determined that the carrying
value of the acquired intangible assets was impaired. Accordingly, the Company
recorded a charge of $112.9 in the fourth quarter of Fiscal 2001 to write down
the carrying value of the goodwill relating to Vertex. As at March 30, 2001, the
carrying value of the acquired intangible assets related to Vertex amounted to
$3.6. The balance was expensed in Fiscal 2002.

The Company also reviewed the carrying value of its fabrication (fab) facilities
in the fourth quarter of Fiscal 2001. Factors leading to the review for
impairment included management's expectation that fab utilization would fall to
less than 50%, resulting in lower cash flows to recover the investment in the
fabs. The lowered expectation resulted from recent partnerships that were
developed with outside fabs for new Zarlink designs based on future technologies
that are beyond existing capabilities at the Company's fabs. This review also
considered the adverse market conditions, which resulted in a low operating rate
for these facilities as well as the Company's manufacturing strategy, described
elsewhere in this Annual Report on Form 10-K, that is expected to incorporate
higher degrees of outsourcing. Based on an analysis of undiscounted expected
future cash flows reflecting these conditions, the Company determined that the
fabrication buildings and equipment were impaired and recorded a charge of
$124.7, before income tax recoveries of $9.3, to write down these carrying
values. The tax recovery was separately included in the Company's total income
tax expense.

Loss (Recovery) on Sale of Busines

On February 22, 2002, Zarlink sold its foundry facility in Bromont, Quebec, and
related business to DALSA Semiconductor Inc. (DALSA) for $16.9. Under the
agreement, Zarlink received $13.0 in cash from DALSA and retained a 19.9%
investment in the Bromont foundry which was subsequently sold in Fiscal 2003. In
the fourth quarter of Fiscal 2002, the Company recorded a loss on sale of the
Bromont foundry business of $5.4, before income tax recoveries of $1.2.

On March 28, 2002, the Company sold its wafer fabrication facility in Plymouth,
U.K., as well as certain intellectual property and related foundry businesses to
companies controlled by X-FAB Semiconductor Foundries AG (X-FAB) of Erfurt,
Germany for $30.0, represented by $12.0 in cash on closing and a note of $18.0
repayable over three years. The gain on sale was deferred and netted against the
carrying value of the note receivable.

The two companies also signed a three-year agreement to ensure continuity of
supply for Zarlink products manufactured at Bromont. There is no minimum unit
volume purchase requirement under the agreement. Approximately 250 Zarlink
employees affiliated with the Bromont operation were transferred to DALSA as
part of the agreement.

In the fourth quarter of Fiscal 2003, the Company recorded a reversal of $2.5
related to the reduction of certain provisions accrued at the time of the
Bromont and Plymouth foundry sales in Fiscal 2002. The excess provision was
reversed as a result of a reduction in the remaining costs to separate the
businesses and to settle claims.

Amortization of Acquired Intangibles

Amortization of acquired intangibles decreased to nil in Fiscal 2003 from $4.4
in Fiscal 2002 and $65.3 in Fiscal 2001. The remaining acquired intangibles,
including goodwill, resulting from the acquisition of Vertex on July 28, 2000
were expensed in Fiscal 2002. The Fiscal 2002 expense was comprised of regular
amortization of $2.8 and an accelerated write-down of $1.6 associated with the
impairment of other acquired intangibles to reduce the carrying value to nil as
at March 29, 2002. The Fiscal 2001 amortization of acquired intangibles was
related to the acquisition of Vertex in Fiscal 2000.


-27-


OTHER INCOME (EXPENSE)

In Fiscal 2003, other expense was $16.5, as compared to income of $7.1 in Fiscal
2002, and an expense of $2.2 in Fiscal 2001. Other income (expense) was
comprised of interest income, foreign exchange gains and losses, and other
non-operating gains and losses.

Interest income was $3.0 for the year ended March 28, 2003 as compared to $5.5
in Fiscal 2002 and $9.0 in Fiscal 2001. The year over year decreases from Fiscal
2001 to Fiscal 2003 were due to lower average cash balances on hand and to lower
interest rates.

Foreign exchange losses in Fiscal 2003 amounted to $5.6 (2002 - gain of $7.3;
2001 - loss of $10.6). Gains and losses are realized on short-term investments
held in currencies other than the functional currency of the parent company, and
according to month-end foreign exchange rates. During Fiscal 2003, there was a
$5.1 net decrease in earnings due to the foreign exchange revaluation of
short-term investments held in currencies other than the functional currency of
the parent company. Other foreign exchange losses amounted to $0.5 in Fiscal
2003.

The Company sold its investment in DALSA in the third quarter of Fiscal 2003 for
cash proceeds of $4.2 and recorded a gain on sale of $0.7.

During the fourth quarter of Fiscal 2003, and as a result of the Company's
assessment of financial information received in the fourth quarter of Fiscal
2003, and of ongoing challenges in the enterprise communications market, the
Company recorded an $11.5 non-cash write-down of its investment in Mitel
Networks Corporation (Mitel). Reference is made to the Company's policy on
Investments in Private Companies, included in Critical Accounting Policies and
Significant Estimates, located elsewhere in this Management's Discussion and
Analysis of Financial Condition and Results of Operations.

During the fourth quarter of Fiscal 2003, the Company recorded a charge of $6.6
related to the settlement of the U.K. defined benefit pension plan.

During the fourth quarter of Fiscal 2003, the Company negotiated the settlement
of a long-term lease contract with a tenant at the Company's Sweden plant. The
Company recorded a recovery of $3.7 in the fourth quarter of Fiscal 2003 in
connection with the cash proceeds from the lease settlement.

During Fiscal 2002, the Company recorded an equity loss from its investment in
Optenia, Inc. amounting to $2.2. The equity loss in Fiscal 2001 was $0.6,
representing only one quarter of activity since the original investment in
January 2001. There were no further equity losses recorded during Fiscal 2003 as
the investment in Optenia, Inc. was written off to nil in the fourth quarter of
Fiscal 2002 after it went into bankruptcy.

INTEREST EXPENSE

Interest expense was $1.0 for Fiscal 2003, compared with $0.8 and $10.7 for
Fiscal 2002 and Fiscal 2001, respectively. Interest expense related primarily to
capital leases.

INCOME TAXES

Income tax expense for Fiscal 2003 was $1.1, compared with an income tax
recovery of $1.4 for Fiscal 2002 and an expense of $3.6 for Fiscal 2001. The tax
expense in Fiscal 2003 was mainly comprised of Canadian income and capital
taxes. The recovery in Fiscal 2002 was principally due to the loss on sale of
the CMOS foundry in Bromont, Canada while the expense in Fiscal 2001 was mostly
attributable to taxable income in Canada.

The Company's effective tax rate was an expense of 2% in Fiscal 2003. This tax
rate was lower than the 35% domestic tax rate due to unrecorded temporary
differences and losses incurred during the year. In Fiscal 2002, Zarlink's
effective tax rate was a recovery of 1%. This tax rate was lower than the 35%
domestic tax rate primarily due to unrecorded temporary differences and losses
incurred during Fiscal 2002. In Fiscal 2001, Zarlink's effective tax rate from
continuing operations was an expense of 1%. This tax rate was lower than the 40%


-28-


domestic tax rate primarily due to the write-down of non-deductible goodwill and
purchased in-process research and development, and unrecorded losses and
temporary differences in the Company's foreign operations.

The Company had a valuation allowance at the end of Fiscal 2003 of $106.0
(Fiscal 2002 - $75.8; Fiscal 2001 - $54.1). Management has determined that
sufficient uncertainties continue to exist regarding the realization of certain
of its deferred tax assets and consequently a valuation allowance has been
required to reduce the recorded value of these assets. The increase in the
allowance relates mainly to unrecorded investment tax credits and losses
incurred in Fiscal 2003 in the Company's domestic and foreign jurisdictions,
which were partially offset by the reversal of temporary differences in those
same jurisdictions.

BACKLOG

(millions of U.S. dollars) 2003 2002 2001
-----------------------------------------
90-Day Backlog $ 38.5 $ 33.5 $ 89.3

Generally, manufacturing lead times for semiconductor products are longer
because of the nature of the production process. However, as orders are
sometimes booked and shipped within the same fiscal quarter (often referred to
as "turns"), order backlog is not necessarily indicative of a sales outlook for
a quarter or year.

The backlog has increased as a result of improved bookings in the Network
Communications and Ultra Low-Power Communications business segments when
compared with Fiscal 2002 levels.

DISCONTINUED OPERATIONS

Communications Systems Business (Systems)

During the fourth quarter of Fiscal 2003, and on the second anniversary of the
sale of the Systems business, the Company recorded a reversal of $2.4, related
to the release of excess provisions related to the discontinued operations.
There were no discontinued operations included in the results of operations for
the year ended March 29, 2002.

On February 16, 2001, the Company concluded the sale of the Systems business to
Dr. Terence H. Matthews for net proceeds of $196.7, after adjustments. As a
result of this sale, the Company recorded a net gain of $13.3, after transaction
costs and income taxes in the year ended March 30, 2001.

Systems recorded revenue of $343.5 during the period from April 1, 2000 to
February 16, 2001, down from $539.3 for the full year in Fiscal 2000. The
revenue decrease from the prior year was principally due to industry-wide market
softness while end customers delayed capital spending on systems and
applications. Management believed industry announcements regarding new voice
communications systems moving to an IP platform resulted in certain customers
deferring capital spending in order to acquire the advanced functionality
afforded by the new IP platforms in the future.

During the period up to the measurement date of November 3, 2000 (the date the
Company adopted formal plans to pursue divestiture opportunities related to the
Systems business), the Systems business had an operating loss, net of tax
recoveries of $3.0, of $5.7 (2000 - $21.4, net of taxes of $14.8).

NET LOSS

The Company recorded a net loss of $57.9, or $0.47 per share in Fiscal 2003.
This compares to a net loss of $120.8, or $0.98 per share, in Fiscal 2002. In
Fiscal 2001, net loss was $270.8, or $2.25 per share.

The net loss in Fiscal 2003 was mainly due to lower revenue, caused by the
continued downturn in the semiconductor industry, and to non-operating charges
described and included in Other Expense.


-29-


The Fiscal 2002 net loss resulted primarily from lower revenue due to the
communications industry downturn, which in turn led to a charge for excess
inventory of $29.1 and special charges of $41.1. The loss also included the $5.4
loss on sale of the Bromont foundry business, stock compensation expense of
$8.4, and the impairment of the Company's equity investment in Optenia amounting
to $3.5.

The net loss in Fiscal 2001 resulted primarily from the charge for impairment of
capital assets of $237.6, the amortization of acquired intangibles of $65.3 and
the expense of $3.8 associated with early repayment of long-term debt, partially
offset by income, net of taxes, from discontinued operations amounting to $7.6.

LIQUIDITY AND CAPITAL RESOURCES

At March 28, 2003, cash, cash equivalents, short-term investments and restricted
cash balances totaled $119.2, down from $154.4 at March 29, 2002. Cash and cash
equivalents at March 28, 2003, included in the amount above, were $23.5 (2002 -
$75.6).

Cash flow used in operations before working capital changes was $26.4 during
Fiscal 2003 compared to cash flow used in operations of $35.0 during Fiscal
2002. The decrease in cash flow used in operations during Fiscal 2003 mainly
resulted from improved operating earnings compared to Fiscal 2002. Since March
29, 2002, the Company's working capital, as reflected in the consolidated
statements of cash flows, decreased by $1.7, mostly due to the reduction of
inventories and prepaid expenses and improved cash collections from trade
receivables. This was offset by reductions of trade accounts payable and other
accrued liabilities and on the settlement of certain pound sterling denominated
hedge contracts. Management expects to further draw down inventory levels in
Fiscal 2004 by reducing cycle times and managing inventories on a build-to-order
basis. In comparison, the Company's working capital decreased by $11.1 during
Fiscal 2002, mainly as a result of inventory reduction and improved cash
collections from trade receivables. This was offset by a reduction of trade
accounts payable and other accrued liabilities, including payments in respect of
exit activities.

Cash used in investing activities was $12.8 for the year ended March 28, 2003
compared to $74.0 used during Fiscal 2002. The net cash outflow from investing
activities during Fiscal 2003 primarily resulted from net purchases of
short-term investments totaling $8.9. Cash balances were also reduced by
purchases of fixed and other assets totaling $8.1, offset by proceeds of $0.4
from the disposal of certain fixed assets. The fixed asset additions were
primarily related to design tools and continuing improvements to information
technology resources. Capital expenditures declined significantly in Fiscal 2003
when compared with Fiscal 2002. Management expects capital spending to decrease
further in Fiscal 2004. A net reduction of long-term investments of $3.8 in
Fiscal 2003 resulted from cash proceeds of $4.2 received during the third
quarter as a result of the sale of the Company's minority investment in DALSA,
offset by a small investment purchased earlier in the year.

The cash outflow from investing activities during Fiscal 2002 was primarily the
result of net purchases of short-term investments in the amount of $80.3. Cash
payments of $30.8 were offset by sale proceeds of $33.4 for fixed and other
assets. Fixed asset additions were primarily related to the construction of, and
leasehold improvements to, the Company's new head office in Ottawa, Canada,
continuing improvements to information technology resources, and design tools.
Cash inflows were primarily a result of the sale of the corporate headquarters
and both of its CMOS fabrication facilities in Fiscal 2002. A cash inflow of
$4.4 from the repayment of a note receivable and net proceeds of $1.3 from the
sale of discontinued operations were offset by a $2.0 increase in long-term
investments in Fiscal 2002.

Cash used in financing activities during Fiscal 2003 totaled $18.6. The cash
outflow was primarily the result of an $8.0 payment to settle the Company's
defined benefit pension plan in the United Kingdom. During Fiscal 2003, the
Company also hypothecated $6.2 of cash and cash equivalents under its revolving
global credit facility to cover outstanding letters of credit, described below.
The repayment of capital lease liabilities in the amount of $2.0, the repurchase
of $1.6 of the Company's redeemable preferred shares, and the payment of $1.5
for dividends on the preferred shares also negatively impacted cash flows. These
cash outflows were offset by $0.7 received from the issuance of new common
shares upon the exercise of stock options. During Fiscal 2002, cash flows used
in financing activities totaled $5.7, primarily as a result of the repayment of
long-term debt and capital lease liabilities. Repurchases of the Company's
redeemable preferred shares and the payment of dividends on


-30-


the preferred shares also negatively impacted cash flows. This was offset by the
receipt of $4.8 for the issuance of common shares upon the exercise of stock
options.

On June 6, 2002, the Company announced its Board of Directors had authorized the
continuation of its normal course issuer bid program to repurchase and cancel up
to 6,358,203 common shares, representing 5% of the 127,164,078 common shares
issued and outstanding at May 31, 2002. The purchases would take place on the
open market through the stock exchanges of New York and Toronto over a
twelve-month period beginning on June 10, 2002 and ending on June 9, 2003, or on
such earlier date as the Company may have completed its purchases pursuant to
the notice of intention to make a normal course issuer bid filed with The
Toronto Stock Exchange. No common shares were repurchased under the renewed
program for the year period ended June 9, 2003, nor under the previous program
during the period from June 9, 2001 to June 8, 2002. The program expired on June
9, 2003 and was not renewed by the Company.

In addition to cash, cash equivalents, short-term investment and restricted cash
balances totaling $119.2 as at March 28, 2003, the Company had a revolving
global credit facility of approximately $17.0 (Cdn$25.0), of which $6.2 in
letters of credit were outstanding. Accordingly, the Company had unused and
available demand bank lines of credit of $10.8 as at March 28, 2003. As a result
of the non-cash write-down of the Mitel investment in the fourth quarter of
Fiscal 2003, the Company did not meet a quarterly financial covenant under the
Company's credit facility. A waiver was obtained from the bank in respect of the
financial covenant. The credit facility is subject to periodic review, including
the determination of financial covenants. It is uncertain if the Company will be
able to meet these financial covenants in the future and, if not, to obtain a
waiver from the bank, which may result in the availability of the credit
facility being reduced or restricted. Management does not anticipate that this
would have a material adverse effect on the financial position of the Company.
Management believes the Company is in a position to meet all foreseeable
business cash requirements and capital lease and preferred share payments from
its cash balance on hand (including cash, cash equivalents, short-term
investments and restricted cash), existing financing facilities and cash flow
from operations.

COMMITMENTS AND GUARANTEES

Performance Guarantees

Performance guarantees are contracts that contingently require the guarantor to
make payments to the guaranteed party based on another entity's failure to
perform under an obligating agreement. The Company has an outstanding
performance guarantee related to a managed services agreement (project
agreement) undertaken by the discontinued Systems business, which was sold to
companies controlled by Dr. Terence H. Matthews on February 16, 2001 and now
operated as Mitel Networks Corporation. This performance guarantee remained with
the Company following the sale of the Systems business to Dr. Matthews. The
project agreement and the Company's performance guarantee extend until July 16,
2012. The terms of the project agreement continue to be fulfilled by Mitel. The
maximum potential amount of future undiscounted payments the Company could be
required to make under the guarantee, at March 28, 2003, was $31.4 (20.0 British
Pounds), assuming the Company is unable to secure the completion of the project.
The Company is not aware of any factors as at March 28, 2003 that would prevent
the project's completion under the terms of the agreement. In the event that
Mitel is unable to fulfill the commitments of the project agreement, the Company
believes that an alternate third-party contractor could be secured to complete
the agreement requirements. At March 28, 2003, the carrying value of these
guarantees was nil.

The Company periodically has entered into agreements with customers and
suppliers that include limited intellectual property indemnifications that are
customary in the industry. These guarantees generally require the Company to
compensate the other party for certain damages and costs incurred as a result of
third party intellectual property claims arising from these transactions. The
nature of the intellectual property indemnification obligations prevents the
Company from making a reasonable estimate of the maximum potential amount it
could be required to pay to its customers and suppliers. Historically, the
Company has not made any significant indemnification payments under such
agreements and no amount has been accrued in the accompanying consolidated
financial statements with respect to these indemnification obligations.


-31-


In connection with the sale of the Systems business described in Note 19, the
Company provided to the purchaser certain income tax indemnities with an
indefinite life and with no maximum liability for the taxation periods up to
February 16, 2001, the closing date of the sale. As at March 28, 2003, the
taxation years 2000 to February 16, 2001 are subject to audit by taxation
authorities.

As at March 28, 2003, the Company has guaranteed a custom bond amounting to $2.6
to a third party on behalf of a subsidiary.

Supply Agreements

The Company has wafer supply agreements with three independent foundries, which
expire from 2005 to 2007. Under these agreements, the suppliers are obligated to
provide certain quantities of wafers per year. None of the agreements have
minimum unit volume purchase requirements.

OTHER

Critical Accounting Policies and Significant Estimates

The Company's consolidated financial statements are based on the selection and
application of significant accounting policies, which require management to make
significant estimates and assumptions. Management believes that the following
are some of the more critical judgment areas in the application of accounting
policies that currently affect Zarlink's financial condition and results of
operations.

In general, any changes in estimates or assumptions relating to revenue
recognition and provisions for inventory are directly reflected in the results
of our reportable operating segments. Changes in estimates or assumptions
pertaining to provisions for restructuring or income tax asset valuations are
not reflected in our reportable operating segments, but are reflected on a
consolidated basis.

Management has discussed the application of these critical accounting policies
with the Audit Committee of the Company's Board of Directors and with the full
Board of Directors. This review is conducted annually.

Revenue Recognition

The Company recognizes revenue when persuasive evidence of an arrangement
exists, delivery has occurred, the price is fixed or determinable, risk of loss
has passed to the customer and collection of the resulting receivable is
probable. The Company's semiconductor products are primarily non-commodity,
specialized products that are proprietary in design and used by multiple
customers. Customer acceptance provisions for performance requirements are
generally based on seller-specified criteria, which we demonstrate prior to
shipment. Should management determine that these customer acceptance provisions
are not met for certain future transactions, revenue recognized for future
reporting periods could be affected.

Inventory

The Company periodically compares its inventory levels to revenue forecasts for
the future twelve months on a part-by-part basis and records a charge for
inventory on hand in excess of the estimated twelve-month demand. During the
first quarter of Fiscal 2002, the Company's inventory of Network Communications
and Consumer Communications products exceeded the estimated 12-month demand by
$29.1 as a result of the industry downturn to result in a charge of the same
amount. If future demand for the Company's products continues to decline, an
additional write-down of inventory may be necessary.

Restructuring

Beginning in the fourth quarter of Fiscal 2003, the Company began accounting for
restructuring activities in accordance with Statement of Financial Accounting
Standards No. 146 (SFAS 146), Accounting for Costs Associated with Exit or
Disposal Activities. SFAS 146 addresses financial accounting and reporting for
costs associated with exit or disposal activities and nullifies EITF Issue No.
94-3, Liability Recognition for Certain


-32-


Employee Termination Benefits and Other Costs to Exit an Activity (including
certain costs Incurred in a Restructuring). In July 2002, The Financial
Accounting Standards Board (FASB) issued SFAS 146, which requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. Under the Company's previous accounting policy,
which was in accordance with EITF 94-3, a liability for an exit cost was
recognized at the date of an entity's commitment to an exit plan. SFAS 146
concludes that an entity's commitment to a plan, by itself, does not create a
present obligation to others that meets the definition of a liability.
Therefore, SFAS 146 eliminates the definition and requirements for recognition
of exit costs in EITF 94-3. The new pronouncement also establishes that fair
value should be used for initial measurement of the liability. Implementation of
SFAS 146 had no impact on the Company's financial statements for Fiscal 2003 but
will impact the accounting treatment of future exit or disposal activities
should they occur.

During Fiscal 2003, Zarlink continued to reduce its workforce across all
geographic regions and withdrew from the VDSL market in order to concentrate its
R&D resources on higher and more immediate growth opportunities. As a result,
the Company incurred and paid severance costs. All severance costs related to
Fiscal 2003 VDSL restructuring activities were accrued and paid by March 28,
2003. During Fiscal 2002, the Company recorded significant reserves in
connection with a restructuring program. These reserves included estimates
pertaining to employee separation costs and the settlements of contractual
obligations resulting from our actions. Although management does not anticipate
significant changes, the actual costs may differ from these estimates.

Income Taxes

Zarlink has incurred losses and other costs that can be applied against future
taxable earnings to reduce the tax liability on those earnings. As management is
uncertain of realizing the future benefit of those losses and expenditures, the
Company has taken a valuation allowance against certain deferred tax assets and
recorded only deferred tax assets that can be applied against income in
currently taxable jurisdictions or applied against deferred tax liabilities that
will reverse in the future. In establishing the appropriate valuation allowance
for tax loss carry-forwards and temporary differences, it is necessary to
consider all available evidence, both positive and negative. Historical
information of profitability is supplemented by current information that is
available about future years. Changes in the business environment and available
information in the future may require the valuation allowance to be adjusted to
account for the revised uncertainties, and such adjustment may be material.

Investment in Private Companies

Management periodically reviews the Company's investment to determine if there
has been other than a temporary decline in the market value of this investment
below the carrying value. Management's assessment of impairment in carrying
value is based on the market value trends of similar public companies and the
current business performance of those investments. As at March 28, 2003, the
Company had an investment in Mitel, a Canadian corporation that files annual and
other reports with the United States Securities and Exchange Commission under
the Securities and Exchange Act of 1934. As a result of the Company's assessment
of financial information received in the fourth quarter of Fiscal 2003 and of
ongoing challenges in the enterprise communications market, the investment in
Mitel was written-down to a nil value in the fourth quarter of Fiscal 2003, as
the Company believes that the carrying value will not be realized in the
foreseeable future.

Foreign Currency Translation

Management periodically evaluates the financial and operational independence of
its foreign operations. Should a foreign subsidiary's local currency cease to be
its functional currency, then translation gains or losses on consolidating the
foreign subsidiary's financial statements subsequent to the change in functional
currency would be charged to operating income instead of a separate component of
accumulated other comprehensive income.

Effective March 29, 2003, the beginning of Fiscal 2004, as a result of the
Company's increased economic activities denominated in U.S. dollars, the U.S.
dollar has become the functional currency across the Company's operations.


-33-


Recently Issued Accounting Standards

In November 2002, the FASB issued Interpretation No. 45 (FIN 45), "Guarantor's
Accounting and Disclosure Requirements for Guarantees of Indebtedness of
Others". FIN 45 requires that a guarantor recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. FIN 45 also requires additional disclosure by a guarantor
in its interim and annual financial statements about its obligations under
certain guarantees. The initial recognition and measurement provisions of FIN 45
were applicable for guarantees issued or modified after December 31, 2002. The
disclosure requirements of FIN 45 were effective for financial statements of
interim or annual periods ending after December 15, 2002. The Company adopted
the provisions of this interpretation at the applicable dates required by FIN
45, however the adoption of this interpretation did not have a material effect
on the Company's financial position, results of operations, or cash flows.

In December 2002, the FASB issued Statement of Accounting Financial Accounting
Standard No. 148 (SFAS 148), "Accounting for Stock-based Compensation -
Transition and Disclosure". SFAS 148 provides alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. SFAS 148 also requires prominent disclosure
in the "Summary of Significant Accounting Policies" of both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reporting results. The Company
has adopted SFAS 148 for the 2003 fiscal year end. Adoption of this statement
has affected the location of the Company's disclosure within the Consolidated
Financial Statements, but will not affect the Company's results of operations or
financial position unless the Company changes to the fair value method of
accounting for stock-based employee.

On April 30, 2003, the FASB issued Statement of Accounting Financial Accounting
Standard No. 149 (SFAS 149), "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities". The amendments set forth in SFAS 149
improve financial reporting by requiring that contracts with comparable
characteristics be accounted for similarly. In particular, this statement
clarifies under what circumstances a contract with an initial net investment
meets the characteristic of a derivative as discussed in SFAS 133. In addition,
it clarifies when a derivative contains a financing component that warrants
special reporting in the statement of cash flows. SFAS 149 amends certain other
existing pronouncements. Those changes will result in more consistent reporting
of contracts that are derivatives in their entirety or that contain embedded
derivatives that warrant separate accounting. This Statement is effective for
contracts entered into or modified after June 30, 2003, except as stated below
and for hedging relationships designated after June 30, 2003. The guidance will
be applied prospectively. The provisions of this Statement that relate to
Statement 133 Implementation Issues that have been effective for fiscal quarters
that began prior to June 15, 2003, will continue to be applied in accordance
with their respective effective dates. In addition, certain provisions relating
to forward purchases or sales of when-issued securities or other securities that
do not yet exist, should be applied to existing contracts as well as new
contracts entered into after June 30, 2003. The Company has not yet evaluated
the impact of this new pronouncement on its financial position, results of
operations or accounting for derivatives.

On May 15, 2003, the FASB issued Statement of Accounting Financial Accounting
Standard No. 150 (SFAS 150), "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity". The Statement improves the
accounting for certain financial instruments that, under previous guidance,
issuers could account for as equity. SFAS 150 requires that those instruments be
classified as liabilities in the statements of financial position, whereas
previously such instruments may have been classified as equity or as temporary
equity. In addition to its requirements for the classification and measurement
of financial instruments in its scope, SFAS 150 also requires disclosures about
alternative ways of settling the instruments and the capital structure of
entities, all of whose shares are mandatorily redeemable. Most of the guidance
in SFAS 150 is effective for all financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. The Company has not yet evaluated
the impact of this new pronouncement on its financial position.


-34-


Forward-Looking Statements

Certain statements in this Management's Discussion and Analysis constitute
forward-looking statements. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of Zarlink, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such risks,
uncertainties and assumptions include the following: general economic and
business conditions; increasing price and product/service competition by foreign
and domestic competitors, including new entrants; demographic changes; import
protection and regulation; rapid technological developments and changes; the
ability to continue to introduce competitive new products on a timely,
cost-effective basis; delays in product development; changes in environmental
and other domestic and foreign governmental regulations; the mix of
products/services; protection and validity of patent and other intellectual
property rights; industry competition, industry capacity and other industry
trends; the ability of Zarlink to attract and retain key employees and other
factors referenced elsewhere in this Form 10-K.

The above factors are representative of the risks, uncertainties and assumptions
that could affect the outcome of the forward-looking statements. In addition,
such statements could be affected by general industry and market conditions and
growth rates, general domestic and international economic conditions including
interest rate and currency exchange rate fluctuations and other risks,
uncertainties and assumptions, as described elsewhere in this Form 10-K,
including those identified under "Forward-Looking Statements and Risk Factors".

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk

Market risk represents the risk of loss that may impact the financial statements
of the Company due to adverse changes in financial market prices and rates.
Zarlink is exposed to market risk from changes in interest rates and foreign
exchange rates. To manage these risks, the Company uses certain derivative
financial instruments including foreign exchange forward contracts and other
derivative instruments from time to time, which have been authorized pursuant to
board-approved policies and procedures. Zarlink does not hold or issue financial
instruments for trading or speculative purposes.

The Company uses forward contracts, and to a lesser extent foreign currency
options, to reduce the exposure to foreign exchange risk. The most significant
foreign exchange exposures for the Company, after the change to the U.S. dollar
as the functional currency in Fiscal 2004, relate to the Canadian dollar and the
U.K. pound sterling. At March 28, 2003, there were unrealized losses of $0.1 on
the forward contracts relating to Fiscal 2004. The unrealized loss is calculated
as the difference between the actual contract rates and the applicable current
market rates that would be used to terminate the forward contracts on March 28,
2003, if it became necessary to unwind these contracts. Additional potential
gains in the net fair value of these contracts, assuming a 5% appreciation in
the U.S. dollar against all currencies, at March 28, 2003, would have been
approximately $1.0. Conversely, a 5% depreciation in the U.S. dollar against all
currencies would have produced a loss of $1.2. Management believes that the
established hedges are effective against its known and anticipated cash flows,
and that potential future losses from these hedges being marked to market would
be largely offset by gains on the underlying hedged transactions.

For Fiscal 2004, the Company's primary exposure to interest rates is expected to
be in the rollover of its short-term investment portfolio. In accordance with
Company policy, cash equivalent and short-term investment balances are primarily
comprised of high-grade money market instruments with original maturity dates of
less than one year. The Company does not hedge the re-investment risk on its
short-term investments.

Based on a sensitivity analysis performed on the financial instruments held at
March 28, 2003 that are sensitive to changes in interest rates, the impact to
the fair value of our cash equivalents and short-term investments portfolio by
an immediate hypothetical parallel shift in the yield curve of plus or minus 50,
100 or 150 basis points would result in a decline or increase in portfolio value
of approximately $nil, $0.1 and $0.1 respectively.


-35-


The estimated potential losses discussed previously assume the occurrence of
certain adverse market conditions. They do not consider the potential effect of
favorable changes in market factors and do not represent projected losses in
fair value that the Company expects to incur. Any future financial impact would
be based on actual developments in global financial markets. Management does not
foresee any significant changes in the strategies used to manage interest and
foreign exchange rate risks in the near future.

Item 8. Financial Statements and Supplementary Data

The following financial statements and supplementary data are filed as part of
this Annual Report on Form 10-K.

Auditors' Report to the Shareholders

Consolidated Balance Sheets as at March 28, 2003 and March 29, 2002

Consolidated Statements of Shareholders' Equity for the years ended March 28,
2003, March 29, 2002, and March 30, 2001

Consolidated Statements of Loss for the years ended March 28, 2003, March 29,
2002, and March 30, 2001

Consolidated Statements of Cash Flows for the years ended March 28, 2003, March
29, 2002, and March 30, 2001

Notes to the Consolidated Financial Statements


-36-


AUDITORS' REPORT

To the Shareholders of Zarlink Semiconductor Inc.:

We have audited the consolidated balance sheets of Zarlink Semiconductor Inc. as
at March 28, 2003 and March 29, 2002 and the consolidated statements of
shareholders' equity, loss, and cash flows for each of the years in the
three-year period ended March 28, 2003. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with United States and Canadian generally
accepted auditing standards. Those standards require that we plan and perform an
audit to obtain reasonable assurance whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.

In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at March 28, 2003
and March 29, 2002 and the results of its operations and its cash flows for each
of the years in the three-year period ended March 28, 2003, in accordance with
United States generally accepted accounting principles.

On April 30, 2003, we reported separately to the shareholders of Zarlink
Semiconductor Inc. on financial statements for the same periods, prepared in
accordance with Canadian generally accepted accounting principles.



Ottawa, Canada /s/ Ernst & Young LLP
April 30, 2003 ---------------------
Chartered Accountants


-37-


Zarlink Semiconductor Inc.
(Incorporated under the laws of Canada)
CONSOLIDATED BALANCE SHEETS
(In millions of U.S. dollars, U.S. GAAP)

March 28, March 29,
2003 2002
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 23.5 $ 75.6
Short-term investments 89.5 78.8
Restricted cash 6.2 --
Trade accounts receivable - net 20.3 24.2
Other accounts receivable 4.2 5.5
Inventories 24.0 33.0
Deferred income tax assets - net 1.0 4.1
Prepaid expenses and other 7.3 13.7
-------- --------
176.0 234.9

Fixed assets - net 56.4 58.1
Deferred income tax assets - net 10.4 11.0
Long-term investments -- 14.1
Other assets - net of deferred gain of $15.8 (2002 - 14.7) 4.8 3.0
-------- --------
$ 247.6 $ 321.1
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 10.1 $ 14.6
Employee-related accruals 15.5 11.7
Income and other taxes payable 13.0 5.9
Provisions for exit activities 4.2 19.8
Other accrued liabilities 12.6 17.7
Deferred credits 1.1 2.2
Current portion of long-term debt 0.6 2.1
-------- --------
57.1 74.0
Long-term debt 0.2 0.7
Pension liabilities 14.3 17.4
Deferred income tax liabilities - net 2.0 6.3
-------- --------
73.6 98.4
-------- --------
Redeemable preferred shares, unlimited shares
authorized; 1,451,600 shares issued and
outstanding (2002 - 1,558,700) 18.9 20.6
-------- --------
Commitments and contingencies (notes 9, 11 and 12)

Shareholders' equity:
Common shares, unlimited shares authorized;
no par value; 127,265,316 shares issued and
outstanding (2002 - 127,082,123) 768.3 767.6
Additional paid in capital 2.1 4.1
Deferred stock compensation -- (0.8)
Deficit (582.8) (522.9)
Accumulated other comprehensive loss (32.5) (45.9)
-------- --------
155.1 202.1
-------- --------
$ 247.6 $ 321.1
======== ========

(See accompanying notes to the consolidated financial statements)


-38-


Zarlink Semiconductor Inc.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In millions of U.S. dollars, U.S. GAAP)





Common Shares Accumulated
Additional Other Total
Number Paid in Deferred Stock Comprehensive Shareholders'
(millions) Amount Capital Compensation Deficit Loss Equity
---------------------------------------------------------------------------------------------

Balance, March 31, 2000 114.0 $ 546.0 $ - $ - $ (127.4) $ (13.7) $ 404.9
--------
Net loss (270.8) (270.8)
Translation adjustment (28.9) (28.9)
--------
Comprehensive loss (299.7)
--------
Issuance of common stock
related to acquisitions 11.0 210.8 (10.2) 200.6
Issuance of common stock
under stock benefit plans 1.1 5.9 5.9
Stock compensation expense 1.7 3.4 5.1
Preferred share dividend (2.0) (2.0)
----- ------- ------ ------- -------- ------- ---------
Balance, March 30, 2001 126.1 762.7 1.7 (6.8) (400.2) (42.6) 314.8
--------
Net loss (120.8) (120.8)
Unrealized net derivative
loss on cash flow hedges (0.4) (0.4)
Minimum pension liability (2.5) (2.5)
Translation adjustment (0.4) (0.4)
--------
Comprehensive loss (124.1)
--------
Issuance of common stock
under stock benefit plans 1.0 4.9 4.9
Stock compensation expense 2.4 6.0 8.4
Preferred share dividend (1.9) (1.9)
----- ------- ------ ------- -------- ------- ---------
Balance, March 29, 2002 127.1 767.6 4.1 (0.8) (522.9) (45.9) 202.1
--------
Net loss (57.9) (57.9)
Unrealized net derivative
gain on cash flow hedges 0.3 0.3
Minimum pension liability 2.5 2.5
Translation adjustment 10.6 10.6
--------
Comprehensive loss (44.5)
--------
Issuance of common stock
under stock benefit plans 0.2 0.7 0.7
Stock compensation
expense(recovery) (2.0) 0.8 (1.2)
Preferred share dividend (2.0) (2.0)
----- ------- ------ ------- -------- ------- ---------
Balance, March 28, 2003 127.3 $ 768.3 $ 2.1 $ - $ (582.8) $ (32.5) $ 155.1.
===== ======= ====== ======= ======== ======= =========


(See accompanying notes to the consolidated financial statements)


-39-


Zarlink Semiconductor Inc.
CONSOLIDATED STATEMENTS OF LOSS
(In millions of U.S. dollars, except per share amounts, U.S. GAAP)




Years Ended
March 28, March 29, March 30,
2003 2002 2001
-----------------------------------

Revenue $ 193.8 $ 222.1 $ 450.2

Cost of revenue 103.4 156.4 226.2
------- -------- --------
Gross margin 90.4 65.7 224.0
------- -------- --------

Expenses:
Research and development 88.8 83.5 93.9
Selling and administrative 47.2 51.4 81.5
Stock compensation expense (recovery) (1.4) 8.4 3.8
Special charges - 41.1 237.6
Loss (recovery) on sale of business (2.5) 5.4 --
Amortization of acquired intangibles -- 4.4 65.3
------- -------- --------
132.1 194.2 482.1
------- -------- --------
Operating loss from continuing operations (41.7) (128.5) (258.1)

Other income (expense) - net (16.5) 7.1 (2.2)
Interest expense (1.0) (0.8) (10.7)
Debt issue costs -- -- (3.8)
------- -------- --------

Loss from continuing operations before income taxes (59.2) (122.2) (274.8)

Income tax expense (recovery) 1.1 (1.4) 3.6
------- --------- --------
Net loss from continuing operations (60.3) (120.8) (278.4)

Discontinued operations, net of tax (2003 - nil;
2002 - nil; 2001 - recovery of $10.4) 2.4 -- 7.6
------- -------- --------

Net loss $ (57.9) $ (120.8) $ (270.8)
======== ========= ========

Net loss attributable to common shareholders after
preferred share dividends $ (59.9) $ (122.7) $ (272.8)
======= ======== ========

Net loss per common share:
Net loss per common share from continuing operations:
Basic and diluted $ (0.49) $ (0.98) $ (2.32)
======= ======== ========
Net loss per common share:
Basic and diluted $ (0.47) $ (0.98) $ (2.25)
======= ======== ========
Weighted average number of common shares outstanding
(millions)
Basic and diluted 127.1 125.6 121.1
======= ======== ========


(See accompanying notes to the consolidated financial statements)


-40-


Zarlink Semiconductor Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions of U.S. dollars, U.S. GAAP)



Years ended
March 28, March 29, March 30,
2003 2002 2001
------------------------------------

CASH PROVIDED BY (USED IN)
Operating activities:
Net loss $ (57.9) $ (120.8) $ (270.8)
Depreciation and amortization of fixed and other assets 14.6 24.3 139.6
Stock compensation expense (recovery) (1.4) 8.4 3.8
Deferred income taxes 0.5 (2.0) (5.8)
Other non-cash changes in operating activities 17.8 55.1 184.1
Decrease (increase) in working capital
Accounts receivable 8.8 22.6 58.2
Inventories 12.0 19.6 (16.9)
Accounts payable and accrued liabilities (17.1) (22.9) (22.6)
Deferred credits (1.4) (1.3) (2.6)
Prepaid expenses and other (0.6) (6.9) 13.8
--------- -------- --------
Total (24.7) (23.9) 80.8
--------- -------- --------
Investing activities:
Purchased short-term investments (252.7) (108.1) (47.9)
Matured short-term investments 243.8 27.8 75.5
Expenditures for fixed and other assets (8.1) (30.8) (66.8)
Proceeds from disposal of fixed and other assets 0.4 33.4 1.1
Proceeds from sale of long-term investments 4.2 -- --
Increase in long-term investments (0.4) (2.0) (5.1)
Proceeds from repayment of note receivable -- 4.4 --
Acquisitions, net of cash acquired -- -- 6.9
Proceeds from sale of discontinued operations - net -- 1.3 192.8
-------- -------- --------
Total (12.8) (74.0) 156.5
-------- -------- --------
Financing activities:
Repayment of long-term debt - (2.7) (133.5)
Repayment of capital lease liabilities (2.0) (5.2) (49.0)
Pension plan settlement (8.0) -- --
Hypothecation of cash under letters of credit (6.2) -- --
Payment of dividends on preferred shares (1.5) (1.9) (2.0)
Issue of common shares 0.7 4.8 5.8
Repurchase of preferred shares (1.6) (0.7) (0.3)
--------- -------- --------
Total (18.6) (5.7) (179.0)
--------- -------- --------
Effect of currency translation on cash 4.0 (0.7) (12.9)
-------- -------- --------
Increase (decrease) in cash and cash equivalents (52.1) (104.3) 45.4
Cash and cash equivalents, beginning of year 75.6 179.9 134.5
-------- -------- --------
Cash and cash equivalents, end of year $ 23.5 $ 75.6 $ 179.9
======== ======== ========


(See accompanying notes to the consolidated financial statements)


-41-


ZARLINK SEMICONDUCTOR INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In millions of U.S. dollars, except per share amounts, U.S. GAAP)


1. NATURE OF OPERATIONS

Zarlink is an international semiconductor product supplier. The Company's
principal business activities comprise the manufacture and distribution of
microelectronic components for the communications industry. The principal
markets for the Company's products are the Asia/Pacific region, Europe, the
United States, and Canada.

2. ACCOUNTING POLICIES

These consolidated financial statements have been prepared by management in
accordance with United States generally accepted accounting principles
(GAAP).

The preparation of financial statements in conformity with United States
GAAP requires management to make estimates and assumptions that affect the
reported assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting periods. Actual
results could differ from those estimates and such differences may be
material.

(A) FISCAL YEAR END

The Company's fiscal year end is the last Friday in March. Normally this
results in a fifty-two week year with four thirteen-week quarters.

(B) BASIS OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company
and of its wholly owned subsidiary companies. Investments in associated
companies in which the Company has significant influence are accounted for
by the equity method. Investments in companies the Company does not control
or over which it does not exercise significant influence are accounted for
using the cost method. All significant intercompany balances and
transactions have been eliminated on consolidation.

(C) CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

All highly liquid investments with original maturities of three months or
less are classified as cash and cash equivalents. The fair value of cash
equivalents approximates the amounts shown in the financial statements.
Short-term investments comprise highly liquid debt instruments that are
held to maturity with terms of not greater than one year. Short-term
investments are carried at amortized cost, which approximates their fair
value.

(D) RESTRICTED CASH

Restricted cash consists of cash and cash equivalents pledged with a bank
as collateral for various letters of credit, as required under the terms of
the Company's revolving global credit facility.

(E) INVENTORIES

Inventories are valued at the lower of average cost and net realizable
value for work-in-process and finished goods, and lower of average cost and
current replacement cost for raw materials. The cost of inventories
includes material, labor and manufacturing overhead.

(F) FIXED AND ACQUIRED INTANGIBLE ASSETS

Fixed assets are initially recorded at cost, net of related research and
development and other government assistance. Goodwill is initially recorded
at the excess of the Company's cost over the amount of the fair value of


-42-


the net identifiable assets acquired in a business combination. The Company
evaluates the realizability of these assets by reference to undiscounted
expected future net cash flows of the related assets. Measurement of an
impairment loss for long-lived assets or certain identifiable intangible
assets held for use is based on the fair value of the asset by discounting
expected future net cash flows of the related assets. When management
performs future assessments of these long-lived assets in the coming
quarters, a decline in the realizability of these assets below carrying
value may require the Company to recognize an impairment on the carrying
value of its fixed assets and that amount could be material.

Depreciation is provided on the bases and at the rates set out below:

Assets Basis Rate
------------------------------------------------------------------------
Buildings Straight-line 2 - 4 %
Equipment Declining balance 20 - 30 %
Straight-line 10 - 33.3%
Leasehold improvements Straight-line 10 %
Acquired intangibles Straight-line 50 %
Patents and trademarks Straight-line 20 %

In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard No. 141 (SFAS 141), "Business
Combinations" and Statement of Financial Accounting Standard No. 142 (SFAS
142), "Goodwill and Other Intangible Assets". In October 2001, the FASB
issued Statement of Financial Accounting Standard No. 144 (SFAS 144),
"Accounting for the Impairment or Disposal of Long-Lived Assets".

SFAS 141 requires that business combinations be accounted for under the
purchase method of accounting and addresses the initial recognition and
measurement of assets acquired, including goodwill and intangibles, and
liabilities assumed in a business combination. The Company adopted SFAS 141
on a prospective basis effective March 30, 2002, the beginning of Fiscal
2003. The adoption of SFAS 141 did not have a material effect on the
Company's financial statements, but will impact the accounting treatment of
future acquisitions.

SFAS 142 requires goodwill to be allocated to, and assessed as part of, a
reporting unit. Further, SFAS 142 specifies that goodwill will no longer be
amortized but instead will be subject to impairment tests at least
annually. The Company adopted SFAS 142 on a prospective basis at the
beginning of Fiscal 2003. As at the beginning of Fiscal 2003, the Company
did not have any goodwill or intangible assets with indefinite lives
recorded on the balance sheet. Accordingly, no transition impairment charge
is necessary to be recognized under SFAS 142, nor was there a material
impact on the Company's financial statements on adoption of the new rules.

The impact of SFAS 142 on net loss and net loss per common share if the
standards had been in effect for the comparative prior periods is as
follows:

2003 2002 2001
---- ---- ----
Net loss, as reported $ (57.9) $ (120.8) $ (270.8)
Adjustments:
Amortization of goodwill -- -- 48.2
Impairment of goodwill -- -- (48.2)
------- --------- ---------
$ (57.9) $ (120.8) $ (270.8)
======= ========= =========
Basic and diluted net loss per
common share, as reported $ (0.47) $ (0.98) $ (2.25)
======= ========= =========
Basic and diluted net loss per
common share, adjusted $ (0.47) $ (0.98) $ (2.25)
======= ========= =========

SFAS 144 supersedes Statement of Financial Accounting Standard No. 121
(SFAS 121), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" and the accounting and reporting


-43-


provisions of Accounting Principles Board (APB) Opinion No. 30 for the
disposal of a business segment. SFAS 144 establishes a single accounting
model, based on the framework established in SFAS 121, for long-lived
assets to be disposed of by sale. SFAS 144 broadens the presentation of
discontinued operations to include disposals of a component of an entity
and provides additional implementation guidance with respect to the
classification of assets as held-for-sale and the calculation of an
impairment loss. The Company adopted SFAS 144 at the beginning of Fiscal
2003. The adoption of SFAS 144 did not have a material impact on the
Company's financial statements. When management performs future assessments
of these long-lived assets in the coming quarters, a decline in the
realizability of these assets below the carrying value may require the
Company to recognize impairment on the carrying value of its fixed assets
that could be material.

(G) INVESTMENTS IN PRIVATE COMPANIES

Investments in non-publicly traded companies in which the Company has less
than 20% of the voting rights and in which it does not exercise significant
influence are evaluated on a periodic basis for potential impairment.
Appropriate reductions in carrying values are made when necessary. These
investments are included in long-term investments on the Company's balance
sheet and are carried at cost, net of write-downs for impairment.

(H) FOREIGN CURRENCY TRANSLATION

The financial statements have been translated into U.S. dollars in
accordance with the Financial Accounting Standards Board's (FASB) Statement
No. 52, "Foreign Currency Translation". The financial statements of the
foreign subsidiaries are measured using local currency as the functional
currency. All balance sheet amounts have been translated using the exchange
rates in effect at the applicable year-end. Income statement amounts have
been translated using the weighted average exchange rate for the applicable
year. The gains and losses resulting from the changes in exchange rates
from year to year have been reported as a separate component of other
comprehensive loss included in Shareholders' Equity. (See also Note 15)

(I) DERIVATIVE FINANCIAL INSTRUMENTS

The Company recognizes and discloses its derivative financial instruments
in accordance with FASB Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133), as amended by FASB
Statement No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities - an Amendment of FASB Statement No. 133". The
standards require that all derivative financial instruments be recorded on
the Company's consolidated balance sheets at fair value. They also provide
criteria for designation and effectiveness of hedging relationships.

The Company utilizes certain derivative financial instruments to enhance
its ability to manage foreign currency exchange rate risk that exists as
part of its ongoing operations. The Company formally documents all
relationships between hedging instruments and hedged items, as well as its
risk management objective and strategy for undertaking various hedge
transactions. This process includes linking all derivatives to specific
firm commitments or forecasted transactions. The Company also formally
assesses, both at the hedge's inception and on an ongoing basis, whether
the derivatives that are used in hedging transactions are highly effective
in offsetting changes in fair values or cash flows of hedged items.

If the derivative is 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 (loss). If the derivative is designated
as a cash flow hedge, the effective portions of changes in fair value of
the derivative are recorded in Other Comprehensive Income (OCI) and are
recognized in net income (loss) against the hedged item when that hedged
item affects net income (loss). If the derivative is designated as a hedge
of a net investment in foreign operations, the changes in fair value are
recorded in OCI to the extent that it is effective. If the derivative is
not designated as part of a hedging relationship, or the designation is
terminated, changes in the fair value of the derivative are recognized in
other income (expense) immediately.


-44-


(J) COMPREHENSIVE INCOME

The Company records the impact of foreign currency translation, unrealized
net derivative gains or losses on cash flow hedges, and changes in minimum
pension liabilities, as components of comprehensive income, in accordance
with Statement of Financial Accounting Standards No. 130 (SFAS 130),
Reporting Comprehensive Income. SFAS 130 provides standards for the
reporting and disclosure of comprehensive income and its components in the
financial statements.

(K) REVENUE RECOGNITION

Continuing operations

Revenue from the sale of products is recognized at the time goods are
shipped to customers. The Company's semiconductor products are primarily
non-commodity, specialized products that are proprietary in design and used
by multiple customers. Customer acceptance provisions for performance
requirements are generally based on seller-specified criteria, and are
demonstrated prior to shipment.

The Company accrues for distributor stock rotations and other allowances as
a reduction of revenue at the time of shipment based on the Company's
experience. The Company's accounting policies for revenue recognition
comply with the provisions of the Securities and Exchange Commission's
Staff Accounting Bulletin No. 101 (SAB 101).

Discontinued operations

Revenue from the sale of products was recognized at the time goods were
shipped to customers. Revenue from the sale of communications systems
including integration and installation services was recognized on a
percentage of completion basis. Revenue from service was recognized at the
time services were rendered. Billings in advance of services were included
in deferred revenue. Estimated warranty costs associated with these
revenues were provided for at the time of the sale.

(L) INCOME TAXES

Income taxes are accounted for using the liability method of accounting for
income taxes. Under this method, deferred income tax assets and liabilities
are determined based on differences between the tax and accounting bases of
assets and liabilities as well as for the benefit of losses available to be
carried forward to future years for tax purposes that are more likely than
not to be realized. Deferred income tax assets and liabilities are measured
using enacted tax rates that apply to taxable income in the years in which
temporary differences are expected to be recovered or settled. Deferred
income tax assets are recognized only to the extent, in the opinion of
management, it is more likely than not that the deferred income tax assets
will be realized in the future.

(M) RESEARCH AND DEVELOPMENT COSTS

Research and development costs are charged to earnings in the periods in
which they are incurred. Purchased in-process research and development is
expensed at the time of acquisition. Related investment tax credits are
deducted from income tax expense.

(N) STOCK-BASED COMPENSATION PLAN

The Company has a stock-based compensation plan described in note 14(D).

As allowed under SFAS 123, "Accounting for Stock-Based Compensation",
management has determined that it will continue to apply the intrinsic
value method as prescribed in Accounting Principles Board Opinion No. 25
(APB 25), in accounting for its employee stock options because the
alternative fair value accounting provided for under SFAS 123 requires the
use of option valuation models that were not developed for use in valuing
employee stock options. In accordance with Company policy, the exercise
price of the Company's employee stock options equals the market price of
the underlying stock on the date of grant. Accordingly under the rules of
APB 25, no


-45-


related compensation expense was recorded in the Company's results of
operations at the grant date of the Company's options. However, stock
compensation expense is recorded in circumstances where the terms of a
previously fixed stock option are modified or when shares are contingently
issuable to employees in connection with an acquisition.

Pro Forma information regarding net income (loss) and net income (loss) per
share is required by SFAS 123 for awards granted or modified after April 1,
1995, 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 option valuation
model was developed for use in estimating the fair value of traded options
that have no vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because the Company's
employee stock options 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 employee stock options.




2003 2002 2001
-----------------------------------

Net loss, as reported $ (57.9) $ (120.8) $ (270.8)
Adjustments:
Stock compensation expense (recovery) as reported (1.4) 8.4 3.8
Pro Forma stock compensation expense (13.8) (20.8) (19.7)
------- -------- --------
Pro forma net loss $ (73.1) $ (133.2) $ (286.7)
------- -------- --------
Net loss per common share, as reported:
Basic and diluted $ (0.47) $ (0.98) $ (2.25)
------- -------- --------
Pro forma net loss per common share:
Basic and diluted $ (0.59) $ (1.08) $ (2.38)
======= ======== ========


The Pro Forma net loss, based upon the fair value method of accounting for
stock compensation expense, is increased by $15.2 as compared to the net
loss, as reported (2002 - $12.4; 2001 - $15.9).

Pro Forma financial information required by SFAS 123 has been determined as
if the Company had accounted for its employee stock options using the
Black-Scholes fair value option-pricing model with the following
weighted-average assumptions for fiscal years 2003, 2002, and 2001:




2003 2002 2001
---------------------------------

Risk-free interest rate 3.98% 5.19% 5.08%
Dividend yield Nil Nil Nil
Volatility factor of the expected market
price of the Company's common stock 67.0% 50.1% 58.3%
Weighted-average expected life of the options 3.3 years 4.0 years 6.0 years


For purposes of Pro Forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period on a
straight-line basis.

The weighted average fair values of stock options, calculated using the
Black-Scholes option pricing model, granted during the three years ended
March 28, 2003, 2002 and 2001 were $1.58, $3.02 and $6.02 per option,
respectively. The weighted average fair value of stock options was based on
prices in Canadian dollars translated at the year-end exchange rate as at
the end of each fiscal year.

(O) EMPLOYEE FUTURE BENEFITS

Defined benefit pension expense, based on management's assumptions, consist
of actuarially computed costs of pension benefits in respect of the current
year's service; imputed interest on plan assets and pension obligation; and
straight-line amortization of experience gains and losses, assumption
changes and plan amendments over the expected average remaining service
life of the employee group.


-46-


The costs of retirement benefits, other than pensions, and certain
post-employment benefits are recognized over the period in which the
employees render services in return for those benefits. Other
post-employment benefits are recognized when the event triggering the
obligation occurs.

(P) RECENT ACCOUNTING PRONOUNCEMENTS

In July 2002, the FASB issued Statement of Accounting Financial Accounting
Standard No. 146 (SFAS 146), "Accounting for Costs Associated with Exit or
Disposal Activities", which addresses financial accounting and reporting
for costs associated with exit or disposal activities and nullifies EITF
Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring)". SFAS 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized when the
liability is incurred. Under Issue 94-3, a liability for an exit cost was
recognized at the date of an entity's commitment to an exit plan. SFAS 146
concludes that an entity's commitment to a plan, by itself, does not create
a present obligation to others that meets the definition of a liability.
Therefore, SFAS 146 eliminates the definition and requirements for
recognition of exit costs in Issue 94-3. SFAS 146 also establishes that
fair value is the objective for initial measurement of the liability. The
provisions of SFAS 146 were implemented at the beginning of the fourth
quarter of Fiscal 2003 and had no impact on the Company's financial
statements, but will impact the accounting treatment of future exit or
disposal activities should they occur.

In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees of
Indebtedness of Others". FIN 45 requires that a guarantor recognize, at the
inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. FIN 45 also requires additional
disclosure by a guarantor in its interim and annual financial statements
about its obligations under certain guarantees. The initial recognition and
measurement provisions of FIN 45 were applicable for guarantees issued or
modified after December 31, 2002. The disclosure requirements of FIN 45
were effective for financial statements of interim or annual periods ending
after December 15, 2002. The Company adopted the provisions of this
interpretation at the applicable dates required by FIN 45, however the
adoption of this interpretation did not have a material effect on the
Company's financial position, results of operations, or cash flows.

In December 2002, the FASB issued Statement of Accounting Financial
Accounting Standard No. 148 (SFAS 148), "Accounting for Stock-based
Compensation - Transition and Disclosure". SFAS 148 provides alternative
methods of transition for a voluntary change to the fair value based method
of accounting for stock-based employee compensation. SFAS 148 also requires
prominent disclosure in the "Summary of Significant Accounting Policies" of
both annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used on
reporting results. The Company has adopted SFAS 148 for the 2003 fiscal
year end. Adoption of this statement has affected the location of the
Company's disclosure within the Consolidated Financial Statements, but has
not affected the Company's results of its operations or financial position.

On April 30, 2003, the FASB issued Statement of Accounting Financial
Accounting Standard No. 149 (SFAS 149), "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". The amendments set forth in
SFAS 149 improve financial reporting by requiring that contracts with
comparable characteristics be accounted for similarly. In particular, this
statement clarifies under what circumstances a contract with an initial net
investment meets the characteristic of a derivative as discussed in SFAS
133. In addition, it clarifies when a derivative contains a financing
component that warrants special reporting in the statement of cash flows.
SFAS 149 amends certain other existing pronouncements. Those changes will
result in more consistent reporting of contracts that are derivatives in
their entirety or that contain embedded derivatives that warrant separate
accounting. This Statement is effective for contracts entered into or
modified after June 30, 2003, except as stated below and for hedging
relationships designated after June 30, 2003. The guidance will be applied
prospectively. The provisions of this Statement that relate to Statement
133 Implementation Issues that have been effective for fiscal quarters that
began prior to June 15, 2003, will continue to be applied in accordance
with their respective effective dates. In addition, certain provisions
relating to forward purchases or sales of when-issued securities or other
securities that do not yet exist, should be applied to existing contracts
as well as new


-47-


contracts entered into after June 30, 2003. The Company has not yet
evaluated the impact of this new pronouncement on its financial position,
results of operations or accounting for derivatives.

On May 15, 2003, the FASB issued Statement of Accounting Financial
Accounting Standard No. 150 (SFAS 150), "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". The
Statement improves the accounting for certain financial instruments that,
under previous guidance, issuers could account for as equity. SFAS 150
requires that those instruments be classified as liabilities in the
statements of financial position, whereas previously such instruments may
have been classified as equity or as temporary equity. In addition to its
requirements for the classification and measurement of financial
instruments in its scope, SFAS 150 also requires disclosures about
alternative ways of settling the instruments and the capital structure of
entities, all of whose shares are mandatorily redeemable. Most of the
guidance in SFAS 150 is effective for all financial instruments entered
into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. The
Company has not yet evaluated the impact of this new pronouncement on its
financial position.

3. ACCOUNTS RECEIVABLE

Included in accounts receivable were allowances for doubtful accounts of
$1.1 (2002 - $1.3).

4. INVENTORIES

2003 2002
------ ------
Raw materials $ 2.6 $ 2.4
Work-in-process 18.3 20.8
Finished goods 3.1 9.8
------ ------
$ 24.0 $ 33.0
====== ======

5. FIXED ASSETS

2003 2002
------- -------
Cost:
Land $ 3.9 $ 3.4
Buildings 11.5 10.1
Leasehold improvements 3.9 3.5
Equipment 137.2 122.3
Assets under capital leases 7.2 8.2
------- -------
163.7 147.5
------- -------
Less accumulated depreciation:
Buildings 4.5 1.9
Leasehold improvements 0.5 0.1
Equipment 97.0 82.7
Assets under capital leases 5.3 4.7
------- -------
107.3 89.4
------- -------
$ 56.4 $ 58.1
======= =======

The comparative gross amounts of cost and accumulated depreciation have
each been adjusted by $57.9 to properly reflect the disposition of certain
fixed assets. There was no impact to the previously reported net fixed
assets.

6. LONG-TERM INVESTMENTS

2003 2002
------- ------

Investment in Mitel Networks Corporation, at cost $ -- $ 10.7
Investment in DALSA Semiconductor Inc., at cost -- 3.4
------- ------
$ -- $ 14.1
======= ======


-48-


As at March 28, 2003, the Company had a nine percent ownership interest in
Mitel Networks Corporation (Mitel), a privately held company. As a result
of the Company's assessment of financial information received in the fourth
quarter of Fiscal 2003, and of ongoing challenges in the enterprise
communications market, the investment in Mitel was written-down to a nil
value, as the Company believes that the carrying value will not be realized
in the foreseeable future. A non-cash write-down of $11.5 was recorded in
the fourth quarter of Fiscal 2003 (see also Note 16).

The Company sold its investment in DALSA Semiconductor Inc. (DALSA) during
the third quarter of Fiscal 2003 for cash proceeds of $4.2 and recorded a
gain of $0.7 in Other Income (Expense) (see also Note 16).


7. OTHER ASSETS

2003 2002
------ ------

Note receivable, non-interest bearing (see also Note 18) $ 15.9 $ 14.8
Less: Deferred gain (see also Note 18) (15.8) (14.7)
------ ------
0.1 0.1
------ ------
Patents, trademarks, and other intangible assets:
Cost 9.5 6.5
Accumulated amortization (5.0) (3.8)
------ ------
Patents, trademarks, and other intangible assets - net 4.5 2.7
------ ------
Other 0.2 0.2
------ ------
$ 4.8 $ 3.0
====== ======

The amortization of patents, trademarks and other intangible assets
amounted to $1.2 in Fiscal 2003 (2002 - $0.6; 2001 - $1.0). The future
amortization of patents and trademarks as at March 28, 2003 was as follows:
2004 - $1.2; 2005 - $1.3; 2006 - $0.9; 2007 - $0.8; and, 2008 - $0.3.


8. PROVISIONS FOR EXIT ACTIVITIES

2003 2002
----- ------

Restructuring provisions (per table below) $ 2.9 $ 7.9
Provision for disposal of discontinued operations
(see also Note 19) 0.1 5.8
Provision for disposal of foundry businesses
(see also Note 18) 1.2 6.1
----- ------
$ 4.2 $ 19.8
===== ======

The remaining restructuring provision relates to idle and excess space as a
result of exit activities implemented and completed in Fiscal 2002 and
Fiscal 2001.

The following table summarizes the continuity of restructuring provisions
in connection with exit activities and special charges for the three years
ended March 28, 2003:


-49-





Lease and Impairment of
Workforce contract Total long-term Impairment
reduction settlement restructuring assets of goodwill Total


Balance, March 31, 2000 $ -- $ -- $ -- $ -- $ -- $ --
Operating expenses -
Restructuring activities 11.2 -- 11.2 -- -- 11.2
Special charges - Impairment
charges -- -- -- 124.7 112.9 237.6
Cash drawdowns (4.5) -- (4.5) -- -- (4.5)
Non-cash drawdowns -- -- -- (124.7) (112.9) (237.6)
------- ------ ------- ------ ------ --------
Balance, March 30, 2001 6.7 -- 6.7 -- -- 6.7
Special charges -
Restructuring activities
and impairment charge 27.8 9.7 37.5 6.7 -- 44.2
Reversals (2.3) (0.8) (3.1) -- -- (3.1)
Cash drawdowns (29.3) (2.8) (32.1) -- -- (32.1)
Non-cash drawdowns -- (1.1) (1.1) (6.7) -- (7.8)
------- ------ ------- ------ ------ --------
Balance, March 29,2002 2.9 5.0 7.9 -- -- 7.9
Cash drawdowns (2.0) (2.0) (4.0) -- -- (4.0)
Non-cash drawdowns -- (1.0) (1.0) -- -- (1.0)
Reversals (0.6) -- (0.6) -- -- (0.6)
Charges -- 0.6 0.6 -- -- 0.6
------- ------ ------- ------ ------ --------
Balance, March 28, 2003 $ 0.3 $ 2.6 $ 2.9 $ -- $ -- $ 2.9
======= ====== ======= ====== ====== ========


9. GUARANTEES

Performance guarantees are contracts that contingently require the
guarantor to make payments to the guaranteed party based on another
entity's failure to perform under an obligating agreement. The Company has
an outstanding performance guarantee related to a managed services
agreement (project agreement) undertaken by the Systems business, which was
sold to companies controlled by Dr. Terence H. Matthews on February 16,
2001 and now operated as Mitel Networks Corporation. This performance
guarantee remained with the Company following the sale of the Systems
business to Dr. Matthews. The project agreement and the Company's
performance guarantee extend until July 16, 2012. The terms of the project
agreement continue to be fulfilled by Mitel. The maximum potential amount
of future undiscounted payments the Company could be required to make under
the guarantee, at March 28, 2003, was $31.4 (20.0 British Pounds), assuming
the Company is unable to secure the completion of the project. The Company
is not aware of any factors as at March 28, 2003 that would prevent the
project's completion under the terms of the agreement. In the event that
Mitel is unable to fulfill the commitments of the project agreement, the
Company believes that an alternate third-party contractor could be secured
to complete the agreement requirements. At March 28, 2003, the carrying
value of these guarantees was nil.

The Company periodically has entered into agreements with customers and
suppliers that include limited intellectual property indemnifications that
are customary in the industry. These guarantees generally require the
Company to compensate the other party for certain damages and costs
incurred as a result of third party intellectual property claims arising
from these transactions. The nature of the intellectual property
indemnification obligations prevents the Company from making a reasonable
estimate of the maximum potential amount it could be required to pay to its
customers and suppliers. Historically, the Company has not made any
significant indemnification payments under such agreements and no amount
has been accrued in the accompanying consolidated financial statements with
respect to these indemnification obligations.


-50-


In connection with the sale of the Systems business described in Note 19,
the Company provided to the purchaser certain income tax indemnities with
an indefinite life and with no maximum liability for the taxation periods
up to February 16, 2001, the closing date of the sale. As at March 28,
2003, the taxation years 2000 to February 16, 2001 are subject to audit by
taxation authorities.

As at March 28, 2003, the Company has guaranteed a custom bond amounting to
$2.6 to a third party on behalf of a subsidiary.

10. LONG-TERM DEBT

2003 2002
---- ----
Capital leases and other, at rates varying from
6.44% to 10.41% with payment terms ranging from
1 to 5 years (2002 - 3.9% to 11.87% with payment
terms ranging from 1 to 7 years) $ 0.8 $ 2.8
Less current portion 0.6 2.1
----- -----
$ 0.2 $ 0.7
===== =====

At March 28, 2003, future minimum lease payments of the obligations under
capital leases were $0.8 of which $0.6 and $0.1 related to fiscal years
2004 and 2005. For fiscal years 2006 through 2008, future minimum lease
payments will be less than $0.1 per year. Interest costs of less than $0.1
are included in the total future lease payments.

Total interest expense from continuing and discontinued operations related
to long-term debt was $0.2 in Fiscal 2003 (2002 - $0.8; 2001 - $10.1).

11. COMMITMENTS

(A) OPERATING LEASES

The future minimum lease payments for operating leases to which the Company
was committed as at March 28, 2003 amounted to $37.8 and were as follows:
2004 - $7.0; 2005 - $6.5; 2006 - $5.7; 2007 - $3.4; 2008 - $3.4; 2009 and
beyond - $11.8.

Rental expense related to operating leases for the year ended March 28,
2003 was $7.4 (2002 - $5.8; 2001 - $3.0).

(B) LETTERS OF CREDIT

The Company had letters of credit outstanding as at March 28, 2003 of
approximately $6.2 (2002 - $2.9). Cash and cash equivalents of $6.2 have
been pledged as security against certain outstanding letters of credit,
which expire within 12 months, and are presented as restricted cash.

As a result of the non-cash write-down of the Mitel investment in the
fourth quarter of Fiscal 2003, the Company did not meet a quarterly
financial covenant under the Company's credit facility. A waiver was
obtained from the bank in respect of the financial covenant.

(C) SUPPLY AGREEMENTS

The Company has wafer supply agreements with 3 independent foundries, which
expire from 2005 to 2007. Under these agreements, the suppliers are
obligated to provide certain quantities of wafers per year. None of the
agreements have minimum unit volume purchase requirements.

12. CONTINGENCIES

The Company is a defendant in a number of lawsuits and party to a number of
other claims or potential claims that have arisen in the normal course of
its business. In the opinion of the Company, any monetary liability or


-51-


financial impact of such lawsuits and claims or potential claims to which
the Company might be subject after final adjudication would not be material
to the consolidated financial position of the Company or the consolidated
results of its operations.

13. REDEEMABLE PREFERRED SHARES

Dividends - Fixed cumulative cash dividends are payable quarterly at a rate
of $1.28 (Cdn$2.00) per share per annum. During the year ended March 28,
2003, the Company declared a $1.28 (Cdn$2.00) per share dividend. The
Company paid dividends of $1.5 during the year, and $0.5 after year-end.

Redemption - The shares are currently redeemable, at the option of the
Company, at $17.03 (Cdn$25.00) per share plus accrued dividends.

Purchase Obligation - The Company is required to make reasonable efforts to
purchase 22,400 shares in each calendar quarter at a price not exceeding
$17.03 (Cdn$25.00) per share plus costs of purchase. During the year ended
March 28, 2003, the Company purchased 112,000 preferred shares for cash
consideration of $1.6 and cancelled 107,100, including 5,000 shares that
were purchased in Fiscal 2002. As at March 28, 2003, there were 9,900
repurchased preferred shares remaining to be cancelled in Fiscal 2004.

14. CAPITAL STOCK

(A) COMMON SHARES

On June 6, 2002, the Company announced its intention to continue its normal
course issuer bid program for up to 6,358,203 common shares (5% of
127,164,078 common shares issued and outstanding at May 31, 2002) between
June 10, 2002 and June 9, 2003. All repurchased shares would be cancelled.
In the year ended March 28, 2003, no shares were repurchased under this
program.

(B) NET LOSS PER COMMON SHARE

The net loss per common share figures were calculated based on net loss
after the deduction of preferred share dividends and using the weighted
monthly average number of shares outstanding during the respective periods.
Diluted earnings per share is computed in accordance with the treasury
stock method and based on the average number of common shares and dilutive
common share equivalents.

The following potentially dilutive common share equivalents have been
excluded from the computation of diluted loss per share because they were
anti-dilutive due to the reported net loss for the periods presented:

2003 2002 2001
------- --------- ----------
Stock options 135,664 1,425,677 8,871,121
Restricted shares -- 637,638 1,634,947
------- --------- ----------
135,664 2,063,315 10,506,068
======= ========= ==========


The following stock options were excluded from the computation of
diluted earnings per share because the options' exercise price exceeded
the average market price of the common shares and, therefore, the
effect would be antidilutive:

2003 2002 2001
---- ---- ----
Number of outstanding options 8,288,782 4,396,145 134,701
Average exercise price per share $ 9.81 $ 1.31 $ 20.91


-52-


The exercise price of stock options was based on prices in Canadian dollars
translated at the year-end rate as at the end of each fiscal year.

(C) DIVIDEND RESTRICTIONS ON COMMON SHARES

The Company may not declare cash dividends on its common shares unless
dividends on the preferred shares have been declared and paid, or set aside
for payment. No common share dividend is currently being paid.

(D) STOCK OPTION PLANS

At the Company's 1991 Annual General Meeting, the shareholders approved
resolutions authorizing stock options for key employees and non-employee
directors (the plan). Certain amendments to the plan were approved by the
shareholders at the 1993, 1995 and 1998 Annual and Special Meetings of
shareholders allowing for 1,000,000, 2,000,000, and 10,200,000 additional
shares, respectively, to be made available for grant. At a Special Meeting
of the shareholders on December 7, 2001, the Company's shareholders
approved an amendment to increase the maximum number of common shares in
respect of which options may be granted under the plan to 20,227,033 common
shares. As 5,037,033 common shares had been issued upon exercise of options
up to May 9, 2001, this amendment increased the number of common shares
issuable under outstanding options and options available for grant, each as
of May 9, 2001, to 15,190,000 that represented 12% of the then outstanding
common shares. The plan was also amended to provide that the maximum number
of common shares in respect of which options may be granted under the plan
to non-employee directors during any fiscal year of the Company would be
20,000 common shares per director.

Available for grant at March 28, 2003 were 3,714,122 (2001 - 3,810,910;
2001 - 1,979,470) options. All options granted prior to January 29, 1998
have ten-year terms and options granted thereafter have six-year terms. All
options become fully exercisable at the end of four years of continuous
employment.

In connection with the sale by the Company of its Plymouth and Bromont
foundry businesses in the fourth quarter of Fiscal 2002 (see also note 18),
all employees of the former foundry businesses who held options to purchase
common shares of the Company which were vested as at the date of the sale
were provided with a period up to 180 days after the anniversary date of
the respective sales to exercise such options if they remained employed
with the buyer until at least one year after the respective sale dates. In
addition, of the remaining unvested options held by such employees as at
the sale date, 50% were accelerated to vest on the first anniversary
(provided that such employees remain employed by the buyer as of such date)
and the remaining 50% were cancelled as of the respective sale dates. All
such employees have a further 180-day period following such accelerated
vesting to exercise such options and any options remaining unexercised as
at August 19, 2003, in respect of the former Bromont employees, and as at
September 23, 2003, in respect of the former Plymouth employees, expire on
that date. As at March 28, 2003, the weighted average exercise prices of
the outstanding options associated with the sale of the Plymouth and
Bromont foundry businesses were $8.60 and $7.87, respectively. During
Fiscal 2003, the Company recorded stock compensation expense of $nil (2002
- $0.1) related to these transactions

On February 21, 2001, the Company offered an option exchange program to
option holders (with the exception of directors, officers and certain
executives) who received stock option grants after November 1, 1999 at
Cdn$14.31 and higher. Under the terms of the program, and with the consent
of The Toronto Stock Exchange, 2,691,350 options were cancelled and an
equal number of new options were granted at an exercise price of Cdn$14.06
per share. The new grants have a term of six years. During Fiscal 2003, the
Company recorded a recovery of stock compensation expense of $0.9 (2002 -
expense of $1.0; 2001 - $nil) related to this option exchange program.

In connection with the sale by the Company of its worldwide Systems
business on February 16, 2001 and further to negotiations with the buyer to
provide the buyer with assistance in retaining employees during the first
year following the closing, all employees of the former Systems business
who held options to purchase common shares of the Company which were vested
as at February 16, 2001 were provided with a period until August 14, 2002
to exercise such options if they remained employed with the buyer until at
least February 15, 2002. In addition, of the remaining unvested options
held by such employees as at February 16, 2001, 50% were accelerated to
vest on February 15, 2002 (provided that such employees remain employed by
the buyer as of


-53-


such date) and the remaining 50% were cancelled as of February 16, 2001.
All such employees had a further 180-day period following such accelerated
vesting to exercise such options and any options remaining unexercised as
at August 14, 2002 expired on that date. On August 14, 2002, 1,136,778
unexercised stock options held by former employees of the discontinued
Systems business expired in accordance with the terms of the sale
agreement. The options were returned to the pool of options available for
grant. During Fiscal 2003, the Company recorded stock compensation expense
of $nil (2002 - $0.7; 2001 - $1.3) related to this transaction.

On July 12, 1999, the Company offered an option exchange program to option
holders (with the exception of directors, officers and certain executives)
who received stock option grants in calendar 1998 at Cdn$17.78 and higher.
Under the terms of the program, and with the consent of The Toronto Stock
Exchange, 1,750,000 options were cancelled and 1,000,657 new options were
granted at an exercise price of Cdn$9.92 per share. The reduction in number
of options was directly proportional to the decrease in the exercise price.
The new grants have a term of six years. During Fiscal 2003, the Company
recorded a recovery of stock compensation expense of $1.1 (2002 - expense
of $0.6; 2001 - expense of $0.4) related to this option exchange program.

A summary of the Company's stock option activity and related information
for the three years ended March 28, 2003 is as follows:




2003 2002 2001
-----------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
-----------------------------------------------------------------------------------

Outstanding options:
Balance, beginning of year 10,914,962 $ 8.84 9,464,693 $ 8.18 9,017,262 $ 8.51
Granted 2,674,088 $ 3.38 3,600,462 $ 10.00 6,098,025 $ 11.80
Exercised (183,193) $ 3.56 (945,324) $ 5.17 (1,141,097) $ 5.15
Forfeited (2,577,300) $ 8.68 (1,153,908) $ 8.80 (841,897) $ 10.66
Cancelled -- $ -- (50,961) $ 10.77 (3,667,600) $ 13.66
-----------------------------------------------------------------------------------
Balance, end of year 10,828,557 $ 8.32 10,914,962 $ 8.84 9,464,693 $ 8.18
-----------------------------------------------------------------------------------
Exercisable, end of year 4,214,012 $ 9.40 4,417,633 $ 8.20 2,542,251 $ 7.51
-----------------------------------------------------------------------------------


The weighted average exercise price of stock options was based on prices in
Canadian dollars translated at the year-end exchange rate as at the end of
each fiscal year and at the year's average exchange rate for changes in
outstanding options during the year.

A summary of options outstanding at March 28, 2003 is as follows:




Total Outstanding Total Exercisable
-------------------------------------------------------------------------------- -----------------------------
Weighted Weighted Average Weighted
Average Remaining Average
Exercise Price Options Exercise Price Contractual Life Options Exercise Price
--------------------------------------------------------------------------------------------------------------------------

$2.32 - $3.47 2,491,513 $3.43 6 years 69,536 $3.41
$3.52 - $5.23 920,888 $5.10 3 years 616,543 $5.12
$5.34 - $7.94 1,119,443 $7.00 3 years 719,631 $6.70
$8.05 - $9.52 710,164 $9.15 4 years 200,520 $9.07
$9.58 2,099,144 $9.58 4 years 1,080,453 $9.58
$9.63 - $11.28 1,691,786 $10.97 5 years 493,306 $10.97
$11.37 - $14.41 1,691,113 $12.69 3 years 971,773 $12.77
$17.77 - $25.45 104,506 $22.78 3 years 62,250 $22.40
---------- ---------
10,828,557 4,214,012
========== =========



-54-


The exercise price of stock options was based on prices in Canadian dollars
translated at the year-end exchange rate.

15. ACCUMULATED OTHER COMPREHENSIVE LOSS

The components of accumulated other comprehensive loss were as follows:




March 28, March 29, March 30,
2003 2002 2001
--------- --------- ---------

Net loss for the period $ (57.9) $ (120.8) $ (270.8)
Other comprehensive gain (loss):
Minimum pension liability 2.5 (2.5) -
Realized net derivative gain on cash flow hedges 0.4 - -
Unrealized net derivative loss on cash flow hedges (0.1) (0.4) -
Change in foreign currency translation adjustment 10.6 (0.4) (28.9)
------------------------------------
Comprehensive loss for the period $ (44.5) $ (124.1) $ (299.7)
====================================


The changes to accumulated other comprehensive loss for three years ended
March 28, 2003 were as follows:




Realized and
Cumulative Minimum Unrealized Net
Translation Pension Gain (Loss) on
Account Liability Derivatives Total
----------------------------------------------------------

Balance, March 31, 2000 $ (13.7) $ -- $ -- $ (13.7)
Change during the year (28.9) -- -- (28.9)
----------------------------------------------------------
Balance, March 30, 2001 (42.6) -- -- (42.6)
Change during the year (0.4) (2.5) (0.4) (3.3)
----------------------------------------------------------
Balance, March 29, 2002 (43.0) (2.5) (0.4) (45.9)
Change during the year 10.6 2.5 0.3 13.4
----------------------------------------------------------
Balance, March 28, 2003 $ (32.4) $ -- $ (0.1) $ (32.5)
==========================================================


During Fiscal 2003, the Company recorded a derivative loss of $7.7 in the
cumulative translation account in respect of a hedge in a net investment in
a foreign subsidiary (2002 - gain of $2.2; 2001 - gain of $13.3).

As at March 29, 2002, the accumulated pension benefit obligation was in
excess of the fair value of the pension plan assets by $2.5, resulting in
an additional minimum pension liability recorded in other comprehensive
loss. In the fourth quarter of Fiscal 2003, the Company settled the
underlying pension benefit obligation, resulting in the realization of the
$2.5 minimum pension liability included in other expense for the year ended
March 28, 2003.

The Company also recorded a net gain to other comprehensive loss in Fiscal
2003 of $0.3 which was attributable to the change in the value of
outstanding foreign currency forward contracts related to the Company's
hedging program that were designated as cash flow hedges for Fiscal 2004.
The Company estimates that $0.1 of derivative loss included in other
comprehensive loss will be reclassified into earnings within the next 12
months.

16. OTHER INCOME (EXPENSE) - NET




2003 2002 2001
----------------------------------


Interest income $ 3.0 $ 5.5 $ 9.0
Foreign exchange gain (loss) (5.6) 7.3 (10.6)
Pension plan settlement (see also Note 23) (6.6) -- --
Gain on sale of long-term investment (see also Note 6) 0.7 -- --
Impairment of long-term investments (see also Note 6) (11.5) (3.5) --
Equity loss in Optenia, Inc. -- (2.2) (0.6)
Lease settlement with tenant 3.7 -- --
Other (0.2) -- --
--------------------------------
Other income (expense) - net $ (16.5) $ 7.1 $ (2.2)
================================



-55-


During the fourth quarter of Fiscal 2003, the Company negotiated the
settlement of a long-term lease contract with a tenant at the Company's
Sweden plant. The Company recorded a recovery of $3.7 in the fourth quarter
of Fiscal 2003 in connection with the cash proceeds from the lease
settlement.

17. INCOME TAXES

The components of loss, before provision of income taxes consists of the
following:




2003 2002 2001
---------------------------------

Loss from continuing operations before income taxes:
Canadian $ (25.2) $ (23.0) $ (155.0)
Foreign (34.0) (99.2) (119.8)
---------------------------------
$ (59.2) $ (122.2) $ (274.8)
=================================



The provision (recovery) for income taxes consists of the following:

2003 2002 2001
------------------------------------
Current:
Canadian $ 0.7 $ 1.0 $ 6.9
Foreign -- -- 2.1
------------------------------------
0.7 1.0 9.0
------------------------------------
Deferred:
Canadian 0.6 (1.7) (1.0)
Foreign (0.2) (0.7) (4.4)
------------------------------------
0.4 (2.4) (5.4)
------------------------------------
$ 1.1 $ (1.4) $ 3.6
====================================

The reconciliation between the statutory Canadian income tax rate and the
actual effective rate is as follows:




2003 2002 2001
------------------------------

Expected Canadian statutory income tax rate 35% 35% 40%
------------------------------

Recovery at Canadian statutory income tax rate $ (20.6) $ (42.5) $(111.4)
Differences between Canadian and foreign taxes 1.7 (0.3) 5.3
Investment tax credits - - (3.7)
Tax effect of losses not recognized 33.1 26.1 32.4
Tax effect of temporary differences not recognized (3.6) 9.1 14.1
Tax effect of amortization of acquired intangibles - 2.6 70.8
Tax effect of realizing benefit of prior
years' loss carryforwards and timing differences (6.7) (2.0) (8.5)
Corporate minimum taxes 0.7 1.0 2.3
Other (3.5) 4.6 2.3
------------------------------
Income tax expense (recovery) $ 1.1 $ (1.4) $ 3.6
==============================



-56-


Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The
significant components of deferred income tax assets and liabilities were
as follows:




2003 2002
--------------------
Deferred tax assets:

Provisions $ 7.5 $ 13.9
Income tax loss carryforwards 89.4 56.0
Investment tax credits 37.5 34.1
Other - net -- 1.8
--------------------
134.4 105.8
Less: valuation allowance (106.0) (75.8)
--------------------
Deferred tax assets 28.4 30.0
--------------------
Deferred tax liabilities:
Book and tax differences on fixed assets 18.3 19.0
Other - net 0.7 2.2
--------------------
Deferred tax liabilities 19.0 21.2
--------------------
Net deferred tax assets $ 9.4 $ 8.8
====================


The increase of $30.2 in the valuation allowance from the previous year
relates to unrecorded investment tax credits and non-capital losses in
Canada, and non-capital losses and temporary deductible differences in the
Company's foreign operations.

Unremitted earnings of subsidiaries subject to withholding taxes will be
indefinitely reinvested with no provision necessary for potential
withholding taxes on repatriation of subsidiary earnings. The current
year's loss before income taxes attributable to all foreign operations,
including discontinued operations, was $34.0 (2002 - loss of $101.0; 2001 -
loss of $68.8).

As at March 28, 2003, the Company had income tax loss carryforwards in
Sweden and the United Kingdom of approximately $198.9 that may be carried
forward indefinitely to reduce future years' income for tax purposes.
Approximately $57.5 of these losses has been recognized as a tax benefit
for accounting purposes to the extent that the Company has deferred tax
liabilities in these jurisdictions. The Company has $80.7 of U.S. federal
income tax loss carryforwards related to operations in the United States
that expire between 2012 and 2023. The Company also has $37.4 of U.S. state
net operating loss carryforwards available that expire between 2004 and
2008. The Company has provided a full valuation allowance on the U.S. loss
carryforward balances.

As at March 28, 2003, the Company had $45.5 of Canadian investment tax
credits available to offset federal income taxes payable. The Company has
recognized an accounting benefit of $10.4 on these investment tax credits.
The investment tax credits expire between 2008 and 2012.

18. SALE OF FOUNDRY BUSINESSES

In the fourth quarter of Fiscal 2003, the Company recorded a reversal of
$2.5 related to the release of certain provisions accrued at the time of
the Bromont and Plymouth foundry sales in Fiscal 2002. The excess provision
was reversed as a result of a reduction in the remaining costs to separate
the businesses and to settle estimated claims.

Plymouth Foundry

On March 28, 2002, Zarlink sold its wafer fabrication facility in Plymouth,
UK, as well as certain intellectual property and related foundry businesses
to companies controlled by X-FAB Semiconductor Foundries AG (X-FAB) of
Erfurt, Germany for $30.0, represented by $12.0 in cash on closing and a
note of $18.0 repayable over three years. The Plymouth foundry facility
comprised two CMOS wafer fabrication lines for producing digital and
mixed-signal communications and medical semiconductors.


-57-


At the time of the sale, the note receivable was discounted at 8% to a
carrying value of $15.9 at March 28, 2003. In accordance with SEC Staff
Accounting Bulletin No. 81 (SAB 81), "Gain Recognition on the sale of a
Business or Operating Assets to a Highly Leveraged Entity", the gain on
sale of $15.6 was deferred and netted against the carrying value of the
note receivable. The net note receivable of $0.1 is included in Other
Assets. The Company will recognize the gain as payments are made on the
note receivable. The first payment of $10.0 against the note receivable is
expected to be received in June 2004 with the final payment of $8.0 due in
March 2005.

As part of the sale, the two companies signed a five-year agreement to
ensure continuity of supply for Zarlink products manufactured at Plymouth.

Bromont Foundry

On February 22, 2002, Zarlink sold its foundry facility in Bromont, Quebec,
and related business to DALSA for $16.9. Under the agreement, Zarlink
received from DALSA $13.0 in cash and retained a 19.9% investment in the
Bromont foundry. DALSA also assumed certain employee-related payables of
approximately $0.5. The Bromont facility is an operation featuring CMOS
process technology for digital and mixed-signal (analog/digital)
communications products.

The Company recorded a loss on sale of the Bromont foundry business of
$5.4, before income tax recoveries of $1.2 in Fiscal 2002. During the third
quarter of Fiscal 2003, Zarlink sold its investment in DALSA for cash
proceeds of $4.2 and recorded a gain of $0.7 in Other Income (Expense).

The two companies also signed a three-year agreement to ensure continuity
of supply for Zarlink products manufactured at Bromont.

19. DISCONTINUED OPERATIONS

On November 3, 2000, the Company adopted formal plans to pursue divestiture
opportunities related to the distinct operations of the Systems business.
Accordingly, the operations related to this business were accounted for as
discontinued operations with November 3, 2000 being the effective
measurement date.

On February 16, 2001, the Company sold its worldwide Systems business,
including the name "Mitel", to a company controlled by Dr. Terence H.
Matthews. As part of the transaction, Zarlink transferred most of its
Ottawa, Canada real estate to Dr. Matthews. The Company received $196.7 in
cash proceeds, after adjustments, in exchange for selling a 90% ownership
interest in the Company's communications systems business and most of its
real property in Ottawa, Canada.

The results of the Systems business operations were as follows:

2001
--------

Sales for the period ended February 16, 2001 $ 343.5
========
Results of operations to the measurement date
of November 3, 2000:
Loss before income taxes $ (8.7)
Income tax recovery 3.0
--------
Loss from discontinued operations to the
measurement date of November 3, 2000 $ (5.7)
========

The Company recorded a gain of $13.3, net of transaction costs and other
provisions to separate the Systems business totaling $21.5, as well as
post-measurement date operating losses of $34.3 and income taxes of $7.4.

During the fourth quarter of Fiscal 2003, the Company recorded the reversal
of $2.4 of excess provisions related to these discontinued operations based
upon remaining costs to settle claims.


-58-


20. ACQUISITION

On July 28, 2000, the Company acquired Vertex Networks (Vertex), a
privately held, California-based, fabless semiconductor company providing
silicon solutions for the enterprise switching and wide area Network
Communications markets. Zarlink acquired Vertex in a share transaction for
approximately 11 million newly issued common shares valued at $210.8.
Approximately 1.1 million shares or 10% of the issued shares were placed in
escrow for a two-year period to indemnify the Company for representations
made by Vertex. In addition, approximately 535,000 issued shares valued at
$10.2 were subject to certain restrictions over a two-year period. Under
GAAP, these amounts were accounted for as compensation rather than a
component of the purchase price. The Company recorded $0.5 of stock
compensation expense in Fiscal 2003 due to the vesting of restricted stock
awarded to certain employees of Vertex as compared to expense of $6.0 in
Fiscal 2002 and $3.3 in Fiscal 2001. No further stock compensation expense
will be recorded against these formerly restricted shares.

During the year ended March 30, 2001, the Company recorded an asset
impairment charge to reduce the carrying value of goodwill by $112.9 to
$3.9 (see also Note 8). During the year ended March 29, 2002, the Company
recorded an additional asset impairment charge of $1.6 to reduce the
carrying value of the acquired intangible assets to nil.

21. RELATED PARTY TRANSACTIONS

There were no related party transactions in Fiscal 2003. During Fiscal
2002, the Company sold to and purchased from significantly influenced
enterprises products and services valued at approximately $1.3 (2001 -
$nil) and $0.7 (2001 - $0.7) respectively. These transactions for products
and services were under usual trade terms and trade prices in Fiscal 2002
and Fiscal 2001.

As at March 28, 2003, the Company had no investments in significantly
influenced enterprises. Included in accounts receivable as at March 28,
2003 were amounts due from significantly influenced enterprises of $nil
(March 29, 2002 - $0.2).

22. INFORMATION ON BUSINESS SEGMENTS

Business Segments

The Company's operations are comprised of three reportable business
segments - Network Communications, Consumer Communications, and Ultra
Low-Power Communications. Reportable segments are business units that offer
different products and services, employ different production processes and
methods of distribution, sell to different customers, and are managed
separately because of these differences.

Prior to the fourth quarter of Fiscal 2003, the Company reported its
business segments as Communications and Medical. The change in segments
resulted from the evolution of the company's business model and direction
toward a designer and marketer of broad-based communications semiconductor
solutions. Network Communications was previously known as Network Access
and was part of the Communications segment. Consumer Communications was
previously known as User Access and was also part of the Communications
segment. The Ultra Low-Power Communications segment, previously known as
Medical, reflects the expanded opportunities arising in healthcare and
communications from the group's Ultra Low-Power expertise.

The Company targets the communications industry with products that
specialize in broadband connectivity solutions over wired, wireless and
optical media, as well as through Ultra Low-Power communications solutions.
The Network Communications business segment offers products that provide
connectivity to the enterprise and metro segments such as feeder,
aggregation and transmission applications, and products that address the
multi-protocol physical and network layers. The Consumer Communications
business segment offers products that allow users to connect to the
network. These products include wireless (for example, cellular chipsets)
and infotainment applications (for example, set-top boxes and digital TV).
The Ultra Low-Power Communications business provides ASIC solutions for
applications such as pacemakers, hearing aids and portable instruments.


-59-


The Chief Executive Officer (CEO) is the chief operating decision maker in
assessing the performance of the segments and the allocation of resources
to the segments. The CEO evaluates the financial performance of each
business segment and allocates resources based on operating income. The
Company does not allocate stock compensation expense, special charges or
gains, interest income or interest expense or income taxes to its
reportable segments. In addition, total assets are not allocated to each
segment as they are primarily tracked by legal entity only; however,
depreciation of fixed assets is allocated to the segments based on the
estimated asset usage. The accounting policies of the reportable segments
are the same as those described in Note 2.




Network Consumer Ultra Low-Power Unallocated
Year Ended March 28, 2003 Communications Communications Communications Costs Total
------------------------- -------------- -------------- -------------- ------------ -----

Total external sales revenue $ 115.8 $ 49.1 $ 28.9 $ -- $ 193.8
Depreciation of buildings and equipment 9.8 2.8 0.5 -- 13.1
Recovery on sale of foundry businesses -- -- -- (2.5) (2.5)
Stock compensation recovery -- -- -- (1.4) (1.4)
Segment's operating loss from
continuing operations (20.0) (21.1) (4.5) 3.9 (41.7)

Network Consumer Ultra Low-Power Unallocated
Year Ended March 28, 2002 Communications Communications Communications Costs Total
------------------------- -------------- -------------- -------------- ------------ -----

Total external sales revenue $ 114.5 $ 72.7 $ 34.9 $ -- $ 222.1
Depreciation of buildings and equipment 13.6 5.9 0.3 -- 19.8
Amortization of acquired intangibles 4.4 -- -- -- 4.4
Loss on sale of foundry business -- -- -- 5.4 5.4
Special charges -- -- -- 41.1 41.1
Stock compensation expense -- -- -- 8.4 8.4
Segment's operating income (loss) from
continuing operations (73.6) (8.8) 8.8 (54.9) (128.5)

Network Consumer Ultra Low-Power Unallocated
Year Ended March 28, 2001 Communications Communications Communications Costs Total
------------------------- -------------- -------------- -------------- ------------ -----
Total external sales revenue $ 259.9 $ 157.5 $ 32.8 $ -- $ 450.2
Depreciation of buildings and equipment 40.8 24.2 0.7 -- 65.7
Amortization of acquired intangibles 65.3 -- -- -- 65.3
Special charges -- -- -- 237.6 237.6
Stock compensation expense -- -- -- 3.8 3.8
Segment's operating income (loss) from
continuing operations (27.5) 9.9 0.9 (241.4) (258.1)


Geographic Segments

Revenues from continuing operations from external customers are attributed
to countries based on location of the selling organization.


-60-


Geographic information is as follows:



2003 2002 2001
------------------ ----------------- ----------------------------
Acquired
Fixed Fixed Fixed Intangible
Revenue Assets Revenue Assets Revenue Assets Assets
----------------- ----------------- ----------------------------

Canada $ 44.4 $ 11.3 $ 43.1 $ 14.3 $ 78.7 $ 28.7 $ 3.9
United Kingdom 79.6 30.9 83.7 30.8 155.5 52.6 --
United States 43.0 1.7 62.8 3.0 173.0 3.6 --
Sweden 19.9 12.1 22.9 9.9 25.4 12.1 --
Other foreign
countries 6.9 0.4 9.6 0.1 17.6 0.8 --
---------------------------------------------------------------------
Total $ 193.8 $ 56.4 $ 222.1 $ 58.1 $ 450.2 $ 97.8 $ 3.9
=====================================================================


Major Customers

For the year ended March 28, 2003, the Company had revenues from one
external customer, a major distributor, which exceeded 10% of total net
revenues (2002 - one; 2001 - one). Sales to this distributor in Fiscal 2003
were $39.0 (2002 - $27.1; 2001 - $64.6) and related to the Network
Communications and Consumer Communications segments.

23. PENSION PLANS

As at March 28, 2003, the Company maintained several defined contribution
and two defined benefit pension plans for its employees. The U.K. defined
benefit pension plan was settled in the fourth quarter of Fiscal 2003.

Pension expense was calculated using the projected benefit method of
valuation. The components of the pension expense were as follows:



2003 2002 2001
-----------------------------

Continuing operations:
Defined contribution plans $ 2.9 $ 1.2 $ 1.3
Defined benefit plans (see table below) 2.2 2.9 2.2
-----------------------------
Pension expense from continuing operations 5.1 4.1 3.5
-----------------------------
Discontinued operations:
Defined contribution plans - - 3.0
Defined benefit plans (see table below) - - 3.0
-----------------------------
Pension expense from discontinued operations - - 6.0
-----------------------------
Pension expense $ 5.1 $ 4.1 $ 9.5
=============================

2003 2002 2001
-----------------------------
Defined benefit pension expense:
Employer service cost $ 1.4 $ 1.8 $ 5.2
Interest cost on projected plan benefits 1.4 1.3 4.7
Expected return on plan assets (0.7) (0.6) (4.7)
Net amortization and deferral 0.1 0.4 -
-----------------------------
Net periodic pension expense 2.2 2.9 5.2
Less: discontinued operations - - (3.0)
-----------------------------
Defined benefit pension expense from
continuing operations $ 2.2 $ 2.9 $ 2.2
=============================



-61-


(A) DEFINED CONTRIBUTION PENSION PLANS

The Company has defined contribution employee savings plans in Canada, the
United Kingdom, and the United States. The Company matches the
contributions of participating employees on the basis of percentages
specified in each plan.

(B) DEFINED BENEFIT PENSION PLANS

In Fiscal 2002, there was one contributory defined benefit pension plan
(the Plan) that covered substantially all employees of Zarlink
Semiconductor Limited (ZSL), a wholly owned subsidiary of the Company. On
November 30, 2001, ZSL suspended contributions to the Plan and ceased
members' pension accruals. The Plan was replaced with a defined
contribution pension plan at that time.

On January 31, 2003 and under a "wind-up" agreement, ZSL paid $8.0 in cash
consideration of the pension obligation settlement to Legal and General
Assurance Society Limited (L&G), a large, AAA-rated insurance company in
the United Kingdom. On the same date, ZSL transferred $15.7, representing
all of the pension plan assets, to L&G. Pursuant to the terms of the
wind-up agreement, the insurance company assumed the ongoing obligations to
administer and make payments against the Plan. L&G purchased
non-participating annuity contracts to cover the vested benefits. The
Company expects to make a final payment of approximately $2.3 in Fiscal
2004 after the final adjustments are calculated. This amount was included
in other accrued liabilities as at March 28, 2003.

In prior years, the Company's policy was to fund defined benefit pension
plans in accordance with independent actuarial valuations and as permitted
by pension regulatory authorities. This Plan provided pension benefits
based on length of service and final pensionable earnings. Employee
contributions were based on pensionable earnings. The Fiscal 2002 actuarial
report in connection with this defined benefit plan, prepared as of March
29, 2002, was based on short-term rates given the Company's intention to
terminate the plan in Fiscal 2003.

In prior years and for purposes of an actuarial valuation, pension fund
assets were valued using the discounted income method. Under this approach,
the value of the assets is obtained by estimating the receipts which will
arise in the future from the plan's investments and then discounting the
amounts to the valuation date, at the valuation rate of return on assets.

As at March 28, 2003, the actuarial present value of ZSL accrued pension
benefits was $nil (2002 - $17.8). The accumulated benefit obligation in
Fiscal 2002 resulted in an additional minimum pension liability of $2.5
recorded as at March 29, 2002, which was subsequently recorded in other
expense when the Plan was settled in the fourth quarter of Fiscal 2003.

The second defined benefit plan covers all employees over the age of
twenty-eight in Sweden and provides pension benefits based on length of
service and final pensionable earnings. During Fiscal 2003, the Company
began to partially fund this pension plan. The associated pension liability
is calculated each year by the Pension Registration Institute. With respect
to the pension liability of $10.6 (2002 - $8.6), the Company has provided,
as collateral, a limited surety bond in the amount of $6.7 and letters of
credit of $4.5. This pension liability was actuarially determined based on
the present value of the accrued future pension benefits and in accordance
with applicable laws and regulations in Sweden.

The third defined benefit plan covers all employees in Germany with over
ten years of active service and provides benefits based on length of
service and final pensionable earnings. There are no segregated pension
fund assets under the plan. The pension liability is actuarially determined
each year and is insured in its entirety by the Swiss Life Insurance
Company. The pension liability of $3.7 (2002 - $3.4) was actuarially
determined based on the present value of the accrued future pension
benefits and in accordance with applicable laws and regulations in Germany.


-62-


The following table shows the plans' funded status reconciled with amounts
reported in the consolidated balance sheets, and the assumptions used in
determining the actuarial present value of the benefit obligations:

2003 2002
-------------------
Change in accrued pension benefits:
Benefit obligation at beginning of year $ 29.2 $ 21.4
Service cost 1.4 1.8
Interest cost 1.4 1.3
Actuarial loss 5.1 5.5
Plan settlement (25.8) --
Benefits paid (0.9) (0.7)
Foreign exchange 5.3 (0.1)
-------------------
Benefit obligation at end of year 15.7 29.2
-------------------
Change in plan assets:
Fair value of plan assets at beginning of year 11.8 8.7
Actual return on plan assets 1.7 (0.3)
Employer contributions 1.4 3.2
Employee contributions -- 0.9
Plan settlement (15.7) --
Benefits paid (0.5) (0.6)
Foreign exchange 2.7 (0.1)
-------------------
Fair value of plan assets at end of year 1.4 11.8
-------------------
Unfunded status (14.3) (17.4)
-------------------
Net pension benefit liability $ (14.3) $ (17.4)
===================

The assumptions used to develop the actuarial present value of the accrued
pension benefits (obligations) were as follows:

Assumptions: 2003 2002 2001
---------------------------------------
Discount rate 3.5%-6.0% 5% 6%
Compensation increase rate 3% Nil 3-4.5%
Investment return assumption 5% 5% 9%

24. FINANCIAL INSTRUMENTS

(A) FAIR VALUE

The Company's financial instruments include cash and cash equivalents,
short-term investments, restricted cash, accounts receivable, notes
receivable, accounts payable, long-term debt and foreign exchange forward
and option contracts. Due to the short-term maturity of cash and cash
equivalents, short-term investments, restricted cash and accounts payable,
the carrying values of these instruments are reasonable estimates of their
fair value. The note receivable was discounted at market rates so that the
carrying value approximates the fair value of the note. The fair value of
long-term debt was determined by discounting future payments of interest
and principal at estimated interest rates that would be available to the
Company at year-end. The fair value of the foreign exchange forward and
option contracts reflects the estimated amount that the Company would have
been required to pay if forced to settle all outstanding contracts at
year-end. This fair value represents a point-in-time estimate that may not
be relevant in predicting the Company's future earnings or cash flows. The
fair value of financial instruments approximates their carrying value.

(B) DERIVATIVE FINANCIAL INSTRUMENTS

The Company operates globally, and therefore is subject to the risk that
earnings and cash flows may be adversely impacted by fluctuations in
foreign exchange. The Company uses forward and option contracts to


-63-


manage foreign exchange risk. Forward and option contracts are designated
for firmly committed or forecasted sales and purchases that are expected to
occur in less than one year.

The notional amounts for forward contracts represent the U.S. dollar
equivalent of an amount exchanged. All of the forward contracts mature
within six months with the longest maturity extending to September 25,
2003. At March 28, 2003, unrealized gains were $nil (2002 - $0.1; 2001 -
$2.6) and unrealized losses were $0.1 (2002 - $0.5; 2001 - $7.7). The
following table presents the net notional amounts of the forward contracts
in U.S. dollars:

Buy (Sell): (U.S. dollars) 2003 2002
-----------------------
Forward contracts:
British pounds $ 15.7 $(14.2)
Canadian dollars 7.4 33.0
Swedish krona - 0.7
Euro - 0.3
----------------------
Total $ 23.1 $ 19.8
======================

(C) CREDIT RISK

The Company's financial assets that are exposed to credit risk consist
primarily of cash and cash equivalents, short-term investments, restricted
cash, accounts receivable and derivative contracts. Cash and cash
equivalents, short-term investments and restricted cash are invested in
government and commercial paper with investment grade credit rating.

The Company is exposed to normal credit risk from customers. However, the
Company's orientation is global with a large number of diverse customers to
minimize concentrations of credit risk (see also Note 22).

The Company's note receivable is subject to credit risk in the event of
non-payment by X-FAB (see also Note 18).

Zarlink is exposed to credit risk on its foreign exchange contracts in the
event of non-performance by its counterparties. The Company does not
anticipate non-performance by any of the counterparties, as it deals with
counterparties that are major financial institutions. The Company
anticipates the counterparties will satisfy their obligations under the
contracts.

(D) INTEREST RATE RISK

The Company is not exposed to significant interest rate risk due to the
short-term maturity of its monetary assets and current liabilities.

(E) UNUSED BANK LINES OF CREDIT

The Company has a line of credit for $17.0 (Cdn$25.0), of which up to $7.5
(Cdn$11.0) is available for letters of credit. At March 28, 2003, $6.2
(2002 - $2.9) in letters of credit were outstanding against this credit
facility, thus the Company had unused and available demand bank lines of
credit of approximately $10.8 (2002 - $12.8) at a rate of interest based on
the prime lending rate plus 0.50%. As at March 28, 2003, cash and cash
equivalents of $6.2 were hypothecated under the Company's revolving global
credit facility to cover certain outstanding letters of credit.

25. SUPPLEMENTARY CASH FLOW INFORMATION

2003 2002 2001
-------------------------
Cash interest paid (included in cash flow
from operations) $ 0.2 $ 0.5 $ 10.1
==========================
Cash taxes paid (included in cash flow
from operations) $ 1.7 $ 2.3 $ 15.8
==========================

The following table summarizes the Company's other non-cash changes in
operating activities:


-64-





2003 2002 2001
-----------------------------

CASH PROVIDED BY (USED IN)
Impairment of long-term investment $ 11.5 $ 3.5 $ --
Income on disposal of discontinued operations (2.4) -- (65.0)
Gain on sale of long-term investment (0.7) -- --
Loss (recovery) on sale of businesses (2.5) 5.4 --
Loss on sale of fixed assets -- 0.5 1.8
Equity loss in investment -- 2.2 0.6
Non-cash foreign exchange loss on short-term investments 5.1 -- --
Pension settlement charge 6.6 -- --
Change in pension liability 0.2 6.6 1.8
Inventory write-down -- 29.1 --
Special charges, non-cash -- 7.8 237.6
Other -- -- 7.3
-----------------------------
Other non-cash changes in operating activities $ 17.8 $ 55.1 $ 184.1
=============================


The following table summarizes the Company's cash flows from (used in)
investing activities from acquisitions:

2003 2002 2001
--------------------------------

Cash acquired $ -- $ -- $ (7.4)
Net assets acquired other than cash -- -- (193.2)
--------------------------------
Total purchase price -- -- (200.6)
Less: cash acquired -- -- 7.4
Less: non-cash consideration paid -- -- 200.6
Less: cash paid for other investments -- -- (0.5)
--------------------------------
Acquisitions, net of cash acquired $ -- $ -- $ 6.9
================================

26. SUBSEQUENT EVENT

Since the third quarter of Fiscal 2002, the Company has presented its
financial statements in U.S. dollars. However, the Company has historically
measured the parent company's financial statements in Canadian dollars and
its subsidiaries' financial statements in their respective local
currencies. Effective March 29, 2003, the beginning of Fiscal 2004, as a
result of the Company's increased economic activities denominated in U.S.
dollars, the U.S. dollar has become the functional currency across the
Company's operations.

27. COMPARATIVE FIGURES

Certain of the Fiscal 2002 and Fiscal 2001 comparative figures have been
reclassified so as to conform to the presentation adopted in Fiscal 2003.

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

None.


-65-


PART III


Item 10. Directors and Executive Officers of the Registrant

Directors

The following table sets forth the name, age and position of each director of
the Company.

Name Age Director Since Positions

Andre Borrel(2) 66 July 23, 1998 Director

Patrick J. Brockett(4) 55 April 9, 2001 Director, President
and Chief Executive
Officer

Hubert T. Lacroix(1,3,4) 46 July 21, 1992 Director

J. Spencer Lanthier 62 May 14, 2003 Director

Kirk K. Mandy(3,4) 46 July 23, 1998 Director and Vice
Chairman

Jules Meunier (2) July 31, 2002 Director

Kent H.E. Plumley(1,2,3) 65 August 22, 2000 Director

Dr. Henry Simon(3,4) 72 July 21, 1992 Director and Chairman

Dr. Semir D. Sirazi(1) 47 September 27, 1999 Director

(1) Member of the Audit Committee (established in accordance with the Canada
Business Corporations Act)

(2) Member of the Compensation and Human Resources Development Committee

(3) Member of the Nominating and Corporate Governance Committee

(4) Member of the Executive Committee

Mr. Borrel has been an independent consultant to the semiconductor industry
since 1995. From 1967 to 1994, he served in senior management positions with
Motorola, Inc. in Europe and the United States. Mr. Borrel is a director of
Chartered Semiconductors Manufacturing in Singapore.

Mr. Brockett joined the Company in April 2001 as President and Chief Executive
Officer. Prior to that he held a variety of executive management positions at
National Semiconductor Corporation, including Executive Vice President from
October 1997 to March 2001.

Mr. Lacroix is presently a consultant to Telemedia Ventures Inc., a private
investment company and Senior Advisor to Stikeman Elliott LLP (law firm). He was
Executive Chairman, Telemedia Corporation from February 2000 to May 2003. Prior
to that date, he was a partner with McCarthy Tetrault LLP (law firm) since 1984.
He is Chairman of the Board and Audit Committee member of SFK Pulp Fund and is a
Director and Audit Committee member of ITS Investments Limited Partnership and
Transcontinental Inc. He is also a Director of the Montreal General Hospital
Foundation, a Trustee of the Martlet Foundation of McGill University and a
Director of Secor Inc.

Mr. Lanthier was appointed to the Board of Directors on May 14, 2003. Until his
retirement, Mr. Lanthier had a long and distinguished career with KPMG Canada
culminating in the position of Chairman and Chief Executive from 1993 to 1999.
Mr. Lanthier is presently a director of Bank of Canada, TSX Group Inc., Torstar
Corporation, Ellis-Don Inc., Intertape Polymer Inc., BCE Emergis Inc., Canada
Life Assurance Company Gerdau Ameristeel Inc.


-66-


Mr. Mandy joined the Company in 1984 serving in executive management positions
until his appointment as President and Chief Executive Officer on July 23, 1998.
Mr. Mandy retired from the Company and was appointed Vice-Chairman of the Board
of Directors on April 6, 2001. He also serves on the board of directors of
several privately-held companies.

Mr. Meunier was appointed to the Board of Directors on July 31, 2002. He was
President and CEO of Proquent Systems Inc. from January 2002 until November
2002. Mr. Meunier held a variety of executive management positions at Nortel
Networks Corporation from 1979 to October 2001. He is also a Director and member
of the Audit Committee of Spectrum Signal Processing.

Mr. Plumley has been a Special Partner of Osler, Hoskin & Harcourt, a law firm,
since January 2002. Prior to that date he was an equity partner in Osler, Hoskin
& Harcourt since May 1990. He also serves on the board of directors of several
privately-held companies and is a Director of the Ottawa Heart Institute
Foundation and Queen's University.

Dr. Simon has been a Special Partner of Schroder Ventures Life Sciences
Advisers, a venture capital company advising on investments in the life
sciences, since January 2002 and Chairman from 1996 to 2001. Dr. Simon has been
Chairman of the Company's Board of Directors since July 21, 1994. He is also
Chairman of Leica Microsystems AG, Director of Gyros AB and Director and
Chairman of the Audit Committee of Eyetek Pharmaceuticals.

Dr. Sirazi has been a consultant to the semiconductor, networking and
telecommunications industries since July 1997. He has held a variety of
executive management positions at U.S. Robotics/3COM and Zenith Electronics
Corporation. He is an active advisor and investor to several private companies
in the high-technology field and serves on the board of directors of these
companies.

There are no family relationships among directors, nominees for director or
executive officers of the Company.

Statement of Corporate Governance Practices

In February 1995, the Toronto Stock Exchange Committee on Corporate Governance
in Canada issued its final report containing a series of guidelines for
effective corporate governance (these guidelines, as amended from time to time,
are herein referred to as the "Governance Guidelines"). The Governance
Guidelines, which are not mandatory, deal with the constitution of boards of
directors and board committees, their functions, the effectiveness and education
of board members, their independence from management, their relationship with
management and shareholders and other means of ensuring sound corporate
governance. The Toronto Stock Exchange has, in accordance with the
recommendations contained in such report, adopted as a listing requirement that
disclosure be made by each listed company of its corporate governance system
with reference to the Governance Guidelines.

In 1999, the Toronto Stock Exchange amended the Governance Guidelines and
companies are now required to disclose their corporate governance practices with
specific reference to each of the 14 Governance Guidelines.

The Board of Directors of the Company has always endorsed the concept,
principles and practices of sound corporate governance and believes that the
Company is fully compliant with the Governance Guidelines, as currently in
force.

In the spring of 2002, the Toronto Stock Exchange circulated proposed disclosure
and continued listing requirements, together with further amendments to the
Governance Guidelines. The Board of Directors believes that the Company's
corporate governance practices conform to the proposed Toronto Stock Exchange
standards in all material respects. It must be noted, however, that as of May
30, 2003, these proposed standards are not yet in force and, if necessary, the
Board of Directors will further review the Company's corporate governance
practices to conform with the Toronto Stock Exchange standards, once in their
final form.

As a company listed on the New York Stock Exchange (NYSE), the Company complies
with the applicable rules and regulations of the NYSE, the United States
Securities and Exchange Commission and other legislation


-67-


applicable to overseas companies listed in the United States, including the
recently-enacted Sarbanes-Oxley Act of 2002. These rules and regulations impose
requirements on the Company related to good corporate governance practices.

The Board of Directors and the Company's management are committed to the highest
standard of corporate governance, and the Company has had standards in place for
many years. The Board of Directors reviews the Company's governance standards
periodically and revises them when necessary to respond to changing regulatory
requirements and evolving best practices. The Company's principal objective in
directing and managing its business and affairs is to enhance shareholder value.
The Company believes that effective corporate governance improves corporate
performance and benefits all shareholders.

During recent months, the Board of Directors and each board committee have
reviewed the Company's corporate governance practices in response to the
Sarbanes-Oxley Act of 2002 and the related SEC rules and proposed corporate
governance standards of the New York Stock Exchange. Many of the corporate
governance practices required by the Sarbanes-Oxley Act of 2002 are being phased
in over time, and the proposed NYSE corporate governance listing standards are
not yet effective; therefore, the Company's response to these changes will be an
on-going process. Nevertheless, the Board of Directors has already taken action
to ensure the Company's compliance with the proposed NYSE rules, including the
requirement to disclose the Company's financial expert. The Nominating and
Corporate Governance Committee and the Board of Directors reviewed the
qualifications of Hubert T. Lacroix as Chairman of the Audit Committee and
determined that he be considered the Company's financial expert.

Executive Officers

The names, ages and positions with the Company of the executive officers of the
Company, other than Mr. Brockett, who is listed in the table of directors, are
as follows:

Name Age Positions
---- --- ---------
Roland Andersson 51 Senior Vice President, Worldwide Sales and
Marketing

Pradeep Singh Arora 39 Vice President Sales, Asia Pacific

Michael Bereziuk 50 Senior Vice President and General Manager,
Consumer Communications

Peter Burke 52 Vice President, Chief Technology Officer

Jonathan Burnie 51 Director, Time To Market

J. Desmond Byrne 51 Vice President Legal and Assistant Secretary

Jean-Jacques Carrier 52 Senior Vice President Finance and Chief
Financial Officer (resigned)

Robert Eschbach 38 Vice President Sales, Americas

Anthony P. Gallagher 49 Senior Vice President, Worldwide Operations

Tsviatko Ganev 55 Vice President and General Manager, Optical
Systems

John Ingvarsson 51 Vice President Sales and Marketing, EMEA

Mark Levi 66 Vice President, Corporate Marketing


-68-


Donald G. McIntyre 55 Senior Vice President Human Resources,
General Counsel and Secretary

Shirley J. Mears 48 Vice President, Treasurer

Scott Milligan 42 Senior Vice President Finance and Chief
Financial Officer

Timothy R. Saunders 42 Vice President and Corporate Controller

Stephen J. Swift 50 Vice President and General Manager, Ultra
Low Power Communications Division

Jitesh B. Vadhia 44 Senior Vice President, Network Communications
Division

Mr. Andersson was appointed Senior Vice President, Worldwide Sales and
Marketing on June 15, 2001. From 1983 until his appointment, Mr. Andersson
served in several senior management positions with National Semiconductor
Corporation.

Mr. Arora was appointed Vice President Sales in June 2001. From 1995 until
his appointment, Mr. Arora served in senior management positions with
National Semiconductor Corporation.

Mr. Bereziuk was appointed Senior Vice President and General Manager,
Consumer Communications on November 5, 2001. From 1984 until his
appointment, Mr. Bereziuk served in several senior management positions
with National Semiconductor Corporation.

Mr. Burke was appointed Vice President, Chief Technology Officer on June
12, 2001. Mr. Burke served as Vice President, Network Access (renamed
Network Communications) from January 2001 to June 2001, Vice President
Strategic Marketing from December 1999 to January 2001 and Vice President
Product Marketing from February 1998 to December 1999. Mr. Burke joined the
Company in 1995.

Mr. Burnie was appointed Director of Time To Market in September 2000.
Previous to that he was Acting Director of Time To Market from February
2002 to September 2002; Planning Manager from December 1999 to January
2002, and Technology Manager from June 1985 to November 1999. Mr. Burnie
joined the Company in 1985.

Mr. Byrne was appointed Vice President, Legal and Assistant Secretary on
January 30, 2001. Mr. Byrne served as Assistant General Counsel and
Assistant Secretary from June 1987 to January 2001. Mr. Byrne joined the
Company in 1983.

Mr. Carrier served as Senior Vice President Finance and Chief Financial
Officer from October 1998 until his resignation effective May 19, 2003. Mr.
Carrier joined the Company in 1993 as Vice President Finance and Chief
Financial Officer and served as a member of the Board of Directors of the
Company from July 1998 to November 2002. Mr. Carrier advised in February
2003 that he would be leaving the Company to pursue other business
opportunities.

Mr. Eschbach joined the Company in 2002 and Vice President Sales, Americas.
From 1997 to his appointment, Mr. Eschbach served in sales and marketing
positions with National Semiconductor Corporation.

Mr. Gallagher was appointed Senior Vice President, Worldwide Operations on
April 1, 2002. Mr. Gallagher served as Vice President Worldwide Operations
from October 2000 to March 2002, Vice President, Europe from April 1999
until September 2000 and Finance Director from October 1992 to March 1999.
Mr. Gallagher joined the Company in 1992.

Mr. Ganev joined the Company in 2002 as Vice President and General Manager
Optoelectronics Business Unit. Mr. Ganev served as Managing Director of
Comsist AB from November 2001 to June 2002, CEO of Electronic Gruppen AB
from December 1999 to November 2001 and Vice President and General Manager,
LME Ericsson Telecom AB from April 1982 to December 1999.


-69-


Mr. Ingvarsson joined the Company in 2002 as Vice President Sales, EMEA.
From 1987 until his appointment, Mr. Ingvarsson served as Director, Compaq
Computer Corporation.

Mr. Levi was appointed Vice President, Marketing Communications on May 7,
2001. From April 1990 until his appointment, Mr. Levi served as Vice
President, Analog Marketing at National Semiconductor Corporation.

Mr. McIntyre was appointed Senior Vice President Human Resources, General
Counsel and Secretary in October 1998. Mr. McIntyre served as Vice
President, General Counsel and Secretary from 1991 to October 1998. Mr.
McIntyre also served as a director of the Company from 1993 to 1996 and
from 1998 to 2002. Mr. McIntyre joined the Company in 1987.

Ms. Mears was appointed Vice President Treasurer in April 1992. Ms. Mears
served as Vice President, Corporate Taxation and Canadian Human Resources
from April 1991 to March 1992 and Vice President, Corporate Taxation from
February 1990 to March 1991. Ms. Mears joined the Company in 1983.

Mr. Milligan was appointed Senior Vice President Finance and Chief
Financial Officer on May 19, 2003. From 2000 to 2002, Mr. Milligan served
as Vice President, Finance and Administration with UUNet Canada (later
WorldCom Canada) and from 1993 to 2000 he served in senior financial
positions with the Pepsi Bottling Group.

Mr. Saunders was appointed Vice President and Corporate Controller in July
1998. Mr. Saunders served as Director, Corporate Finance from July 1992 to
June 1997 and as Corporate Controller from June 1997 to July 1998. Mr.
Saunders joined the Company in 1992.

Mr. Swift was appointed Vice President and General Manager, Ultra Low Power
Communications Division in April 2001. Mr. Swift served as General Manager,
Medical (renamed Ultra Low Power Communications) from April 1998 to April
2001 and Manager, ASIC Engineering from September 1997 to April 1998. Mr.
Swift joined the Company in 1997.

Mr. Vadhia was appointed Senior Vice President, Network Communications
Division in June 2002. Mr. Vadhia served as Vice President and General
Manager, Optical Systems from October 2001 to June 2002 and as Vice
President and General Manager, Network Access (renamed Network
Communications) from June 2001 to October 2001. From 1987 until his
appointment, Mr. Vadhia served in several senior management positions with
National Semiconductor Corporation.

Item 11. Executive Compensation

The aggregate compensation paid by the Company to its directors and
executive officers for services rendered during Fiscal 2003 was $5,427,068.
This amount includes salary, bonuses, severance payments, car allowances
and other perquisites and excludes the amount set out below for pension,
retirement and similar benefits paid to executive officers.

The aggregate amount set aside or accrued by the Company and its
subsidiaries during Fiscal 2003 for the provision of pension, retirement
and similar benefits to the directors and executive officers the Company as
a group was $279,974, excluding adjustments for market value fluctuations
related to the current year.

Summary Compensation Table

The following table sets forth compensation information for the three
fiscal years ended March 28, 2003, March 29, 2002, and March 30, 2001,
respectively, for the Chief Executive Officer and the four other most
highly compensated executive officers of the Company who were serving as
executive officers of the Company on March 28, 2003 (collectively, the
"Named Executive Officers").


-70-




- ------------------------------------------------------------------------------------------------------------------
Long-Term
Annual Compensation Compensation
------------------------------------- ------------------
Bonus Other Securities
Name and (Annual Annual Under All Other
Principal Fiscal Incentive Compen- Options Compen-
Position Year Salary(4) Awards)(4) sation(1,2,4) Granted sation(3,4)
$ $ $ # $
- ------------------------------------------------------------------------------------------------------------------


Patrick J. Brockett 2003 499,207 -- 139,483 150,000 95,363
President and Chief 2002 495,657 297,391 142,124 1,110,000 2,128
Executive Officer 2001 -- -- -- -- --

Jitesh Vadhia 2003 269,370 213,275 30,002 50,000 7,962
Senior Vice President and, 2002 196,850 80,000 -- 115,000 100,000
General Manager, 2001 -- -- -- -- --

Network Communications



Roland Andersson 2003 343,107 50,000 34,651 50,000 129,988
Senior Vice President, 2002 241,666 100,000 78,901 105,000 150,000
Worldwide Sales and Marketing 2001 -- -- -- -- --

Anthony A.P. Gallagher 2003 266,158 111,641 19,805 50,000 22,055
Senior Vice President 2002 144,335 95,933 11,287 50,000 11,029
Worldwide Operations 2001 159,627 44,943 12,573 26,000 10,408

Michael Bereziuk 2003 275,000 40,000 68,861 45,000 1,657
Senior Vice President and 2002 98,656 103,125 75,360 105,000 127,202
General Manager, 2001 -- -- -- -- --
Consumer Communications
- ------------------------------------------------------------------------------------------------------------------


(1) The value of benefits not exceeding the lesser of CAD$50,000 (representing
approximately $32,000) and 10% of the sum of salary and bonuses has been
omitted for each of the Named Executive Officers.

(2) "Other Annual Compensation" includes relocation and living expenses for
three Named Executive Officers as follows: Mr. Brockett - Fiscal 2003
includes rent payments of $62,422 and tax equalization amounting to $62,054
(2002 - includes rent payments of $103,942 and relocation expenses totaling
$25,136); Mr. Vadhia - Fiscal 2003 includes rent payments of $7,250 and tax
equalization amounting to $12,733; Mr. Andersson - Fiscal 2003 includes car
expenses amounting to $29,796 (2002 - includes car expenses amounting to
$67,720); Mr. Gallagher - Fiscal 2003 includes car expenses amounting to
$18,742; and Mr. Bereziuk - Fiscal 2003 includes 15% premium of $41,250 and
a Goods and Services Allowance amounting to $27,611 payable under the
Company's Expatriate Assignment Policy to cover extra expenses relating to
international assignments (2002 - 15% premium and Goods and Services
Allowance amounting to $32,308 and a resettlement allowance of $43,052).

(3) "All Other Compensation" includes contributions made and accrued by the
Company to a defined contribution pension plan, excluding adjustments for
market value fluctuations related to the current year and previous year
accruals which totaled a decrease of $482 for one Named Executive Officer.

(4) Canadian dollar amounts have been converted to United States dollars using
the Fiscal 2003 average exchange rate of 0.644132 (2002 - 0.639551; 2001 -
0.666937).

Employee Share Ownership Plan

The Employee Share Ownership Plan was approved by the Board of Directors in
May 1997. The purpose of this plan is to enable employees to invest in
equity shares of the Company through employee savings. Employees


-71-


make contributions by means of payroll deductions and common shares of the
Company are purchased twice per month through normal market facilities by
Computershare Trust Company of Canada, which assumed the administration
role for Montreal Trust Company of Canada (the trustee appointed to
administer the plan). The Company pays all brokerage commissions, transfer
taxes, and other charges and expenses of the purchase and sale of the
common shares except for the issuance of a certificate for fewer than 100
shares, in which case the employee is responsible for such costs.

During April 2001, the Company implemented a matching contribution in
connection with the Employee Share Ownership Plan which provides for a
contribution by the Company equal to 15% of each employee's contribution
under the plan, subject to a maximum of $320 per employee per year. A total
contribution by the Company of approximately $130,000 is estimated under
this plan for the next fiscal year.

Director, CEO and Executive Share Ownership

The policy for Director, CEO and Executive Share Ownership (the "Policy")
was approved by the Board of Directors in May 2003 in order to better align
the interests of the Company's directors, CEO and those executives who
report directly to the CEO (the "Executives") with the financial interests
of the shareholders of the Company, create ownership focus and build
long-term commitment.

The Policy requires the Directors, the CEO Executives establish and hold
specified stock ownership levels in the Company within defined periods of
time following the implementation of the Policy or from their date of hire
or promotion to these roles after the effective date of the Policy, if
later.

The Chairman of the Board must purchase and hold common shares of the
Company worth at least CAD$100,000 within three years after the effective
date of the Policy or his/her date of appointment to the role, if later.

Each non-executive Director, who is not Chairman of the Board, must
purchase and hold common shares of the Company worth at least CAD$30,000
within three years after the effective date of the Policy or his/her date
of appointment to the Board, if later.

The CEO must purchase and hold common shares of the Company worth two times
his/her base salary by the end of five years from the effective date of the
Policy or his/her date of hire or promotion to the role, whichever is
later.

Each Executive must purchase and hold common shares of the Company worth
one times his/her base salary by the end of five years from the effective
date of the Policy or his/her date of hire or promotion to the role,
whichever is later.

The following guidelines and rules apply for purposes of the Policy: (a)
base salary will be the average base salary of the CEO or the Executive, as
applicable, over the three years prior to each measurement date; (b)
interim ownership thresholds for the CEO and Executives will be 25% of
target levels after two years; 50% after three years; 75% after four years;
and 100% after five years; (c) these interim and final measurement dates
will be extended to the extent that the CEO or any Executive has not earned
sufficient after-tax incentive plan payments to fund purchases of common
shares of the Company or to exercise vested options at the date that each
incentive payment is made; (d) after the initial three-year period for
Directors and five-year period for the CEO and the Executives, the
measurement date will be once per year on the applicable anniversary date;
and (e) at each ownership measurement date, the stock price used for
calculating whether the common share ownership threshold requirement has
been met or continues to be met will be the highest common share price on
the Toronto Stock Exchange during the six-month period prior to such
measurement date.

If the CEO or any Executive misses the target common share ownership level
at any of the measurement dates or thereafter, except as permitted in (c)
above, one-half of any incentive payments earned by the CEO or Executive,
as applicable, after the measurement date will be withheld and not paid to
the CEO or Executive until his/her common share ownership level has been
increased to meet the required target level as of the most recent
measurement date.


-72-


If any Director misses the target common share ownership level at any of
the measurement dates or thereafter, any annual Director's fees owing to
that Director after the measurement date will be withheld and not paid to
the Director until his/her common share ownership level has been increased
to meet the required target level of the most recent measurement date.

Pursuant to the Policy, until the required ownership levels are met, it is
expected that any exercise of outstanding options to purchase common shares
will be used to increase the individual's required Company common share
holdings.

All trades (purchases and sales) of common shares of the Company by the
Directors, the CEO and the Executives must be made in strict adherence with
the Company's Insider Trading Guidelines and relevant securities laws.

1991 Stock Option Plan for Key Employees and Non-Employee Directors

The 1991 Stock Option Plan for Key Employees and Non-Employee Directors
(the "Option Plan") provides for the granting of non-transferable options
to purchase common shares to certain key employees and non-employee
directors of the Company and its subsidiaries as determined from time to
time by the Compensation and Human Resources Development Committee (the
"Compensation Committee") administering the Option Plan. The Option Plan
was approved by the Shareholders at the 1991 Annual and Special Meeting of
Shareholders and certain amendments were approved by the Shareholders at
the 1993, 1995, and 1998 Annual and Special Meetings of Shareholders.
Further amendments were made to the Option Plan by the directors on May 9,
2001 and approved by the Shareholders at the December 7, 2001 Special
Meeting of Shareholders.

On May 9, 2001 the Board of Directors amended the Option Plan, as later
approved by the Shareholders on December 7, 2001, to provide that all
future options granted under the Option Plan must be exercised within a
maximum of six years (as opposed to the 10-year period prior to such
amendment) following the date of grant or within such other shorter time or
times as may be determined by the Compensation Committee at the time of
grant. Since 1998, all options granted have had a six-year term. In the
case of options granted to employees of the Company, other than executive
officers and non-employee directors and first-time option grants to new
employees, the terms of the Option Plan provide for staggered equal monthly
vesting at a rate of 2.08% per month over a period of four years commencing
on the date of grant of the options, or at such other time or times as may
be determined by the Compensation Committee at the time of grant. In the
case of first-time option grants to new employees, up to twenty-five
percent of the common shares in respect of each option may be purchased
after one year from the date of grant and 2.08% per month for each month
thereafter during a three-year period, or at such other time or times as
may be determined by the Compensation Committee at the time of grant. In
the case of executive officers and non-employee directors, up to
twenty-five percent of the common shares in respect of each option may be
purchased after one year from the date of grant, up to fifty percent after
two years from the date of grant, up to seventy-five percent after three
years from the date of grant and up to one hundred percent after four years
from the date of grant or at such other time or times as may be determined
by the Compensation Committee at the time of grant.

In addition, on May 9, 2001 the Board of Directors amended the Option Plan,
as later approved by the Shareholders on December 7, 2001, to increase the
maximum number of common shares that may be issued under the Option Plan
from 16,000,000 common shares to 20,227,033 common shares. As 5,037,033
common shares had been issued upon exercise of options up to May 9, 2001,
this amendment increased the number of common shares issuable under
outstanding options and options available for grant, each as of May 9,
2001, to 15,190,000 which represented 12% of the then outstanding common
shares. The Option Plan was also amended to provide that the maximum number
of common shares in respect of which options may be granted under the
Option Plan to non-employee directors during any fiscal year of the Company
would be 20,000 common shares per director.

The price at which common shares may be purchased upon exercise of an
option is the average of the market price (as defined in the Option Plan)
of the common shares on the Toronto Stock Exchange for the five trading day
period immediately preceding the date of grant.


-73-


The Option Plan provides that, in the event of the death or permanent
disability of an optionholder, the exercise period of any options
unexercised at the date of death or permanent disability will be
accelerated so that the optionholder's legal personal representative will
be permitted to purchase and take delivery of, (i) in the case where the
optionholder shall have been in the employment of the Company or any
subsidiary for at least five years prior to the date of such employee's
death or permanent disability, 50% of all common shares under option and
not purchased or delivered at the date of death or permanent disability and
(ii) in the case where the optionholder shall have been in the employment
of the Company or any subsidiary for at least ten years prior to the date
of such employee's death or permanent disability, all common shares under
option and not purchased or delivered at the date of death or permanent
disability, in each such case during the one year period following such
optionholder's death or permanent disability (but in no event after the
expiration date of such option).

The Option Plan also provides that, in the event of the termination of an
employee's employment for any reason other than cause or death, the
employee's options may be exercised, to the extent the options are
exercisable as of the termination date, within 90 days following the date
the employee's employment is terminated (but in no event after the
expiration date of such options); provided, however, that the Board of
Directors of the Company may, in its discretion, amend the terms of any
option to permit the employee to exercise such options as if such
employee's employment had not been terminated, for up to a maximum of three
years following the date of termination of the employee's employment (but
in no event after the expiration date of such option). In the event the
employee's employment has been terminated for cause, the employee's options
shall be immediately cancelled.

The Option Plan further provides that, in the event of a change of control
(whether in fact or in law) of the Company which results in a non-employee
director being replaced, the vesting period shall be waived with respect to
the options then held by such non-employee director in order to permit the
full exercise of all outstanding options then held by such person. In the
event that the non-employee director ceases to act as a director of the
Company, all options held by such director, which are then exercisable, may
be exercised within 180 days following the announcement of the quarterly
results next following the date of resignation of such person (but in no
event after the expiration date of such option). The Option Plan also
provides that the Compensation Committee may determine that any option
granted under the Option Plan shall include provisions which accelerate the
date on which an option shall become exercisable upon the happening of such
events as the Compensation Committee may determine and as permitted in the
Option Plan.

On January 11, 2000, the Board of Directors of the Company decided that all
unvested stock options held by each director, the President and Chief
Executive Officer, the then five Senior Vice Presidents and any other
executives of the Company as may be designated by the Board of Directors
from time to time would be accelerated and become fully vested and
immediately exercisable in the event of (i) the making by any person of a
take-over bid (as defined in the Securities Act (Ontario)) for the common
shares of the Company, or (ii) a change of control (whether in fact or in
law and as more fully defined in such Board resolution) of the Company.

Under the terms of the Option Plan, the maximum number of common shares as
to which options have been or may be granted (including options that have
been exercised to date) is 20,227,033 (representing approximately 15.9% of
the common shares outstanding as of May 30, 2003). As of May 30, 2003, the
closing price of the common shares of the Company on the New York Stock
Exchange was $5.23 and therefore the total market value as of such date of
the 10,321,145 common shares (excluding 5,692,687 common shares as to which
options have been previously exercised and 4,213,201 common shares still
available for option grant) that were subject to outstanding options
pursuant to the Option Plan as of May 30, 2003 was $53,979,588.

During Fiscal 2003, the Company granted options to purchase up to 2,674,088
common shares to 493 employees and seven non-employee directors of the
Company at an average exercise price of $3.56 per share, of which options
for 717,000 common shares were granted to 16 executive officers at an
average exercise price of $3.76 per share. During Fiscal 2003, there was no
exercise of options by executive officers of the Company.

As at May 30, 2003, there were outstanding under the Option Plan options
for an aggregate of 10,321,145 common shares at prices ranging from $2.32
to $25.45 per share and expiring at various dates through 2009. Of such
options, options for an aggregate of 767,000 common shares were held by 17
executive officers, one of whom is a director of the Company.


-74-


The following table sets forth the details regarding options granted to the
Named Executive Officers under the Option Plan.

Option Grants During Fiscal 2003




=======================================================================================================================
Market Value
% of Total of Securities
Securities Options Underlying
Under Granted to Exercise Options
Options Employees or on the Date
Granted in Fiscal Base Price(1) of Grant Expiration
Name (#) 2003 ($/Security) ($/Security) Date
- -----------------------------------------------------------------------------------------------------------------------

Patrick J. Brockett 150,000 5.96 3.36 3.16 February 6, 2009

Jitesh Vadhia 17,000 (2) 3.04 3.05 November 14, 2008
50,000 1.98 3.36 3.16 February 6, 2009

Roland Andersson 50,000 1.98 3.36 3.16 February 6, 2009

Anthony A.P. Gallagher 50,000 1.98 3.36 3.16 February 6, 2009

Michael Bereziuk 45,000 1.78 3.36 3.16 February 6, 2009

=======================================================================================================================


(1) Exercise price is determined by the five-day averaging formula as defined
in the Option Plan and Market Value is the market price on the Toronto
Stock Exchange on the date of grant converting Canadian dollar amounts to
United States dollars using the closing foreign exchange rate of the Bank
of Canada on the date of each grant.

(2) The percentage of total options granted was less than 1%.

Year-End Option Values Table

The following table summarizes, for each of the Named Executive Officers,
the aggregated options exercised during Fiscal 2003 and option values at
March 28, 2003.


-75-


Aggregated Options Exercised During Fiscal 2003
and Fiscal Year-End Option Values



=========================================================================================================================
Securities Aggregate Value of Unexercised
Acquired Value Unexercised Options at In-the-Money Options
Name On Exercise Realized March 28, 2003 at March 28, 2003(1)
(#) ($) (#) ($)
------------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
=========================================================================================================================


Patrick J. Brockett nil nil 277,500 982,500 -- 30,000

Jitesh Vadhia nil nil 28,750 153,250 -- 18,670

Roland Andersson nil nil 26,250 128,750 -- 10,000

Anthony A.P.Gallagher nil nil 41,759 105,920 -- 10,000

Michael Bereziuk nil nil 26,250 123,750 -- 9,000

=========================================================================================================================


(1) Canadian dollar amounts have been converted to United States dollars using
the closing foreign exchange rate provided by the Bank of Canada on the
date of grant to calculate the "Value of Unexercised In-the-Money Options".

Employment Agreements

The Company has entered into employment agreements with the CEO and other
Named Executive Officers on the terms and conditions described below.

PATRICK J. BROCKETT

On March 20, 2001, the Company entered into an employment agreement with
Mr. Patrick J. Brockett with respect to his employment as President and
Chief Executive Officer.

Pursuant to the agreement, Mr. Brockett is entitled to receive an annual
base salary in the amount of $495,652, plus an annual bonus, conditional
upon the successful achievement by Mr. Brockett of specific target
objectives in each fiscal year, as follows: (i) if a minimum of 85% of the
objectives are achieved, the annual bonus will be equal to 30% of the
annual base salary, (ii) if the objectives are achieved in full, the annual
bonus will be equal to 60% of the annual base salary, and (iii) if all
objectives collectively are exceeded by at least 25%, the annual bonus will
be equal to 120% of the annual base salary. The bonus objectives for each
fiscal year are reviewed and finalized with the Board of Directors of the
Company within 45 days following the commencement of each fiscal year. In
the first year of employment (Fiscal 2002), Mr. Brockett was entitled to
receive a guaranteed minimum bonus amounting to $297,391. In Fiscal 2003,
Mr. Brockett, as his request, did not receive a discretionary bonus.

Mr. Brockett is also entitled to customary benefits and options to purchase
one million common shares at exercise prices determined as follows: (i) 25%
of such options may be exercised at the market price (as defined in the
Option Plan) of $7.33 in effect on April 9, 2001 (being the start date by
Mr. Brockett of his employment with the Company) (the Initial Market
Price), (ii) 25% of such options may be exercised at $8.79 being 120% of
the Initial Market Price, (iii) 25% of such options may be exercised at
$10.55 being 144% of the Initial Market Price, and (iv) the remaining 25%
of such options may be exercised at $12.86 being 173% of the Initial Market
Price. The options provide for equal annual vesting over a period of four
years commencing one year following their


-76-


date of grant, and are otherwise governed by the terms and conditions of
the Option Plan. Note: Canadian dollar amounts have been converted to
United States dollars using the closing foreign exchange rate provided by
the Bank of Canada on the date of grant.

Mr. Brockett's employment agreement provides further that, in the event
that the Company terminates his employment without legal grounds for which
an employer is entitled to dismiss an employee without notice or
compensation in lieu of notice, he will be entitled to the following
termination package: (i) a lump sum payment equal to two times his annual
base salary and average earned annual bonus over the previous three fiscal
years (or such shorter period during which Mr. Brockett will then have been
employed by the Company), (ii) a payment of two years' regular annual
contributions to an executive pension plan (or a contribution equal to 30%
of the then current base salary, to the extent Mr. Brockett is not then
participating in an executive pension plan) and (iii) continuous group life
and health benefits coverage during such two-year period. In addition, Mr.
Brockett will have a period of six months following the date of termination
to exercise all stock options that are vested up to the end of such
exercise period.

JITESH VADHIA

On May 31, 2001, the Company entered into an employment agreement with
Jitesh Vadhia with respect to his employment as Senior Vice President and
General Manager, Network Communications.

Pursuant to the agreement, Mr. Vadhia is entitled to receive an annual base
salary in the amount of $270,000, plus an annual bonus, conditional upon
the successful achievement by Mr. Vadhia of specific target objectives in
each fiscal year, as follows: (i) if a minimum of 85% of the objectives are
achieved, the annual bonus will be equal to 22.5% of the annual base
salary, (ii) if the objectives are achieved in full, the annual bonus will
be equal to 45% of the annual base salary, and (iii) if all objectives are
exceeded by at least 50%, the annual bonus will be equal to 67.5% of the
annual base salary. The bonus objectives for each fiscal year are reviewed
and finalized with the Board of Directors of the Company within 45 days
following the commencement of each fiscal year. In the first year of
employment, Mr. Vadhia was entitled to receive a guaranteed minimum bonus
amounting to $80,000 and was also entitled to receive a signing bonus of
$100,000.

Mr. Vadhia is also entitled to customary benefits and options to purchase
75,000 common shares pursuant to the Option Plan. The options provide for
equal annual vesting over a period of four years commencing one year
following their date of grant, and are otherwise governed by the terms and
conditions of the Option Plan.

Mr. Vadhia's employment agreement provides further that, in the event that
the Company terminates his employment without legal grounds for which an
employer is entitled to dismiss an employee without notice or compensation
in lieu of notice, he will be entitled to the following termination
package: (i) a lump sum payment equal to one times his annual base salary,
(ii) a lump sum payment of an amount in lieu of bonus equal to one times
his average earned annual bonus over the previous three fiscal years (or
such shorter period during which Mr. Vadhia will then have been employed by
the Company), and (iii) continuous group life and health benefits coverage
in accordance with the Company's U.S. policy relating to post-termination
life and health benefits coverage. In addition, Mr. Vadhia will have a
period of 90 days following the date of termination to exercise all stock
options that are vested up to the end of such exercise period.

Pursuant to an addendum to his employment agreement dated October 10, 2001,
Mr. Vadhia accepted an assignment of approximately one year as Vice
President and General Manager of the Optical Systems Division based
primarily in Sweden. Pursuant to this addendum, Mr. Vadhia was entitled to
receive a target bonus of 45% of base salary for the Swedish assignment
only and the potential for a further special bonus of 45% of base salary
based on performance deliverables as agreed between Mr. Vadhia and the
President and CEO of the Company. Mr. Vadhia also received options to
purchase 10,000 common shares pursuant to the Option Plan and was eligible
for a further 20,000 options at the end of this assignment based upon the
achievement of significant performance deliverables agreed between Mr.
Vadhia and the President and CEO of the Company. The addendum also provided
for a period of six months following Mr. Vadhia's date of termination to
exercise all stock options that were vested at the end of that six-month
period.


-77-


Pursuant to a further addendum to his employment agreement dated December
20, 2002, Mr. Vadhia accepted an assignment of approximately two years'
duration, subject to review, as Senior Vice President and General Manager,
Network Communications based primarily in Ottawa and secondarily in
California. This addendum was effective as of January 1, 2003. Pursuant to
this addendum, Mr. Vadhia is entitled to receive a bonus of 55% of his base
salary at full achievement of agreed performance objectives.

ROLAND ANDERSSON

On May 10, 2001, the Company entered into an employment agreement with
Roland Andersson with respect to his employment as Senior Vice President,
Worldwide Sales and Marketing.

Pursuant to the agreement, Mr. Andersson is entitled to receive an annual
base salary in the amount of $290,000 (which was fixed at an equivalent
amount in Swedish Kroner based on the exchange rate at time of hire), plus
an annual bonus, conditional upon the successful achievement by Mr.
Andersson of specific target objectives in each fiscal year, as follows:
(i) if a minimum of 85% of the objectives are achieved, the annual bonus
will be equal to 27.5% of the annual base salary, (ii) if the objectives
are achieved in full, the annual bonus will be equal to 55% of the annual
base salary, and (iii) if all objectives are exceeded by at least 25%, the
annual bonus will be equal to 85% of the annual base salary. The bonus
objectives for each fiscal year are reviewed and finalized with the Board
of Directors of the Company within 45 days following the commencement of
each fiscal year. In the first year of employment, Mr. Andersson was
entitled to receive a guaranteed minimum bonus amounting to $100,000 and a
signing bonus in the amount of $150,000. The agreement also provides for
Company funding of 20 to 25% of Mr. Andersson's base salary annually to
continue his private executive pension arrangement in Sweden.

Mr. Andersson is also entitled to customary benefits and options to
purchase 75,000 common shares pursuant to the Option Plan. The options
provide for equal annual vesting over a period of four years commencing one
year following their date of grant, and are otherwise governed by the terms
and conditions of the Option Plan.

Mr. Andersson's employment agreement provides further that, in the event
that the Company terminates his employment without legal grounds for which
an employer is entitled to dismiss an employee without notice or
compensation in lieu of notice, he will be entitled to the following
termination package: (i) a lump sum payment equal to one times his annual
base salary and (ii) a lump sum payment equal to one times his average
earned annual bonus over the previous three fiscal years (or such shorter
period during which Mr. Andersson will then have been employed by the
Company). In addition, Mr. Andersson will have a period of 90 days
following the date of termination to exercise all stock options that are
vested up to the end of such exercise period and will receive continued
group life and health benefits coverage not to extend beyond one year in
accordance with the Company's Sweden policy relating to post-termination
life and health benefits coverage.

ANTHONY A. P. GALLAGHER

Anthony Gallagher was employed by GEC Plessey Semiconductor from 1992 until
1998, at which time the Company acquired the assets of GEC Plessey
Semiconductor and Mr. Gallagher became an employee of the Company. Mr.
Gallagher's initial employment agreement with GEC Plessey Semiconductors
was entered into on May 26, 1992, and subsequently amended by agreements
with the Company dated April 7, 1999, April 20, 2000 and April 18, 2002,
respectively.

Pursuant to the current agreement, Mr. Gallagher is employed as Senior Vice
President, Worldwide Operations, and is entitled to receive an annual base
salary of $246,500, plus an annual bonus equal to 50% of the annual base
salary, conditional upon the successful achievement by Mr. Gallagher of
specific target objectives in each fiscal year. Mr. Gallagher is also
entitled to customary benefits.

Mr. Gallagher's employment agreement further provides that any termination
of employment by either Mr. Gallagher or the Company is subject to nine
months' prior notice of termination.


-78-


MICHAEL BEREZIUK

On October 25, 2001, the Company entered into an employment agreement with
Mr. Michael Bereziuk with respect to his employment as Senior Vice
President and General Manager, Consumer Communications. This agreement
covers Mr. Bereziuk's foreign assignment in the U.K. for a minimum term of
36 months, renewable and extendable for a further period under conditions
reassessed and mutually agreed upon at that time.

Pursuant to the agreement, Mr. Bereziuk is entitled to receive an annual
base salary in the amount of $275,000, plus an annual bonus amounting to
50% of his base salary at full performance of the objectives. In the first
year of employment, Mr. Bereziuk was entitled to receive a guaranteed
minimum bonus amounting to $103,125 and was also entitled to receive a
signing bonus of $65,000, grossed-up for tax.

Mr. Bereziuk is also entitled to customary benefits and options to purchase
75,000 common shares pursuant to the Option Plan. The options provide for
equal annual vesting over a period of four years commencing one year
following their date of grant, and are otherwise governed by the terms and
conditions of the Option Plan.

Mr. Bereziuk's employment agreement provides further that, in the event
that the Company terminates his employment without legal grounds for which
an employer is entitled to dismiss an employee without notice or
compensation in lieu of notice, he will be entitled to the following
termination package: (i) a lump sum payment equal to one times his annual
base salary, (ii) a lump sum payment in lieu of bonus equal to one times
his target annual bonus, and (iii) continuous group life and health
benefits coverage in accordance with the Company's U.S. policy relating to
post-termination life and health benefits coverage. In addition, Mr.
Bereziuk will have a period of 90 days following the date of termination to
exercise all stock options that are vested up to the end of such exercise
period.

Compensation of Non-Employee Directors

During the fiscal year ended March 28, 2003, each director who was not a
salaried officer of the Company or its subsidiaries received an annual
stipend of $6,400 and a director's fee of $1,280 for each meeting of the
Board of Directors or any Committee thereof attended in person and for each
day spent on the affairs of the Company or $800 for each telephone meeting
of the Board of Directors and was reimbursed for his expenses. In addition,
the Chairman of each Committee of the Board of Directors received an
additional annual fee of $3,800. The Company pays the Chairman of the Board
of Directors, when such person is not an employee of the Company, an annual
stipend of $64,000 (inclusive of Board and Committee meeting fees) and a
per diem of $1,600 for attendance to Company business to an annual maximum
of $32,000.

The following table summarizes the aggregate number of unexercised options
held by non-employee directors at May 30, 2003.


-79-


Option Information For Non-Employee Directors

===========================================================================
Date of Grant Unexercised Options at May 30, 2003
Exercisable / Unexercisable
---------------------------------------------------------------------------
May 12, 1994 24,000 / --
---------------------------------------------------------------------------
May 17, 1995 40,000 / --
---------------------------------------------------------------------------
May 16, 1996 40,000 / --
---------------------------------------------------------------------------
May 22, 1997 40,000 / --
---------------------------------------------------------------------------
March 12, 1998 50,000 / --
---------------------------------------------------------------------------
July 23, 1998 25, 000 / --
---------------------------------------------------------------------------
May 20, 1999 55,000 / --
---------------------------------------------------------------------------
August 27, 1999 15,000 / 5,000
---------------------------------------------------------------------------
January 12, 2000 60,000 / 20,000
---------------------------------------------------------------------------
May 4, 2000 37,500 / 12,500
---------------------------------------------------------------------------
August 22, 2000 10,000 / 10,000
---------------------------------------------------------------------------
February 21, 2001 100,000 / 100,000
---------------------------------------------------------------------------
February 6, 2002 30,000 / 90,000
---------------------------------------------------------------------------
July 13, 2002 -- / 20,000
---------------------------------------------------------------------------
February 6, 2003 -- / 140,000
---------------------------------------------------------------------------
May 14, 2003 -- / 20,000
===========================================================================

Directors' and Officers' Liability Insurance

As at May 30, 2003, the Company had in force Directors' and Officers' Liability
Insurance policies in the amount of $30,000,000 for the benefit of the directors
and officers of the Company and its subsidiaries. The total amount of the
premiums paid by the Company for the policies in effect for the fiscal year
ended March 28, 2003 was $634,053. No portion of these premiums was paid by the
directors and officers of the Company. The policies do not provide for a
deductible for any loss in connection with a claim against a director or an
officer. For claims brought against the Company, a deductible of $1,000,000
applies.

Indebtedness of Directors, Executive Officers and Senior Officers

As at May 30, 2003, no director, executive officer or senior officer of the
Company, or any proposed nominee for election as a director of the Company, or
any associate of any such director, officer or proposed nominee was indebted to
the Company or any one of its subsidiaries in connection with the purchase of
securities of the Company or its subsidiaries or otherwise (other than for
routine indebtedness).

Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters

The following table sets forth information as at May 30, 2003 with respect to
(1) all shareholders known by the Company to be beneficial owners (which
includes shares over which control or direction is exercised) of more than 5% of
its outstanding common shares; and (2) ownership of common shares and $2.00
Cumulative Redeemable Convertible Preferred Shares, 1983 R&D Series (R&D
Preferred Shares) by each director, each of the Named Executive Officers and all
executive officers and directors as a group.


-80-

Amount Percent
Class of Beneficially of
Name and Address Shares Owned Class(1)

The CC&L Financial Services Group(5) Common 8,217,300 6.46
1200 Cathedral Place
925 West Georgia Street
Vancouver BC V6C 3L2
Canada

Massachusetts Financial Services Company(5) common 7,921,735 6.23
500 Boylston Street
Boston, Massachusetts
U.S.A. 02116-3741

*Roland Andersson common 50,052 (4)

*Pradeep Arora common 43,028 (4)

*Michael Bereziuk common 38,893 (4)
Andre Borrel common 70,000 (4)
Chemin du bois de Seyme, 1
1253 Vandoeuvres-GE- Suisse

*Patrick J. Brockett common 556,891 (4)

*Peter Burke common 97,050 (4)

*Jonathan Burnie common 10,466 (4)

*J. Desmond Byrne common 34,763 (4)

*Jean-Jacques Carrier(6) common 273,403 (4)

*Robert Eschbach common nil

*Anthony P. Gallagher common 49,472 (4)

*Tsviatko Ganev common 12,500 (4)

*John Ingvarsson common nil

Hubert T. Lacroix common 167,528 (4)
1 Place Ville Marie, Suite 3333
Montreal, QC H3B 3N2

*J. Spencer Lanthier common nil

*Mark Levi common 54,043 (4)

*Kirk K. Mandy common 95,500 (4)

*Donald G. McIntyre common 257,309 (4)

*Shirley Mears common 60,132 (4)

*Jules Meunier common 5,000 (4)

*Scott Milligan common nil


-81-


Amount Percent
Class of Beneficially of
Name and Address Shares Owned Class(1)

Kent H. E. Plumley common 25,000 (4)
1500 - 50 O'Connor Street
Ottawa, ON K1P 6L2

*Timothy Saunders common 56,050 (4)

Dr. Henry Simon common 260,000 (4)
1 Telegraph Hill
London, England NW3 7NU

Dr. Semir D. Sirazi common 45,000 (4)
500 Elmwood Ave
Wilmette, IL 60091

*Stephen Swift common 47,050 (4)

*Jitesh Vadhia common 116,250 (4)

23 directors and executive officers common 2,425,380 (4)
as a group(2,3) R&D Preferred nil

* These executive officers are located c/o Zarlink Semiconductor Inc., 400
March Road, Ottawa, Ontario, Canada K2K 3H4.

The persons named hold the sole investment and voting power except as set forth
below:

(1) Percentage ownership is calculated based upon total shares in the class
outstanding plus shares in the class subject to options currently
exercisable or exercisable within sixty days by the entity or group
indicated.

(2) These holdings include stock options currently exercisable or exercisable
within 60 days by: Mr. Andersson - 45,000; Mr. Arora - 40,750; Mr. Bereziuk
- 26,250; Mr. Borrel - 70,000; Mr. Brockett - 527,500; Mr. Burke - 84,159;
Mr. Burnie - 9,231; Mr. Byrne - 34,763; Mr. Carrier - 242,500; Mr.
Gallagher - 47,179; Mr. Ganev - 12,500; Mr. Lacroix - 159,000; Mr. Levi -
37,500; Mr. Mandy - 92,500; Mr. McIntyre - 202,500; Ms. Mears - 59,400; Mr.
Plumley - 25,000; Mr. Saunders - 56,050; Dr. Simon - 135,000; Dr. Sirazi -
45,000; Mr. Swift - 43,148, and Mr. Vadhia - 47,500.

(3) Does not include stock options granted to non-employee directors which are
not currently exercisable, as follows: Mr. Borrel - 50,000; Mr. Lacroix -
50,000; Mr. Lanthier - 20,000; Mr. Mandy - 97,500; Mr. Meunier - 40,000;
Mr. Plumley - 55,000; Dr. Simon - 50,000, and Dr. Sirazi - 55,000.

(4) Represents less than 1% of the class.

(5) The Company has relied on a Schedule 13G filed with the SEC disclosing the
number of shares beneficially owned by each reporting person.

(6) Mr. Carrier resigned as an executive officer of the Company effective May
16, 2003.

Statements contained in the table as to securities beneficially owned by persons
referred to therein or over which they exercise control or direction are, in
each instance, based upon information provided by such persons.

Item 13. Certain Relationships and Related Transactions

None.


-82-


Item 14. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Within the 90-day period prior to the filing of this report, an evaluation was
carried out under the supervision and with the participation of the Company's
management, including the Company's President and Chief Executive Officer (CEO)
and Chief Financial Officer (CFO), of the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rule
13a-14(c) of the Securities Exchange Act of 1934). Based upon that evaluation,
the Company's management, including the CEO and CFO, concluded that the design
and operation of these disclosure controls and procedures were effective.

Changes in Internal Controls

There were no significant changes in the Company's internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of their evaluation.


-83-


Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.

a) The following financial statements and supplementary data are filed as part
of this report under Item 8:

Page
1. Consolidated Financial Statements. Number
(within the 10-K)

Auditor's Report to the Shareholders 37

Consolidated Balance Sheets at March 28, 2003,
March 29, 2002, and March 30, 2001 38

Consolidated Statements of Shareholders' Equity for the
fiscal years ended March 28, 2003, March 29, 2002, and
March 30, 2001 39

Consolidated Statements of Loss for the fiscal years ended
March 28, 2003, March 29, 2002, and March 30, 2001 40

Consolidated Statements of Cash Flows for the fiscal years
ended March 28, 2003, March 29, 2002, and March 30, 2001 41

Notes to the Consolidated Financial Statements 42

2. Financial Statement Schedules. The Schedules supporting the consolidated
financial statements, which are filed as part of this report, are as follows:

Schedule II - Valuation and qualifying accounts

Note: Schedules other than that listed above are omitted as they are not
applicable or not required, or the information is included in the consolidated
financial statements or notes thereto.

3. Exhibits

Exhibit Description
Number

2.1 Acquisition Agreement by and among the Company, 3755461 Canada Inc.
and Dr. Terence H. Matthews, dated as of January 2, 2001 (the
Acquisition Agreement)(incorporated by reference to Exhibit 2.1 to
Form 8-K filed on March 2, 2001). The following exhibits to the
Acquisition Agreement were omitted. The Company will furnish
supplementally a copy of any omitted exhibit to the Securities and
Exchange Commission upon request.

Omitted exhibits:

Schedule 1.1(nn) Financial Statements Schedule
Schedule 1.1(nnn) Permitted Encumbrances
Schedule 2.2 Purchase Price Allocation Schedule
Schedule 2.3 Audit Report Schedule
Schedule 3.4 Authorized and Issued Capital - Vendor Group
Schedule 3.6 Loan Agreement Particulars
Schedule 3.7 Vendor Group Subsidiaries
Schedule 3.8 Violations
Schedule 3.9 Locations
Schedule 3.11 Real and Leased Property
Schedule 3.13 Real Property Leases
Schedule 3.16(a)-(g) Business Intellectual Property
Schedule 3.19 Material Contracts
Schedule 3.20 Licenses and Permits


-84-


Schedule 3.21 Consents
Schedule 3.25 Tax Matters
Schedule 3.26 Legal and Regulatory Proceedings
Schedule 3.28 Environmental Matters
Schedule 3.29 Employee Plans Excluding United States
Schedule 3.30 Employee Benefit Plans - United States
Schedule 3.31 Collective Agreements
Schedule 3.32 Employees and Contractors
Schedule 3.34 Customers and Suppliers
Schedule 3.35 Product Warranties
Schedule 3.36 Grants
Schedule 6.1(a) Restructuring
Schedule 6.2(a) Current Corporate Structure
Schedule 6.2(b) Reorganization
Schedule 6.2(d)(i) Lease Agreement
Schedule 6.2(d)(ii) Phase V Lease
Schedule 6.2(e) License Agreement
Schedule 6.3(a) Transition Plan Agreement
Schedule 6.11 Non-Competition Agreement
Schedule 6.22 Employees
Schedule 6.23 Tangible Personal Property
Schedule 7.1(i) Form of Opinion of Vendor's Counsel
(Canada, UK and US)
Schedule 7.1(m) Supply Agreement
Schedule 7.1(n) Shareholders Agreement
Schedule 7.1(p) Form of Release
Schedule 7.3(f) Form of Opinion of Purchaser's Counsel

3.1 Conformed Composite Copy of the Company's Articles, as amended to date
(incorporated by reference to Exhibit 4.3 to Registration Statement
No.333-83556 on Form S-8)

3.2 By-law No. 16 of the Company

3.3 Form of Specimen Certificate for Common Shares of the Company

10.1 Share Sale and Purchase Agreement, dated February 12, 1998, between
The General Electric Company p.l.c., London, England and Zarlink
Telecom Limited, Portskewett, Gwent, Wales and the Company, Kanata,
Ontario, Canada (incorporated by reference to Exhibit 2.1 to Form 8-K
filed on February 27, 1998)

10.2 Deed of Tax Covenant, dated February 12, 1998, between The General
Electric Company p.l.c. and Zarlink Telecom Limited (incorporated by
reference to Exhibit 2.2 to Form 8-K filed on February 27, 1998)

10.3 Environmental Deed, dated February 12, 1998, between The General
Electric Company p.l.c. and Zarlink Telecom Limited (incorporated by
reference to Exhibit 2.3 to Form 8-K filed on February 27, 1998)

21 Subsidiaries of the Company

23 Consent of Ernst & Young LLP

99.1 Management's Discussion and Analysis of the Company's Financial
Condition and Results of Operations- Canadian Supplement

99.2 Consolidated Financial Statements in accordance with Canadian
Generally Accepted Accounting Principles


-85-


b) Reports on Form 8-K. The Company filed two Current Reports on Form 8-K
in the quarter ended March 28, 2003. The Reports were dated January
31, 2003 and February 17, 2003. The Report dated January 31, 2003 was
in respect of certifications provided by the Chief Executive Officer
and the Chief Financial Officer pursuant to 18 U.S.C. SECTION 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. The
report dated February 17, 2003 was in respect of the announcement that
Jean-Jacques Carrier, the Company's Senior Vice President of Finance
and Chief Financial Officer would be leaving the Company.


-86-


Signatures

Pursuant to the requirements of Section 13 or 15 (d) 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.

ZARLINK SEMICONDUCTOR INC.

By:/s/ Patrick J. Brockett
---------------------------------------
(Patrick J. Brockett)
President and Chief Executive Officer

Dated: June 25, 2003

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

Signature Title Date

/s/ Henry Simon Chairman of the Board June 25, 2003
- ------------------------
(Henry Simon)

/s/ Kirk K. Mandy Vice Chairman of the Board June 25, 2003
------------------------
(Kirk K. Mandy)

/s/ Patrick J. Brockett President and Chief Executive June 25, 2003
- ------------------------ Officer
(Patrick J. Brockett)

/s/ Andre Borrel Director June 25, 2003
- ------------------------
(Andre Borrel)

/s/ Hubert T. Lacroix Director June 25, 2003
- ------------------------
(Hubert T. Lacroix)

/s/ J. Spencer Lanthier Director June 25, 2003
- ------------------------
(J. Spencer Lanthier)

/s/ Jules Meunier Director June 25, 2003
- ------------------------
(Jules Meunier)

/s/ Kent H.E. Plumley Director June 25, 2003
- ------------------------
(Kent H.E. Plumley)

/s/ Semir D. Sirazi Director June 25, 2003
- ------------------------
(Semir D. Sirazi)


-87-


Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant
to Section 302 (a) of the Sarbanes-Oxley Act of 2002

I, Patrick J. Brockett, President and Chief Executive Officer of Zarlink
Semiconductor Inc., certify that:

I have reviewed this annual report on Form 10-K of Zarlink Semiconductor
Inc. (the registrant);

Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;

Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;

The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;

evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the Evaluation Date); and

presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.

Date: June 25, 2003
-------------

/s/ PATRICK J. BROCKETT
-------------------------------------
Patrick J. Brockett
President and Chief Executive Officer


-88-


Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to
Section 302 (a) of the Sarbanes-Oxley Act of 2002

I, Scott Milligan, Senior Vice-President of Finance and Chief Financial
Officer of Zarlink Semiconductor Inc., certify that:

I have reviewed this annual report on Form 10-K of Zarlink Semiconductor
Inc. (the registrant);

Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;

Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;

The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:


designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;

evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the Evaluation Date); and

presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.

Date: June 25, 2003
-------------

/s/ SCOTT MILLIGAN
--------------------------------------
Scott Milligan
Senior Vice-President of Finance and
Chief Financial Officer


-89-


SCHEDULE II

ZARLINK SEMICONDUCTOR INC.
VALUATION AND QUALIFYING ACCOUNTS
March 28, 2003
(in millions of U.S. dollars)




Additions
Balance, Balance,
Beginning Charged to Charged to End
Description of Period expense other accounts Deductions of Period

Allowance for doubtful accounts:

Fiscal 2003 $ 1.3 $ 0.2 -- $ (0.4) $ 1.1
Fiscal 2002 0.3 1.6 -- (0.6) 1.3
Fiscal 2001 5.1 2.0 -- (6.8) 0.3

Restructuring provisions:
Fiscal 2003 $ 7.9 $ -- -- $ (5.0) $ 2.9
Fiscal 2002 6.7 41.1 -- (39.9) 7.9
Fiscal 2001 -- 11.2 -- (4.5) 6.7



-90-


SECURITIES AND EXCHANGE COMMISSION

ZARLINK SEMICONDUCTOR INC.

ANNUAL REPORT ON FORM 10-K

FOR THE PERIOD ENDING MARCH 28, 2003

EXHIBITS