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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 26, 2004

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. [X]

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

At May 28, 2004, 127,302,973 common shares of the registrant were issued and
outstanding. Non-affiliates of the registrant held 108,011,531 common shares
having an aggregate market value of $419,084,740 based upon the closing price of
the common shares on the New York Stock Exchange (September 26, 2003, being the
last day of the Company's most recently completed second quarter) of $3.88.

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....................................................2
Business Strategy........................................................2
Industry.................................................................2
Products and Customers...................................................3
Network Communications Segment........................................4
Consumer Communications Segment.......................................6
Ultra Low-Power Communications Segment................................6
Sales, Marketing and Distribution........................................7
Competition..............................................................8
Manufacturing............................................................9
Research and Development.................................................9
Employees...............................................................10
Proprietary Rights......................................................10
Forward-Looking Statements and Risk Factors.............................10

Item 2. Properties.........................................................14

Item 3. Legal Proceedings..................................................14

Item 4. Submission of Matters to a Vote of Security Holders................15

PART II.......................................................................16

Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities..................16
Principal Markets.......................................................16
Shareholders............................................................16
Dividend Policy.........................................................16

Item 6. Selected Financial Data............................................16

Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................18
BUSINESS OVERVIEW.......................................................18
RESULTS OF OPERATIONS...................................................19
GEOGRAPHIC REVENUE......................................................21
United States........................................................22
Other Regions........................................................22
GROSS MARGIN............................................................22
OPERATING EXPENSES......................................................23
Research and Development (R&D).......................................23
Selling and Administrative (S&A).....................................24
Stock Compensation Expense...........................................24
Asset Impairment and Other...........................................24



Loss (Recovery) on Sale of Business..................................24
Special Charges......................................................25
Amortization of Acquired Intangibles.................................25
OTHER INCOME (EXPENSE)..................................................26
INTEREST EXPENSE........................................................26
INCOME TAXES............................................................26
DISCONTINUED OPERATIONS.................................................27
NET LOSS................................................................27
LIQUIDITY AND CAPITAL RESOURCES.........................................28
COMMITMENTS AND GUARANTEES..............................................30
BACKLOG.................................................................30
OTHER...................................................................31
Critical Accounting Policies and Significant Estimates...............31
Foreign Currency Translation.........................................32
Forward-Looking Statements...........................................33

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.......33

Item 8. Financial Statements and Supplementary Data........................34

Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...........................................61

Item 9A. Controls and Procedures..........................................61

PART III......................................................................62

Item 10. Directors and Executive Officers of the Registrant...............62
Directors...............................................................62
Statement of Corporate Governance Practices.............................63
Executive Officers......................................................65

Item 11. Executive Compensation...........................................66
Summary Compensation Table..............................................66
Employee Share Ownership Plan...........................................68
Director, CEO and Executive Share Ownership.............................68
1991 Stock Option Plan for Key Employees and Non-Employee Directors.....69
Option Grants During Fiscal 2004........................................70
Aggregated Options Exercised During Fiscal 2004 and
Fiscal Year-End Option Values.........................................72
Employment Agreements...................................................72
Compensation of Non-Employee Directors..................................75
Option Information for Non-Employee Directors...........................75
Directors' and Officers' Liability Insurance............................75
Indebtedness of Directors, Executive Officers and Senior Officers.......76

Item 12. Security Ownership of Certain Beneficial Owners and Management...77
Equity Compensation Plan Information....................................79

Item 13. Certain Relationships and Related Transactions...................79

Item 14. Principal Accounting Fees and Services...........................79

Item 15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K......................................................80



PART I

Item 1. 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", other than dollars per share
and executive compensation, 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 is 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

Zarlink designs, manufactures and markets semiconductors primarily for the
communications and health care industries. 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 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.

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 components that process information.
Management believes that the Company's success is built on its technology
strengths encompassing voice and data networks, and consumer and ultra low-power
communications. Zarlink's mission is to provide the most compelling products for
the network, consumer and ultra low-power communications markets, ahead of the
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.

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
telecommunication functions continues.



Financial Information

Financial information about industry segments, 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 21 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 traffic onto packet-based data networks, thereby
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 communications
and healthcare. 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 (CMOS) processes,
while maintaining 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 (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 penetrate new communications applications
while maintaining a major position in healthcare device applications. See
"Business-Products and Customers."

Industry

The global communications industry is characterized by rapid structural change
and economic growth caused by technological innovation, economic factors, and
changes in government policies that encourage competition and choice. Further,
the communications industry is driven by the need to enhance competitive
advantage through access to information, anytime, and 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 like the Company, 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 markets
retrenched. With this, network capital spending plans were reduced across the


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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 this 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 is evidence of 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 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
TDM-based networks to packet networks (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 now favor 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 technology employed in
pacemaker and hearing aid products, and Zarlink RF technology employed in
wireless products, uniquely positions the Company in the emerging ultra
low-power communications market.

Products and Customers

Zarlink's integrated circuits are microelectronic components that offer high
feature integration, low-power consumption, and the low physical space, or
footprint, required for the design of advanced systems. These ICs 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, 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


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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 54%, 60% and 51% of the
Company's total revenue from continuing operations in Fiscal 2004, 2003, and
2002, respectively. Consumer Communications segment revenue accounted for 28%,
25% and 33% of the Company's total revenue from continuing operations in Fiscal
2004, 2003, and 2002, respectively. Ultra Low-Power Communications segment
revenue accounted for 18%, 15% and 16% 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 2004,
Zarlink had revenues from one independent distributor (the Memec group of
companies), which exceeded 10% of total sales. Worldwide sales to this
distributor in Fiscal 2004 amounted to $46.1, or 23% of sales from continuing
operations (Fiscal 2003 - $39.0, or 20%; Fiscal 2002 - $27.1, or 12% of sales).
The increased sales to this distributor resulted from consolidating sales
previously made directly to end customers and the consolidation of independent
distributors.

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.

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 Phase Locked-Loop (PLL)
circuitry for timing and synchronization functions. Digital switches are used in
a wide variety of applications, including media gateways, central offices,
Private Branch Exchanges (PBXs), 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, digital PLLs and high-speed, low-jitter analog PLL devices for
SONET/SDH applications, and fully featured timing modules for Optical Carrier
level 3 (OC-3) line cards and timing 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, PBXs, wireless base
stations, and routers.

Packet Switching

Zarlink provides layer two Ethernet switches that offer a high level of Quality
of Service (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.


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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 (MANs). The Company has
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/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.

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 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 optical components for the industrial, communications, and
military/security markets. The Company designs and sells a variety of
transmitters, including Vertical Cavity Surface Emitting Lasers (VCSELs), Light
Emitting Diodes (LEDS); and receivers, including Positive-Intrinsic-Negative
(PIN) photodiodes and PIN photodiodes with integrated preamplifiers
(PIN/Preams). The Company also offers a range of Very Short Reach (VSR) single
and parallel fiber optic modules for optical interconnection.

In optical components, management believes that Zarlink has an established
presence as a value-added supplier offering custom and semi-custom solutions
based upon industry-standard, high-performance optical technology. For example,
the Company recently introduced two highly integrated optical receivers for
specialized DTV optical broadcast systems, and a family of four Fabry-Parot
laser diodes for a broad range of industrial and commercial equipment. 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 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 single-channel, 4-channel, and 12-channel transceiver,
transmitter, and receiver modules. Zarlink's 12-channel pluggable, parallel
fiber optic transmitter/receiver modules offer an aggregate capacity of
32.4-gigabits per second (Gb/s), for transporting massive volumes of traffic in
optical networking equipment.


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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. Zarlink strengthens
its product offering by providing customers with production-ready blueprints,
known as Reference Designs, that assist manufacturers in designing their
equipment. For example, Zarlink recently introduced a single-chip wideband
direct conversion tuner, with a Reference Design for a complete front-end
subsystem used in digital satellite STBs. 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 offers a 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 have been 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.

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 a wide
variety of analog products for broadband communications. The product offering
includes laser diode drivers for high-speed DVD/CD record and rewrite systems,
operational amplifiers for driving high-resolution video signals, 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).

Digital Cellular Telephony

Zarlink has built on the success of its earlier analog chipsets by developing
products that 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 GSM ANSI-136
Interoperability Team (GAIT), 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 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 external circuitry. Zarlink's devices are designed
into the products of leading handset manufacturers.

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. Zarlink's silicon solutions meet the rigorous
standards of equipment makers and customers in the healthcare field.


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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. For example, Zarlink recently
introduced an ultra low-power, analog-to-digital converter chip for digital
microphones used in next-generation cell phones offering stereo sound.
Management believes that this is the first analog-to-digital converter to meet
the stringent performance demanded by cell phone manufacturers.

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's strategic account program focuses 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.

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. Over 65% 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

Zarlink primarily uses a direct sales model in the Americas Region. The direct
sales force includes major account teams that target specific large customers
for standard product designs. Distributors also 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


-7-


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 and
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 and its intellectual property
for the network communications, consumer communications, and ultra low-power
communications 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 compete 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.

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.


-8-


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 at 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 this 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.

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 R&D
spending amounted to $75.1 in Fiscal 2004, as compared to $87.5 and $82.9 in
Fiscals 2003 and Fiscal 2002, respectively.

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 network timing and synchronization
functions, wide area network (WAN) chips, packet switching, packet processing,
and voice processing functions, set-top box and digital TV 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 communications and 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, California in the United States; Caldicot, Swindon,
Plymouth, Lincoln and Borehamwood in the United Kingdom; and Rotterdam in the
Netherlands.

As at March 26, 2004, Zarlink employed 265 research and development personnel
primarily based in the United Kingdom, Canada, Sweden, and the United States.


-9-


Employees

As at March 26, 2004, the Company employed 1,037 persons. Approximately 51% of
the Company's employees are located in the United Kingdom, 20% in Canada, 16% in
Sweden, 8% in the United States, and 5% 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 27 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. Management considers
the Company's relationship with the unions in the United Kingdom to be
satisfactory.

In Sweden, three unions represent approximately 116 employees. The Metall
Industriarbetarforbundet union represents approximately 14 production employees;
the Svenska Industriarbetarforbundet union represents approximately 67 office
professional employees; and the Civilingenjorsforbundet union represents
approximately 35 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, 2007. Management considers the Company's relationship with the unions
in Sweden to be satisfactory.

Proprietary Rights

The Company owns many patents and has made numerous applications for patents
relating to communications and semiconductor and optoelectronic technologies.
Not withstanding the accounting treatment for patents, 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 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:


-10-


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 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".


-11-


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 all of its executive officers,
including Patrick J. Brockett, its President and Chief Executive Officer.

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 thereunder 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


-12-


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 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, the creation of goodwill or other intangible assets, or
significant one-time write-offs. 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 76% of the Company's sales in Fiscal 2004 were derived from sales
in markets outside the United States and 71% 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.

On March 29, 2003, the Company changed the functional currencies in the parent
company and its subsidiaries to the U.S. dollar. However, a portion of the
Company's costs of sales and other expenses are denominated in U.K. pounds
sterling, Canadian dollars, 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. 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


-13-


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 42,000 sf is
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 62,000
sf of the space is sub-let to five tenants with sub-lease periods expiring from
February 2006 to April 2008.

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 128,600
sf, primarily dedicated to design and sales. A geographical breakdown of these
facilities is as follows: nine locations in the United States totaling 43,100
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 6,100 sf (France, Germany, Holland); and, six locations in the
Asia/Pacific region (China, Japan, Korea, Singapore, Taiwan, and Malaysia)
totaling 10,100 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.

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


-14-


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.


-15-


PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities

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)

2004 2003
------------- ------------- ------------ ------------
High Low High Low
------------- ------------- ------------ ------------

1st Quarter 5.44 3.55 10.00 4.65
2nd Quarter 5.63 3.88 5.43 1.97
3rd Quarter 4.29 2.66 3.96 1.31
4th Quarter 4.76 3.30 3.65 2.26

Toronto Stock Exchange
(Canadian Dollars)

2004 2003
------------- ------------- ------------ ------------
High Low High Low
------------- ------------- ------------ ------------

1st Quarter 7.44 5.27 15.90 7.05
2nd Quarter 7.70 5.20 8.48 3.15
3rd Quarter 5.65 3.49 6.25 2.16
4th Quarter 6.27 4.38 5.69 3.53

Shareholders

There were 3,836 common shareholders of record as at May 28, 2004.

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%.

Item 6. Selected Financial Data

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


-16-


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 2004 2003 2002 2001 2000
-------------------------------------------------------------

Income Statement Data:
Revenue $ 198.5 $ 193.8 $ 222.1 $ 450.2 $ 409.9
Gross margin percentage 45% 47% 30% 50% 46%
Gross research and development expense 75.1 87.5 82.9 92.9 69.5
Net income (loss) from continuing operations (39.8) (60.3) (120.8) (278.4) 34.2
Net income (loss) (38.6) (57.9) (120.8) (270.8) 50.2
Net income (loss) per common share from continuing
operations
Basic (0.33) (0.49) (0.98) (2.32) 0.28
Diluted (0.33) (0.49) (0.98) (2.32) 0.27
Net income (loss) per common share
Basic (0.32) (0.47) (0.98) (2.25) 0.42
Diluted (0.32) (0.47) (0.98) (2.25) 0.41
Balance Sheet Data:
Working capital $ 95.8 $ 114.8 $ 156.8 $ 222.0 $ 263.6
Total assets 197.4 247.6 321.1 463.6 835.2
Long-term debt 0.1 0.2 0.7 4.8 149.6
Redeemable preferred shares 17.6 18.9 20.6 21.4 23.5
Shareholders' equity
Common shares 768.4 768.3 767.6 762.7 546.0
Additional paid in capital 2.3 2.1 4.1 1.7 -
Deferred stock compensation - - (0.8) (6.8) -
Deficit (623.5) (582.8) (522.9) (400.2) (127.4)
Accumulated other comprehensive loss (32.6) (32.5) (45.9) (42.6) (13.7)


See Note 18 to the consolidated financial statements for a discussion regarding
the effect of the discontinued operations on Fiscal 2004 and 2003. For the year
ended March 30, 2001, the Company recorded a gain on sale of discontinued
operations of $7.6, net of a tax recovery of $10.4.


-17-


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 2004 First Second Third Fourth Full
(Unaudited) Quarter Quarter Quarter Quarter Year
----------- ----------- ------------ ----------- -----------


Revenue $ 53.7 $ 46.6 $ 47.0 $ 51.2 $ 198.5
Gross margin 25.6 19.4 21.0 23.4 89.4
Gross margin percentage 48% 42% 45% 46% 45%
Net loss (6.2) (18.9) (11.2) (2.3) (38.6)
Net loss per common share - basic and diluted (0.05) (0.15) (0.09) (0.02) (0.32)





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 and diluted (0.07) (0.10) (0.11) (0.19) (0.47)


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.

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, and
consumer and ultra low-power communications. At March 26, 2004, the Company
employed 1,037 people worldwide, including 265 designers.

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

The following discussion and analysis explains trends in Zarlink's financial
condition and results of operations for the fiscal year ended March 26, 2004,
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.


-18-


RESULTS OF OPERATIONS

Summary of Results from Operations




(millions of U.S. dollars, except per share amounts) 2004 2003 2002
---- ---- ----

Consolidated revenue: $ 198.5 $ 193.8 $ 222.1
Network Communications 107.1 115.8 114.5
Consumer Communications 55.6 49.1 72.7
Ultra Low-Power Communications 35.8 28.9 34.9

Operating income (loss) from continuing operations: (45.3) (41.7) (128.5)
Network Communications (19.6) (18.1) (73.6)
Consumer Communications (24.0) (23.0) (8.8)
Ultra Low-Power Communications (1.7) (4.5) 8.8
Unallocated recoveries (costs) - 3.9 (54.9)

Net loss from continuing operations (39.8) (60.3) (120.8)
Net loss per common share from
continuing operations - basic and diluted (0.33) (0.49) (0.98)
Net loss (38.6) (57.9) (120.8)
Net loss per common share - basic and diluted (0.32) (0.47) (0.98)
Weighted average common shares outstanding - millions 127.3 127.1 125.6


Fiscal 2004 revenue increased by $4.7, or 2%, from Fiscal 2003. The increase in
revenue was due to higher sales volumes in the Consumer Communications segment,
principally in the tuners and demodulators markets, and in the audiologic
component market within the Ultra Low-Power Communications segment, partially
offset by decreased sales volumes in the Network Communications segment. The
market continues to pose challenges as semiconductor sales volumes continue to
be affected by the prolonged downturn impacting the semiconductor industry.
However, increased customer bookings are beginning to show an indication of an
improvement in the level of inventory held by customers.

Revenue in Fiscal 2003 decreased by $28.3, or 13%, from revenue in 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.

In Fiscal 2004, the Company recorded a net loss from continuing operations of
$39.8, or $0.33 per share. This compares to a net loss from continuing
operations of $60.3, or $0.49 per share, in Fiscal 2003. The Fiscal 2004 net
loss was primarily a result of lower revenue due to the continued downturn in
the semiconductor industry, as well as restructuring costs incurred as a result
of the industry downturn. During the year, severance costs of $7.0 were recorded
as the company reduced its headcount in all areas. In addition, the net loss
included $11.1 of asset impairment and other restructuring costs.

In Fiscal 2003, the Company recorded a net loss from continuing operations of
$60.3, or $0.49 per share. 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 Corporation 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 holding
significant U.S. 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.

In Fiscal 2002, the net loss from continuing operations was $120.8, or $0.98 per
share. 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.

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-


-19-


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) 2004 2003 2002
---- ---- ----
Revenue: $ 107.1 $ 115.8 $ 114.5
------- ------- -------
As a % of total revenue 54% 60% 51%
Operating loss $ (19.6) $ (18.1) $ (73.6)
------- ------- -------

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.

Revenue for Fiscal 2004 totaled $107.1, down 8% from $115.8 in Fiscal 2003 and
6% from $114.5 in Fiscal 2002. 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 2004. Revenue declines
primarily resulted from decreased sales volumes of the Company's packet
switching and specialty products, partially offset by an increase in sales
volumes of optical communication products.

The segment's operating loss increased to $19.6 in Fiscal 2004 from an operating
loss of $18.1 in Fiscal 2003, and decreased from an operating loss of $73.6 in
Fiscal 2002. The increase in net loss in Fiscal 2004 was due mainly to $6.8 of
asset impairments and other restructuring costs, partially offset by the results
of cost control initiatives and lower R&D spending. During Fiscal 2004, the
Network Communications segment also incurred approximately $4.0 of severance
costs. The Fiscal 2002 results of the Network Communications segment were
adversely affected by lower sales volumes due to the downturn in the
semiconductor industry. In addition, the segment recorded an excess inventory
charge of $23.4 in cost of revenue for inventories estimated to be beyond its
needs for the following 12 months.

Despite the above market conditions, the Network Communications segment
continued its 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 2004, the Company continued to secure design wins and introduced 61 new
products to the market, up from 53 new products introduced in Fiscal 2003 and 25
in Fiscal 2002.

Consumer Communications
(millions of U.S. dollars) 2004 2003 2002
---- ---- ----
Revenue: $ 55.6 $ 49.1 $ 72.7
------- ------- ------
As a % of total revenue 28% 25% 33%
Operating loss $ (24.0) $ (23.0) $ (8.8)
------- ------- ------

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 2004 totaled $55.6, up 13% from $49.1 in Fiscal 2003, but
down 24% from $72.7 in Fiscal 2002. Fiscal 2004 revenue increases resulted
primarily from increased shipments of the Company's tuners and demodulators,
partially offset by decreased sales volumes of the segment's specialty products.
Fiscal 2003 revenue decreases resulted from lower sales volumes of the Company's
tuners and wireless products caused by the continued downturn in the
semiconductor industry.

The segment's operating loss totaled $24.0 in Fiscal 2004, up from operating
losses of $23.0 in Fiscal 2003 and $8.8 in Fiscal 2002. The increase in
operating loss from Fiscal 2003 to Fiscal 2004 was partially due to asset
impairments and severance costs of $3.4 and $2.4, respectively, as well as lower
margins resulting from increasing price pressure on certain of the Company's
tuners. These impacts were partially offset by increases in


-20-


revenue. The increase in operating loss from Fiscal 2002 to Fiscal 2003 resulted
primarily from lower sales volumes during Fiscal 2003. In addition, the Fiscal
2002 results were adversely affected by an excess inventory charge of $5.7 to
cost of revenue for inventories estimated to be beyond its needs for the
following 12 months.

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 2004, the Company continued to secure
design wins and introduced seven new products to the market, in addition to the
ten new products introduced in Fiscal 2003 and nine in Fiscal 2002.

Ultra Low-Power Communications
(millions of U.S. dollars) 2004 2003 2002
---- ---- ----
Revenue: $ 35.8 $ 28.9 $ 34.9
------ ------ ------
As a % of total revenue 18% 15% 16%
Operating income (loss) $ (1.7) $ (4.5) $ 8.8
------ ------ ------

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 2004 Ultra Low-Power Communications sales of $35.8 were up 24% from $28.9
in Fiscal 2003 and up 3% from $34.9 in Fiscal 2002. Fiscal 2004 revenue
increased due predominantly to improved shipments of the Company's hearing aid
and wireless products. The decline in revenue between Fiscal 2003 and 2002
resulted from higher customer inventories and reduced demand in the analog
audiologic business.

The segment's operating loss improved to $1.7 in Fiscal 2004 from an operating
loss of $4.5 in Fiscal 2003, and declined from operating income of $8.8 in
Fiscal 2002. The Fiscal 2004 improvements resulted primarily from a more
favorable product mix and increased margins, and savings resulting from cost
control initiatives. These favorable impacts were partially offset by $0.6 in
severance costs and asset impairment and other costs of $0.9. Fiscal 2003
operating results declined from Fiscal 2002 due to lower revenues and a weaker
product mix resulting in lower gross margins.

During Fiscal 2004, the Ultra Low-Power Communications group introduced six new
products in addition to the seven new products introduced in Fiscal 2003 and the
seven new products introduced in Fiscal 2002.

GEOGRAPHIC REVENUE

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




(millions of U.S. dollars) 2004 % of Total 2003 % of Total 2002 % of Total
---- ---------- ---- ---------- ---- ----------

Asia Pacific $ 80.7 40% $ 75.5 39% $ 56.7 25%
Europe 59.4 30 62.5 32 82.5 37
United States 45.2 23 39.6 20 63.5 29
Canada 9.1 5 11.2 6 15.6 7
Other Regions 4.1 2 5.0 3 3.8 2
--------- --- --------- --- --------- ---
Total $ 198.5 100% $ 193.8 100% $ 222.1 100%
========= === ========= === ========= ===


For the year ended March 26, 2004, there was no impact of the net movement in
exchange rates on the Company's revenue, as a result of the Company changing its
functional currency to the U.S. dollar at the end of the prior fiscal year. 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).

Asia/Pacific

Sales in the Asia/Pacific region increased by 7% in Fiscal 2004 compared to
Fiscal 2003, and continue to represent the largest geographic segment of
customer revenues. Sales in this region improved due to increased


-21-


volumes of tuners and demodulators shipped within the Consumer Communications
segment, partially offset by decreased sales of packet switching and specialty
products in the Network Communications segment.

Asia/Pacific sales in Fiscal 2003 increased by 33% compared to Fiscal 2002 due
to higher product sales within the Network Communications segment resulting from
market improvements primarily within the Company's TDM switching, timing, and
specialty product lines. In addition, the Company experienced increased
shipments of tuners and demodulators in the Consumer Communications segment.
Ultra Low-Power Communications sales in Asia/Pacific decreased in Fiscal 2003,
as compared to Fiscal 2002, due primarily to lower sales of the Company's
hearing aid products.

Europe

European sales decreased by 5% in Fiscal 2004 from Fiscal 2003 due primarily to
lower sales of the Company's specialty products within the Network
Communications and Consumer Communications segments. These declines were
partially offset by sales improvements of audiologic products in Ultra Low-Power
Communications segment.

Fiscal 2003 sales into Europe decreased by 24% from Fiscal 2002 due primarily to
lower sales of Network Communications and Consumer Communications products
caused by the downturn in the semiconductor industry.

United States

Sales into the United States increased by 14% in Fiscal 2004 from Fiscal 2003.
The increase was due predominantly to higher sales of audiologic and wireless
products in the Ultra Low-Power Communications segment, and increased shipments
of wireless products within the Consumer Communications segment.

Sales decreased by 38% in the United States 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
caused by the downturn in the semiconductor industry.

Canada

Canadian sales decreased by 19% in Fiscal 2004 from Fiscal 2003, and by 28% in
Fiscal 2003 from Fiscal 2002 due primarily to declining sales of the Company's
legacy products in the Network Communications segment.

Other Regions

Sales into other regions decreased by $0.9 in Fiscal 2004 compared with Fiscal
2003, and increased by $1.2 in Fiscal 2003 as compared to Fiscal 2002.

GROSS MARGIN

(millions of U.S. dollars) 2004 2003 2002
---- ---- ----
Gross margin $89.4 $ 90.4 $ 65.7
As a % of total revenue 45% 47% 30%

The Company's gross margin as a percentage of revenue was 45% for the year ended
March 26, 2004, compared to 47% in Fiscal 2003. The gross margin declines in
Fiscal 2004 compared to Fiscal 2003 were attributable to the increased
proportion of Consumer Communications products in the overall mix. Margins in
the Consumer Communications segment were also lower due to price pressure on the
Company's tuners. Gross margin also included severance costs of $1.1, as the
Company continues its outsourcing initiatives. These impacts were partially
offset by more favorable product mixes in the Ultra Low-Power and Network
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 higher gross margin in Fiscal 2003 compared to Fiscal 2002 was attributable
to lower overall manufacturing costs, and a favorable product mix in the Network
Communications and Consumer Communications segments.


-22-


In addition, Fiscal 2002 gross margin was adversely impacted by a $29.1
inventory obsolescence charge to cost of revenue. Margins were also lower in
Fiscal 2002 due to the declining sales volumes of Network Communications and
Consumer Communications products and the associated negative manufacturing
variances resulting from lower plant utilization.

OPERATING EXPENSES

Research and Development (R&D)

(millions of U.S. dollars) 2004 2003 2002
---- ---- ----
R&D expenses $ 75.1 $ 87.5 $ 82.9
As a % of total revenue 38% 45% 37%

R&D expenses decreased by 14%, or $12.4, in Fiscal 2004 from Fiscal 2003,
primarily due to cost reduction activities. The Company continues to focus its
R&D resources on programs and products that demonstrate superior potential for
near and medium term revenue. This decrease in expense was partially offset by
severance costs of $2.6 as the Company reduced its R&D headcount by
approximately 147 employees. In Fiscal 2003, the Company recorded R&D severance
costs of $2.8, which were mainly related to the Company's decision in 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. Fiscal 2003 R&D increased by 6%, or $4.6,
relative to Fiscal 2002 R&D 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.

The Company is dedicated to continuing its investments in high-growth areas
within the Network Communications, Consumer Communications, and in Ultra
Low-Power Communications segments.

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

o Time Division Multiplex (TDM) Switching - Solutions to set new industry
standards for channel density, levels of integration, feature sets and
power density for enterprise, edge and metro segments;

o Network Timing and Synchronization - Digital and Analog Phase Lock Loops
(PLL) solutions for T1/E1 to SONET/SDH equipment requiring accurate and
standards driven timing and synchronization;

o Voice Processing Solutions - Low, medium and high-density voice echo
cancellation solutions meeting G.168 standards for wireless, wired and
enterprise segments;

o TDM to Internet Protocol (IP) Processing Solutions - Meeting network
convergence with TDM to IP processing solutions for applications requiring
Circuit Switched Traffic over Packet Domains;

o Ethernet Switching - Fast Ethernet (FE) to Gigabit Ethernet (GbE)
switching for communication backplanes and linecards; and

o Receivers and transmitters for single mode fiber (SMF) targeting the
access network as well as industrial applications where customization is
required.

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

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, wireless
and audiological applications, including:

o High performance custom Coder/Decoders (CODECs) chips for major hearing
aid companies;


-23-


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

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

o Surge protection chips used in implantable pacemakers and defibrillators
for cardiac rhythm management; 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) 2004 2003 2002
---- ---- ----
S&A expenses $ 48.5 $ 48.5 $ 52.0
As a % of total revenue 24% 25% 23%

Overall S&A expenses were unchanged in Fiscal 2004 as compared to Fiscal 2003.
S&A expenses in Fiscal 2004 included approximately $3.3 of severance charges
within the sales, marketing, and other administrative functions in France,
Canada and various other geographic regions, which were partially offset by
savings realized by these cost reduction activities. During Fiscal 2003, the
Company implemented 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.

In Fiscal 2003, S&A expenses decreased by $3.5, or 7%, from Fiscal 2002 as a
result of cost reductions implemented during that year in response to the
industry downturn.

The Company anticipates a reduction in S&A expenses in Fiscal 2005 as compared
to Fiscal 2004 as a result of these cost reduction activities.

Stock Compensation Expense

The Company records stock compensation expense arising from certain stock
options subjected to option exchange programs and from stock options awarded to
former employees. In prior years, the Company also recorded stock compensation
expense and recovery arising from retention conditions associated with the stock
awarded to certain employees of Vertex Networks, Inc. (Vertex), which was
acquired in July 2000. During Fiscal 2004, the Company recorded stock
compensation expense of $0.2, as compared to a stock compensation recovery of
$1.4 in Fiscal 2003 and expense of $8.4 in Fiscal 2002. The compensation expense
in Fiscal 2004 represented the amortization of the fair value of stock options
awarded to a former employee. The compensation recovery in Fiscal 2003 consisted
of a $1.9 recovery of previously recorded stock compensation expense resulting
from the decrease in market price of the underlying common stock in Fiscal 2003,
offset by stock compensation expense of $0.5 due to the vesting of restricted
stock awarded to employees of Vertex. The expense in Fiscal 2002 consisted of
$6.0 due to the vesting of restricted stock awarded to Vertex employees, as well
as $2.4 expense from options subject to accelerated vesting conditions and
option exchange programs.

Asset Impairment and Other

During Fiscal 2004 the Company recorded $11.1 of asset impairment and other
restructuring costs. As a result of a review of the ongoing usage of the
Company's testing equipment and enterprise resource planning system, the Company
recorded an asset impairment loss on fixed assets of $6.1. The Company also
performed a review of its patent portfolio and recorded a charge on other assets
of $4.1, as it was no longer possible to reasonably forecast significant cash
flows expected to be saved or generated related to these assets. In addition,
the Company recorded a charge of $0.6 related to excess space under lease
contract in Canada, and a charge of $0.3 related to impairment on software
design tools.

Loss (Recovery) on Sale of Business

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 Fiscal


-24-


2002, the Company recorded a loss on sale of the Bromont foundry business of
$5.4, before income tax recoveries of $1.2.

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.

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.

In 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. In the fourth quarter of Fiscal 2004, the remaining provision of $0.2
was reversed as the Company does not expect to incur any further costs related
to the foundry sales.

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.

Amortization of Acquired Intangibles

Amortization of acquired intangibles was nil in Fiscal 2004 and Fiscal 2003 and
$4.4 in Fiscal 2002. 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.


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OTHER INCOME (EXPENSE)

In Fiscal 2004, other income was $0.9, as compared to an expense of $16.5 in
Fiscal 2003 and income of $7.1 in Fiscal 2002. Other income (expense) was
comprised of interest income, foreign exchange gains and losses, and other
non-operating gains and losses.

Interest income was $1.3 for the year ended March 26, 2004 as compared to $3.0
in Fiscal 2003 and $5.5 in Fiscal 2002. The year over year decreases from Fiscal
2002 to Fiscal 2004 were due to lower average cash balances on hand and to lower
interest rates.

Foreign exchange losses in Fiscal 2004 amounted to $1.0 (2003 - loss of $5.6;
2002 - gain of $7.3). In Fiscal 2004, net losses were recorded on monetary
assets and liabilities denominated in currencies other than the U.S. dollar
functional currency, and according to month-end market 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. Fiscal 2002 foreign exchange gains resulted
primarily from increases in the market value of certain forward contracts prior
to their designation as cash flow hedges.

During the third quarter of Fiscal 2004, the Company sold its investment in a
privately held company for cash proceeds of $0.6. The investment had a carrying
value of $nil resulting from an impairment charge recorded in Fiscal 2002,
resulting in a gain on sale of $0.6 during Fiscal 2004. In Fiscal 2003 the
Company sold its investment in DALSA for cash proceeds of $4.2 and recorded a
gain on sale of $0.7.

In Fiscal 2003, the Company recorded an $11.5 non-cash write-down of its
investment in Mitel Networks Corporation (Mitel), as a result of the Company's
ongoing assessment of financial information and ongoing challenges in the
enterprise communications market. Reference is made to the Company's policy on
Investments in Private Companies, included in Critical Accounting Policies and
Significant Estimates of Form 10-K for the year ended March 28, 2003.

During Fiscal 2003, the Company recorded a charge of $6.6 related to the
settlement of the U.K. defined benefit pension plan. The Company also 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 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. There were no further equity losses recorded during Fiscal
2003 or Fiscal 2004 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 $0.9 for Fiscal 2004, compared with $1.0 and $0.8 for
Fiscal 2003 and Fiscal 2002, respectively. Interest expense relates primarily to
financing costs related to the Company's pension plan in Sweden and interest on
capital leases.

INCOME TAXES

The Company's effective tax rate is based on pre-tax income, statutory tax rates
and tax planning strategies available to it in the various jurisdictions in
which it operates. In determining net income, significant management judgment is
required in determining the Company's effective tax rate, in evaluating its tax
position and in determining the recoverability of deferred tax assets that arise
from temporary differences between the tax and financial statement recognition
of revenues and expenses. The Company establishes reserves when, despite its
belief that its tax return positions are supportable, it believes these
positions may be challenged. The Company adjusts these reserves as warranted by
changing facts and circumstances. Although the Company believes its estimates
are reasonable, no assurance can be given that the final outcome of these
matters will not be different than what is reflected in the historical income
tax provisions and accruals.

A number of years may elapse before a particular matter for which the Company
has established a reserve is audited and finally resolved. The number of years
for which the Company has audits that are open varies depending on the tax
jurisdiction. While it is often difficult to predict the final outcome or the
timing of the resolution, the Company believes that its reserves reflect the
probable outcome of known tax contingencies. Favorable resolutions would be
recognized as a reduction of its tax expense in the year of resolution.
Unfavorable resolutions would be recognized as a reduction to its reserves, a
cash outlay for settlement and a


-26-


possible increase to its annual tax provision. Such differences could have a
material impact on the income tax provision and operating results in the period
in which such determination is made.

Income tax recovery for Fiscal 2004 was $5.5, compared with an income tax
expense of $1.1 for Fiscal 2003 and a recovery of $1.4 for Fiscal 2002. The tax
recovery in Fiscal 2004 was due primarily to tax recoveries on current year
losses, tax refunds received, and changes in management estimates of future tax
recoveries and probable outcomes on historical tax filings based on settlement
of past audits, passage of time, and tax losses accumulated during our most
recent fiscal years. 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.

During the year, the Company received tax refunds in excess of its original
provision estimates in both its domestic and foreign operations. These amounts
were booked as tax recoveries during the year. The refunds account for $2.8
of the income tax recovery.

Based on its periodic review, management determined that an adjustment was
required to its income tax provision, and deferred tax asset balances, in the
fourth quarter of Fiscal 2004. These adjustments were based upon an overall
assessment of the settlements of past audits, passage of time in certain
jurisdictions, and tax losses incurred in its domestic operations. Based upon
this assessment, the Company recorded an income tax recovery of $4.4 related to
the adjustment of these income tax accruals. In addition, based upon
consideration of recent losses, the Company recorded a deferred income tax
expense of $3.1 related to an increase in the valuation allowance on the
Company's investment tax credits in Canada, resulting in a net income tax
recovery of $1.3 booked during the year.

The remaining $1.4 relates to income taxes recoverable for tax loss carrybacks,
net of current year taxes paid.

In Fiscal 2004, Zarlink's effective tax rate was a recovery of 12%. This rate
was lower than the 35% domestic tax rate due to unrecorded temporary differences
and losses incurred during the year net of the recoveries discussed above. 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.

The Company had a valuation allowance at the end of Fiscal 2004 of $176.8
(Fiscal 2003 - $128.1; Fiscal 2002 - $75.8). Management has determined that
sufficient uncertainties continue to exist regarding the realization of certain
of its deferred tax assets and consequently a valuation allowance is required to
reduce the recorded value of these assets. The increase in the allowance relates
mainly to unrecorded investment tax credits, losses, and reversing deductible
temporary differences incurred in Fiscal 2004 in the Company's domestic and
foreign jurisdictions.

DISCONTINUED OPERATIONS

Communications Systems Business (Systems)

During Fiscal 2001, the Company concluded the sale of the Systems business to
Dr. Terence H. Matthews for net proceeds of $196.7, 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. During Fiscal
2004 the Company recorded an adjustment of $1.2 related to a tax recovery on
discontinued operations, resulting from management's revision of estimates based
on the closure of audit years in certain foreign jurisdictions. During Fiscal
2003, and on the second anniversary of the sale of the Systems business, the
Company recorded a recovery of $2.4 related to the reversal of excess provisions
based upon remaining costs to settle claims. There were no discontinued
operations included in the results of operations for the year ended March 29,
2002.

NET LOSS

The Company recorded a net loss of $38.6, or $0.32 per share in Fiscal 2004.
This compares to a net loss of $57.9, or $0.47 per share, in Fiscal 2003. In
Fiscal 2002, net loss was $120.8, or $0.98 per share.

The net loss in Fiscal 2004 was mainly due to lower revenue caused by the
continued downturn in the semiconductor industry, as well as the impairment and
restructuring expenses discussed elsewhere in this Management Discussion and
Analysis.


-27-


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

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.

LIQUIDITY AND CAPITAL RESOURCES

At March 26, 2004, cash, cash equivalents, short-term investments and restricted
cash balances totaled $91.8, down from $119.2 at March 28, 2003. Cash and cash
equivalents at March 26, 2004, included in the amount above, were $27.0 (2003 -
$23.5).

Cash used in operating activities during Fiscal 2004 was $20.3 as compared to
$24.7 during Fiscal 2003. Cash flow used in operations before changes in working
capital was $11.6 during Fiscal 2004 compared to cash flow used in operations of
$26.4 during Fiscal 2003. The decrease in cash flow used in operations during
Fiscal 2004 mainly resulted from improved operating earnings compared to Fiscal
2003. Since March 28, 2003, the Company's working capital, as reflected in the
consolidated statements of cash flows, increased by $8.7, mostly due to the
reduction of accounts payable and accrued liabilities and increases in accounts
receivable and prepaid expenses, caused by the timing of cash receipts and
payments during the year. This was partially offset by a reduction in inventory
levels. Management expects to further draw down inventory levels in Fiscal 2005
by reducing cycle times and managing inventories on a build-to-order basis. In
comparison, the Company's working capital decreased by $1.7 during Fiscal 2003,
mostly due to the reduction of inventories and improved cash collections from
trade receivables. This was offset by reductions of trade accounts payable and
other accrued liabilities, increases in prepaid expenses, and on the settlement
of certain pound sterling denominated hedge contracts.

Cash provided from investing activities was $30.9 for the year ended March 26,
2004 compared to cash used of $12.8 used during Fiscal 2003. The net cash inflow
from investing activities during Fiscal 2004 primarily resulted from net sales
of short-term investments totaling $34.7, and proceeds upon disposal of certain
fixed assets of $1.1. This increase was partially offset by purchases of fixed
and other assets totaling $5.5. The fixed asset additions were primarily related
to test equipment and continuing improvements to existing information technology
resources. Capital expenditures declined in Fiscal 2004 as compared with Fiscal
2003. Management expects Fiscal 2005 capital spending to remain consistent with
Fiscal 2004 levels. In addition, proceeds of $0.6 were received upon sale of the
Company's investment in a privately held company. The cash outflow from
investing activities during Fiscal 2003 was primarily the result of 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. A net reduction of long-term
investments of $3.8 in Fiscal 2003 resulted from cash proceeds of $4.2 received
as a result of the sale of the Company's minority investment in DALSA, offset by
a small investment purchased during the year.

Cash used in financing activities during Fiscal 2004 totaled $7.5. The cash
outflow was primarily the result of an increase in restricted cash of $3.8.
During Fiscal 2004, cash and cash equivalents of $3.3 were hypothecated under
the Company's credit facility to cover outstanding letters of credit. The
Company also pledged $0.5 as a security for a custom bond and related credit
facilities. In addition, cash outflows resulted from the repayment of capital
lease liabilities in the amount of $0.5, the repurchase of $1.2 of the Company's
redeemable preferred shares, and the payment of $2.1 for dividends on the
preferred shares. A cash inflow of $0.1 was received from the issuance of new
common shares upon the exercise of stock options. During Fiscal 2003, cash flows
used in financing activities totaled $18.6, primarily as a 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. 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, the Company took steps to wind up its defined benefit
pension plan in the United Kingdom and replaced it with a defined contribution
plan. The Company expects to make a final payment of approximately


-28-


$2.7 in Fiscal 2005 after the final adjustments are calculated. This amount was
included in other accrued liabilities as at March 26, 2004.

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, over a twelve-month period beginning on June 10,
2002 and ending on June 9, 2003. No common shares were repurchased under the
renewed program for the year period ended June 9, 2003, or 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.

As at March 28, 2003, the Company had not met a quarterly financial covenant
with respect to shareholder's equity under the Company's credit facility, as a
result of restructuring and impairment losses recorded during the year. A waiver
was obtained from the bank in respect of the financial covenant. During Fiscal
2004, the Company cancelled the operating line component of its revolving global
credit facility, as it was not being utilized or required by the Company. This
resulted in reducing the total credit facility from $18.9 (Cdn $25.0) to a
facility of $9.5 (Cdn $12.5) available for letters of credit. In addition, the
financial covenant with respect to the shareholder's equity was modified under
the new agreement such that no waiver was required as at March 26, 2004.

As at March 26, 2004, cash and cash equivalents totaling $9.5 were hypothecated
under the credit facility to cover outstanding letters of credit. Of this
amount, $8.0 was issued to secure letters of credit related to the Company's
pension plan in Sweden, and $0.7 of letters of credit were outstanding related
to the Company's Supplementary Executive Retirement Plan (SERP) plan. In
addition, $0.8 was issued to secure certain obligations under a performance
guarantee and office lease arrangement. The Company has also pledged $0.5 as a
security for a custom bond and related credit facilities. The credit facilities
are subject to periodic review, including the determination of certain 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 balances on hand, existing financing
facilities and cash flow from operations.

The following tables provide a summary of the effect on liquidity of the
Company's contractual obligations as of March 26, 2004:




Payments Due by Period
--------------------------------------------------------------
Less than 1
Contractual Obligations Total year 1 - 3 years 4 - 5 years After 5 years
- ----------------------- ----- ---- ----------- ----------- -------------

Capital Lease Obligations $ 0.2 $ 0.1 $ 0.1 $ -- $ --
Operating Leases (1) 36.2 7.6 11.0 7.5 10.1
Purchase Obligations (2) 18.8 8.7 10.1 -- --
------ ------ ------ ----- ------
Total Contractual Obligations $ 55.2 $ 16.4 $ 21.2 $ 7.5 $ 10.1
====== ====== ====== ===== ======


(1) Operating lease commitments exclude payments to be received under
noncancelable sublease arrangements.
(2) Purchase obligations consist of commitments to purchase design tools and
software for use in product development. Wafer purchase commitments have
not been included in the above table, as the pricing and timeframe of
payment are not fixed, and will vary depending on the Company's
manufacturing needs. The Company does not have obligations that exceed
expected wafer requirements.


-29-





Amount of Committed Expiration per Period
---------------------------------------------------------------
Less than 1
Other Commercial Commitments Total year 1 - 3 years 4 - 5 years After 5 years
----- ----------- ----------- ----------- -------------

Letters of Credit (3) $ 9.5 $ 9.5 $ -- $ -- $ --
Guarantees (4) 0.5 0.5 -- -- --
------ ------ ------ ------- ------
Total Commercial Commitments $ 10.0 $ 10.0 $ -- $ -- $ --
====== ====== ====== ======= ======


(3) Cash and cash equivalents of $9.5 have been hypothecated under the
Company's credit facility to cover these letters of credit, as discussed
elsewhere in this Management's Discussion and Analysis.
(4) The Company has pledged $0.5 as a security for a custom bond and related
credit facilities, as discussed elsewhere in this Management's Discussion
and Analysis.

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 is now
operated as Mitel Networks Corporation (Mitel). 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 May 28, 2004, was $36.7
(20.0 British Pounds), assuming the Company is unable to secure the completion
of the project. The Company is not aware of any factors 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. The Company has not recorded a liability in its
consolidated financial statements associated with this guarantee.

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.

In connection with the sale of the Systems business described in Note 18, 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 26, 2004, the
taxation years 2000 to February 16, 2001 are subject to audit by taxation
authorities in certain foreign jurisdictions.

As at March 26, 2004, the Company has provided security to the financial
institution of a subsidiary in the form of a guarantee amounting to $2.9 in
relation to the subsidiary's liabilities for custom and excise duties.

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.

BACKLOG

The Company's 90-day backlog as at March 26, 2004 was $38.7 (2003 - $36.9).
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
the quarter or year. Backlog increased from the prior quarter due to increased
bookings across the Consumer and Network Communications segments.


-30-


The comparative backlog amount has been adjusted to reflect the Company's
revised methodology of applying distributor stock rotations and allowances
against distributor orders at the time of booking. The revised methodology
better matches order backlog with the net sales recorded at the time of
shipment.

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, provisions for inventory, and provisions for restructuring are
directly reflected in the results of our reportable operating segments. Changes
in estimates or assumptions pertaining to 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

The Company has undertaken, and may in the future undertake, restructuring
initiatives which have required the development of formalized plans for exiting
certain activities. All restructuring charges have been accounted for in
accordance with Emerging Issues Task Force Issue No. 94-3 (EITF 94-3), Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including certain costs Incurred in a Restructuring), and Statement of
Financial Accounting Standards No. 146 (SFAS 146), Accounting for Costs
Associated with Exit or Disposal Activities, depending on the time of the
restructuring activity. These activities require estimation of the cost and
timing of expenses for lease cancellations, severance, and other restructuring
costs. Given the significance, complexity and the timing of the execution of
such activities, management periodically reassesses the assumptions used and
estimates made upon initial recognition of the costs. Although management does
not anticipate significant changes, actual costs may differ from these
estimates.

During Fiscal 2004, the Company continued to reduce its workforce and incurred
and paid severance costs of $7.0. Reductions were performed globally across all
job categories and business units. During Fiscal 2003, Zarlink reduced 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 of
$6.8. 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.


-31-


Income Taxes

The Company is subject to income taxes in Canada, Sweden, the United Kingdom,
the United States and numerous other foreign jurisdictions. The effective tax
rate is based on pre-tax income, statutory tax rates and available tax planning
strategies. In determining net income, significant management judgment is
required in determining the effective tax rate, in evaluating the tax position
and in the recoverability of deferred tax assets that arise from temporary
differences between the tax and financial statement recognition of revenues and
expenses. The Company has recorded a valuation allowance on its deferred tax
assets, and recorded only deferred tax assets that can be applied against income
in 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 investment tax credits, it is necessary to consider
all available evidence, both positive and negative.

Management periodically reviews the Company's provision for income taxes and
valuation allowance to determine whether the overall tax estimates are
reasonable. When management performs its quarterly assessments of the provision
and valuation allowance, it may be determined that an adjustment is required.
This adjustment may have a material impact on the Company's financial position
and results of operations.

Based on its periodic review, management determined that an adjustment was
required to its income tax provision, and deferred tax asset balances, in the
fourth quarter of Fiscal 2004. These adjustments were based upon an overall
assessment of the settlements of past audits, passage of time in certain
jurisdictions, and tax losses incurred in its domestic operations. Based upon
this assessment, the Company recorded an income tax recovery of $4.4 related to
the adjustment of these income tax accruals. In addition, based upon
consideration of recent losses, the Company recorded a deferred income tax
expense of $3.1 related to an increase in the valuation allowance on the
Company's investment tax credits in Canada, resulting in a net income tax
recovery of $1.3 booked during the year.

Long-Lived Assets

The Company evaluates the recoverability of property, plant and equipment in
accordance with Statement of Financial Accounting Standards No. 144 (SFAS 144),
"Accounting for the Impairment or Disposal of Long-Lived Assets". Management
assesses the impairment of long-lived assets when events or changes in
circumstances indicate that the carrying value of the assets or the asset
groupings may not be recoverable. In assessing the impairment, the Company
compares projected undiscounted net cash flows associated with the related asset
or group of assets over their estimated remaining useful life against their
carrying amounts. If projected undiscounted cash flows are not sufficient to
recover the carrying value of the assets, the assets are written down to their
estimated fair values based on expected discounted cash flows. Changes in the
estimates and assumptions used in assessing projected cash flows could
materially affect the results of management's evaluation.

As a result of the restructuring activities incurred in the year ended March 28,
2004, the Company recorded an asset impairment charge of $6.1 resulting from a
review of the usage of the Company's testing equipment and enterprise resource
planning system. In addition, the Company recorded a charge of $4.1 on patent
assets, as management had assessed that it was no longer possible to reasonably
forecast significant cash flows expected to be saved or generated related to
these assets.

Foreign Currency Translation

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.

Prior to March 29, 2003, the financial statements of the foreign subsidiaries
were measured using the local currency as the functional currency. All balance
sheet amounts were translated using the exchange rates in effect at the
applicable period end, and income statement amounts were translated using the
weighted average exchange rates for the applicable period. Any gains and losses
resulting from the changes in exchange rates from year to year were reported as
a separate component of other comprehensive loss included in Shareholders'
Equity.


-32-


Effective March 29, 2003, the carrying value of monetary balances denominated in
currencies other than U.S. dollars were remeasured at the balance sheet date
rates of exchange. The gains or losses resulting from the remeasurement of these
amounts have been reflected in earnings in the respective periods. Non-monetary
items and any related amortization of such items are measured at the rates of
exchange in effect when the assets were acquired or obligations incurred. All
other income and expense items have been remeasured at the average rates
prevailing during the period.

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; product mix; 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 foreign exchange and interest
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, the
Swedish Krona and the U.K. pound sterling. At March 26, 2004, there were
unrealized losses of $0.2 on the forward contracts and foreign currency options
relating to Fiscal 2005. 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 and foreign currency options on
March 26, 2004, 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 26, 2004, would
have been approximately $1.4. Conversely, a 5% depreciation in the U.S. dollar
against all currencies would have produced a loss of $1.7. 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 2005, 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 26, 2004 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 an insignificant decline or increase in
portfolio value.


-33-


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 foreign
exchange and interest 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 26, 2004 and March 28, 2003

Consolidated Statements of Shareholders' Equity for the years ended March 26,
2004, March 28, 2003, and March 29, 2002

Consolidated Statements of Loss for the years ended March 26, 2004, March 28,
2003, and March 29, 2002

Consolidated Statements of Cash Flows for the years ended March 26, 2004, March
28, 2003, and March 29, 2002

Notes to the Consolidated Financial Statements


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Report of Independent Registered Public Accounting Firm

To the Shareholders of Zarlink Semiconductor Inc.:

We have audited the consolidated balance sheets of Zarlink Semiconductor Inc. as
at March 26, 2004 and March 28, 2003 and the consolidated statements of
shareholders' equity, loss, and cash flows for each of the years in the
three-year period ended March 26, 2004. 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 the standards of the Public Company
Accounting Oversight Board (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 26, 2004
and March 28, 2003 and the results of its operations and its cash flows for each
of the years in the three-year period ended March 26, 2004, in accordance with
United States generally accepted accounting principles.

On April 30, 2004, except for notes 6, 17 and 25, as to which the date is June
9, 2004, 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, 2004 ---------------------
except for notes 6, 17 Chartered Accountants
and 25, as to which the
date is June 9, 2004


-35-


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




March 26, March 28,
2004 2003
--------- ---------

ASSETS
Current assets:
Cash and cash equivalents $ 27.0 $ 23.5
Short-term investments 54.8 89.5
Restricted cash 10.0 6.2
Trade accounts receivable - less allowance for doubtful
accounts of $0.3 (March 28, 2003 - $1.1) 24.1 20.3
Other accounts receivable 2.3 4.2
Note receivable, net of deferred gain of $17.1
(March 28, 2003 - $15.8) 0.1 --
Inventories 20.8 24.0
Deferred income tax assets - net -- 1.0
Prepaid expenses and other 5.1 3.2
-------- --------
144.2 171.9
Fixed assets - net 41.1 56.4
Deferred income tax assets - net 7.5 10.4
Other assets 4.6 8.8
Note receivable, net of deferred gain of $17.1
(March 28, 2003 - $15.8) -- 0.1
-------- --------
$ 197.4 $ 247.6
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 15.0 $ 10.1
Employee-related payables 11.1 15.5
Income and other taxes payable 7.9 13.0
Provisions for exit activities 2.7 4.2
Other accrued liabilities 10.9 12.7
Deferred credits 0.7 1.0
Current portion of long-term debt 0.1 0.6
-------- --------
48.4 57.1
Long-term debt 0.1 0.2
Pension liabilities 16.7 14.3
Deferred income tax liabilities - net -- 2.0
-------- --------
65.2 73.6
-------- --------
Redeemable preferred shares, unlimited shares authorized;
non-voting; 1,390,300 shares issued and outstanding
(2003 - 1,451,600) 17.6 18.9
-------- --------
Commitments and contingencies (notes 8, 10 and 11)
Shareholders' equity:
Common shares, unlimited shares authorized; no par value;
127,301,411 shares issued and outstanding
(2003 - 127,265,316) 768.4 768.3
Additional paid-in capital 2.3 2.1
Deficit (623.5) (582.8)
Accumulated other comprehensive loss (32.6) (32.5)
-------- --------
114.6 155.1
-------- --------
$ 197.4 $ 247.6
======== ========


(See accompanying notes to the consolidated financial statements)


-36-


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 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 1.0 4.9 -- -- -- -- 4.9
under stock benefit plans
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 0.2 0.7 -- -- -- -- 0.7
under stock benefit plans
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
----- --------- -------- ------------ ---------- -------- ---------
Net loss -- -- -- -- (38.6) -- (38.6)
Unrealized net derivative
gain (loss) on cash flow
hedges -- -- -- -- -- (0.1) (0.1)
Minimum pension liability -- -- -- -- -- -- -
Translation adjustment -- -- -- -- -- -- -
----------
Comprehensive loss -- -- -- -- -- -- (38.7)
---------
Issuance of common stock -- 0.1 -- -- -- -- 0.1
under stock benefit plans
Stock compensation expense
(recovery) -- -- 0.2 -- -- -- 0.2
Preferred share dividend -- -- -- -- (2.1) -- (2.1)
----- --------- -------- ------------ ---------- -------- ---------
Balance, March 26, 2004 127.3 $ 768.4 $ 2.3 $ -- $ (623.5) $ (32.6) $ (114.6)
===== ========= ======== ============ ========== ======== =========


(See accompanying notes to the consolidated financial statements)


-37-


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




Years Ended
March 26, March 28, March 29,
2004 2003 2002
--------- --------- ---------

Revenue $ 198.5 $ 193.8 $ 222.1

Cost of revenue 109.1 103.4 156.4
--------- --------- ---------
Gross margin 89.4 90.4 65.7
--------- --------- ---------
Expenses:
Research and development 75.1 87.5 82.9
Selling and administrative 48.5 48.5 52.0
Stock compensation expense (recovery) 0.2 (1.4) 8.4
Asset impairment and other 11.1 -- --
Loss (recovery) on sale of business (0.2) (2.5) 5.4
Special charges -- -- 41.1
Amortization of acquired intangibles -- -- 4.4
--------- --------- ---------
134.7 132.1 194.2
--------- --------- ---------
Operating loss from continuing operations (45.3) (41.7) (128.5)

Other income (expense) - net 0.9 (16.5) 7.1
Interest expense (0.9) (1.0) (0.8)
--------- --------- ---------

Loss from continuing operations before income taxes (45.3) (59.2) (122.2)

Income tax expense (recovery) (5.5) 1.1 (1.4)
--------- --------- ---------
Net loss from continuing operations (39.8) (60.3) (120.8)

Discontinued operations, net of tax (2004 - recovery
of 1.2; 2003 - nil; 2002 - nil) 1.2 2.4 --
--------- --------- ---------
Net loss $ (38.6) $ (57.9) $ (120.8)
========== ========== ==========
Net loss attributable to common shareholders after
preferred share dividends $ (40.7) $ (59.9) $ (122.7)
========== ========== ==========
Net loss per common share:
Net loss per common share from continuing operations:
Basic and diluted $ (0.33) $ (0.49) $ (0.98)
========== ========== ==========
Net loss per common share:
Basic and diluted $ (0.32) $ (0.47) $ (0.98)
========== ========== ==========
Weighted average number of common shares
outstanding (millions)
Basic and diluted 127.3 127.1 125.6
========== ========== ==========


(See accompanying notes to the consolidated financial statements)


-38-


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



Years Ended
March 26, March 28, March 29,
2004 2003 2002
-------- -------- --------

CASH PROVIDED BY (USED IN)
Operating activities:
Net loss $ (38.6) $ (57.9) $ (120.8)
Depreciation of fixed assets 12.1 13.1 19.3
Amortization of acquired intangibles -- -- 4.4
Amortization of other assets 1.6 1.3 0.6
Stock compensation expense (recovery) 0.2 (1.4) 8.4
Deferred income taxes 1.9 0.5 (2.0)
Other non-cash changes in operating activities 11.2 18.0 55.1
Decrease (increase) in working capital
Accounts receivable (2.7) 8.8 22.6
Inventories 3.3 12.0 19.6
Accounts payable and accrued liabilities (7.1) (17.1) (22.9)
Deferred credits (0.3) (1.4) (1.3)
Prepaid expenses and other (1.9) (0.6) (6.9)
-------- -------- --------
Total (20.3) (24.7) (23.9)
-------- -------- --------
Investing activities:
Purchased short-term investments (134.9) (252.7) (108.1)
Matured short-term investments 169.6 243.8 27.8
Expenditures for fixed and other assets (5.5) (8.1) (30.8)
Proceeds from disposal of fixed and other assets 1.1 0.4 33.4
Proceeds from sale of long-term investments 0.6 4.2 --
Increase in long-term investments -- (0.4) (2.0)
Proceeds from repayment of note receivable -- -- 4.4
Proceeds from sale of discontinued operations - net -- -- 1.3
-------- -------- --------
Total 30.9 (12.8) (74.0)
-------- -------- --------
Financing activities:
Repayment of long-term debt -- -- (2.7)
Repayment of capital lease liabilities (0.5) (2.0) (5.2)
Pension plan settlement -- (8.0) --
Increase in restricted cash (3.8) (6.2) --
Payment of dividends on preferred shares (2.1) (1.5) (1.9)
Issue of common shares 0.1 0.7 4.8
Repurchase of preferred shares (1.2) (1.6) (0.7)
-------- -------- --------
Total (7.5) (18.6) (5.7)
-------- -------- --------
Effect of currency translation on cash 0.4 4.0 (0.7)
-------- -------- --------
Increase (decrease) in cash and cash equivalents 3.5 (52.1) (104.3)
Cash and cash equivalents, beginning of year 23.5 75.6 179.9
-------- -------- --------
Cash and cash equivalents, end of year $ 27.0 $ 23.5 $ 75.6
======== ======== ========


(See accompanying notes to the consolidated financial statements)


-39-


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 design, 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 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 INTANGIBLE ASSETS

Fixed and intangible assets are initially recorded at cost, net of related
research and development and other government assistance. Management
assesses the impairment of long-lived assets when events or changes in
circumstances indicate that the carrying value of the assets or the asset
groupings may not be recoverable. In assessing the impairment, the Company
compares projected undiscounted net cash flows associated with the related
asset or group of assets over their estimated remaining useful life
against their carrying amounts. If projected undiscounted cash flows are
not sufficient to recover the carrying value of the assets, the assets are
written down to their estimated fair values based on expected discounted
cash flows. Changes in the estimates


-40-


and assumptions used in assessing projected cash flows could materially
affect the results of management's evaluation.

Depreciation is provided on the basis 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%
Other intangibles Straight-line 20 - 33.3%

(G) FOREIGN CURRENCY TRANSLATION

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.

Prior to March 29, 2003, the financial statements of the foreign
subsidiaries were measured using the local currency as the functional
currency. All balance sheet amounts were translated using the exchange
rates in effect at the applicable period end, and income statement amounts
were translated using the weighted average exchange rates for the
applicable period. Any gains and losses resulting from the changes in
exchange rates from year to year were reported as a separate component of
other comprehensive loss included in Shareholders' Equity (See also Note
14).

Effective March 29, 2003, the carrying value of monetary balances
denominated in currencies other than U.S. dollars were remeasured at the
balance sheet date rates of exchange. The gains or losses resulting from
the remeasurement of these amounts have been reflected in earnings in the
respective periods. Non-monetary items and any related amortization of
such items are measured at the rates of exchange in effect when the assets
were acquired or obligations incurred. All other income and expense items
have been remeasured at the average rates prevailing during the period.

(H) 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", and
Statement No. 149 (SFAS 149), "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities". 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, including
forward and option contracts, 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). Prior to the change in functional
currency, if the derivative was designated as a hedge of a net investment
in foreign operations, the changes in fair value was recorded in OCI to
the extent that it was effective.


-41-


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 net income(loss) immediately.

(I) 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.

(J) REVENUE RECOGNITION

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. 104 (SAB 104).

(K) 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.

Management periodically reviews the Company's provision for income taxes
and valuation allowance to determine whether the overall tax estimates are
reasonable. When management performs its quarterly assessments of the
provision and valuation allowance, it may be determined that an adjustment
is required. This adjustment may have a material impact on the Company's
financial position and results of operations.

(L) 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.

(M) STOCK-BASED COMPENSATION PLAN

The Company has a stock-based compensation plan described in note 13(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 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


-42-


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.




2004 2003 2002
--------- --------- ----------

Net loss, as reported $ (38.6) $ (57.9) $ (120.8)
Adjustments:
Stock compensation expense (recovery) as reported 0.2 (1.4) 8.4
Pro Forma stock compensation expense (13.8) (13.8) (20.8)
--------- --------- ----------
Pro forma net loss $ (52.2) $ (73.1) $ (133.2)
========= ========= ==========
Net loss per common share, as reported:
Basic and diluted $ (0.32) $ (0.47) $ (0.98)
========= ========= ==========
Pro forma net loss per common share:
Basic and diluted $ (0.43) $ (0.59) $ (1.08)
========= ========= ==========


The Pro Forma net loss, based upon the fair value method of accounting for
stock compensation expense, is increased by $13.6 as compared to the net
loss, as reported (2003 - $15.2; 2002 - $12.4).

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 2004, 2003, and 2002:




2004 2003 2002
---- ---- ----

Risk-free interest rate 3.13% 3.98% 5.19%
Dividend yield Nil Nil Nil
Volatility factor of the expected market price of the Company's
common stock 68.3% 67.0% 50.1%
Weighted average expected life of the options 3.8 years 3.3 years 4.0 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 fiscal years 2004,
2003 and 2002 were $2.03, $1.58 and $3.02 per option, respectively. The
weighted average fair value of stock options granted in Canadian dollars
was translated at the year-end exchange rate as at the end of each fiscal
year.

(N) 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.

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.

3. INVENTORIES

2004 2003
------- -------
Raw materials $ 2.2 $ 2.6
Work-in-process 13.3 18.3
Finished goods 5.3 3.1
------- -------
$ 20.8 $ 24.0
======= =======


-43-


4. FIXED ASSETS

2004 2003
------- -------
Cost:
Land $ 3.8 $ 3.8
Buildings 15.8 15.8
Leasehold improvements 4.0 3.9
Equipment 170.0 165.9
------- -------
193.6 189.4
------- -------
Less accumulated depreciation:
Buildings 8.6 8.8
Leasehold improvements 0.9 0.5
Equipment 143.0 123.7
------- -------
152.5 133.0
------- -------
$ 41.1 $ 56.4
======= =======

Included in equipment are assets under capital lease of $0.3 (2003 -
$3.3). The Company recorded an impairment loss on fixed assets of $6.1 in
Fiscal 2004 (2003 - Nil) as a result of a review of the ongoing usage of
the Company's testing equipment and enterprise resource planning system.
In addition, the comparative gross amounts of cost and accumulated
depreciation have each been adjusted by $25.7 to properly reflect the
historical costs of assets in use by the Company. There was no impact to
the previously reported net fixed assets.

5. OTHER ASSETS

2004 2003
------ ------
Patents, trademarks, and other intangible assets:
Cost -- 9.5
Accumulated amortization -- (5.0)
------ ------
Patents, trademarks, and other intangible assets - net -- 4.5
------ ------

Other 4.6 4.3
------ ------
$ 4.6 $ 8.8
====== ======

As a result of a review of the Company's patent portfolio, the Company
recorded a charge of $4.1, included in asset impairment and other, in
Fiscal 2004 (2003 - Nil) as management determined that it was no longer
possible to reasonably forecast significant cash flows expected to be
saved or generated related to these assets.

6. NOTE RECEIVABLE

2004 2003
------ ------
Note receivable, non-interest bearing
(see also Note 17) $ 17.2 $ 15.9
Less: Deferred gain (see also Note 17) (17.1) (15.8)
------ ------
0.1 0.1
Less: Current portion (0.1) --
------ ------
$ -- $ 0.1
====== ======

Based upon the terms of the Plymouth Foundry sale agreement with X-FAB
Semiconductor Foundries AG, the first payment of $10.0 against the
discounted note receivable is due in June 2004 with the final payment of
$8.0 due in March 2005. On March 30, 2004 and June 9, 2004, X-FAB
exercised their option to repay a portion of the note receivable, and paid
$3.0 and $4.0, respectively, as installments of the $10.0 payment due
later in June 2004. As a result of this repayment, the Company will record
a gain on sale of $7.0 during the first quarter of Fiscal 2005.


-44-


7. PROVISIONS FOR EXIT ACTIVITIES

2004 2003
------ ------
Restructuring provisions (per table below) $ 2.7 $ 2.9
Provision for disposal of discontinued operations
(see also Note 18) -- 0.1
Provision for disposal of foundry businesses
(see also Note 17) -- 1.2
------ ------
$ 2.7 $ 4.2
====== ======

During Fiscal 2004, the Company implemented further cost reductions in
efforts to outsource programs, streamline operations, and focus its R&D
resources. The Company incurred workforce reduction costs of $7.0 (2003 -
$6.8) as a result of reducing the Company's employee base by approximately
240 employees (2003 - 200; 2002 - 471). The reductions were performed
globally across all job categories and business units. During Fiscal 2004,
severance costs of $2.6 (2003 - $2.8) were included in research and
development, related to a reduction in R&D engineers, and as a result of a
further reduction in the selling and administrative workforce, severance
costs of $3.3 (2003 - $3.0) were included in selling and administration.
The Company also recorded severance costs of $1.1 (2003 - $1.0) in cost of
revenue, related to further cost reductions as it finalizes its
outsourcing programs and streamlines operations. In Fiscal 2002, severance
costs of $25.5 were included in special charges.

As a result of the workforce reduction program and streamlining of
operations, the Company recorded a charge of $0.6 during Fiscal 2004 (2003
- nil), included in asset impairment and other, related to excess space
under lease contract in Canada. In Fiscal 2002, the cost of excess space
under lease contracts in Canada, the U.S. and the U.K. of $8.9 was
included in special charges.

Of the $7.6 of restructuring provision recorded in Fiscal 2004, $4.6
related to the Network Communications segment, $2.4 related to the
Consumer Communications segment, and $0.6 related to the Ultra Low-Power
Communications segment.

The remaining lease and contract settlement costs included in the
restructuring provision relate to idle and excess space as a result of
exit activities implemented and completed in recent years, and will be
paid over the lease term unless settled earlier.

The following table summarizes the continuity of restructuring provisions
in connection with exit activities and special charges for the three years
ended March 26, 2004:




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

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
Restructuring activities 6.8 -- 6.8 -- 6.8
Cash drawdowns (8.8) (2.0) (10.8) -- (10.8)
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
Restructuring activities 7.0 0.6 7.6 -- 7.6
Cash drawdowns (6.6) (1.2) (7.8) -- (7.8)
------- ------ ------- ---- -------
Balance, March 26, 2004 $ 0.7 $ 2.0 $ 2.7 $ -- $ 2.7
======= ====== ======= ==== =======



-45-


8. 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 is now operated as Mitel Networks Corporation (Mitel). 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 26, 2004, was $36.2 (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 26, 2004 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. The Company has
not recorded a liability in its consolidated financial statements
associated with this guarantee.

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.

In connection with the sale of the Systems business described in Note 18,
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 26,
2004, the taxation years 2000 to February 16, 2001 are subject to audit by
taxation authorities in certain foreign jurisdictions.

As at March 26, 2004, the Company has provided security to the financial
institution of a subsidiary in the form of a guarantee amounting to $2.9
in relation to the subsidiary's liabilities for custom and excise duties.

Based upon the transition rules outlined in FASB Interpretation no. 45
("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for
Guarantees of Indebtedness of Others", no amounts have been recorded by
the Company related to the above-mentioned items.

The Company records a liability based upon its historical experience with
warranty claims. The table below presents a reconciliation of the changes
in the Company's product warranty accrual for the year ended March 26,
2004:

Year ended
March 26, 2004
--------------
Beginning balance $ --
Accruals for new and pre-existing warranties 0.5
Reduction based on change in estimates (0.4)
------
Ending balance $ 0.1
======

9. LONG-TERM DEBT

2004 2003
------ ------
Capital leases and other, at rates varying
from 6.44% to 10.41% with payment terms
ranging from 1 to 3 years (2003 - 6.44% to
10.41% with payment terms ranging from 1
to 5 years) $ 0.2 $ 0.8
Less current portion (0.1) (0.6)
------ ------
$ 0.1 $ 0.2
====== ======


-46-


At March 26, 2004, future minimum lease payments of the obligations under
capital leases and other debt were $0.2 of which $0.1 and $0.1 related to
fiscal years 2005 and 2006, respectively. Interest costs included in the
total future lease payments were not material.

Total interest expense from continuing and discontinued operations related
to long-term debt was $nil in Fiscal 2004 (2003 - $0.2; 2002 - $0.8).

10. COMMITMENTS

(A) OPERATING LEASES

The future minimum lease payments for operating leases to which the
Company was committed as at March 26, 2004 amounted to $36.2 and were as
follows: 2005 - $7.6; 2006 - $6.9; 2007 - $4.1; 2008 - $3.8; 2009 - $3.7;
2010 and beyond - $10.1. Certain leases are subject to renewal options.

The future minimum payments to be received under noncancelable subleases
as at March 26, 2004 was as follows: 2005 - $3.1; 2006 - $3.2; 2007 -
$1.8; 2008 - $0.8; 2009 - $0.5; 2010 and beyond - $1.0.

Rental expense related to operating leases for the year ended March 26,
2004 was $7.1 (2003 - $7.4; 2002 - $5.8).

(B) LETTERS OF CREDIT

As at March 26, 2004, the Company had letters of credit outstanding of
approximately $9.5 (2003 - $6.2), which expire within 12 months. Cash and
cash equivalents of $9.5 have been pledged as security against these
letters of credit, and are presented as restricted cash. Of this amount,
$8.0 was issued to secure letters of credit related to the Company's
pension plan in Sweden, and $0.7 of letters of credit were outstanding
related to the Company's SERP plan. In addition, $0.8 was issued to secure
certain obligations under a performance guarantee and office lease
arrangement. The Company has also pledged $0.5 as security for a custom
bond and related credit facilities.

As at March 28, 2003, and during Fiscal 2004, the Company had not met a
quarterly financial covenant with respect to shareholder's equity under
the Company's credit facility, as a result of restructuring and impairment
losses recorded during the year. A waiver was obtained from the bank in
respect of the financial covenant. During Fiscal 2004, the Company
cancelled the operating line component of its revolving global credit
facility, as it was not being utilized or required by the Company. This
resulted in reducing the total credit facility from $18.9 (Cdn $25.0) to a
facility of $9.5 (Cdn $12.5) available for letters of credit. In addition,
the financial covenant with respect to the shareholder's equity was
modified under the new agreement such that no waiver was required as at
March 26, 2004.

(C) 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.

11. 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
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.

12. REDEEMABLE PREFERRED SHARES

Dividends - Fixed cumulative cash dividends are payable quarterly at a
rate of $1.47 (Cdn$2.00) per share per annum. During the year ended March
26, 2004, the Company declared a $1.47 (Cdn$2.00) per share dividend.


-47-


The Company paid dividends of $2.1 during the year, including $0.5 of
dividends declared during Fiscal 2003. An additional $0.5 of dividends
declared during Fiscal 2004 were paid after year-end.

Redemption - The shares are currently redeemable, at the option of the
Company, at $18.94 (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 $18.94 (Cdn$25.00) per share plus costs of purchase. During the
year ended March 26, 2004, the Company purchased 64,600 preferred shares
for cash consideration of $1.2 and cancelled 61,300 shares, including
9,900 shares that were purchased in Fiscal 2003. As at March 26, 2004,
there were 13,200 repurchased preferred shares remaining to be cancelled
in Fiscal 2005.

13. 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.
No shares were purchased under the normal course issuer bid program in the
period ended June 9, 2003. The program was not renewed.

(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:

2004 2003 2002
--------- --------- ---------
Stock options 299,604 135,664 1,425,677

Restricted shares -- -- 637,638
--------- --------- ---------
299,604 135,664 2,063,315
========= ========= =========

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:

2004 2003 2002
---- ---- ----
Number of outstanding options 6,800,986 8,288,782 4,396,145
Average exercise price per share $ 10.73 $ 9.81 $ 11.31

The average exercise price of stock options granted in Canadian dollars
was translated at the U.S. dollar 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


-48-


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 26, 2004 were 2,971,904 (2003 - 3,714,122;
2002 - 3,810,910) 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.

A summary of the Company's stock option activity and related information
for the three years ended March 26, 2004 is as follows:




2004 2003 2002
---------------------------- ------------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
---------- --------- ---------- -------- ---------- ---------

Outstanding options:
Balance, beginning of year 10,828,557 $ 8.32 10,914,962 $ 8.84 9,464,693 $ 8.18
Granted 2,525,500 $ 3.92 2,674,088 $ 3.38 3,600,462 $ 10.00
Exercised (36,095) $ 3.64 (183,193) $ 3.56 (945,324) $ 5.17
Forfeited (1,783,282) $ 10.16 (2,577,300) $ 8.68 (1,153,908) $ 8.80
Cancelled -- $ -- -- $ -- (50,961) $ 10.77
---------- --------- ---------- -------- ---------- ---------
Balance, end of year 11,534,680 $ 7.93 10,828,557 $ 8.32 10,914,962 $ 8.84
========== ========= ========== ======== ========== =========
Exercisable, end of year 5,333,344 $ 9.68 4,214,012 $ 9.40 4,417,633 $ 8.20
========== ========= ========== ======== ========== =========


The weighted average exercise price of stock options granted in Canadian
dollars was 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 26, 2004 is as follows:




Total Outstanding Total Exercisable
--------------------------------------------------------------------------- -------------------------------

Weighted Weighted Average Weighted
Average Remaining Average
Exercise Price Options Exercise Price Contractual Life Options Exercise Price
-------------- ------- -------------- ---------------- ------- --------------

$2.58 - $3.86 2,572,653 $3.73 5 years 647,544 $3.78
$3.88 - $5.82 3,011,574 $4.48 5 years 694,695 $5.64
$5.94 - $8.83 872,148 $7.87 2 years 690,709 $7.67
$8.95 - $10.58 669,750 $10.21 3 years 348,166 $10.18
$10.65 1,672,525 $10.65 3 years 1,271,047 $10.65
$10.71 - $12.54 1,511,166 $12.21 4 years 842,946 $12.21
$12.64 - $16.02 1,140,364 $14.11 3 years 774,862 $14.19
$19.76 - $28.30 84,500 $25.94 2 years 63,375 $25.94
---------- ---------
11,534,680 5,333,344
========== =========


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

In connection with the sale by the Company of its Plymouth and Bromont
foundry businesses in Fiscal 2002 (see also Note 17), all employees of the
former foundry businesses who held options to purchase common shares of


-49-


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 remained employed by the buyer as of such date) and the
remaining 50% were cancelled as of the respective sale dates. 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 19, 2003, in respect of the former Bromont employees, and as at
September 23, 2003, in respect of the former Plymouth employees, expired
on that date. In accordance with the terms of the agreements, 88,547
unexercised stock options held by former Bromont employees expired on
August 19, 2003, and 26,134 unexercised stock options held by former
Plymouth employees expired on September 23,2003. The options were returned
to the pool of options available for grant. No stock compensation expense
was recorded during Fiscal 2004 or 2003 related to these transactions
(2002 - $0.1).

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 2004,
the Company recorded stock compensation expense of $nil (2003 - recovery
of $0.9; 2002 - $1.0) related to this option exchange program. The Company
will record further stock compensation expense on these options only when
the market price exceeds the grant price of these options.

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 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 2004, the
Company recorded stock compensation expense of $nil (2003 - $nil; 2002 -
$0.7) 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
2004, the Company recorded stock compensation expense of $nil (2003 -
recovery of $1.0; 2002 -$0.6) related to this option exchange program. The
Company will record further stock compensation expense on these options
only when the market price exceeds the grant price of these options.

14. ACCUMULATED OTHER COMPREHENSIVE LOSS

The components of accumulated other comprehensive loss were as follows:




March 26, March 28, March 29,
2004 2003 2002
--------- --------- ---------

Net loss for the period $ (38.6) $ (57.9) $ (120.8)
Other comprehensive gain (loss):
Minimum pension liability -- 2.5 (2.5)
Realized net derivative loss (gain) on cash flow hedges (1.0) 0.4 --
Unrealized net derivative gain (loss) on cash flow hedges 0.9 (0.1) (0.4)
Change in foreign currency translation adjustment -- 10.6 (0.4)
------- ------- --------
Comprehensive loss for the period $ (38.7) $ (44.5) $ (124.1)
======= ======= ========


The changes to accumulated other comprehensive loss for three years ended
March 26, 2004 were as follows:


-50-





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

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)
Change during the year -- -- (0.1) (0.1)
------- ---- ------ -------
Balance, March 26, 2004 $ (32.4) $ -- $ (0.2) $ (32.6)
======= ==== ====== =======


During Fiscal 2004, the Company recorded a derivative loss of $nil in the
cumulative translation account in respect of a hedge in a net investment
in a foreign subsidiary (2003 -$7.7; 2002 - gain of $2.2).

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 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 an increase in other comprehensive loss in
Fiscal 2004 of $0.1 which was attributable to the change in the value of
outstanding foreign currency forward and option contracts related to the
Company's hedging program that were designated as cash flow hedges for
Fiscal 2005. The Company estimates that $0.2 of derivative loss included
in other comprehensive loss will be reclassified into earnings within the
next twelve months.

15. OTHER INCOME (EXPENSE) - NET

2004 2003 2002
---- ---- ----
Interest income $ 1.3 $ 3.0 $5.5
Foreign exchange gain (loss) (1.0) (5.6) 7.3
Pension plan settlement (see also Note 22) -- (6.6) --
Gain on sale of long-term investments 0.6 0.7 --
Impairment of long-term investments -- (11.5) (3.5)
Equity loss in Optenia, Inc. -- -- (2.2)
Lease settlement with tenant -- 3.7 --
Other -- (0.2) --
------ ------- -----
Other income (expense) - net $ 0.9 $ (16.5) $ 7.1
====== ======= =====

During the third quarter of Fiscal 2004, the Company sold its investment
in a privately held company for cash proceeds of $0.6. The carrying value
had been written down to $nil in Fiscal 2002 to reflect an impairment. The
Fiscal 2002 write-down was recorded in Special Charges.

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 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
believed that the carrying value would not be realized in the foreseeable
future. A non-cash write-down of $11.5 was recorded in Fiscal 2003.

The Company sold its investment in DALSA Semiconductor Inc. (DALSA) during
Fiscal 2003 for cash proceeds of $4.2 and recorded a gain of $0.7.

During 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 Fiscal 2003 in connection with the cash
proceeds from the lease settlement.


-51-


16. INCOME TAXES

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

2004 2003 2002
---- ---- ----
Loss from continuing operations
before income taxes:
Canadian $ (8.7) $ (25.2) $ (23.0)
Foreign (36.6) (34.0) (99.2)
------- -------- --------
$ (45.3) $ (59.2) $ (122.2)
======= ======== ========

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

2004 2003 2002
------ ------ ------
Current:
Canadian $ (8.2) $ 0.7 $ 1.0
Foreign (0.4) -- --
------ ------ ------
(8.6) 0.7 1.0
------ ------ ------
Deferred:
Canadian 3.1 0.6 (1.7)
Foreign -- (0.2) (0.7)
------ ------ ------
3.1 0.4 (2.4)
------ ------ ------
$ (5.5) $ 1.1 $ (1.4)
====== ====== ======

During the year, the Company received tax refunds in excess of its
original provision estimates in both its domestic and foreign operations.
These amounts were booked as tax recoveries during the year. The refunds
account for $2.8 of the income tax recovery.

Based on its periodic review, management determined that an adjustment was
required to its income tax provision, and deferred tax asset balances, in
the fourth quarter of Fiscal 2004. These adjustments were based upon an
overall assessment of the settlements of past audits, passage of time in
certain jurisdictions, and tax losses incurred in its domestic operations.
Based upon this assessment, the Company recorded an income tax recovery of
$4.4 related to the adjustment of these income tax accruals. In addition,
based upon consideration of recent losses, the Company recorded a deferred
income tax expense of $3.1 related to an increase in the valuation
allowance on the Company's investment tax credits in Canada, resulting in
a net income tax recovery of $1.3 booked during the year.

The remaining $1.4 relates to income taxes recoverable for tax loss
carrybacks, net of current year taxes paid.

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




2004 2003 2002
------- ------- -------

Expected Canadian statutory income tax rate 35% 35% 35%
------- ------- -------
Recovery at Canadian statutory income tax rate $ (15.9) $ (20.6) $ (42.5)
Differences between Canadian and foreign taxes 2.3 1.7 (0.3)
Tax effect of losses not recognized 15.6 33.1 26.1
Tax effect of temporary differences not recognized 0.4 (3.6) 9.1
Tax effect of amortization of acquired intangibles -- -- 2.6
Tax effect of realizing benefit of prior
years' loss carryforwards and timing differences (0.2) (6.7) (2.0)
Corporate minimum taxes 0.4 0.7 1.0
Tax recoveries in excess of provisions (2.8) (0.2) (0.6)
Previously recognized provision no longer required (4.4) -- --
Increase in valuation allowance on investment
tax credits, net of related deferred tax credits 3.1 -- --
Non-reversing nondeductible items and other (3.1) (3.3) 5.2
Foreign exchange impact on closing balances (0.9) -- --
------- ------- -------
Income tax expense (recovery) $ (5.5) $ 1.1 $ (1.4)
======= ======= =======


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:


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2004 2003
-------- --------
Deferred tax assets:
Provisions $ 5.9 $ 7.5
Book and tax differences on fixed assets 6.7 6.2
Income tax loss carryforwards 119.9 89.4
Investment tax credits 52.7 37.5
Other - net 0.9 --
-------- --------
186.1 140.6
Less: valuation allowance (176.8) (128.1)
-------- --------
Deferred tax assets 9.3 12.5
-------- --------
Deferred tax liabilities:
Book and tax differences on fixed assets 1.8 1.4
Other - net -- 1.7
-------- --------
Deferred tax liabilities 1.8 3.1
-------- --------

Net deferred tax assets $ 7.5 $ 9.4
======== ========

The increase of $48.7 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. Also contributing to this change was a $3.1
increase in the valuation allowance on previously recorded investment tax
credits, which was done in conjunction with the Company's periodic review
of tax assets and liabilities, and was based upon consideration of recent
losses.

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 $36.6 (2003 - $34.0; 2002 -
$101.0).

As at March 26, 2004, the Company had income tax loss carryforwards in
Sweden and the United Kingdom of approximately $248.8 that may be carried
forward indefinitely to reduce future years' income for tax purposes.
Approximately $6.3 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 $85.0 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 $37.6 of U.S.
state net operating loss carryforwards available that expire between 2005
and 2009. The Company has provided a full valuation allowance on the U.S.
loss carryforward balances.

As at March 26, 2004, the Company had $53.8 of Canadian investment tax
credits available to offset federal income taxes payable. The Company has
recognized an accounting benefit of $7.5 on these investment tax credits
net of associated deferred tax credits. The investment tax credits expire
between 2007 and 2014.

17. SALE OF FOUNDRY BUSINESSES

In 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. In the fourth quarter of Fiscal
2004, the remaining provision of $0.2 was reversed as the Company does not
expect to incur any further costs related to the foundry sales.

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.

At the time of the sale, the note receivable was discounted at 8% to a
carrying value of $17.2 at March 26, 2004. 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 $17.1 was deferred and netted against the


-53-


carrying value of the note receivable. The Company will recognize the gain
as payments are made on the note receivable. The first payment of $10.0
against the note receivable was expected to be received in June 2004 with
the final payment of $8.0 due in March 2005. On March 30, 2004 and June 9,
2004, X-FAB exercised their option to repay a portion of the note
receivable, and paid $3.0 and $4.0, respectively, as installments of the
payment due later in June 2004. As a result of these repayments, the
Company will record a gain of $7.0 during the first quarter of Fiscal
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 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 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.

18. 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.

During Fiscal 2004, the Company recorded an adjustment of $1.2 related to
a tax recovery on discontinued operations resulting from management's
revision of estimates based on the closure of audit years in certain
foreign tax jurisdictions. During Fiscal 2003, the Company recorded the
reversal of $2.4 of excess provisions related to these discontinued
operations based on remaining costs to settle claims.

19. 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. No further stock compensation
expense will be recorded against these formerly restricted shares.

During the year ended March 29, 2002, the Company recorded an asset
impairment charge of $1.6 to reduce the carrying value of the acquired
intangible assets to nil.

20. RELATED PARTY TRANSACTIONS

There were no related party transactions in Fiscal 2004 and Fiscal 2003.
During Fiscal 2002, the Company sold to and purchased from significantly
influenced enterprises products and services valued at approximately $1.3
and $0.7 respectively. These transactions for products and services were
under usual trade terms and trade prices.


-54-


21. 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.

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 Application-Specific Integrated Circuit (ASIC) and
Application-Specific Standard Product (ASSP) solutions for applications
such as pacemakers, hearing aids and portable instruments.

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, interest expense or income taxes to its reportable
segments. In addition, the Company does not use a measure of segment
assets to assess performance or allocate resources. As a result, segmented
asset information is not presented; 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 26, 2004 Communications Communications Communications Costs Total
-------------- -------------- -------------- ----------- -----

Total external sales revenue $ 107.1 $ 55.6 $ 35.8 $ -- $ 198.5
Depreciation of buildings and equipment 6.7 3.4 2.0 -- 12.1
Asset impairment and other 6.8 3.4 0.9 -- 11.1
Stock compensation expense -- -- -- 0.2 0.2
Recovery on sale of foundry businesses -- -- -- (0.2) (0.2)
Segment's operating loss from
continuing operations (19.6) (24.0) (1.7) -- (45.3)


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 (18.1) (23.0) (4.5) 3.9 (41.7)

Network Consumer Ultra Low-Power Unallocated
Year Ended March 29, 2002 Communications Communications Communications Costs Total
-------------- -------------- -------------- ----------- -----
Total external sales revenue $ 114.5 $ 72.7 $ 34.9 $ -- $ 222.1
Depreciation of buildings and equipment 13.3 5.7 0.3 -- 19.3
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)



-55-


Geographic Segments

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

Geographic information is as follows:




2004 2003 2002
-------------------- --------------------- --------------------
Fixed Fixed Fixed
Revenue Assets Revenue Assets Revenue Assets
------- ------ ------- ------ ------- ------

Canada $ 43.7 $ 6.8 $ 44.4 $ 11.3 $ 43.1 $ 14.3
United Kingdom 81.0 22.4 79.6 30.9 83.7 30.8
United States 45.2 1.2 43.0 1.7 62.8 3.0
Sweden 22.7 10.5 19.9 12.1 22.9 9.9
Other foreign
countries 5.9 0.2 6.9 0.4 9.6 0.1
-------- ------- -------- ------- -------- -------
Total $ 198.5 $ 41.1 $ 193.8 $ 56.4 $ 222.1 $ 58.1
======== ======= ======== ======= ======== =======


Major Customers

For the year ended March 26, 2004, the Company had revenues from one
external customer, a major distributor, which exceeded 10% of total net
revenues (2003 - one; 2002 - one). Sales to this distributor in Fiscal
2004 were $46.1 (2003 - $39.0; 2002 - $27.1) and related to the Network
Communications and Consumer Communications segments.

22. PENSION PLANS

As at March 26, 2004, the Company sponsors a number of Canadian, U.S. and
foreign pension plans to provide retirement benefits for its employees.
The majority of these plans are defined contribution plans, although the
Company does participate in defined benefit plans and multiemployer plans
for certain employee groups.

Sweden

The Swedish 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. Effective January 1, 2002, the
Company began to fund its Swedish pension obligation with contributions to
multiemployer plans. Based on cash contributions made by the Company, as
determined by mutual pension insurance companies, the pension plan assets
or liabilities associated with these multiemployer plans are not
identifiable.

Prior to January 1, 2002, the Company maintained an unfunded defined
benefit plan. The associated pension liability is calculated each year by
the Pension Registration Institute for pensions earned under this plan
until December 31, 2001. With respect to the pension liability of $12.1
(2003 - $10.6), the Company has provided, as collateral, a limited surety
bond in the amount of $4.8 and a letter of credit of $8.0, which is
secured by restricted cash. 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.
In addition to the pension expense, the Company also incurred $0.2 (2003 -
$0.1) of administrative costs with respect to this plan.

Germany

The German defined benefit plan covers all employees in Germany with over
ten years of active service and provides pension benefits based on length
of service and final pensionable earnings. The pension liability of $4.6
(2003 - $3.7) was actuarially determined based on the present value of the
accrued future pension benefits and in accordance with applicable laws and
regulations in Germany. There are no segregated pension fund assets


-56-


under this plan. The pension liability is insured in its entirety by the
Swiss Life Insurance Company, and the related asset is recorded in other
assets.

United Kingdom

In Fiscal 2002, there was one contributory defined benefit 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 in 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 plan settlement in Fiscal 2003 resulted in a loss of $6.6,
which was recorded in other expense. The Company expects to make a final
payment of approximately $2.7 in Fiscal 2005 after the final adjustments
are calculated. This amount was included in other accrued liabilities as
at March 26, 2004.

In prior years, the Company's policy was to fund defined benefit pension
plans in accordance with independent actuarial valuations and as permitted
by the pension regulatory authorities. This Plan provides 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.

As at March 26, 2004, the actuarial present value of ZSL accrued pension
benefits was $nil (2003 - $nil). 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 settled in Fiscal 2003.


-57-


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:

2004 2003
------- -------
Change in accrued pension benefits:
Benefit obligation at beginning of year $ 14.3 $ 29.2
Interest cost 1.2 1.4
Actuarial loss -- 5.1
Plan settlement -- (25.8)
Benefits paid (0.9)
(0.4)
Foreign exchange 1.6 5.3
------- -------
Benefit obligation at end of year 16.7 14.3
------- -------
Change in plan assets:
Fair value of plan assets at beginning of year -- 11.8
Actual return on plan assets -- 1.7
Plan settlement -- (15.7)
Benefits paid -- (0.5)
Foreign exchange -- 2.7
------- -------
Fair value of plan assets at end of year -- --
------- -------
Unfunded status (16.7) (14.3)
------- -------
Net pension benefit liability $ (16.7) $ (14.3)
======= =======

2004 2003 2002
Assumptions: ---- ---- ----
Discount rate 6% 3.5%-6.0% 5%
Compensation increase rate 2.0-2.5% 3% Nil
Investment return assumption n/a 5% 5%

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

2004 2003 2002
------ ------ ------
Employer service cost $ -- $ -- $ 1.8
Interest cost on projected plan benefits 1.2 1.4 1.3
Expected return on plan assets -- (0.7) (0.6)
Net amortization and deferral -- 0.1 0.4
------ ------ ------
Defined benefit pension expense 1.2 0.8 2.9
Defined contribution pension expense 4.7 4.2 1.2
------ ------ ------
Total pension expense $ 5.9 $ 5.0 $ 4.1
====== ====== ======

Company contributions to multiemployer and other defined contribution
pension plans approximate the amount of annual expense presented in the
table above.

23. 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, accounts receivable
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


-58-


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 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.

All of the forward and option contracts mature within 10 months with the
longest maturity extending to January 20, 2005. At March 26, 2004,
unrealized gains were $nil (2003 - $nil; 2002 - $0.1) and unrealized
losses were $0.2 (2003 - $0.1; 2002 - $0.5). As at March 26, 2004, the
change in time value of option contracts resulted in a loss of $0.4 (2003
- $nil, 2002 - $nil), which was recorded in other expense. This portion of
the option contract value was deemed ineffective for managing the foreign
exchange risk.

(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 21).

The Company's note receivable is subject to credit risk in the event of
non-payment by X-FAB (see also Note 17).

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 $9.5 (Cdn$12.5) available for letters
of credit. At March 26, 2004, $9.5 (2003 - $6.2) in letters of credit were
outstanding against this credit facility. For Fiscal 2003, the Company had
unused and available demand bank lines of credit of approximately $10.8 at
a rate of interest based on the prime lending rate plus 0.50%. As at March
26, 2004, cash and cash equivalents of $9.5 (2003 - $6.2) were
hypothecated under the Company's revolving global credit facility to cover
certain outstanding letters of credit.

24. SUPPLEMENTARY CASH FLOW INFORMATION

2004 2003 2002
---- ---- ----
Cash interest paid (included in cash
flow from operations) $ -- $ 0.2 $ 0.5
====== ===== ======
Cash taxes paid (included in cash
flow from operations) $ 0.4 $ 1.7 $ 2.3
====== ===== ======


-59-


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

2004 2003 2002
------- ------- -------
CASH PROVIDED BY (USED IN)
Impairment of long-term investment $ -- $ 11.5 $ 3.5
Income on disposal of discontinued
operations (1.2) (2.4) --
Gain on sale of long-term investment (0.6) (0.7) --
Loss (recovery) on sale of businesses (0.2) (2.5) 5.4
Change in pension liability 2.4 0.2 6.6
Asset impairment and other 11.1 -- --
Other (0.3) -- --
Non-cash foreign exchange loss on
short-term investments -- 5.1 --
Pension settlement charge -- 6.6 --
Impairment of goodwill -- 0.2 --
Loss on sale of fixed assets -- -- 0.5
Equity loss in investment -- -- 2.2
Inventory write-down -- -- 29.1
Special charges, non-cash -- -- 7.8
------- ------- -------
Other non-cash changes in operating
activities $ 11.2 $ 18.0 $ 55.1
======= ======= =======

25. SUBSEQUENT EVENT

On March 30, 2004 and June 9, 2004, X-FAB exercised their option to repay
a portion of the note receivable, and paid $3.0 and $4.0, respectively, as
installments of the $10.0 payment due later in June 2004. As a result of
these repayments, the Company will record a gain on sale of $7.0 during
the first quarter of Fiscal 2005.

26. COMPARATIVE FIGURES

Certain of the Fiscal 2003 and Fiscal 2002 comparative figures have been
reclassified so as to conform to the presentation adopted in Fiscal 2004.


-60-


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

None.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company's management carried out an evaluation, with the participation of
its Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the Company's disclosure controls and procedures as of March 26, 2004. Based
upon that evaluation, the Company's Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures were
effective to ensure that information required to be disclosed by the Company in
reports that it files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported, within the time periods specified
in the rules and forms of the Securities and Exchange Commission.

There has not been any change in the Company's internal controls over financial
reporting in connection with the evaluation required by Rule 13a-15(d) under the
Exchange Act that occurred during the quarter ended March 26, 2003 that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.


-61-


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) 67 July 23, 1998 Director

Patrick J. Brockett(4) 56 April 9, 2001 Director, President and
Chief Executive Officer

Hubert T. Lacroix(1,3,4) 48 July 21, 1992 Director

J. Spencer Lanthier(1,3) 63 May 14, 2003 Director

Kirk K. Mandy(3,4) 48 July 23, 1998 Director and
Vice Chairman

Jules Meunier (2) 48 July 31, 2002 Director

Kent H.E. Plumley(3) 67 August 22, 2000 Director

Dr. Henry Simon(3,4) 73 July 21, 1992 Director and Chairman

Dr. Semir D. Sirazi(1) 49 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. Andre 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 also serves on
the Board of Chartered Semiconductor and is a Director of the Advisory Board of
Leica Microsystems AG. He is an Officer of the French National Order of Merit,
and holds a Master's Degree in Electronics from Ecole Nationale Superieure des
Telecommunications in Paris.

Mr. Patrick J. Brockett has over thirty years experience in the semiconductor
industry starting with Texas Instruments in 1966. He joined National
Semiconductor in 1979 and over a twenty-two year career held senior executive
positions in world sales and marketing and general management. In his last
assignment, Mr. Brockett was responsible for National's Analog and Wireless
businesses, which grew to over seventy percent of the company's revenues during
his tenure. He joined Zarlink as President and Chief Executive Officer in April
2001.

Mr. Hubert T. Lacroix has been a consultant to Telemedia Ventures Inc., a
private investment company, and Senior Advisor to Stikeman Elliott (law firm)
since May 5, 2003. He also currently teaches law classes at Universite de
Montreal. He was Executive Chairman, Telemedia Corporation from February 2000 to
May 2003. Prior to that date, he was a partner with McCarthy Tetrault (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. Lacroix received his Bachelor of Law
from McGill University, was admitted to the Quebec Bar in 1977 and holds a
Master of Business Administration from McGill University.

Mr. J. Spencer Lanthier was appointed to the Board of Directors on May 14, 2003.
He has been a Management Consultant since his retirement in 1999 from KPMG
Canada, where he had a long and distinguished career culminating in the position
of Chairman and Chief Executive from 1993 until his retirement. A recipient of
the Order of Canada, Mr. Lanthier is currently a member of the board of the TSX
Group, Inc., Bank of Canada, Torstar Corporation, Ellis-Don Inc., Intertape
Polymer Group Inc., BCE Emergis Inc., and Gerdau Ameristeel Inc. He is also
active with the United Way, Goodwill Industries, The University of Toronto, and
the London Health


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Sciences Foundation. Educated at McGill University, Mr. Lanthier received an
honorary Doctor of Law from the University of Toronto in 2002.

Mr. Kirk K. 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 has been a Management Consultant since his retirement from
the Company in April 2001. Upon his retirement, he was appointed Vice-Chairman
of the Board of Directors on April 6, 2001. Mr. Mandy is also Co-Chairman of the
National Research Council's Regional Innovation Forum, Co-Chairman of the Ottawa
Partnership, and a member of the board of Epocal, Mitel Networks, and the Nectar
Foundation. He has served on the Board of the Strategic Microelectronics
Corporation, the Canadian Advanced Technology Association, The Canadian
Microelectronics Corp., The Ottawa Center for Research and Innovation, Micronet,
and is past chairman of the Telecommunications Research Institute of Ontario.
Mr. Mandy is a graduate of Algonquin College in Ottawa.

Mr. Jules M. Meunier was appointed to the Board of Directors on July 31, 2002.
He was President and CEO of Proquent Systems Inc. from January to November 2002.
Prior to January 2002, over a 20-year career with Nortel Networks Corporation,
he helped shape the company's direction as Chief Technical Officer, and held
senior positions in wired, wireless, and optical communications, including
serving as President of its Wireless Networks division. He is also a Director
and member of the Audit Committee of Spectrum Signal Processing, a British
Columbia-based firm developing wireless and Voice over Packet equipment. Mr.
Meunier holds Bachelor of Science degrees in Mathematics and Computer Science
from the University of Ottawa.

Mr. Kent H. E. Plumley has been a Special Partner of Osler, Hoskin & Harcourt
(law firm) since January 2002. Prior to that date, he was an equity partner of
Osler, Hoskin & Harcourt since May 1990. Mr. Plumley is co-founder and Chairman
of Genesys Capital Partners Inc. He has 35 years' experience in raising venture
and equity capital for Canadian technology companies. Mr. Plumley is also
Vice-Chairman of Bridgewater Systems, and a Director of The Stem Cell Network,
Photonics Research Ontario, and the Ottawa Life Sciences Council. He serves on
the Board of Trustees for The University of Ottawa Heart Institute Foundation
and Queen's University, and is a representative to the Advisory Board of the
Centre for Innovation Law & Policy at the University of Toronto Law School. Mr.
Plumley has a Bachelor of Science in Chemical Engineering and a Bachelor of
Laws, both from Queen's University.

Dr. Henry Simon has been Chairperson of the Company's Board of Directors since
July 21, 1994. He is a Special Partner of Schroder Ventures Life Sciences
Advisers, a venture capital company advising on investments in the life
sciences. He joined Schroder Ventures in 1987 to head a venture capital group
that developed a life sciences business in the U.K., and was CEO of the life
sciences team until 1995. He is also Chairman of Leica Microsystems AG, Director
of Gyros AB and Director and Chairman of the Audit Committee of Eyetek
Pharmaceuticals. Dr. Simon holds an Electrical Engineering degree from the
Institute of Technology in Munich, and a doctorate in Telecommunications from
the Royal Institute of Technology in Stockholm.

Dr. Semir 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 Executive Chairman of Prominence Networks, and a Director
with Ureach Technologies, Visonael Inc., and Novarra, Inc. Dr. Sirazi received a
Bachelor of Science in Electronics and Communications from Istanbul Technical
University, a Master of Science in Electronics and Communications from
Bosphorous University, and a PhD in Computer Science from the Illinois Institute
of Technology. He holds eight patents and contributed to the standardization of
Ethernet and other networking protocols as an active member of the IEEE 802
Standards Committee.

There are no family relationships among directors 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 (the "TSX") 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.


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In 1999, the TSX 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 believes that the Company is fully
compliant with the Governance Guidelines, as currently in force.

As the Company's common shares are registered in the United States, Zarlink is
subject to certain provisions of the United States Sarbanes-Oxley Act of 2002
("Sarbanes-Oxley Act") and the rules and regulations ("SEC Rules") of the U.S.
Securities and Exchange Commission ("SEC"). Moreover, as the Company's common
shares are listed on the New York Stock Exchange ("NYSE"), Zarlink is subject to
certain NYSE corporate governance rules which became final in November 2003
("NYSE Rules").

The Canadian Securities Administrators ("CSA") published for comment in January
2004 a policy relating to best practices for corporate governance standards
("CSA Best Practices Policy"). In addition, in March 2004, the CSA rules
relating to audit committees and certification of financial disclosure came into
force ("CSA Rules").

The Company fully complies with the corporate governance standards set out in
the NYSE Rules although, as a foreign issuer, Zarlink is not required to comply
with many of the NYSE Rules. As it fully complies with the NYSE Rules, the
Company is exempt from compliance with the CSA Rules relating to the role and
composition of its audit committee. The Company has already adopted all of the
corporate governance practices proposed in the CSA Best Practices Policy.

The Governance Guidelines define independent directors as "unrelated", which
means a director is independent of management and is free from any interest and
any business or other relationship which could, or could reasonably be perceived
to, materially interfere with the director's ability to act with a view to the
best interests of the Company, other than interests and relationships arising
from shareholding. The NYSE Rules require that a majority of the board must be
"independent". Independence is defined under the NYSE Rules to mean the board
has affirmatively determined that the director has no material relationship with
the Company (either directly or as a partner, shareholder or officer of an
organization (including any charitable organization) that has a relationship
with the Company). The NYSE Rules deem certain relationships to be indicative of
non-independence. The NYSE Rules also require that all audit committee members
meet additional independence standards, including not accepting, directly or
indirectly, any consulting or other compensatory fee and not being an affiliate
of the Company.

The Board of Directors has reviewed the Governance Guidelines and NYSE Rules and
has individually considered their respective interests in and relationships with
the Company. As a consequence, the Board of Directors has determined that, on a
rigorous application of these definitions, the Board is composed of eight
unrelated and "independent" directors out of nine board members. As the
President and Chief Executive Officer of the Company, Patrick J. Brockett is
considered to be a "related" and not an "independent" director.

The NYSE Rules require that all of audit committee members be independent and
financially literate, as defined by such rules. The Company is also required,
under the Sarbanes-Oxley Act and SEC Rules, to disclose whether it has an audit
committee financial expert (within the meaning of such rules) serving on its
audit committee. The Board of Directors has reviewed the qualifications of the
members of the audit committee and has determined that all audit committee
members are independent and financially literate and that Hubert T. Lacroix,
Chairperson of the Audit Committee, and J. Spencer Lanthier, a member of the
Audit Committee, are the audit committee financial experts.

The Board of Directors has approved a detailed set of internal corporate
governance policies including mandates for the Board of Directors and its
committees. These policies are available to any shareholder upon request, and
are also available in their entirety at the Company's website at
www.zarlink.com.

All of the Company's employees (including the senior executives) are subject to
a Code of Ethics and Business Conduct. The Chief Executive Officer, the Chief
Financial Officer and the Corporate Controller of the Company must, in addition,
meet the standards and requirements of the Supplementary Code of Ethics and
Business, which are available to any shareholder upon request, and also
available in their entirety at the Company's website at www.zarlink.com.

The Board of Directors continues to monitor changes to corporate governance
rules and best practices and to take appropriate action, including, as
appropriate, the adoption of voluntary policies and procedures.


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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 52 Senior Vice President, Worldwide Sales and
Marketing

Pradeep Singh Arora 40 Vice President Sales, Asia Pacific

Michael Bereziuk 51 Senior Vice President and General Manager,
Consumer Communications

Peter Burke 53 Vice President, Chief Technology Officer

Jonathan Burnie 52 Director, Time To Market

J. Desmond Byrne 52 Vice President Legal and Assistant Secretary

Robert Eschbach 39 Vice President Sales, Americas

Anthony P. Gallagher 50 Senior Vice President, Worldwide Operations

Tsviatko Ganev 56 Vice President and General Manager, Optical
Systems
Mark Levi 67 Vice President, Corporate Marketing

Donald G. McIntyre 56 Senior Vice President Human Resources,
General Counsel and Secretary

Scott Milligan 43 Senior Vice President Finance and Chief
Financial Officer

Stephen J. Swift 51 Vice President and General Manager, Ultra
Low Power Communications Division

Jitesh B. Vadhia 45 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.


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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. 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.

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.

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. 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 2004 was $5,619,755. 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 2004 for the provision of pension, retirement and similar benefits
to the directors and executive officers the Company as a group was $228,199,
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 26, 2004, March 28, 2003, and March 29, 2002, respectively,
for the Chief Executive Officer, the current Chief Financial Officer, the former
Chief Financial Officer and the three most highly compensated executive officers
of the Company, other than the Chief Executive Officer and the Chief Financial
Officer, who were serving as executive officers of the Company on March 26, 2004
(collectively, the "Named Executive Officers").


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

Patrick J. Brockett 2004 569,839 -- 90,260 150,000 85,843
President and Chief 2003 499,207 -- 139,483 150,000 95,363
Executive Officer 2002 495,657 297,391 142,124 1,110,000 2,128
- ----------------------------------------------------------------------------------------------------------------------------
Scott Milligan(4) 2004 204,186 -- 15,229 130,000 31,600
Senior Vice President Finance 2003 -- -- -- -- --
and Chief Financial Officer 2002 -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Jean-Jacques Carrier 2004 99,960(5) -- 4,711 -- 802,252(5)
Former Chief Financial Officer 2003 217,740 -- 11,630 -- 35,085
2002 205,191 121,515 17,527 40,000 52,376
- ----------------------------------------------------------------------------------------------------------------------------
Roland Andersson 2004 406,467 -- 34,669 100,000 109,794
Senior Vice President, 2003 343,107 50,000 34,651 50,000 129,988
Worldwide Sales and 2002 241,666 100,000 78,901 105,000 150,000
Marketing
- ----------------------------------------------------------------------------------------------------------------------------
Anthony A.P. Gallagher 2004 290,514 -- 22,840 100,000 23,449
Senior Vice President, 2003 266,158 111,641 19,805 50,000 22,055
Worldwide Operations 2002 144,335 95,933 11,287 50,000 11,029
- ----------------------------------------------------------------------------------------------------------------------------
Tsviatko Ganev 2004 286,837 -- 22,257 60,000 72,904
Vice President, Optoelectronics 2003 242,125 -- -- 95,000 --
Business Unit 2002 -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------


(1) "Other Annual Compensation" includes relocation and living expenses for
certain Named Executive Officers as follows: Mr. Brockett - Fiscal 2004
includes rent payments of $37,120 and tax equalization amounting to
$36,004 (2003 - includes rent payments of $62,422 and relocation expenses
totalling $62,054; 2002 - includes rent payments of $103,942 and
relocation expenses totalling $25,136); Mr. Milligan - Fiscal 2004
includes car expenses amounting to $11,106; Mr. Andersson - Fiscal 2004
includes car expenses amounting to $34,669 (2003 - includes car expenses
amounting to $29,796; 2002 - includes car expenses amounting to $67,720);
Mr. Gallagher - Fiscal 2004 includes car expenses amounting to $21,490
(2003 - includes car expenses amounting to $18,742; 2002 - includes car
expenses amounting to $11,287); Mr. Ganev - Fiscal 2004 includes car
expenses amounting to $14,583.

(2) "All Other Compensation" includes contributions made and accrued by the
Company to a defined contribution pension plan. Also includes $9,570
contributed in Fiscal 2004, on behalf of Mr. Ganev, to a Swedish state
defined benefit multi-employer pension plan administered by a mutual
pension insurance company which provides pension benefits based on length
of service in a pensionable position with one or more employers and final
pensionable earnings.

(3) Messrs. Brockett, Andersson, Gallagher, and Ganev's changes in salary from
Fiscal 2003 to Fiscal 2004 were due solely to foreign exchange
fluctuations. Canadian dollar amounts have been converted to United States
dollars using the Fiscal 2004 average exchange rate of $0.735268 (2003 -
0.644132; 2002 - 0.639551). Swedish Kroner amounts have been converted to
United States dollars using the Fiscal 2004 average exchange rate of
0.127483 (2003 - 0.107611, 2002 - 0.095934). British pounds sterling
amounts have been converted to United States dollars using the Fiscal 2004
average exchange rate of 1.681215 (2003 - 1.541018, 2002 - 1.442441).

(4) Mr. Milligan was appointed Senior Vice-President Finance and Chief
Financial Officer on May 19, 2003. Accordingly, the summary compensation
table set forth above does not provide for any information concerning


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Mr. Milligan for Fiscal 2003 or Fiscal 2002 and the information provided
for Fiscal 2004 relates to the period from May 19, 2003 to March 26, 2004.

(5) Mr. Carrier resigned as Senior Vice-President and Chief Financial Officer
effective May 19, 2003. Upon termination of his employment with the
Company, in accordance with executive termination arrangements effective
January 1, 2000, Mr. Carrier received $784,875 of which (i) $738,944 was a
lump sum payment equal to two times his annual base salary and target
annual incentive payment, (ii) $38,933 was a lump sum equal to one times
the Company's annual contribution to the Executive Pension Plan and (iii)
$6,998 was a lump sum equivalent to two years payment of group life and
health insurance (see "Employment Agreements").

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 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 $368 per employee per year. The maximum contribution by the Company
under this plan for the next fiscal year is estimated at $150,000 based on
average headcount during Fiscal 2004, assuming that each eligible employee
contributes the maximum amount permitted under the plan.

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 including the CFO
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 that the Directors, the CEO and 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 Chairperson of the Board must purchase and hold common shares of the Company
worth at least CDN $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 Chairperson of the Board, must purchase
and hold common shares of the Company worth at least CDN $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


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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.

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.

The following table sets forth the details regarding options granted to the
Named Executive Officers under the Option Plan during Fiscal 2004.


-69-


Option Grants During Fiscal 2004


==================================================================================================================
Market Value
% of Total of Securities
Options Underlying
Securities Granted to Exercise or Options on the
Under Options Employees in Base Price(1) Date of Grant(1)
Name Granted (#) Fiscal 2004 ($/Security) ($/Security) Expiration Date
- ------------------------------------------------------------------------------------------------------------------

Patrick J. Brockett 150,000 5.90% $4.04 $3.92 January 29, 2010

Scott Milligan 80,000 3.17% $4.04 $3.92 January 29, 2010
50,000 1.98% $4.83 $4.71 May 19, 2009

Jean-Jacques Carrier Nil -- -- -- --

Roland Andersson 100,000 3.96% $4.04 $3.92 January 9, 2010

Anthony A.P. Gallagher 100,000 3.96% $4.04 $3.92 January 29, 2010

Tsviatko Ganev 60,000 2.38% $4.04 $3.92 January 29, 2010
===================================================================================================================

(1) Exercise price is determined by the five previous trading days 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.

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. As at May 28, 2004, the number of common shares issuable under


-70-


outstanding options and options available for grant was 14,506,584, which
represented 11.4% of the then outstanding common shares.

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.

The Option Plan provides that, in the event of the death or permanent disability
of an optionholder, the vesting 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
options).

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 options). 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 options). 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 which included the CFO 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. By full action of the Board of
Directors, this resolution now applies to each director and 13 designated
executives including the President and Chief Executive Officer and the Chief
Financial Officer.

The following table summarizes, for each of the Named Executive Officers, the
aggregated options exercised during Fiscal 2004 and option values at March 26,
2004.


-71-


Aggregated Options Exercised During Fiscal 2004 and Fiscal Year-End Option
Values




===========================================================================================================================
Name Securities Aggregate
Acquired Value Unexercised Options Value of Unexercised In-the-Money
On Exercise Realized at March 26, 2004 Options at March 26, 2004(1)
(#) ($) (#) ($)
----------------------------- ----------------------------------
Exercisable Unexercisable Exercisable Unexercisable
============================================================================================================================

Patrick J. Brockett -- -- 592,500 817,500 -- --

Scott Milligan -- -- -- 130,000 -- --

Jean-Jacques Carrier -- -- 290,000 -- -- --

Roland Andersson -- -- 65,000 190,000 -- --
- -
Anthony A.P.Gallagher -- -- 78,678 169,001 -- --

Tsviatko Ganev -- -- 23,750 131,250 -- --
=============================================================================================================================


(1) None of the options were in-the-money as of March 26, 2004.

Employment Agreements

The Company has entered into employment agreements with the CEO, the CFO 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 $569,839. Mr. Brockett's base salary is determined in
Canadian dollars and has remained unchanged at CDN $775,000 since he was engaged
by the Company in April 2001. The change in the US dollar equivalent of Mr.
Brockett's base salary is solely due to foreign exchange rate fluctuations since
April 2001. He is also entitled to receive an annual incentive payment,
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 incentive payment will be equal to 30% of
the annual base salary, (ii) if the objectives are achieved in full, the annual
incentive payment will be equal to 60% of the annual base salary, and (iii) if
all objectives collectively are exceeded by at least 25%, the annual incentive
payment will be equal to 120% of the annual base salary. The incentive payment
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 incentive payment amounting to
$297,391. In Fiscal 2003 and Fiscal 2004, Mr. Brockett did not receive any
incentive payment.

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 of Mr. Brockett's
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 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.


-72-


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
incentive payment 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)
continued 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.

Scott Milligan

On May 12, 2003, the Company entered into an employment agreement with Mr. Scott
Milligan with respect to his employment as Senior Vice President, Finance and
Chief Financial Officer.

Pursuant to the agreement, Mr. Milligan is entitled to receive an annual base
salary in the amount of $246,315, Mr. Milligan's base salary is determined in
Canadian dollars and is CDN $335,000. He is also entitled to receive an annual
incentive payment, conditional upon the successful achievement by Mr. Milligan
of specific target objectives in each fiscal year, as follows: (i) if the
objectives are achieved in full, the annual incentive payment will be equal to
50% of the annual base salary, and (ii) if the financial component of the
objectives is exceeded, Mr. Milligan may earn up to 150% of his target incentive
payment. The incentive payment 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.

Mr. Milligan is also entitled to customary benefits and options to purchase
50,000 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. Milligan'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 then current annual base salary, (ii) a lump sum
payment in lieu of incentive payment equal to one times his target annual
incentive payment, and (iii) continued group life and health benefits coverage
until the earlier of one year following the date of termination or 30 days after
he secures substantially similar replacement coverage through re-employment. In
addition, Mr. Milligan 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.

Jean-Jacques Carrier

Mr. Carrier resigned as Senior Vice President, Finance and Chief Financial
Officer effective May 19, 2003. Upon termination of his employment with the
Company, in accordance with executive termination arrangements effective January
1, 2000, Mr. Carrier received $784,875 of which (i) $738,944 was a lump sum
payment equal to two times his annual base salary and target annual incentive
payment, (ii) $38,933 was a lump sum equal to one times the Company's annual
contribution to the Executive Pension Plan and (iii) $6,998 was a lump sum
equivalent to two years payment of group life and health insurance. In addition,
upon termination of his employment, all of the options granted to Mr. Carrier
became vested and he was granted a period of eighteen months following the date
of termination to exercise all such options unless any such options expired
before the end of such 18-month period.

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 agreed to be fixed at an equivalent
amount in Swedish Kroner based on the exchange rate at the time of hire) Mr.
Andersson's base salary in Kroner has not changed since he was engaged by the
Company on June 4, 2001. The change in the US dollar equivalent of Mr.
Andersson's base salary is solely due to foreign exchange fluctuations since
June 4, 2001. He is also entitled to receive an annual incentive payment,
conditional upon the successful achievement by Mr. Andersson of specific target
objectives in each fiscal year, as follows: (i) if a


-73-


minimum of 85% of the objectives are achieved, the annual incentive payment will
be equal to 27.5% of the annual base salary, (ii) if the objectives are achieved
in full, the annual incentive payment will be equal to 55% of the annual base
salary, and (iii) if all objectives are exceeded by at least 25%, the annual
incentive payment will be equal to 85% of the annual base salary. The incentive
payment 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 incentive payment amounting to $100,000 and a
signing incentive payment 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 incentive payment 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. Mr. Gallagher's base salary is 160,000 pounds sterling and
has not changed since April 1, 2002. The change in the US dollar equivalent of
Mr. Gallagher's base salary is due solely to foreign exchange fluctuations since
April 1, 2002. He is also entitled to receive an annual incentive payment 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, other than for cause, is
subject to nine months' prior notice of termination.

Tsviatko Ganev

On June 24, 2002, the Company entered into an employment agreement with Mr.
Tsviatko Ganev with respect to his employment as Vice President of the
Optoelectronics Business Unit.

Pursuant to the agreement, Mr. Ganev is entitled to receive an annual base
salary in the amount of $286,837. Mr. Ganev's base salary is 2.25 million Kroner
which has not changed since he was engaged by the Company on July 22, 2002. The
change in US dollar equivalent of Mr. Ganev's base salary is solely due to
foreign exchange fluctuations since July 22, 2002. He is also entitled to
receive an annual incentive payment, conditional upon the successful achievement
by Mr. Ganev of specific target objectives in each fiscal year, as follows: (i)
if a minimum of 85% of the objectives are achieved, the annual incentive payment
will be equal to 25% of the annual base salary, (ii) if the objectives are
achieved in full, the annual incentive payment will be equal to 50% of the
annual base salary, and (iii) if all objectives are exceeded by at least 50%,
the annual incentive payment will be equal to 75% of the annual base salary. The
incentive payment 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.

Mr. Ganev is also entitled to customary benefits and options to purchase 50,000
common shares pursuant to the Option Plan. The options provide for equal annual
vesting over a period of four years commencing one year


-74-


following their date of grant, have a term of six years and are otherwise
governed by the terms and conditions of the Option Plan.

Mr. Ganev'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 in lieu of incentive payment equal to one times his then current annual
base salary, (ii) a lump sum payment equal to one times his average earned
annual incentive payment over the previous three fiscal years (or such shorter
period during which he was employed by the Company) and (iii) continued group
life and health benefits coverage in accordance with the Company's Swedish
policy relating to post termination life and health benefits coverage. In
addition, Mr. Ganev will have a period of 30 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 26, 2004, each director who was not a
salaried officer of the Company or its subsidiaries received an annual stipend
of $7,353 and a director's fee of $1,471 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 $919 for each telephone meeting of the Board of
Directors and was reimbursed for his expenses. In addition, the Chairperson of
each Committee of the Board of Directors received an annual fee of $4,412, with
the exception of the Chairperson of the Audit Committee who received an annual
fee of $11,029. The Company pays the Chairperson of the Board of Directors, when
such person is not an employee of the Company, an annual stipend of $73,527
(inclusive of Board and Committee meeting fees) and a per diem of $1,471 for
attendance to Company business to an annual maximum of $36,763.

The following table summarizes the aggregate number of unexercised options held
by non-employee directors at May 28, 2004.

Option Information for Non-Employee Directors

================================================================================
Unexercised Options at May 28, 2004
Date of Grant -----------------------------------
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
- --------------------------------------------------------------------------------
January 29, 2004 -- 160,000
================================================================================

Directors' and Officers' Liability Insurance

As at May 28, 2004, 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 26, 2004 was $1,179,900. No portion of these premiums was paid by
the directors and officers of the Company. The policies do


-75-


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 28, 2004, no director, executive officer or senior officer of the
Company, or any associate of any such director or officer 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.


-76-


Item 12. Security Ownership of Certain Beneficial Owners and Management

The following table sets forth information as at May 28, 2004 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.




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

McLean Budden (6) common 9,574,850 7.52
145 King Street West
Suite 2525
Toronto, ON
M5H 1J8
Massachusetts Financial Services Company (5) common 9,172,375 7.21
500 Boylston Street
Boston, Massachusetts
U.S.A. 02116-3741

*Roland Andersson common 83,803 (4)

*Pradeep Arora common 84,240 (4)

*Michael Bereziuk common 77,044 (4)

Andre Borrel common 90,000 (4)
Chemin du bois de Seyme, 1
1253 Vandoeuvres-GE- Suisse

*Patrick J. Brockett common 922,235 (4)

*Peter Burke common 144,994 (4)

Jonathan Burnie common 12,064 (4)

*J. Desmond Byrne common 41,013 (4)

*Jean-Jacques Carrier common 290,000 (4)

Robert Eschbach common 15,000 (4)

*Anthony P. Gallagher common 83,666 (4)

Tsviatko Ganev common 36,250 (4)

Hubert T. Lacroix common 162,528 (4)
1 Place Ville Marie, Suite 3333
Montreal, QC H3B 3N2

J. Spencer Lanthier common 15,000 (4)

*Mark Levi common 92,836 (4)

Kirk K. Mandy common 145,000 (4)
400 March Road
Kanata, ON K2K 3H4

*Donald G. McIntyre common 281,803 (4)



-77-





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

Jules Meunier common 15,000 (4)
207 18A St. NW
Calgary, AB T2N 1W5

Scott Milligan common 30,534 (4)

Kent H. E. Plumley common 45,000 (4)
1500 - 50 O'Connor Street
Ottawa, ON K1P 6L2

Dr. Henry Simon common 255,000 (4)
1 Telegraph Hill
London, England NW3 7NU

Dr. Semir D. Sirazi common 99,500 (4)
500 Elmwood Ave
Wilmette, IL 60091

*Stephen Swift common 74,701 (4)

*Jitesh Vadhia common 187,401 (4)

24 directors and executive officers as a common 3,284,612 (4)
group(2,3) R&D Preferred nil


* These executive officers, or in the case of Mr. Carrier, a former
executive officer, can be contacted 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 - 83,750; Mr. Arora - 79,416; Mr.
Bereziuk - 63,750; Mr. Borrel - 90,000; Mr. Brockett - 842,500; Mr. Burke
- 109,159; Mr. Burnie - 10,231; Mr. Byrne - 41,013; Mr. Carrier - 290,000;
Mr. Eschbach - 15,000; Mr. Gallagher - 78,678; Mr. Ganev - 36,250; Mr.
Lacroix - 130,000; Mr. Lanthier - 5,000; Mr. Levi - 68,750; Mr. Mandy -
140,000; Mr. McIntyre - 226,250; Mr. Meunier - 10,000; Mr. Milligan -
12,500; Mr. Plumley - 45,000; Dr. Simon - 130,000; Dr. Sirazi - 70,000;
Mr. Swift - 70,148, and Mr. Vadhia - 93,000.

(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 - 35,000; Mr. Mandy - 70,000; Mr. Meunier - 50,000;
Mr. Plumley - 55,000; Dr. Simon - 50,000, and Dr. Sirazi - 50,000.

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

(5) Based upon information provided on a Schedule 13G filed with the SEC.

(6) Based upon information provided by McLean Budden.

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.


-78-


Equity Compensation Plan Information

The following table provides information as of March 26, 2004 about the common
shares of the Company that may be issued upon exercise of options, warrants and
rights under all of the Company's equity compensation plans.




- -----------------------------------------------------------------------------------------------------------
Number of securities
remaining available for
future issuance under
Number of securities to Weighted-average exercise equity compensation
be issued upon exercise price of outstanding plans (excluding
of outstanding options, options, warrants and securities reflected in
Plan Category warrants and rights rights column (a))
- -----------------------------------------------------------------------------------------------------------

Equity compensation plans 11,534,680 $8.35 2,971,904
approved by securityholders

Equity compensation plans -- -- --
not approved by
securityholders

Total 11,534,680 $8.35 2,971,904
- -----------------------------------------------------------------------------------------------------------


Item 13. Certain Relationships and Related Transactions

None.

Item 14. Principal Accounting Fees and Services.

For Fiscal 2004 and the fiscal year ended March 28, 2003 ("Fiscal 2003"), Ernst
& Young LLP was paid $859,000 and $1,012,000, respectively, as detailed below:


Ernst & Young LLP Fiscal 2004 Fiscal 2003
- ----------------- ----------- -----------
Audit services(1) $ 496,000 $ 489,000
Audit related services(2) $ 91,000 $ 166,000
Tax services(3) $ 272,000 $ 325,000
Non-audit services -- $ 32,000
---------- ----------
Total $ 859,000 $1,012,000

(1) These fees included fees paid for the audit of the consolidated financial
statements and other services performed such as statutory audits and
quarterly reviews.

(2) These fees included fees paid for assistance in internal control
certification, audit of pension plans, various accounting consultation and
assistance with review of documents filed with local and foreign
regulatory authorities.

(3) These fees generally included fees for assistance with corporate tax
compliance as well as income tax compliance and other assistance to
expatriates.

The Audit Committee has adopted a policy that requires advance approval of all
audit, audit-related, tax and other services performed by the independent
auditor. The policy provides for pre-approval by the Audit Committee of
specifically defined audit and non-audit services. Unless the specific service
has been previously pre-approved with respect to that year, the Audit Committee
must approve the permitted service before the independent auditor is engaged to
perform it.


-79-


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:

1. Consolidated Financial Statements.

Auditor's Report to the Shareholders

Consolidated Balance Sheets at March 26, 2004, March 28, 2003, and March
29, 2002

Consolidated Statements of Shareholders' Equity for the fiscal years ended
March 26, 2004, March 28, 2003, and March 29, 2002

Consolidated Statements of Loss for the fiscal years ended March 26, 2004,
March 28, 2003, and March 29, 2002

Consolidated Statements of Cash Flows for the fiscal years ended March 26,
2004, March 28, 2003, and March 29, 2002

Notes to the Consolidated Financial Statements

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.


-80-


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
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 (incorporated by reference to Exhibit 3.2 to
Form 10-K filed on June 25, 2003)

3.3 Form of Specimen Certificate for Common Shares of the Company
(incorporated by reference to Exhibit 3.3 to Form 10-K filed on June 25,
2003)


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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 (incorporated by reference to Exhibit 21 to
Form 10-K filed on June 25, 2003)

23 Consent of Ernst & Young LLP

31.1 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To
Section 302(a) of The Sarbanes-Oxley Act of 2002, President and Chief
Executive Officer

31.2 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To
Section 302(a) of The Sarbanes-Oxley Act of 2002, Senior Vice President of
Finance and Chief Financial Officer

32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
President and Chief Executive Officer

32.2 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
Senior Vice President of Finance and Chief Financial Officer

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

b) Reports on Form 8-K. The Company filed one Current Report on Form 8-K
during the quarter ended March 26, 2004. The Report was dated January 21,
2004, and was in respect of the announcement of a press release announcing
the Company's financial results for the third quarter of Fiscal 2004.


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SCHEDULE II

ZARLINK SEMICONDUCTOR INC.
VALUATION AND QUALIFYING ACCOUNTS
March 26, 2004
(in millions of U.S. dollars)




Additions
-------------------------------------------
Balance, Charged to Balance,
Beginning Charged to other End
Description of Period expense accounts Deductions of Period
- ----------- --------- ------- -------- ---------- ---------
Sales Reserves:

Fiscal 2004 $ 2.5 -- 8.9 (10.1) $ 1.3
Fiscal 2003 $ 2.8 -- 7.6 (7.9) $ 2.5
Fiscal 2002 $ 2.7 -- 9.0 (8.9) $ 2.8

Allowance for doubtful accounts:
Fiscal 2004 $ 1.1 -- -- (0.8) $ 0.3
Fiscal 2003 $ 1.3 0.2 -- (0.4) $ 1.1
Fiscal 2002 $ 0.3 1.6 -- (0.6) $ 1.3




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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 9, 2004

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 9, 2004
- -----------------------
(Henry Simon)

/s/ Kirk K. Mandy Vice Chairman of the Board June 9, 2004
- -----------------------
(Kirk K. Mandy)

/s/ Patrick J. Brockett President and Chief Executive Officer June 9, 2004
- -----------------------
(Patrick J. Brockett)

/s/ Andre Borrel Director June 9, 2004
- -----------------------
(Andre Borrel)

/s/ Hubert T. Lacroix Director June 9, 2004
- -----------------------
(Hubert T. Lacroix)

/s/ J. Spencer Lanthier Director June 9, 2004
- -----------------------
(J. Spencer Lanthier)

/s/ Jules Meunier Director June 9, 2004
- -----------------------
(Jules Meunier)

/s/ Kent H.E. Plumley Director June 9, 2004
- -----------------------
(Kent H.E. Plumley)

/s/ Semir D. Sirazi Director June 9, 2004
- -----------------------
(Semir D. Sirazi)


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