Exhibit 99.1

                           Zarlink Semiconductor Inc.
                     (incorporated under the laws of Canada)
                           CONSOLIDATED BALANCE SHEETS
          (In millions of U.S. dollars, except share amounts, CDN GAAP)
                                   (Unaudited)

                                                             Dec. 24,  March 26,
                                                               2004       2004
                                                             --------  --------
ASSETS
Current assets:
 Cash and cash equivalents                                   $   29.7  $   27.0
 Short-term investments                                          39.6      54.8
 Restricted cash                                                 13.9      10.0
 Trade accounts  receivable,  less  allowance for doubtful
   accounts of $0.3 (March 26, 2004 - $0.3)                      25.4      24.1
 Other receivables                                                5.1       2.9
 Current portion of long-term receivables (Note 6)                7.8       9.8
 Inventories (Note 4)                                            28.1      20.8
 Prepaid expenses and other                                       6.8       4.7
                                                             --------  --------
                                                                156.4     154.1
Fixed assets - net (Note 5)                                      38.0      42.3
Long-term receivables (Note 6)                                    9.2      16.0
Other assets                                                      5.1       4.6
                                                             --------  --------
                                                             $  208.7  $  217.0
                                                             ========  ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
 Trade accounts payable                                      $   18.3  $   15.0
 Employee-related payables                                        9.9      11.1
 Income and other taxes payable                                   7.7       7.9
 Provisions for exit activities (Note 7)                          1.1       2.7
 Other accrued liabilities                                        8.6      10.9
 Deferred credits                                                 0.3       0.7
 Current portion of long-term debt                                 --       0.1
                                                             --------  --------
                                                                 45.9      48.4
Long-term debt                                                    0.1       0.1
Pension liabilities                                              19.2      16.7
Future income tax liabilities                                     1.2       1.1
                                                             --------  --------
                                                                 66.4      66.3
                                                             --------  --------
Commitments (Note 9)

Shareholders' equity:
 Preferred shares, unlimited shares authorized;
   1,377,100 shares issued and outstanding
   (March 26, 2004 - 1,390,300) (Note 10)                        19.6      19.6
 Common shares, unlimited shares authorized;
   no par value; 127,308,973 shares issued
   and outstanding (March 26, 2004 - 127,301,411)
   (Note 11)                                                    407.9     407.9
 Contributed surplus (Note 12)                                    7.5       6.3
 Deficit                                                       (306.3)   (296.7)
 Translation account                                             13.6      13.6
                                                             --------  --------
                                                                142.3     150.7
                                                             --------  --------
                                                             $  208.7  $  217.0
                                                             ========  ========

        (See accompanying notes to the consolidated financial statements)


                                       1
<PAGE>

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

<TABLE>
<CAPTION>

                                                   Three Months Ended         Nine Months Ended
                                                 ----------------------    -----------------------
                                                  Dec. 24,     Dec. 26,     Dec. 24,      Dec. 26,
                                                    2004        2003          2004         2003
                                                 ---------    ---------    ---------    ---------
<S>                                              <C>          <C>          <C>          <C>
Revenue                                          $    51.2    $    47.0    $   165.8    $   147.3
Cost of revenue                                       29.0         26.2         92.0         81.9
                                                 ---------    ---------    ---------    ---------
Gross margin                                          22.2         20.8         73.8         65.4
                                                 ---------    ---------    ---------    ---------

Expenses:
  Research and development                            15.7         19.5         46.2         57.9
  Selling and administrative                          12.7         11.8         34.4         38.0
  Stock compensation expense                           0.4          0.1          1.2          0.1
  Asset impairment and other                            --          1.7           --          7.0
                                                 ---------    ---------    ---------    ---------
                                                      28.8         33.1         81.8        103.0
                                                 ---------    ---------    ---------    ---------
Operating loss                                        (6.6)       (12.3)        (8.0)       (37.6)
Interest income                                        0.4          0.6          1.2          2.0
Foreign exchange gain loss                            (1.8)        (1.2)        (2.2)        (2.1)
Gain on sale of long-term investment                    --          0.6           --          0.6
Interest expense                                        --         (0.2)          --         (0.5)
                                                 ---------    ---------    ---------    ---------
Loss before income taxes                              (8.0)       (12.5)        (9.0)       (37.6)
Income tax (expense) recovery                         (0.1)         1.4          1.0          1.8
                                                 ---------    ---------    ---------    ---------
Net loss for the period                          $    (8.1)   $   (11.1)   $    (8.0)   $   (35.8)
                                                 =========    =========    =========    =========
Deficit, beginning of period                        (297.6)      (282.0)      (296.7)      (256.3)
                                                 ---------    ---------    ---------    ---------
                                                    (305.7)      (293.1)      (304.7)      (292.1)
Dividends on preferred shares                         (0.6)        (0.6)        (1.6)        (1.6)
                                                 ---------    ---------    ---------    ---------
Deficit, end of period                           $  (306.3)   $  (293.7)   $  (306.3)   $  (293.7)
                                                 =========    =========    =========    =========
Net loss attributable to common shareholders
     after preferred share dividends             $    (8.7)   $   (11.7)   $    (9.6)   $   (37.4)
                                                 =========    =========    =========    =========
Net loss per common share:
      Basic and diluted                          $   (0.07)   $   (0.09)   $   (0.08)   $   (0.29)
                                                 =========    =========    =========    =========
Weighted-average number of common shares
  outstanding (millions):
      Basic and diluted                              127.3        127.3        127.3        127.3
                                                 =========    =========    =========    =========
</TABLE>

        (See accompanying notes to the consolidated financial statements)


                                       2
<PAGE>

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

<TABLE>
<CAPTION>

                                                                      Three Months Ended                 Nine Months Ended
                                                                  --------------------------        --------------------------
                                                                   Dec. 24,        Dec. 26,          Dec. 24,         Dec. 26,
                                                                     2004            2003              2004             2003
                                                                  ---------        ---------        ---------        ---------
<S>                                                                    <C>             <C>               <C>             <C>
CASH PROVIDED BY (USED IN)
Operating activities:
  Net loss for the period                                              (8.1)           (11.1)            (8.0)           (35.8)
  Depreciation of fixed assets                                          2.2              3.0              7.2             10.3
  Amortization of other assets                                           --               0.4              --              1.2
  Future income taxes                                                  (0.3)            (0.4)            (0.5)            (1.2)
  Other non cash changes in operating activities
    (Note 16)                                                           1.1              1.7              0.9              7.7
  Stock compensation expense                                            0.4              0.1              1.2              0.1
  Decrease (increase) in working capital:
      Trade accounts and other receivables                              0.3             (2.8)            (3.6)            (8.4)
      Inventories                                                      (3.6)            (1.8)            (7.3)             0.5
      Prepaid expenses and other                                        0.1              0.2             (2.1)            (2.5)
      Payables and other accrued liabilities                            1.2              2.8             (2.0)             2.7
      Deferred credits                                                  0.1              0.3             (0.3)             0.1
                                                                  ---------        ---------        ---------        ---------
    Total                                                              (6.6)            (7.6)           (14.5)           (25.3)
                                                                  ---------        ---------        ---------        ---------
Investing activities:
  Purchased short-term investments                                    (39.6)           (59.7)           (94.2)          (134.8)
  Matured short-term investments                                       47.2             35.2            109.4            164.6
  Expenditures for fixed and other assets                              (1.2)            (1.5)            (3.2)            (4.7)
  Proceeds from disposal of fixed and other assets                      0.2              0.2              0.6              0.8
  Proceeds from repayment of note receivable                             --               --              9.9               --
  Proceeds from sale of long-term investments                            --              0.6               --              0.6
  Increase in restricted cash                                          (3.9)            (3.9)            (3.9)            (3.3)
                                                                  ---------        ---------        ---------        ---------
    Total                                                               2.7            (29.1)            18.6             23.2
                                                                  ---------        ---------        ---------        ---------
Financing activities:
  Repayment of capital lease liabilities and long term
    debt                                                                 --             (0.1)            (0.1)            (0.5)
  Payment of dividends on preferred shares                             (0.6)            (0.6)            (1.6)            (1.6)
  Repurchase of preferred shares                                         --             (0.7)              --             (1.2)
                                                                  ---------        ---------        ---------        ---------
    Total                                                              (0.6)            (1.4)            (1.7)            (3.3)
                                                                  ---------        ---------        ---------        ---------
Effect of currency translation on cash and cash equivalents             0.2              0.3              0.3              0.5
                                                                  ---------        ---------        ---------        ---------
Increase (decrease) in cash and cash equivalents                       (4.3)           (37.8)             2.7             (4.9)

Cash and cash equivalents, beginning of period                         34.0             56.4             27.0             23.5
                                                                  ---------        ---------        ---------        ---------
Cash and cash equivalents, end of period                          $    29.7        $    18.6        $    29.7        $    18.6
                                                                  =========        =========        =========        =========
</TABLE>

        (See accompanying notes to the consolidated financial statements)


                                       3
<PAGE>

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

1.    Basis of presentation

      These  unaudited  interim  consolidated  financial  statements  have  been
      prepared by Zarlink  Semiconductor Inc. (Zarlink or the Company) in United
      States (U.S.) dollars,  unless  otherwise  stated,  and in accordance with
      accounting  principles  generally accepted in Canada for interim financial
      statements  and with the  instructions  to Form  10-Q and  Regulation  S-X
      pertaining to interim  financial  statements.  Accordingly,  these interim
      consolidated  financial  statements  do not  include all  information  and
      footnotes required by generally accepted accounting  principles (GAAP) for
      complete  financial  statements.  In  the  opinion  of  management  of the
      Company, the unaudited interim  consolidated  financial statements reflect
      all adjustments,  which consist only of normal and recurring  adjustments,
      necessary to present  fairly the  financial  position at December 24, 2004
      and the results of operations  and cash flows of the Company for the three
      and nine month  periods  ended  December 24, 2004,  and December 26, 2003,
      respectively,  in accordance  with Canadian GAAP,  applied on a consistent
      basis.  The  consolidated  financial  statements  include the  accounts of
      Zarlink and its wholly owned subsidiaries.  Intercompany  transactions and
      balances have been eliminated.  U.S. GAAP financial statements for interim
      periods are also prepared and presented to shareholders.

      The  balance  sheet at March 26,  2004 has been  derived  from the audited
      consolidated financial statements at that date but does not include all of
      the information and footnotes  required by generally  accepted  accounting
      principles for complete financial  statements.  These financial statements
      should be read in  conjunction  with the  financial  statements  and notes
      thereto contained in the Canadian  Consolidated  Financial  Statements for
      the year ended March 26, 2004. The Company's  fiscal  year-end is the last
      Friday in March.

      The results of operations  for the periods  presented are not  necessarily
      indicative  of the  results  to be  expected  for the full  year or future
      periods.

2.    Significant accounting policies

      a) Revenue recognition

      The Company  recognizes  revenue from the sale of semiconductor  products,
      which  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   generates   revenue  through  direct  sales  and  sales  to
      distributors,  of which distributor  sales account for approximately  48%,
      48%, and 35% of  semiconductor  product  sales in Fiscal 2004,  2003,  and
      2002, respectively.

      In accordance with the CICA Emerging  Issues  Committee (EIC) Abstract No.
      141, Revenue  Recognition,  the Company recognizes product revenue through
      direct  sales and sales to  distributors  when the  following  fundamental
      criteria are met: (i) persuasive  evidence of an arrangement  exists, (ii)
      transfer of title has  occurred,  (iii) the price to the customer is fixed
      or  determinable,  and (iv)  collection  of the  resulting  receivable  is
      reasonably assured.

      In addition,  the Company has agreements with its distributors  that cover
      two sales programs,  specifically  ship and debit claims,  which relate to
      pricing  adjustments  based upon distributor  resale,  and stock rotations
      claims,  which  relate to  certain  stock  return  rights  earned  against
      subsequent sales. The Company accrues for these programs as a reduction of
      revenue  at the time of  shipment,  based  on  historical  sales  returns,
      analysis of credit memo data,  and other  factors  known at the time.  The
      Company believes that these programs are common to distributor  agreements
      in the industry,  and it is  appropriate  that the  distributor  sales are
      recognized  as  revenue at the time of  shipment  in  accordance  with EIC
      Abstract No. 141 because of the following:

      i)    The  Company's  price  to  the  buyer  is  substantially   fixed  or
            determinable at the date of sale.


                                       4
<PAGE>

        (In millions of U.S. dollars, except per share amounts, CDN GAAP)

      ii)   The distributor is obligated to pay the Company,  and the obligation
            is not contingent on resale of the product.

      iii)  The distributor's  obligation to the Company would not be changed in
            the event of theft or physical destruction or damage of the product.

      iv)   The distributor  has economic  substance apart from that provided by
            the Company.

      v)    The  Company  does  not  have  significant  obligations  for  future
            performance  to directly  bring  about  resale of the product by the
            distributor.

      vi)   The amount of future returns can be reasonably estimated.

      b) Income taxes

      Income taxes are accounted  for using the  liability  method of accounting
      for  income  taxes.  Under  this  method,  future  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. Future 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.  Future income tax assets are recognized only to the
      extent, in the opinion of management,  it is more likely than not that the
      future 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.

      c) 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.

3.    Stock-based compensation

      In October 2003, the CICA revised CICA Handbook Section 3870,  Stock-Based
      Compensation and Other Stock-Based  Payments (Section 3870).  Effective in
      Fiscal  2004,  the  Company  elected  to  expense   employee   stock-based
      compensation  using the fair  value  method  prospectively  for all awards
      granted or  modified  after  March 29,  2003.  Prior to Fiscal  2004,  the
      Company,  as  permitted  under  Section  3870,  did not  expense  employee
      stock-based compensation using the fair value based method. The fair value
      of the  Company's  stock-based  awards to employees  is estimated  using a
      Black-Scholes option pricing model. The Black-Scholes option pricing 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.

<TABLE>
<CAPTION>

                                                       Three Months Ended      Nine Months Ended
                                                     ---------------------   ---------------------
                                                      Dec. 24,    Dec. 26,    Dec. 24,   Dec. 26,
                                                        2004        2003        2004       2003
                                                     ---------   ---------   ---------   ---------
      <S>                                            <C>         <C>         <C>         <C>
      Net loss, as reported                          $   (8.1)   $  (11.1)   $   (8.0)   $  (35.8)
      Adjustments:
         Stock compensation expense, as reported          0.4         0.1         1.2         0.1
         Pro forma stock compensation expense            (3.3)       (3.4)       (9.2)       (9.6)
                                                     ---------   ---------   ---------   ---------
      Pro forma net loss                             $  (11.0)   $  (14.4)   $  (16.0)   $  (45.3)
                                                     ---------   ---------   ---------   ---------
      Net loss per common share, as reported
         Basic and diluted                           $   (0.07)  $   (0.09)  $   (0.08)  $   (0.29)
                                                     ---------   ---------   ---------   ---------
      Pro forma net loss per common share
         Basic and diluted                           $   (0.09)  $   (0.12)  $   (0.14)  $   (0.37)
                                                     ---------   ---------   ---------   ---------
</TABLE>


                                       5
<PAGE>

        (In millions of U.S. dollars, except per share amounts, CDN GAAP)

      Based  upon the fair value  method of  accounting  for stock  compensation
      expense,  the pro  forma  net loss for the  three  and nine  months  ended
      December  24,  2004,  was  increased  by $2.9 and $8.0,  respectively,  as
      compared to the  reported  net loss.  For the three and nine month  fiscal
      periods ended  December 26, 2003,  the pro forma net loss was increased by
      $3.3 and $9.5, respectively.

      Pro forma financial information required by CICA Handbook Section 3870 has
      been  determined as if the Company had  accounted  for its employee  stock
      options using the  Black-Scholes  option  pricing model with the following
      weighted-average  assumptions  for the three and nine month fiscal periods
      ended December 24, 2004 and December 26, 2003:

<TABLE>
<CAPTION>

                                                                      Three Months Ended                 Nine Months Ended
                                                                  --------------------------        --------------------------
                                                                   Dec. 24,        Dec. 26,          Dec. 24,         Dec. 26,
                                                                     2004            2003              2004             2003
                                                                  ---------        ---------        ---------        ---------
      <S>                                                         <C>              <C>              <C>              <C>
      Weighted-average   fair  value   price  of  the  options     $    1.46        $    1.50       $    1.89        $    1.74
         granted during the period
      Risk free interest rate                                          3.52%            3.26%           3.80%            3.15%
      Dividend yield                                                     Nil              Nil             Nil              Nil
      Volatility factor of the expected market price of the
        Company's common stock                                         60.2%            70.1%           63.4%            69.2%
      Weighted-average expected life of the options                4.7 years        3.3 years       4.3 years        3.3 years
</TABLE>

      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.

4.    Inventories

                                                Dec. 24,      March 26,
                                                 2004           2004
                                                --------      ---------
      Raw materials                             $  2.8         $  2.2
      Work-in-process                             19.4           13.3
      Finished goods                               5.9            5.3
                                                ------         ------
                                                $ 28.1         $ 20.8
                                                ======         ======

5.    Fixed assets

                                                Dec. 24,     March 26,
                                                 2004          2004
                                                --------     ---------
      Cost                                      $ 195.8      $  193.6
      Accumulated depreciation                   (157.8)       (151.3)
                                                -------      --------
                                                $  38.0      $  42.3
                                                =======      ========

      Depreciation  expense for the three  months and nine month  periods  ended
      December  24, 2004 was $2.2 and $7.2,  respectively  (three and nine month
      periods ended December 26, 2003, $3.0 and $10.3, respectively).

6.    Long term receivables

                                               Dec. 24,       March 26,
                                                 2004           2004
                                               --------       ---------
      Note receivable, non-interest bearing     $  7.8         $ 17.2
      Investment tax credits recoverable           9.2            8.6
                                                ------         ------
                                                  17.0           25.8
      Less: current portion                       (7.8)          (9.8)
                                                ------         ------
                                                $  9.2         $ 16.0
                                                ======         ======

      Based upon the terms of the  Plymouth  Foundry sale  agreement  with X-FAB
      Semiconductor  Foundries AG (X-FAB),  payment of the note  receivable  was
      scheduled to occur in two installments of $10.0 and $8.0. In the first six
      months of Fiscal 2005,  X-FAB  exercised its option to make early payments
      on the $10.0  installment.  As a result of the  early  payments,  the note
      receivable  was  discounted by $0.1 and the Company  received  payments of
      $9.9 in the nine month  period ended  December  24,  2004.  On January 28,
      2005,  the  Company  received  an early  payment of


                                       6
<PAGE>

        (In millions of U.S. dollars, except per share amounts, CDN GAAP)

      $2.0 on the $8.0 final installment of the note receivable that is due from
      X-FAB in the first quarter for Fiscal 2006.

      The investment tax credit  receivable is recorded net of a $49.8 valuation
      allowance.  Under Canadian GAAP, an investment tax credit ("ITC") may only
      be realized  when it is  reasonably  assured that the Company will receive
      the  amount  in  the  future.  Based  on  historical  taxable  income  and
      uncertainties  relating to future taxable  income during the  carryforward
      period,  management  has determined  that it is not reasonably  assured of
      generating  enough  taxable  income  in the  future to  realize  its total
      available ITCs.

      Management  periodically  reviews  the ITCs  and  valuation  allowance  to
      determine  whether the ITC is  appropriately  valued.  When this review is
      completed,  management may determine that an adjustment is required.  This
      adjustment may have a material impact on the Company's  financial position
      and results of operations.

7.    Provisions for exit activities

      In response to  economic  downturns  in the  semiconductor  industry,  the
      Company  implemented  restructuring  activities  in Fiscal 2002 and Fiscal
      2004.

      During Fiscal 2004, the Company incurred workforce reduction costs of $7.0
      as a result of reducing the Company's  employee base by approximately  240
      employees,  globally  across all job categories and business  units.  As a
      result of this workforce  reduction  program and the  streamlining  of its
      operations,  the Company  also  recorded a charge of $0.6 in Fiscal  2004,
      included  in asset  impairment  and other,  related to excess  space under
      lease contract in Canada. Of the $7.6 of restructuring provision recorded,
      $4.6  related to the Network  Communication  segment,  $2.4 related to the
      Consumer  Communications  segment, and $0.6 related to the Ultra Low-Power
      segment.  In Fiscal 2005,  the Company paid the remaining  $0.7 related to
      these workforce reductions.

      The remaining balance in the  restructuring  provision relates to idle and
      excess space as a result of exit  activities  implemented and completed in
      Fiscal  2002 and Fiscal  2004.  The  cumulative  amount  recorded  to date
      related  to these  activities  is $9.5.  Costs of $8.9  were  recorded  as
      special  charges in Fiscal 2002, and costs of $0.6 were reflected in asset
      impairment and other charges in Fiscal 2004.

      With  the  exception  of lease  payments  on the  idle  and  excess  space
      estimated at $1.1,  which will be paid over the lease term unless  settled
      earlier,  the Company has completed  substantially  all of the  activities
      associated with these restructuring plans.

      The following  table  summarizes  the  continuity  of these  restructuring
      provisions for the three and nine months ended December 24, 2004:


                                                        Lease and
                                           Workforce    contract
                                           Reduction    settlement      Total
                                           ---------    ----------      -----
      Balance, March 26, 2004                $  0.7       $  2.0       $  2.7
      Cash drawdowns during quarter            (0.7)        (0.5)        (1.2)
                                             ------       ------       ------
      Balance, June 25, 2004                   --            1.5          1.5
      Cash drawdowns during quarter            --           (0.1)        (0.1)
                                             ------       ------       ------
      Balance, September 24, 2004              --            1.4          1.4
      Cash drawdowns during quarter            --           (0.3)        (0.3)
                                             ------       ------       ------
      Balance, December 24, 2004             $ --         $  1.1       $  1.1
                                             ======       ======       ======

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 Communications  Systems
         business  (Systems),  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
         December  24,  2004,  was $38.5 (20.0  British


                                       7
<PAGE>

        (In millions of U.S. dollars, except per share amounts, CDN GAAP)

      Pounds),  assuming the Company is unable to secure the  completion  of the
      project.  The Company was not aware of any factors as at December 24, 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.

      In connection with the sale of the Systems  business on February 16, 2001,
      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 December 24,
      2004,  the taxation  years 2000 to February 16, 2001 are still  subject to
      audit by taxation  authorities in certain  foreign  jurisdictions  and are
      therefore still subject to the above noted tax indemnities.

      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.

      On November  19,  2002,  the Company  provided  security to the  financial
      institution  of a subsidiary in the form of a guarantee in relation to the
      subsidiary's  liability for custom and excise  duties.  As at December 24,
      2004, the maximum amount of the guarantee was $3.1 ($1.6 British Pounds).

      The Company  records a liability  based on its historical  experience with
      warranty claims.  The warranty accrual was insignificant for the three and
      nine month periods ended December 24, 2004.

9.    Commitments

      The Company had letters of credit  outstanding  as at December 24, 2004 of
      $13.3  (March 26, 2004 - $9.5),  which expire  within 13 months.  Cash and
      cash  equivalents of $13.3 have been pledged as security  against  certain
      outstanding  letters of credit,  and are presented as restricted  cash. Of
      this amount,  $11.6 was issued to secure  letters of credit related to the
      Company's  pension  plan in  Sweden,  and  $1.0  letters  of  credit  were
      outstanding  related to the Company's  Senior  Executive  Retirement  Plan
      (SERP). In addition, $0.7 was issued to secure certain obligations under a
      performance  guarantee and office lease arrangement.  The Company has also
      pledged  $0.6,  which is presented as  restricted  cash, as security for a
      custom bond and related credit facilities.

      The  Company  has  committed  to  fully  secure  its  outstanding  pension
      liability  in Sweden of $14.1 by  December  2005.  In December  2004,  the
      Company  increased  its letters of credit  related to its pension  plan in
      Sweden by $3.6, with an equivalent  increase expected to occur in December
      2005, depending upon foreign exchange rates at that time.

10.   Redeemable preferred shares

      During the three months ended  December 24, 2004,  there were no preferred
      shares purchased or cancelled by the Company. During the nine months ended
      December 24, 2004,  there were no preferred  shares  purchased  and 13,200
      shares  cancelled.  These cancelled  preferred shares had been repurchased
      during Fiscal 2004.

      During the third quarter of Fiscal 2005, the Company declared dividends on
      its redeemable  preferred shares of $0.6 based on a quarterly  dividend of
      $0.41 (Cdn $0.50) per share, and paid second quarter dividends of $0.6.


                                       8
<PAGE>

        (In millions of U.S. dollars, except per share amounts, CDN GAAP)

11.   Capital stock

      a)    The Company has not  declared  nor paid any  dividends on its common
            shares.

      b)    A summary of the Company's stock option activity is as follows:

                                                   Nine Months Ended
                                             ----------------------------
                                              Dec. 24,           Dec. 26,
                                               2004               2003
                                             ----------        ----------
            Outstanding Options:
            Balance, beginning of period     11,534,680        10,828,557
            Granted                             386,000           379,500
            Exercised                            (7,562)          (10,617)
            Forfeited                          (465,690)       (1,396,565)
                                             ----------        ----------
            Balance, end of period           11,447,428         9,800,875
                                             ==========        ==========

            As at December  24,  2004,  there were  3,051,594  (March 26, 2004 -
            2,971,904)  options  available for grant under the stock option plan
            approved by the  Company's  shareholders  on  December 7, 2001.  The
            exercise  price of  outstanding  stock options  ranges from $2.68 to
            $30.38 per share with exercise  periods  extending to December 2010.
            The exercise price of stock options  issued in Canadian  dollars was
            translated at the U.S. dollar exchange rate on December 24, 2004.

      c)    The net income (loss) per common share figures were calculated based
            on the net income  (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 based
            on the average  number of common  shares and  dilutive  common share
            equivalents.

            The common shares and dilutive common share  equivalents used in the
            computation of the Company's  basic and diluted  earnings per common
            share are as follows:

<TABLE>
<CAPTION>

                                                                 Three Months Ended              Nine Months Ended
                                                            ---------------------------     ---------------------------
                                                               Dec. 24,       Dec. 26,        Dec. 24,       Dec. 26,
                                                                2004            2003           2004            2003
                                                            -----------     -----------     -----------     -----------
            <S>                                             <C>             <C>             <C>             <C>
            Weighted-average common shares outstanding      127,308,973     127,275,933     127,306,975     127,274,768
            Dilutive effect of stock options                         --              --          36,721              --
                                                            -----------     -----------     -----------     -----------
            Weighted-average common shares outstanding,
                assuming dilution                           127,308,973     127,275,933     127,343,696     127,274,768
                                                            ===========     ===========     ===========     ===========
</TABLE>

            For the three months ended  December 24, 2004,  1,600 stock  options
            have been  excluded from the  computation  of diluted loss per share
            because they were anti-dilutive due to the reported net loss for the
            period  (three and nine months ended  December 26, 2003 - 19,599 and
            328,532 stock options, respectively).

            The following  stock options were excluded from the  computation  of
            common  share  equivalents  because  the  options'  exercise  prices
            exceeded  the average  market  price of the common  shares,  thereby
            making them anti-dilutive:

<TABLE>
<CAPTION>

                                                       Three Months Ended             Nine Months Ended
                                                  -------------------------     ---------------------------
                                                     Dec. 24,      Dec. 26,        Dec. 24,       Dec. 26,
                                                      2004           2003           2004            2003
                                                  ----------     ----------     -----------      ----------
            <S>                                   <C>             <C>            <C>             <C>
            Number of outstanding options         11,394,428      9,488,938      11,057,990      7,126,213

            Average exercise price per share     $      8.38     $     9.13     $      8.54      $   10.87
</TABLE>

      The average  exercise price of stock options  granted in Canadian  dollars
      was translated at the closing period-end U.S. dollar exchange rate.


                                       9
<PAGE>

        (In millions of U.S. dollars, except per share amounts, CDN GAAP)

12.   Contributed surplus

      A continuity of the contributed surplus balance is as follows:

                                                  Three Months      Nine Months
                                                     Ended             Ended
                                                    Dec. 24,          Dec. 24,
                                                      2004              2004
                                                  ------------      -----------
      Balance, beginning of period                   $  7.1           $  6.3
      Stock compensation expense                        0.4              1.2
                                                     ------           ------
      Balance, end of period                         $  7.5           $  7.5
                                                     ======           ======

13.   Income taxes

      A $0.1  income tax expense was  recorded  for the third  quarter of Fiscal
      2005,  compared  with a recovery of $1.4 for the  corresponding  period in
      Fiscal 2004. During the nine months ended December 24, 2004, an income tax
      recovery  of $1.0 was  recorded,  compared  with a recovery of $1.8 in the
      same period of Fiscal 2004. The recovery of $1.0 related to the release of
      previously  recognized  provisions  no  longer  required  as a  result  of
      settlements  with tax  authorities,  in  addition  to a  recovery  of $0.3
      relating to income tax refunds received in excess of provisions previously
      recorded, offset by income tax expense of $0.2.

      The Company  establishes a valuation  allowance  against future income tax
      assets when management has determined that it is more likely than not that
      some or all of its future income tax assets may not be realized.  Based on
      historical  taxable  income and  uncertainties  relating to future taxable
      income  over the  periods  in which  the  future  income  tax  assets  are
      deductible, the Company has established a valuation allowance of $136.4 as
      at  December  24,  2004  (March 26,  2004 - $126.1).  The  increase in the
      valuation allowance relates mainly to losses incurred, partially offset by
      temporary differences in the Company's domestic and foreign operations.

14.   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   provides
      semiconductor  solutions for enterprise,  access,  edge and metro networks
      over wired,  wireless,  and optical media.  The product lines enable voice
      and data for traditional,  convergent,  and packet networks.  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 segment
      provides  custom  Integrated  Circuit and  Application  Specific  Standard
      Product  (ASSP)  solutions  for  healthcare  applications  such as cardiac
      pacemakers, hearing-aids, swallowable camera capsules and portable medical
      instruments.  The Ultra-Low  Power  Communications  business  segment also
      provides ultra low-power  solutions for commercial  applications,  such as
      electronic  shelf  labels,  radio  frequency  tagging  and  personal  area
      communications devices.

      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  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 of the Company as reflected
      in the consolidated financial statements.


                                       10
<PAGE>

        (In millions of U.S. dollars, except per share amounts, CDN GAAP)

<TABLE>
<CAPTION>

Three Months Ended Dec. 24, 2004                 Network             Consumer        Ultra Low-Power    Unallocated
                                              Communications      Communications     Communications        Costs          Total
                                              --------------      --------------     --------------     -----------       -----
<S>                                           <C>                 <C>                 <C>                <C>            <C>
Total external sales revenue                  $     23.8          $     18.9          $      8.5         $      --      $    51.2
Depreciation of buildings and equipment              1.0                 0.9                 0.3                --            2.2
Stock compensation expense                           --                  --                  --                 0.4           0.4
Segment's operating loss                      $     (1.0)         $     (2.2)         $     (3.0)        $     (0.4)   $     (6.6)

                                                 Network             Consumer        Ultra Low-Power    Unallocated
Three Months Ended Dec. 26, 2003              Communications      Communications     Communications        Costs          Total
                                              --------------      --------------     --------------     -----------       -----
Total external sales revenue                  $     24.2          $     14.9          $     7.9          $      --     $    47.0
Depreciation of buildings and equipment              1.8                 0.8                0.4                 --           3.0
Asset impairment and other                           1.6                 0.1                --                  --           1.7
Stock compensation expense                           --                  --                 --                  0.1          0.1
Segment's operating income (loss)             $     (5.8)         $     (6.7)         $     0.3          $     (0.1)   $   (12.3)

Nine Months Ended Dec. 24, 2004                  Network             Consumer        Ultra Low-Power    Unallocated
                                              Communications      Communications     Communications        Costs          Total
                                              --------------      --------------     --------------     -----------       -----
Total external sales revenue                  $     76.6          $     58.7          $     30.5         $      --     $   165.8
Depreciation of buildings and equipment              3.1                 2.9                 1.2                --           7.2
Stock compensation expense                           --                  --                  --                 1.2          1.2
Segment's operating income (loss)             $      4.0          $     (6.4)         $     (4.4)        $     (1.2)   $    (8.0)

                                                 Network             Consumer        Ultra Low-Power    Unallocated
Nine Months Ended Dec. 26, 2003               Communications      Communications     Communications        Costs          Total
                                              --------------      --------------     --------------     -----------       -----
Total external sales revenue                  $     78.5          $     42.1          $     26.7         $      --     $   147.3
Depreciation of buildings and equipment              5.5                 3.3                 1.5                --          10.3
Asset impairment and other                           4.6                 2.0                 0.4                --           7.0
Stock compensation expense                           --                  --                  --                 0.1          0.1
Segment's operating loss                      $    (18.6)         $    (18.2)         $     (0.7)        $     (0.1)   $   (37.6)
</TABLE>

15.   Pension plans

      As at December  24,  2004,  the  Swedish  pension  liability  of $14.1 was
      partially  secured by letters of credit of $11.6. As at December 24, 2004,
      the  German  pension  liability  of $5.1 was  insured  with the Swiss Life
      Insurance Company, and the related asset was recorded in other assets.

      The total pension expense under these plans consisted of interest costs on
      projected  plan  benefits.  Total pension  expense on the defined  benefit
      pension plans for the three and nine month periods ended December 24, 2004
      was $0.7 and  $1.1,  respectively  (three  and nine  month  periods  ended
      December 26, 2003 - $0.2 and $0.6, respectively).

      As of December 24,  2004,  the Company had not made any  contributions  to
      these pension plans in Fiscal 2005.


                                       11
<PAGE>

        (In millions of U.S. dollars, except per share amounts, CDN GAAP)

16.   Supplementary cash flow information

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

<TABLE>
<CAPTION>

                                                            Three Months Ended             Nine Months Ended
                                                         -----------------------       ------------------------
                                                          Dec. 24,       Dec. 26,       Dec. 24,       Dec. 26,
                                                           2004           2003           2004          2003
                                                         --------       --------       --------       --------
<S>                                                      <C>            <C>            <C>            <C>
(Gain) loss on disposal of fixed assets                  $    --        $    --        $   (0.3)      $    0.1
Change in pension liabilities                                 1.9            1.2            2.5            2.8
Accrued interest on note receivable                          (0.1)          (0.3)          (0.5)          (1.1)
Impairment of fixed assets                                    --             1.7            --             6.4
Provision for excess space under lease contract               --             --             --             0.6
Gain on sale of long-term investments                         --            (0.6)           --            (0.6)
Other                                                        (0.7)          (0.3)          (0.8)          (0.5)
                                                         --------       --------       --------       --------
Other non cash changes in operating activities           $    1.1       $    1.7       $    0.9       $    7.7
                                                         ========       ========       ========       ========
</TABLE>

17.   Comparative figures

      Certain of the Fiscal 2004 comparative  figures have been  reclassified to
      conform to the presentation adopted in Fiscal 2005.

18.   Subsequent events

      On January 26, 2005,  the Board of Directors of the Company  announced the
      appointment  of Kirk K.  Mandy,  Vice-Chairman  of the  Board,  as interim
      President  and Chief  Executive  Officer.  The Board also  announced  that
      Patrick  J.  Brockett  resigned  to  pursue  other  interests,   effective
      immediately.

      On January 28, 2005, the Company  received an early payment of $2.0 on the
      $8.0 final  installment of the note  receivable  that is due from X-FAB in
      the first quarter for Fiscal 2006.


                                       12