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

                                    FORM 10-Q

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

                For the quarterly period ended September 26, 2003

                           Commission File No. 1-8139

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

             CANADA                                                 NONE
(State or other jurisdiction of                               (I.R.S. Employer
 incorporation or organization)                              Identification No.)

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

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

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  whether  the  registrant  is an  accelerated  filer (as
defined in Rule 12b-2 of the Exchange Act)
Yes |X| No |_|

As at  October  17,  2003  there  were  127,275,933  Common  Shares  of  Zarlink
Semiconductor Inc., no par value, issued and outstanding.


<PAGE>


                           ZARLINK SEMICONDUCTOR INC.

                                TABLE OF CONTENTS

Item No.                                                                Page No.
--------                                                                --------

PART I - FINANCIAL INFORMATION (Unaudited).....................................3

ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS.....................................3
              Consolidated Balance Sheets (Unaudited)..........................3
              Consolidated Statements of Loss (Unaudited)......................4
              Consolidated Statements of Cash Flows (Unaudited)................5
              Notes to the Consolidated Financial Statements (Unaudited).......6

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...........................................15

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS..........24

ITEM 4.  DISCLOSURE CONTROLS AND PROCEDURES...................................24

PART II - OTHER INFORMATION...................................................25

ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K...................................25

Signatures....................................................................25


                                       2

<PAGE>

PART I - FINANCIAL INFORMATION (Unaudited)

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

                           Zarlink Semiconductor Inc.
                           CONSOLIDATED BALANCE SHEETS
                    (In millions of U.S. dollars, U.S. GAAP)

                                                       September 26,   March 28,
                                                           2003          2003
                                                       -------------   ---------
                                                        (Unaudited)
ASSETS
Current assets:
  Cash and cash equivalents                                 $ 56.4       $ 23.5
  Short-term investments                                      35.2         89.5
  Restricted cash                                              5.6          6.2
  Trade accounts receivable, less
   allowance for doubtful accounts of
   $0.7 (March 28, 2003 - $1.1)                               27.0         20.3
  Other receivables                                            2.7          4.2
  Note receivable - net of deferred gain of
    $16.4 (March 28, 2003 - $15.8)                             0.1           --
  Inventories                                                 21.8         24.0
  Deferred income tax assets - net                             1.4          1.0
  Prepaid expenses and other                                  10.4          7.3
                                                            ------       ------
                                                             160.6        176.0
Fixed assets - net                                            46.6         56.4
Deferred income tax assets - net                              11.3         10.4
Other assets                                                   4.6          4.7
Note receivable - net of deferred gain of
  $16.4 (March 28, 2003 - $15.8)                                --          0.1
                                                            ------       ------
                                                            $223.1       $247.6
                                                            ======       ======

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Trade accounts payable                                    $ 15.3       $ 10.1
  Employee-related accruals                                   10.2         15.5
  Income and other taxes payable                              15.0         13.0
  Provisions for exit activities                               4.5          4.2
  Other accrued liabilities                                   10.7         12.6
  Deferred credits                                             0.8          1.1
  Current portion of long-term debt                            0.3          0.6
                                                            ------       ------
                                                              56.8         57.1
Long-term debt                                                 0.1          0.2
Pension liabilities                                           15.9         14.3
Deferred income tax liabilities - net                          2.5          2.0
                                                            ------       ------
                                                              75.3         73.6
                                                            ------       ------
  Redeemable preferred shares, unlimited
    shares authorized; 1,419,800 shares
    issued and outstanding (March 28, 2003 -
    1,451,600)                                                18.4         18.9
                                                            ------       ------

Commitments (Note 11)

Shareholders' equity:

  Common shares, unlimited shares authorized;
    no par value; 127,275,933 shares
    issued and outstanding (March 28, 2003 -
    127,265,316)                                             768.3        768.3
  Additional paid-in capital                                   2.1          2.1
  Deficit                                                   (608.9)      (582.8)
  Accumulated other comprehensive loss                       (32.1)       (32.5)
                                                            ------       ------
                                                             129.4        155.1
                                                            ------       ------
                                                            $223.1       $247.6
                                                            ======       ======

        (See accompanying notes to the consolidated financial statements)


                                       3
<PAGE>


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

<TABLE>
<CAPTION>
                                                                            Three Months Ended                 Six Months Ended
                                                                        ---------------------------       --------------------------
                                                                        Sept. 26,         Sept. 27,       Sept. 26,        Sept. 27,
                                                                          2003              2002            2003             2002
                                                                        ---------         ---------       ---------        ---------
<S>                                                                      <C>              <C>              <C>              <C>
Revenue                                                                  $  46.6          $  46.2          $ 100.3          $  94.2
Cost of revenue                                                             27.2             25.5             55.3             51.4
                                                                         -------          -------          -------          -------
Gross margin                                                                19.4             20.7             45.0             42.8
                                                                         -------          -------          -------          -------
Expenses:
  Research and development                                                  19.2             22.9             38.4             43.3
  Selling and administrative                                                14.2             11.6             25.8             23.7
  Asset impairment and other                                                 5.3               --              5.3               --
  Stock compensation expense (recovery)                                       --              0.2               --             (1.4)
                                                                         -------          -------          -------          -------
                                                                            38.7             34.7             69.5             65.6
                                                                         -------          -------          -------          -------
Loss from operations                                                       (19.3)           (14.0)           (24.5)           (22.8)
Other income (expense) - net                                                 0.4              3.0             (0.3)             3.5
Interest expense                                                            (0.3)            (0.3)            (0.3)            (0.4)
                                                                         -------          -------          -------          -------
Loss before income taxes                                                   (19.2)           (11.3)           (25.1)           (19.7)
Income tax (expense) recovery                                                0.3             (0.6)              --             (0.9)
                                                                         -------          -------          -------          -------
Net loss for the period                                                  $ (18.9)         $ (11.9)         $ (25.1)         $ (20.6)
                                                                         =======          =======          =======          =======
Net loss attributable to common shareholders
 after preferred share dividends                                         $ (19.4)         $ (12.4)         $ (26.1)         $ (21.6)
                                                                         =======          =======          =======          =======
Net loss per common share:
      Basic and diluted                                                  $ (0.15)         $ (0.10)         $ (0.20)         $ (0.17)
                                                                         =======          =======          =======          =======
Weighted average number of common
  shares outstanding (millions):
      Basic and diluted                                                    127.3            127.2            127.3            126.9
                                                                         =======          =======          =======          =======
</TABLE>

        (See accompanying notes to the consolidated financial statements)


                                       4
<PAGE>

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

<TABLE>
<CAPTION>
                                                                            Three Months Ended                 Six Months Ended
                                                                        ---------------------------       --------------------------
                                                                        Sept. 26,         Sept. 27,       Sept. 26,        Sept. 27,
                                                                          2003              2002            2003             2002
                                                                        ---------         ---------       ---------        ---------
<S>                                                                      <C>              <C>              <C>              <C>
CASH PROVIDED BY (USED IN)
Operating activities:
  Net loss for the period                                                $ (18.9)         $ (11.9)         $ (25.1)         $ (20.6)
  Depreciation of fixed assets                                               3.3              3.4              6.9              6.5
  Amortization of other assets                                               0.5              0.3              0.8              0.6
  Other non cash changes in operating activities                             5.9             (1.8)             7.0             (1.5)
  Stock compensation expense (recovery)                                       --              0.2               --             (1.4)
  Deferred income taxes                                                     (0.9)              --             (0.8)              --
  Decrease (increase) in working capital
    Trade accounts and other receivables                                     1.8              0.4             (5.6)             2.5
    Inventories                                                              1.5              4.6              2.3              7.3
    Prepaid expenses and other                                               0.3               --             (2.7)             1.9
    Trade accounts payable and other accrued liabilities                    (1.4)            (9.8)            (0.1)           (14.5)
    Deferred credits                                                          --              0.4             (0.2)             0.3
                                                                         -------          -------          -------          -------
Total                                                                       (7.9)           (14.2)           (17.5)           (18.9)
                                                                         -------          -------          -------          -------
Investing activities:
    Purchased short-term investments                                       (22.7)           (63.6)           (85.0)          (149.6)
    Matured short-term investments                                          49.8            119.5            139.3            166.0
    Proceeds from disposal of fixed and other assets                         0.2              0.4              0.6              0.4
    Expenditures for fixed and other assets                                 (2.0)            (1.6)            (3.2)            (4.3)
    Increase in long-term investments                                         --               --               --             (0.4)
                                                                         -------          -------          -------          -------
Total                                                                       25.3             54.7             51.7             12.1
                                                                         -------          -------          -------          -------
Financing activities:
    Repayment of capital lease liabilities                                  (0.2)            (0.8)            (0.4)            (1.4)
    Payment of dividends on preferred shares                                (0.5)            (0.5)            (1.0)            (1.0)
    Issue of common shares                                                    --               --               --              0.5
    Repurchase of preferred shares                                          (0.1)            (0.2)            (0.5)            (0.4)
    Reduction in hypothecation of cash
      under letters of credit                                                0.6               --              0.6               --
                                                                         -------          -------          -------          -------
Total                                                                       (0.2)            (1.5)            (1.3)            (2.3)
                                                                         -------          -------          -------          -------
Effect of currency translation on cash
  and cash equivalents
                                                                              --             (2.0)              --              1.4
                                                                         -------          -------          -------          -------

Increase (decrease) in cash and cash equivalents                            17.2             37.0             32.9             (7.7)

Cash and cash equivalents, beginning of period                              39.2             30.9             23.5             75.6
                                                                         -------          -------          -------          -------

Cash and cash equivalents, end of period                                 $  56.4          $  67.9          $  56.4          $  67.9
                                                                         =======          =======          =======          =======
</TABLE>

        (See accompanying notes to the consolidated financial statements)


                                       5
<PAGE>

                           Zarlink Semiconductor Inc.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
       (In millions of U.S. dollars, except per share amounts, U.S. 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 the U.S.  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 September 26, 2003,
      and the results of operations  and cash flows of the Company for the three
      and six month  periods  ended  September  26, 2003 and September 27, 2002,
      respectively, in accordance with U.S. 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.  Separate  Canadian GAAP  financial  statements are also
      prepared and presented to shareholders.

      These  financial  statements  should  be  read  in  conjunction  with  the
      financial  statements and notes thereto  contained in the Company's Annual
      Report  on Form 10-K for the year  ended  March 28,  2003.  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.    Change in functional currency

      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.

      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.

3.    Recently issued accounting pronouncements

      On April 30,  2003,  the FASB issued  Statement  of  Financial  Accounting
      Standard No. 149 ("SFAS  149"),  "Amendment of Statement 133 on Derivative
      Instruments and Hedging Activities".  The amendments set forth in SFAS 149
      improve  financial  reporting by requiring that contracts with  comparable
      characteristics be accounted for similarly. In particular,  this statement
      clarifies  under  what  circumstances  a  contract  with  an  initial  net
      investment meets the  characteristic  of a derivative as discussed in SFAS
      133. In  addition,  it clarifies  when a  derivative  contains a financing
      component that warrants special  reporting in the statement of cash flows.
      SFAS 149 amends certain other existing pronouncements.  Those changes will
      result in more  consistent  reporting of contracts that are derivatives in
      their entirety or that contain embedded  derivatives that warrant separate
      accounting.  This  Statement is effective  for  contracts  entered into or
      modified  after June 30,  2003,  except as stated  below,  and for hedging


                                       6
<PAGE>

      relationships designated after June 30, 2003. The guidance will be applied
      prospectively.  The  provisions of this Statement that relate to Statement
      133  Implementation  Issues that have been  effective for fiscal  quarters
      that  began  prior  to June 15,  2003,  will  continue  to be  applied  in
      accordance with their  respective  effective  dates. In addition,  certain
      provisions   relating  to  forward   purchases  or  sales  of  when-issued
      securities or other securities that do not yet exist, should be applied to
      existing  contracts as well as new  contracts  entered into after June 30,
      2003.  The  adoption  of SFAS 149 did not have a  material  impact  on the
      Company's financial statements.

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

4.    Stock-based compensation

      Pro forma  information  regarding  net income (loss) and net income (loss)
      per share is  required by SFAS 123 for awards  granted or  modified  after
      April 1, 1995, as if the Company had accounted for its stock-based  awards
      to  employees  under the fair value  method of SFAS 123. The fair value of
      the  Company's  stock-based  awards to  employees  was  estimated  using a
      Black-Scholes  option pricing model.  The  Black-Scholes  option valuation
      model was developed for use in estimating the fair value of traded options
      that have no vesting restrictions and are fully transferable. In addition,
      option valuation models require the input of highly subjective assumptions
      including  the  expected  stock price  volatility.  Because the  Company's
      employee stock options have characteristics  significantly  different from
      those of traded  options,  and  because  changes in the  subjective  input
      assumptions can materially affect the fair value estimate, in management's
      opinion,  the existing models do not necessarily provide a reliable single
      measure of the fair value of its employee stock options.

<TABLE>
<CAPTION>
                                                                            Three Months Ended                 Six Months Ended
                                                                        ---------------------------       --------------------------
                                                                        Sept. 26,         Sept. 27,       Sept. 26,        Sept. 27,
                                                                          2003              2002            2003             2002
                                                                        ---------         ---------       ---------        ---------
<S>                                                                      <C>              <C>              <C>              <C>
      Net loss, as reported                                              $ (18.9)         $ (11.9)         $ (25.1)         $ (20.6)
      Adjustments:
         Stock compensation expense (recovery) as                             --              0.2               --             (1.4)
         reported
         Pro forma stock compensation expense                               (3.1)            (3.4)            (6.2)            (6.7)
                                                                         -------          -------          -------          -------
      Pro forma net loss                                                 $ (22.0)         $ (15.1)         $ (31.3)         $ (28.7)
                                                                         -------          -------          -------          -------
      Net loss per common share, as reported
         Basic and diluted                                               $ (0.15)         $ (0.10)         $ (0.20)         $ (0.17)
                                                                         -------          -------          -------          -------
      Pro forma net loss per common share:
         Basic and diluted                                               $ (0.17)         $ (0.12)         $ (0.25)         $ (0.23)
                                                                         -------          -------          -------          -------
</TABLE>

      Based  upon the fair value  method of  accounting  for stock  compensation
      expense,  the pro  forma  net  loss for the  three  and six  months  ended
      September  26,  2003,  was  increased by $3.1 and $6.2,  respectively,  as
      compared  to the  net  loss,  as  reported  (three  and six  months  ended
      September 27, 2002, $3.2 and $8.1, respectively).


                                       7
<PAGE>

      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 the three and six month fiscal  periods
      ended September 26, 2003 and September 27, 2002:

<TABLE>
<CAPTION>
                                                                           Three Months Ended                 Six Months Ended
                                                                       ---------------------------       --------------------------
                                                                       Sept. 26,         Sept. 27,       Sept. 26,        Sept. 27,
                                                                         2003              2002            2003             2002
                                                                       ---------         ---------       ---------        ---------
      <S>                                                               <C>              <C>              <C>              <C>

      Weighted  average fair value price of the options
        granted during the quarter                                      $  2.39          $  1.56          $  2.31          $  1.73


      Risk free interest rate                                              3.01%            3.69%            3.10%            4.19%
      Dividend yield                                                        Nil              Nil              Nil              Nil
      Volatility factor of the expected market
        price of the Company's common stock                               0.692            0.628            0.687            0.595
      Weighted-average expected life of the options                   3.4 years        3.0 years        3.4 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.

5.    Inventories

                                                      Sept. 26,       March 28,
                                                        2003            2003
                                                      ---------       ---------
      Raw materials                                     $ 2.3           $ 2.6
      Work-in-process                                    16.0            18.3
      Finished goods                                      3.5             3.1
                                                        -----           -----
                                                        $21.8           $24.0
                                                        =====           =====

6.    Fixed assets

                                                       Sept. 26,       March 28,
                                                         2003            2003
                                                       ---------       ---------
      Cost                                              $163.5          $163.7
      Accumulated depreciation                           116.9           107.3
                                                        ------          ------
                                                        $ 46.6          $ 56.4
                                                        ======          ======

      The Company recorded an impairment loss on fixed assets of $4.7 during the
      second quarter of Fiscal 2004 as a result of a review of the ongoing usage
      of the  Company's  testing  equipment  and  enterprise  resource  planning
      system.

7.       Other assets

                                                       Sept. 26,       March 28,
                                                         2003            2003
                                                       ---------       ---------
      Patents, trademarks, and other
        intangible assets:
        Cost                                             $10.5           $ 9.5
        Accumulated amortization                          (5.9)           (5.0)
                                                         -----           -----
        Patents, trademarks, and other
          intangible assets - net                          4.6             4.5
      Other                                                 --             0.2
                                                         -----           -----
                                                         $ 4.6           $ 4.7
                                                         =====           =====

      The  amortization  of  patents,  trademarks  and other  intangible  assets
      amounted  to $0.5 and $0.8,  respectively,  for the  three and six  months
      ended  September 26, 2003 (three and six months ended September 27, 2002 -
      $0.3 and $0.6, respectively).


                                       8
<PAGE>

8.    Note Receivable

                                                       Sept. 26,       March 28,
                                                         2003            2003
                                                       ---------       ---------
      Note receivable, non-interest bearing              $16.5           $15.9
      Less: Deferred gain                                (16.4)          (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.

9.    Provisions for exit activities

                                                       Sept. 26,       March 28,
                                                         2003            2003
                                                       ---------       ---------
      Restructuring provisions                           $ 3.8           $ 2.9
      Provision for disposal of
        discontinued operations                             --             0.1
      Provision for disposal of
        foundry businesses                                 0.7             1.2
                                                         -----           -----
                                                         $ 4.5           $ 4.2
                                                         =====           =====

      During the second quarter of Fiscal 2004, the Company  implemented further
      cost   reductions  in  efforts  to  outsource   programs  and   streamline
      operations.  The Company incurred  workforce  reduction costs of $3.4 as a
      result of  reducing  the  Company's  employee  base by  approximately  120
      employees,  globally  across all job  categories  and business  units.  In
      particular,  severance  costs  of  $1.0  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 $1.8 were included in selling and  administration in the quarter.
      The  Company  also  recorded  severance  costs of $0.6 in cost of revenue,
      related  to  further  cost  reductions  as it  finalizes  its  outsourcing
      programs and streamline operations.

      As a  result  of the  workforce  reduction  program  and  streamlining  of
      operations,  the  Company  recorded  a charge of $0.6,  included  in asset
      impairment  and other,  related to excess  space under  lease  contract in
      Canada.

      Of the $4.0 of restructuring  provision  recorded in the second quarter of
      Fiscal  2004,  $2.6  related to the Network  Communication  segment,  $0.9
      related to the Consumer  Communications  segment,  and $0.5 related to the
      Ultra Low-Power segment.

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

      The following  table  summarizes  the  continuity  of these  restructuring
      provisions for the three and six months ended September 26, 2003:


                                                         Lease and
                                          Workforce       contract
                                          reduction      settlement     Total
                                          ---------      ----------   ---------

      Balance, March 28, 2003                $0.3           $2.6         $2.9
      Cash drawdowns during quarter          (0.1)          (0.2)        (0.3)
                                             ----           ----         ----
      Balance, June 27, 2003                 $0.2           $2.4         $2.6
      Restructuring activities
        during the quarter                    3.4            0.6          4.0
      Cash drawdowns during quarter          (2.2)          (0.6)        (2.8)
                                             ----           ----         ----
      Balance, Sept. 26, 2003                $1.4           $2.4         $3.8
                                             ====           ====         ====


                                       9
<PAGE>

10.   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  September  26,  2003,  was $33.2 (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 September 26, 2003
      that  would  prevent  the  project's  completion  under  the  terms of the
      agreement. In the event that Mitel is unable to fulfill the commitments of
      the project agreement,  the Company believes that an alternate third-party
      contractor  could be secured to complete the  agreement  requirements.  At
      September 26, 2003, the carrying value of this guarantee was nil.


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

      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 September 26,
      2003, the taxation years 2000 to February 16, 2001 are subject to audit by
      taxation authorities.

      As at  September  26,  2003,  the  Company  has  guaranteed  a custom bond
      amounting to $2.7 to a third party on behalf of a subsidiary.

      Based upon the  transition  rules outlined in FIN 45, 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 three and six month
      periods ended September 26, 2003:

                                                 Three Months     Six Months
                                                    Ended            Ended
                                                Sept. 26, 2003   Sept. 26, 2003
                                                --------------   --------------

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


                                       10
<PAGE>

11.   Commitments

      The Company had letters of credit  outstanding as at September 26, 2003 of
      approximately  $5.6 (September 27, 2002 - $3.1). Cash and cash equivalents
      of $5.6 have been pledged as security against certain  outstanding letters
      of credit,  which expire within 12 months, and are presented as restricted
      cash.

      As a result of the  restructuring  and impairment  losses  recorded in the
      second  quarter  of Fiscal  2004,  the  Company  did not meet a  quarterly
      financial  covenant  with  respect  to  shareholder's   equity  under  the
      Company's credit facility.  A waiver was obtained from the bank in respect
      of the financial  covenant,  and subsequent to the quarter ended September
      26, 2003,  the Company has cancelled the operating  line  component of the
      revolving global credit  facility.  As a result of this change the Company
      will  operate with a credit  facility of  approximately  $9.2  (Cdn$12.5),
      available for letters of credit.  The  financial  covenant with respect to
      shareholder's equity has also been modified under the new agreement.

12.   Redeemable Preferred Shares

      There were 27,800  preferred  shares purchased during the six months ended
      September  26, 2003 for cash  consideration  of $0.5.  As at September 26,
      2003,  there were 5,900  repurchased  preferred  shares  that had not been
      cancelled by the end of the quarter.

      During the second  quarter of Fiscal 2004,  the Company paid  dividends on
      its redeemable  preferred shares of $0.5 and declared a quarterly dividend
      of $0.37 (Cdn$0.50) per share, resulting in a cumulative dividend of $0.74
      (Cdn$1.00) per share for the first six months of Fiscal 2004.

13.   Capital stock

      a)    The Company has not  declared  or paid any  dividends  on its common
            shares.

      b)    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 percent of  127,164,078  common shares issued and  outstanding at
            May 31, 2002) between June 10, 2002 and June 9, 2003. No shares were
            repurchased under the normal course issuer bid program in the period
            ended June 9, 2003. The program was not renewed.

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

                                                     Six Months Ended
                                             -----------------------------------
                                             September 26,         September 27,
                                                 2003                  2002
                                             -------------         -------------
      Outstanding Options:
      Balance, beginning of period              10,828,557         10,914,962
      Granted                                      109,500            357,300
      Exercised                                    (10,617)          (109,193)
      Forfeited                                   (997,883)        (1,476,966)
                                                ----------         ----------
      Balance, end of period                     9,929,557          9,686,103
                                                ==========         ==========

      As at  September  26,  2003,  there  were  4,602,505  (March  28,  2003  -
      3,714,122)  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 $2.51 to $ 27.57 per share
      with exercise periods  extending to June 2008. The exercise price of stock
      options was based on prices in  Canadian  dollars  translated  at the U.S.
      dollar exchange rate on September 26, 2003.

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


                                       11
<PAGE>

      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:

<TABLE>
<CAPTION>
                                                             Three Months Ended                 Six Months Ended
                                                         ---------------------------      ---------------------------
                                                         Sept. 26,         Sept. 27,      Sept. 26,         Sept. 27,
                                                            2003             2002            2003             2002
                                                         ---------         ---------      ---------         ---------
<S>                                                       <C>               <C>             <C>              <C>
      Stock options                                       537,993           41,054          573,690          208,942
                                                          =======           ======          =======          =======
</TABLE>

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

<TABLE>
<CAPTION>
                                                             Three Months Ended                 Six Months Ended
                                                         ---------------------------      ---------------------------
                                                         Sept. 26,         Sept. 27,      Sept. 26,         Sept. 27,
                                                            2003             2002            2003             2002
                                                         ---------         ---------      ---------         ---------
      <S>                                                 <C>             <C>             <C>              <C>
      Number of outstanding options                      7,451,043        9,420,728       7,401,043        8,219,274

      Average exercise price per share                   $   10.56        $    9.03       $   10.59        $    9.65
</TABLE>

      The  average  exercise  price of stock  options  was  based on  prices  in
      Canadian  dollars  translated  at the  U.S.  dollar  exchange  rate on the
      applicable period end date.

14.   Accumulated other comprehensive income (loss)

      The components of other comprehensive income (loss) were as follows:

<TABLE>
<CAPTION>
                                                             Three Months Ended                 Six Months Ended
                                                         ---------------------------      ---------------------------
                                                         Sept. 26,         Sept. 27,      Sept. 26,         Sept. 27,
                                                            2003             2002            2003             2002
                                                         ---------         ---------      ---------         ---------
      <S>                                                 <C>             <C>             <C>              <C>
      Net loss for the period                             $ (18.9)        $ (11.9)        $ (25.1)         $ (20.6)
      Other comprehensive income (loss):
      Realized net derivative (gains) losses on cash
           flow hedges                                       (0.1)           (1.5)             --             (1.4)
      Unrealized net derivative gains (losses) on
           cash flow hedges                                   0.3            (1.7)            0.4             (2.2)
      Change in cumulative translation adjustment              --            (5.8)             --              6.5
                                                          -------         -------         -------          -------
      Other comprehensive loss for the period             $ (18.7)        $ (20.9)        $ (24.7)         $ (17.7)
                                                          =======         =======         =======          =======
</TABLE>

      The changes to  accumulated  other  comprehensive  loss for the six months
      ended September 26, 2003 were as follows:

<TABLE>
<CAPTION>
                                                                 Realized and
                                                Cumulative      Unrealized Net
                                                Translation    Gain (Loss) on
                                                  Account        Derivatives        Total
                                                -----------    ----------------   ----------
      <S>                                          <C>               <C>            <C>
      Balance, March 28, 2003                      $(32.4)           $(0.1)         $(32.5)
      Change during the three months
        ended June 27, 2003                            --              0.2             0.2
                                                   ------            -----          ------
      Balance, June 27, 2003                       $(32.4)           $ 0.1          $(32.3)
      Change during the three months
        ended September 26, 2003                       --              0.2             0.2
                                                   ------            -----          ------
      Balance, September 26, 2003                  $(32.4)           $ 0.3          $(32.1)
                                                   ======            =====          ======
</TABLE>

      The  Company  recorded a decrease in other  comprehensive  loss in the six
      months ended  September 26, 2003 (September 27, 2002 - $3.6) of $0.4 which
      was  attributable  to the  change  in the  value  of  outstanding  foreign
      currency forward  contracts  related to the Company's hedging program that
      were  designated as cash flow hedges.  The Company  estimates that $0.3 of
      net  derivative  gain  included  in  other   comprehensive  loss  will  be
      reclassified into earnings within the next four months.


                                       12
<PAGE>

15.   Other income (expense) (net)

<TABLE>
<CAPTION>
                                                             Three Months Ended                     Six Months Ended
                                                      --------------------------------      -------------------------------
                                                      Sept. 26, 2003    Sept. 27, 2002      Sept. 26, 2003   Sept. 27, 2002
                                                      --------------------------------      -------------------------------
<S>                                                         <C>              <C>                  <C>                 <C>
      Interest income                                       $0.3             $1.0                 $0.6                $1.9
      Foreign exchange gain (loss)                           0.1              2.0                 (0.9)                1.6
                                                      ---------------------------------     -------------------------------
      Other income (expense) (net)                          $0.4             $3.0                $(0.3)               $3.5
                                                      =================================     ===============================
      </TABLE>

16.   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  sectors such as
      feeder,  aggregation  and  transmission  applications,  and products  that
      address the  multi-protocol  physical  and network  layers.  The  Consumer
      Communications  business  segment  offers  products  that  allow  users to
      connect to the network.  These  products  include  wireless  (for example,
      cellular  chipsets) and infotainment  applications  (for example,  set-top
      boxes  and  digital  TV).  The  Ultra  Low-Power  Communications  business
      provides ASIC solutions for applications such as pacemakers,  hearing aids
      and portable instruments.

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

<TABLE>
<CAPTION>
                                                       Network             Consumer       Ultra Low-Power   Unallocated
      Three Months Ended Sept. 26, 2003            Communications      Communications     Communications       Costs        Total
                                                   --------------      --------------     ---------------   -----------   --------
      <S>                                            <C>                  <C>                <C>             <C>          <C>
      Total external sales revenue                   $   25.0             $   13.8           $    7.8        $     --     $   46.6
      Amortization of buildings and equipment             1.9                  1.0                0.4              --          3.3
      Asset impairment and other                          3.0                  1.9                0.4              --          5.3
      Segment's operating loss                          (11.5)                (5.8)              (2.0)             --        (19.3)

                                                      Network             Consumer        Ultra Low-Power   Unallocated
      Three Months Ended Sept. 27, 2002            Communications      Communications     Communications       Costs        Total
                                                   --------------      --------------     ---------------   -----------   --------
      Total external sales revenue                   $   29.4             $   10.4           $    6.4        $     --     $   46.2
      Amortization of buildings and equipment             2.6                  0.6                0.1              --          3.3
      Stock compensation expense                           --                   --                 --             0.2          0.2
      Segment's operating loss                           (6.5)                (6.0)              (1.3)           (0.2)       (14.0)

</TABLE>


                                       13
<PAGE>

<TABLE>
<CAPTION>
                                                       Network             Consumer        Ultra Low-Power   Unallocated
      Six Months Ended Sept. 26, 2003               Communications      Communications     Communications       Costs        Total
                                                    --------------      --------------     ---------------   -----------   ---------
      <S>                                            <C>                  <C>                 <C>             <C>          <C>
      Total external sales revenue                     $   54.3           $   27.2            $   18.8        $     --     $  100.3
      Amortization of buildings and equipment               3.7                2.1                 1.1              --          6.9
      Asset impairment and other                            3.0                1.9                 0.4              --          5.3
      Segment's operating loss                            (13.9)              (9.6)               (1.0)             --        (24.5)

                                                       Network             Consumer        Ultra Low-Power   Unallocated
      Six Months Ended Sept. 27, 2002               Communications      Communications     Communications       Costs        Total
                                                    --------------      --------------     ---------------   -----------   ---------
      Total external sales revenue                     $   57.8           $   23.0            $   13.4        $     --     $   94.2
      Amortization of buildings and equipment               5.1                1.2                 0.2                          6.5
      Stock compensation recovery                            --                 --                  --            (1.4)        (1.4)
      Segment's operating loss                            (11.8)             (11.1)               (1.3)            1.4        (22.8)
</TABLE>

17.   Supplementary cash flow information

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

<TABLE>
<CAPTION>
                                                             Three Months Ended                     Six Months Ended
                                                      --------------------------------      -------------------------------
                                                      Sept. 26, 2003    Sept. 27, 2002      Sept. 26, 2003   Sept. 27, 2002
                                                      --------------------------------      -------------------------------
     <S>                                                  <C>               <C>                   <C>             <C>
     Cash provided by (used in)
     Loss on disposal of fixed assets                     $   0.1           $    --               $   0.1         $    --
     Foreign exchange gain on short-term investments           --              (1.8)                   --            (1.5)
     Change in pension liabilities                            0.5                --                   1.6              --
     Impairment of fixed assets                               4.7                --                   4.7              --
     Provision for excess space under lease contract          0.6                --                   0.6              --
                                                      ---------------------------------------------------------------------
   Other non-cash changes in operating activities         $   5.9           $  (1.8)              $   7.0         $  (1.5)
                                                      =====================================================================
   </TABLE>

18.   Subsequent event

      On October 16, 2003, the Company announced  reduced spending  primarily in
      its  Network  Communications   segment.  The  Company  expects  to  record
      additional  charges of  approximately  $4.5 in the third quarter of Fiscal
      2004, related to reducing its global workforce by approximately 5%.

19.   Comparative figures

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


                                       14
<PAGE>

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

             (in millions of U.S. dollars, except per share amounts,
                        and in accordance with U.S. GAAP)

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.  Zarlink is a global provider of  microelectronics
for voice and data networks,  consumer and ultra low-power  communications,  and
high-performance analog.


The following  discussion and analysis  explains  trends in Zarlink's  financial
condition and results of operations for the three and six months ended September
26, 2003,  compared with the corresponding  periods in the previous fiscal year.
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.  This discussion  should be read in conjunction  with the  consolidated
financial statements and notes thereto included elsewhere in this Form 10-Q, and
with the Company's audited  consolidated  financial statements and notes thereto
for the fiscal year ended March 28, 2003.

Forward-Looking Statements

Certain statements in this Quarterly Report on Form 10-Q contain forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 (the "Reform  Act") that are based on current  expectations,  estimates and
projections  about the  industries in which the Company  operates,  management's
beliefs and assumptions made by management.  These statements are not guarantees
of future performance and involve certain risks,  uncertainties and assumptions,
which are  difficult to predict.  Accordingly,  actual  outcomes and results may
differ materially from results  forecasted or suggested in such  forward-looking
statements.

Such risks,  uncertainties and assumptions include, among others, the following:
increasing  price  and  product/service  competition  by  foreign  and  domestic
competitors,  including  new  entrants;  rapid  technological  developments  and
changes;  the ability to continue to  introduce  competitive  new  products on a
timely,  cost-effective  basis;  delays  in  product  development;  the  mix  of
products/services;  the  ability to ensure  continuity  of supply  from  outside
fabrication  services;  changes in environmental  and other domestic and foreign
governmental   regulations;   protection   and  validity  of  patent  and  other
intellectual  property  rights;  import  protection  and  regulation;   industry
competition;  industry  capacity and other industry  trends;  the ability of the
Company to  attract  and retain key  employees;  demographic  changes  and other
factors  referenced in the  Company's  Annual Report on Form 10-K for the fiscal
year ended March 28, 2003.

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 in the Company's Annual Report on
Form 10-K for the fiscal year ended March 28, 2003,  including those  identified
under   "Forward-Looking   Statements  and  Risk   Factors".   In  making  these
forward-looking  statements,  which  are  identified  by words  such as  "will",
"expects", "intends",  "anticipates" and similar expressions, the Company claims
the protection of the safe-harbor for  forward-looking  statements  contained in
the Reform Act. The Company  undertakes  no  obligation  to update  publicly any
forward-looking statements whether as a result of new information, future events
or otherwise.


                                       15
<PAGE>

RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED SEPTEMBER 26, 2003

<TABLE>
<CAPTION>
  Summary of Results from Operations                         Three Months Ended        Six Months Ended
                                                           -----------------------   ----------------------
                                                           Sept. 26,     Sept. 27,   Sept. 26,    Sept. 27,
  (millions of U.S. dollars, except per share amounts)       2003           2002        2003        2002
                                                           ---------     ---------   ---------    ---------
<S>                                                        <C>          <C>          <C>          <C>
Consolidated revenue                                       $  46.6      $  46.2      $ 100.3      $  94.2
   Network Communications segment revenue                     25.0         29.4         54.3         57.8
   Consumer Communications segment revenue                    13.8         10.4         27.2         23.0
   Ultra Low-Power Communications segment revenue              7.8          6.4         18.8         13.4

Operating loss                                               (19.3)       (14.0)       (24.5)       (22.8)
   Network Communications segment operating loss             (11.5)        (6.5)       (13.9)       (11.8)
   Consumer Communications segment operating loss             (5.8)        (6.0)        (9.6)       (11.1)
   Ultra Low-Power Communications segment operating loss      (2.0)        (1.3)        (1.0)        (1.3)
   Unallocated recoveries (costs)                               --         (0.2)          --          1.4

Net loss for the period                                      (18.9)       (11.9)       (25.1)       (20.6)
Net loss per common share - basic and diluted                (0.15)       (0.10)       (0.20)       (0.17)
Weighted average common shares outstanding - millions        127.3        127.2        127.3        126.9
</TABLE>

Revenue in the second  quarter of Fiscal 2004 was $46.6,  an increase of 1% from
the  second  quarter of Fiscal  2003.  Revenue in the first six months of Fiscal
2004 was $100.3, an increase of 6% from the first six months of Fiscal 2003. The
market continues to pose challenges as  semiconductor  sales volumes continue to
be affected by the prolonged downturn impacting the semiconductor  industry. The
Company  experienced  lower sequential  bookings in the second quarter of Fiscal
2004, in excess of that expected with normal seasonal trends for lower shipments
through the summer months.  Booking levels  improved late in the second quarter,
and remain above those levels experienced during the same period in Fiscal 2003.

In the second  quarter of Fiscal 2004,  the Company  recorded a net loss,  after
preferred share dividends,  of $19.4, or $0.15 per share. This compares to a net
loss,  after  preferred  share  dividends,  of $12.4, or $0.10 per share, in the
second quarter of Fiscal 2003.

For the six months ended  September 26, 2003,  the Company  recorded a net loss,
after preferred share dividends,  of $26.1, or $0.20 per share. This compares to
a net loss, after preferred share  dividends,  of $21.6, or $0.17 per share, for
the six months ended September 27, 2002.

The Company  implemented further cost reductions in the second quarter of Fiscal
2004 in efforts to outsource  programs  and  streamline  operations.  During the
quarter,  the Company  incurred $3.4 of expenses  related to reducing its global
workforce by approximately  120 employees across all regions and business units.
The Company also recorded a charge  related to excess space under lease contract
of $0.6 as a result of restructuring  activities implemented during the quarter.
In addition,  the Company recorded an impairment loss on fixed assets of $4.7 as
a result of a review of the ongoing usage of certain assets of the Company.

Zarlink's  operations  are  comprised of three  reportable  business  segments -
Network   Communications,   Consumer   Communications,   and   Ultra   Low-Power
Communications.   Zarlink  targets  the  network  and  consumer   communications
industries  with offerings that specialize in broadband  connectivity  solutions
over wired, wireless and optical media. Zarlink's Ultra Low-Power communications
segment  provides  ultra  low-power  ASIC  solutions  for  applications  such as
pacemakers,  hearing aids and portable  instruments.  Zarlink sells its products
through both direct and indirect channels of distribution. Factors affecting the
choice of distribution  include,  among others,  end-customer type, the level of
product complexity,  the stage of product introduction,  geographic presence and
location of markets, and volume levels.


                                       16
<PAGE>

Network Communications

<TABLE>
<CAPTION>
                                                   Three Months Ended            Six Months Ended
     Network Communications                    Sept. 26,        Sept. 27,      Sept. 26,     Sept. 27,
     (millions of U.S. dollars)                   2003            2002            2003          2002
                                               ---------        ---------      ---------     ----------
<S>                                             <C>              <C>            <C>           <C>
Revenue:
                                                $  25.0          $  29.4        $  54.3       $  57.8
                                                =======          =======        =======       =======
As a % of total revenue                              54%              64%            54%           61%

Operating loss                                  $ (11.5)         $  (6.5)       $ (13.9)      $ (11.8)
                                                =======          =======        =======       =======
</TABLE>

Zarlink's  Network   Communications   segment   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.  In simple terms,  Network
Communications semiconductor products connect network equipment together.

Revenue for the second quarter of Fiscal 2004 totaled  $25.0,  down 15% from the
second  quarter  of Fiscal  2003.  During  the first six  months of Fiscal  2004
revenue decreased to $54.3, down 6% from the same period in Fiscal 2003. Reduced
capital  spending  in the  market  continues  to  impact  demand  by  networking
companies.  Revenue  declines  were a  result  of  decreased  revenue  from  the
Company's  packet  switching,   packet  processing,   and  specialty   products,
predominately in the Asia Pacific region.

The segment's operating loss declined to $13.9 in the first six months of Fiscal
2004 from an operating loss of $11.8 in the first six months of Fiscal 2003, due
primarily to asset impairments and other costs incurred in the second quarter of
Fiscal 2004,  partially offset by cost control  initiatives and improved margins
on a stronger mix of products  sold.  During the first half of Fiscal 2004,  the
Network  Communications segment has incurred asset impairment and other costs of
$3.0 and  approximately  $0.6 of  severance  costs  related  to its  direct  R&D
initiatives, as it implemented cost control initiatives.

Consumer Communications

<TABLE>
<CAPTION>
                                                   Three Months Ended             Six Months Ended
Consumer Communications                        Sept. 26,        Sept. 27,      Sept. 26,     Sept. 27,
(millions of U.S. dollars)                       2003            2002            2003           2002
                                               ---------        ---------      ---------     ---------
<S>                                             <C>              <C>            <C>           <C>
Revenue:
                                                $  13.8          $  10.4        $  27.2       $  23.0
                                                =======          =======        =======       =======
As a % of total revenue                              29%              22%            27%           25%

Operating loss                                  $  (5.8)         $  (6.0)       $  (9.6)      $ (11.1)
                                                =======          =======        =======       =======
</TABLE>

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,  terrestrial and satellite set-top boxes
and digital TV).

Revenue for the second  quarter of Fiscal 2004  totaled  $13.8,  up 33% from the
second  quarter of Fiscal  2003.  During  the first six  months of Fiscal  2004,
revenue increased 18% over the same period in Fiscal 2003, to $27.2, principally
as a result of improved shipments of the Company's tuners and demodulators.

The  segment's  operating  loss  decreased  to $9.6,  in the first six months of
Fiscal 2004 from an  operating  loss of $11.1 in the same period of Fiscal 2003,
due principally to improved  revenues,  partially offset by asset impairment and
other  costs  of  $1.9  and  cost   control   initiatives,   where  it  incurred
approximately $0.2 in R&D specific severance costs during the period.


                                       17
<PAGE>

Ultra Low-Power Communications

<TABLE>
<CAPTION>
                                                   Three Months Ended            Six Months Ended
Ultra Low-Power Communications                 Sept. 26,        Sept. 27,      Sept. 26,     Sept. 27,
(millions of U.S. dollars)                        2003            2002            2003          2002
                                               ---------        ---------      ---------     ---------
<S>                                             <C>              <C>            <C>           <C>
Revenue:
                                                $   7.8          $   6.4        $  18.8      $  13.4
                                                =======          =======        =======      =======
As a % of total revenue                              17%              14%            19%          14%

Operating loss                                  $  (2.0)         $  (1.3)       $  (1.0)     $  (1.3)
                                                =======          =======        =======      =======
</TABLE>

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

Revenue for the second  quarter of Fiscal  2004  totaled  $7.8,  up 22% from the
second  quarter of Fiscal  2003.  During  the first six  months of Fiscal  2004,
revenue  increased 40% over the same period in Fiscal 2003, to $18.8, due mainly
to increases in the sale of hearing aid components.  Revenue  improvements  were
also realized on the Company's pacemaker circuits.

The segment's operating loss improved to $1.0, in the first six months of Fiscal
2004 from an  operating  loss of $1.3 in the same  period of  Fiscal  2003,  due
principally  to a more  favorable  product  mix and  cost  control  initiatives,
inclusive of approximately  $0.2 in severance costs during the period related to
its R&D spending,  but partially offset by asset  impairments and other costs of
$0.4 recorded during the second quarter of Fiscal 2004.

GEOGRAPHIC REVENUE

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

<TABLE>
<CAPTION>
                                            Three Months Ended                                Six Months Ended
                                 -------------------------------------------     ------------------------------------------
                                 Sept. 26,    % of      Sept. 27,      % of      Sept. 26,    % of      Sept. 27,      % of
(millions of U.S. dollars)         2003       Total       2002         Total       2003       Total       2002        Total
                                 ---------    -----     ---------      -----     ---------    -----     ---------     -----
<S>                               <C>           <C>       <C>            <C>      <C>           <C>       <C>           <C>
Revenue:
Asia / Pacific                    $ 17.7        38%       $ 18.0         39%      $ 40.2        40%       $ 34.7        37%
Europe                              13.7        29%         14.7         32%        30.5        30%         31.0        33%
United States                       10.6        23%          9.9         21%        22.9        23%         19.7        21%
Canada                               2.3         5%          2.3          5%         3.9         4%          6.5         7%
Other Regions                        2.3         5%          1.3          3%         2.8         3%          2.3         2%
                                  ------      ----        ------       ----       ------      ----        ------      ----
Total                             $ 46.6       100%       $ 46.2        100%      $100.3       100%       $ 94.2       100%
                                  ======      ====        ======       ====       ======      ====        ======      ====

</TABLE>

Asia/Pacific

Asia/Pacific  sales  decreased  by 2% during the second  quarter of Fiscal  2004
compared to the second  quarter of Fiscal 2003,  but  continue to represent  the
largest geographic  segment of customer revenues.  The decline in regional sales
was  primarily  within the Network  Communications  segment  during the quarter.
During the first six months of Fiscal 2004,  sales  increased by 16% compared to
the same  period  in Fiscal  2003.  Increases  were  driven  primarily  from the
Consumer  Communication  segment,  with  moderate  improvements  from the  Ultra
Low-Power Communications segment.


                                       18
<PAGE>

Europe

European sales  decreased by 7% in the second quarter of Fiscal 2004 compared to
the second  quarter  of Fiscal  2003.  For the first six months of Fiscal  2004,
sales  decreased  by 2%  compared  to the first six months of Fiscal 2003 due to
declines in the revenues  from the Consumer  Communications  segments  offset by
improved revenues in the Network and Ultra Low-Power Communications segments.

United States

Sales to  customers  in the  United  States  increased  by 7% during  the second
quarter of Fiscal 2004  compared to the second  quarter of Fiscal 2003.  For the
first six months of Fiscal  2004,  sales  increased  by 16% compared to the same
period  in Fiscal  2003.  The  increase  was due  primarily  to  improved  Ultra
Low-Power and Consumer Communications product sales.

Canada

Canadian  sales in the second  quarter of Fiscal 2004 were in line with the same
period in Fiscal  2003.  During  the first six months of Fiscal  2004,  sales to
Canadian  customers  decreased by 40% compared to the same period in Fiscal 2003
due to lower Network Communications segment sales.

GROSS MARGIN

                                     Three Months Ended       Six Months Ended
                                    --------------------   ---------------------
(millions of U.S. dollars)          Sept. 26,  Sept. 27,   Sept. 26,   Sept. 27,
                                      2003       2002        2003        2002
                                    ---------  ---------   ---------   ---------
Gross Margin                          $19.4      $20.7        $45.0      $42.8

As a percentage of revenue               42%        45%          45%       45%

Gross  margin  decreased  by three  percentage  points in the second  quarter of
Fiscal 2004  compared to the same period in Fiscal 2003.  The decrease in margin
was a result of lower than expected sales volumes and increasing  price pressure
on products in the Consumer  Communication  segment.  Also included in the gross
margin during the quarter was  approximately  $0.6 of severance costs related to
the restructuring activities implemented this period.

Gross margin of 45% in the first six months of Fiscal 2004 was  consistent  with
the same  period in Fiscal  2003.  During  the first  half of Fiscal  2004,  the
Company  continued  its  effort  to lower  overall  manufacturing  costs,  as it
incurred approximately $0.7 of severance costs during the period.

OPERATING EXPENSES

Research and Development ("R&D")

                                     Three Months Ended       Six Months Ended
                                    --------------------   ---------------------
(millions of U.S. dollars)          Sept. 26,  Sept. 27,   Sept. 26,   Sept. 27,
                                      2003       2002        2003        2002
                                    ---------  ---------   ---------   ---------

R&D Expenses                          $19.2      $22.9        $38.4      $43.3

As a percentage of revenue               41%        50%          38%        46%

R&D  expenses  decreased by 16%, or $3.7,  in the second  quarter of Fiscal 2004
from the same period in Fiscal 2003. During the first six months of Fiscal 2004,
R&D  expenses  decreased  by 11%, or $4.9  compared to the same period in Fiscal
2003,  primarily  due to the  timing  of  certain  material  spending  and  cost
reduction  initiatives  implemented in the second quarter of Fiscal 2004. During
the three and six month periods ended  September  26, 2003,  severance  costs of
$1.0 were  incurred.  The  Company  continues  to refocus its R&D  resources  on
programs  and  products  that  demonstrate  superior  potential  for  near-  and
medium-term revenue. Management expects that R&D spending will decrease over the
balance of Fiscal 2004 as a result of optimizing  electronic  design  automation
and cost control.

The Company  continued its investment in research and development to develop and
launch new products,  with 11 new products  being released in the second quarter
of Fiscal 2004, bringing the year to date total to 22 new product launches.


                                       19
<PAGE>

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.

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 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;

      o     Analog and Mixed Signal Solutions - Timing, Synthesizers,  Interface
            drivers,  ADSL drivers and High Speed Amplifiers  products for wired
            and  wireless   applications;   utilizing  our   analog/mixed-signal
            expertise; and

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

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

      o     Providing a 2G cellular phone radio transceiver chip, compliant with
            2G standards for Time  Division  Multiple  Access  ("TDMA")/Advanced
            Mobile Phone Service/System  ("AMPS"), and developing a 2-chip radio
            solution for 3rd  generation  GSM/Wideband  Code  Division  Multiple
            Access ("WCDMA") cellular phones;

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

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

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

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

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

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

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

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

Selling and Administrative ("S&A")

                                     Three Months Ended       Six Months Ended
                                    --------------------   ---------------------
(millions of U.S. dollars)          Sept. 26,  Sept. 27,   Sept. 26,   Sept. 27,
                                      2003       2002        2003        2002
                                    ---------  ---------   ---------   ---------
S&A Expenses                          $14.2      $11.6       $25.8       $23.7

As a percentage of revenue               30%        25%         26%         25%

In the second  quarter of Fiscal 2004,  S&A expenses  increased by $2.6,  or 22%
compared to the second  quarter of Fiscal 2003,  principally as a result of cost
reduction activities  implemented during the quarter. S&A expenses in the second
quarter of Fiscal 2004 included  approximately  $1.8 of severance  charges.  The
Company  anticipates  a reduction  in S&A expenses  during the third  quarter of
Fiscal 2004, as a result of these cost reduction activities.

Stock Compensation

The Company  records  stock  compensation  expense  arising from  certain  stock
options subjected to option exchange programs.  In prior years, the Company also
recorded stock compensation expense arising from retention conditions


                                       20
<PAGE>

associated  with the stock  awarded to  certain  employees  of Vertex  Networks,
Incorporated, which was acquired in July 2000.

During the three and six months ended  September  26,  2003,  there was no stock
compensation  recorded,  as the  intrinsic  value of options  under the exchange
program was nil.  During the three months ended  September 27, 2002, the Company
recorded a stock  compensation  expense of $0.2 (six months ended  September 27,
2002 - recovery  of $1.4)  related to the  amortization  of  intrinsic  value of
unexercised stock options modified by the option exchange  programs,  net of the
vesting of  restricted  stock.  No further  stock  compensation  expense will be
recorded related to the formerly restricted shares.

OTHER INCOME (EXPENSE)

Other income  (expense)  was comprised of interest  income and foreign  exchange
gains and losses.

Interest  income  was $0.3 for the three  months  ended  September  26,  2003 as
compared to $1.0 in the same period of Fiscal 2003.  During the first six months
of Fiscal  2004,  interest  income was $0.6 as compared to $1.9 in the first six
months of Fiscal 2003.  The  decreases  were mainly due to reduced  average cash
balances and lower interest rates in Fiscal 2004.

Foreign  exchange gains in the second quarter of Fiscal 2004 amounted to $0.1 as
compared  to gains of $2.0 for the same  period in Fiscal  2003.  During the six
months ended  September 26, 2003,  foreign  exchange  losses amounted to $0.9 as
compared  to a gain of $1.6 for the six months  ended  September  27,  2002.  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. In Fiscal 2003, the foreign exchange gains
were related to gains  realized on  short-term  investments  held in  currencies
other than the  functional  currency of the parent  company,  and  according  to
month-end foreign exchange rates.

INTEREST EXPENSE

Interest  expense  was $0.3 for the  three  months  ended  September  26,  2003,
compared with $0.3 for the second quarter of Fiscal 2003.  During the first half
of Fiscal 2004,  interest expense was $0.3, compared with $0.4 for the first six
months of Fiscal 2003. The interest  expense relates  primarily to the Company's
capital leases.

INCOME TAXES

An income tax  recovery of $0.3 was  recorded  for the second  quarter of Fiscal
2004, as a result of a recovery of domestic  income taxes,  partially  offset by
capital taxes,  compared with an expense of $0.6 for the corresponding period in
Fiscal 2003.  During the six months ended September 26, 2003, income tax expense
was nil,  compared  with an  expense  of $0.9 for the first six months of Fiscal
2003.

The  Company  has a  valuation  allowance  against  its  deferred  tax assets at
September 26, 2003 of $127.6,  (March 28, 2003 - $106.0).  The increase  relates
mainly to losses incurred in the Company's  foreign  jurisdictions and temporary
differences  in the Company's  foreign and domestic  operations.  Management has
determined  that  sufficient  uncertainties  exist  regarding the realization of
certain of its deferred tax assets.

NET LOSS

The Company recorded a net loss,  after preferred share dividends,  of $19.4, or
$0.15 per share,  in the second  quarter of Fiscal 2004.  This compares to a net
loss, after preferred share dividends, of $12.4, or $0.10 per share, in the same
period in Fiscal 2003. For the six months ended  September 26, 2003, the Company
recorded a net loss,  after  preferred share  dividends,  of $26.1, or $0.20 per
share, as compared to $21.6 or $0.17 per share in the first six months of Fiscal
2003.

The net loss for the three and six month periods ended  September 26, 2003, were
primarily  a result of low  revenues,  caused by the  continued  downturn in the
semiconductor  industry,  combined with severance and asset  impairment  charges
incurred  upon  implementation  of cost  cutting  initiatives  during the second
quarter.

LIQUIDITY AND CAPITAL RESOURCES

At September  26, 2003,  cash,  cash  equivalents,  short-term  investments  and
restricted cash balances totaled $97.2, down from $119.2 at March 28, 2003. Cash
and cash  equivalents  at  September  26,  2003,  included in the amount  above,
totaled $56.4 (March 28, 2003 - $23.5).


                                       21
<PAGE>

Cash used in operations  before working capital changes amounted to $11.2 during
the first six months of Fiscal 2004,  as compared to $16.4 used in the first six
months of Fiscal 2003. Cash used in operations  included various one-time costs,
including  severance  payments,  associated  with the  restructuring  activities
implemented  during the quarter.  Since March 28, 2003,  the  Company's  working
capital  increased  by  $6.3,  mainly  as a  result  of  increases  in  accounts
receivable  of $5.6,  other  prepaid  expenses  totaling  $2.7,  a reduction  in
accounts  payable  and other  accrued  liabilities  totaling  $0.1 and  deferred
credits of $0.2. The increase in accounts  receivable was a result of the timing
of sales late in the quarter,  resulting in the cash inflow not occurring  until
the third quarter of Fiscal 2004. The increase in other prepaid expenses was due
to scheduled  payments for insurance and other annual payments.  These increases
in working  capital were partially  offset by a reduction in inventories of $2.3
over the  first  half of the  year.  Management  expects  to  further  draw down
inventory  levels  through the remainder of Fiscal 2004 by reducing  cycle times
and managing inventories on a build-to-order basis. In comparison, the Company's
working  capital  decreased  by $2.5 during the first six months of Fiscal 2003,
mainly as a result of reductions in  inventories  and improved cash  collections
against trade receivables.

Cash  provided  from  investing  activities  was $51.7 for the six months  ended
September  26, 2003,  primarily  from matured  short-term  investments  totaling
$139.3,  offset by purchases of short-term  investments of $85.0.  Cash balances
were reduced by purchases of fixed and other assets amounting to $3.2 during the
first six months of the year,  offset by proceeds  from disposal of fixed assets
of $0.6.  The  fixed  asset  additions  were  primarily  related  to  continuing
improvements to existing test equipment and the Company's information technology
resources.  Management expects quarterly capital spending to remain flat through
the rest of Fiscal 2004 in  comparison  to the first six months of Fiscal  2004.
Cash  provided by investing  activities  for the first six months of Fiscal 2003
was $12.1. Net proceeds from the sale of short-term investments in the amount of
$16.4  contributed to the net cash inflow,  offset by net purchases of fixed and
other assets of $4.3. The fixed asset additions were primarily related to design
tools and continuing improvements to information technology resources.

Cash used in financing activities during the first six months of Fiscal 2004 was
$1.3.  The use of cash was  primarily the result of repayment of $0.4 of capital
leases, the repurchase of $0.5 of the Company's redeemable preferred shares, and
the payment of $1.0 for dividends on the preferred  shares.  These cash outflows
were partially offset by a reduction of the  hypothecation of cash under letters
of credit.  Cash used in financing  activities in the first six months of Fiscal
2003 was $2.3. The use of cash was primarily the result of the repayment of $1.4
of capital lease  liabilities,  the repurchase of $0.4 of preferred shares,  and
the payment of $1.0 for dividends on the preferred shares, offset by $0.5 of new
common shares issued from exercised 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 $2.3 later in
Fiscal 2004 after the final adjustments are calculated.

During  the first six  months of Fiscal  2004,  the  Company  declared  and paid
dividends of $1.0 on its redeemable preferred shares based on a cumulative $0.74
(Cdn$1.00)  per share  dividend.  In  addition,  the  Company  purchased  27,800
preferred  shares  under its  purchase  obligation  during  this  period.  As at
September 26, 2003, the Company has repurchased  5,900 preferred shares that had
not yet been cancelled by the transfer agent.

On June 6, 2002, the Company announced its Board of Directors had authorized the
continuation  of its normal  course  issuer  bid  program  to  repurchase  up to
6,358,203 common shares, representing 5% of the 127,164,078 common shares issued
and  outstanding  at May 31, 2002.  The purchases were to take place on the open
market  through the stock  exchanges of New York and Toronto over a twelve-month
period  beginning on June 10, 2002 and ending on June 9, 2003.  No common shares
were repurchased under the program during the period from March 28, 2003 to June
9,  2003.  The  program  expired  on June 9,  2003,  and was not  renewed by the
Company.

In addition to cash, cash equivalents, short-term investment and restricted cash
balances of $97.2 as at September 26, 2003,  the Company had a revolving  global
credit facility of approximately  $18.5 (Cdn$25.0),  of which $5.6 in letters of
credit were  outstanding.  Accordingly,  the  Company  had unused and  available
demand bank lines of credit  totaling  $12.9 as at September 26, 2003.  Cash and
cash equivalents  totaling $5.6 were  hypothecated  under the credit facility to
cover  outstanding  letters  of  credit.  As a result of the  restructuring  and
impairment losses recorded in the second quarter of Fiscal 2004, the Company did
not meet a quarterly  financial  covenant with respect to  shareholder's  equity
under the  Company's  credit  facility.  A waiver was obtained  from the bank in
respect of the financial covenant, and subsequent to the quarter ended September
26,  2003,  the  Company has  cancelled  the  operating  line  component  of the
revolving  global credit  facility.  As a result of this change the Company will
operate with a credit facility of approximately  $9.2 (Cdn$12.5),  available for
letters of credit. The financial  covenant with respect to shareholder's  equity
has also been modified under the new agreement.  The credit  facility is subject
to periodic review,  including the determination of financial  covenants.  It is
uncertain if the Company will be able to meet these  financial  covenants in the
future and,  if not,  to obtain a waiver from the bank,  which may result in the
availability of the credit facility being reduced or restricted. Management does
not anticipate  that this would have a material  adverse effect on the financial
position of the  Company.  Management  believes  the Company is in a position to
meet all


                                       22
<PAGE>

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.

BACKLOG

                                                     As at
                               -------------------------------------------------
(millions of U.S. dollars)     Sept. 26, 2003    June 27, 2003    March 28, 2003
                               --------------    -------------    --------------
90 Day Backlog                     $ 27.5            $ 31.5           $ 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  decreased  from the prior  quarter due to reduced  bookings  across the
Consumer  and  Ultra  Low-Power  segments,  partially  offset  by  a  sequential
improvement in bookings in the Network Communications segment. Bookings continue
to be affected by the  continued  downturn in the  communications  semiconductor
industry, described elsewhere in this Management's Discussion and Analysis.

The  comparative  backlog  amounts have 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.  As a result of writing off the carrying
value of the Company's  remaining  investment in Mitel  Networks  Corporation in
Fiscal 2003,  management believes the policy on investments in private companies
is no longer a critical accounting policy of the Company.  Other than the policy
on  investments  in  private  companies,  there is no  change  in the  Company's
critical  accounting  policies included in Item 7,  Management's  Discussion and
Analysis of Financial  Condition  and Results of  Operations,  of the  Company's
Annual Report on Form 10-K for the year ended March 28, 2003.

Foreign Currency Translation

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.

Effective   March  29,  2003,  the  functional   currency  of  Zarlink  and  its
subsidiaries is the U.S. dollar.  Monetary assets and liabilities denominated in
currencies  other than the U.S. dollar are remeasured at the closing  period-end
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.  Gains  (losses)  relating  to  external  foreign
exchange  contracts are  recognized  in income as they mature,  or to the extent
they are ineffective hedges.

Recently Issued Accounting Standards

On April 30, 2003, the FASB issued  Statement of Financial  Accounting  Standard
No. 149 ("SFAS 149"),  "Amendment of Statement 133 on Derivative Instruments and
Hedging  Activities".  The  amendments  set forth in SFAS 149 improve  financial
reporting  by  requiring  that  contracts  with  comparable  characteristics  be
accounted for similarly.  In particular,  this  statement  clarifies  under what
circumstances a contract with an initial net investment meets the characteristic
of a  derivative  as discussed  in SFAS 133. In  addition,  it clarifies  when a
derivative contains a financing component that warrants special reporting in the
statement of cash flows. SFAS 149 amends certain other existing  pronouncements.
Those  changes will result in more  consistent  reporting of contracts  that are
derivatives in their entirety or that contain embedded  derivatives that warrant
separate  accounting.  This Statement is effective for contracts entered into or
modified  after  June  30,  2003,  except  as  stated  below,  and  for  hedging
relationships  designated  after June 30,  2003.  The  guidance


                                       23
<PAGE>

will be applied  prospectively.  The provisions of this Statement that relate to
Statement 133 Implementation Issues that have been effective for fiscal quarters
that began prior to June 15,  2003,  will  continue to be applied in  accordance
with their respective effective dates. In addition,  certain provisions relating
to forward purchases or sales of when-issued securities or other securities that
do not yet  exist,  should  be  applied  to  existing  contracts  as well as new
contracts  entered  into after June 30,  2003.  The adoption of SFAS 149 did not
have a material impact on the Company's financial statements.

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

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

Foreign Exchange Risk. The Company  currently 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
relate to the Canadian dollar,  the U.K. pound sterling,  and the Swedish Krona.
At  September  26,  2003,  there were  unrealized  gains of $0.3 on the  forward
contracts  relating to Fiscal 2004.  The  unrealized  gain is  calculated as the
difference  between the actual contract rates and the applicable  current market
rates that would be used to terminate  the forward  contracts  on September  26,
2003, if it became necessary to unwind these contracts. 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.

Interest Rate Risk. 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  equivalents  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.

Management  does not foresee any  significant  changes in the strategies used to
manage interest and foreign exchange rate risks in the near future.

As at September 26, 2003,  there were no material  changes in information  about
market risks as disclosed in the  Company's  Annual  Report on Form 10-K for the
fiscal year ended March 28, 2003.

ITEM 4. 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 September 26, 2003. Based
upon that evaluation,  the Company's Chief Executive Officer and Chief Financial
Officer  concluded  that  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 September 26, 2003 that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.


                                       24
<PAGE>

PART II - OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

a) Exhibits

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  Selected  Consolidated   Financial  Statements  in  U.S.  Dollars  and  in
      accordance with Canadian Generally Accepted Accounting Principles

99.2  Management's Discussion and Analysis of Financial Condition and Results of
      Operations - Canadian Supplement

b) Reports on Form 8-K

  Date of Filing           Description
--------------------------------------------------------------------------------
July 16, 2003         Press Release: "Financial Results for the Quarter Ended
                      June 27, 2003"
September 23, 2003    Press Release: "Zarlink Revises Guidance for Second
                      Quarter Fiscal 2004"

SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934, the Registrant,  Zarlink  Semiconductor  Inc., has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.

Zarlink Semiconductor Inc.
(Registrant)

Name                            Title                      Date
--------------------------      ----------------------     ---------------------

/s/ SCOTT MILLIGAN
------------------------
Scott Milligan                  Senior Vice President of   October 24, 2003
                                Finance and Chief
                                Financial Officer
                                (Principal Financial
                                and Accounting
                                Officer)


                                       25
<PAGE>

                                  EXHIBIT INDEX

Exhibit
Number                     Description                               Page
-------  ----------------------------------------------------    -------------

 31.1    Certification Pursuant to 18 U.S.C. Section 1350, As         27
         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         28
         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                 29
         Sarbanes-Oxley Act of 2002, President and Chief
         Executive Officer

 32.2    Certification Pursuant to Section 906 of the                 30
         Sarbanes-Oxley Act of 2002, Senior Vice President
         of Finance and Chief Financial Officer

 99.1    Selected Consolidated Financial Statements in U.S.           31
         Dollars and in accordance with Canadian Generally
         Accepted Accounting Principles

 99.2    Management's Discussion and Analysis of                      42
         Financial Condition and Results of  Operations -
         Canadian Supplement


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