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 June 25, 2004

                           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  July  16,  2004  there  were   127,308,973   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.................................................3

ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS.....................................3

              CONSOLIDATED BALANCE SHEETS......................................3
              CONSOLIDATED STATEMENTS OF INCOME (LOSS).........................4
              CONSOLIDATED STATEMENTS OF CASH FLOWS............................5
              NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS...................6

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
         AND RESULTS OF OPERATIONS............................................13

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...........20

ITEM 4.  CONTROLS AND PROCEDURES..............................................21

PART II - OTHER INFORMATION...................................................22

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.....................................22

SIGNATURES....................................................................22


                                       2
<PAGE>

PART I - FINANCIAL INFORMATION

ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS

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


                                                             June 25,  March 26,
                                                               2004      2004
                                                            --------   --------
ASSETS
Current assets:
  Cash and cash equivalents                                 $   23.3   $   27.0
  Short-term investments                                        54.6       54.8
  Restricted cash                                               10.0       10.0
  Trade accounts receivable, less allowance for
     doubtful accounts of $0.3 (March 26, 2004 - $0.3)          29.2       24.1
  Other receivables                                              3.3        2.3
  Note receivable - net of deferred gain of $10.3
    (March 26, 2004 - $17.1)                                     0.1        0.1
  Inventories                                                   25.1       20.8
  Prepaid expenses and other                                     8.3        5.1
                                                            --------   --------
                                                               153.9      144.2
Fixed assets - net                                              40.0       41.1
Deferred income tax assets - net                                 7.3        7.5
Other assets                                                     4.6        4.6
                                                            --------   --------
                                                            $  205.8   $  197.4
                                                            ========   ========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Trade accounts payable                                    $   20.5   $   15.0
  Employee-related accruals                                     10.2       11.1
  Income and other taxes payable                                 7.0        7.9
  Provisions for exit activities                                 1.5        2.7
  Other accrued liabilities                                      9.4       10.9
  Deferred credits                                               0.6        0.7
  Current portion of long-term debt                              0.1        0.1
                                                            --------   --------
                                                                49.3       48.4
Long-term debt                                                   0.1        0.1
Pension liabilities                                             16.9       16.7
                                                            --------   --------
                                                                66.3       65.2
                                                            --------   --------
Redeemable preferred shares, unlimited shares
authorized; 1,390,300 shares issued and
outstanding (March 26, 2004 - 1,390,300)                        17.6       17.6
                                                            --------   --------
Commitments (Note 8)

Shareholders' equity:
  Common shares, unlimited shares authorized;
    no par value; 127,302,973 shares issued
    and outstanding (March 26, 2004 - 127,301,411)             768.4      768.4
  Additional paid-in capital                                     2.4        2.3
  Deficit                                                     (616.5)    (623.5)
  Accumulated other comprehensive loss                         (32.4)     (32.6)
                                                            --------   --------
                                                               121.9      114.6
                                                            --------   --------
                                                            $  205.8   $  197.4
                                                            ========   ========

        (See accompanying notes to the consolidated financial statements)


                                       3
<PAGE>

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

                                                          Three Months Ended
                                                        June 25,     June 27,
                                                          2004         2003
                                                     ---------       ---------
Revenue                                              $    55.8       $    53.7
Cost of revenue                                           30.6            28.1
                                                     ---------       ---------
Gross margin                                              25.2            25.6
                                                     ---------       ---------
Expenses:
  Research and development                                14.9            19.2
  Selling and administrative                              10.6            11.6
  Gain on sale of business                                (7.0)            --
  Stock compensation expense                               0.1             --
                                                     ---------       ---------
                                                          18.6            30.8
                                                     ---------       ---------
Income (loss) from operations                              6.6            (5.2)
Other expense - net                                       (0.1)           (0.7)
                                                     ---------       ---------
Income (loss) before income taxes                          6.5            (5.9)
Income tax (expense) recovery                              1.0            (0.3)
                                                     ---------       ---------
Net income (loss) for the period                     $     7.5       $    (6.2)
                                                     =========       =========
Net income (loss) attributable to common
shareholders after preferred share dividends         $     7.0       $    (6.7)
                                                     =========       =========
Net income (loss) per common share:
      Basic and diluted                              $     0.05      $    (0.05)
                                                     =========       =========
Weighted average number of common shares
outstanding (millions):
      Basic                                              127.3           127.3
                                                     =========       =========
      Diluted                                            127.5           127.3
                                                     =========       =========

        (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)

                                                            Three Months Ended
                                                           June 25,     June 27,
                                                             2004         2003
                                                           -------      -------
CASH PROVIDED BY (USED IN)
Operating activities:
  Net income (loss) for the period                         $   7.5      $  (6.2)
  Depreciation of fixed assets                                 2.3          3.6
  Amortization of other assets                                 --           0.3
  Other non cash changes in operating activities              (7.0)         1.0
  Stock compensation expense                                   0.1          --
  Deferred income taxes                                        0.2          0.1
  Decrease (increase) in working capital:
      Trade accounts and other receivables                    (6.1)        (7.4)
      Inventories                                             (4.3)         0.8
      Prepaid expenses and other                              (3.2)        (3.0)
      Payables and accrued liabilities                         0.6          1.3
      Deferred credits                                        (0.1)        (0.2)
                                                           -------      -------
    Total                                                    (10.0)        (9.7)
                                                           -------      -------
Investing activities:
  Purchased short-term investments                           (54.6)       (62.3)
  Matured short-term investments                              54.8         89.5
  Expenditures for fixed and other assets                     (0.4)        (1.2)
  Proceeds from disposal of fixed and other assets             --           0.4
  Proceeds from repayment of note receivable                   7.0          --
                                                           -------      -------
     Total                                                     6.8         26.4
                                                           -------      -------
Financing activities:
  Repayment of capital lease liabilities
    and long term debt                                        (0.1)        (0.2)
  Payment of dividends on preferred shares                    (0.5)        (0.5)
  Repurchase of preferred shares                               --          (0.4)
                                                           -------      -------
     Total                                                    (0.6)        (1.1)
                                                           -------      -------
Effect of currency translation on cash                         0.1          0.1
                                                           -------      -------
Increase (decrease) in cash and cash equivalents              (3.7)        15.7

Cash and cash equivalents, beginning of period                27.0         23.5
                                                           -------      -------
Cash and cash equivalents, end of period                   $  23.3      $  39.2
                                                           =======      =======

       (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 June 25, 2004, and
      the  results of  operations  and cash flows of the  Company  for the three
      month  periods  ended June 25, 2004 and June 27,  2003,  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.
      Canadian GAAP financial  statements for interim  periods are also prepared
      and presented to shareholders.

      The  balance  sheet at March 26,  2004 has been  derived  from the audited
      consolidated financial statements at that date but does not include all of
      the information and footnotes  required by generally  accepted  accounting
      principles for complete financial  statements.  These financial statements
      should be read in  conjunction  with the  financial  statements  and notes
      thereto contained in the Company's Annual Report on Form 10-K for the year
      ended March 26, 2004. The Company's  fiscal year-end is the last Friday in
      March.

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


2.    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.

                                                            Three Months Ended
                                                           June 25,    June 27,
                                                             2004        2003
                                                           -------     -------
      Net income (loss), as reported                       $  7.5      $ (6.2)
      Adjustments:
         Stock compensation expense as reported               0.1         --
         Pro forma stock compensation expense                (2.9)       (3.1)
                                                           -------     -------
      Pro forma net income (loss)                          $  4.7      $ (9.3)
                                                           -------     -------
       Net income (loss) per common share, as reported
         Basic and diluted                                 $  0.05     $ (0.05)
                                                            -------     -------
      Pro forma net income (loss) per common share:
         Basic and diluted                                 $  0.03     $ (0.08)
                                                           -------     -------


                                       6
<PAGE>

      Based  upon the fair value  method of  accounting  for stock  compensation
      expense, the pro forma net income for the quarter ended June 25, 2004, was
      decreased  by $2.8 as  compared to the net income,  as  reported.  For the
      quarter ended June 27, 2003, the pro forma net loss was increased by $3.1.

      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 month fiscal periods ended June
      25, 2004 and June 27, 2003:

                                                            Three Months Ended
                                                          June 25,      June 27,
                                                            2004          2003
                                                         --------       --------
       Weighted  average fair value price of the
         options  granted  during the quarter             $  1.97       $  2.31

       Risk free interest rate                              4.06%         3.19%
       Dividend yield                                         Nil           Nil
       Volatility factor of the expected market
          price of the Company's common stock               65.4%         68.2%
       Weighted-average expected life of the options    4.1 Years     3.3 Years

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

3.    Inventories
                                                   June 25,         March 26,
                                                     2004              2004
                                                   --------         ---------
      Raw materials                                 $   2.7          $   2.2
      Work-in-process                                  16.8             13.3
      Finished goods                                    5.6              5.3
                                                    -------          -------
                                                    $  25.1          $  20.8
                                                    =======          =======

4.    Fixed assets
                                                   June 25,         March 26,
                                                     2004              2004
                                                   --------         ---------
      Cost                                        $  194.7         $  193.6
      Accumulated depreciation                      (154.7)          (152.5)
                                                  ---------        ---------
                                                  $   40.0         $   41.1
                                                  =========        =========

5.       Note receivable
                                                   June 25,         March 26,
                                                     2004              2004
                                                   --------         ---------

      Note receivable, non-interest bearing        $  10.4         $  17.2
      Less: Deferred gain                            (10.3)          (17.1)
                                                   -------         -------
                                                       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 (X-FAB),  payment of the note  receivable  was
      scheduled to occur in two installments of $10.0 and $8.0. During the first
      quarter of Fiscal 2005,  X-FAB exercised its option to make early payments
      totaling $7.0 against the $10.0  installment  due in the second quarter of
      Fiscal 2005. As a result of the early payments,  the Company  recognized a
      gain on sale of business of $7.0 during the first quarter of Fiscal 2005.

      Based  upon the  terms  of the sale  agreement,  the note  receivable  was
      discounted by $0.1 as a result of the early  payments made by X-FAB.  This
      discount was applied  against the remaining  $3.0  installment  due in the
      second


                                       7
<PAGE>

      quarter of Fiscal 2005. On July 1, 2004, the Company received a payment of
      $2.9 from X-FAB,  to settle the  installment due at that time. The Company
      will  recognize a gain on sale business of $2.9 during the second  quarter
      of Fiscal 2005 (See also Note 17).

      The  final  installment  payment  of $8.0 is due from  X-FAB in the  first
      quarter of Fiscal 2006.

6.    Provisions for exit activities

      The remaining balance in the  restructuring  provision relates to idle and
      excess space as a result of exit  activities  implemented and completed in
      previous  years,  and will be paid  over the  lease  term  unless  settled
      earlier.

      The following  table  summarizes  the  continuity  of these  restructuring
      provisions for the three months ended June 25, 2004:

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

7.    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 June 25, 2004,  was $36.4 (20.0 British  Pounds),
      assuming  the Company is unable to secure the  completion  of the project.
      The  Company  was not aware of any  factors as at June 25, 2004 that would
      prevent the project's completion under the terms of the agreement.  In the
      event that  Mitel is unable to  fulfill  the  commitments  of the  project
      agreement,  the Company believes that an alternate third-party  contractor
      could be secured to complete the agreement  requirements.  The Company has
      not  recorded  a  liability  in  its  consolidated   financial  statements
      associated with this guarantee.

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

      In connection with the sale of the Systems  business 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 June 25,
      2004,  the taxation  years 2000 to February 16, 2001 were subject to audit
      by taxation authorities in certain foreign jurisdictions.

      On November  19,  2002,  the Company  provided  security to the  financial
      institution  of a subsidiary in the form of a guarantee in relation to the
      subsidiary's  liability for custom and excise duties. As at June 25, 2004,
      the maximum amount of the guarantee was $2.9 ($1.6 British Pounds).

      The Company  records a liability  based on its historical  experience with
      warranty claims. The warranty accrual was immaterial for the quarter ended
      June 25, 2004.


                                       8
<PAGE>

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

8.    Commitments

      The  Company  had  letters of credit  outstanding  as at June 25,  2004 of
      approximately  $9.4 (June 27,  2003 - $6.2),  which  expire  within  seven
      months.  Cash and cash  equivalents  of $9.4 have been pledged as security
      against  certain  outstanding  letters of  credit,  and are  presented  as
      restricted  cash.  Of this  amount,  $8.0 was issued to secure  letters of
      credit  related  to the  Company's  pension  plan in  Sweden,  and $0.7 of
      letters  of  credit  were  outstanding  related  to the  Company's  Senior
      Executive  Retirement Plan (SERP). In addition,  $0.7 was issued to secure
      certain  obligations  under  a  performance  guarantee  and  office  lease
      arrangement.  The Company has also  pledged  $0.6 as security for a custom
      bond and related credit facilities.

9.    Redeemable Preferred Shares

      There were no  preferred  shares  purchased  during the three months ended
      June  25,  2004.  As at June  25,  2004,  there  were  13,200  repurchased
      preferred shares that had not been cancelled by the transfer agent.  These
      preferred shares were repurchased during Fiscal 2004.

      During the first  quarter of Fiscal  2005,  the Company  declared and paid
      dividends on its redeemable  preferred shares of $0.5 based on a quarterly
      dividend of $0.37 (Cdn $0.50) per share.


10.   Capital stock

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

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

                                                        Three Months Ended
                                                  -----------------------------
                                                   June 25,          June 27,
                                                     2004              2003
                                                  ----------        ----------
      Outstanding Options:
      Balance, beginning of period                11,534,680        10,828,557
      Granted                                        298,000           106,500
      Exercised                                       (1,562)           (8,582)
      Forfeited                                     (156,321)         (646,022)
                                                  ----------        ----------
      Balance, end of period                      11,674,797        10,280,453
                                                  ==========        ==========

      As at June 25,  2004,  there were  2,830,225  (March 26, 2004 - 2,971,904)
      options  available  for grant under the stock option plan  approved by the
      Company's  shareholders  on  December  7,  2001.  The  exercise  price  of
      outstanding  stock  options  ranges  from  $2.52 to $27.69  per share with
      exercise  periods  extending  to June 2010.  The  exercise  price of stock
      options  issued in Canadian  dollars  was  translated  at the U.S.  dollar
      exchange rate on June 25, 2004.

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


                                       9
<PAGE>

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

                                                         Three Months Ended
                                                     --------------------------
                                                       June 25,        June 27,
                                                         2004           2003
                                                     -----------     -----------
      Weighted average common shares outstanding     127,302,973     127,273,898
      Dilutive effect of stock options                   149,619            --
                                                     -----------     -----------
      Weighted average common shares outstanding,
       assuming dilution                             127,452,592     127,273,898
                                                     ===========     ===========


      For the three months ended June 27, 2003,  612,952 stock options have been
      excluded from the  computation of diluted loss per share because they were
      anti-dilutive due to the reported net loss for the period.

      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:

                                                     Three Months Ended
                                               ------------------------------
                                                 June 25,            June 27,
                                                   2004               2003
                                                 --------            --------
      Number of outstanding options             8,965,608          7,698,178

      Average exercise price per share         $     8.85         $    10.63

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

11.   Accumulated other comprehensive income (loss)

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

                                                              Three Months Ended
                                                              June 25,  June 27,
                                                                2004     2003
                                                              --------  --------
       Net income (loss) for the period                        $  7.5   $ (6.2)
       Other comprehensive income (loss):
         Realized net derivative loss on cash flow hedges         0.2      0.1
         Unrealized net derivative gains on cash flow hedges      --       0.1
                                                               ------   ------
      Total comprehensive income (loss) for the period         $  7.7   $ (6.0)
                                                               ======   ======

      The changes to accumulated other  comprehensive  loss for the three months
      ended June 25, 2004 were as follows:

                                                      Realized and
                                       Cumulative    Unrealized Net
                                      Translation    Gain (Loss) on
                                        Account        Derivatives       Total
                                      -----------    ---------------     -----
      Balance, March 26, 2004           $ (32.4)         $ (0.2)        $ (32.6)
      Change during the three months
        ended June 25, 2004                 --              0.2             0.2
                                        -------          ------         -------
      Balance, June 25, 2004            $ (32.4)         $  --          $ (32.4)
                                        =======          ======         =======


                                       10
<PAGE>

      The Company  recorded an  increase  in other  comprehensive  income in the
      three  months  ended June 25,  2004 of $0.2,  as compared to a decrease in
      other  comprehensive loss of $0.2 in the three months ended June 27, 2003.
      These  changes  were  attributable  to the  change  in the  fair  value of
      outstanding  foreign currency option and forward  contracts related to the
      Company's hedging program that were designated as cash flow hedges.  There
      were  no   material   derivative   gains  or  losses   included  in  other
      comprehensive income at June 25, 2004.

12.   Other expense - net

                                                          Three Months Ended
                                                         June 25,     June 27,
                                                           2004         2003
                                                           ----         ----
      Interest income                                    $  0.2        $  0.3
      Foreign exchange loss                                (0.3)         (1.0)
                                                         -------       ------
      Other expense - net                                $ (0.1)       $ (0.7)
                                                         ======        ======

13.   Income taxes

      An income  tax  recovery  of $1.0 was  recorded  for the first  quarter of
      Fiscal  2005,  as a result of a recovery  of domestic  and foreign  income
      taxes,  compared with an expense of $0.3 for the  corresponding  period in
      Fiscal 2004.  The  recovery of $1.0  related to the release of  previously
      recognized  provision no longer  required as a result of settlements  with
      tax  authorities.  In  addition,  the Company  recorded a recovery of $0.2
      relating to income tax refunds received in excess of provisions previously
      recorded, offset by income tax expense of $0.2.

      The Company has a valuation  allowance  against its deferred tax assets at
      June 25, 2004 of $174.5  (March 26, 2004 - $176.8).  The decrease  relates
      mainly to the reversal of temporary differences and 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.

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

14.   Information on business segments

      Business Segments

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

      The  Company  targets  the  communications  industry  with  products  that
      specialize in broadband  connectivity  solutions over wired,  wireless and
      optical  media,  as  well  as  through  ultra   low-power   communications
      solutions.  The Network  Communications  business  segment 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 segment
      provides    Application-Specific    Integrated    Circuit    (ASIC)    and
      Application-Specific  Standard  Product (ASSP)  solutions for applications
      such as  pacemakers,  hearing aids,  portable  instruments  and electronic
      shelf labels.


                                       11
<PAGE>

      The Chief Executive Officer (CEO) is the chief operating decision maker in
      assessing the  performance of the segments and the allocation of resources
      to the  segments.  The CEO evaluates  the  financial  performance  of each
      business segment and allocates  resources based on operating  income.  The
      Company does not allocate stock compensation  expense,  special charges or
      gains, interest income, interest expense or income taxes to its reportable
      segments.  In  addition,  the  Company  does not use a measure  of segment
      assets to assess performance or allocate resources. As a result, segmented
      asset information is not presented;  however, depreciation of fixed assets
      is allocated  to the  segments  based on the  estimated  asset usage.  The
      accounting  policies of the  reportable  segments are the same as those of
      the Company as reflected in the consolidated financial statements.

<TABLE>
<CAPTION>

Three Months Ended June 25, 2004                 Network             Consumer        Ultra Low-Power   Unallocated
                                              Communications      Communications     Communications     Recoveries      Total
                                                                                                         (Costs)
                                           ----------------- ------------------- ------------------ ------------- -------------
<S>                                            <C>                <C>                 <C>              <C>           <C>
Total external sales revenue                   $  25.9            $  19.2             $  10.7          $  --         $  55.8
Depreciation of buildings and equipment
                                                   1.0                0.8                 0.5             --             2.3
Gain on sale of business                           --                 --                  --              7.0            7.0
Stock compensation expense                         --                 --                  --             (0.1)          (0.1)

Segment's operating income (loss)              $   2.1            $  (2.0)            $  (0.4)         $  6.9        $   6.6
</TABLE>

<TABLE>
<CAPTION>

                                                 Network             Consumer        Ultra Low-Power     Unallocated
Three Months Ended June 27, 2003              Communications      Communications     Communications         Costs         Total
                                            ------------------- ------------------- ------------------ ------------- -------------
<S>                                            <C>                <C>                 <C>              <C>           <C>
Total external sales revenue                   $  29.3            $  13.4             $   11.0         $  --         $  53.7
Depreciation of buildings and equipment            1.8                1.1                  0.7            --             3.6

Segment's operating income (loss)              $  (1.7)           $  (4.5)            $    1.0            --            (5.2)
</TABLE>


15.   Supplementary cash flow information

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

                                                           Three Months Ended
                                                         ----------------------
                                                         June 25,      June 27,
                                                           2004          2003
                                                           ----          ----
      Cash provided by (used in)
        Gain on disposal of fixed assets                  $ (0.1)    $  --
        Gain on sale of business                            (7.0)       --
        Change in pension liabilities                        0.2        1.1
        Other                                               (0.1)      (0.1)
                                                          ------     ------
      Other non cash changes in operating activities      $ (7.0)    $  1.0
                                                          ======     ======

16.   Comparative figures

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


17.   Subsequent event

      Based upon the terms of the  Plymouth  Foundry  sale  agreement,  the note
      receivable  was  discounted by $0.1 as a result of the early payments made
      by X-FAB. This discount was applied against the remaining $3.0 installment
      due in the second  quarter of Fiscal  2005.  On July 1, 2004,  the Company
      received a payment of $2.9 from X-FAB,  to settle the  installment  due at
      that time.  The Company  will  recognize  a gain on sale  business of $2.9
      during the second quarter of Fiscal 2005 (See also Note 5).


                                       12
<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, and consumer and ultra low-power communications.

The following  discussion and analysis  explains  trends in Zarlink's  financial
condition  and results of  operations  for the three months ended June 25, 2004,
compared  with the  corresponding  period  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 26, 2004.

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;  product mix; 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 26, 2004.

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 26, 2004,  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.


                                       13
<PAGE>

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 25, 2004

<TABLE>
<CAPTION>

Summary of Results from Operations                                        Three Months Ended
                                                                    -----------------------------
(millions of U.S. dollars, except per share amounts)                June 25, 2004   June 27, 2003
----------------------------------------------------                -------------   -------------
<S>                                                                 <C>              <C>
Consolidated revenue                                                $    55.8        $    53.7
   Network Communications segment revenue                                25.9             29.3
   Consumer Communications segment revenue                               19.2             13.4
   Ultra Low-Power Communications segment revenue                        10.7             11.0

Operating income (loss)                                                   6.6             (5.2)
   Network Communications segment operating income (loss)                 2.1             (1.7)
   Consumer Communications segment operating loss                        (2.0)            (4.5)
   Ultra Low-Power Communications segment operating income (loss)        (0.4)             1.0
   Unallocated recoveries - net                                           6.9              --

Net income (loss) for the period                                          7.5             (6.2)
Net income (loss) per common share
     Basic and diluted                                                    0.05            (0.05)
Weighted average common shares outstanding - millions
     Basic                                                              127.3            127.3
     Diluted                                                            127.5            127.3
</TABLE>

Revenue in the first  quarter of Fiscal  2005 was $55.8,  up 4% from  revenue of
$53.7 in the first quarter of Fiscal 2004. Despite continuing  challenges in the
semiconductor  industry,  significant revenue  improvements were achieved in the
Company's Consumer Communications business segment.

In addition,  the Company  experienced  higher sequential  bookings in the first
quarter of Fiscal 2005, as well as higher bookings than those experienced during
the same period in Fiscal 2004.

In the first quarter of Fiscal 2005, the Company recorded net income of $7.5, or
$0.05 per share. This compares to a net loss of $6.7, or $0.05 per share, in the
first quarter of Fiscal 2004. The net income in the first quarter of Fiscal 2005
included  a gain on sale of  foundry  business  of  $7.0,  and  lower  operating
expenses  as a result of the cost  reduction  activities  implemented  in Fiscal
2004.

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.

Network Communications

                                            Three Months Ended
                                         ------------------------
       Network Communications             June 25,       June 27,
       (millions of U.S. dollars)           2004           2003
                                         --------       --------
       Revenue:                           $ 25.9         $ 29.3
                                          ======         ======
       As a % of total revenue                47%            55%
       Operating income (loss)            $  2.1         $ (1.7)
                                          ======         ======

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


                                       14
<PAGE>

systems, and subscriber access systems. In simple terms, Network  Communications
semiconductor products connect network equipment together.

Revenue for the first  quarter of Fiscal 2005 totaled  $25.9,  down 12% from the
first quarter of Fiscal 2004 as a result of  production  issues at the Company's
foundry  suppliers  which  delayed  shipment of certain  orders in the  quarter.
Reduced capital  spending in the market continues to impact demand by networking
companies.  Revenue  declines  were a result of decreased  sales  volumes of the
Company's packet processing, voice processing, and specialty products during the
quarter.  The overall decline in revenue was  predominantly due to lower revenue
from the Asia/Pacific region.

Despite lower  revenues,  the segment had operating  income of $2.1 in the first
quarter of Fiscal 2005,  as compared to an  operating  loss of $1.7 in the first
quarter of Fiscal 2004.  During Fiscal 2005, the segment  benefited from savings
realized from headcount and cost reductions implemented during Fiscal 2004.

Consumer Communications

                                                  Three Months Ended
                                                ----------------------
              Consumer Communications           June 25,      June 27,
              (millions of U.S. dollars)          2004          2003
                                                  ----          ----
              Revenue:
                                                $ 19.2        $ 13.4
                                                ======        ======
              As a % of total revenue               34%           25%
              Operating loss                    $ (2.0)       $ (4.5)
                                                ======        ======

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 first  quarter of Fiscal  2005  totaled  $19.2,  up 43% from the
first  quarter of Fiscal  2004.  Revenue  improvements  were driven by increased
shipments of the Company's  tuners and  demodulators,  despite price pressure on
these products.  These  improvements  were partially offset by a decrease in the
sales volumes of the Company's specialty products.

The segment's  operating  loss during the first quarter of Fiscal 2005 decreased
to $2.0,  down $2.5 from the same period of Fiscal 2004.  This was due primarily
to  revenue  improvements  as well  as  savings  realized  from  cost  reduction
activities implemented during Fiscal 2004.

Ultra Low-Power Communications

                                                 Three Months Ended
                                               ----------------------
        Ultra Low-Power Communications         June 25,       June 27,
        (millions of U.S. dollars)               2004           2003
                                                 ----           ----

        Revenue:
                                                $ 10.7        $ 11.0
                                                ======        ======
        As a % of total revenue                     19%           20%
        Operating income (loss)                 $ (0.4)       $  1.0
                                                ======        ======

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

Revenue for the first  quarter of Fiscal 2005  totaled  $10.7,  down 3% from the
first quarter of Fiscal 2004,  due mainly to decreased  sales volumes of hearing
aid components and pacemaker  circuits,  partially  offset by an increase in the
sales volume of wireless products.


                                       15
<PAGE>

The segment had an operating  loss of $0.4 in the first  quarter of Fiscal 2005,
as compared to operating  income of $1.0 in the same period of Fiscal 2004,  due
principally  to a product mix  resulting  in lower  margins,  as well as revenue
decreases.

GEOGRAPHIC REVENUE

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

                                                 Three Months Ended
                                     -----------------------------------------
(millions of U.S. dollars)          June 25,     % of      June 27,      % of
                                      2004       Total       2003        Total
                                      ----       -----       ----        -----
Asia/Pacific                        $ 24.0         43%     $ 22.5         42%
Europe                                16.0         29        16.8         31
United States                         11.6         20        12.3         23
Canada                                 2.1          4         1.6          3
Other Regions                          2.1          4         0.5          1
                                    ------        ----     ------        ----
Total                               $ 55.8        100%     $ 53.7        100%
                                    ======        ====     ======        ====

Asia/Pacific

Asia/Pacific  revenue  increased  by 7% during the first  quarter of Fiscal 2005
compared to the first  quarter of Fiscal 2004,  and  continues to represent  the
largest  geographic  segment of  customer  revenues.  The  increase in the first
quarter of Fiscal  2005 was  driven  primarily  by  increased  shipments  of the
Company's  tuners and  demodulators,  partially  offset by a revenue decrease in
voice  processing  and  specialty  products  within the  Network  Communications
segment.

Europe

European  revenues  decreased by 5% in the first quarter of Fiscal 2005 compared
to the first  quarter of Fiscal 2004 due to revenue  declines  of the  Company's
packet  processing  and  specialty  products  within the Network  Communications
segment.  These declines were  partially  offset by increased  wireless  product
revenues in the Ultra Low-Power Communications segment.

United States

Revenue to  customers  in the  United  States  decreased  by 6% during the first
quarter  of Fiscal  2005  compared  to the first  quarter  of Fiscal  2004,  due
primarily to lower shipments of the Company's hearing aid products.

Canada

Canadian  revenue  in the first  quarter  of  Fiscal  2005  increased  by 31% as
compared  to the same  period in Fiscal  2004 due to  higher  specialty  product
revenue within the Network Communications segment.

Other

Revenue to customers in other regions increased by $1.6 during the first quarter
of Fiscal  2005  compared  to the first  quarter  of Fiscal  2004 as a result of
higher wireless product revenues within the Consumer Communications segment.

GROSS MARGIN

                                                    Three Months Ended
                                                  ----------------------
  (millions of U.S. dollars)                      June 25,      June 27,
                                                   2004          2003
                                                   ----          ----
  Gross margin                                   $ 25.2        $ 25.6

  As a percentage of revenue                         45%          48%

Gross margin in the first  quarter of Fiscal 2005 was 45%, a decrease of 3% from
the same period in Fiscal 2004. The margin  decreases were driven primarily from
unfavorable  product  mixes  across  all of  the  Company's  business  segments,


                                       16
<PAGE>

particularly  in  the  Company's  Timing,  TDM  switching,  Optoelectronic,  and
Wireless  product  lines.  The Company was unable to ship certain  higher-margin
Network Communications products due to production issues at one of the Company's
foundry  suppliers.  In  addition,  the  Company  experienced  increasing  price
pressure on the sale of tuners and  demodulators.  These  negative  impacts were
partially offset by a more favorable product mix within the Company's  specialty
product lines.

OPERATING EXPENSES

Research and Development ("R&D")

                                                    Three Months Ended
                                                  ----------------------
  (millions of U.S. dollars)                      June 25,      June 27,
                                                   2004          2003
                                                   ----          ----
  R&D expenses                                   $ 14.9        $ 19.2

  As a percentage of revenue                         27%          36%

R&D expenses decreased by 22%, or $4.3, in the first quarter of Fiscal 2005 from
the same period in Fiscal  2004.  The  decreases  resulted  mainly from  savings
generated as a result of cost  reduction  activities  and  headcount  reductions
implemented  during Fiscal 2004. During Fiscal 2004, the Company reduced its R&D
headcount by 147 employees.  The Company  continues to refocus its R&D resources
on programs  and  products  that  demonstrate  superior  potential  for near and
medium-term  revenue.  In  the  Network  Communications  business  segment,  R&D
activities focused on the following areas:

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

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

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

      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; and

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

In the Consumer  Communications  business segment, R&D activities focused on the
following areas:

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

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

In the Ultra Low-Power  Communications  business segment, R&D activities focused
on semiconductor  solutions and technologies for a variety of applications where
low-power consumption is an important differentiating feature, including:

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

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

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


                                       17
<PAGE>

      o     High  performance,  ultra  low-power  audio  data  converter  ASSPs,
            intended   for  use  in  digital   microphones,   for  high   growth
            communications and entertainment applications; and

      o     Ultra low-power integrated circuits supporting  short-range wireless
            communications for industrial  applications such as electronic shelf
            labels, and healthcare  applications such as implantable devices and
            swallowable camera capsules.

Selling and Administrative ("S&A")

                                                    Three Months Ended
                                                  ----------------------
  (millions of U.S. dollars)                      June 25,      June 27,
                                                   2004          2003
                                                   ----          ----
  S&A Expenses                                   $ 10.6        $ 11.6

  As a percentage of revenue                         19%           22%

S&A expenses  decreased by 9%, or $1.0, in the first quarter of Fiscal 2005 from
the same period in Fiscal 2004. The Company reduced its headcount  within sales,
marketing,  and other  administrative  functions in France,  Canada, and various
other geographic regions in Fiscal 2004. These headcount reductions,  as well as
other cost  reduction  activities  implemented  during Fiscal 2004 resulted in a
reduction of S&A expense in the first quarter of Fiscal 2005.

Stock Compensation

The Company  records  stock  compensation  expense  arising from  certain  stock
options  subjected to option exchange programs and from stock options awarded to
former  employees.  During the three  months  ended June 25,  2004,  the Company
recorded  stock  compensation  expense  of  $0.1  (2003  -  nil),   representing
amortization of the fair value of stock options awarded to a former employee.

Gain on Sale of Business

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

Based upon the terms of the Plymouth Foundry sale agreement with X-FAB,  payment
of the note  receivable was scheduled to occur in two  installments of $10.0 and
$8.0.  During the first  quarter of Fiscal 2005,  X-FAB  exercised its option to
make early  payments  totaling  $7.0  against the $10.0  installment  due in the
second  quarter of Fiscal 2005. As a result of the early  payments,  the Company
recognized a gain on sale of business of $7.0 during the first quarter of Fiscal
2005.

Based upon the terms of the sale  agreement,  the note receivable was discounted
by $0.1 as a result  of the early  payments  made by X-FAB.  This  discount  was
applied  against the remaining  $3.0  installment  due in the second  quarter of
Fiscal 2005. On July 1, 2004, the Company received a payment of $2.9 from X-FAB,
to settle the installment due at that time. The Company will recognize a gain on
sale  business of $2.9  during the second  quarter of Fiscal 2005 (See also Note
17).

The final installment  payment of $8.0 is due from X-FAB in the first quarter of
Fiscal 2006.


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<PAGE>

OTHER EXPENSE - NET

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

Interest income was $0.2 for the three months ended June 25, 2004 as compared to
$0.3 in the same period of Fiscal  2004.  The decrease was mainly due to reduced
average cash balances in Fiscal 2005.

Foreign  exchange losses in the first quarter of Fiscal 2005 amounted to $0.3 as
compared to $1.0 for the same period in Fiscal 2004. Net foreign exchange 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.

INCOME TAXES

An income tax  recovery  of $1.0 was  recorded  for the first  quarter of Fiscal
2005, as a result of a recovery of domestic and foreign  income taxes,  compared
with an  expense  of $0.3 for the  corresponding  period  in  Fiscal  2004.  The
recovery of $1.0 related to the release of  previously  recognized  provision no
longer required as a result of settlements  with tax  authorities.  In addition,
the Company  recorded a recovery of $0.2 relating to income tax refunds received
in excess of  provisions  previously  recorded,  offset by income tax expense of
$0.2.

The Company has a valuation  allowance  against its  deferred tax assets at June
25, 2004 of $174.5 (March 26, 2004 - $176.8). The decrease relates mainly to the
reversal of temporary  differences and 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.

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

NET INCOME (LOSS)

The Company recorded net income,  after preferred share  dividends,  of $7.0, or
$0.05 per share,  in the first  quarter of Fiscal 2005.  This  compares to a net
loss, after preferred share dividends,  of $6.7, or $0.05 per share, in the same
period in Fiscal 2004.

The net income for the three month period ended June 25, 2004,  was  primarily a
result of the gain on sale of  business of $7.0,  as well as improved  operating
results  due to  operating  expense  savings  realized  from the cost  reduction
activities implemented during Fiscal 2004.

LIQUIDITY AND CAPITAL RESOURCES

At June 25, 2004,  the Company  held cash and cash  equivalents  totaling  $23.3
(March 26, 2004 - $27.0). In addition,  the Company held short-term  investments
of $54.6 at June 25,  2004 (March 26, 2004 - $54.8).  The  Company's  restricted
cash balance of $10.0 was unchanged from March 26, 2004, to June 25, 2004.

Cash used in operating  activities  for the three months ended June 25, 2004 was
$10.0, as compared to $9.7 used in the same period of Fiscal 2004. Cash provided
by operating  activities before working capital changes amounted to $3.1 for the
three months  ended June 25,  2004,  as compared to $1.2 used in the first three
months of Fiscal 2004.  Cash  provided by  operations  resulted  primarily  from
improved  operating  results  during the  quarter.  Since  March 26,  2004,  the
Company's working capital increased by $10.0, mainly as a result of increases in
accounts  receivable  of $6.1,  inventory of $4.3,  and other  prepaid  expenses
totaling $3.2. 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
second  quarter  of Fiscal  2005.  Inventory  levels  increased  to  accommodate
expected  sales  demand in the second  quarter of Fiscal  2005.  The increase in
other prepaid expenses was due to scheduled payments for software license design
tools and other annual payments.  In comparison,  the Company's  working capital
increased by $8.5 during the first three  months of Fiscal 2004,  as a result of
increases in accounts  receivable and prepaid expenses resulting from the timing
of cash collections and payments during the quarter.

Cash provided from investing activities was $6.8 for the three months ended June
25, 2004,  primarily  from proceeds of $7.0  received as payment  against a note
receivable from X-FAB. Cash provided from investing activities was $26.4 for the
three months ended June 27, 2003, primarily from matured short-term  investments
totaling  $89.5,  partially  offset by purchases of  short-term  investments  of
$62.3. Cash used in financing activities during the first three months of Fiscal



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<PAGE>

2005 was $0.6.  The use of cash was  primarily the result of the payment of $0.5
for dividends on the preferred shares. Cash used in financing  activities during
the first three  months of Fiscal 2004 was $1.1,  resulting  primarily  from the
repurchase of $0.4 of the Company's redeemable preferred shares, and the payment
of $0.5 for dividends on the preferred shares.

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 $2.7 later in
Fiscal 2005 after the final adjustments are determined. This amount was included
in other accrued liabilities as at June 25, 2004.

During the first three  months of Fiscal  2005,  the Company  declared  and paid
dividends of $0.5 on its redeemable preferred shares based on a $0.37 (Cdn$0.50)
per share dividend.  There were no preferred  shares  purchased during the three
months ended June 25, 2004. As at June 25, 2004,  there were 13,200  repurchased
preferred  shares  that had not been  cancelled  by the  transfer  agent.  These
preferred shares were repurchased during Fiscal 2004.

In addition to the Company's cash, cash equivalents,  short-term  investment and
restricted  cash  balances,  the Company had a credit  facility  which was fully
utilized  as at June 25,  2004.  Cash and cash  equivalents  totaling  $9.4 were
hypothecated  under the credit facility to cover outstanding  letters of credit.
Of this  amount,  $8.0 was  issued to secure  letters  of credit  related to the
Company's pension plan in Sweden, and $0.7 of letters of credit were outstanding
related to the Company's  SERP. In addition,  $0.7 was issued to secure  certain
obligations  under a  performance  guarantee and office lease  arrangement.  The
Company has also pledged $0.6 as a security for a custom bond and related credit
facilities.  The credit facilities are subject to periodic review, including the
determination of compliance with certain financial covenants. It is uncertain if
the Company will be able to meet these financial covenants in the future and, if
not, to obtain a waiver from the bank,  which may result in the  availability of
the credit facility being reduced or restricted.  Management does not anticipate
that this would have a material adverse effect on the financial  position of the
Company.  Management  believes  the  Company  is  in  a  position  to  meet  all
foreseeable  business cash  requirements  and capital lease and preferred  share
payments from its cash balances on hand, existing financing  facilities and cash
flow from operations.

The Company's liquidity is impacted by contractual obligations.  There have been
no significant changes to the Company's contractual obligations 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
26, 2004.

BACKLOG

The  Company's  90-day  backlog as at June 25, 2004 was $44.1  (March 26, 2004 -
$38.7).  Generally,  manufacturing  lead times for  semiconductor  products  are
longer because of the nature of the production  process.  However, as orders are
sometimes  booked and shipped within the same fiscal quarter (often  referred to
as "turns"),  order backlog is not necessarily indicative of a sales outlook for
the quarter or year.  Backlog  increased from the prior quarter due to increased
bookings across the Consumer and Network Communications segments.

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.  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 26, 2004.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk

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


                                       20
<PAGE>

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 Swedish Krona, and the U.K. pound sterling.  At June 25, 2004, there
were no material unrealized gains or losses on the forward contracts and foreign
currency  options  relating to Fiscal 2005. 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 and foreign
currency  options  on June 25,  2004,  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.

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 foreign exchange and interest rate risks in the near future.

As at June 25, 2004, 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 26, 2004.

ITEM 4.  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 June 25, 2004. Based upon
that  evaluation,  the Company's  Chief  Executive  Officer and Chief  Financial
Officer  concluded that the Company's  disclosure  controls and procedures  were
effective to ensure that information  required to be disclosed by the Company in
reports that it files or submits  under the  Securities  Exchange Act of 1934 is
recorded, processed,  summarized and reported, within the time periods specified
in the rules and forms of the Securities and Exchange Commission.

There has not been any change in the Company's  internal controls over financial
reporting in connection with the evaluation required by Rule 13a-15(d) under the
Exchange  Act that  occurred  during the  quarter  ended June 25,  2004 that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.


                                       21
<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
--------------          --------------------------------------------------------
May 6, 2004             Item  12 - Press  Release:  "Financial  Results  for the
                        Fourth Quarter and Year Ended March 26, 2004"

June 10, 2004           Items  5  and  7 -  Press  Release:  "Receipt  of  X-Fab
                        Payment"

June 21, 2004           Items 7 and 9 - Press Release: "Notice of Annual General
                        Meeting and Proxy Circular dated June 8, 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 Finance       July 23, 2004
                            and Chief Financial Officer
                            (Principal Financial and Accounting
                            Officer)


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