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 December 24, 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  January  28,  2005  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 ...................   16

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ........   25

ITEM 4. CONTROLS AND PROCEDURES ...........................................   26

PART II - OTHER INFORMATION ...............................................   27

ITEM 5. OTHER INFORMATION .................................................   27

ITEM 6. EXHIBITS ..........................................................   27

SIGNATURES ................................................................   28


                                       2
<PAGE>

PART I - FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

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

                                                           Dec. 24,    March 26,
                                                            2004         2004
                                                          ---------   ----------

ASSETS
Current assets:
  Cash and cash equivalents                               $   29.7    $   27.0
  Short-term investments                                      39.6        54.8
  Restricted cash                                             13.9        10.0
  Trade accounts receivable, less allowance for
    doubtful accounts of $0.3
    (March 26, 2004 - $0.3)                                   25.4        24.1
  Other receivables                                            5.1         2.9
  Note receivable - net of deferred gain of $7.7
    (March 26, 2004 - $17.1)                                   0.1         0.1
  Inventories                                                 28.1        20.8
  Prepaid expenses and other                                   6.8         4.5
                                                          --------    --------
                                                             148.7       144.2
Fixed assets - net of accumulated depreciation of
   $158.4 (March 26, 2004 - $152.5)                           37.4        41.1
Deferred income tax assets - net                               8.0         7.5
Other assets                                                   5.1         4.6
                                                          --------    --------
                                                          $  199.2    $  197.4
                                                          ========    ========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Trade accounts payable                                  $   18.3    $   15.0
  Employee-related accruals                                    9.9        11.1
  Income and other taxes payable                               7.7         7.9
  Provisions for exit activities                               1.1         2.7
  Other accrued liabilities                                    8.1        10.9
  Deferred credits                                             0.3         0.7
  Current portion of long-term debt                             --         0.1
                                                          --------    --------
                                                              45.4        48.4
Long-term debt                                                 0.1         0.1
Pension liabilities                                           19.2        16.7
                                                          --------    --------
                                                              64.7        65.2
                                                          --------    --------
Redeemable preferred shares, unlimited shares
    authorized; 1,377,100 shares issued and
    outstanding (March 26, 2004 - 1,390,300)                  17.6        17.6
                                                          --------    --------

Commitments (Note 9)

Shareholders' equity:
  Common shares, unlimited shares authorized;
    no par value; 127,308,973 shares
    issued and outstanding (March 26, 2004
    - 127,301,411                                            768.4       768.4
  Additional paid-in capital                                   2.4         2.3
  Deficit                                                   (622.0)     (623.5)
  Accumulated other comprehensive loss                       (31.9)      (32.6)
                                                          --------    --------
                                                             116.9       114.6
                                                          --------    --------
                                                          $  199.2    $  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)

<TABLE>
<CAPTION>
                                                                             Three Months Ended          Nine Months Ended
                                                                           -----------------------    -------------------------
                                                                            Dec. 24,       Dec 26,     Dec. 24,        Dec. 26,
                                                                              2004          2003         2004           2003
                                                                           ---------    ----------    ----------    -----------

<S>                                                                        <C>           <C>           <C>           <C>
Revenue                                                                    $    51.2     $    47.0     $   165.8     $   147.3
Cost of revenue                                                                 28.8          26.0          91.4          81.3
                                                                           ---------    ----------    ----------    ----------
Gross margin                                                                    22.4          21.0          74.4          66.0
                                                                           ---------    ----------    ----------    ----------

Expenses:
  Research and development                                                      15.7          19.5          46.2          57.9
  Selling and administrative                                                    12.7          11.9          34.4          37.7
  Asset impairment and other                                                      --           1.7            --           7.0
  Gain on sale of business                                                        --            --          (9.9)           --
                                                                           ---------    ----------    ----------    ----------
                                                                                28.4          33.1          70.7         102.6
                                                                           ---------    ----------    ----------    ----------
Income (loss) from operations                                                   (6.0)        (12.1)          3.7         (36.6)
Interest income                                                                  0.3           0.3           0.7           0.9
Foreign exchange loss                                                           (1.8)         (1.2)         (2.2)         (2.1)
Gain on sale of long-term investments                                             --           0.6            --           0.6
Interest expense                                                                  --          (0.2)           --          (0.5)
                                                                           ---------    ----------    ----------    ----------
Income (loss) before income taxes                                               (7.5)        (12.6)          2.2         (37.7)
Income tax (expense) recovery                                                   (0.1)          1.4           0.9           1.4
                                                                           ---------    ----------    ----------    ----------
Net income (loss) for the period                                           $    (7.6)    $   (11.2)    $     3.1     $   (36.3)
                                                                           =========    ==========    ==========    ==========

Net income (loss) attributable to common shareholders after
    preferred share dividends                                              $    (8.2)    $   (11.8)    $     1.5     $   (37.9)
                                                                           =========    ==========    ==========    ==========

Net income (loss) per common share:
    Basic and diluted                                                      $   (0.06)   $    (0.09)   $     0.01    $    (0.30)
                                                                           =========    ==========    ==========    ==========

Weighted-average number of common shares outstanding (millions):
    Basic and diluted                                                          127.3         127.3         127.3         127.3
                                                                           =========    ==========    ==========    ==========
</TABLE>

        (See accompanying notes to the consolidated financial statements)


                                       4
<PAGE>

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

                                                              Nine Months Ended
                                                             -------------------
                                                             Dec. 24,   Dec. 26,
                                                               2004       2003
                                                             --------   --------
CASH PROVIDED BY (USED IN)
Operating activities:
  Net income (loss) for the period                            $  3.1     $(36.3)
  Depreciation of fixed assets                                   6.6        9.7
  Amortization of other assets                                    --        1.2
  Other non cash changes in operating activities                (8.5)       8.8
  Stock compensation expense                                     0.1        0.1
  Deferred income taxes                                         (0.5)      (1.2)
  Decrease (increase) in working capital:
    Trade accounts and other receivables                        (3.6)      (8.4)
    Inventories                                                 (7.3)       0.5
    Prepaid expenses and other                                  (2.1)      (2.5)
    Payables and other accrued liabilities                      (2.0)       2.7
    Deferred credits                                            (0.3)       0.1
                                                              ------     ------
Total                                                          (14.5)     (25.3)
                                                              ------     ------

Investing activities:
    Purchased short-term investments                           (94.2)    (134.8)
    Matured short-term investments                             109.4      164.6
    Expenditures for fixed and other assets                     (3.2)      (4.7)
    Proceeds from disposal of fixed and other assets             0.6        0.8
    Proceeds from sale of long-term investments                   --        0.6
    Proceeds from repayment of note receivable                   9.9         --
                                                              ------     ------
Total                                                           22.5       26.5
                                                              ------     ------

Financing activities:
    Repayment of capital lease liabilities
      and long-term debt                                        (0.1)      (0.5)
    Payment of dividends on preferred shares                    (1.6)      (1.6)
    Repurchase of preferred shares                                --       (1.2)
    Increase in restricted cash                                 (3.9)      (3.3)
                                                              ------     ------
Total                                                           (5.6)      (6.6)
                                                              ------     ------

Effect of currency translation on cash                           0.3        0.5
                                                              ------     ------

Increase (decrease) in cash and cash equivalents                 2.7       (4.9)

Cash and cash equivalents, beginning of period                  27.0       23.5
                                                              ------     ------

Cash and cash equivalents, end of period                      $ 29.7     $ 18.6
                                                              ======     ======

        (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 share and 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 December 24, 2004,
      the  results of  operations  of the  Company  for the three and nine month
      periods ended  December 24, 2004 and December 26, 2003,  and cash flows of
      the  Company  for the nine  month  periods  ended  December  24,  2004 and
      December 26, 2003, 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.    Recently issued accounting pronouncements

      In December 2004 the Financial Accounting Standards Board (FASB) published
      a revision to Statement of Financial  Accounting  Standards (SFAS) No. 123
      (SFAS 123R),  Share-Based Payments. The revision requires all companies to
      measure compensation cost for all share-based payments, including employee
      stock options,  at fair value. Under the new standard,  companies will not
      be able to account for share-based  payments using the intrinsic method in
      accordance  with  Accounting   Principles  Board  Opinion  (APB)  No.  25,
      Accounting  for Stock Issued to Employees.  The revisions to SFAS 123R are
      effective  for public  companies  in the first  interim  or annual  period
      beginning  after June 15, 2005. The Company has not yet  determined  which
      fair-value method or transitional  provision it will follow. The impact on
      the  Company's  financial  statements  of applying  one of the  acceptable
      fair-value  based methods of accounting for  stock-based  compensation  is
      disclosed in Note 4.

      In November 2004 the FASB issued SFAS No. 151,  Inventory Costs.  SFAS 151
      clarifies  that  abnormal  amounts  of  idle  facility  expense,  freight,
      handling costs,  and wasted materials  (spoilage)  should be recognized as
      current-period  charges  and require the  allocation  of fixed  production
      overheads  to  inventory  based on the normal  capacity of the  production
      facilities.  The guidance is effective for inventory costs incurred during
      fiscal  years  beginning  after  June 15,  2005.  Earlier  application  is
      permitted for inventory costs incurred during fiscal years beginning after
      November 23, 2004. The Company is currently  evaluating the impact of SFAS
      151 on its financial statements.

3.    Significant accounting policies

      a)    Revenue recognition

      The Company  recognizes  revenue from the sale of semiconductor  products,
      which  are  primarily   non-commodity,   specialized   products  that  are
      proprietary in design and used by multiple customers.  Customer acceptance
      provisions   for   performance   requirements   are  generally   based  on
      seller-specified criteria, and are demonstrated prior to shipment.


                                       6
<PAGE>

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

      In accordance with  Securities and Exchange  Commission  Staff  Accounting
      Bulletin (SAB) No. 101, Revenue Recognition in Financial  Statements,  and
      SAB No. 104, Revenue  Recognition,  the Company recognizes product revenue
      through  direct  sales  and  sales  to  distributors  when  the  following
      fundamental  criteria are met: (i)  persuasive  evidence of an arrangement
      exists,  (ii)  transfer  of title  has  occurred,  (iii)  the price to the
      customer is fixed or  determinable,  and (iv)  collection of the resulting
      receivable is reasonably assured.

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

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

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

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

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

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

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

      b)    Income taxes

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

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

      c)    Inventories

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


                                       7
<PAGE>

4.    Stock-based compensation

      Pro forma  information  regarding  net income (loss) and net income (loss)
      per  share  is  required   by  SFAS  123,   Accounting   for   Stock-Based
      Compensation,  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 pricing model was developed for
      use in  estimating  the fair value of traded  options that have no vesting
      restrictions  and are fully  transferable.  In addition,  option valuation
      models require the input of highly  subjective  assumptions  including the
      expected  stock price  volatility.  Because the Company's  employee  stock
      options have characteristics  significantly different from those of traded
      options,  and because  changes in the  subjective  input  assumptions  can
      materially affect the fair value estimate,  in management's  opinion,  the
      existing  models do not  necessarily  provide a reliable single measure of
      the fair value of its employee stock options.

                                           Three Months Ended  Nine Months Ended
                                           ------------------  -----------------
                                           Dec. 24,  Dec. 26,  Dec. 24, Dec. 26,
                                             2004     2003       2004    2003
                                           --------  --------  -------- --------

      Net income (loss), as reported       $ (7.6)   $(11.2)   $  3.1   $(36.3)
      Adjustments:
         Stock compensation expense,
           as reported                         --       0.1       0.1      0.1
         Pro forma stock
           compensation expense              (3.3)     (3.4)     (9.2)    (9.6)
                                           ------------------------------------
      Pro forma net loss                   $(10.9)   $(14.5)   $ (6.0)  $(45.8)
                                           ------------------------------------

      Net income (loss) per common
        share, as reported
        Basic and diluted                  $(0.06)   $(0.09)   $ 0.01   $(0.30)
                                           ------------------------------------
      Pro forma net income (loss) per
        common share
        Basic and diluted                  $(0.09)   $(0.12)   $(0.06)  $(0.37)
                                           ------------------------------------

      Based  upon the fair value  method of  accounting  for stock  compensation
      expense,  for the three and nine month fiscal  periods ended  December 24,
      2004,  the pro forma net loss was  increased by $3.3 and the pro forma net
      income was  decreased by $9.1,  respectively,  as compared to the reported
      net loss and net income. For the three and nine month fiscal periods ended
      December 26, 2003,  the pro forma net loss was increased by $3.3 and $9.5,
      respectively.

      Pro forma financial  information  required by SFAS 123 has been determined
      as if the Company had accounted  for its employee  stock options using the
      Black-Scholes  option  pricing model with the  following  weighted-average
      assumptions  for the three and nine month periods ended  December 24, 2004
      and December 26, 2003:

                                        Three Months Ended   Nine Months Ended
                                        -------------------  -------------------
                                         Dec. 24,  Dec. 26,  Dec. 24,   Dec. 26,
                                           2004      2003      2004      2003
                                        ---------  --------  --------   --------

Weighted-average fair  value price
  of  the  options granted during
  the period                               $ 1.46    $ 1.50    $ 1.89    $ 1.74

Risk free interest rate                     3.52%     3.26%     3.80%     3.15%
Dividend yield                                Nil       Nil       Nil       Nil
Volatility factor of the expected
  market price of the
  Company's common stock                    60.2%     70.1%     63.4%     69.2%
Weighted-average expected
  life of the options                   4.7 years 3.3 years 4.3 years 3.3 years

      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.

      In  December  2004,  the FASB  revised  Statement  No.  123  (SFAS  123R),
      "Share-Based  Payment," which requires  companies to expense the estimated
      fair value of employee stock options and similar awards. See also Note 2.


                                       8
<PAGE>

5.    Inventories

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

6.    Note receivable

                                                       Dec. 24,        March 26,
                                                        2004             2004
                                                      --------------------------
      Note receivable, non-interest bearing           $   7.8          $  17.2
      Less: Deferred gain                                (7.7)           (17.1)
                                                      --------------------------
                                                      $   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. In the first six
      months of Fiscal 2005,  X-FAB  exercised its option to make early payments
      on the $10.0  installment.  As a result of the  early  payments,  the note
      receivable was discounted by $0.1 and the Company  recognized a total gain
      on sale of business of $9.9 for the nine month period  ended  December 24,
      2004.

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

7.    Provisions for exit activities

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

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

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

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


                                       9
<PAGE>

      The following  table  summarizes  the  continuity  of these  restructuring
      provisions for the three and nine months ended December 24, 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
      Cash drawdowns during quarter             --         (0.1)           (0.1)
                                           -------------------------------------
      Balance, September 24, 2004               --          1.4             1.4
      Cash drawdowns during quarter             --         (0.3)           (0.3)
                                           -------------------------------------
      Balance, December 24, 2004            $   --       $  1.1          $  1.1
                                           =====================================

8.    Guarantees

      Performance   guarantees  are  contracts  that  contingently  require  the
      guarantor  to make  payments  to the  guaranteed  party  based on  another
      entity's failure to perform under an obligating agreement. The Company has
      an  outstanding  performance  guarantee  related  to  a  managed  services
      agreement (project  agreement)  undertaken by the  Communications  Systems
      business (Systems),  which was sold to companies controlled by Dr. Terence
      H.  Matthews on February  16, 2001 and is now  operated as Mitel  Networks
      Corporation (Mitel).  This performance guarantee remained with the Company
      following the sale of the Systems  business to Dr.  Matthews.  The project
      agreement and the Company's  performance  guarantee  extend until July 16,
      2012.  The terms of the  project  agreement  continue to be  fulfilled  by
      Mitel. The maximum  potential amount of future  undiscounted  payments the
      Company  could be required to make under the  guarantee,  at December  24,
      2004, was $38.5 (20.0 British  Pounds),  assuming the Company is unable to
      secure the  completion  of the  project.  The Company was not aware of any
      factors  as  at  December  24,  2004  that  would  prevent  the  project's
      completion  under the terms of the  agreement.  In the event that Mitel is
      unable to fulfill the  commitments of the project  agreement,  the Company
      believes  that an  alternate  third-party  contractor  could be secured to
      complete  the  agreement  requirements.  The  Company  has not  recorded a
      liability in its consolidated  financial  statements  associated with this
      guarantee.

      In connection with the sale of the Systems  business on February 16, 2001,
      the Company provided to the purchaser  certain income tax indemnities with
      an indefinite life and with no maximum  liability for the taxation periods
      up to February 16, 2001,  the closing date of the sale. As at December 24,
      2004,  the taxation  years 2000 to February 16, 2001 are still  subject to
      audit by taxation  authorities in certain  foreign  jurisdictions  and are
      therefore still subject to the above noted tax indemnities.

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

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

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

      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.


                                       10
<PAGE>

9.    Commitments

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

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

10.   Redeemable preferred shares

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

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

11.   Capital stock

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

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

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

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

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


                                       11
<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:

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

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

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

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

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

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

12.   Accumulated other comprehensive income (loss)

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

                                           Three Months Ended Nine Months Ended
                                           ------------------ ------------------
                                            Dec. 24, Dec. 26, Dec. 24,  Dec. 26,
                                             2004      2003     2004     2003
                                            ----------------- ------------------
      Net income (loss) for the period      $(7.6)  $(11.2)     $3.1   $(36.3)
      Other comprehensive income (loss):
        Unrealized net derivative gains
            on cash flow hedges               0.6      0.7        0.5     1.1
        Realized net derivative (gains)
            losses on cash flow hedges         --     (0.3)       0.2    (0.3)
                                            ---------------------------------
      Total comprehensive income (loss)
            for the period                  $(7.0)  $(10.8)     $3.8   $(35.5)
                                            ==================================


                                       12
<PAGE>

      The changes to accumulated  other  comprehensive  loss for the nine months
      ended December 24, 2004 were as follows:

                                                            Unrealized
                                                Cumulative   Net Gain
                                               Translation  (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)
Change during the three months ended
  September 24, 2004                                 --        (0.1)       (0.1)
                                               ---------------------------------
Balance, September 24, 2004                       (32.4)       (0.1)      (32.5)
Change during the three months ended
  December 24, 2004                                  --         0.6         0.6
                                               ---------------------------------
                                                 $(32.4)      $ 0.5      $(31.9)
                                               =================================

      The Company recorded an increase in other comprehensive income in the nine
      months ended  December 24, 2004 of $0.7 as compared to a decrease in other
      comprehensive  loss of $0.8 in the nine months  ended  December  26, 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.  The
      Company  estimates  that $0.5 of net  derivative  gains  included in other
      comprehensive  income  at  December  24,  2004 will be  reclassified  into
      earnings within the next quarter.

13.   Income taxes

      A $0.1  income tax expense was  recorded  for the third  quarter of Fiscal
      2005,  compared  with a recovery of $1.4 for the  corresponding  period in
      Fiscal 2004. During the nine months ended December 24, 2004, an income tax
      recovery of $0.9 was  recorded,  compared with a $1.4 recovery in the same
      period of Fiscal  2004.  The  recovery  of $0.9  related to the release of
      previously  recognized  provisions  no  longer  required  as a  result  of
      settlements  with tax  authorities,  in  addition  to a  recovery  of $0.3
      relating to income tax refunds received in excess of provisions previously
      recorded, offset by income tax expense of $0.3.

      The Company  establishes a valuation allowance against deferred tax assets
      when  management has determined  that it is more likely than not that some
      or all of its deferred tax assets may not be realized. Based on historical
      taxable  income and  uncertainties  relating to future taxable income over
      the periods in which the deferred tax assets are  deductible,  the Company
      has  established  a valuation  allowance of $186.4 as at December 24, 2004
      (March 26, 2004 - $176.8). The increase in the valuation allowance relates
      mainly to losses incurred,  partially  offset by temporary  differences in
      the Company's domestic and foreign operations.

14.   Information on business segments

      Business segments

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

      The  Company  targets  the  communications  industry  with  products  that
      specialize in broadband  connectivity  solutions over wired,  wireless and
      optical  media,  as  well  as  through  ultra   low-power   communications
      solutions.   The  Network   Communications   business   segment   provides
      semiconductor  solutions for enterprise,  access,  edge and metro networks
      over wired,  wireless,  and optical media.  The product lines enable voice
      and data for traditional,  convergent,  and packet networks.  The Consumer
      Communications  business  segment  offers  products  that  allow  users to
      connect to the network.  These  products  include  wireless  (for example,
      cellular  chipsets) and infotainment  applications  (for example,  set-top
      boxes and digital TV). The Ultra Low-Power Communications business segment
      provides  custom  Integrated  Circuit and  Application  Specific  Standard
      Product  (ASSP)  solutions  for  healthcare  applications  such as cardiac
      pacemakers, hearing-aids, swallowable camera capsules and portable


                                       13
<PAGE>

      medical instruments.  The Ultra-Low Power Communications  business segment
      also provides ultra low-power solutions for commercial applications,  such
      as electronic  shelf  labels,  radio  frequency  tagging and personal area
      communications devices.

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

<TABLE>
<CAPTION>
Three Months Ended Dec. 24, 2004                           Network          Consumer       Ultra Low-Power  Unallocated
                                                       Communications    Communications    Communications      Gains          Total
                                                       ----------------------------------------------------------------------------

<S>                                                         <C>              <C>               <C>           <C>             <C>
Total external sales revenue                                $23.8            $18.9            $ 8.5          $    --         $51.2
Depreciation of buildings and equipment                       1.0              0.7              0.3               --           2.0
Segment's operating loss                                    $(1.0)           $(2.0)           $(3.0)         $    --         $(6.0)

Three Months Ended Dec. 26, 2003                           Network          Consumer       Ultra Low-Power  Unallocated
                                                       Communications    Communications    Communications      Gains          Total
                                                       ----------------------------------------------------------------------------

Total external sales revenue                                $24.2            $14.9             $7.9          $    --        $ 47.0
Depreciation of buildings and equipment                       1.8              0.6              0.4               --           2.8
Asset impairment and other                                    1.6              0.1               --               --           1.7
Segment's operating income (loss)                           $(5.9)           $(6.5)            $0.3          $    --        $(12.1)


Nine Months Ended Dec. 24, 2004                            Network          Consumer       Ultra Low-Power  Unallocated
                                                       Communications    Communications    Communications      Gains          Total
                                                       ----------------------------------------------------------------------------

Total external sales revenue                                $76.6            $58.7             $30.5         $ --            $165.8
Depreciation of buildings and equipment                       3.1              2.3               1.2           --               6.6
Gain on sale of business                                       --               --                --         (9.9)             (9.9)
Segment's operating income (loss)                           $ 4.1            $(5.8)            $(4.5)        $9.9            $  3.7

Nine Months Ended Dec. 26, 2003                            Network          Consumer       Ultra Low-Power  Unallocated
                                                       Communications    Communications    Communications      Gains          Total
                                                       ----------------------------------------------------------------------------

Total external sales revenue                                $78.5            $42.1             $26.7         $    --         $147.3
Depreciation of buildings and equipment                       5.5              2.7               1.5              --            9.7
Asset impairment and other                                    4.6              2.0               0.4              --            7.0
Segment's operating loss                                    $(18.3)          $(17.6)           $(0.7)        $    --         $(36.6)
</TABLE>

15.   Pension plans

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

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

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


                                       14
<PAGE>

16.   Supplementary cash flow information

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

                                                             Nine Months Ended
                                                            --------------------
                                                            Dec. 24,    Dec. 26,
                                                              2004       2003
                                                            --------    --------

(Gain) loss on disposal of fixed assets                      $(0.3)     $0.1
Gain on sale of business                                      (9.9)       --
Gain on sale of long-term investments                           --      (0.6)
Change in pension liabilities                                  2.5       2.8
Impairment of fixed assets                                      --       6.4
Provision for excess space under lease contract                 --       0.6
Other                                                         (0.8)     (0.5)
                                                            --------------------
Other non cash changes in operating activities               $(8.5)     $8.8
                                                            ====================

17.   Comparative figures

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

18.   Subsequent events

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

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


                                       15
<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  Inc. 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 and nine months ended December
24, 2004,  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 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 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;  exposure to currency  exchange  rate  fluctuations;  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.


                                       16
<PAGE>

RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED DECEMBER 24, 2004

<TABLE>
<CAPTION>
Summary of Results from Operations                       Three Months Ended    Nine Months Ended
                                                         -------------------   -------------------
(millions of U.S. dollars, except per share amounts)     Dec. 24,   Dec. 26,   Dec. 24,   Dec. 26,
                                                           2004       2003       2004       2003
                                                         --------   --------   --------   --------

<S>                                                      <C>        <C>        <C>        <C>
Consolidated revenue:                                    $  51.2    $  47.0    $ 165.8    $ 147.3
   Network Communications                                   23.8       24.2       76.6       78.5
   Consumer Communications                                  18.9       14.9       58.7       42.1
   Ultra Low-Power Communications                            8.5        7.9       30.5       26.7

Income (loss) from operations:                              (6.0)     (12.1)       3.7      (36.6)
   Network Communications                                   (1.0)      (5.9)       4.1      (18.3)
   Consumer Communications                                  (2.0)      (6.5)      (5.8)     (17.6)
   Ultra Low-Power Communications                           (3.0)       0.3       (4.5)      (0.7)
   Unallocated gain                                           --         --        9.9         --

Net income (loss) for the period                            (7.6)     (11.2)       3.1      (36.3)
Net income (loss) per common share:
    Basic and diluted                                      (0.06)     (0.09)      0.01      (0.30)

Weighted average common shares outstanding (millions):
    Basic and diluted                                      127.3      127.3      127.3      127.3
</TABLE>

Revenue in the third  quarter of Fiscal  2005 was $51.2,  up 9% from  revenue of
$47.0 in the third  quarter of Fiscal  2004.  In the first nine months of Fiscal
2005,  revenue was $165.8, an increase of 13% from revenue of $147.3 in the same
period  of Fiscal  2004.  Despite  continuing  challenges  in the  semiconductor
industry,   revenue   improvements  were  achieved  in  the  Company's  Consumer
Communications and Ultra Low-Power business segments.

The Company experienced  slightly lower sequential bookings in the third quarter
of Fiscal  2005  given the  economic  slowdown  in the  semiconductor  industry.
Bookings in the third quarter of Fiscal 2005 were also slightly lower than those
experienced during the same period in Fiscal 2004.

In the third quarter of Fiscal 2005, the Company recorded a net loss of $7.6, or
$0.06 per share.  This compares to a net loss of $11.2,  or $0.09 per share,  in
the third  quarter of Fiscal  2004.  Although  the  Company  experienced  higher
revenues  and lower  expenses  in the  quarter as compared to the same period in
Fiscal  2004,  the net loss in the third  quarter of Fiscal 2005  resulted  from
lower sequential  revenues due to weaker customer demand in the quarter, as well
as increased  expenses  primarily  related to  corporate  governance  costs.  In
addition,  foreign  exchange  losses of $1.8  contributed to the net loss in the
quarter.  The loss in the third  quarter of Fiscal 2004  included  costs of $2.9
related  to  reducing  the  Company's  global  workforce  by  approximately  100
employees across all regions and business units. In addition,  the third quarter
Fiscal 2004 loss included an impairment of fixed assets of $1.7  resulting  from
the  review  of  the  ongoing  usage  of the  Company's  testing  equipment  and
enterprise resource planning system.

For the nine months ended December 24, 2004, the Company  recorded net income of
$3.1,  or $0.01 per share.  This  compares to a net loss of $36.3,  or $0.30 per
share,  for the same period of Fiscal 2004. Net income for the first nine months
of Fiscal 2005 includes a gain on sale of foundry business of $9.9. In addition,
higher revenues and margins in the Company's  Consumer  Communications and Ultra
Low-Power  business segments and lower operating  expenses due to cost reduction
activities  implemented  in Fiscal 2004 resulted in net income  improvements  as
compared to the same period in Fiscal 2004. The loss incurred in the nine months
ended December 26, 2003 resulted  primarily from lower revenues and margins,  as
well as expenses of $6.3 incurred in the  workforce  reduction and $7.0 in asset
impairment  and excess space related  activities  undertaken in Fiscal 2004. The
Company has  substantially  completed all of the activities  associated with the
Fiscal 2004 restructuring plans.

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.


                                       17
<PAGE>

Network Communications

                                 Three Months Ended       Nine Months Ended
                                 -------------------------------------------
                                 Dec. 24,    Dec. 26,    Dec. 24,   Dec.26,
(millions of U.S. dollars)         2004        2003        2004      2003
                                 --------    --------    --------   -------

Revenue                          $  23.8     $  24.2     $  76.6    $  78.5
                                 =======     =======     =======    =======
As a % of total revenue               46%         51%         46%        53%
Operating income (loss)          $  (1.0)    $  (5.9)    $   4.1    $ (18.3)
                                 =======     =======     =======    =======

Zarlink's Network Communications  segment provides  semiconductor  solutions for
enterprise,  access,  edge and metro  networks over wired,  wireless and optical
media. The product lines enable voice and data for  traditional,  convergent and
packet networks.

Revenue for the third  quarter of Fiscal 2005  totaled  $23.8,  down 2% from the
third quarter of Fiscal 2004.  Reduced capital  spending in the market continues
to impact demand by networking companies. Revenue declines were driven primarily
by lower sales volumes of the Company's  legacy and voice  processing  products,
which accounted for approximately 9% and 4%, respectively,  of the decline. This
decline was partially offset by higher sales volumes in the Company's Timing and
Time Slot  Interchange  (TSI) and Optical  product  lines,  which  accounted for
revenue  increases of  approximately 9% and 2%,  respectively.  During the first
nine months of Fiscal 2005  revenue  decreased  to $76.6,  down 2% from the same
period in Fiscal 2004, due primarily to decreased sales volumes of the Company's
legacy products.

The segment had an operating  loss of $1.0 and  operating  income of $4.1 in the
three and nine months  ended  December 24,  2004,  respectively,  as compared to
operating  losses of $5.9 and $18.3 in the three and nine months ended  December
26, 2003,  respectively.  During Fiscal 2005, the segment benefited from savings
realized from headcount and cost reductions  implemented during Fiscal 2004. The
losses in Fiscal  2004 were  driven  primarily  by higher  R&D  expenses,  asset
impairment  and other  costs of $4.6,  and R&D related  severance  costs of $1.4
incurred in the first nine months of Fiscal 2004.

Consumer Communications

                                    Three Months Ended      Nine Months Ended
                                    --------------------------------------------
                                    Dec. 24,    Dec. 26,   Dec. 24,      Dec.26,
(millions of U.S. dollars)            2004        2003       2004         2003
                                    --------    --------   --------      -------

Revenue                              $18.9       $14.9       $58.7       $42.1
                                     =====       =====       =====       ======
As a % of total revenue                 37%         32%         36%         29%
Operating loss                       $(2.0)      $(6.5)      $(5.8)      $(17.6)
                                     =====       =====       =====       ======

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

During the third  quarter of Fiscal 2005,  revenue  increased 27% over the third
quarter of Fiscal 2004, to $18.9.  Revenue in the nine months ended December 24,
2004  totaled  $58.7,  an increase  of 39% over the same period of Fiscal  2004.
Revenue  improvements  were driven  primarily by increased  sales volumes of the
Company's demodulators.

The  segment  had an  operating  loss of $2.0 in the three  month  period  ended
December  24, 2004,  as compared to $6.5 in the same period of Fiscal 2004.  The
segment's  operating  loss during the first nine months of Fiscal 2005 decreased
to $5.8, down $11.8 from the same period of Fiscal 2004. These improvements were
driven  primarily by revenue  improvements as well as savings realized from cost
reduction  activities  implemented during Fiscal 2004. The operating loss in the
nine month period ended  December 26, 2003 included  asset  impairment and other
costs of $2.0 and severance costs of $1.9.


                                       18
<PAGE>

Ultra Low-Power Communications

                                     Three Months Ended      Nine Months Ended
                                     -------------------------------------------
                                     Dec. 24,    Dec. 26,   Dec. 24,    Dec. 26,
(millions of U.S. dollars)             2004        2003       2004        2003
                                     --------    --------   --------    --------

Revenue                               $ 8.5       $ 7.9      $30.5       $26.7
                                      =====       =====      =====       =====
As a % of total revenue                  17%         17%        18%         18%
Operating income (loss)               $(3.0)      $ 0.3      $(4.5)      $(0.7)
                                      =====       =====      =====       =====

Zarlink's  Ultra  Low-Power  Communications  business  segment  provides  custom
Integrated  Circuit and Application  Specific  Standard Product (ASSP) solutions
for  healthcare   applications   such  as  cardiac   pacemakers,   hearing-aids,
swallowable camera capsules and portable medical  instruments.  The segment also
provides  ultra  low-power  solutions  for  commercial  applications,   such  as
electronic   shelf   labels,   radio   frequency   tagging  and  personal   area
communications devices.

Revenue for the third  quarter of Fiscal 2005  totaled  $8.5,  an increase of 8%
from the third  quarter of Fiscal  2004.  Revenue  improvements  were  driven by
higher sales  volumes  within the wireless  product  line,  which  accounted for
approximately  16% of the revenue  increase.  These  improvements were partially
offset  by lower  shipments  of  implantable  products,  which  accounted  for a
decrease of 7% of revenue.  During the first nine months of Fiscal 2005, revenue
increased 14% over the same period in Fiscal 2004, to $30.5.  Revenue  increases
were  due  mainly  to  increased  sales  volumes  of  wireless  products,  which
contributed  approximately  18% towards the segment's  revenue  increase.  These
improvements were partially offset by lower shipments in the audiologic  product
line, which accounted for a revenue decrease of approximately 4%.

For the three months ended  December 24, 2004, the segment had an operating loss
of $3.0 as  compared  to  operating  income  of $0.3 in the three  months  ended
December 26, 2003.  The segment had an operating  loss of $4.5 in the first nine
months of  Fiscal  2005 as  compared  to an  operating  loss of $0.7 in the same
period of Fiscal 2004.  Despite revenue  improvements in Fiscal 2005, net losses
were incurred in both periods  primarily  due to higher R&D  expenses.  The loss
incurred in Fiscal  2004 was due mainly to the asset  impairment  and  severance
costs incurred during the period.

GEOGRAPHIC REVENUE

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

<TABLE>
<CAPTION>
                                               Three Months Ended                                  Nine Months Ended
                                  --------------------------------------------------------------------------------------------------
(millions of U.S. dollars)         Dec. 24,     % of        Dec. 26,     % of        Dec. 24,      % of         Dec. 26,      % of
                                     2004       Total         2003       Total         2004        Total          2003       Total
                                  --------------------------------------------------------------------------------------------------
Revenue:
<S>                                <C>           <C>        <C>           <C>        <C>            <C>        <C>            <C>
Asia / Pacific                     $  21.9       42%        $  20.4       44%        $   69.9       42%        $   60.6       41%
Europe                                14.2       28%           13.8       29%            48.6       29%            44.3       30%
United States                         12.9       25%           10.0       21%            37.5       23%            32.9       23%
Canada                                 1.9        4%            2.5        5%             6.4        4%             6.4        4%
Other Regions                          0.3        1%            0.3        1%             3.4        2%             3.1        2%
                                  --------------------------------------------------------------------------------------------------
Total                              $  51.2      100%        $  47.0      100%        $  165.8      100%        $  147.3      100%
                                  ==================================================================================================
</TABLE>

Asia/Pacific

Asia/Pacific  revenue  increased  by 7% during the third  quarter of Fiscal 2005
compared to the third  quarter of Fiscal 2004,  and  continues to represent  the
largest geographic segment of customer revenues. During the first nine months of
Fiscal 2005, revenue in the Asia/Pacific region increased by 15% compared to the
same period in Fiscal  2004.  The revenue  increases  in Fiscal 2005 were driven
primarily by increased shipments in the Consumer  Communications  segment, which
accounted for  approximately 18% and 24%,  respectively,  of the increase in the
three and nine months  ended  December 24, 2004.  This was  partially  offset by
lower sales volumes within the Network  Communications  segment, which accounted
for revenue decreases of approximately 9% and 7%, respectively,  of the decrease
in the same period of Fiscal 2004.


                                       19
<PAGE>

Europe

European  revenues  increased by 3% in the third quarter of Fiscal 2005 compared
to the third  quarter of Fiscal 2004.  The Company had higher  sales  volumes of
electronic  shelf labels in the Ultra-Low  Power  segment,  which were partially
offset by lower sales volumes of legacy  products in the Network  Communications
segment.  In the first nine  months of Fiscal  2005,  revenue  increased  by 10%
compared to the same period of Fiscal 2004.  Improvements  were driven primarily
by increased  shipments of electronic  shelf labels  within the Ultra  Low-Power
Communications segment.

United States

Revenue to  customers  in the United  States  increased  by 29% during the third
quarter of Fiscal 2005 compared to the third  quarter of Fiscal 2004.  Increased
sales volumes were seen predominantly in the Company's Timing and TSI and legacy
Consumer  product  lines,   which  accounted  for  approximately  15%  and  10%,
respectively,  of the revenue increase. In the first nine months of Fiscal 2005,
revenue  increased  by 14%  compared  to the same  period  of Fiscal  2004.  The
increases  were due  primarily  to  higher  sales  volumes  within  the  Network
Communications segment.

Canada

Canadian  revenue in the third quarter of Fiscal 2005 decreased by $0.6 compared
to the same  period in Fiscal  2004,  primarily  due to lower  sales  volumes of
wireless products within the Ultra Low-Power segment.  Revenue in the first nine
months of  Fiscal  2005 was in line with  revenue  in the same  period of Fiscal
2004.

Other Regions

Revenue to customers in other  regions  during the third  quarter of Fiscal 2005
was  consistent  with revenue in the third  quarter of Fiscal 2004. In the first
nine months of Fiscal  2005,  revenue  decreased by $0.3 as compared to the same
period in Fiscal 2004 due to lower  shipments  of wireless  products  within the
Consumer Communications segment.

GROSS MARGIN

                                      Three Months Ended     Nine Months Ended
                                      ------------------    --------------------
                                      Dec. 24,   Dec. 26,   Dec. 24,    Dec. 26,
(millions of U.S. dollars)             2004        2003       2004       2003
                                      --------   --------   --------    --------
Gross Margin                           $22.4      $21.0      $74.4      $66.0

As a percentage of revenue               44%        45%        45%        45%

Gross  margin in the three  month  period  ended  December  24,  2004 was 44%, a
decrease of one percentage  point from gross margin in the same period in Fiscal
2004.  Gross margin in the nine month period ended December 24, 2004 was 45% and
was  unchanged  from gross  margin in the nine months  ended  December 26, 2003.
Despite  savings  realized  in  Fiscal  2005  from  cost  reduction   activities
implemented  in the previous  year,  margins in Fiscal 2005 remained  consistent
with levels in Fiscal 2004 due to product mix in Fiscal  2005.  Products  within
the Company's Consumer  Communications segment generally have lower margins than
products in the Company's other business segments, and increased revenue in this
segment has  decreased  overall  margins.  Fiscal 2004 margins for the three and
nine month periods ended December 26, 2003 were unfavorably impacted by $0.4 and
$1.0,  respectively,  of severance  costs incurred as part of the Company's cost
reduction efforts.

OPERATING EXPENSES

Research and Development ("R&D")

                                      Three Months Ended     Nine Months Ended
                                      ------------------    --------------------
                                      Dec. 24,   Dec. 26,   Dec. 24,    Dec. 26,
(millions of U.S. dollars)             2004        2003       2004       2003
                                      --------   --------   --------    --------

R&D Expenses                             $15.7      $19.5      $46.2      $57.9

As a percentage of revenue                 31%        41%        28%        39%


                                       20
<PAGE>

R&D expenses decreased by 19%, or $3.8, in the third quarter of Fiscal 2005 from
the same period in Fiscal  2004.  In the first nine months of Fiscal  2005,  R&D
expenses were $46.2,  a decrease of 20% as compared to the same period in Fiscal
2004.  The  decreases  resulted  mainly from  savings  generated  as a result of
headcount  reductions and other cost  reduction  activities  implemented  during
Fiscal 2004, primarily in the Network Communications and Consumer Communications
segments.  During the three and nine month  periods  ended  December  26,  2003,
severance costs of $1.4 and $2.4, respectively, were incurred resulting from R&D
headcount  reductions.  These  savings were  partially  offset by increased  R&D
activity in the Ultra Low-Power  segment.  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;

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

      o     Parallel  optical  modules for high speed  short reach  applications
            using multi mode fiber (MMF).

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
ultra low power consumption is an important differentiating feature, including:

      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;

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

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


                                       21
<PAGE>

Selling and Administrative ("S&A")

                                      Three Months Ended    Nine Months Ended
                                      ------------------    --------------------
                                      Dec. 24,   Dec. 26,   Dec. 24,    Dec. 26,
(millions of U.S. dollars)             2004        2003       2004       2003
                                      --------   --------   --------    --------

S&A Expenses                             $12.7      $11.9      $34.4      $37.7

As a percentage of revenue                 25%        25%        21%        26%

S&A expenses  increased by 7%, or $0.8, in the third quarter of Fiscal 2005 from
the same  period  in Fiscal  2004.  The  increase  was  primarily  due to higher
corporate  governance  costs.  These increases were partially  offset by savings
realized  from cost  reductions  implemented  in Fiscal  2004,  when the Company
reduced  its  headcount  within  sales,  marketing,   and  other  administrative
functions  in France,  Canada,  and  various  other  geographic  regions.  These
headcount  reductions  resulted in  severance  costs of $1.1 in the three months
ended December 26, 2003.

For the nine months ended  December 24, 2004,  S&A expense was $34.4, a decrease
of 9% over the first nine months of Fiscal 2004.  Headcount  reductions resulted
in  severance  costs of $2.9 in the nine months ended  December 26, 2003.  These
costs as well as other cost reduction activities  implemented during Fiscal 2004
resulted in a reduction of S&A expense in 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 and nine months ended December 24, 2004, the
Company recorded stock compensation expense of nil and $0.1, respectively (three
and nine months  ended  December  26, 2003 - $0.1 and $0.1,  respectively).  The
expense resulted from amortization of the fair value of stock options awarded to
a former employee. Stock compensation expense was recorded as a component of S&A
expense during the periods.

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 recognizes 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. In the first six months of Fiscal 2005, X-FAB exercised its option to make
early payments on the $10.0 installment.  As a result of the early payments, the
note  receivable was discounted by $0.1 and the Company  recognized a total gain
on sale of business of $9.9 for the nine month period ended December 24, 2004.

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

NON-OPERATING INCOME AND EXPENSE

Interest Income

Interest  income was $0.3 for the three months ended  December 24, 2004 and $0.3
in the same period of Fiscal 2004.  During the first nine months of Fiscal 2005,
interest  income was $0.7 as compared to $0.9 in the first nine months of Fiscal
2004.  The  decreases  were mainly due to reduced  average  cash and  short-term
investment balances in Fiscal 2005.


                                       22
<PAGE>

Foreign Exchange Gains and Losses

Foreign  exchange losses in the third quarter of Fiscal 2005 amounted to $1.8 as
compared to losses of $1.2 for the same period in Fiscal  2004.  During the nine
months ended  December 24, 2004,  foreign  exchange  losses  amounted to $2.2 as
compared  to $2.1 for the nine  months  ended  December  26,  2003.  Net foreign
exchange  gains and 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. The foreign exchange losses incurred relate
primarily to the Company's pension liability denominated in Swedish Krona.

Interest Expense

Interest  expense  was nil for the three and nine  month  fiscal  periods  ended
December 24, 2004, as compared to $0.2 and $0.5, respectively, for the three and
nine month fiscal periods ended December 26, 2003.

INCOME TAXES

A $0.1 income tax expense was  recorded  for the third  quarter of Fiscal  2005,
compared  with a recovery of $1.4 for the  corresponding  period in Fiscal 2004.
During the nine months ended  December 24, 2004,  an income tax recovery of $0.9
was  recorded,  compared with a $1.4 recovery in the same period of Fiscal 2004.
The recovery of $0.9 related to the release of previously  recognized provisions
no longer required as a result of settlements with tax authorities,  in addition
to a recovery  of $0.3  relating  to income tax  refunds  received  in excess of
provisions previously recorded, offset by income tax expense of $0.3.

The Company  establishes a valuation  allowance against deferred tax assets when
management  has  determined  that it is more likely than not that some or all of
its deferred tax assets may not be realized.  Based on historical taxable income
and  uncertainties  relating to future  taxable income over the periods in which
the deferred tax assets are deductible,  the Company has established a valuation
allowance  of $186.4 as at December  24,  2004  (March 26,  2004 - $176.8).  The
increase in the valuation allowance relates mainly to losses incurred, partially
offset  by  temporary   differences  in  the  Company's   domestic  and  foreign
operations.

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

NET INCOME (LOSS)

The Company recorded a net loss,  after preferred share  dividends,  of $8.2, or
$0.06 per share,  in the third  quarter of Fiscal 2005.  This  compares to a net
loss, after preferred share dividends, of $11.8, or $0.09 per share, in the same
period of Fiscal 2004.  For the nine month period ended  December 24, 2004,  net
income after preferred share dividends was $1.5, or $0.01 per share, as compared
to a net loss after  preferred  share dividends of $37.9, or $0.30 per share, in
the same period of Fiscal 2004.

The net income for the nine month period ended  December 24, 2004, was primarily
a result of the gain on sale of  business of $9.9,  as well as improved  results
due to improved revenues and margins and operating expense savings realized from
the cost reduction activities implemented during Fiscal 2004.

LIQUIDITY AND CAPITAL RESOURCES

At December 24, 2004, the Company held cash and cash equivalents  totaling $29.7
(March 26, 2004 - $27.0). In addition,  the Company held short-term  investments
of $39.6 at December 24, 2004 (March 26, 2004 - $54.8). The Company's restricted
cash balance at December 24, 2004 was $13.9 (March 26, 2004 - $10.0).

Cash used in operating  activities  for the nine months ended  December 24, 2004
was $14.5,  as compared to $25.3 used in the same  period of Fiscal  2004.  Cash
provided by operating activities before working capital changes amounted to $0.8
for the nine months ended  December  24, 2004,  as compared to $17.7 used in the
first nine months of Fiscal 2004. Cash provided by operations resulted primarily
from improved  operating  results during Fiscal 2005.  Since March 26, 2004, the
Company's working capital increased by $15.3, mainly as a result of increases in
inventory of $7.3, other accounts  receivable of $2.2, prepaid expenses of $2.1,
and trade  accounts  receivable of $1.4,  and decreases in accounts  payable and
accrued  liabilities  totaling $2.0.  Inventory  levels increased to accommodate
expected  sales demand in upcoming  quarters.  Prepaid  expenses  increased  due
primarily to the timing of payments for software design tool contracts. Other


                                       23
<PAGE>

accounts receivable increases resulted from claims with certain of the Company's
foundry suppliers. The increase in trade accounts receivable was a result of the
timing of cash receipts at the end of the quarter.  Accounts payable and accrued
liabilities  decreased  primarily  due to the  timing  of  payments  made to the
Company's  foundry  suppliers.  In  comparison,  the Company's  working  capital
increased by $7.6 during the nine months of Fiscal  2004,  primarily as a result
of  increases  in  accounts  receivable  of $8.4 and  prepaid  expenses  of $2.5
resulting from the timing of cash  collections  and payments during the quarter,
partially offset by an increase in accounts  payable and accrued  liabilities of
$2.7.

Cash  provided  from  investing  activities  was $22.5 for the nine months ended
December 24, 2004, primarily from proceeds of $9.9 received as payment against a
note  receivable  from X-FAB.  In addition,  cash increased from the maturity of
short-term  investments  totaling  $109.4,  partially  offset  by  purchases  of
short-term  investments  totaling $94.2. Cash provided from investing activities
was $26.5 for the nine months ended  December 26, 2003,  primarily  from matured
short-term  investments  totaling  $164.6,  partially  offset  by  purchases  of
short-term investments of $134.8.

Cash used in  financing  activities  during the first nine months of Fiscal 2005
was $5.6.  The use of cash was primarily the result of an increase in restricted
cash of $3.9,  and $1.6 payment of dividends on preferred  shares.  Cash used in
financing  activities  during  the first  nine  months of Fiscal  2004 was $6.6,
resulting from an increase in restricted cash of $3.3, $1.6 payment of dividends
on  preferred  shares,  the  repurchase  of  $1.2  of the  Company's  redeemable
preferred shares, and the repayment of $0.5 of capital leases.

During  Fiscal  2002,  the  Company  took steps to wind up its  defined  benefit
pension  plan in the United  Kingdom and replace it with a defined  contribution
plan. The Company expects to make a final payment of  approximately  $2.2 in the
fourth quarter of Fiscal 2005 after the final  adjustments are determined.  This
amount was included in other accrued liabilities as at December 24, 2004.

During the first nine  months of Fiscal  2005,  the  Company  declared  and paid
dividends  of  $1.6  on its  redeemable  preferred  shares  based  on  quarterly
dividends  averaging  $0.39 (Cdn $0.50) per share.  During the nine months ended
December 24, 2004, there were no preferred shares purchased by the Company,  and
13,200 preferred  shares  cancelled.  These cancelled  preferred shares had been
repurchased during Fiscal 2004.

In addition to the Company's cash, cash equivalents,  short-term  investment and
restricted  cash balances,  the Company has a credit facility of $14.1 available
for  letters of credit.  Prior to the second  quarter of Fiscal  2005,  a credit
facility in Canadian dollars was available.  During the second quarter of Fiscal
2005,  the  facility  agreement  was  amended to reflect the limit as $10.0 U.S.
dollars,  to better reflect the nature of the Company's  activities.  During the
third quarter of Fiscal 2005, an additional  $4.1 (Cdn $5.0) credit facility was
obtained  to secure an  additional  letter of credit  related  to the  Company's
pension  plan in Sweden.  As at December  24,  2004,  cash and cash  equivalents
totaling $13.3 were hypothecated  under the credit facility to cover outstanding
letters of credit,  and were  reported  as  restricted  cash.  Accordingly,  the
Company had an unused facility of $0.8 available for letters of credit. The $3.9
increase  in  restricted  cash  during the first nine  months of Fiscal 2005 was
required to secure additional letters of credit related to the Company's pension
plan in Sweden and to further secure  changes in existing  letters of credit due
to changes in foreign  exchange  rates.  Of the $13.3  restricted  cash balance,
$11.6 was issued to secure  letters of credit  related to the Company's  pension
plan in Sweden,  and $1.0  letters  of credit  were  outstanding  related to the
Company's 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.

The Company has committed to fully secure its outstanding  pension  liability in
Sweden of $14.1 by December 2005. In December  2004,  the Company  increased its
letters  of credit  related  to its  pension  plan in  Sweden  by $3.6,  with an
equivalent  increase expected to occur in December 2005,  depending upon foreign
exchange  rates at that time.  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.  The Company's
wafer supply agreements  stipulate wafer pricing based upon quantities  ordered.
Although these agreements do not have minimum unit volume purchase requirements,
one of the Company's supply agreements contains  contractual  obligations in the
event  of an order  cancellation.  This  agreement  states  that if the  Company
decreases the total  quantity of an order  containing  fixed price and quantity,
the Company is committed to a higher fixed unit price for those wafers purchased
on that order. In this situation,  the overall  obligation is dependent upon the
volume and type of wafers purchased, and the remaining purchase period of


                                       24
<PAGE>

this pricing agreement.  Based upon the number of wafers purchased to date under
this  agreement,  as at  December  24,  2004,  the  maximum  value of the  price
adjustment was $0.4.

During the third  quarter  of Fiscal  2005,  the  Company  renegotiated  certain
contracts  related to design tools and software for use in product  development.
Under the new agreements,  the Company's purchase obligations as at December 24,
2004 were as follows:

                                             Payments due by period
                                       --------------------------------
                                               Less than 1        1 - 3
                                       Total         year         years
                                       --------------------------------
Purchase Obligations                   19.7          8.9          10.8

There  have  been no other  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 December 24, 2004 was $32.6  (September 24,
2004 - $36.6).  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
decreased  bookings  within  the  Ultra-Low  Power and  Consumer  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.

The Company  currently uses forward  contracts and foreign  currency  options to
reduce the exposure to foreign  exchange risk on operating cash flows.  The most
significant  foreign exchange exposures for the Company relate to the U.K. pound
sterling,  Canadian dollar, and the Swedish Krona. The change in market value of
the derivatives resulted in an unrealized gain of $0.5. 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  assets and  liabilities  denominated  in foreign  currencies  are
subject  to the  effects  of  exchange  rate  fluctuations  of those  currencies
relative to the U.S.  dollar.  The most significant  liability  denominated in a
foreign  currency is the  Company's  pension  liability  denominated  in Swedish
Krona. The Company is currently assessing alternatives to reduce its exposure to
foreign currency fluctuations on this liability.

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-


                                       25
<PAGE>

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.

Other than the  planned  review of  alternatives  to reduce  exposure to foreign
currency  fluctuations  on the Swedish  pension  liability,  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 December 24, 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 December 24, 2004. Based
upon that evaluation,  the Company's Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures:

      (i)   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 are recorded, processed,  summarized
            and  reported,  within the time  periods  specified in the rules and
            forms of the Securities and Exchange Commission; and

      (ii)  include controls and procedures  designed to ensure that information
            required  to  be  disclosed  by  the  Company  in  such  reports  is
            accumulated and communicated to the Company's management,  including
            the  Chief  Executive  Officer  and  Chief  Financial  Officer,   as
            appropriate,   to  allow   timely   decisions   regarding   required
            disclosure.

In conjunction with the Company's review and evaluation of its internal controls
during the quarter ended December 24, 2004, the Company identified and initiated
a number of measures to improve the internal  controls  over the  existence  and
valuation  of  inventory.   In  general,   these  measures   included   improved
reconciliation   procedures,  and  documented  reviews  and  approvals  of  work
performed or procedures executed.

In connection with the evaluation  required by Rule 13a-15(d) under the Exchange
Act that  occurred  during the quarter  ended  December 24, 2004,  the Company's
management  has  assessed  that  these  control   improvements  have  materially
affected,  or are reasonably likely to materially affect, the Company's internal
control over financial reporting.


                                       26
<PAGE>

PART II - OTHER INFORMATION

ITEM 5.    OTHER INFORMATION

The Company has been made aware of certain  payroll work performed from November
1999 to  August  2002  by an  affiliate  of its  Independent  Registered  Public
Accounting  Firm,  Ernst & Young LLP (E&Y) in the  Netherlands  that has  raised
issues  regarding  E&Y's  independence  with respect to its performance of audit
services.  During this period, E&Y's Netherlands  affiliate  transferred payroll
disbursements to a Zarlink employee on behalf of the Company.  To facilitate the
payroll  disbursements,  a bank account was opened by the Company,  in which E&Y
Netherlands was assigned as power of attorney. These services were terminated in
August 2002 at which time there was no further  activity  in the  account  until
July 2004 when the  remaining  account  balance of 50,000 euros was  transferred
back to the Company and the payroll  account was closed.  These services are not
permitted under the auditor independence rules. The Company, its Audit Committee
and Ernst & Young have considered the impact the providing of these services may
have had on  Ernst &  Young's  independence  with  respect  to the  Company  and
concluded there has been no impairment of Ernst & Young's independence.

ITEM 6.   EXHIBITS

31.1      Rule 13a-14(a) Certification, President and Chief Executive Officer

31.2      Rule  13a-14(a)  Certification,  Senior Vice  President of Finance and
          Chief Financial Officer

32.1      Section 1350 Certification, President and Chief Executive Officer

32.2      Section 1350 Certification, 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


                                       27
<PAGE>

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     February 2, 2005
                           and Chief Financial Officer
                           (Principal Financial and
                           Accounting Officer)


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