http://www.zarlink.com

                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 27, 2002

                           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  31,  2003 there were  127,265,316  shares of the Common  Stock of
Zarlink Semiconductor Inc., no par value, issued and outstanding.
<PAGE>

                           ZARLINK SEMICONDUCTOR INC.

                                TABLE OF CONTENTS

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

PART I - FINANCIAL INFORMATION (Unaudited).....................................2

    ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)......................2
            Consolidated Balance Sheets (unaudited)............................2
            Consolidated Statements of Loss (unaudited)........................3
            Consolidated Statements of Cash Flows (unaudited)..................4
            Notes to the Consolidated Financial Statements (unaudited).........5

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

    ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.......22

    ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES................................23

PART II - OTHER INFORMATION...................................................24

    ITEM 5. OTHER INFORMATION.................................................24

    ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................................24

Signatures....................................................................24

Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002......25


                                       1
<PAGE>

PART I - FINANCIAL INFORMATION (Unaudited)

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

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

                                                        December 27,   March 29,
                                                            2002         2002
                                                        ------------   ---------
                                                        (Unaudited)
ASSETS

Current assets:
  Cash and cash equivalents                                 $ 27.8       $ 75.6
  Short-term investments                                     105.3         78.8
  Trade accounts receivable, less allowance
    for doubtful accounts of $1.2
    (March 29, 2002 - $1.3)                                   21.0         24.2
  Other receivables                                            5.8          5.5
  Inventories                                                 23.1         33.0
  Deferred income tax assets - net                             1.7          4.1
  Prepaid expenses and other                                   9.6         11.5
                                                            ------       ------
                                                             194.3        232.7
Fixed assets (net)                                            58.1         60.3
Deferred income tax assets - net                              11.1         11.0
Long-term investments                                         11.2         14.1
Other assets - net of deferred gain of $15.6
   (March 29, 2002 - $14.7)                                    4.3          3.0
                                                            ------       ------
                                                            $279.0       $321.1
                                                            ======       ======
LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
  Trade accounts payable                                    $  7.2       $ 14.6
  Employee-related payables                                   13.8         12.8
  Income and other taxes payable                               8.3          5.9
  Provisions for exit activities                              12.2         19.8
  Other accrued liabilities                                   11.5         16.6
  Deferred credits                                            12.8          2.2
  Current portion of long-term debt                            0.8          2.1
                                                            ------       ------
                                                              66.6         74.0
Long-term debt                                                 0.2          0.7
Pension liabilities                                           20.6         17.4
Deferred income tax liabilities - net                          3.7          6.3
                                                            ------       ------
                                                              91.1         98.4
                                                            ------       ------
Redeemable preferred shares, unlimited
   shares authorized; 1,473,900 shares
   issued and outstanding
   (March 29, 2002 - 1,558,700)                               19.3         20.6
                                                            ------       ------
Shareholders' equity:
  Common shares, unlimited shares authorized;
    no par value; 127,191,316 shares
    issued and outstanding
    (March 29, 2002 - 127,082,123)                           768.1        767.6
  Additional paid-in capital                                   2.1          4.1
  Deferred stock compensation                                   --         (0.8)
  Deficit                                                   (559.0)      (522.9)
  Accumulated other comprehensive loss                       (42.6)       (45.9)
                                                            ------       ------
                                                             168.6        202.1
                                                            ------       ------
                                                            $279.0       $321.1
                                                            ======       ======

        (See accompanying notes to the consolidated financial statements)


                                       2
<PAGE>

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

<TABLE>
<CAPTION>
                                                                         Three Months Ended                   Nine Months Ended
                                                                      -------------------------           -------------------------
                                                                      Dec. 27,          Dec 28,           Dec. 27,          Dec. 28,
                                                                        2002             2001               2002              2001
                                                                      -------           -------           -------           -------
<S>                                                                   <C>               <C>               <C>               <C>
Revenue                                                               $  46.8           $  51.7           $ 141.0           $ 170.0
Cost of revenue                                                          25.6              30.8              77.0             127.4
                                                                      -------           -------           -------           -------
Gross margin                                                             21.2              20.9              64.0              42.6
                                                                      -------           -------           -------           -------

Expenses:
  Research and development                                               23.8              19.9              67.7              62.9
  Selling and administrative                                             11.5              11.8              34.7              37.7
  Stock compensation expense (recovery)                                    --               3.8              (1.4)             10.1
  Special charge                                                           --                --                --              34.6
  Amortization of acquired intangibles                                     --               2.2                --               4.4
                                                                      -------           -------           -------           -------
                                                                         35.3              37.7             101.0             149.7
                                                                      -------           -------           -------           -------
Loss from operations                                                    (14.1)            (16.8)            (37.0)           (107.1)
Other income (expense) - net                                              1.0              (0.9)              4.5               6.9
Interest expense                                                         (0.3)             (0.2)             (0.7)             (0.6)
                                                                      -------           -------           -------           -------
Loss before income taxes                                                (13.4)            (17.9)            (33.2)           (100.8)
Income tax (expense) recovery                                            (0.3)             (0.4)             (1.2)              2.3
                                                                      -------           -------           -------           -------
Net loss for the period                                               $ (13.7)          $ (18.3)          $ (34.4)          $ (98.5)
                                                                      =======           =======           =======           =======
Net loss attributable to common
 shareholders after preferred
 share dividends                                                      $ (14.2)          $ (18.8)          $ (35.9)          $(100.0)
                                                                      =======           =======           =======           =======
Net loss per common share:
      Basic and diluted                                               $ (0.11)          $ (0.15)          $ (0.28)          $ (0.80)
                                                                      =======           =======           =======           =======
Weighted average number of common
 shares outstanding (millions):
      Basic and diluted                                                 127.2             126.0             127.0             125.4
                                                                      =======           =======           =======           =======
</TABLE>

        (See accompanying notes to the consolidated financial statements)


                                       3
<PAGE>

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

<TABLE>
<CAPTION>
                                                                         Three Months Ended                   Nine Months Ended
                                                                      -------------------------           -------------------------
                                                                      Dec. 27,          Dec 28,           Dec. 27,          Dec. 28,
                                                                        2002             2001               2002              2001
                                                                      -------           -------           -------           -------
<S>                                                                   <C>               <C>               <C>               <C>
Cash flows from operating activities:
  Net loss for the period                                             $ (13.7)          $ (18.3)          $ (34.4)          $ (98.5)
  Depreciation and amortization                                           3.4               7.5              10.5              20.2
  Stock compensation expense (recovery)                                    --               3.8              (1.4)             10.1
  Special charges, non-cash                                                --                --                --               1.1
  Loss (gain) on disposal of fixed assets                                (0.1)             (0.1)             (0.1)              0.3
  Gain on sale of long-term investment                                   (0.7)               --              (0.7)               --
  Inventory write-down                                                     --                --                --              29.1
  Deferred income taxes                                                   0.1              (1.2)              0.1              (2.7)
  Change in pension liability                                              --               0.1                --               0.4
  Equity loss in investment                                                --               0.8                --               2.2
  Decrease (increase) in working capital
      Trade accounts and other receivables                                3.9               6.7               6.4              24.6
      Inventories                                                         5.6               7.6              12.9              11.2
      Prepaid expenses and other                                          1.6               2.7               3.6              (2.6)
      Trade accounts payable and other accrued
        liabilities                                                      (5.8)             (4.5)            (20.3)            (16.8)
      Deferred credits                                                    3.7              (0.1)              4.0                --
                                                                      -------           -------           -------           -------
Cash provided by (used in) operating activities                          (2.0)              5.0             (19.4)            (21.4)
                                                                      -------           -------           -------           -------

Cash flows from investing activities:
      Purchased short-term investments                                 (105.4)            (28.0)           (251.9)            (28.0)
      Matured short-term investments                                     65.3                --             227.0                --
      Proceeds from disposal of fixed and other assets                     --                --               0.4               0.2
      Expenditures for fixed and other assets                            (1.4)             (5.6)             (5.7)            (28.4)
      Increase in long-term investments                                    --                --              (0.4)             (2.0)
      Proceeds from sale of long-term investments                         4.2                --               4.2                --
      Proceeds from repayment of note receivable                           --                --                --               4.4
      Proceeds from sale of discontinued operations - net                  --                --                --               1.3
                                                                      -------           -------           -------           -------
Cash used in investing activities                                       (37.3)            (33.6)            (26.4)            (52.5)
                                                                      -------           -------           -------           -------
Cash flows from financing activities:
      Repayment of long-term debt                                          --              (0.1)               --              (0.9)
      Repayment of capital lease liabilities                             (0.4)             (1.5)             (1.8)             (4.2)
      Payment of dividends on preferred shares                           (0.5)             (0.5)             (1.5)             (1.5)
      Issue of common shares                                               --               1.2               0.5               3.3
      Repurchase of preferred shares                                     (0.9)             (0.3)             (1.3)             (0.7)
                                                                      -------           -------           -------           -------
Cash used in financing activities                                        (1.8)             (1.2)             (4.1)             (4.0)
                                                                      -------           -------           -------           -------
Effect of currency translation on cash and cash
 equivalents                                                              1.0              (1.1)              2.1              (0.5)
                                                                      -------           -------           -------           -------

Decrease in cash and cash equivalents                                   (40.1)            (30.9)            (47.8)            (78.4)

Cash and cash equivalents, beginning of period                           67.9             132.4              75.6             179.9
                                                                      -------           -------           -------           -------
Cash and cash equivalents, end of period                              $  27.8           $ 101.5           $  27.8           $ 101.5
                                                                      =======           =======           =======           =======
</TABLE>

        (See accompanying notes to the consolidated financial statements)


                                       4
<PAGE>

                           Zarlink Semiconductor Inc.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
       (in millions of U.S. dollars, except per share amounts, U.S. GAAP)
                                   (Unaudited)

1.    Basis of presentation

      These  unaudited  interim  consolidated  financial  statements  have  been
      prepared by Zarlink  Semiconductor  Inc.  ("Zarlink" or the  "Company") in
      United States (U.S.) dollars,  unless otherwise stated,  and in accordance
      with  accounting  principles  generally  accepted in the U.S.  for interim
      financial statements and with the instructions to Form 10-Q and Regulation
      S-X pertaining to interim financial statements. Accordingly, these interim
      consolidated  financial  statements  do not  include all  information  and
      footnotes required by generally accepted  accounting  principles  ("GAAP")
      for complete  financial  statements.  In the opinion of  management of the
      Company, the unaudited interim  consolidated  financial statements reflect
      all adjustments,  which consist only of normal and recurring  adjustments,
      necessary to present  fairly the financial  position at December 27, 2002,
      and the results of operations  and cash flows of the Company for the three
      and nine month  periods  ended  December  27, 2002 and  December 28, 2001,
      respectively, in accordance with U.S. GAAP, applied on a consistent basis.
      The consolidated  financial statements include the accounts of Zarlink and
      its wholly owned subsidiaries. Intercompany transactions and balances have
      been  eliminated.  Separate  Canadian GAAP  financial  statements are also
      prepared and presented to shareholders.

      These  financial  statements  should  be  read  in  conjunction  with  the
      financial  statements and notes thereto  contained in the Company's Annual
      Report  on Form 10-K for the year  ended  March 29,  2002.  The  Company's
      fiscal year-end is the last Friday in March.

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

2.    Change in accounting policies

      In July 2001, the Financial  Accounting  Standards  Board ("FASB")  issued
      Statement of Financial Accounting Standard No. 141 ("SFAS 141"), "Business
      Combinations"  and  Statement  of  Financial  Accounting  Standard No. 142
      ("SFAS 142"), "Goodwill and Other Intangible Assets". In October 2001, the
      FASB issued  Statement  of  Financial  Accounting  Standard No. 144 ("SFAS
      144"), "Accounting for the Impairment or Disposal of Long-Lived Assets".

      a)    SFAS 141 requires that business  combinations be accounted for under
            the  purchase   method  of  accounting  and  addresses  the  initial
            recognition and measurement of assets acquired,  including  goodwill
            and intangibles,  and liabilities assumed in a business combination.
            The Company adopted SFAS 141 on a prospective  basis effective March
            30, 2002, the beginning of Fiscal 2003. The adoption of SFAS 141 did
            not have a material  effect on the Company's  financial  statements,
            but will impact the accounting treatment of future acquisitions.

      b)    SFAS 142 requires  goodwill to be allocated to, and assessed as part
            of, a reporting unit. Further, SFAS 142 specifies that goodwill will
            no longer be  amortized  but instead  will be subject to  impairment
            tests  at  least  annually.  The  Company  adopted  SFAS  142  on  a
            prospective  basis  at  the  beginning  of  Fiscal  2003.  As at the
            beginning of Fiscal  2003,  the Company did not have any goodwill or
            intangible  assets  with  indefinite  lives  recorded on the balance
            sheet. Accordingly,  no transition impairment charge is necessary to
            be recognized under SFAS 142, nor was there a material impact on the
            Company's financial statements on adoption of the new rules.

            As there was no  goodwill or  indefinite  lived  intangibles  on the
            balance sheet at the beginning of Fiscal 2002, the comparative prior
            period's  financial results would not have been affected if SFAS 142
            were adopted in Fiscal 2002.

      c)    SFAS 144 supersedes  Statement of Financial  Accounting Standard No.
            121 ("SFAS  121"),  "Accounting  for the  Impairment  of  Long-Lived
            Assets  and  for  Long-Lived  Assets  to Be  Disposed  Of"  and  the
            accounting and reporting  provisions of Accounting  Principles Board
            ("APB") Opinion No. 30 for the disposal of a business segment.  SFAS
            144 establishes a single  accounting  model,  based on the framework
            established in SFAS 121, for long-lived  assets to be disposed of by
            sale. SFAS 144 broadens the presentation of discontinued  operations
            to  include  disposals  of a  component  of an entity  and  provides
            additional    implementation    guidance   with   respect   to   the
            classification  of assets as held-for-sale and the calculation of an
            impairment  loss.  The Company  adopted SFAS 144 at the beginning of
            Fiscal 2003. The adoption of SFAS 144 did not have a material impact
            on the Company's financial statements.


                                       5
<PAGE>

3.    Recently issued accounting pronouncements

      a)    In July 2002,  the FASB  issued  Statement  No.  146  ("SFAS  146"),
            "Accounting for Costs Associated with Exit or Disposal  Activities",
            which  addresses  financial   accounting  and  reporting  for  costs
            associated with exit or disposal activities and nullifies EITF Issue
            No. 94-3,  "Liability  Recognition for Certain Employee  Termination
            Benefits  and Other  Costs to Exit an  Activity  (including  Certain
            Costs  Incurred  in a  Restructuring)."  SFAS  146  requires  that a
            liability for a cost associated with an exit or disposal activity be
            recognized  when the  liability  is  incurred.  Under Issue 94-3,  a
            liability for an exit cost was recognized at the date of an entity's
            commitment  to an exit plan.  SFAS 146  concludes  that an  entity's
            commitment  to  a  plan,  by  itself,  does  not  create  a  present
            obligation  to others  that  meets the  definition  of a  liability.
            Therefore,  SFAS 146 eliminates the definition and  requirements for
            recognition of exit costs in Issue 94-3.  SFAS 146 also  establishes
            that fair value is the  objective  for  initial  measurement  of the
            liability.   SFAS  146  will  be  effective  for  exit  or  disposal
            activities  initiated  after  December 31, 2002 and had no impact on
            the Company's financial  statements,  but will impact the accounting
            treatment of future exit or disposal activities should they occur.

      b)    In November 2002, the FASB issued  Interpretation No. 45 ("FIN 45"),
            "Guarantor's  Accounting and Disclosure Requirements for Guarantees,
            Including  Indirect  Guarantees of Indebtedness  of Others".  FIN 45
            requires that a guarantor is required to recognize, at the inception
            of a  guarantee,  a liability  for the fair value of the  obligation
            undertaken in issuing the guarantee. FIN 45 also requires additional
            disclosure  by a  guarantor  in its  interim  and  annual  financial
            statements  about its  obligations  under  certain  guarantees.  The
            initial  recognition  and  measurement  provisions  of  FIN  45  are
            applicable  for  guarantees  issued or modified  after  December 31,
            2002.  The  disclosure  requirements  of FIN 45  are  effective  for
            financial  statements  of interim  or annual  periods  ending  after
            December  15,  2002.  The  adoption  of this  interpretation  is not
            anticipated  to have a material  effect on the  Company's  financial
            position, results of operations, or cash flows.

4.    Inventories

                                                  December 27,      March 29,
                                                      2002             2002
                                                  ------------      ---------
      Raw materials                                  $   2.5         $   2.4
      Work-in-process                                   15.9            20.8
      Finished goods                                     4.8             9.8
                                                     -------         -------
                                                     $  23.1         $  33.0
                                                     =======         =======

5.    Fixed assets

                                                  December 27,      March 29,
                                                      2002             2002
                                                  ------------      ---------
      Cost                                           $ 165.2         $ 153.1
      Accumulated depreciation                        (107.1)          (92.8)
                                                     -------         -------
                                                     $  58.1         $  60.3
                                                     =======         =======

      The comparative  gross amounts of cost and accumulated  depreciation  have
      each been adjusted by $57.9 to properly reflect the disposition of certain
      fixed  assets.  There was no impact to the  previously  reported net fixed
      assets.

      Management periodically reviews the Company's fixed assets to evaluate the
      realizability  of these  assets  based upon the fair value as estimated by
      reference  to  discounted  expected  future net cash flows of the  related
      assets.  When management  performs future  assessments of these long-lived
      assets in the coming  quarters,  a decline in the  realizability  of these
      assets  below the  carrying  value may require  the  Company to  recognize
      impairment  on the  carrying  value of its  fixed  assets  which  could be
      material.


                                       6
<PAGE>

6.    Long-term investments

      As at December 27, 2002, the Company had a nine percent ownership interest
      in Mitel Networks  Corporation,  a Canadian  corporation that files annual
      and  other  reports  with  the  United  States   Securities  and  Exchange
      Commission  under the  Securities  Exchange  Act of 1934,  with a carrying
      value of $11.2 (March 29, 2002 - $14.1).  Management  periodically reviews
      the  Company's  investments  to  determine  if there has been other than a
      temporary  decline  in the  market  value of these  investments  below the
      carrying  value.  When  management  performs  future  assessments  of  its
      investments in the coming quarters, a decline in the value of this company
      may require the Company to recognize  impairment on the remaining value of
      its investments which could be material.

      The Company sold its investment in DALSA  Semiconductor  Inc. ("DALSA") on
      October 3, 2002 for cash  proceeds of $4.2 and  recorded a gain of $0.7 in
      the third quarter of Fiscal 2003.

7.    Provisions for exit activities

                                                  December 27,      March 29,
                                                      2002             2002
                                                  ------------      ---------
      Restructuring provisions                       $   4.2         $   7.9
      Provision for disposal of
        discontinued operations                          3.8             5.8
      Provision for disposal of
        foundry businesses                               4.2             6.1
                                                     -------         -------
                                                     $  12.2         $  19.8
                                                     =======         =======

8.    Deferred credits

      On December 31,  2002, a tenant of space leased by the Company  terminated
      its lease.  In  settlement  of the lease,  the former  tenant  paid to the
      Company a net amount of $3.3 in cash on December  20,  2002,  all of which
      was  treated as a deferred  credit as at  December  27,  2002.  The entire
      amount  will be  recorded  as income in the fourth  quarter of Fiscal 2003
      when the termination date expires.

      The  deferred  credits at December  27,  2002,  included an amount of $6.4
      ($0.2 - March 29, 2002)  representing  the fair value of external  foreign
      exchange contracts held by the Company.

9.    Guarantees

      Performance   guarantees  are  contracts  that  contingently  require  the
      guarantor  to make  payments  to the  guaranteed  party  based on  another
      entity's failure to perform under an obligating agreement. The Company has
      an  outstanding  performance  guarantee  related  to  a  managed  services
      agreement  ("project  agreement")  undertaken by the discontinued  Systems
      business,  which  was  sold to  companies  controlled  by Dr.  Terence  H.
      Matthews  on  February  16,  2001  and  now  operated  as  Mitel  Networks
      Corporation.   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 26,
      2012. The terms of the project agreement continue to be fulfilled by Mitel
      Networks Corporation.  The maximum potential amount of future undiscounted
      payments  the Company  could be required to make under the  guarantee,  at
      December  27,  2002,  was $32.0,  based upon the Company  being  unable to
      secure the  completion  of the  project.  The  Company is not aware of any
      factors  as  at  December  27,  2002  that  would  prevent  the  project's
      completion  under the terms of the  agreement.  In the  event  that  Mitel
      Networks  Corporation was unable to fulfill the commitments of the project
      agreement,  the Company believes that an alternate third-party  contractor
      could be secured to complete the agreement  requirements.  At December 27,
      2002, the carrying value of these guarantees is nil.

      In connection with the sale of the Systems  business  described in note 21
      (a) to the consolidated  financial statements for the year ended March 29,
      2002, 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 27,  2002,  the  taxation  years 1997 to February  16, 2001,  are
      subject to audit by taxation authorities.


                                       7
<PAGE>

10.   Redeemable preferred shares

      There were 86,000  preferred shares purchased during the nine months ended
      December  27, 2002 for cash  consideration  of $1.3.  The  transfer  agent
      cancelled  84,800  shares in the first nine months of Fiscal  2003.  As at
      December 27, 2002,  there were 6,200  repurchased  preferred  shares to be
      cancelled in the fourth quarter of Fiscal 2003.

      During the third quarter, the dividend declared and paid on the redeemable
      preferred  shares  was  $0.32  (Cdn  $0.50)  per  share,  resulting  in  a
      cumulative  dividend  of $0.96  (Cdn$1.50)  per share  for the first  nine
      months of Fiscal 2003.

11.   Capital stock

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

      b)    On June 6, 2002, the Company announced its intention to continue its
            normal course  issuer bid program for up to 6,358,203  common shares
            (5 percent of  127,164,078  common shares issued and  outstanding at
            May  31,  2002)  between  June  10,  2002  and  June  9,  2003.  All
            repurchased shares would be cancelled.  During the nine months ended
            December  27,  2002,  no shares  were  repurchased  under the normal
            course issuer bid program.

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

                                                          Nine Months Ended
                                                    ----------------------------
                                                    December 27,    December 28,
                                                        2002           2001
                                                    ------------    ------------
      Outstanding Options:
      Balance, beginning of period                   10,914,962       9,464,693
      Granted                                           400,300       2,125,550
      Exercised                                        (109,193)       (638,663)
      Forfeited                                      (1,896,121)       (983,599)
                                                    -----------     -----------
      Balance, end of period                          9,309,948       9,967,981
                                                    ===========     ===========

            On August 14,  2002,  1,136,778  unexercised  stock  options held by
            former  employees of the  discontinued  Systems  business expired in
            accordance  with the terms of the sale  agreement.  The options were
            returned to the pool of options  available for grant.  Available for
            grant  at  December  27,  2002  were  5,306,731  (March  29,  2002 -
            3,810,910)  common shares.  The exercise price on outstanding  stock
            options ranges from $1.77 to $24.95 per share with exercise  periods
            extending to November  2008. The exercise price of stock options was
            based on prices in Canadian  dollars  translated at the U.S.  dollar
            exchange rate on December 27, 2002.

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

      The following  potentially  dilutive  common share  equivalents  have been
      excluded from the  computation of diluted loss per share because they were
      anti-dilutive due to the reported net loss for the periods presented:

                                 Three Months Ended          Nine Months Ended
                                ---------------------      ---------------------
                                Dec. 27,     Dec. 28,      Dec. 27,     Dec. 28,
                                  2002         2001          2002         2001
                                ---------------------      ---------------------
Stock options                   30,473      1,720,301      91,921      1,392,736
Restricted shares                   --        704,379          --        704,379
                                ---------------------      ---------------------
Total                           30,473      2,424,680      91,921      2,097,115
                                =====================      =====================


                                       8
<PAGE>

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

                               Three Months Ended         Nine Months Ended
                             -----------------------   ------------------------
                              Dec. 27,      Dec. 28,     Dec. 27,     Dec. 28,
                                2002          2001         2002         2001
                             -----------------------   ------------------------
Number of outstanding
 options                      9,218,448    2,996,080    8,837,767     3,086,580

Average exercise price
 per share                   $     8.92   $    11.71   $     9.21    $    11.64

      Pro Forma financial  information has been determined as if the Company had
      accounted  for its employee  stock options  using the  Black-Scholes  fair
      value option pricing model with the following weighted-average assumptions
      for the three and nine month fiscal  periods  ended  December 27, 2002 and
      December 28, 2001:

                                Three Months Ended         Nine Months Ended
                              -----------------------   ------------------------
                               Dec. 27,      Dec. 28,     Dec. 27,     Dec. 28,
                                 2002          2001         2002         2001
                              -----------------------   ------------------------
Pro Forma net loss
 attributable to common
 shareholders after
 preferred dividends             $(17.5)      $(23.0)      $(45.9)      $(114.7)

Pro Forma net loss per
 common share:
  Basic and diluted              $(0.14)      $(0.18)      $(0.36)      $ (0.91)

Weighted average fair
 value price of the options      $ 1.19       $ 5.00       $ 1.82       $  3.63

Risk free interest rate            3.45%        5.19%        3.82%         5.19%
Dividend yield                      Nil          Nil          Nil           Nil
Volatility factor of the
 expected market price of
 the Company's common stock       0.673        0.501        0.622         0.501
Weighted-average expected
 life of the options          3.1 years    4.0 years    3.1 years     4.0 years

      The  Black-Scholes  option  valuation  model  was  developed  for  use  in
      estimating  the  fair  value  of  traded  options  that  have  no  vesting
      restrictions  and are fully  transferable.  In addition,  option valuation
      models require the input of highly  subjective  assumptions  including the
      expected  stock price  volatility.  Because the Company's  employee  stock
      options have characteristics  significantly different from those of traded
      options,  and because  changes in the  subjective  input  assumptions  can
      materially affect the fair value estimate,  in management's  opinion,  the
      existing  models do not  necessarily  provide a reliable single measure of
      the fair value of its employee stock options.

      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.

12.   Accumulated other comprehensive loss

      The components of other comprehensive loss were as follows:

                               Three Months Ended         Nine Months Ended
                             -----------------------   ------------------------
                              Dec. 27,      Dec. 28,     Dec. 27,     Dec. 28,
                                2002          2001         2002         2001
                             -----------------------   ------------------------
Net loss for the period        $(13.7)      $(18.3)      $(34.4)      $(98.5)
Other comprehensive
income (loss):
Unrealized net derivative
 gains (losses) on cash
 flow hedges                    (2.4)         1.9         (6.0)         1.4
Change in cumulative
 translation adjustment          2.8          4.0          9.3          7.9
                             -----------------------   ------------------------
Other comprehensive
 loss for the period           $(13.3)      $(12.4)      $(31.1)      $(89.2)
                             =======================   ========================


                                       9
<PAGE>

      The changes to accumulated  other  comprehensive  loss for the nine months
      ended December 27, 2002 were as follows:

<TABLE>
<CAPTION>
                                                             Cumulative         Minimum       Unrealized Net
                                                             Translation        Pension           Loss on
                                                               Account         Liability        Derivatives        Total
                                                             -------------------------------------------------------------
<S>                                                            <C>               <C>              <C>              <C>
Balance, March 29, 2002                                        $ (43.0)          $  (2.5)         $  (0.4)         $ (45.9)
Change during the three months ended
  June 28, 2002                                                   12.3                --             (0.4)            11.9
                                                             -------------------------------------------------------------
Balance, June 28, 2002                                         $ (30.7)          $  (2.5)         $  (0.8)         $ (34.0)
Change during the three months ended
  September 27, 2002                                              (5.8)               --             (3.2)            (9.0)
                                                             -------------------------------------------------------------
Balance, September 27, 2002                                    $ (36.5)          $  (2.5)         $  (4.0)         $ (43.0)
Change during the three months ended
  December 27, 2002                                                2.8                --             (2.4)             0.4
                                                             -------------------------------------------------------------
Balance, December 27, 2002                                     $ (33.7)          $  (2.5)         $  (6.4)         $ (42.6)
                                                             =============================================================
</TABLE>

      The Company recorded an increase in other  comprehensive  loss in the nine
      months ended  December  27, 2002 of $6.0 (nine  months ended  December 28,
      2001 - $1.4  gain)  which was  attributable  to the change in the value of
      outstanding  foreign currency forward  contracts  related to the Company's
      hedging  program that were  designated as cash flow hedges or a hedge of a
      net  investment.  The Company  estimates that $6.4 of net derivative  loss
      included in other  comprehensive  loss will be reclassified  into earnings
      within the next 12 months.

13.   Inventory write-down and restructuring

      a)    Fiscal 2003 Workforce Reduction

            During the third  quarter and first nine months of Fiscal 2003,  the
            Company  continued  to reduce its  workforce  across all  geographic
            regions and incurred  severance  costs of $3.6 ($5.0  year-to-date).
            Worldwide  headcount was reduced by approximately 200 employees over
            the  first  nine  months  of the  year  in a  continuing  effort  to
            streamline operations.  Severance costs of $0.3 in the quarter ($0.9
            year-to-date)  were included in cost of revenue.  The balance of the
            severance costs increased  research and development  ("R&D") expense
            by $2.5 in the quarter ($2.7  year-to-date),  and increased  selling
            and various general administration function ("S&A") expenses by $0.8
            in the quarter ($1.4 year-to-date). As a result of the restructuring
            activities  undertaken  in the first  nine  months  of Fiscal  2003,
            accrued  severance  payments of $0.6,  included in  employee-related
            payables,  are  expected to be paid in the fourth  quarter of Fiscal
            2003.

      b)    First Quarter of Fiscal 2002

            In the first  quarter  of Fiscal  2002,  the  Company  reviewed  its
            inventory  requirements for the succeeding 12 months in light of the
            semiconductor industry-wide slowdown and higher channel inventories.
            As a result of this review, the Company recorded an excess inventory
            charge to cost of sales amounting to $29.1 for inventories estimated
            to be beyond its needs for the following 12 months.

            In the first  quarter of Fiscal 2002 and in response to the industry
            downturn,  the Company implemented a cost-containment  plan in order
            to preserve cash  resources.  The  cost-containment  plan included a
            workforce  reduction of the  Company's  total  employee  base by 439
            employees,  globally across all job categories,  which was completed
            by the end of  Fiscal  2002.  The total  cost of the  first  quarter
            Fiscal 2002 workforce reduction program was estimated to be $26.7.

            As a result of the  workforce  reduction  program and  consolidating
            design activity, the Company took steps to provide for excess leased
            facilities in Canada, the United States, the United Kingdom, and the
            Far East. The cost of the lease and contract settlements amounted to
            $7.9 in the first quarter of Fiscal 2002.

            The total of these pre-tax special charges  amounted to $34.6 in the
            first quarter of Fiscal 2002. In the fourth  quarter of Fiscal 2002,
            $3.1 of the first quarter special charge was reversed due to savings
            on the workforce reduction program and to the subsequent sub-letting
            of vacant space in Irvine, California.


                                       10
<PAGE>

            The following  summarizes the activity related to the March 29, 2002
            restructuring liability during the first nine months of Fiscal 2003:

                                                               Excess
                                                    Workforce   Lease
                                                    Reduction   Costs      Total
                                                    ---------  -------     -----
Provision balance as at March 29, 2002                 $2.9      $5.0      $7.9
  Cash draw-downs during Q1 2003                       (0.5)     (0.3)     (0.8)
  Cash draw-downs during Q2 2003                       (0.4)     (0.7)     (1.1)
  Non-cash draw-downs during Q2 2003                     --      (0.5)     (0.5)
  Cash draw-downs during Q3 2003                       (0.8)     (0.5)     (1.3)
                                                       ----      ----      ----
Provision balance as at December 27, 2002              $1.2      $3.0      $4.2
                                                       ====      ====      ====

            All of the  liability  relating  to the  workforce  reduction  is in
            respect of the fourth quarter Fiscal 2002 restructuring program.

14.   Other income (expense) (net)

<TABLE>
<CAPTION>
                                                     Three Months Ended               Nine Months Ended
                                             ------------------------------     ------------------------------
                                              Dec. 27, 2002   Dec. 28, 2001      Dec. 27, 2002   Dec. 28, 2001
                                             ------------------------------     ------------------------------
<S>                                               <C>                <C>             <C>            <C>
Interest income                                   $ 0.7              $ 1.0           $ 2.6          $ 4.6
Foreign exchange gain (loss)                       (0.4)              (1.1)            1.2            4.5
Equity loss in Optenia, Inc.                         --               (0.8)             --           (2.2)
Gain on sale of DALSA investment                    0.7                 --             0.7             --
                                             -------------------------------    ------------------------------
Other income (expense) (net)                      $ 1.0              $(0.9)          $ 4.5          $ 6.9
                                             ===============================    ==============================
</TABLE>

15.   Information on business segments

      The  Company's   reportable   business   segments  are  comprised  of  the
      Communications and Medical groups.  Reportable segments are business units
      that offer different products and services,  sell to different  customers,
      use  different  production  and  distribution  processes,  and are managed
      separately because of these differences.

      The  Communications   business   specializes  in  broadband   connectivity
      solutions  over wired,  wireless  and optical  media.  The  Communications
      business includes network access products that provide connectivity to the
      enterprise and metro segments such as feeder, aggregation and transmission
      applications  and those  that  address  the  multi-protocol  physical  and
      network layers.  In addition,  the  Communications  business includes user
      access products that allow users to connect to the network. These products
      include  wireless and infotainment  applications.  Network access products
      accounted  for  $27.8 and $85.6 in  revenue  in the three and nine  months
      ended  December  27,  2002,  respectively  (three  and nine  months  ended
      December 28, 2001 - $25.8 and $88.2,  respectively).  User access products
      accounted  for  $12.0 and $35.0 in  revenue  in the three and nine  months
      ended  December  27,  2002,  respectively  (three  and nine  months  ended
      December 28, 2001 - $16.9 and $56.0, respectively).

      The  Medical  business   provides  ultra  low  power  ASIC  solutions  for
      applications such as pacemakers, hearing aids and portable instruments.

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


                                       11
<PAGE>

<TABLE>
<CAPTION>
                                                                                                       Unallocated
Three Months Ended Dec. 27, 2002                                   Communications        Medical          Costs              Total
                                                                   --------------        -------       -----------           -----
<S>                                                                    <C>                <C>              <C>               <C>
Revenue                                                                $ 39.8             $ 7.0            $  --             $ 46.8
Depreciation of fixed assets                                              3.1                --               --                3.1
Segment's operating loss                                                (12.9)             (1.2)              --              (14.1)

<CAPTION>
                                                                                                       Unallocated
Three Months Ended Dec. 28, 2001                                   Communications        Medical          Costs              Total
                                                                   --------------        -------       -----------           -----
<S>                                                                    <C>                <C>              <C>               <C>
Revenue                                                                $ 42.7             $ 9.0            $  --             $ 51.7
Depreciation of fixed assets                                              5.2               0.1               --                5.3
Amortization of acquired intangibles                                      2.2                --               --                2.2
Stock compensation expense                                                 --                --              3.8                3.8
Segment's operating income (loss)                                       (14.2)              1.2             (3.8)             (16.8)

<CAPTION>
                                                                                                       Unallocated
Nine Months Ended Dec. 27, 2002                                    Communications        Medical          Costs              Total
                                                                   --------------        -------       -----------           -----
<S>                                                                    <C>                <C>              <C>               <C>
Revenue                                                                $120.6             $20.4            $  --             $141.0
Depreciation of fixed assets                                              9.5               0.1               --                9.6
Stock compensation recovery                                                --                --             (1.4)              (1.4)
Segment's operating loss                                                (35.8)             (2.6)             1.4              (37.0)

<CAPTION>
                                                                                                       Unallocated
Nine Months Ended Dec. 28, 2001                                    Communications        Medical          Costs              Total
                                                                   --------------        -------       -----------           -----
<S>                                                                    <C>                <C>              <C>               <C>
Revenue                                                                $144.2             $25.8            $  --             $170.0
Depreciation of fixed assets                                             15.6               0.3               --               15.9
Amortization of acquired intangibles                                      4.4                --               --                4.4
Stock compensation expense                                                 --                --             10.1               10.1
Special charge                                                             --                --             34.6               34.6
Segment's operating income (loss)                                       (68.7)              6.3            (44.7)            (107.1)
</TABLE>

16.   Subsequent events

      a)    On January 28, 2003,  and  subsequent to the third quarter of Fiscal
            2003,  cash and cash  equivalents  totaling  $6.1 were  hypothecated
            under  the  Company's  revolving  global  credit  facility  to cover
            outstanding letters of credit.

      b)    During  Fiscal  2002,  the Company took steps to wind up its defined
            benefit  pension  plan in the United  Kingdom and replaced it with a
            defined  contribution  plan. The cash settlement of the pension plan
            is expected to cost  approximately  $10.5.  On January 28, 2003, and
            subsequent  to the third  quarter of Fiscal  2003,  the Company paid
            $8.0 as partial  consideration of the pension obligation  settlement
            to a large,  AAA-rated insurance company in the U.K. under a wind-up
            agreement.  In addition,  the Company will transfer its pension plan
            assets of approximately  $15.5 in February 2003. The Company expects
            to make a  final  payment  of  approximately  $2.5 to the  insurance
            company  later in  Fiscal  2004  after  the  final  adjustments  are
            calculated.

            As a result  of the  settlement,  the  pension  liabilities  will be
            reduced by $6.6, representing the accrued U.K. pension plan balance.
            The Company  expects to record an expense of  approximately  $6.6 in
            the fourth quarter of Fiscal 2003 related to this settlement.

17.   Comparative figures

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


                                       12
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS
        (in millions of U.S. dollars, except per share amounts, and in
        accordance with U.S. GAAP)

Overview

Zarlink is a global  provider  of  microelectronics  for  voice,  data and video
networks  and  for  medical  applications.   Zarlink's  Communications  business
specializes in broadband connectivity solutions over wired, wireless and optical
media.  Zarlink's Medical business  provides  applications  specific  integrated
circuit solutions (ASIC) for applications  such as pacemakers,  hearing aids and
portable instruments.  At December 27, 2002, the Company employed  approximately
1,322 people worldwide, including approximately 450 designers.

The following  discussion and analysis  explains  trends in Zarlink's  financial
condition and results of operations for the three and nine months ended December
27, 2002, respectively,  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 29, 2002.

Forward-Looking Statements

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

Such risks,  uncertainties and assumptions include, among others, the following:
increasing  price  and  product/service  competition  by  foreign  and  domestic
competitors,  including  new  entrants;  rapid  technological  developments  and
changes;  the ability to continue to  introduce  competitive  new  products on a
timely,  cost-effective  basis;  delays  in  product  development;  the  mix  of
products/services;  changes in  environmental  and other  domestic  and  foreign
governmental   regulations;   protection   and  validity  of  patent  and  other
intellectual  property  rights;  import  protection  and  regulation;   industry
competition;  industry  capacity and other industry  trends;  the ability of the
Company to  attract  and retain key  employees;  demographic  changes  and other
factors  referenced in the  Company's  Annual Report on Form 10-K for the fiscal
year ended March 29, 2002.

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 29, 2002,  including those  identified
under   "Forward-Looking   Statements  and  Risk   Factors".   In  making  these
forward-looking  statements,  which  are  identified  by words  such as  "will",
"expects", "intends",  "anticipates" and similar expressions, the Company claims
the protection of the safe-harbor for  forward-looking  statements  contained in
the Reform Act. The Company  undertakes  no  obligation  to update  publicly any
forward-looking statements whether as a result of new information, future events
or otherwise.


                                       13
<PAGE>

RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED DECEMBER 27, 2002

<TABLE>
<CAPTION>
Summary of Results from Operations                                      Three Months Ended                  Nine Months Ended
                                                                -------------------------------     --------------------------------
(millions of U.S. dollars, except per share amounts)            Dec. 27, 2002     Dec. 28, 2001     Dec. 27, 2002      Dec. 28, 2001
                                                                -------------     -------------     -------------      -------------
<S>                                                                <C>               <C>               <C>               <C>
Consolidated revenue                                               $  46.8           $  51.7           $ 141.0           $ 170.0
   Communications segment revenue                                     39.8              42.7             120.6             144.2
   Medical segment revenue                                             7.0               9.0              20.4              25.8

Operating loss                                                       (14.1)            (16.8)            (37.0)           (107.1)
   Communications segment operating loss                             (12.9)            (14.2)            (35.8)            (68.7)
   Medical segment operating income (loss)                            (1.2)              1.2              (2.6)              6.3
   Unallocated recoveries (costs)                                       --              (3.8)              1.4             (44.7)

Net loss for the period                                              (13.7)            (18.3)            (34.4)            (98.5)
Net loss per common share - basic and diluted                        (0.11)            (0.15)            (0.28)            (0.80)
Weighted average common shares outstanding - millions                127.2             126.0             127.0             125.4
</TABLE>

Revenue in the third  quarter of Fiscal  2003 was  $46.8,  a decrease  of 9%, or
$4.9, from the third quarter of Fiscal 2002. Revenue in the first nine months of
Fiscal 2003 was $141.0, a decrease of 17%, or $29.0,  from the first nine months
of Fiscal  2002.  Semiconductor  sales  volumes  continue  to be affected by the
prolonged downturn impacting the entire semiconductor  industry.  Higher channel
inventory  levels and lower  end-customer  demand  continue to keep sales levels
suppressed,  however recent increased customer bookings are beginning to show an
indication of improved inventory positions with customers.

In the third  quarter of Fiscal  2003,  the Company  recorded a net loss,  after
preferred share dividends,  of $14.2, or $0.11 per share. This compares to a net
loss,  after  preferred  share  dividends,  of $18.8, or $0.15 per share, in the
third quarter of Fiscal 2002, after amortization of acquired intangibles of $2.2
and stock compensation expense of $3.8.

During the third  quarter  and first nine  months of Fiscal  2003,  the  Company
continued to reduce its  workforce  across all  geographic  regions and incurred
severance  costs  of $3.6  ($5.0  year-to-date).  Worldwide  headcount  has been
reduced by approximately 200 employees over the first nine months of the year in
a continuing  effort to streamline  operations.  Severance  costs of $0.3 in the
quarter  ($0.9  year-to-date)  were  included  in  cost of  revenue,  negatively
impacting  gross  margins by one  percentage  point during the third quarter and
first nine months of Fiscal  2003,  respectively.  The balance of the  severance
costs increased research and development  ("R&D") expense by $2.5 in the quarter
($2.7  year-to-date),  and  negatively  impacted  selling  and  various  general
administration   function   ("S&A")  expenses  by  $0.8  in  the  quarter  ($1.4
year-to-date).

For the nine months ended  December 27, 2002,  the Company  recorded a net loss,
after preferred share dividends, of $35.9, or $0.28 per share, including a stock
compensation  recovery of $1.4.  This  compares to a net loss,  after  preferred
share  dividends,  of $100.0,  or $0.80 per  share,  for the nine  months  ended
December  28,  2001,  after a special  inventory  write-down  of $29.1,  special
charges of $34.6 related to workforce  restructuring,  amortization  of acquired
intangibles of $4.4, and stock compensation expense of $10.1.

Zarlink's  operations  are  comprised  of two  reportable  business  segments  -
Communications  and Medical.  Zarlink targets the  communications  industry with
offerings  that  specialize  in  broadband  connectivity  solutions  over wired,
wireless and optical media.  Zarlink's Medical business 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.


                                       14
<PAGE>

Communications

<TABLE>
<CAPTION>
                                                  Three Months Ended                                Nine Months Ended
                                      ------------------------------------------       -------------------------------------------
                                      Dec. 27,    % of         Dec. 28,    % of        Dec. 27,    % of         Dec. 28,     % of
(millions of U.S. dollars)              2002      Total          2001      Total         2002      Total          2001       Total
                                      --------    -----        --------    -----       --------    -----        --------     -----
<S>                                    <C>         <C>          <C>         <C>         <C>         <C>         <C>         <C>
Revenue:
Network Access                         $ 27.8       70%         $ 25.8       60%        $ 85.6       71%        $  88.2      61%
User Access                              12.0       30%           16.9       40%          35.0       29%           56.0      39%
                                       ------      ---          ------      ---         ------      ---         -------     ---
Total Communications                   $ 39.8      100%         $ 42.7      100%        $120.6      100%        $ 144.2     100%
                                       ======      ===          ======      ===         ======      ===         =======     ===
As a % of total revenue                             85%                      83%                     86%                     85%

Communications
Operating loss                         $(12.9)                  $(14.2)                 $(35.8)                  $(68.7)
                                       ======                   ======                  ======                   ======
</TABLE>

Network  access  and  user  access  products  represent  the two  major  product
categories in the Company's  Communications  business  segment.  Network  access
products include products that provide  connectivity to the enterprise and metro
segments such as feeder,  aggregation and transmission applications and products
that address the  multi-protocol  physical and network layers.  In simple terms,
network access semiconductor  products connect network equipment together.  User
access  products allow users to connect to the network.  These products  include
wireless (for example,  cellular  chipsets) and infotainment  applications  (for
example, set top boxes and digital TV).

Revenue for the three months ended December 27, 2002 totaled $39.8, down 7% from
$42.7 for the same period in Fiscal  2002.  Although  relatively  flat from last
quarter, the Communication  revenues included a larger percentage of user access
product revenues as against the total for the segment.

Revenue for the first nine months of Fiscal 2003 totaled  $120.6,  down 16% from
$144.2 for the same period in Fiscal  2002.  Revenue was  adversely  affected by
customer and channel  inventory  adjustments in the Company's network access and
user access  business,  a trend that began during the second half of Fiscal 2001
and is continuing into Fiscal 2003. Revenue also decreased in Fiscal 2003 due to
the loss of foundry  revenue  resulting  from the disposal of two  complementary
metal oxide semiconductor  ("CMOS") fabrication facilities in the fourth quarter
of Fiscal 2002.

With customers  currently  placing orders to meet their  short-term  needs,  the
"turns"  business  (customers  placing  orders for  shipment  in the same fiscal
quarter) had been steadily increasing since the second quarter of Fiscal 2002 to
peak at 40% of orders  shipped in the second quarter of Fiscal 2003. The "turns"
business dropped to approximately  35% of the orders shipped in the three months
ended December 27, 2002.

The  segment's  operating  loss declined to $12.9 in the third quarter of Fiscal
2003 from an operating loss of $14.2 in the same period of Fiscal 2002. Included
in the current  quarter's  operating loss were severance costs of  approximately
$3.2,  mostly  related to the  termination  of the VDSL (Very high rate  Digital
Subscriber Line) product  development,  discussed elsewhere in this Management's
Discussion and Analysis.

The  segment's  operating  loss  declined  to $35.8 in the first nine  months of
Fiscal 2003 from an  operating  loss of $68.7 in the same period of Fiscal 2002.
The nine month Fiscal 2002  operating  loss included an inventory  write-down of
$29.1 in the first quarter of that year.  The balance of the  improvement is due
to the effects of cost reduction programs implemented since the first quarter of
Fiscal 2002.

Medical

<TABLE>
<CAPTION>
                                                  Three Months Ended                                Nine Months Ended
                                      ------------------------------------------       -------------------------------------------
                                      Dec. 27,    % of         Dec. 28,    % of        Dec. 27,    % of         Dec. 28,     % of
(millions of U.S. dollars)              2002      Total          2001      Total         2002      Total          2001       Total
                                      --------    -----        --------    -----       --------    -----        --------     -----
<S>                                    <C>         <C>          <C>         <C>         <C>         <C>         <C>         <C>
Revenue:
Medical                                $ 7.0       100%         $ 9.0       100%        $ 20.4      100%        $25.8       100%
                                       =====       ===          =====       ===         ======      ===         =====       ===
As a % of total revenue                             15%                      17%                     14%                     15%

Medical Operating
Income (loss)                          $(1.2)                   $ 1.2                   $ (2.6)                 $ 6.3
                                       =====                    =====                   ======                  =====
</TABLE>

Zarlink's   Medical  business  provides  ultra  low  power  ASIC  solutions  for
applications such as pacemakers, hearing aids and portable instruments.


                                       15
<PAGE>

Revenue  decreased  during the third quarter of Fiscal 2003 to $7.0 from $9.0 in
the third  quarter of Fiscal 2002.  During the first nine months of Fiscal 2003,
revenue  decreased  to $20.4 from $25.8 in the first nine  months of Fiscal 2002
due to higher customer inventories and reduced demand by customers in the analog
audiologic business.

The "turns"  business in the third  quarter  also  decreased  within the Medical
Segment from last quarter, to represent  approximately 17% of the orders shipped
in the three months ended December 27, 2002.

The  segment's  operating  results for the third  quarter and nine months  ended
December 27, 2002,  declined from the corresponding  periods in Fiscal 2002 as a
result of lower revenues  combined with reduced  margins on the medical  segment
products.

GEOGRAPHIC REVENUE

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

<TABLE>
<CAPTION>
                                                  Three Months Ended                                Nine Months Ended
                                      ------------------------------------------       -------------------------------------------
                                      Dec. 27,    % of         Dec. 28,    % of        Dec. 27,    % of         Dec. 28,     % of
(millions of U.S. dollars)              2002      Total          2001      Total         2002      Total          2001       Total
                                      --------    -----        --------    -----       --------    -----        --------     -----
<S>                                    <C>         <C>          <C>         <C>         <C>         <C>         <C>         <C>
Revenue:
Asia/Pacific                           $17.6        37%         $15.5        30%        $ 52.3       37%        $ 42.7       25%
Europe                                  15.4        33%          18.2        35%          46.4       33%          60.1       35%
United States                            9.7        21%          14.1        27%          29.4       21%          51.8       30%
Canada                                   2.4         5%           3.4         7%           8.9        6%          12.0        8%
Other Regions                            1.7         4%           0.5         1%           4.0        3%           3.4        2%
                                       -----       ---          -----       ---         ------      ---         ------      ---
Total                                  $46.8       100%         $51.7       100%        $141.0      100%        $170.0      100%
                                       =====       ===          =====       ===         ======      ===         ======      ===
</TABLE>

For the three months ended December 27, 2002, the net movement in exchange rates
from the corresponding period in Fiscal 2002 favorably impacted total revenue by
5% ($2.3).  During the first nine  months of Fiscal  2003,  the net  movement in
exchange rates from the corresponding  period in Fiscal 2002 favorably  impacted
total revenue by 3% ($4.6).  The favorable  foreign exchange impact in the third
quarter and first nine months of Fiscal 2003 was primarily a result of increases
in the U.K.  pound sterling and Swedish Krona against the U.S.  dollar  exchange
rate.

Asia/Pacific

Asia/Pacific  sales  increased  by 14% during the third  quarter of Fiscal  2003
compared to the third  quarter of Fiscal 2002,  and  continue to  represent  the
largest geographic segment of customer revenues. During the first nine months of
Fiscal 2003,  sales increased by 22% compared to the same period in Fiscal 2002,
due to  higher  communications  product  sales in both of the  network  and user
access product categories, partially offset by reduced medical sales.

Europe

European sales  decreased by 15% in the third quarter of Fiscal 2003 compared to
the third  quarter of Fiscal  2002.  For the first nine  months of Fiscal  2003,
sales  decreased  by 23% compared to the first nine months of Fiscal 2002 due to
lower  communications  segment  sales of both  network  access  and user  access
products, offset by moderate increases in medical product sales.

United States

Sales to  customers  in the  United  States  decreased  by 31%  during the third
quarter of Fiscal 2003  compared to the third  quarter of Fiscal  2002.  For the
first nine months of Fiscal 2003,  United States sales decreased by 43% compared
to the same period in Fiscal  2002.  The  decrease  was due  primarily  to lower
medical and user access product sales.

Canada

Canadian  sales  decreased  by 29% in the third  quarter of Fiscal 2003 over the
same period in Fiscal 2002.  During the first nine months of Fiscal 2003,  sales
to Canadian  customers  decreased  by 26%  compared to the same period in Fiscal
2002 due to lower communications segment sales.


                                       16
<PAGE>

GROSS MARGIN

<TABLE>
<CAPTION>
                                                                    Three Months Ended                 Nine Months Ended
                                                              ------------------------------     -------------------------------
(millions of U.S. dollars)                                    Dec. 27, 2002    Dec. 28, 2001     Dec. 27, 2002     Dec. 28, 2001
                                                              -------------    -------------     -------------     -------------
<S>                                                                <C>              <C>               <C>               <C>
Gross Margin                                                       $21.2            $20.9             $64.0             $42.6

As a percentage of revenue                                            45%              40%               45%               25%
As a percentage of revenue, excluding Q1
  Fiscal 2002 excess inventory charge of $29.1                        45%              40%               45%               42%
</TABLE>

Gross margin improved by 5 percentage points in the third quarter of Fiscal 2003
compared to the same period in Fiscal 2002. Lower overall  manufacturing  costs,
and a favorable  product mix in the  communications  segment has  benefited  the
margin  percentages in the quarter  relative to last year.  Gross margin for the
quarter was flat as compared to the second quarter of Fiscal 2003.

Gross margin improved by 3 percentage  points in the first nine months of Fiscal
2003 compared to the same period in Fiscal 2002,  excluding the excess inventory
charge  recorded  in the first  quarter of Fiscal  2002,  as a result of reduced
manufacturing costs and an improved product mix. However, gross margin continues
to be impacted by low sales volumes.

Fiscal 2002 Inventory Charge

During the first quarter ended June 29, 2001, the Company reviewed its inventory
requirements  for  the  following  12  months  in  light  of  the  semiconductor
industry-wide  slowdown  and  higher  channel  inventories.  As a result of this
review,  the Company recorded an excess inventory charge to cost of sales in the
first quarter of Fiscal 2002 amounting to $29.1 for inventories  estimated to be
beyond its needs for the following 12 months. Excluding the effect of the excess
inventory  charge of $29.1,  the Company's  gross margin as a percent of revenue
was 42% for the nine months ended December 28, 2001.

OPERATING EXPENSES

Research and Development ("R&D")

<TABLE>
<CAPTION>
                                                                    Three Months Ended                 Nine Months Ended
                                                              ------------------------------     -------------------------------
(millions of U.S. dollars)                                    Dec. 27, 2002    Dec. 28, 2001     Dec. 27, 2002     Dec. 28, 2001
                                                              -------------    -------------     -------------     -------------
<S>                                                                <C>              <C>               <C>               <C>
R&D Expenses                                                       $ 23.8           $ 19.9            $ 67.7            $ 62.9

As a percentage of revenue                                             51%              38%               48%               37%
</TABLE>

R&D expenses increased by 20%, or $3.9, in the third quarter of Fiscal 2003 from
the same period in Fiscal 2002. During the first nine months of Fiscal 2003, R&D
expenses  increased by 8%, or $4.8,  compared to the same period in Fiscal 2002,
primarily  due to new product  development,  increased  headcount in certain R&D
projects to accelerate time to market  initiatives  and certain  severance costs
associated with project cancellations.  Third quarter R&D expenses included $2.5
of  severance  costs,  principally  related to the  Company's  decision to cease
product  development in the VDSL (Very high rate Digital Subscriber Line) market
in order to concentrate  its R&D resources on higher and more  immediate  growth
opportunities.  Management decided to cease its VDSL product  development due to
revised expectations of unacceptably long time-to-revenue and volume deployment.

The Company continues to refocus its R&D resources on programs and products that
demonstrate  superior  potential for near- and medium-term  revenue.  Management
expects that R&D  spending  will  decrease  over the balance of Fiscal 2003 as a
result of this exercise.

During the third quarter of Fiscal 2003,  the Company  released 26 new products,
putting  the total for the first nine  months of Fiscal  2003 at 54 new  product
releases.  New  communications  circuits released during Fiscal 2003 target high
performance in network access  processing and data  switching,  and also include
industry  leading  tuner chips for cable set top boxes.  The  Company's  medical
segment has also released various pacemaker protection circuits,  in addition to
analog and digital hearing aid circuits,  during the first nine months of Fiscal
2003.


                                       17
<PAGE>

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

o     Time Division  Multiplex  ("TDM")  switch  development to set new industry
      standards in terms of channel density, levels of integration, feature sets
      and power density;

o     Development  of Voice  Processing  products for today's  emerging  Carrier
      Class Gateways and Voice over IP (Internet  Protocol)  Networks for mobile
      telephony,  addressing  the  problem  of voice  echo  cancellation  in the
      system.   New  products  will  include   Zarlink   technology  to  improve
      convergence time, voice quality and allow the product to consume even less
      power and also  enable  better  power  consumption  for voice  transmitted
      through the mobile network;

o     Planned  development  of higher speed Phase Lock Loops ("PLL") for Network
      Timing &  Synchronization.  These  high speed PLLs will be used to provide
      the timing for transporting  information over SONET/SDH links that operate
      up to 622 Mbits/s;

o     Meeting  convergence  with TDM/IP  Processing  in Packet  Processing,  and
      Ethernet  Switching  for  backplanes,  linecard,  edge/metro  and  Virtual
      Private Network ("VPN") switches in Packet Switching;

o     Utilization  of  its  Radio   Frequency   ("RF")   expertise  for  Timing,
      Synthesizers,  Interface drivers,  and Amplifiers for its High Performance
      Analog product development; and

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

In the User Access product line, R&D activities focused on the following areas:

o     Providing a multi-mode cell phone radio transceiver  chip,  compliant with
      2/2.5G standards for Time Division Multiple Access  ("TDMA")/Global System
      for Mobile  communications  ("GSM")/Enhanced  Data rates for GSM Evolution
      ("EDGE")/General  Packet  Radio  Service  ("GPRS")/Advanced  Mobile  Phone
      Service/System  ("AMPS"),  and  developing a 2-chip radio solution for 3rd
      generation  GSM/Wide and Code  Division  Multiple  Access  ("WCDMA")  cell
      phones;

o     Providing Tuner, demodulator and peripheral chips for Satellite, Cable and
      Terrestrial  Digital Set Top boxes,  integrated  Digital  TV's 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  Medical  business  segment,  R&D  activities  focused  on  semiconductor
solutions  and   technologies   for  a  variety  of  in-vivo  and   audiological
applications, including:

o     Implantable  pacemakers and  defibrillators  for cardiac  rhythm  control,
      hearing aids,  cochlea implants (auditory nerve stimulators) for restoring
      hearing in the profoundly  deaf, and medical  instruments for a variety of
      diagnostic and therapeutic applications;

o     Ultra low power radio  frequency  communication  with medical devices that
      have increasing diagnostic capability;

o     Ultra low power audio processing and customized  digital signal processing
      ("DSP") and  Coder/Decoders  ("CODECs")  to support  digital  hearing aids
      providing  improved  sound  quality  that  can be  better  matched  to the
      patient's hearing loss; and

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

Selling and Administrative ("S&A")

<TABLE>
<CAPTION>
                                                                    Three Months Ended                 Nine Months Ended
                                                              ------------------------------     -------------------------------
(millions of U.S. dollars)                                    Dec. 27, 2002    Dec. 28, 2001     Dec. 27, 2002     Dec. 28, 2001
                                                              -------------    -------------     -------------     -------------
<S>                                                                <C>              <C>               <C>               <C>
S&A Expenses                                                       $ 11.5           $ 11.8            $ 34.7            $ 37.7

As a percentage of revenue                                             25%              23%               25%               22%
</TABLE>

Third quarter S&A expenses,  inclusive of $0.8 in severance costs,  decreased by
$0.3, or 3% compared to the third quarter of Fiscal 2002. During the nine months
ended  December 27, 2002,  S&A expenses,  inclusive of $1.4 in severance  costs,
decreased  by $3.0,  or 8%, as compared to the first nine months of Fiscal 2002,
principally  as a  result  of cost  reductions  implemented  in  Fiscal  2002 in
response to the industry downturn. Cost reduction strategies were applied within
the  sales  and  marketing  organizations  and  various  general  administration
functions across all geographic  regions.  Management  expects that S&A expenses
will continue to show moderate cost savings in the fourth quarter of Fiscal 2003
in absolute dollar amounts.


                                       18
<PAGE>

Stock Compensation

The  Company  records  stock  compensation  expense  or  recovery  arising  from
retention  conditions  associated with the stock awarded to certain employees of
Vertex  Networks,  Incorporated  ("Vertex") which was acquired in July 2000, and
from certain stock options subjected to option exchange programs.

During the three months ended December 27, 2002,  the Company  recorded no stock
compensation  expense due to the vesting of restricted  stock awarded to certain
employees  of Vertex  (December  28,  2001 - $3.8,  related  to the  vesting  of
restricted  stock and the  amortization of intrinsic value of unexercised  stock
options modified by the option exchange programs). No further stock compensation
expense will be recorded against these formerly restricted shares.

For the nine months ended  December 27, 2002,  the Company  recorded a net stock
compensation  recovery of $1.4, as compared to a stock  compensation  expense of
$10.1 for the nine months ended December 28, 2001. The compensation  recovery in
the first nine months of Fiscal 2003 is a result of the decrease in market price
of the underlying common stock in Fiscal 2003. The reduced market price resulted
in a reduction of the intrinsic value being amortized over the term of the stock
option and a recovery  of  previously  recorded  stock  compensation  expense on
outstanding unvested options.

Special Charge Recorded in the First Quarter of Fiscal 2002

In the first  quarter of Fiscal 2002 and in response to the  industry  downturn,
the  Company  implemented  a  cost-containment  plan in order to  preserve  cash
resources.  The  cost-containment  plan  included a workforce  reduction  of the
Company's  total  employee  base  by 439  employees,  globally  across  all  job
categories, which was completed by the end of Fiscal 2002. The total cost of the
first quarter Fiscal 2002 workforce reduction program was estimated to be $26.7.

As a  result  of  the  workforce  reduction  program  and  consolidating  design
activity,  the Company  took steps to provide for excess  leased  facilities  in
Canada, the United States,  the United Kingdom,  and the Far East. The estimated
cost of the lease and contract settlements amounted to $7.9 in the first quarter
of Fiscal 2002.

The  total of these  pre-tax  special  charges  amounted  to $34.6 in the  first
quarter of Fiscal 2002. In the fourth quarter of Fiscal 2002,  $3.1 of the first
quarter  special  charge was  reversed  due to savings of $2.3 on the  workforce
reduction program and $0.8 related to the subsequent sub-letting of vacant space
in Irvine, California.

Amortization of Acquired Intangibles

Amortization  of  acquired  intangibles  decreased  in the three and nine months
ended  December  27,  2002 to nil in each period from $2.2 and $4.4 in the third
quarter  and first  nine  months of Fiscal  2002,  respectively.  The  remaining
acquired  intangibles,  including  goodwill,  resulting from the  acquisition of
Vertex on July 28,  2000 were  expensed  in the third  quarter of Fiscal 2002 to
reduce the carrying  value to nil. With the adoption of SFAS 142 in Fiscal 2003,
intangible assets with indefinite lives will no longer be amortized, but will be
subject to periodic impairment tests.

OTHER INCOME (EXPENSE)

Other income (expense) was comprised of interest income,  foreign exchange gains
or losses, and gains or losses from equity investments.

On October 3, 2002, the Company sold its investment in DALSA  Semiconductor Inc.
("DALSA") for cash proceeds of $4.1  resulting in a gain of $0.7 being  recorded
in Other Income during the third quarter and first nine months of Fiscal 2003.

Interest  income  was $0.7 for the  three  months  ended  December  27,  2002 as
compared to $1.0 in the same period of Fiscal 2002. The decrease compared to the
third quarter of Fiscal 2002 was mainly due to lower interest rates.  During the
first nine months of Fiscal 2003,  interest  income was $2.6 as compared to $4.6
in the first nine months of Fiscal 2002. The decrease compared to the first nine
months  of  Fiscal  2002 was due to  reduced  average  cash  balances  and lower
interest rates.

Foreign  exchange losses in the third quarter of Fiscal 2003 amounted to $0.4 as
compared to losses of $1.1 for the same period in Fiscal  2002.  During the nine
months ended  December  27, 2002,  foreign  exchange  gains  amounted to $1.2 as
compared to gains of $4.5 for the nine months ended  December  28,  2001.  Gains
(losses)  relating to external  foreign  exchange  contracts  are  recognized in
income as they  mature,  or to the extent  they are  ineffective  hedges.  Gains
(losses) were also realized on short-term  investments  held in currencies other
than the functional  currency of the parent company,  and according to month-end
market rates.


                                       19
<PAGE>

There were no further  equity losses  recorded  during the three and nine months
ended December 27, 2002, as the  investment in Optenia,  Inc. was written off to
nil in the fourth quarter of Fiscal 2002 following its bankruptcy. Equity losses
of $0.8 on the investment in Optenia,  Inc. were recognized in the third quarter
of Fiscal 2002.  During the first nine months of Fiscal 2002,  equity  losses on
the investment in Optenia, Inc. amounted to $2.2.

INTEREST EXPENSE

Interest expense was $0.3 for the three months ended December 27, 2002, compared
with $0.2 for the third quarter of Fiscal 2002.  During the first nine months of
Fiscal 2003, interest expense of $0.7 was recognized, compared with $0.6 for the
first nine months of Fiscal 2002. The interest  expense  relates  principally to
capital leases and the pension liability in Sweden.

INCOME TAXES

Income tax expense for the third  quarter of Fiscal 2003 was $0.3,  comprised of
domestic  income and  capital  taxes,  compared  with an expense of $0.4 for the
corresponding period in Fiscal 2002.

Income tax expense for the first nine months of Fiscal 2003 was $1.2,  comprised
of domestic  income and capital taxes,  compared with a recovery of $2.3 for the
corresponding  period in Fiscal 2002.  The income tax recovery in the first nine
months of Fiscal  2002 was due  principally  to tax  allowances  on the  special
inventory charge recorded at June 29, 2001.

The  Company  has a  valuation  allowance  against  its  deferred  tax assets at
December  27, 2002 of $104.4  (March 29,  2002 - $75.8).  The  increase  relates
mainly to losses incurred in the Company's  foreign  jurisdictions and temporary
differences  in the Company's  foreign and domestic  operations.  Management has
determined  that  sufficient  uncertainties  exist  regarding the realization of
certain of its deferred tax assets.

BACKLOG

<TABLE>
<CAPTION>
                                                                                        As at
                                                       -----------------------------------------------------------------------
(millions of U.S. dollars)                             Dec. 27, 2002     Sept. 27, 2002      June 28, 2002       Mar. 29, 2002
                                                       -------------     --------------      -------------       -------------
<S>                                                       <C>                <C>                 <C>                 <C>
90 Day Backlog                                            $ 36.0             $ 31.5              $ 28.0              $ 33.5
</TABLE>

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.

As a result of improved  bookings  during the quarter in both the  communication
and medical  segments,  the backlog has  increased  as compared  against  recent
quarters. However, bookings continue to be affected by the continued downturn in
the  communications   semiconductor   industry,   described  elsewhere  in  this
Management's Discussion and Analysis.

NET LOSS

The Company recorded a net loss,  after preferred share dividends,  of $14.2, or
$0.11 per share,  in the third  quarter of Fiscal 2003.  This  compares to a net
loss, after preferred share dividends, of $18.8, or $0.15 per share, in the same
period in Fiscal 2002.  For the nine months ended December 27, 2002, the Company
recorded a net loss,  after  preferred share  dividends,  of $35.9, or $0.28 per
share,  as compared to $100.0,  or $0.80 per share,  in the first nine months of
Fiscal 2002.

The net losses for the three and nine  months  ended  December  27,  2002,  were
primarily  a result of lower  revenues  across the  communications  and  medical
segments.  There was no stock  compensation  expense  included in the  quarterly
results,  while the year-to-date net loss included a stock compensation recovery
of $1.4.

The  comparative net loss for the nine months ended December 28, 2001 included a
charge  to  cost  of  revenue  for  excess   inventory   of  $29.1  and  special
restructuring  charges  of $34.6.  The loss  also  included  stock  compensation
expense of $10.1 and amortization of intangibles of $4.4.

LIQUIDITY AND CAPITAL RESOURCES

At December 27, 2002, cash, cash equivalents and short-term  investment balances
totaled $133.1, down from $154.4 at March 29, 2002. Cash and cash equivalents at
December 27, 2002, included in the amount above, totaled $27.8 (March 29, 2002 -
$75.6).


                                       20
<PAGE>

Cash used in operations  before working capital changes amounted to $26.0 during
the first nine  months of Fiscal  2003,  as  compared to $37.8 used in the first
nine  months of  Fiscal  2002 when the  Company  began to carry out  significant
restructuring  activities.  Since March 29, 2002, the Company's working capital,
as reflected in the  consolidated  statements of cash flows,  decreased by $6.6,
mainly  as a result of  reductions  of  inventories,  accounts  receivable,  and
prepaid  expenses  totaling $22.9.  Deferred  credits  increased by $4.0,  which
included  the  receipt  of a $3.3 net cash  favorable  settlement  from a former
tenant  for  lease  obligations  at the  Swedish  plant at the end of the  third
quarter.  This was offset by the reduction of trade  accounts  payable and other
accrued  liabilities in the amount of $20.3.  Management expects to further draw
down  inventory  levels  through the remainder of Fiscal 2003 by reducing  cycle
times and managing  inventories on a  build-to-order  basis. In comparison,  the
Company's  working  capital  decreased  by $16.4 during the first nine months of
Fiscal  2002,  mainly as a result  of  reductions  in  accounts  receivable  and
inventories  totaling $24.6 and $11.2,  respectively.  This was offset by a $2.6
increase in prepaid  expenses and other assets and  reductions of trade accounts
payable and other accrued liabilities in the amount of $16.8.

Cash used in investing  activities  was $26.4 for the nine months ended December
27, 2002,  primarily from purchases of short-term  investments  totaling $251.9,
offset by matured short-term  investments of $227.0.  Cash balances were reduced
by fixed  asset  purchases  of $5.7  during the first  nine  months of the year,
offset by  proceeds  from  disposal  of fixed  assets of $0.4.  The fixed  asset
additions were primarily related to design tools and continuing  improvements to
information  technology  resources.   Management  expects  capital  spending  to
decrease  in the last  quarter of Fiscal  2003.  A net  reduction  in  long-term
investments  of $3.8 in the first nine months of Fiscal 2003  resulted from cash
proceeds  of $4.2  received  during  the  third  quarter  from  the  sale of the
Company's  minority  investment in DALSA  Semiconductor Inc. on October 3, 2002,
offset  by a small  investment  earlier  in the  year.  Cash  used in  investing
activities was $52.5 for the nine months ended December 28, 2001, primarily as a
result of cash payments of $28.4 for fixed asset  additions,  offset by proceeds
from the  repayment  of a note  receivable  in the amount of $4.4.  Additions to
fixed  assets  during the first nine months of Fiscal 2002 mainly  consisted  of
construction of the Company's new headquarters in Ottawa,  Canada.  The building
was  subsequently  sold in the fourth  quarter of Fiscal 2002.  Net purchases of
short-term  investments in the amount of $28.0 also  contributed to the net cash
outflow from investing activities during the first nine months of Fiscal 2002.

Cash used in  financing  activities  during the first nine months of Fiscal 2003
was $4.1.  The use of cash was  primarily  the  result of  repayment  of $1.8 of
capital  leases,  the repurchase of $1.3 of the Company's  redeemable  preferred
shares, and the payment of $1.5 for dividends on the preferred shares, offset by
$0.5 of new common  shares issued from  exercised  stock  options.  Cash used in
financing  activities in the first nine months of Fiscal 2002 was $4.0.  The use
of cash was primarily the result of the repayment of $5.1 of long-term  debt and
capital lease  liabilities,  the repurchase of $0.7 of preferred shares, and the
payment of $1.5 for  dividends on the  preferred  shares,  offset by $3.3 of new
common shares issued from exercised stock options.

During  Fiscal  2002,  the  Company  took steps to wind up its  defined  benefit
pension plan in the United  Kingdom and replaced it with a defined  contribution
plan. The cash settlement of the pension plan is expected to cost  approximately
$10.5.  The increase in the cost from that  reported in previous SEC filings was
due to subsequent  unfavorable  movements in the yield on U.K. government bonds.
On January 28,  2003,  the  Company  paid $8.0 as partial  consideration  of the
pension  obligation  settlement to a large,  AAA-rated  insurance company in the
U.K.  under a wind-up  agreement.  In addition,  the Company  will  transfer its
pension plan assets of approximately $15.5 in February 2003. The Company expects
to make a final  payment of  approximately  $2.5 later in Fiscal  2004 after the
final adjustments are calculated.

Cash is expected to further decline in the fourth quarter by approximately  $7.9
on  settlement  of a  foreign  currency  hedge  contract  on the  Company's  net
investment in a subsidiary in the United Kingdom.  This  transaction will result
in a corresponding  adjustment to the translation account in other comprehensive
loss relating to the Company's net investment in that subsidiary.

During the first nine  months of Fiscal  2003,  the  Company  declared  and paid
dividends of $1.5 on its redeemable preferred shares based on a $0.96 (Cdn$1.50)
per share dividend.  In addition,  the Company purchased 86,000 preferred shares
under its  purchase  obligation  during this  period.  As at December  27, 2002,
84,800  repurchased  preferred shares were cancelled by the transfer agent, with
an additional 6,200 shares to be cancelled in the fourth quarter of Fiscal 2003.
The cost to  repurchase  the  preferred  shares  totaled  $1.3 in the first nine
months of Fiscal 2003.

On June 6, 2002, the Company announced its Board of Directors had authorized the
continuation  of its normal  course  issuer  bid  program  to  repurchase  up to
6,358,203 common shares, representing 5% of the 127,164,078 common shares issued
and  outstanding  at May 31, 2002.  The  purchases  would take place on the open
market  through the stock  exchanges of New York and Toronto over a twelve-month
period beginning on June 10, 2002 and ending on June 9, 2003, or on such earlier
date as the  Company  may  complete  its  purchases  pursuant  to the  notice of
intention  to make a normal  course  issuer  bid filed  with The  Toronto  Stock
Exchange. The Company, which intends to cancel the repurchased shares,  believes
that at present no director, senior officer or insider of the Company intends to
sell any common  shares under this


                                       21
<PAGE>

program.  No common shares were repurchased  under the program during the period
from  March 30,  2002 to June 8, 2002,  nor under the  renewed  program  for the
period ended December 27, 2002.

In addition to cash,  cash  equivalents  and short-term  investment  balances of
$133.1 as at December  27,  2002,  the Company  had a  revolving  global  credit
facility of approximately  $15.9 (Cdn$25.0),  of which $6.0 in letters of credit
were outstanding.  Accordingly, the Company had unused and available demand bank
lines of credit totaling $9.9 as at December 27, 2002. In January 2003, cash and
cash equivalents  totaling $6.1 were  hypothecated  under the credit facility to
cover  outstanding  letters of credit.  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.

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 29, 2002.

As at  December  27,  2002,  the  Company  had  investments  in  Mitel  Networks
Corporation, a Canadian corporation that files annual and other reports with the
United States Securities and Exchange  Commission under the Securities  Exchange
Act of 1934, with a carrying value of $11.2 (March 29, 2002 - $14.1). Management
periodically  reviews the  Company's  investment  to determine if there has been
other than a temporary  decline in the market value of this investment below the
carrying value. When management  performs future  assessments of this investment
in the coming quarters, a decline in the value of Mitel Networks Corporation may
require  the  Company to  recognize  impairment  on the  remaining  value of its
investment which could be material.

Foreign Currency Translation

Management periodically evaluates the financial and operational  independence of
its foreign operations. Should a foreign subsidiary's local currency cease to be
its functional  currency,  then translation gains or losses on consolidating the
foreign subsidiary's financial statements subsequent to the change in functional
currency would be charged to operating income instead of a separate component of
accumulated other comprehensive income.

Recently issued accounting standards

In July 2002, the Financial Accounting Standards Board ("FASB") issued Statement
No. 146 ("SFAS 146"),  "Accounting  for Costs  Associated  with Exit or Disposal
Activities",  which  addresses  financial  accounting  and  reporting  for costs
associated  with exit or disposal  activities and nullifies EITF Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity  (including  Certain  Costs  Incurred in a  Restructuring)."
Statement 146 requires that a liability  for a cost  associated  with an exit or
disposal  activity be  recognized  when the  liability is incurred.  Under Issue
94-3,  a liability  for an exit cost was  recognized  at the date of an entity's
commitment to an exit plan.  Statement 146 concludes that an entity's commitment
to a plan, by itself,  does not create a present obligation to others that meets
the definition of a liability. Therefore, SFAS 146 eliminates the definition and
requirements  for  recognition  of exit  costs  in  Issue  94-3.  SFAS  146 also
establishes  that fair value is the  objective  for initial  measurement  of the
liability.  SFAS 146 will be effective for exit or disposal activities initiated
after December 31, 2002 and had no impact on the Company's financial statements,
but will impact the accounting  treatment of future exit or disposal  activities
should they occur.

In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), "Guarantor's
Accounting  and  Disclosure  Requirements  for  Guarantees,  Including  Indirect
Guarantees  of  Indebtedness  of Others".  FIN 45 requires  that a guarantor  is
required to recognize, at the inception of a guarantee, a liability for the fair
value  of the  obligation  undertaken  in  issuing  the  guarantee.  FIN 45 also
requires  additional  disclosure  by a  guarantor  in  its  interim  and  annual
financial statements about its obligations under certain guarantees. The initial
recognition and  measurement  provisions of FIN 45 are applicable for guarantees
issued or modified after December 31, 2002. The disclosure  requirements  of FIN
45 are effective for financial  statements of interim or annual  periods  ending
after December 15, 2002. The adoption of this  interpretation is not anticipated
to have a  material  effect on the  Company's  financial  position,  results  of
operations, or cash flows.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

Market Risk.  Market risk represents the risk of loss that may impact  Zarlink's
financial statements due to adverse changes


                                       22
<PAGE>

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

Foreign Exchange Risk. The Company  currently uses forward  contracts,  and to a
lesser  extent  foreign  currency  options,  to reduce the  exposure  to foreign
exchange risk. The most significant  foreign exchange  exposures for the Company
relate to the U.S.  dollar and the U.K.  pound  sterling.  At December 27, 2002,
there were unrealized losses of $6.4 on the forward contracts relating to Fiscal
2003.  The unrealized  loss is calculated as the  difference  between the actual
contract  rates and the  applicable  current  market rates that would be used to
terminate the forward  contracts on December 27, 2002, if it became necessary to
unwind these  contracts.  Management  believes that the  established  hedges are
effective  against  its known and  anticipated  cash flows,  and that  potential
future  losses from these hedges being marked to market would be largely  offset
by gains on the underlying hedged transactions.

Interest Rate Risk. The Company's primary exposure to interest rates is expected
to be in the rollover of its short-term investment portfolio. In accordance with
Company  policy,  cash  equivalents  and  short-term   investment  balances  are
primarily  comprised  of  high-grade  money  market  instruments  with  original
maturity  dates  of  less  than  one  year.  The  Company  does  not  hedge  the
re-investment risk on its short-term investments.

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

As at December 27, 2002,  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 29, 2002.

ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES

As of January 24, 2003, an evaluation was performed  under the  supervision  and
with the  participation  of the  management of the Company,  including its Chief
Executive  Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness
of the design and operation of the Company's disclosure controls and procedures.
Based on that evaluation,  the Company's management,  including the CEO and CFO,
concluded that the Company's  disclosure  controls and procedures were effective
as of December 27, 2002. There have been no significant changes in the Company's
internal controls or in other factors that could  significantly  affect internal
controls subsequent to December 27, 2002.


                                       23
<PAGE>

PART II - OTHER INFORMATION

ITEM 5. OTHER INFORMATION

As  part  of  the  Company's  continuing  efforts  to  optimize  good  corporate
governance  practices,  executive  directors  Jean-Jacques  Carrier  and  Donald
McIntyre resigned from the Company's Board of Directors,  effective  November 6,
2002.  Messrs.  Carrier and McIntyre  continue in their daily  management  roles
relating to Finance and Legal / Human  Resources,  respectively.  As a result of
these resignations,  the Company's Board was reduced by two and is now comprised
of eight individuals.  With this change,  Patrick Brockett,  President and Chief
Executive  Officer of the Company,  is the only member of the Board of Directors
of Zarlink who is also an employee.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

a) Exhibits

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

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

b) Reports on Form 8-K

Date of Filing     Description
--------------     -------------------------------------------------------------

November 8, 2002   Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
                   Pursuant To Section 906 of The Sarbanes-Oxley Act of 2002,
                   President and Chief Executive Officer

                   Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
                   Pursuant To Section 906 of The Sarbanes-Oxley Act of 2002,
                   Senior Vice President of Finance and Chief Financial Officer

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/ JEAN-JACQUES CARRIER
---------------------------
Jean-Jacques Carrier          Senior Vice President of Finance  January 31, 2003
                              and Chief Financial Officer
                              (Principal Financial and
                              Accounting Officer)


                                       24
<PAGE>

                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                SECTION 302 (a) OF THE SARBANES-OXLEY ACT OF 2002

I,  Patrick  J.  Brockett,  President  and Chief  Executive  Officer  of Zarlink
Semiconductor Inc., certify that:

      1.    I have  reviewed  this  quarterly  report  on Form  10-Q of  Zarlink
            Semiconductor Inc. (the "registrant");

      2.    Based on my knowledge,  this quarterly  report on Form 10-Q does not
            contain any untrue  statement of a material  fact or omit to state a
            material fact necessary to make the statements made, in light of the
            circumstances  under which such statements were made, not misleading
            with respect to the period covered by this quarterly report;

      3.    Based on my knowledge, the financial statements, and other financial
            information included in this quarterly report, fairly present in all
            material respects the financial condition, results of operations and
            cash flows of the  registrant as of, and for, the periods  presented
            in this quarterly report;

      4.    The registrant's other certifying officers and I are responsible for
            establishing and maintaining  disclosure controls and procedures (as
            defined in Exchange Act Rules 13a-14 and 15d-14) for the  registrant
            and we have:

            a)    designed  such  disclosure  controls and  procedures to ensure
                  that  material   information   relating  to  the   registrant,
                  including its consolidated  subsidiaries,  is made known to us
                  by others  within  those  entities,  particularly  during  the
                  period in which this quarterly report is being prepared;

            b)    evaluated the  effectiveness  of the  registrant's  disclosure
                  controls and  procedures  as of a date within 90 days prior to
                  the filing  date of this  quarterly  report  (the  "Evaluation
                  Date"); and

            c)    presented in this quarterly  report our conclusions  about the
                  effectiveness of the disclosure  controls and procedures based
                  on our evaluation as of the Evaluation Date;

      5.    The  registrant's  other  certifying  officers and I have disclosed,
            based on our most recent  evaluation,  to the registrant's  auditors
            and the audit  committee  of  registrant's  board of  directors  (or
            persons performing the equivalent function):

            a)    all  significant  deficiencies  in the design or  operation of
                  internal   controls   which   could   adversely   affect   the
                  registrant's ability to record, process,  summarize and report
                  financial  data  and  have  identified  for  the  registrant's
                  auditors any material weaknesses in internal controls; and

            b)    any fraud,  whether or not material,  that involves management
                  or  other  employees  who  have  a  significant  role  in  the
                  registrant's internal controls; and

      6.    The registrant's  other certifying  officers and I have indicated in
            this quarterly report whether or not there were significant  changes
            in internal  controls or in other  factors that could  significantly
            affect internal  controls  subsequent to the date of our most recent
            evaluation,   including  any  corrective   actions  with  regard  to
            significant deficiencies and material weaknesses.

      Date: January 31, 2003
            --------------------------

                                        /s/ PATRICK J. BROCKETT
                                        ----------------------------------------
                                        Patrick J. Brockett
                                        President and Chief Executive Officer


                                       25
<PAGE>

                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                SECTION 302 (a) OF THE SARBANES-OXLEY ACT OF 2002

I, Jean-Jacques  Carrier,  Senior  Vice-President of Finance and Chief Financial
Officer of Zarlink Semiconductor Inc., certify that:

      1.    I have  reviewed  this  quarterly  report  on Form  10-Q of  Zarlink
            Semiconductor Inc. (the "registrant");

      2.    Based on my knowledge,  this quarterly  report on Form 10-Q does not
            contain any untrue  statement of a material  fact or omit to state a
            material fact necessary to make the statements made, in light of the
            circumstances  under which such statements were made, not misleading
            with respect to the period covered by this quarterly report;

      3.    Based on my knowledge, the financial statements, and other financial
            information included in this quarterly report, fairly present in all
            material respects the financial condition, results of operations and
            cash flows of the  registrant as of, and for, the periods  presented
            in this quarterly report;

      4.    The registrant's other certifying officers and I are responsible for
            establishing and maintaining  disclosure controls and procedures (as
            defined in Exchange Act Rules 13a-14 and 15d-14) for the  registrant
            and we have:

            a)    designed  such  disclosure  controls and  procedures to ensure
                  that  material   information   relating  to  the   registrant,
                  including its consolidated  subsidiaries,  is made known to us
                  by others  within  those  entities,  particularly  during  the
                  period in which this quarterly report is being prepared;

            b)    evaluated the  effectiveness  of the  registrant's  disclosure
                  controls and  procedures  as of a date within 90 days prior to
                  the filing  date of this  quarterly  report  (the  "Evaluation
                  Date"); and

            c)    presented in this quarterly  report our conclusions  about the
                  effectiveness of the disclosure  controls and procedures based
                  on our evaluation as of the Evaluation Date;

      5.    The  registrant's  other  certifying  officers and I have disclosed,
            based on our most recent  evaluation,  to the registrant's  auditors
            and the audit  committee  of  registrant's  board of  directors  (or
            persons performing the equivalent function):

            a)    all  significant  deficiencies  in the design or  operation of
                  internal   controls   which   could   adversely   affect   the
                  registrant's ability to record, process,  summarize and report
                  financial  data  and  have  identified  for  the  registrant's
                  auditors any material weaknesses in internal controls; and

            b)    any fraud,  whether or not material,  that involves management
                  or  other  employees  who  have  a  significant  role  in  the
                  registrant's internal controls; and

      6.    The registrant's  other certifying  officers and I have indicated in
            this quarterly report whether or not there were significant  changes
            in internal  controls or in other  factors that could  significantly
            affect internal  controls  subsequent to the date of our most recent
            evaluation,   including  any  corrective   actions  with  regard  to
            significant deficiencies and material weaknesses.

      Date: January 31, 2003
            -------------------------

                                        /s/ JEAN-JACQUES CARRIER
                                        ----------------------------------------
                                        Jean-Jacques Carrier
                                        Senior Vice-President of Finance and
                                        Chief Financial Officer


                                       26
<PAGE>

                                  EXHIBIT INDEX

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

  99.1       Selected Consolidated Financial Statements in U.S.              28
             Dollars and in accordance with Canadian Generally
             Accepted Accounting Principles

  99.2       Management's Discussion and Analysis of Financial               39
             Condition and Results of Operations - Canadian Supplement


                                  27