SECURITIES AND EXCHANGE COMMISSION 
Washington, D.C. 20549

FORM 20-F

(Mark One)|_| REGISTRATION STATEMENT
  PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

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

For the fiscal year ended April 25,
2004

OR

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

For the transition period
  from _________________ to ________________

Commission file number:
0-49984

MITEL NETWORKS
  CORPORATION
             (Exact name of Registrant as specified in its charter)

Canada 
                 (Jurisdiction of incorporation or organization)

350 Legget Drive 
                         Ottawa, Ontario, Canada K2K 2W7 
(Address of principal executive offices)

Securities registered or to be
registered pursuant to Section 12(b) of the Act: None

Securities registered or to be
registered pursuant to Section 12(g) of the Act:

Common Shares, Without
Par Value 
                                (Title of Class)

Securities for which there is a
reporting obligation pursuant to Section 15(d) of the Act: None

Indicate the number of outstanding
shares of each of the issuer's classes of capital or common stock as of the close of the
period covered by the annual report: 111,688,279 common shares, 20,000,000 Class A
Convertible Preferred Shares, Series 1, and 67,249,944 Class B Convertible Preferred
Shares, Series 1, as of July 27, 2004.

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 which
financial statement item the registrant has elected to follow.

Item 17 |_|  Item 18 |X|



| |  | 
| |  | 

---



Basis of Presentation

The financial results of Mitel
Networks Corporation (Mitel Networks or the Company) contained in
this Form 20-F are reported in United States dollars and have been prepared in compliance
with accounting principles generally accepted in the United States of America for the
purposes of this annual report. Mitel Networks has mailed separately to its shareholders
audited consolidated financial statements prepared in accordance with accounting
principles generally accepted in Canada and reported in Canadian dollars. In this annual
report, all dollar amounts are expressed in United States dollars except where otherwise
indicated.

Forward Looking
Information

Certain statements in this annual
report constitute forward-looking statements. Mitel Networks has based these
forward-looking statements on its current expectations, which are subject to known and
unknown risks, uncertainties and assumptions. They include statements relating to future
revenues, expenses and profitability, the future development and expected growth of Mitel
Networks business and the communications industry, Mitel Networks ability to
successfully execute its business model and business strategy, projected capital
expenditures, and trends in government regulation.

Forward-looking statements can be
identified by terminology such as may, will, should,
could, expects, intends, plans,
anticipates, believes, estimates,
predicts, potential, or continue, or the negative of
these terms or other comparable terminology. These statements are only predictions. Actual
events or results may differ materially from those suggested by these forward-looking
statements. In evaluating these statements, carefully consider the risks outlined under
Item 3. Key Information  Risk Factors.

Although Mitel Networks believes that
the expectations reflected in the forward-looking statements are reasonable, it cannot
guarantee future results, levels of activity, performance or achievements. Mitel Networks
does not promise to update forward-looking information to reflect actual results or
changes in assumptions.



| | -
i - | 
| | ----- | 

---



TABLE OF CONTENTS

|                                                                    |   
|------------------------------------------------------------------- | --
|PART I                                                              | 1 
|                                                                    |   
|Item 1. Identity of Directors, Senior Management
      and Advisors | 1 
|                                                                    |   
|Item 2. Offer Statistics and Expected Timetable                     | 1 
|                                                                    |   
|Item 3. Key Information                                             | 1 
|                                                                    |   
|A. Selected Financial
      Data                                    | 1 
|B. Capitalization
      and Indebtedness                            | 3 
|C. Reasons for the
      offer and use of proceeds                  | 3 
|D. Risk Factors                                                     | 3 
|                                                                    |   
|Item 4. Information on Mitel Networks                               | 13
|                                                                    |   
|A. History and Development
      of Mitel Networks                  | 13
|B. Business Overview                                                | 15
|C. Organizational
      Structure                                   | 25
|D. Property, Plants
      and Equipment                             | 26
|                                                                    |   
|Item 5. Operating and Financial Review and Prospects                | 27
|                                                                    |   
|A. Operating Results                                                | 33
|B. Liquidity and
      Capital Resources                            | 43
|C. Research and
      Development, Patents and Licenses, etc        | 47
|D. Trend Information                                                | 47
|E. Off-balance sheet
      arrangements                             | 48
|F. Tabular disclosure
      of contractual obligations              | 50
|                                                                    |   
|Item 6. Directors, Senior Management and Employees                  | 51
|                                                                    |   
|A. Directors and
      Senior Management                            | 51
|B. Compensation                                                     | 57
|C. Board Practices                                                  | 60
|D. Employees                                                        | 61
|E. Share Ownership                                                  | 61
|                                                                    |   
|Item 7. Major Shareholders and Related Party Transactions           | 63
|                                                                    |   
|A. Major Shareholders                                               | 63
|B. Related Party
      Transactions                                 | 65
|C. Interests of
      Experts and Counsel                           | 68
|                                                                    |   
|Item 8. Financial Information                                       | 69
|                                                                    |   
|A. Consolidated
      Statements and Other Financial Information    | 69
|B. Significant Changes                                              | 69
|                                                                    |   
|Item 9. The Offer and Listing                                       | 69
|                                                                    |   
|A. Offer and Listing
      Details                                  | 69



| |  | 
| |  | 

---





|                                                                                             |   
|-------------------------------------------------------------------------------------------- | --
|B. Plan
      of distribution                                                                | 70
|C. Markets                                                                                   | 70
|D. Selling shareholders                                                                      | 70
|E. Dilution                                                                                  | 70
|F. Expenses of the
      issue                                                               | 70
|                                                                                             |   
|Item 10. Additional Information                                                              | 71
|                                                                                             |   
|A. Share Capital                                                                             | 71
|B. Memorandum and
      Articles of Incorporation                                            | 71
|C. Material Contracts                                                                        | 76
|D. Exchange Controls                                                                         | 87
|E. Taxation                                                                                  | 87
|F. Dividends and
      Paying Agents                                                         | 91
|G. Statement by
      Experts                                                                | 91
|H. Documents on
      Display                                                                | 92
|I. Subsidiary Information                                                                    | 92
|                                                                                             |   
|Item 11. Quantitative and Qualitative Disclosures
      About Market Risk                    | 92
|                                                                                             |   
|Item 12. Description of Securities Other than
      Equity Securities                        | 94
|                                                                                             |   
|PART II                                                                                      | 94
|                                                                                             |   
|Item 13. Defaults, Dividend Arrearages and Delinquencies                                     | 94
|                                                                                             |   
|Item 14. Material Modifications to the Rights
      of Security Holders and  Use of Proceeds | 94
|                                                                                             |   
|Item 15. Controls and Procedures                                                             | 94
|                                                                                             |   
|Item 16. [Reserved]                                                                          | 94
|                                                                                             |   
|Item 16A. Audit
      Committee Financial Expert                                             | 94
|Item 16B. Code of
      Ethics                                                               | 95
|Item 16C. Principal
      Accountant Fees and Services                                       | 95
|Item 16D. Exemptions
      from the Listing Standards for Audit Committees                   | 96
|Item
      16E. Purchases of Equity Securities by the Issuer andAffiliated
      Purchasers 
|96                                                                                          
|                                                                                             |   
|PART III                                                                                     | 96
|                                                                                             |   
|Item 17. Financial Statements                                                                | 96
|                                                                                             |   
|Item 18. Financial Statements                                                                | 96
|                                                                                             |   
|Item 19. Exhibits                                                                            | 97



| |  | 
| |  | 

---



PART I

Item 1. Identity of
Directors, Senior Management and Advisors

Not applicable.

Item 2. Offer
Statistics and Expected Timetable

Not applicable.

Item 3. Key Information

A. Selected Financial
Data

The following sets forth selected
financial information derived from (a) Mitel Networks unaudited carve-out
consolidated statements of operations of the communications systems business, which is
referred to in this annual report as the Predecessor Business, of Mitel Corporation, now
known as Zarlink Semiconductor Inc. (Zarlink), for the fiscal year ended March
31, 2000 (b) the unaudited carve-out combined statement of revenues and direct expenses of
the Predecessor Business for the forty-six week period ended February 16, 2001, (c) the
unaudited consolidated financial statements of Mitel Networks as of, and for the ten week
period ended April 27, 2001, and (d) the audited consolidated financial statements of
Mitel Networks as of and for the fiscal years ended April 28, 2002, April 27, 2003, and
April 25, 2004. The selected financial information may not be indicative of Mitel
Networks future performance and should be read in conjunction with
Managements Discussion and Analysis of Financial Condition and Results of
Operations and the consolidated financial statements and the notes thereto included
elsewhere in this annual report.



| | -
1 - | 
| | ----- | 

---



STATEMENT OF OPERATIONS DATA 
(in millions of U.S. dollars, except per share data)

|                                                                           | Mitel Networks | Predecessor Business
|-------------------------------------------------------------------------- | -------------- | --------------------
|
|
|Revenues                                                                   | $ 340.7        |                     
|Cost of revenues                                                           | 202.9          |                     
|                                                                           |                |                     
|Gross margin                                                               | 137.8          |                     
|                                                                           |                |                     
|Research and development                                                   | 36.2           |                     
|Selling, general andadministrative                                        
|111.4                                                                      |                | 114.9               
|Purchased in-process researchand
         development                     
|                                                                          |                |                    
|Special charges                                                            | 11.7           |                     
|Loss on disposal of business                                               | 0.6            |                     
|Amortization of acquiredintangibles                                       
|0.2                                                                        |                | 29.1                
|                                                                           |                |                     
|Operating income (loss)                                                    | (22.3          | )                   
|Other expense, net                                                         | (8.0           | )                   
|Income tax (expense) recovery                                              | (0.3           | )                   
|                                                                           |                |                     
|Net loss                                                                   | $  (30.6       | )                   
|                                                                           |                |                     
|Net loss per share:                                                       
|Basic and diluted                                                          | $  (0.26       | )                   
|                                                                           |                |                     
|Weighted average number ofcommon shares outstanding 
         (inmillions) | 127.8          |                     
|                                                                          
|
|
|
|
|                                                                           |                |                     

|As at 
      April 25, 
      2004              | As at 
      April 27, 
      2003 | As at 
      April 28, 
      2002
|----------------------------------------------- | ---------------------------------- | ----------------------------------
|Cash and cash equivalents                       | $   26.7                           |                                   
|Other current assets                            | 115.0                              |                                   
|Property and equipment                          | 20.3                               |                                   
|Other assets                                    | 7.4                                |                                   
|                                                |                                    |                                   
|Total assets                                    | $ 169.4                            |                                   
|                                                |                                    |                                   
|Current liabilities                             | $ 103.2                            |                                   
|Other liabilities                               | 69.5                               |                                   
|Redeemable shares                               | 51.3                               |                                   
|Capital stock                                   | 184.8                              |                                   
|Other capital accounts                          | 7.7                                |                                   
|Accumulated deficit                             | (247.1                             | )                                 
|                                                |                                    |                                   
|Total liabilities and
      shareholdersequity
|$ 169.4                                         |                                    | $ 175.5                           
|                                                |                                    |                                   



| | -
2 - | 
| | ----- | 

---



B. Capitalization and
Indebtedness

Not applicable.

C. Reasons for the offer and use of proceeds

Not applicable.

D. Risk Factors

Investment in Mitel Networks
common shares should be regarded as highly speculative and is suitable only for those
investors who are able to sustain a total loss of their investment. The risk factors set
forth below and elsewhere in this annual report are not intended to be an exhaustive list
of the general or specific risks involved, but identify certain risks that are now
foreseen by Mitel Networks. Investors should carefully consider all information contained
in this annual report, and should give particular consideration to the following risk
factors when evaluating Mitel Networks and its business. Additional risks and
uncertainties that are not yet identified or that Mitel Networks currently considers to be
immaterial may also materially adversely affect Mitel Networks business and
financial condition in the future. Any of the following risks could materially adversely
affect Mitel Networks business, results of operations or financial condition and
could result in a complete loss of an investment in Mitel Networks.

Mitel Networks has incurred net
losses from operations since its inception and may not be profitable in the future.

Mitel Networks has generated revenues
and has incurred net losses from operations since its inception. The future success of
Mitel Networks in building its revenue and market share for its products is dependent upon
the ability of Mitel Networks to continue to attract orders, develop products that have a
competitive advantage, and manage its manufacturing and assembly costs, including the
costs of those products supplied by BreconRidge Manufacturing Solutions Corporation and
its subsidiaries (collectively, BreconRidge). The high technology industry is
characterized by long and variable delays between expenses incurred for research and
development (R&D), and sales and marketing and the generation of revenues,
if any, from such expenditures. There can be no assurance that Mitel Networks will be able
to grow its revenues and market share or that there will not be changes that will require
unanticipated expenditure of Mitel Networks capital resources. Finally, there can be
no assurance that Mitel Networks will be able to achieve profitability or that, if
achieved, such profitability can be sustained.

In the past Mitel Networks
revenues from operations have not been sufficient to cover its operating expenses and,
while Mitel Networks believes that its expected cash flow from operations and other
existing cash resources should be sufficient to satisfy cash requirements of Mitel
Networks in the coming year, Mitel Networks cannot make any assurance that it will not
require additional equity or debt financing in the future.

In previous years Mitel
Networks revenues from operations were not sufficient to cover its operating
expenses. While Mitel Networks believes that its expected cash flow from operations and
other existing cash resources should be sufficient to satisfy Mitel Networks cash



| | -
3 - | 
| | ----- | 

---



requirements in the coming year,
there is no assurance that Mitel Networks will not require additional equity or debt
financing in the future. Failure to generate the expected level of cash flow from
operations, loss of existing financing or inability to renew Mitel Networks
revolving credit facilities could result in the delay or abandonment of some or all of
Mitel Networks business plans, the sale of assets, or the undertaking of other
measures which could have a material adverse effect on Mitel Networks business,
financial condition and results of operations. In addition, due to the current general
economic and industry environment, and Mitel Networks current credit condition, an
increased portion of Mitel Networks cash and cash equivalents may be restricted as
cash collateral for credit facilities or for customer bid and performance bonds. There can
be no assurance that Mitel Networks will be able to obtain on satisfactory terms, or at
all, any additional financing required to compete successfully. Any such financing, if
obtained, may involve the issuance of further equity at prices which may dilute an
investors interest in Mitel Networks. Failure to obtain such financing could have a
material adverse effect on Mitel Networks business, financial condition and results
of operations. In addition, certain holders of common shares and preferred shares have
anti-dilution protection and redemption rights under certain circumstances, which could be
triggered by any such additional financing.

The significant number of outstanding
preferred shares and warrants could adversely affect the market value of Mitel
Networks common shares as well the ability of Mitel Networks to complete any future
equity financing.

As of April 25, 2004, Mitel Networks
had outstanding:

| |  | 20,000,000 Class A Convertible Preferred Shares, Series 1 (the Series A
Shares) and 67,060,988 Class B Convertible Preferred Shares, Series 1 (the
Series B Shares) which are convertible into common shares (on a one-for one
basis and, in certain circumstances on a greater than one-for-one basis) of the Company at
the option of the holders and upon certain triggering events (please refer to Item 10.B
for a discussion of the conversion privileges of the Series A Shares and Series B Shares);
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Stock options to acquire 4,482,264 common shares at exercise prices ranging from $1.47 to
$2.94 (CDN$2.00 to CDN$4.00) per share; and
|- |  | -------------------------------------------------------------------------------------------------------------------------------------

| |  | Warrants to acquire up to an additional 18,986,968 common shares with exercise prices
ranging from $nil to $0.92 (CDN$nil to CDN$1.25) per share.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------

In addition, Mitel Networks has
issued to the lead investor in its April 2004 financing, a Series 2 Warrant to acquire
certain additional common shares upon the occurrence of certain events, such number of
common shares to be determined in accordance with the formula set forth in the Series 2
Warrant.

The issuance of Mitel Networks
common shares upon the conversion of these preferred shares or the exercise of these
warrants or stock options will likely occur at a time when the conversion or exercise
price is below the market value of Mitel Networks common shares. Therefore, the
conversion or exercise of these securities will likely have a dilutive effect on the
market value of Mitel Networks common shares. The conversion or exercise of these
securities will also result



| | -
4 - | 
| | ----- | 

---



in Mitel Networks having more common
shares outstanding, which would have a dilutive effect on its earnings per share.
Furthermore, the significant number of preferred shares, warrants and stock options as
well as the terms of these securities could materially impair Mitel Networks future
ability to raise capital through an offering of equity securities.

The exercise of put rights by certain
shareholders would have a material adverse effect on Mitel Networks.

The holders of 10,000,000 common
shares, 16,000,000 Series B Shares, and 20,000,000 Series A Shares have the right pursuant
to the Shareholders Agreement (discussed in further detail in Items 5.F and 10.C of this
annual report) to require Mitel Networks to purchase all or any portion of such shares if
Mitel Networks has not completed an initial public offering by September 1, 2006. The
exercise of these put rights would have a material adverse effect on Mitel Networks
business, financial condition and results of operations.

If Mitel Networks is unable to comply
with the financial covenants contained in its credit facilities, it will be, in the
absence of waivers, adversely affected in its ability to access these credit facilities.

Mitel Networks credit facility
contains a financial covenant requiring quarterly minimum levels of earnings before
interest, taxes, depreciation and amortization (EBITDA), adjusted for other non-cash
income and non-cash expenses. During certain periods in the past, Mitel Networks has not
been in compliance with this financial covenant. Although Mitel Networks expects to be in
compliance with the quarterly minimum levels of EBITDA during Fiscal 2005, there is no
assurance that this will be the case. In the event of non-compliance by Mitel Networks
with future quarterly minimum levels of EBITDA, Mitel Networks would seek waivers of such
non-compliance from the lender. Failure to obtain a waiver of non-compliance from the
lender could have a material adverse effect on Mitel Networks business, financial
condition and results of operations.

Mitel Networks trade
receivables securitization facility, entered into on April 16, 2004, contains certain
amortization events, the occurrence of which would result in the commencement of
amortization of the trade receivables securitization facility. In the event an
amortization event was to occur, no future trade receivables would be eligible for sale
under the facility. If Mitel Networks were unable to obtain a waiver of the amortization
event, the inability to sell future trade receivables pursuant to the trade receivable
securitization facility could have a material adverse effect on Mitel Networks
liquidity and financial condition.

The quarterly and annual revenues and
operating results of Mitel Networks have fluctuated historically and are highly variable.
Therefore, the results of one period may not provide a reliable indicator of Mitel
Networks future performance.

The quarterly and annual revenues and
operating results of Mitel Networks have fluctuated historically depending upon, among
other factors, the timing of executed contracts and purchase orders. Accordingly, Mitel
Networks operating results in a particular period are highly variable, difficult to
predict and may not meet the expectations of investors. Factors which may cause Mitel
Networks financial results to fluctuate significantly from period to period include,
but are



| | -
5 - | 
| | ----- | 

---



not limited to: the fact that each
individual order or contract can represent substantial dollars of revenue; many of Mitel
Networks products may require significant capital expenditures by the customer; the
size, timing and shipment of individual orders; changes in pricing by Mitel Networks or
its competitors; discount levels; foreign currency exchange rates; the mix of products
sold; the timing of the announcement, introduction and delivery of new products and/or
product enhancements by Mitel Networks and its competitors; and general economic
conditions. As a result of the foregoing factors, a quarter-to-quarter or a year-to-year
comparison of Mitel Networks results of operations is not necessarily meaningful.
Investors should not rely upon the results of one period as an indication of Mitel
Networks future performance.

Mitel Networks success is
dependent on its intellectual property. The inability of, or any failure by, Mitel
Networks to protect its intellectual property could have a material adverse effect on
Mitel Networks business, financial condition and results of operations.

Mitel Networks success depends
on the intellectual property in the products and services that it develops and sells. See
Item 4.B Business Overview  Intellectual Property for further details
concerning Mitel Networks intellectual property. Mitel Networks relies upon a
combination of copyright, patent, trade secrets, trademarks, confidentiality procedures
and contractual provisions to protect its proprietary technology. There can be no
assurance that Mitel Networks present protective measures will be enforceable or
adequate to prevent misappropriation of its technology or independent third-party
development of the same or similar technology. Many foreign jurisdictions offer less
protection of intellectual property rights than Canada or the United States, and there can
be no assurance that the protection provided to Mitel Networks proprietary
technology by the laws of Canada or the United States or foreign jurisdictions will be
sufficient to protect such technology. Preventing the unauthorized use of such proprietary
technology may be difficult in part because it may be difficult to discover such use.
Stopping unauthorized use of such proprietary technology may be difficult, time-consuming
and costly. In addition, litigation may be necessary in the future to enforce Mitel
Networks intellectual property rights, to protect Mitel Networks trade
secrets, to determine the validity and scope of the proprietary rights of others, or to
defend against claims of infringement or invalidity. Such litigation, whether successful
or unsuccessful, could result in substantial cost and diversion of management resources,
and a successful claim against Mitel Networks could effectively block Mitel Networks
ability to use or license its technology in the United States or abroad or otherwise have
a material adverse effect on Mitel Networks business, financial condition and
results of operations.

Mitel Networks has been and may in
the future be notified of claims that the products and services offered and sold by Mitel
Networks are subject to patents or proprietary rights of third parties. Any such claim,
whether or not it has merit, has been and would be time consuming to evaluate and defend,
and could result in litigation, increased costs, potential shipment delays and stoppages,
or lengthy and complex license negotiations.

Mitel Networks has entered into
agreements with customers and suppliers that include limited intellectual property
indemnifications that are customary in the industry. These undertakings generally require
Mitel Networks to compensate the other party for certain damages and costs incurred as a
result of third party intellectual property claims arising from these transactions. The
nature of the intellectual property indemnification obligations prevents Mitel Networks
from



| | -
6 - | 
| | ----- | 

---



making a reasonable estimate of the
maximum potential amount it could be required to pay to its customers and suppliers.
Historically, Mitel Networks has not made any significant indemnification payments under
such agreements and no amount has been accrued in the accompanying consolidated financial
statements with respect to these indemnification obligations.

As is common in the industry, Mitel
Networks has in the past been, and may in the future be, notified of claims that the
products or services offered and sold by Mitel Networks are subject to patents or other
proprietary rights of third parties. For example, certain claims have been asserted
against end users and demands for the payment of licensing fees have been made or end
users have otherwise been threatened with litigation over claims of alleged infringement.
Mitel Networks generally agrees to indemnify and defend such customers to the extent a
claim for infringement is brought against its customers with respect to Mitel
Networks products although Mitel Networks contracts lay out the specific
instances where it will respond as well as its defenses. In the event that a Mitel
Networks product becomes the subject of litigation, a customer could attempt to invoke
Mitel Networks indemnity obligations under the applicable agreement. As with most
sales contracts with suppliers of computerized equipment, Mitel Networks contractual
indemnity obligations are generally limited to the products and services provided by Mitel
Networks, and generally require the customer to allow Mitel Networks to have control over
any litigation and settlement negotiations with the patent holder.

There can be no assurance that
infringement or invalidity claims (or claims for indemnification resulting from
infringement claims) will not be asserted or prosecuted against Mitel Networks or its
customers. Any such claim, whether or not it has merit, would be time consuming to
evaluate and defend, and could result in increased costs, potential shipment delays and
stoppages, or lengthy and complex license negotiations. While Mitel Networks is currently
not defending itself against any material intellectual property lawsuit (e.g. for direct,
contributory or inducing infringement whether solely Mitel Networks technology or in
combination with other technology), there can be no assurance that such will not arise
against it or its customers or that current or future negotiations with third parties to
establish license or cross license arrangements, or to renew existing licenses, will
result in Mitel Networks obtaining or renewing a license on satisfactory terms or at all.
Moreover, license agreements with third parties may not include all intellectual property
rights that may be issued to or owned by the licensors and thus future disputes with these
parties are possible. In the event an intellectual property dispute is not settled through
a license, or any existing license is not renewed, litigation could result. Any litigation
relating to intellectual property rights, whether or not determined in Mitel
Networks favor or settled by it, would at a minimum be costly and would divert the
attention and efforts of management and technical personnel. An adverse determination in
such litigation or proceeding could prevent Mitel Networks from making, using or selling
certain of its products and subject Mitel Networks to damage assessments, all of which
could have a material adverse effect on Mitel Networks business, financial condition
and results of operations.



| | -
7 - | 
| | ----- | 

---



All of Mitel Networks products
are manufactured by a third party and Mitel Networks has concentrated supply arrangements
for certain product components. Elimination or disruption of one or more of these
arrangements could adversely affect the timing of product shipments.

In August 2001, Mitel Networks and
certain of its subsidiaries signed a supply agreement with BreconRidge, which at the time
was controlled by Dr. Terence H. Matthews (Dr. Matthews), pursuant to which
BreconRidge provides required manufacturing for Mitel Networks and such subsidiaries.
Subject to certain exceptions, the supply agreement is now exclusive until December 31,
2007 with respect to current products and new product introductions. There are risks
inherent in outsourcing key aspects of any business including: loss of key personnel, loss
of proprietary know-how, limited ability to control the manufacturing process, costs, and
quality, dependence on the third party manufacturers and component suppliers and their
related proprietary technology. While Mitel Networks believes that alternative sources of
manufacturing would be available if these arrangements were to cease, disruption of its
manufacturing could create a temporary, adverse effect on product shipments. Mitel
Networks has concentrated arrangements for the supply of certain product components used
in the manufacture of Mitel Networks products. Although Mitel Networks believes that
alternative sources of supply would be available for these product components, the
elimination of one or more of these arrangements could create a temporary adverse effect
on the timing of product shipments. There can be no assurance that the arrangements
between Mitel Networks and BreconRidge, or any other supplier from which Mitel Networks
obtains technology, products or components will achieve Mitel Networks business
objectives.

Certain of Mitel Networks
products contain third party software applications and components. Mitel Networks
dependence on third party suppliers to provide these software applications and components
could adversely affect its ability to develop and deliver its products on a timely and
reliable basis.

Mitel Networks business may be
harmed by a delay in delivery of software applications or components from one or more of
its third party suppliers. In addition, most of Mitel Networks supply agreements can
be terminated by the suppliers under various circumstances and are generally
non-exclusive, which means that the suppliers may develop relationships with, and supply
similar or the same software applications and components to, competitors. In the event
that software application or component suppliers terminate their relationships with Mitel
Networks or are unable to fill Mitel Networks orders on a timely basis, Mitel
Networks may be unable to deliver its products to meet customers orders if it is
unable to develop alternative or additional supply sources, which could have a material
adverse effect on its business, financial condition and results of operations.

The failure of Mitel Networks to
achieve and sustain market acceptance of its products and technologies in broader industry
segments or to develop new customers could have a material adverse effect on Mitel
Networks business, financial condition and results of operations.

Certain of Mitel Networks
products (such as IP Telephony) represent alternatives to traditional designs (such as
TDM). As a result, such products may be slow to achieve, or may not achieve, market
acceptance, as customers may seek further validation of the efficiency and reliability of
Mitel Networks technology. In addition, revenues from the sale of traditional Mitel
Networks



| | -
8 - | 
| | ----- | 

---



TDM based products may decline faster
than the adoption and sale of IP Telephony products, which could have a material adverse
effect on Mitel Networks business, financial condition and results of operations.
Mitel Networks believes that, to a significant extent, its growth prospects depend on the
continuing acceptance by a broader group of customers and by broader industry segments of
its new products and technologies. The failure of Mitel Networks to obtain and sustain
acceptance of its products and technologies in broader industry segments or to develop new
customers could have a material adverse effect on Mitel Networks business, financial
condition and results of operations.

Mitel Networks loss of key
personnel could have a material adverse effect on Mitel Networks operations and
business prospects.

The success of Mitel Networks is
dependent upon the services of a number of the members of its senior management and
software and engineering staff, as well as the expertise of its directors. The loss of one
or more of these individuals could have a material adverse effect on Mitel Networks
operations and business prospects. In addition Mitel Networks success will also
depend on its ability to attract and retain additional highly qualified management and
technical personnel. For instance: (a) Mitel Networks faces competition for qualified
personnel, many of whom are often subject to competing employment offers; (b) a portion of
Mitel Networks compensation to its key employees is in the form of stock option
grants and as a consequence, a depression in Mitel Networks share price or the
continued lack of a public market for such shares could make it difficult for Mitel
Networks to retain employees and recruit additional qualified personnel; and (c) recent
economic conditions have made it necessary for Mitel Networks to implement certain cost
saving initiatives that have a direct effect on employees. Mitel Networks currently does
not maintain corporate life insurance policies on the lives of its directors or key
employees.

The occurrence of design defects,
errors, failures or bugs in Mitel Networks products could result in damage to Mitel
Networks reputation, lost revenue, and the loss of, or delay in achieving, market
acceptance of Mitel Networks products, and adversely affect Mitel Networks
ability to attract new customers or retain existing customers.

Mitel Networks products are
highly complex and, from time to time, may contain certain defects that are difficult to
detect and correct. Errors, failures or bugs may be found in Mitel Networks products
after shipment to customers. If errors are discovered, Mitel Networks may not be able to
correct such errors in a timely manner or at all. The occurrence of errors and product
failures could result in damage to Mitel Networks reputation, lost revenue, and the
loss of, or delay in achieving, market acceptance of Mitel Networks products, and
adversely affect Mitel Networks ability to attract new customers or retain existing
customers. Efforts to correct such errors and failures in Mitel Networks products
could require significant expenditure of capital and resources by Mitel Networks and may
not be successful. The sale and support of such products may entail the risk of product
liability claims. In addition, the failure of Mitel Networks products to perform to
published specifications could give rise to warranty claims. Mitel Networks
insurance may not cover or its coverage may be insufficient to cover any such claims
successfully asserted against Mitel Networks or its contracted suppliers and
manufacturers, including BreconRidge, and therefore the consequences of such errors,
failures and claims could



| | -
9 - | 
| | ----- | 

---



have a material adverse effect on
Mitel Networks business, financial condition and results of operations.

There are significant restrictions on
the resale of Mitel Networks securities and there can be no assurance as to when
such restrictions will cease to apply, if ever.

There is presently no market through
which Mitel Networks securities may be sold or resold. Mitel Networks
securities are not listed for trading on any stock exchange and there is no guarantee that
any such listing will be completed in the future. Mitel Networks securities have not
been registered under the United States Securities Act of 1933, as amended (the
Securities Act) or the securities laws of any of the states of the United
States, the securities laws of Canada or any province thereof, or the securities laws of
any other jurisdiction. All of Mitel Networks outstanding securities as of July 27,
2004 are restricted securities as defined under the rules of the Securities
Act, which securities may not be transferred to a U.S. person except pursuant to
registration under the Securities Act, or pursuant to an available exemption from
registration under the Securities Act. Canadian provincial securities laws also restrict
the transfer of securities of Mitel Networks, unless an exemption from the prospectus
requirements is available in respect of such transfer, at least until the time Mitel
Networks becomes a reporting issuer in a province of Canada. In addition, Mitel
Networks articles currently contain restrictions on the transfer of shares of the
capital stock of the Company (see Item 10.B of this annual report for a more detailed
description of these transfer restrictions). Investors may be unable to liquidate an
investment in Mitel Networks securities, whether or not a listing is subsequently
effected. An investor should not purchase securities in Mitel Networks unless such
investor is able to endure lack of liquidity and/or withstand a total loss of his or her
investment.

Mitel Networks competitive
position may be affected by fluctuations in exchange rates and its current currency
hedging strategy may not be sufficient to counter such fluctuations.

A significant portion of the business
of Mitel Networks is conducted in currencies other than the Canadian dollar. Due to the
substantial volatility of currency exchange rates, Mitel Networks cannot predict the
effect of exchange rate fluctuations upon future sales. Mitel Networks uses financial
instruments, principally forward exchange contracts, in its management of foreign currency
exposures. These contracts primarily require Mitel Networks to purchase and sell certain
foreign currencies with or for Canadian dollars at contractual rates. It is Mitel
Networks practice to monitor the financial standing of the counterparties to these
financial instruments, which include several major financial institutions, and limit the
amount of exposure to any one institution. Mitel Networks may be exposed to a credit loss
in the event of nonperformance by the counterparties of these contracts. Additionally,
Mitel Networks operations could be adversely affected if it is unable to guard
against currency fluctuations in the future. There can be no assurance that foreign
currency fluctuations will not have a material adverse effect on Mitel Networks
business, financial condition and results of operations.



| | -
10 - | 
| | ------ | 

---



The failure of Mitel Networks
products to keep pace with rapidly changing technology and evolving industry standards
could have a material adverse effect on Mitel Networks business, financial condition
and results of operations.

The markets for Mitel Networks
products are competitive and characterized by rapidly changing technology, evolving
industry standards and frequent new product introductions. Mitel Networks has invested and
intends to continue to invest in the development of products. There is no assurance that
such products will be accepted in the face of competing products and changing customer
requirements.

Mitel Networks may not be able to
compete effectively in the highly competitive high technology industry.

Mitel Networks competitors
include large corporations with greater name recognition, larger customer bases and
significantly greater financial, technical, marketing, public relations, sales and other
resources than those of Mitel Networks. There can also be no assurance that Mitel
Networks competitors will not develop technological innovations of their own that
will successfully compete against or render Mitel Networks products obsolete.

There are risks inherent in Mitel
Networks international operations which may have a material adverse effect on its
business, financial condition and results of operations.

Mitel Networks sales from markets
outside of Canada represent a significant portion of total sales. Certain risks are
inherent in all international operations, including exposure to currency exchange rate
fluctuations, political and economic conditions, unexpected changes in regulatory
requirements, exposure to different legal standards, particularly with respect to
intellectual property, future import and export restrictions, difficulties in staffing and
managing operations, difficulties in collecting receivables and potentially adverse tax
consequences. Sales in higher risk markets such as Eastern Europe, the Middle East, Asia,
Latin America and Africa constitute less than 10% of Mitel Networks sales. Mitel
Networks is more susceptible in those areas to political instability, local currency
devaluation, higher interest rates and increased governmental control of the economy than
a company that limits its operations to North America. There can be no assurance that any
or all of these factors resulting from international operations will not have a material
adverse effect on Mitel Networks business, financial condition and results of
operations.

It may be difficult to enforce a
judgment of a United States court against Mitel Networks.

Mitel Networks is a business
corporation established pursuant to the federal laws of Canada. Mitel Networks
headquarters are located in Ottawa, Ontario, Canada, and it maintains limited assets in
the United States. In addition, most of Mitel Networks officers, and all members of
its board of directors are residents of countries other than the United States. As a
result, it may be difficult or impossible to effect service of process within the United
States on, or to enforce in the United States any judgments of courts of the United States
against, Mitel Networks, its officers and directors, including those in relation to
actions pursuant to United States federal securities laws. In addition, a Canadian court
may not permit an investor to bring an original



| | -
11 - | 
| | ------ | 

---



action in Canada or to enforce in
Canada a judgment of a United States court based upon civil liability provisions of United
States federal securities laws.

The failure of Mitel Networks to
modify its products to comply with new regulatory requirements, or to obtain or maintain
the necessary regulatory approvals for its products could have a material adverse effect
on Mitel Networks business, financial condition and results of operations.

The sale of Mitel Networks
products is affected by governmental regulatory policies, the imposition of tariffs and
taxation of communications services. These policies and activities are under continuous
review and are subject to change. Regulations may prohibit sales of products that fail to
comply with these regulations, increase industry costs of R&D or otherwise subject
Mitel Networks to liability with respect to the sale of its products until Mitel Networks
makes appropriate modifications. Likewise, potential changes to current regulatory
framework may cause competitive harm to Mitel Networks. There can be no assurance that
Mitel Networks will be successful in modifying its products, or in obtaining or
maintaining the necessary regulatory approvals for its products, and its failure to do so
could have a material adverse effect on Mitel Networks business, financial condition
and results of operations.

Adverse changes to the industry,
overall economic conditions and governmental policies could have a material adverse effect
on Mitel Networks business, financial condition and results of operations.

There can be no assurance that the
current taxation policy, and other government policies and provisions applicable to the
high technology industry, will not be adversely changed in the future. The possibility of
renewed terrorist activity, and its consequent effect on the global economy, remain as
constant threats. Military activity in the Middle East or elsewhere may also contribute to
continued political and economic uncertainty. The occurrence of any of such events could
have a material adverse effect on Mitel Networks business, financial condition and
results of operations.

Mitel Networks is exposed to risks
inherent in its defined benefit pension plan which may have a material adverse effect on
its business, cash flow requirements, financial condition and results of operations.

Mitel Networks currently maintains a
defined benefit pension plan in the United Kingdom. The contributions to fund benefit
obligations under this plan are based on actuarial valuations, which themselves are based
on certain assumptions about the long-term operation of the plan, including employee
turnover and retirement rates, the performance of the financial markets and interest
rates. If the actual operation of the plan differs from the assumptions, additional
contributions by Mitel Networks may be required. The equity markets can be, and recently
have been, very volatile, and therefore Mitel Networks estimates of future
contribution requirements can change significantly in a short period of time. Similarly,
changes in interest rates can impact contribution requirements. In a low interest rate
environment, the likelihood of required contributions in the future increases. Any future
requirements to make significant contributions to fund the defined benefit plan could have
material adverse effects on Mitel Networks business, cash flows requirements,
financial condition and results of operations.



| | -
12 - | 
| | ------ | 

---



Mitel Networks inability to
effectively manage significant growth in the number of its employees or the scope of its
operations could have a material adverse effect on Mitel Networks business,
financial condition and results of operations.

Should Mitel Networks experience a
need for significant growth in the number of its employees and the scope of its
operations, it may place a significant strain on Mitel Networks management and
operations, particularly with respect to:

| | Broadening
its management team;
|- | -------------------------------

| | Attracting
and retaining skilled employees;
|- | -------------------------------------------

| | Developing
and managing a larger, more complex international organization;
|- | --------------------------------------------------------------------------

| |  | Expanding Mitel Networks treasury and accounting functions and information systems
to meet the demands imposed by Mitel Networks growth; and
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------

| |  | Strengthening Mitel Networks financial and management controls in a manner
appropriate for a larger enterprise.
|- |  | ----------------------------------------------------------------------------------------------------------------

Item 4. Information on
Mitel Networks

A. History and
Development of Mitel Networks

The registered name of Mitel
  Networks is Mitel Networks Corporation. Mitel Networks was incorporated in Canada
  on January 12, 2001, pursuant to the Canada Business Corporations Act.
  Mitel Networks is not a reporting issuer as such term is defined in the Securities
  Act (Ontario) or the securities laws of any other province of Canada. Mitel
  Networks registered office and corporate headquarters are located at 350
  Legget Drive, Ottawa, Ontario, Canada, K2K 2W7, Telephone: (613) 592-2122, Facsimile:
  (613) 592-4784.

Mitel Networks was formed by Zarlink
in order to reorganize its communications systems division in contemplation of the sale of
that business to companies controlled by Dr. Matthews. In a series of related transactions
dated February 16, 2001 and March 27, 2001, which are collectively referred to in this
annual report as the Acquisition Transactions, Mitel Networks acquired the
Mitel name and substantially all of the assets and subsidiaries of the
communications systems division of Zarlink, other than Canadian real estate and most
intellectual property assets. As a consequence of the Acquisition Transactions, Dr.
Matthews became the indirect owner of 90% of the shares of Mitel Networks and Zarlink
retained the remaining 10% at the time. See Item 4.C of this annual report for the current
ownership structure of the Company.

Significant developments during the
year ended April 25, 2004:

Mitel Networks and its subsidiaries,
  Mitel Networks, Inc. and Mitel Networks Solutions, Inc. (collectively, the Mitel
  Group), entered into a ReceivablePurchase
  Agreement (the RPA)



| | -
13 - | 
| | ------ | 

---



with The Canada Trust Company (the
Purchaser) and the securitization agent named therein with an effective date
of April 16, 2004, whereby certain qualifying non-interest bearing trade receivables in
Canada and the United States may be purchased from each of the Mitel Group by the
Purchaser and transferred to a securitization trust. At April 25, 2004 no trade
receivables had been sold by the Mitel Group to the Purchaser pursuant to this agreement.

On April 23, 2004, Mitel Networks
completed an equity financing transaction (the Financing), pursuant to which,
and in accordance with the terms and conditions of the Class A Convertible Preferred Share
Subscription Agreement (the Subscription Agreement) entered into between Mitel
Networks and EdgeStone Capital Equity Fund II-B GP, Inc., as agent for EdgeStone Capital
Equity Fund II-A, L.P. and its parallel investors, and EdgeStone Capital Equity Fund II
Nominee, Inc., as nominee for EdgeStone Capital Equity Fund II-A, L.P. and its parallel
investors (collectively EdgeStone):

| |  | Mitel Networks issued and sold 20,000,000 Series A Shares at a purchase price of CDN$1.00
per share to EdgeStone.
|- |  | -----------------------------------------------------------------------------------------------------------------

| |  | Mitel Networks issued and sold to EdgeStone, for the aggregate price of CDN$1.00, a
warrant (the Series 1 Warrant) to purchase up to 5,000,000 common shares at an
exercise price of CDN$1.25 per share.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Mitel Networks issued and sold to EdgeStone for the aggregate price of CDN$1.00, a warrant
(the Series 2 Warrant) to purchase certain common shares (the Series 2
Warrant Shares), in order to provide certain anti-dilution protection to the holder
of the Series 2 Warrant upon the occurrence of certain events relating to the exercise of
put rights under the Shareholders Agreement. Upon the exercise of certain of such put
rights whereby Mitel Networks is required to repurchase a certain number of common shares
and preferred shares (the Repurchased Securities), the Series 2 Warrant will
be exercisable for a number of common shares, determined by multiplying the Series 2
Warrant holders proportionate share of the then outstanding common shares of the
Company by the number of shares determined in accordance with the following formula: by
dividing (a) the amount by which the aggregate purchase price of the Repurchased
Securities exceeds the greater of (i) the fair market value of the Repurchased Securities
or (ii) the number of Repurchased Securities multiplied by CDN$1.00; by (b) the then
applicable fair market value of a common share.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Mitel Networks granted to EdgeStone or its permitted assignees an option (the
EdgeStone Purchase Option), exercisable at any time until August 31, 2004 or
such later date as may be agreed to in writing by Mitel Networks and EdgeStone, to
purchase up to an additional 5,000,000 Series A Shares (the Purchase Option
Shares) at a price of CDN$1.00 per share and otherwise in accordance with the
Subscription Agreement. Upon exercise of the EdgeStone Purchase Option, each purchaser of
the Purchase Option Shares shall also be entitled to receive (i) a warrant, having the
same terms as the Series 1 Warrant discussed above, to acquire a number of additional
common shares determined based on the number of Purchase Option Shares acquired by such
purchaser; and (ii) a Series 2 Warrant having the terms discussed above.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | -
14 - | 
| | ------ | 

---





| |  | Mitel Networks may, at its option, issue and sell up to an additional 5,000,000 Series A
Shares, at any time until August 31, 2004 or such later date as may be agreed to in
writing by Mitel Networks and EdgeStone, to other investors at a price per share of not
less than CDN$1.00 and otherwise in accordance with the Subscription Agreement.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In connection with the Financing,
certain previously issued and outstanding securities of Mitel Networks were exchanged for
or converted into Series B Shares, as follows:

| |  | 20,448,875 common shares held by Wesley Clover Corporation (WCC), a
corporation controlled by Dr. Matthews, which had been issued by Mitel Networks in October
2003 upon the conversion of certain promissory notes previously issued by Mitel Networks
in favour of WCC, were exchanged on a one-to-two basis for an aggregate of 40,897,750
Series B Shares. On June 30, 2004, WCC, Mitel Systems Corporation (Mitel
Systems), and certain other companies, amalgamated and continued under the name of
Wesley Clover Corporation (Mitel Systems and WCC shall be collectively referred to in this
annual report as Wesley Clover));
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 4,000,000 common shares held by Power Technology Investment Corporation (PTIC)
were exchanged on a one-to-four basis for 16,000,000 Series B Shares; and
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 5,081,619 common shares, issued in October 2003 upon the conversion of mandatory
convertible debentures previously issued by Mitel Networks in favour of certain existing
investors, were exchanged on a one-to-two basis for 10,163,238 Series B Shares.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Also see Item 10.C of this annual
report for a description of the Shareholders Agreement and the Registration Rights
Agreement, which were entered into in connection with the Financing on April 23, 2004.

B. Business Overview

Mitel Networks designs, develops,
  markets and sells voice, video and data products and services to address the
  business communications needs of enterprise and small business customers. Products
  and services are sold individually or offered as a solution, which is a combination
  of products and/or services designed to address specific communications needs.
  Mitel Networks portfolio of products includes voice, video and data systems,
  desktop phones and applications for contact centers, speech-enabled unified
  communications, collaboration, presence, video conferencing and wireless communications.
  Mitel Networks traditional products are based on circuit switched Private
  Branch Exchange (PBX) telephone systems that utilize Time Division
  Multiplexing (TDM) technology in which communications are delivered
  across both the public and private telephone networks through actual switched
  circuits that maintain a hard-wired connection across the entire communication
  path. PBX systems are telephone systems that switch calls between users on local
  lines, while allowing all users to share a certain number of external telephone
  lines. Mitel Networks Internet Protocol -based communications systems
  are designed to leverage Internet Protocol (IP) technology, which
  is a method by which packetized data is sent from one device to another device
  via the Internet, Local Area Network (LAN) or Wide Area Network
  (WAN). Within the technology industry, this type of communication
  has commonly been referred to as Voice Over Internet Protocol (VoIP).
  More recently, the term IP Telephony has emerged as a more commonly used description.
  In addition, the combination



| | - 15
- | 
| | ------ | 

---

of voice, video and data transferred
over a single network is often referred to as converged communications.

Mitel Networks currently serves the
small business market (5-50 employees), the small to medium enterprise market (51-500
employees) and the corporate major enterprise market (greater than 500 employees) through
communications products, applications and services. Mitel Networks addresses these markets
through a distribution network of direct sales offices, an indirect channel distribution
network of resellers, communications service providers (also known as carriers), systems
integrators, and technology providers. Products are sold to organizations internationally
and are supported by a regional presence in major areas of operations. See Sales,
Marketing and Distribution.

Mitel Networks outsources the
manufacture and repair of the majority of its products, as well as global logistics and
distribution support, to BreconRidge, a company in which Dr. Matthews owns a 33%
beneficial interest. Mitel Networks has entered into a supply agreement with BreconRidge
that is exclusive, subject to certain exceptions. Pursuant to an amendment executed
February 27, 2003, the initial term of the supply agreement was extended until December
31, 2007, followed by automatic one year renewal terms thereafter, all subject to the
right of either party to terminate the agreement on at least one hundred eighty days prior
notice during any renewal term. The supply agreement and the amendment were negotiated on
an arms length basis and contain certain price protections and annualized cost
reduction arrangements that management believes benefit Mitel Networks, as well as those
rights and protections typically afforded to a customer of such services. BreconRidge
agreed to an open books approach to arrive at reasonable, competitive pricing,
and has multiple sources of supply for all essential components. Upon any termination of
the supply agreement, Mitel Networks has a right to obtain a license of any intellectual
property owned by BreconRidge that is required to make or have made all of Mitel
Networks products.

As of April 25, 2004, Mitel Networks
had approximately 1,849 employees primarily located in North America and in the U.K. with
more than 800 distributors worldwide. Mitel Networks operates in four major geographic
regions: North America; Europe, the Middle East and Africa; Asia Pacific; and Central
America/Latin America.

Mitel Networks traditional
products include the SX-200 and SX-2000 PBX systems, a suite of SuperSET telephones,
NuPoint voicemail systems and other related applications such as contact center software.
Mitel Networks has also developed and introduced an array of IP-based communications
systems that combine voice, video and data processing technologies into a single
integrated system. These products include the Mitel Networks SX-200, 3100, 3300 and 3340
integrated communications platforms (ICP) as well as a host of IP-based
desktop telephones, peripherals and applications.

Mitel Networks offers a migration
strategy that allows customers to gain cost efficiencies of IP-based systems by leveraging
their investment in existing communications infrastructure and minimizing their
incremental investment. Customers do not have to replace their entire business
communications systems in order to obtain the features and functionality provided by Mitel
Networks products and services. For the purposes of reporting revenue by product,
Mitel Networks combines revenues from traditional and new IP-enabled products under the



| | - 16
- | 
| | ------ | 

---

Communications Platforms and
Desktop Appliances category due to the similar nature of the products. See Item 5.A
Managements Discussion and Analysis of Financial Condition and Results of
Operations  Operating Results for discussion of revenue by segment.

Small Business
Portfolio:

Mitel Networks offers both
traditional and the newer IP-based communications products to the small business markets.
The SX-200 is a traditional PBX voice system that addresses single site and small
multi-site businesses having under 400 users. It is designed to provide voice
communications to this customer segment and is complemented by a broad portfolio of
digital telephones and a suite of applications. The systems distributed architecture
allows for flexibility in deployment and ease of growth. In the fall of 2002, Mitel
Networks released an IP node for the SX-200 PBX. The SX-200 with the IP node provides IP
capability on the traditional Mitel Networks SX-200 PBX system. This allows Mitel Networks
the ability to migrate the installed base of traditional SX-200 systems to IP capabilities
such as IP networking, teleworking and IP desktop devices and applications. In 2003, Mitel
Networks launched the SX-200 ICP which is designed to further enhance the small business
portfolio. Supporting up to 96 IP extensions and 194 TDM devices, the SX-200 ICP includes
a series of embedded applications, management tools and fully supports IP networking
protocols to assist small businesses in reducing their toll charges. The SX-200 ICP is
further designed to offer a migration path to existing SX-200 customers. The SX-200 ICP
also supports a range of traditional TDM and IP telephones and peripherals.

The Mitel Networks small
business, IP-based system, the Mitel Networks 3100 ICP is an all-in-one communications
solution for small businesses with up to 55 users. The 3100 ICP provides converged
features by integrating a hybrid key telephone system, voicemail and auto-attendant, a
router, a line powered switched Ethernet LAN and high-speed Internet connectivity packaged
into one simple-to-install platform. It supports the same range of IP phones used with the
Mitel Networks 3300 ICP Enterprise platform, with the exception of the Mitel Networks
5230.

Enterprise Business
Portfolio:

Mitel Networks product offering
to the enterprise business customer is broad and supports both traditional PBX technology
as well as the newer IP-based technologies. The SX-2000 is a fully featured traditional
communications system that addresses businesses with more than 60 users. This system
provides extensive feature/functionality, a distributed architecture, cost-effective
redundancy and support for internetworking based on industry standard protocols for
seamless voice communications between sites. In addition, a broad portfolio of digital
desktop telephones and applications supports the system.

The Mitel Networks 3300 ICP is the
cornerstone of the IP-based enterprise business offering and is designed for organizations
with more than 40 users. The system provides an evolutionary migration that can be used to
enable existing SX-2000 customers and those of other traditional PBX vendors to evolve to
an IP-based infrastructure. The Mitel Networks 3300 ICP includes a suite of applications
and IP-enabled telephones that allow enterprise customers to save operational expense by
merging their voice, video and data services to a single infrastructure. Mitel Networks
believes that carrier costs are reduced and that the single management and



| | - 17
- | 
| | ------ | 

---

administration of the information
technology infrastructure provides additional cost benefits to the end customer. The use
of IP also enables Mitel Networks to provide new applications that are designed to improve
the interaction and collaboration between employees, customers and suppliers of an
enterprise for increased productivity, efficiency and better customer loyalty and
retention.

Branch Offices and Remote Working
Solutions:

Mitel Networks branch office
and remote working products seek to address the needs of the integrated branch office
market and are centered around the Mitel Networks 3340 ICP. This system is designed to
provide branch offices of up to 100 users with seamless communications between corporate
offices and local survivability of full telephone service should corporate network links
become unavailable. Through a combination of the Mitel Networks 3340 ICP as well as the
same applications and IP desktop telephones available to larger corporate offices, Mitel
Networks believes it offers a comprehensive portfolio designed to address the
communications challenges facing organizations with decentralized operations and
personnel.

Mitel Networks solutions
portfolio consists of applications developed wholly by Mitel Networks, by Mitel Networks
in conjunction with another vendor, or completely by a third party vendor, and include
some of the following applications: contact center applications, wireless telephony, video
applications, soft phone applications, unified communications, and teleworking.

Contact Center
Applications:

Mitel Networks Contact Center
portfolio provides a modular suite of Web-centric contact center applications that provide
large enterprise functionality for the small-to-medium contact center. Highly scalable,
the portfolio provides multimedia functionality incorporating routing and reporting for
e-mail, voice and fax and is fully supported across a centralized, multi-site, IP or TDM
environment. Combining robust communications platforms, automated call distribution
(ACD) and a modular suite of feature-rich, Web-based applications for
streamlining contact center management and enabling advanced multimedia customer contacts.

Wireless Telephony:

Mitel Networks offers wireless
telephony for in-building mobility. The wireless telephony is a standard gateway combined
with a Mitel Networks 3300 ICP or a SX-200 ICP that permits employees to be accessible and
stay in touch, while providing them with the same communication features that they would
utilize if they were in their offices. The wireless users are integrated with the wired
telephony community through extension-to-extension dialing, attendant functions, voice
mail, messaging, external calling and other capabilities designed to be common and
seamless.

Video Applications:

Mitel Networks Voice First
application and related devices provide businesses access to video conferencing at the
desktop or for dedicated conference rooms. Users are able to establish a conference call
using telephone sets, and by pressing a single button to transform the audio call



| | - 18
- | 
| | ------ | 

---

into a video call. The application
also incorporates collaboration tools that allow users to share computer applications
during conferences.

Mitel Networks has a strategic
alliance with March Networks in connection with digital security monitoring and
transaction reporting products. This product supports browser-based video security
monitoring, transaction reporting, digital storage and rapid retrieval from networked
locations.

Desktop Applications:

Mitel Networks Your Assistant
is a computer-based soft phone and collaboration, presence and contact management
application. It interacts with a users and/or a business contact database,
offers secure instant messaging capabilities and enables simplified drag and
drop call set up and conference call initiation. By matching the calling
partys number identification to the local database, it can automatically display
pertinent contact information prior to the call being established. Your Assistant also
enables users to record, store and forward calls, annotate notes and maintain a history of
dialed, received and missed calls, as well as store other user defined contact
information. Your Assistant can be used from any location; for example, a home, hotel, or
WiFi hotspot that allows the establishment of a secure Internet connection.

Unified Messaging, Integrated
Messaging and Voice Mail:

Mitel Networks Unified
Messaging is a speech-enabled application that gives users the ability to control their
telephony functions through voice-activated commands. Unified Messaging supports
conversational speech recognition, recognizing entire sentences and not simply single
words, allowing users to answer or forward voice and email messages with voice or text
responses. Mitel Networks 6510 Integrated Messaging product allows businesses to mix
and match the requirements of individual employees by supporting both unified messaging
and traditional voicemail on the same platform. Mitel Networks range of enterprise
to carrier class voice messaging portfolio offers a complete range of voice mail features
and functionality.

Teleworking:

Mitel Networks teleworking
solution enables users to work out of the office from remote locations. Mitel
Networks teleworking solution provides seamless integration between the remote
locations and the corporate office, while maintaining full functionality of voicemail,
conferencing and other features of the office telephony system. It uses standard
high-speed Internet connection to make a remote Mitel Networks IP phone a secure and
encrypted extension off a corporate network.

Desktop Portfolio:

Mitel Networks desktop
portfolio of products includes a broad range of telephones, consoles and ancillary devices
that support traditional Private Branch Exchange systems as well as the IP-based
communications systems. Mitel Networks has been acknowledged as a leader in the design of
desktop devices recognized for their ease of use, aesthetics, high quality, and
functionality.



| | - 19
- | 
| | ------ | 

---

Mitel Networks IP-based desktop
products are available to both the small and medium-sized business and inter-operate with
all IP-based systems and applications. The portfolio includes a wide range of telephones,
from simple low-end sets to sophisticated web sets and personal digital assistant
(PDA) integration sets as well as IP-based consoles and conference units.
These products allow users access to advanced telephone features and services such as
integrated web-browsing, enhanced directory management, and visual voicemail. In addition,
they offer integration of mobile devices as well as voice and video conferencing.

Client Services:

Mitel Networks services group
is focused in North America and the European Union and provides customers with a number of
services, branded as MiService, from initial planning and design through to implementation
and support, which complement Mitel Networks product mix. Planning services include
needs assessments, site surveys, system configuration, network design and project
management. Implementation services include IP-based system and application
implementations, advanced messaging implementations, multi-site installations and on-site
systems training. Additional services include resource coordination, project management,
contract administration, performance management, custom voice-centric business
applications development, technical support services, long-term systems management
services (Managed Services), and training.

Business Segments and
Principal Markets

Mitel Networks reports its
  operations in two segments: the Communications Solutions (Solutions)
  segment and the Customer Services (Services) segment. The Solutions
  segment consists of enterprise voice, video and data communications systems
  and software and communications applications provided through Mitel Networks
  dealer and reseller network. The Services segment includes direct product sales
  and services, professional services, Managed Services, maintenance and technical
  support services.



| | - 20
- | 
| | ------ | 

---

The following table sets forth the
breakdown of (i) total revenues by business segment and geographic market and (ii)
business segments and geographic markets as a percentage of total revenues, for each of
the last three fiscal years:

|                              | Year Ended
|----------------------------- | ----------
|
|(in millions of U.S. dollars)
|                             
|Business Segments:            |           
|Solutions                     |           
|Services                      |           
|                             
|                              |           
|                             
|Geographic Markets:           |           
|                              |           
|Canada                        |           
|United States                 |           
|United Kingdom                |           
|Other countries               |           
|                             
|                              |           
|                             

Sales, Marketing and
Distribution

Mitel Networks uses a combination of
direct and indirect sales channels to market and distribute its products and services on a
global basis. Mitel Networks communications products and services are distributed in
over 70 countries worldwide and are supported either directly or indirectly through an
extensive network of value-added resellers, system integrators, carriers and service
providers. Mitel Networks world headquarters are located in Ottawa, Ontario, Canada,
and it maintains regional headquarters in Caldicot, Wales, U.K., Herndon, Virginia,
U.S.A., and in Hong Kong, China. In addition, Mitel Networks has sales and/or service
offices throughout the world, including Canada, the U.S., Mexico, the U.K., Spain,
Germany, Italy, France, the Netherlands, the United Arab Emirates, South Africa, Australia
and China.

Direct Sales: Mitel Networks focuses
its direct sales efforts on key customer accounts in Canada, the United States, and the
United Kingdom, while augmenting and strengthening relationships with service providers,
system integrators, and technology providers on the indirect side. The direct sales force
is flexible in its approach to market. Mitel Networks may serve customers directly by
performing the staging, configuring and programming of the communications systems sold, as
well as the subsequent installation and maintenance. Alternatively, Mitel Networks may opt
to sub-contract these services to a solution provider who is best positioned to address
the needs of the customer.

Value Added Resellers: Mitel
Networks value added resellers, (VARs), are located worldwide and make
up a significant part of Mitel Networks indirect sales channel. The VARs are
independent contractors who undertake responsibility, on a non-exclusive basis, for
marketing, selling, installing and maintaining Mitel Networks products pursuant to
written



| | - 21
- | 
| | ------ | 

---

dealership agreements. The VARs
generally service what they sell utilizing Mitel Networks-certified technicians who they
employ. Mitel Networks VARs either purchase product directly from Mitel Networks or
from wholesale distributors for resale to customers. The indirect reseller channel is
supported through awareness campaigns, company-run tradeshows and conferences, marketing
collateral, training, support, lead generation activities, configuration and pricing
tools, proposal development and in-depth technical product expertise.

Mitel Networks global reseller
network consists of three tiers: Platinum, Gold and Silver. The global reseller tiered
model is a competency-based program designed to ensure that the customer receives a high
quality of service and support from resellers committed to achieving high levels of
customer satisfaction. Accreditation at each level is based on a resellers technical
and commercial skill set, particularly in the area of convergence. Each tier carries its
own set of accreditation requirements and receives differing levels of support from Mitel
Networks. Resellers primarily operate in defined territories and are able to earn volume
discounts and rebates as well as marketing credits.

Mitel Networks also provides
value-added services through its Service Partners Program. This program screens and
accredits authorized resellers to provide sales-independent installation and support
services for the indirect sales channel. Service partners are given the opportunity to
fulfill installation and service requests within their primary coverage area.
Alternatively, VARs can contract with Mitel Networks for services including, but not
limited to, planning, implementation, maintenance and support.

Service Providers: Providers of
communications services, including traditional telephone companies, supply a large portion
of the customer premise equipment sold into the small and enterprise business markets.
Service providers undertake responsibility, on a non-exclusive basis, for marketing and
selling Mitel Networks communications solutions pursuant to a written carrier
distribution agreement. Service providers purchase equipment directly from Mitel Networks.
They either install and maintain the products themselves, or subcontract the work back to
Mitel Networks or Mitel Networks VARs, depending upon the location of the customer
site.

Systems Integrators: Mitel Networks
currently has relationships with a number of systems integrators and intends to develop
additional relationships primarily as a penetration strategy to larger enterprise
customers. In addition, Mitel Networks plans to transition some existing direct corporate
customers with outsourcing requirements to systems integrators. Systems integrators enter
into supply agreements directly with Mitel Networks, and Mitel Networks supplies them with
communications products and services as needed to enable them to act as prime contractors
for the purposes of fulfilling their customers needs.

Technology Providers: Mitel Networks
has entered into strategic relationships with several technology companies to jointly
market and deploy integrated voice and data solutions. This initiative has generated
significant value to end users of Mitel Networks solutions by offering a broad range
of functionality which takes advantage of Mitel Networks core IP telephony
communication platform technologies.



| | - 22
- | 
| | ------ | 

---

To extend the value of third party
components, Mitel Networks introduced the MiSolutions Network (MiSN) program
in the fall of 2002. The program provides resources and infrastructure to assist other
companies to integrate their products with Mitel Networks platforms, which program
enables Mitel Networks to offer custom solutions that meet the specific demands of
enterprise customers.

Independent Consultants: Mitel
Networks has developed relationships with independent consultants who focus on assisting
companies with network design, implementation and vendor selection. Mitel Networks has a
formal Consultant Liaison Program under which it holds regular sessions to ensure that the
consulting community has the most current and relevant information on Mitel Networks
products to assist their clients.

Growth Strategy

Mitel Networks is pursuing a growth
strategy to:

| |  |  | increase and broaden distribution channels within its core markets;
| | - |  | -------------------------------------------------------------------

| |  |  | expand geographic penetration into new markets;
| | - |  | -----------------------------------------------

| |  |  | expand its addressable market by introducing products for less than             50
users; and
| | - |  | ---------------------------------------------------------------------------------------------

| |  |  | migrate
customers from legacy PBX systems to converged voice, video and data communications in an
evolutionary manner.
| | - |  | ----------------------------------------------------------------------------------------------------------------------

The expansion of geographic
penetration outside of its core markets is seen by management as an essential component of
Mitel Networks growth strategy. Mitel Networks has opened a number of sales offices
in newly targeted regions, and has invested significant resources to develop and deliver
regionally compliant products. Since 2001, Mitel Networks has opened sales offices in
Italy, Spain, Germany, France, the Netherlands, the United Arab Emirates, South Africa,
Mexico, Hong Kong, Australia and China. Given the current uncertainty in the high
technology sector, as well as the global economy generally, it is difficult to predict
timeframes for further expansion into new markets.

Mitel Networks growth strategy
may also include the acquisition of additional businesses, technologies, product lines or
services in the future and may also include the divestiture or downsizing of product or
service groups in order to permit Mitel Networks to focus on what management believes are
Mitel Networks core competencies, although no such acquisitions or divestitures are
currently contemplated.

Competition

The market for Mitel Networks
solutions and services is highly competitive and subject to constant change in terms of
technology, distribution and price. The major competition for Mitel Networks
traditional TDM, PBXs and applications includes Nortel Networks, Avaya, Siemens, Alcatel,
Inter-Tel and NEC. In the IP Telephony sector, Cisco Systems and 3Com augment the
competitors listed above. Many of Mitel Networks competitors are significantly
larger than Mitel Networks and have greater financial, sales and marketing, technical
resources as well as having higher brand recognition and a larger customer base. As the IP
Telephony market



| | - 23
- | 
| | ------ | 

---

matures, and new services are
implemented, management anticipates increased opportunities for Mitel Networks but also
further competitive pressure from the incumbent and competitive service providers.

Intellectual Property

Mitel Networks intellectual
property assets include patented technology, industrial designs, proprietary software and
the copyright therein, operating and instruction manuals, trade secrets and confidential
business information. Until November 1, 2002, most intellectual property was owned by and
licensed from Mitel Knowledge Corporation (Mitel Knowledge), a corporation
controlled by Dr. Matthews. On November 1, 2002, Mitel Networks purchased the intellectual
property from Mitel Knowledge as described in Item 10.C of this annual report.

Description of Intellectual Property:

Mitel Networks has accumulated,
through development or acquisition, a significant body of intellectual property related to
customer premise communications products and related applications. The intellectual
property consists of approximately 134 inventions for which patents have been granted in
at least one country, and approximately 115 additional inventions for which patent
applications have been filed. This intellectual property has been primarily embodied and
expressed in telecommunications products based on analog, TDM, and IP technologies. Over
the last number of years, particular emphasis has been placed on VoIP implementations and
on applications leveraging the features and capabilities provided by IP/packet-based
technologies. As a result, 18 of the patents granted or patent applications referred to
above relate specifically to IP and its associated technologies. In connection with the
acquisition transactions, Mitel Networks has entered into an Intellectual Property License
Agreement with Zarlink under which Zarlink granted Mitel Networks a perpetual
non-exclusive license to certain intellectual property retained by Zarlink to enable Mitel
Networks to continue the operations of the Predecessor Business.

Mitel Networks also maintains an
active trademark registration policy and has a portfolio of trademarks and design marks.
Mitel Networks also endeavors to register or otherwise protect its current product names,
taglines and domain names.

Additionally, Mitel Networks depends
on third party suppliers to provide software applications and components for certain of
its products, pursuant to supply agreements entered into with such third parties.

As a standard practice, Mitel
Networks enters into confidentiality agreements with its employees, consultants,
customers, distributors, value-added resellers, solution providers and original equipment
manufacturers.



| | - 24
- | 
| | ------ | 

---

Government Regulations

There are certain United States
regulatory policies that require the disabled to have access to communications solutions
to the same extent that non-disabled persons do. Failure to achieve this form of
accessibility could subject Mitel Networks to liability with respect to commercial sales
of its products and/or could prevent the government from procuring Mitel Networks
products to the extent the products of others are deemed to be more accessible and
otherwise a better value. Mitel Networks design experts are aware of these and other
regulations and design Mitel Networks products accordingly. Mitel Networks is
likewise aware of the fact that the U.S. Department of Defense requires interoperability
certification from its vendors before procuring new communications systems and Mitel
Networks is in the process of applying for such certification testing to be conducted.
Finally the U.S. Federal Communications Commission (FCC) has recently issued
certain Notices of Proposed Rule-Making regarding E_911 and VoIP issues that may impact
the industry depending on the degree to which regulation may ensue. There is no assurance
that the above-noted government regulations will not have a material effect on Mitel
Networks capital expenditures, results of operations, cash flows or competitive
position.

C. Organizational
Structure

See Item 7.A of this annual report for
a discussion of the major shareholders of Mitel Networks and their related ownership
interest in the Company.

Mitel Networks carries on its
worldwide business through its subsidiaries. Mitel Networks subsidiaries are shown
on the chart below, the jurisdiction of incorporation being noted in parentheses.



| | - 25
- | 
| | ------ | 

---



D. Property, Plants
and Equipment

Mitel Networks activities are
currently conducted in North America from leased headquarters facilities of 512,391 square
feet located in Ottawa, Ontario, Canada, from leased facilities of 8,972 square feet
located in Herndon, Virginia, USA and from owned premises of 286,000 square feet located
in Caldicot, Wales, U.K. The headquarters facilities are leased from a company controlled
by Dr. Matthews, under terms and conditions reflecting prevailing market conditions for a
period of 10 years, expiring on February 15, 2011. Mitel Networks also has a number of
smaller leased premises located elsewhere in North America, the U.K. and throughout the
world.

On August 31, 2001, Mitel
  Networks entered into sublease agreements with BreconRidge (the BreconRidge
  sublease) for certain office and manufacturing facilities in Ottawa and
  in the United Kingdom totaling 252,941 square feet under terms and conditions
  reflecting prevailing



| | - 26
- | 
| | ------ | 

---

market conditions. The Ottawa
sublease agreement with BreconRidge was amended on May 31, 2002 to increase leased space
by 4,026 square feet, bringing the total space subleased to BreconRidge to 256,967 square
feet. The Ottawa sublease agreement is for a term of five years expiring on August 31,
2006. The United Kingdom lease agreement is for a term of fifteen years expiring in August
2016 with cancellation options in the fifth and tenth years available to Mitel Networks
and BreconRidge.

Mitel Networks Limited
(MNL), a wholly-owned subsidiary of Mitel Networks, entered into a lease
agreement dated February 2, 2001 with a wholly-owned subsidiary of Zarlink, pursuant to
which the subsidiary leases 49,500 square feet at MNLs premises at Portskewett
Business Park, Portskewett, Monmouthshire, U.K., on terms reflecting prevailing market
conditions. The term of the lease is five years. Both parties have the right to terminate
the lease upon at least twelve months prior written notice.

# Item 5.  Operating
and Financial Review and Prospects

Managements
Discussion and Analysis of Financial Condition and Results of Operations

Managements Discussion and
Analysis of Financial Condition and Results of Operations should be read in conjunction
with the accompanying audited consolidated financial statements for the fiscal years ended
April 28, 2002, April 27, 2003 and April 25, 2004. These reports are presented in United
States dollars and have been prepared in accordance with accounting principles generally
accepted in the United States, referred to in this annual report as US GAAP.

During Fiscal 2004, the Company
  adopted the United States (US) dollar as its reporting currency. As a result
  of the change in reporting currency, the financial statements for all periods
  presented were translated from Canadian dollars to US dollars in accordance
  with SFAS No. 52, Foreign Currency Translation. Income statement balances
  were translated using weighted average exchange rates over the relevant periods,
  assets and liabilities were translated at the exchange rate as of the balance
  sheet dates, and shareholders equity balances were translated at the exchange
  rates in effect on the date of each transaction. The Company made this change
  to enhance the communication of its financial results with its shareholders
  and potential investors using the currency that is familiar to both groups.
  This presentation is also more consistent with the presentation of the financial
  results of its industry counterparts and competitors. There has been no change
  in the functional currencies used in preparing the consolidated financial statements
  discussed herein.

Overview

Mitel Networks is a global provider
of next-generation IP telephony, video and data products that creates advanced
communication products and applications in the areas of speech recognition, wireless
mobility, unified messaging, and customer interaction. Through direct and indirect
channels of distribution, Mitel Networks serves a wide range of vertical markets,
including the retail, education, hospitality, healthcare, and government segments, in the
United States, Europe and Canada.



| | - 27
- | 
| | ------ | 

---

Business Segments:

Mitel Networks reports its operations
in two segments: the Solutions segment and the Services segment. The Solutions segment
represents Mitel Networks core business, consisting of enterprise voice, video and
data communications systems and software as well as communications applications.
Solutions products are distributed through Mitel Networks dealer and reseller
networks and are used by large enterprises, small and medium businesses as well as
government, education and healthcare organizations. The Services segment consists of
direct product sales and services, professional services, maintenance and technical
support services, all of which are provided through Mitel Networks direct sales
offices throughout North America and the United Kingdom. Mitel Networks does not allocate
general and administrative expenses, amortization of acquired intangibles, stock-based
compensation expense and one-time charges to its segments as management does not use this
information to measure the performance of the operating segments. These unallocated
expenses are included in the category of corporate and other in the segmented
information disclosure contained in Mitel Networks financial statements included
elsewhere in this annual report.

Restructuring Actions:

During Fiscal 2004, Mitel Networks
implemented additional workforce reduction programs in a continued effort to realign
spending levels with the lower sales volumes experienced in the year. These restructuring
actions resulted in total special charges recorded in Fiscal 2004 of $11.7 million (see
additional details in the section Special Charges). Additional restructuring
actions occurred during Fiscal 2003 and Fiscal 2002, as described later in this
Managements Discussion and Analysis.

Related Party
Transactions:

Mitel Networks enters into a
significant number of related party transactions in the normal course of business and in
connection with the financing of its operations. Material related party transactions that
occurred during the past three fiscal years include the outsourcing of the manufacturing
and repair operations to BreconRidge, R&D funding received from Mitel Knowledge,
financing of operations through demand promissory notes payable to companies controlled by
Dr. Matthews and the subsequent conversion of such demand promissory notes into equity
securities of the Company, leasing of the Ottawa headquarters facilities from Mitel
Research Park Corporation (MRPC), a company controlled by Dr. Matthews, and
the distribution of March Networks products through Mitel Networks channels. The
terms of the supply agreement with BreconRidge reflect prevailing market conditions, with
the exception of certain committed cost reductions on purchases of traditional
communications platform products. These cost reductions have improved Mitel Networks
results of operations through August 1, 2004. Mitel Networks liquidity was also
positively affected during the last three fiscal years by the R&D funding received
from Mitel Knowledge, and the financing obtained from companies controlled by Dr.
Matthews. See Item 7.B Related Party Transactions for further details on related party
transactions.



| | - 28
- | 
| | ------ | 

---

Outsourcing of Manufacturing
Operations:

Mitel Networks outsources its
worldwide manufacturing and repair operations to BreconRidge. Mitel Networks and certain
subsidiaries entered into a supply agreement dated August 31, 2001 under which BreconRidge
manufactures the majority of Mitel Networks products and provides certain services
to Mitel Networks and its subsidiaries. Pursuant to an amendment executed February 27,
2003, the initial term of the supply agreement was extended to December 31, 2007, followed
by automatic one year renewal terms thereafter, all subject to the right of either party
to terminate the agreement on at least one hundred eighty days prior notice during any
renewal term. Subject to certain exceptions, the supply agreement is exclusive during the
amended initial term with respect to current products and new product introductions. Under
the terms of the supply agreement, BreconRidge is required to purchase Mitel
Networks raw material inventory, before turning to third party suppliers for raw
material procurement. Mitel Networks is not obligated to purchase finished products from
BreconRidge in any specific quantity, except pursuant to firm purchase orders. Mitel
Networks may be obligated to purchase certain excess inventory levels from BreconRidge
that could result from Mitel Networks actual sales varying from forecasted sales.
Under the terms of the supply agreement, BreconRidge has committed to certain cost
reductions through August 1, 2004 on purchases of traditional communications platform
products. Mitel Networks does not anticipate that potential future changes in the price of
materials purchased from BreconRidge will have a material adverse effect on the
Companys financial results during Fiscal 2005.

The supply agreement with BreconRidge
represents a concentration that, if suddenly eliminated, could have an adverse effect on
Mitel Networks operations. While Mitel Networks believes that alternative sources of
manufacturing would be available if this arrangement were to cease, disruption of its
primary source of manufacturing could create a temporary adverse effect on product
shipments. There can be no assurance that the supply agreement with BreconRidge will
achieve the business objectives and cost reductions currently anticipated.

In connection with the outsourcing of
its manufacturing and repair operations on August 31, 2001, Mitel Networks entered into
lease and sublease agreements with BreconRidge for certain office and manufacturing
facilities in Ottawa and in the United Kingdom as further described in Item 4.D of this
annual report.

Research and Development
Arrangements:

Pursuant to the terms of the MNC
R&D Agreement, as defined and described in Item 10.C of this annual report, which
terms were in effect until November 1, 2002, Mitel Knowledge owned substantially all of
the intellectual property developed by Mitel Networks, excluding trademarks, and licensed
it and the intellectual property acquired in connection with the acquisition transactions
to Mitel Networks and its subsidiaries. These arrangements enabled Mitel Networks to
secure a source of funding on attractive terms for a portion of its R&D, while
permitting Mitel Networks and its subsidiaries to exploit the intellectual property
throughout the world.

Pursuant to the terms of these
agreements, Mitel Knowledge provided R&D funding to Mitel Networks. During Fiscal
2004, Mitel Networks received $nil (Fiscal 2003  $4.4 million; Fiscal 2002 
$6.6 million) in R&D funding, net of royalty expenses of $nil (Fiscal 2003  $0.3
million;



| | - 29
- | 
| | ------ | 

---

Fiscal 2002  $0.2 million),
that was recorded as a liability to related parties on Mitel Networks Consolidated
Balance Sheet.

The R&D agreement provided for a
call right pursuant to which Mitel Networks had the right to require Mitel Knowledge to
sell all of its rights, title and interest in and to the intellectual property (the
Mitel Knowledge IP), including improvements and new technology, to Mitel
Networks (the Call Right). The purchase price for the intellectual property
was to be paid through the issuance of common shares from Mitel Networks treasury,
with each such share having an assigned value of CDN$5.25.

Effective November 1, 2002, Mitel
Networks exercised the Call Right and acquired the intellectual property from Mitel
Knowledge for a price of approximately $8.0 million (CDN$12.5 million), satisfied through
the issuance of 4,555,169 common shares from treasury based upon the value of CDN$5.25 per
share in accordance with the formula in the R&D agreement (the Purchase
Price). The shares issued had a fair value of CDN$2.75 per share on the date of
issuance based upon an independent valuation previously obtained. As a result, both the
R&D agreement and the R&D cost-sharing agreement were terminated during Fiscal
2003, as discussed in Item 10.C of this annual report. The Fiscal 2003 transaction
resulted in the settlement of the liability to issue common shares of $14.7 million (April
28, 2002  $10.0 million) classified in the due to related parties balance in Mitel
Networks Consolidated Balance Sheet, an increase of $0.1 million to the carrying
value of intangible assets and an increase of $14.8 million to the carrying value of
common shares.

Critical Accounting
Policies:

The preparation of financial
statements and related disclosures in conformity with US GAAP requires management to make
estimates and assumptions about future events that affect the amounts reported in Mitel
Networks financial statements and accompanying notes. The determination of estimates
requires the exercise of judgment and actual results could differ from those estimates,
and any such differences may be material to the financial statements. Mitel Networks
significant accounting policies are described in Note 3 of the Notes to the Consolidated
Financial Statements included in this annual report. The following critical accounting
policies are significantly impacted by judgments, assumptions and estimates.

REVENUE RECOGNITION  For
products sold through indirect distribution channels, arrangements usually involve
multiple elements, including post-contract technical support and training. Mitel Networks
also sells products, including installation and related maintenance and support services,
directly to customers. Due to the complexity of Mitel Networks sales agreements,
judgment is routinely applied principally in the areas of customer acceptance, product
returns, unbundling of multiple element arrangements and collectibility. Mitel Networks
relies on historical trends and past experience to estimate product returns and assess
customer acceptance and collectibility. Different judgments or different contract terms
could adversely affect the amount of revenue recorded.

COLLECTIBILITY OF ACCOUNTS RECEIVABLE
 The allowance for doubtful accounts is based on Mitel Networks assessment of
the collectibility of specific customer accounts and the aging of accounts receivable. If
there is a deterioration of a major customers credit worthiness



| | - 30
- | 
| | ------ | 

---

or actual defaults are higher than
Mitel Networks historical experience, its estimates of the recoverability of amounts
due could be adversely affected.

INVENTORIES  In order to record
inventory at the lower of cost or market, Mitel Networks must assess its inventory
valuation which requires judgment as to future demand. Mitel Networks also reviews its
historical inventory usage and applies judgment to adjust its inventory allowances. If
there is a sudden and significant decrease in demand for Mitel Networks products or
there is a higher risk of inventory obsolescence because of rapidly changing technology
and customer requirements, Mitel Networks may be required to increase its inventory
allowances and its gross margin could be adversely affected.

WARRANTY PROVISION  Mitel
Networks accrues warranty costs based on the past experience of claims and expected
material usage costs to provide warranty services. If Mitel Networks experiences an
increase in warranty claims that is higher than Mitel Networks past experience, or
an increase in actual costs to service the claims is experienced, gross margin could be
adversely affected.

LONG-LIVED ASSETS  Mitel
Networks assesses the impairment of property, equipment and definite lived intangible
assets whenever events or changes in circumstances indicate that the carrying value may
not be recoverable. The determination of useful lives and whether or not these assets are
impaired involves significant judgment. In response to changes in industry and market
conditions, Mitel Networks may strategically realign its resources and consider
restructuring, disposing of or exiting businesses, which could result in an impairment
charge.

GOODWILL  Mitel Networks
assesses goodwill for impairment on an annual basis or more frequently if circumstances
warrant, as required by SFAS 142. An impairment charge is recorded if the implied fair
value of goodwill of a reporting unit is less than the book value of goodwill for that
unit. The Company has four reporting units that have assigned goodwill of $5.6 million.
Quoted stock market prices are not available for these individual reporting units.
Accordingly, consistent with SFAS 142, Mitel Networks methodology for estimating the
fair value of each reporting unit primarily considers estimated future revenues for those
reporting units. Revenue estimates involve a significant amount of judgement, and
significant movements in revenue or changes in the assumptions used may result in
fluctuations in the value of goodwill that is supported.

SPECIAL CHARGES  Mitel
  Networks records restructuring costs when the liability has been incurred. Mitel
  Networks reassesses the prior restructuring accruals on a regular basis to reflect
  changes in the costs of the restructuring activities, and Mitel Networks records
  new restructuring accruals when the liability has been incurred. Estimates are
  based on anticipated costs to exit such activities and are subject to change.

CONTINGENCIES  Mitel Networks
is party to various claims and litigation arising in the normal course of business. As a
result, Mitel Networks considers the likelihood of loss of an asset or the incidence of a
liability, as well as its ability to reasonably estimate the amount of loss, in
determining loss contingencies. Mitel Networks recognizes a provision for estimated loss
contingencies when it is probable that an asset has been impaired or a liability has been



| | - 31
- | 
| | ------ | 

---

incurred and the amount of loss can
be reasonably estimated. Mitel Networks regularly evaluates current information available
to determine whether such provisions should be adjusted.

DEFERRED TAXES  Mitel Networks
recognizes deferred tax assets and liabilities based on the differences between the
financial statement carrying amounts and the tax bases of assets and liabilities.
Significant management judgement is required in determining any valuation allowance
recorded against Mitel Networks net deferred tax assets. Management makes an
assessment of the likelihood that Mitel Networks deferred tax assets will be
recovered from future taxable income, and to the extent that recovery is not believed to
be more likely than not, a valuation allowance is recorded.

PENSION COSTS  Mitel
Networks defined benefit pension costs are developed from actuarial valuations.
Inherent in these valuations are key assumptions provided by Mitel Networks to the
actuaries, including discount rates, expected return on plan assets and rate of
compensation increases. In estimating the rates and returns, Mitel Networks considers
current market conditions and anticipates how these will affect discount rates, expected
returns and rates of compensation increases. Material changes in Mitel Networks
pension benefit costs may occur in the future as a result of changes to these assumptions
or from fluctuations in Mitel Networks related headcount or market conditions.

DERIVATIVE INSTRUMENT ON CONVERTIBLE,
REDEEMABLE PREFERRED SHARES  Mitel Networks issued convertible, redeemable preferred
shares which have a redemption value that is indexed to the common share price of the
Company. This redemption feature qualifies as a derivative instrument that has to be
accounted for separately under SFAS 133. The derivative component has been estimated based
on the present value of the Companys common share price at the balance sheet date.
Changes in assumptions used in present value calculations and movements in the future
common share price of the Company could have a material impact on Mitel Networks
financial statements.

Recent Accounting
Pronouncements:

Refer to Note 3 (w) of Mitel
Networks audited consolidated financial statements in Section 18 of this annual
report.



| | - 32
- | 
| | ------ | 

---

A. Operating Results

The following table sets forth the
audited consolidated statement of operations data for Mitel Networks for the fiscal years
indicated:

|                            | Year Ended
|--------------------------- | ----------
|
|
|                           
|Revenues                    |           
|Cost of revenues            |           
|                           
|Gross margin                |           
|Research and development    |           
|Selling, general and        |           
|administrative              |           
|Special charges             |           
|Loss on disposal of         |           
|business                    |           
|Amortization of acquired    |           
|intangibles                 |           
|                           
|Operating loss              |           
|Interest expense            |           
|Beneficial conversion       |           
|feature on convertible      |           
|debentures                  |           
|Other (income) expense, net |           
|Income tax (recovery)       |           
|expense                     |           
|                           
|Net loss                    |           
|                           

Year ended April 25, 2004
  (Fiscal 2004) compared to year ended April 27, 2003 (Fiscal
  2003):



|REVENUE:
|--------

The following table sets forth
external segmented revenue, both in dollars and in percentage terms, for the fiscal years
indicated:

|         
|---------
|
|
|
|Solutions
|Services 
|         
|         
|         



| | - 33
- | 
| | ------ | 

---

Fiscal 2004 revenue decreased by 3.3%
compared to Fiscal 2003 as a result of an 11.5% reduction in revenue generated by the
Services segment being partially offset by a 6.1% increase in revenue generated by the
Solutions segment. The decline in revenue of the Services segment was driven primarily by
lower product sales (both Mitel Networks and third party original equipment manufacturer
(OEM) products) and associated services to its direct customers in both North
America and the United Kingdom. The growth in the Solutions segment revenue was due to
higher sales of communication systems platforms and desktop appliances through Mitel
Networks dealer and reseller networks with the most significant growth coming from
the dealer and reseller networks in the United Kingdom.

Management expects continued pressure
on the Companys ability to expand revenue and it is not clear whether business
communications spending will improve significantly in the near term. It is difficult to
predict the nature, timing and extent of future business investments in communications
systems and as a result, if and when the Companys sales will increase. Management
expects that any revenue growth will be driven primarily by revenue from the Solutions
segment.

The following table sets forth
external revenue for groups of similar products and services, both in dollars and in
percentage terms, for the fiscal years indicated:

|                             | Year Ended
|---------------------------- | ----------
|
|                            
|                            
|Products:                    |           
|Communications platforms and |           
|desktop appliances           |           
|Software applications        |           
|OEM products                 |           
|Other                        |           
|                            
|                             |           
|                            
|Services:                    |           
|Maintenance and support      |           
|Managed services             |           
|Professional services        |           
|                            
|                             |           
|                            
|                             |           
|                            

Product sales

Fiscal 2004 revenue from product
sales amounted to $230.9 million (or 68% of total revenue) compared to $256.8 million (or
73% of total revenue) in Fiscal 2003. The decline in product sales was due primarily to
reduced sales of software applications arising from the Companys messaging and
contact center applications, and lower sales of third party hardware platforms associated
with revenue generated by the Companys Services segment. Despite the decline in
product sales, revenue generated by the Companys core business, communications
platforms



| | - 34
- | 
| | ------ | 

---

and desktop appliances, was virtually
flat over prior year levels. Although sales of communication platforms and desktop
appliances were unchanged over Fiscal 2003, the Company, as expected, continued to see a
shift in sales away from its traditional communication platform products towards increased
sales of IP products. In Fiscal 2004 sales of IP products accounted for 43% of total
product revenue compared to 27% in Fiscal 2003. This is in line with the Companys
strategy to realign its efforts towards IP products and this trend is expected to continue
for the foreseeable future.

Services sales

Fiscal 2004 revenue from services
sales increased to 32% of total revenue compared to 27% in Fiscal 2003 and grew in
absolute dollars by 15% year over year. The growth in services revenue was driven by a 13%
increase in revenue from fixed maintenance contracts.Overall, services revenue has not
been as impacted by the general economic slowdown as other sources of revenue. However,
the Company does not anticipate that it will continue to experience the current level of
annual growth from services revenue in the foreseeable future, though services revenue is
expected to continue to grow in terms of absolute dollars.

The following table sets forth sales
by geographic regions, both in dollars and in percentage terms, for the fiscal years
indicated:

|               | Year Ended
|-------------- | ----------
|
|
|              
|Canada         |           
|United States  |           
|United Kingdom |           
|Other foreign  |           
|countries      |           
|              
|               |           
|              

From a geographical perspective, the
overall decline in revenue from Fiscal 2003 to Fiscal 2004 was driven primarily by a
decline in revenue via the United States and United Kingdom geographical regions. The
revenue decline in these regions was due primarily to lower product and services sales via
the direct sales offices in these regions. Revenue from outside of these regions was up
marginally year over year and is primarily due to Mitel Networks continued efforts
to penetrate new markets and channels primarily in continental Europe, Asia and the South
Pacific.



| | - 35
- | 
| | ------ | 

---

Although Mitel Networks cannot
guarantee future results, management expects that Fiscal 2005 will continue to see the
majority of worldwide revenue being generated from the United States and the United
Kingdom.

Backlog:

Mitel Networks defines backlog as
unconditional purchase orders or other contractual agreements for products or services
(excluding maintenance) for which customers have requested delivery within the next twelve
months. Backlog was $23.2 million at April 25, 2004, compared with $26.8 million at April
27, 2003. Mitel Networks has historically operated with a relatively small backlog as
orders are frequently booked and shipped within the same fiscal month. In addition, orders
are subject to cancellation, rescheduling by customers or product specification changes by
the customers. As a result, Mitel Networks does not believe that its backlog, at any given
date, is a reliable indicator of future revenues.



|GROSS MARGIN:
|-------------

The Fiscal 2004 gross margin as a
percentage of revenue increased to 40.4% of revenue compared to 36% of revenue in Fiscal
2003. This increase resulted from improvements in gross margin as a percentage of revenue
in both the Solutions and the Services segments, as further described below.

Solutions segment

Cost of sales of the Solutions
segment consists of cost of goods purchased from BreconRidge and other suppliers,
inventory provisions, engineering costs, warranty costs and other supply chain management
costs.

The Solutions segment gross margin as
a percentage of revenue increased to 36.7% in Fiscal 2004 from 32% in Fiscal 2003. This
increase was attributed to the following: (i) shift in product sales mix whereby decreased
sales of lower margin products were partially offset by increased sales of higher margin
IP products with larger line sizes; and (ii) significantly lower inventory obsolescence
provisions recorded in Fiscal 2004 compared to Fiscal 2003. During Fiscal 2003 significant
amounts of inventory were written off as a result of the Companys realignment
towards IP products, the magnitude of which was not repeated in Fiscal 2004.

The Companys margins may vary
from period to period depending upon distribution channel, product and software mix.
Management anticipates that cost reductions resulting from re-design efforts and improved
manufacturing costs of IP desktop appliances could have a positive effect on the Solutions
segment gross margin in Fiscal 2005. Although the gross margin on traditional
communications platform products remained strong in Fiscal 2004, the gross margin on these
products are expected to gradually trend downwards.



| | - 36
- | 
| | ------ | 

---

Services segment

Cost of sales of the Services segment
consists of cost of goods purchased from the Solutions segment and other suppliers, labor
costs associated with installation and support services, inventory provisions and other
supply chain management costs.

The Services segments gross
margin as a percentage of the segments revenue increased from 37.1% of revenue in
Fiscal 2003 to 37.8% in Fiscal 2004. This increase was mainly attributable to overall
lower inventory obsolescence provisions recorded in Fiscal 2004 compared to Fiscal 2003,
which were associated with the realignment towards an IP-centric product portfolio.

OPERATING EXPENSES



R&D:



R&D expenses decreased from 11.7%
of total revenue in Fiscal 2003 to 10.6% of total revenue in Fiscal 2004. As anticipated
by management, the R&D expenses continue to decrease as a result of workforce
reduction programs implemented in the current and previous two fiscal years, and the
closure of the Companys United Kingdom R&D facility during Fiscal 2003.
Management expects for the foreseeable future that R&D expenses will increase in
absolute dollars as the Company continues to develop and enhance existing and new
technologies and products. These expenses may vary, however, as a percentage of revenue.

Selling, General and Administrative
(SG&A):

SG&A expenses decreased in
absolute dollars during Fiscal 2004 compared to Fiscal 2003 but remained relatively flat
as a percentage of total revenue. As expected by management, this decrease in absolute
dollars was primarily the result of workforce reductions implemented in the current and
prior two fiscal years, coupled with other cost cutting measures implemented by the
Company including the deferral of certain marketing programs and other expenditures during
Fiscal 2004. Management expects for the foreseeable future that SG&A expenses will
increase in absolute dollars, assuming that revenue is increased and the Company continues
to enhance existing and develop new technologies and products. These expenses may vary,
however, as a percentage of revenue.

Special Charges:

Special charges as a percentage of
revenue decreased 0.5 percentage points mainly as a result of fewer employee terminations
arising from workforce reduction programs implemented during Fiscal 2004 compared to
Fiscal 2003.

During Fiscal 2004, Mitel Networks
recorded special restructuring charges of $11.7 million related to further cost reduction
measures taken to minimize the impact of declining revenues, net of reversals of prior
years charges of $0.3 million resulting primarily from adjustments to original
estimated severance costs. The net restructuring charges included workforce reduction
costs of $8.5 million relating to employee severance and benefits and associated legal
costs incurred in the termination of 196 employees throughout the world. Non-cancelable
lease costs of $3.2 million relating to excess facilities in certain Canadian and U.K.
offices and a loss on



| | - 37
- | 
| | ------ | 

---

disposal of capital assets of $0.3
million were also included in the Fiscal 2004 restructuring charges.

Subsequent to April 25, 2004, Mitel
Networks recorded additional special restructuring charges of $1.8 million, as follows:
(i) $1.0 million related to the Companys discontinuation of its internal ASIC design
program in June 2004, which represented the write off of tools associated with the
discontinued program and the termination of 7 employees in Canada, and (ii) $0.8 million
related to the termination of 10 employees in the Companys United Kingdom services
business and other reductions throughout continental Europe. These actions are expected to
have a positive effect on Mitel Networks operating costs going forward.

Loss on Disposal of Manufacturing
Assets:

On August 31, 2001, Mitel Networks
outsourced its manufacturing operations, including the sale of related net assets and the
transfer of employees and certain liabilities to BreconRidge, for total net consideration
of $5.0 million in the form of long-term promissory notes receivable of $5.4 million and
promissory notes payable of $0.4 million. The transaction resulted in a loss on disposal
of $1.5 million recorded in Fiscal 2002 operating expenses. The loss represented the
excess of the carrying value of the plant, equipment and manufacturing workforce over the
total net consideration.The long-term promissory notes
receivable, net of the long-term promissory notes payable, were paid in full in February
2003, prior to the original maturity date of August 31, 2003.

The original loss on disposal
recorded during Fiscal 2002 contained estimates and assumptions regarding expected
subleasing income arising from premises that had been subleased to BreconRidge pursuant to
the disposal of the manufacturing operations. It became evident during Fiscal 2004 that
sublease income over the lease renewal period, which was originally included in the
estimated loss on disposal, will no longer be realized. As a result an amount of $0.6 was
recorded in Fiscal 2004 as an additional loss arising on the disposal activity.

Amortization of Acquired Intangibles:

As part of the February 16, 2001
acquisition transactions, Mitel Networks recorded acquired intangible assets of $92.2
million consisting of developed technology, workforce, customer base and patents.
Resulting amortization expense amounted to $43.8 million, $29.1 million and $0.2 million
for Fiscal 2002, Fiscal 2003 and Fiscal 2004, respectively. Acquired intangible assets
were fully amortized in early Fiscal 2004.

Other (Income)
Expense, Net:

Other (income) expense, on
  a net basis, consists primarily of foreign exchange rate gains and losses and
  interest income. Other expense, on a net basis, amounted to $0.6 million in
  Fiscal 2004 compared to other income, on a net basis, of $3.3 million in Fiscal
  2003. The expense recorded in Fiscal 2004 primarily resulted from transactional
  foreign currency losses of $1.0 million (compared with transactional foreign
  currency gains of $3.0 million in Fiscal 2003), arising mainly from adverse
  movements between the U.S. dollar and the Canadian dollar during



| | - 38
- | 
| | ------ | 

---

the year. Mitel Networks uses foreign
currency forward contracts and foreign currency swaps to minimize the short-term impact of
currency fluctuations on foreign currency receivables, payables and intercompany balances.

Beneficial Conversion Feature on
Convertible Debentures:

During Fiscal 2004 Mitel Networks
recorded a $3.1 million expense representing the beneficial conversion feature on the
conversion of debentures. The debentures, which did not have a fixed conversion price at
the commitment date, were converted to common shares of the Company at a price that was
lower than the fair market value of the common shares at the commitment date. As a result,
a non-cash expense representing the difference between the effective conversion price and
the fair market value of the common shares was calculated and recorded as required by
generally accepted accounting principles.

Provision for Income
Taxes:

In Fiscal 2004 Mitel Networks
recorded income tax expense, net of deferred tax recoveries, of $0.3 million. The current
income tax expense amounted to $2.0 million, arising as a result of the U.K. subsidiary
being in a taxable position in Fiscal 2004. This tax expense was largely offset by
deferred tax recoveries arising from deductible taxable amounts available to the Company
of $1.7 million.

# Year ended April 27,
2003 (Fiscal 2003) compared to year ended April 28, 2002 (Fiscal 2002):

REVENUE:

Fiscal 2003 revenue decreased by 1.6%
compared to Fiscal 2002 as a result of the discontinuation, in Fiscal 2002, of the Network
Access Solutions business which generated $2.5 million of revenue in Fiscal 2003 compared
to $12.8 million in Fiscal 2002. Excluding the impact of the Network Access Solutions
revenue, the Fiscal 2003 Solutions segment sales increased by 9% compared to Fiscal 2002
mainly as a result of a significant increase in IP sales across all regions and expansion
into new geographic markets and distribution channels. Growth in the Solutions segment was
partially offset by a 5.9% decline in revenue from the Services segment as a result of
poorer global economic conditions and associated political issues. The majority of the
decline in the Services segment revenue was in the United States market.

Product sales

Fiscal 2003 revenue from product
sales amounted to $256.8 million (or 73% of total revenue) compared to $270.9 million (or
76% of total revenue) in Fiscal 2002. The decrease was mainly attributable to the
discontinuation, in Fiscal 2002, of the Network Access Solutions business, which amounted
to $12.8 million in Fiscal 2002 compared to only $2.5 million in Fiscal 2003. The
platforms and appliances product category was characterized by a significant increase in
IP product sales across all regions, offset by the expected decline in sales of
traditional communications platform products.



| | - 39
- | 
| | ------ | 

---

Services sales

Fiscal 2003 revenue from services
sales increased to 27% of total revenue compared to 24% in Fiscal 2002 and grew in
absolute dollars by 10% year over year. As in the current year, the growth in services
revenue was driven by increased revenue from fixed maintenance contracts.

Geographical sales

Compared to Fiscal 2002, Fiscal 2003
revenue by geographic region increased or generally remained consistent in all regions
except in the United States. The decline in the United States revenue was largely
attributable to on-going economic and political issues.

GROSS MARGIN:

Gross margin as a percentage
  of revenue declined from 39.8% of revenue in Fiscal 2002 to 36.0% of revenue
  in Fiscal 2003. This decline primarily resulted from decreases in both the Solutions
  and the Services segments margin, as a percentage of revenue.

Solutions segment

Mitel Networks operated manufacturing
  plants for the first four months of Fiscal 2002 and, following the outsourcing
  of its manufacturing operations on August 31, 2001, entered into a supply agreement
  with BreconRidge for the remainder of Fiscal 2002 and for Fiscal 2003. As a
  result of such supply agreement with BreconRidge, manufacturing costs of Mitel
  Networks products were eliminated and replaced by purchase prices of finished
  products for the last eight months of Fiscal 2002 and for Fiscal 2003. This
  change to an outsource manufacturing model did not have a material impact on
  the Fiscal 2002 gross margin, however, the Fiscal 2003 gross margin was positively
  affected by certain cost reductions on purchases of traditional communications
  platform products pursuant to the terms of the supply agreement with BreconRidge.

Despite the cost reductions
  pursuant to the terms of the BreconRidge supply agreement explained above, the
  Solutions segments gross margin as a percentage of the segments
  revenue decreased from 35.7% of revenue in Fiscal 2002 to 32% in Fiscal 2003.
  This decline was mainly attributable to increased inventory obsolescence provisions
  associated with the realignment towards an IP-centric product portfolio. Factors
  that also contributed to the overall decrease of the Solutions segments
  margin as a percentage of revenue included: (i) the continued lower gross margin
  generated from IP demonstration and field trial systems sold at lower prices
  and in lower line sizes experienced in the first half of Fiscal 2003, (ii) the
  increased costs associated with the introduction of IP products, and (iii) the
  higher proportion of third party software application sales at a lower margin.

Services segment

The Services segments
  gross margin as a percentage of the segments revenue decreased from 39%
  of revenue in Fiscal 2002 to 37.1% in Fiscal 2003. This decrease was mainly
  attributable to significant inventory obsolescence provisions associated with
  the realignment towards an IP-



| | - 40 - | 
| | ------ | 

---

centric product portfolio,
  partially offset by a shift in revenue mix towards higher margin fixed term
  maintenance contracts.

OPERATING EXPENSES

R&D:

R&D expenses decreased
  from 16.5% in Fiscal 2002 to 11.7% in Fiscal 2003. This decrease resulted from
  workforce reductions implemented in Fiscal 2002 and Fiscal 2003, the closing
  of the United Kingdom R&D facility in Fiscal 2003 and the completion of
  the significant investment required in Fiscal 2002 to launch Mitel Networks
  new IP-enabled solutions.

SG&A:

SG&A expenses decreased
  to 32.6% of revenue in Fiscal 2003 compared to 39.6% of revenue in Fiscal 2002.
  This improvement was primarily attributable to the workforce reductions implemented
  in Fiscal 2002 and Fiscal 2003 described in the section Special Charges.
  The significant investment made during Fiscal 2002 in geographic expansion,
  new strategic alliances and channel expansion, not repeated in Fiscal 2003,
  also contributed to the improvement in Fiscal 2003 SG&A expenses.

Special Charges:

During Fiscal 2003, Mitel
  Networks recorded special restructuring charges of $13.7 million related to
  additional cost reduction measures taken to minimize the impact of the economic
  slowdown, net of reversals of current years charges of $1.6 million and
  prior years charges of $0.6 million resulting primarily from adjustments
  to original estimated severance costs and fewer than originally anticipated
  employee terminations. The net restructuring charges included workforce reduction
  costs of $12.6 million relating to 265 terminated employees across most geographic
  regions, non-cancelable lease costs of $3.0 million and a loss on disposal of
  capital assets of $0.3 million, both related to the closure of the United Kingdom
  R&D facility, were also included in the Fiscal 2003 restructuring charges.
  These restructuring programs were completed by April 27, 2003.

During Fiscal 2002, Mitel
  Networks recorded special restructuring charges of $7.4 million in operating
  expenses related to the implementation of a series of cost reduction actions
  taken to realign Mitel Networks organization and reduce overhead, including
  the termination of R&D efforts related to the Network Access Solutions products.
  The restructuring charges included workforce reduction costs of $6.6 million
  related to 278 terminated employees across most geographic regions. Legal costs
  of $0.4 million and a loss on disposal of capital assets of $0.4 million related
  to the restructuring actions taken in the Solutions segment were also included
  in the Fiscal 2002 restructuring charges. Mitel Networks completed these cost
  reduction actions in the first quarter of Fiscal 2003.

Loss on Disposal of Manufacturing
  Assets:

On August 31, 2001, Mitel
  Networks outsourced its manufacturing operations, including the sale of related
  net assets and the transfer of employees and certain liabilities to BreconRidge,
  for total



| | - 41 - | 
| | ------ | 

---

net consideration of $5.0
  million in the form of long-term promissory notes receivable of $5.4 million
  and promissory notes payable of $0.4 million. The transaction resulted in a
  loss on disposal of $1.5 million recorded in Fiscal 2002 operating expenses.
  The loss represented the excess of the carrying value of the plant, equipment
  and manufacturing workforce over the total net consideration. This loss did
  not recur during Fiscal 2003.

The long-term promissory
  notes receivable, net of the long-term promissory notes payable, were paid in
  full in February 2003, prior to the original maturity date of August 31, 2003.

Amortization of Acquired
  Intangibles:

As part of the February 16,
  2001 acquisition transactions, Mitel Networks recorded acquired intangible assets
  of $92.2 million consisting of developed technology, workforce, customer base
  and patents. Resulting amortization expense amounted to$43.8 million and $29.1
  million in Fiscal 2002 and Fiscal 2003 respectively. The majority of the acquired
  intangible assets reached the end of their estimated useful lives and were fully
  amortized during Fiscal 2003.

Interest Expense:

Interest expense was $4.2
  million in Fiscal 2003 compared to $3.0 million in Fiscal 2002, representing
  an increase of $1.2 million in Fiscal 2003 compared to Fiscal 2002.This increase
  was mainly due to a higher amount of weighted average credit facilities and
  long-term debt outstanding compared with the previous year.

Other (Income)
  Expense, Net:

Other income, on a net basis,
  amounted to $3.3 million in Fiscal 2003 compared to other expense, on a net
  basis, of $0.4 million in Fiscal 2002. The income recorded in Fiscal 2003 principally
  resulted from significant transactional foreign currency gains of $3.0 million
  realized in the year, compared to transactional foreign currency losses of $0.8
  million recorded during Fiscal 2002.

Provision for
  Income Taxes:

Mitel Networks recorded an
  income tax recovery of $2.9 million in Fiscal 2003 and income tax expenses of
  $0.1 million for Fiscal 2002. The Fiscal 2003 recovery resulted primarily from
  tax assessments and tax refunds received in respect of prior periods. The Fiscal
  2002 expense resulted primarily from minimum tax liabilities in certain jurisdictions.
  Based on the statutory tax rates in Canada, Mitel Networks would have been expected
  to record income tax recoveries for each of these three fiscal years. However,
  a significant portion of the tax losses was derived from foreign subsidiaries
  operating in jurisdictions with lower statutory tax rates than those that apply
  in Canada. Furthermore, tax benefits of tax losses and deductible temporary
  differences incurred during each of the last three fiscal years have not been
  recognized for accounting purposes to date due to the lack of historical profitability.

- 42 -

B. Liquidity
  and Capital Resources

|(in millions of U.S. dollars, except
      DSO) | April 25,
      2004 | April 27,
      2003 | $ Change
      from Fiscal
      2003 | % change
      from Fiscal
      2003
|----------------------------------------------- | -------------------- | -------------------- | ------------------------------------- | -------------------------------------
|Cash and cash equivalents                       |                      | $ 26.7               |                                       | $ 22.3                               
|Working capital                                 |                      | 38.5                 |                                       | 7.1                                  
|Net cash provided by (used in)                  |                     
|Operating activities                            |                      | 10.8                 |                                       | (11.9                                
|Investing activities                            |                      | (6.3                 | )                                     | (0.2                                 
|Financing activities                            |                      | (2.0                 | )                                     | 30.5                                 
|                                               
|Days sales outstanding (DSO)                    |                      | 82                   |                                       | 70                                   
|                                               

Cash and cash equivalents:

During Fiscal 2004 and Fiscal
  2003, Mitel Networks implemented actions, further described below, to strengthen
  its liquidity and cash position, resulting in an overall improvement in the
  Companys cash position of $4.4 million during Fiscal 2004.

Working capital:

Working capital represents
  the Companys current assets less its current liabilities. The working
  capital position improved significantly from $7.1 at the end of Fiscal 2003
  to $38.5 at the end of Fiscal 2004. This improvement was primarily attributed
  to the repayment of $19.0 million of bank indebtedness during the year and the
  conversion of $31.0 million of related party loans into common shares of the
  Company. The increase in accounts receivable of $5.2 million, arising as a result
  of increased DSO described below, was offset by a reduction in inventory balances
  of $8.4 million, which arose from actions taken by the Company to better manage
  its inventory during Fiscal 2004.

Days sales outstanding (DSO)
  was 82 days at April 25, 2004 compared to 70 days as at April 27, 2003. DSO
  is a measure of the length of time taken to collect accounts receivables. The
  Company calculates its DSO ratio based on ending accounts receivable balances
  and annual revenue. The increase in DSO in Fiscal 2004 was largely the result
  of decreased collection efficiency in European markets which led to average
  longer days to collect in those markets. The Company is taking actions to reverse
  this trend, including a review of its sales and collections incentive structure.

On April 16, 2004 the Company
  entered into a receivables purchase and sale agreement whereby up to $38 million
  of qualifying non-interest bearing trade receivables in Canada and the United
  States may be sold to a securitization trust. The Company entered into this
  agreement primarily as a means of increasing its available credit facilities
  and providing more timely access to cash.



| | - 43 - | 
| | ------ | 

---

While no receivable balances
  had been sold under this agreement as at April 25, 2004, management anticipates
  that during Fiscal 2005, overall DSO will decrease due to the sale of its trade
  receivables under this agreement.

# Cash provided
  by operating activities:

Net cash generated from operating
  activities was $10.8 million in Fiscal 2004 compared to net cash usage of $11.9
  million in Fiscal 2003, representing an improvement of $22.7 million (or 190.7%)
  over Fiscal 2003. This substantial improvement resulted primarily from restructuring
  and other cost reduction actions taken in the current and prior fiscal year,
  which resulted in a significant reduction in operating expenses during Fiscal
  2004. Cash generated from the change in non-cash operating assets and liabilities
  was $23.0 million compared to $5.0 million in Fiscal 2003, due principally to
  improvements in working capital described above.

# Cash used
  in investing activities:

Net cash used in investing
  activities totaled $6.3 million in Fiscal 2004 compared to $0.2 million in Fiscal
  2003. The adverse change noted in Fiscal 2004 was primarily due to an early
  repayment of related party notes receivable during Fiscal 2003 of $5.3 million,
  not recurring during Fiscal 2004.

# Cash used in
  financing activities:

Net cash used in financing
  activities totaled $2.0 million in Fiscal 2004 compared to net cash provided
  of $30.5 million in Fiscal 2003. Cash flows from financing activities in Fiscal
  2004 were mainly attributable to (i) net proceeds of $12.9 million from the
  issuance of convertible, redeemable preferred shares, (ii) proceeds of $9.8
  million from the issuance of warrants, offset by repayments of bank indebtedness,
  related party loans, long-term debt and capital lease obligations totaling $25.2
  million.

During Fiscal 2004 Mitel
  Networks raised gross proceeds of $15 million through the issuance of 20,000,000
  Series A Shares. As described in Item 4.A, in connection with this Financing,
  holders of 29,530,494 common shares exchanged their common shares for 67,060,988
  Series B Shares. Share issue costs incurred in connection with these transactions
  totaled $2.1 million in Fiscal 2004. The rights, privileges, restrictions and
  conditions attaching to the Series A Shares and Series B Shares are described
  in Item 10.B of this annual report. The proceeds raised through the issuance
  of the Series A Shares will be used mainly to support operating activities.

In Fiscal 2003, Mitel Networks
  closed a private offering of debentures, which were convertible into common
  shares of the Company, that resulted in total cash proceeds of $6.4 million.
  The initial term of the convertible debentures was to have expired on April
  25, 2003, but was extended by resolution of the board of directors, in accordance
  with the terms of the debentures, until July 27, 2003 and then extended further
  to October 31, 2003. The debentures accrued interest at the rate of 6.5% per
  annum payable on the maturity date or upon conversion of the debentures and
  accrued interest into common shares of Mitel Networks. During Fiscal 2004 the
  entire balance of the debentures outstanding of $8.3 million was converted into
  5,445,775 common shares of the Company at their then fair value of CDN$2 per
  common share. On April



| | - 44 - | 
| | ------ | 

---

23, 2004, 5,081,619 of these
  common shares were exchanged for 10,163,238 Series B Shares at their then fair
  value of CDN$1 per preferred share, in connection with the Financing, as described
  in Item 4.A of this annual report. Subsequent to April 25, 2004 holders of an
  additional 94,478 of these common shares exchanged their shares for 188,956
  Series B Shares, and the Company anticipates that the remaining 269,678 common
  shares issued on conversion of the convertible debentures in October 2003 will
  likely be exchanged for Series B Shares.

During Fiscal 2003 and Fiscal
  2002 Mitel Networks borrowed funds from Wesley Clover, which bore interest at
  the prime rate and were payable on demand. At April 27, 2003 the balance of
  the loan payable to Wesley Clover was $29.1 million. During Fiscal 2004 the
  entire loan outstanding of $31.0 million was converted into 20,448,875 common
  shares of the Company at their then fair value of CDN$2 per common share. On
  April 23, 2004 all of the common shares issued on conversion of the loan were
  exchanged for 40,897,750 Series B Shares of the Company at their then fair value
  of CDN$1 per preferred share, in connection with the Financing, as described
  in Item 4.A of this annual report.

During Fiscal 2003 Mitel
  Networks, March Networks Corporation (March Networks) and Mitel
  Knowledge, signed an agreement with the Government of Canada (the TPC
  Agreement) that provides for financing of up to CDN$60 million for certain
  March Networks and Mitel Networks R&D activities over a three
  year period. The financing is provided through the Technology Partnerships Canada
  program, which is an initiative of the Government of Canada that is designed
  to promote economic growth in Canada through strategic investment in technological
  research, development and innovation. Mitel Networks expects to benefit from
  approximately 90% of financing commitment under the TPC Agreement. In exchange
  for the funds received by Mitel Networks under the TPC Agreement, Mitel Networks
  is required, as of September 30th in each of 2002, 2003, 2004, to issue warrants
  to Her Majesty the Queen in Right of Canada. The warrants are exercisable on
  a one-for-one basis for common shares for no additional consideration. The number
  of warrants to be issued is equal to the amount of contributions paid to Mitel
  Networks under the TPC Agreement in the immediately preceding 12-month period,
  divided by the fair market value of Mitel Networks common shares as of
  the applicable date.

During Fiscal 2004, Mitel
  Networks received total cash of $9.8 million under the TPC Agreement. During
  Fiscal 2004 Mitel Networks issued warrants exercisable for a total of 6,804,380
  common shares. The number of warrants issued during Fiscal 2004 was calculated
  based on the then fair value of CDN$2 per common share. 5,099,112 of the warrants
  issued during Fiscal 2004 related to funds received or receivable at the end
  of Fiscal 2003, and the remaining 1,705,268 warrants related to funds received
  during Fiscal 2004. The balance of the warrants required to be issued under
  the TPC Agreement with respect to funds received and receivable during Fiscal
  2004 will be issued in September 2004.

Borrowings:

Mitel Networks has a 364-day
  revolving credit facility of up to a maximum of $22 million (CDN $30 million)
  that expires in June 2005 and that is subject to a borrowing base. The facility
  was amended in July 2004 such that borrowings in excess of $11 million (CDN
  $15 million) are dependent upon certain financial criteria being met; however
  the Company does not anticipate



| | - 45 - | 
| | ------ | 

---

that it will require borrowings
  under this facility to be in excess of the stated threshold over the next fiscal
  year. The facility bears interest at the Prime rate or U.S. base rate plus 1.5%
  or LIBOR or Bankers Acceptance rate plus 2.5% and is secured by a general
  assignment of substantially all Mitel Networks accounts receivable and
  a general security interest in the remaining assets of Mitel Networks and its
  two wholly-owned U.S. subsidiaries, each of which is a guarantor. The credit
  facility contains certain restrictions and a financial covenant requiring Mitel
  Networks to achieve quarterly minimum levels of earnings before interest, income
  taxes, depreciation and amortization (EBITDA), also adjusted for
  other non-cash income and non-cash expenses. At April 25, 2004, Mitel Networks
  was in compliance with the EBITDA covenant. In the past, Mitel Networks has
  breached the EBITDA covenant, and while the Company continues to take significant
  measures to reduce costs through its restructuring activities, it is reasonably
  possible that these EBITDA requirements may be breached in the future. Mitel
  Networks is exposed to the risk that its ability to renew this credit facility
  on favorable terms may be adversely affected by its non-compliance with the
  EBITDA covenant as a result of a deterioration of its financial performance
  if the actual demand for its products does not reach expected levels. At April
  25, 2004, Mitel Networks had borrowed cash of $6.6 million under this facility
  and $1.0 million was committed under letters of credit, leaving approximately
  $14.4 million available under this credit facility.

MNL has a $1.8 million (£1.0
  million) overdraft facility and indemnity facilities totaling $5.3 million (£3.0
  million) available for letters of credit and other guarantees. The overdraft
  facility bears interest at U.K. base rate plus 1.5%. The overdraft facility
  and the indemnity facilities are secured by a parent company guarantee. At April
  25, 2004, the overdraft facility was unused and $2.3 million was committed under
  letters of credit and other indemnities.

MNL is liable under mortgages
  totaling $13.8 million (£7.8 million). The remaining principal of the
  first mortgage loan amounted to $1.6 million at April 25, 2004, bears interest
  at 7.7%, is payable in monthly installments until October 2004 and is secured
  by certain equipment of the subsidiary. The remaining principal of the second
  mortgage loan amounted to $11.2 million at April 25, 2004, bears interest at
  7.4% until December 2006, with an option to continue using the fixed rate or
  select a variable rate at LIBOR plus 1.75% thereafter, is payable in quarterly
  installments of $0.5 million (£0.3 million) with the balance due in December
  2011 and is secured by the real estate properties of the subsidiary. The remaining
  principal of the third mortgage loan amounted to $1.0 million at April 25, 2004
  and bears interest at 6.3%, payable in monthly installments until April 2006
  and secured by certain equipment of the subsidiary. Pursuant to the terms of
  these mortgages, MNL must comply with a financial covenant. MNL was in compliance
  with such financial covenant at April 25, 2004 and expects to remain compliant
  for the respective terms of the loan agreements.

Mitel Networks is contractually
  obligated to make cash payments under the above noted loan facilities, as further
  described under Item 5. F of this annual report, Tabular Disclosure of
  Contractual Obligations.

Mitel Networks anticipates
  continued capital expenditures during the fiscal year ending April 24, 2005,
  consisting primarily of anticipated costs of enhancements to the Companys
  IT infrastructure. These expenditures are expected to be financed through operations.



| | - 46 - | 
| | ------ | 

---

Mitel Networks primary future
cash needs on a recurring basis will include the funding of operations, working capital,
capital expenditures, debt service and other contractual obligations. During Fiscal 2004
Mitel Networks completed restructuring actions which the Company expects will result in a
reduction in operating costs over the next fiscal year. The temporary reduction in Mitel
Networks contributions to the Canadian pension plan to the minimum contribution
level required by the Financial Services Commission of Ontario, which was initiated in
December 2001, continued throughout Fiscal 2004 and will be maintained until Mitel
Networks financial situation is improved. Mitel Networks also implemented a
temporary 10% hour reduction program (the Hours Reduction Program) effective
July 2002 to the end of September 2002 and, subsequently, implemented a temporary unpaid
days off program which remained in effect until the end of January 2003 at which point the
Hours Reduction Program, first instituted in July 2002, was resumed. The Hours Reduction
Program was terminated in March 2004, and all employee salaries returned to pre-Hours
Reduction Program levels.

In May 2004 Mitel Networks initiated
a proposal to raise additional equity financing through the issuance of common shares to
employees of the Company and certain accredited investors. While the Company seeks to
raise up to CDN$10 million, there can be no assurance that Mitel Networks will be able to
complete the offering at all. The securities that will be offered have not been and will
not be registered under the Securities Act of 1933 and may not be offered or sold to a
U.S. person absent registration or an applicable exemption from registration requirements.

Based on proceeds raised in the April
2004 financing, the working capital balance, expected cash flows from operations and other
existing credit facilities, Mitel Networks believes that it will have sufficient cash and
available credit facilities to support its business operations for the foreseeable future.
However, there can be no assurance that Mitel Networks underlying assumed levels of
revenues and expenses will be accurate as Mitel Networks is exposed to the risk that
actual demand for its products may not reach expected levels. If Mitel Networks
operating results were to fail to meet expected levels or if inventory, accounts
receivable or other working capital items were to require a greater use of cash than is
currently anticipated, the additional funding that Mitel Networks has obtained may not be
sufficient and it could be required to seek additional funding through additional private
financing or other arrangements. There can be no assurance that any additional financing
will be available when required or on favorable terms, which could have a material adverse
effect on Mitel Networks business, financial condition and results of operations.

# C.          Research
and Development, Patents and Licenses, etc.

See Item 5.A Operating
Results.

D. Trend Information

During the course of fiscal 2004, the
improvement in the economy and the continuing adoption of IP Telephony assisted the
Solutions segment of the business. The downturn in Mitel Networks Services segment
was due primarily to lower product sales and the associated services to its direct
customers in North America and the United Kingdom. During fiscal 2004, action was taken to
adjust the operating model of the business to better reflect the anticipated trends in the
market.



| | - 47
- | 
| | ------ | 

---

It should be noted that the following
factors could affect Mitel Networks revenue in the future:

| |  | Even though market indicators anticipate growth, particularly in IP Telephony, Mitel
Networks performance could be impacted by the Companys existing and
prospective customers willingness to invest in new communications solutions.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Mitel Networks IP shipments have continued to grow throughout fiscal 2004 due
primarily to the cost saving and business process benefits an IP solution can deliver to a
customer. Management believes that an enterprise with multiple networked locations or
employees who work from home can benefit significantly from an IP telephony solution.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | As
the depreciation cycles of TDM solutions installed prior to the year 2000 mature, there
is willingness to transition to an IP based solution. Mitel Networks considers that this
replacement trend will continue.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | It
is anticipated that the reduction in the cost of revenues, evidenced in fiscal 2004, will
continue. Inventory turns are now comparable with industry averages and R&D programs
are in place to further reduce the cost of revenues.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The market in which Mitel Networks operates is extremely competitive and there is
significant pressure to remain price competitive. Mitel Networks believes that the
programs in place to increase margins will continue to offset pricing pressures.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | During the course of fiscal 2004 there have been significant movements in currency
exchange around the world. The continued uncertainty in world markets could have an
adverse impact on revenues and cash balances.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

During Fiscal 2004, Mitel
  Networks made some significant sales to new customers, most particularly in
  the retail and healthcare sectors. If the economy continues to recover, Mitel
  Networks believes that the growth being seen in the IP Telephony market will
  continue to favorably impact product revenues. The adjustment to the operating
  model implemented during fiscal 2004 is expected by Mitel Networks to continue
  to yield a solid foundation going forward.

E.    
  Off-balance sheet arrangements

Mitel Networks has the following
significant off balance sheet arrangements at April 25, 2004:

Intellectual property indemnification
obligations:

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



| | - 48
- | 
| | ------ | 

---

Bid and performance related bonds:

Mitel Networks enters into bid and
performance related bonds related to various customer contracts. Performance related bonds
usually have a term of twelve months and bid bonds generally have a much shorter term.
Potential payments due under these may be related to Mitel Networks performance
and/or its resellers performance under the applicable contract. At April 25, 2004,
the total maximum potential amount of future payments the Company could be required to
make under bid and performance related bonds, excluding letters of credit, was $8.1
million. Of that amount, $7.3 million relates to guarantees of resellers performance.
Historically, Mitel Networks has not had to make material payments and does not anticipate
that it will be required to make material payments under these types of bonds. Mitel
Networks cash collateral requirements in connection with obtaining new customer
performance bonds amounted to $0.9 million at April 25, 2004.

Letters of credit:

At April 25, 2004 Mitel Networks had
letters of credit outstanding totaling $3.2 million.

Securitization of trade accounts
receivable:

On April 16, 2004 Mitel Networks entered
into a Receivables Purchase and Sale Agreement whereby certain qualifying non-interest
bearing trade receivables in Canada and the United States are transferred to a
securitization trust. The Company entered into this agreement primarily as a means of
increasing its available credit facilities and providing more timely access to cash. As at
April 25, 2004, no receivables had been transferred under the above noted agreement and
there were no securitized receivables outstanding at year-end. As a result no revenues,
expenses, or cash flows had been generated from the above noted agreement as at April 25,
2004.



| | - 49
- | 
| | ------ | 

---

F.    
  Tabular disclosure of contractual obligations

The following table sets forth Mitel
Networks contractual obligations as at April 25, 2004.

|                                               | Payments Due by Period
|---------------------------------------------- | ----------------------
|
|                                              
|Long-term debt obligations (1)                 |                       
|Capital lease obligations (1)                  |                       
|Operating lease obligations (2)                |                       
|Purchase obligations (3)                       |                       
|Other long-term liabilities reflected
      on |                       
|Mitel Networks
      balance sheet (4)        |                       
|                                              
|Total contractual cash obligations             |                       
|                                              

(1)     Represents
          the principal component of the loans. Interest  on these loans ranges  from
          6.3% to 11.4%, as described in Mitel Networks consolidated financial statements
          contained herein.

(2)    
          Operating lease obligations exclude payments to be received by Mitel Networks
          under sublease arrangements.

(3)    
          Represents primarily Mitel Networks obligation to acquire excess inventory
          from BreconRidge pursuant to the supply agreement between BreconRidge and Mitel
          Networks dated August 31, 2001, which is further described in Item 10.C  of this
          annual report.

(4)    
          Not included in the above are liabilities arising from Mitel Networks
          defined benefit pension plan and potential cash payments the Company may be
          required to make upon redemption of its redeemable preferred shares or the
          exercise of contractual put rights by holders of certain common or preferred
          shares.

MNL maintains a defined benefit
pension plan. At April 25, 2004, the pension benefit obligation of $103.4 million exceeded
the fair value of the plan assets of $66.1 million, resulting in an unfunded status of
$37.3 million (April 27, 2003  $39.8 million), of which $24.8 million was recorded
on Mitel Networks Consolidated Balance Sheet in accordance with US GAAP. Mitel
Networks future contributions to the pension plan are determined by an independent
actuarial valuation, in compliance with U.K. pension regulations with respect to
contributions to, and funding levels of the pension plan. The estimated contribution to
the defined benefit plan for the next one year is $3.5 million (£2 million).

Under the terms of the
Shareholders Agreement described under Item 10.C of this annual report, Zarlink and
PTIC have the right (put rights) to require Mitel Networks to purchase their
common shares and Series B Shares, respectively, if Mitel Networks fails to complete an
initial



| | - 50
- | 
| | ------ | 

---

public offering (IPO) on
or prior to September 1, 2006. Furthermore, upon the exercise of put rights by Zarlink or
PTIC, EdgeStone, the holder of Series A Shares, also has the right to require Mitel
Networks to purchase its Series A Shares. Mitel Networks is exposed to the risk that if
these put rights are exercised upon a failure by the Company to complete an IPO by the
stated date, it could be required to purchase (a) up to 10 million common shares held by
Zarlink for cash consideration of up to $20.9 million (CDN$28.5 million), (b) up to 16
million Series B Shares held by PTIC for cash consideration of up to $11.8 million (CDN$16
million) plus interest accrued at an annual rate of 7% commencing on August 31, 2001 and
compounded semi-annually, and (c) up to 20,000,000 Series A Shares held by EdgeStone for
cash consideration of CDN$1 per preferred share, plus any dividends declared but not paid,
plus the issuance of the number of common shares (other than the Additional Common Shares
referred to in Item 10.B of this annual report under Capital Stock) into which such Series
A Shares are then convertible. In addition, the Series 2 Warrant would become exercisable
upon the exercise of put rights by Zarlink. If such events occur, there can be no
assurance that Mitel Networks cash flows would be sufficient to satisfy such
obligations.

As further described under Item 10.B
of this annual report, the Series A Shares and Series B Shares are redeemable at the
option of the holders at any date after five years and one day from the original issuance
date or upon a partial sale event other than a public offering. The Series A Shares and
Series B Shares are also convertible to common shares at any time at the option of the
holders, and automatically upon certain events. Should the Series A Shares and Series B
Shares not be converted to common shares, Mitel Networks could be required to redeem up to
20,000,000 Series A Shares and up to 67,060,988 Series B Shares for cash consideration of
CDN$1 per preferred share, plus any dividends declared but not paid, plus the then current
fair market value of the common shares into which the preferred shares are convertible. If
such an event occurs, there can be no assurance that Mitel Networks cash flows would
be sufficient to satisfy such obligations.

Item 6. Directors, Senior
  Management and Employees

A. Directors and
Senior Management

The directors, officers and senior
managers of Mitel Networks are as follows:

|Name                    |  | Position                   |  | Position Held
      Since
|----------------------- |  | -------------------------- |  | -------------------------
|Dr. Terence H. Matthews |  | Chairman                   |  | February 2001            
|                        |  |                            |  |                          
|Peter D. Charbonneau    |  | Director and Vice-Chairman |  | February 2001            
|                        |  |                            |  |                          
|Kirk Mandy              |  | Director                   |  | July 2002                
|                        |  |                            |  |                          
|Sir David Rowe-Beddoe   |  | Director                   |  | July 2002                
|                        |  |                            |  |                          
|Guthrie Stewart         |  | Director                   |  | April 2004               



| | - 51
- | 
| | ------ | 

---



|Name                |  | Position                                                                          |  | Position Held
      Since
|------------------- |  | --------------------------------------------------------------------------------- |  | -------------------------
|Gilbert S. Palter   |  | Director                                                                          |  | April 2004               
|                    |  |                                                                                   |  |                          
|Donald W. Smith *   |  | Director
      Chief Executive Officer                                            |  | April 2001               
|                    | 
|Paul A.N. Butcher * |  | Director, President and Chief
      Operating Officer                             |  | February 2001            
|                    | 
|Steven Spooner *    |  | Chief Financial Officer                                                           |  | June 2003                
|                    |  |                                                                                   |  |                          
|James Davies        |  | Chief Technology Officer                                                          |  | June 2003                
|                    |  |                                                                                   |  |                          
|Raymond Brown       |  | Vice-President, Client Services                                                   |  | December 2003            
|                    |  |                                                                                   |  |                          
|Carl Carruthers     |  | Vice-President, Operations                                                        |  | May 2002                 
|                    |  |                                                                                   |  |                          
|Simon Gwatkin       |  | Vice-President, Strategic Marketing                                               |  | September 2003           
|                    |  |                                                                                   |  |                          
|Graham Bevington    |  | Vice-President and Managing Director,
      Europe, Middle-East and Africa Region |  | February 2001            
|                    | 
|John Uehling        |  | Vice-President Sales, USA                                                         |  | June 2004                
|                    |  |                                                                                   |  |                          
|Stephen Grassie     |  | Vice-President, Sales, Canada,
      Caribbean & Latin America                    |  | June 2004                
|                    | 
|Jerry Sparling      |  | Vice President, Customer Support and
      Engineering Services                   |  | June 2002                
|                    | 
|Douglas McCarthy    |  | Treasurer and Director Taxation                                                   |  | November 2003            
|                    |  |                                                                                   |  |                          
|Ron Wellard         |  | Vice-President, Research and
       Development                                   |  | December 2003            
|                    | 
|Simon Thompson      |  | Vice-President, Information Technology                                            |  | January 2004             
|                    |  |                                                                                   |  |                          
|Roger Fung          |  | Vice-President, Sales, Asia Pacific                                               |  | December 2002            
|                    |  |                                                                                   |  |                          
|Kathy Enright       |  | Vice-President, Human Resources                                                   |  | January 2004             



| | - 52
- | 
| | ------ | 

---



|Name          |  | Position                         |  | Position Held
      Since
|------------- |  | -------------------------------- |  | -------------------------
|David Pipkins |  | Head of Product Line Management  |  | December 2003            
|              |  |                                  |  |                          
|Steve Davis   |  | Vice-President, Global Marketing |  | May 2004                 
|              | 

* Represents the Executive Officers
of the Company.

Directors are either elected annually
by the shareholders at the annual meeting of shareholders or, subject to the articles of
incorporation of Mitel Networks and applicable law, appointed by the board of directors
between annual meetings. Each director holds office until the close of the next annual
meeting of Mitel Networks shareholders or until he or she ceases to be a director by
operation of law, or until his or her removal or resignation becomes effective. (Please
see also Item 6.C Board Practices, and Item 10.B Memorandum and Articles
of Incorporation for additional details on board practices and directors).

Pursuant to the Shareholders
Agreement dated April 23, 2004, EdgeStone is entitled to nominate two directors to the
Board. Gilbert S. Palter and Guthrie Stewart are the nominees of EdgeStone. The parties to
the Shareholders Agreement agreed, among other matters, to act and vote from time to time
so that on any election of directors by the shareholders of the Company, the EdgeStone
nominees are elected. See Item 10.C Material Contracts for further discussion of the
Shareholders Agreement.

The following summarizes certain
biographical data concerning the directors and senior management of Mitel Networks:

Dr. Terence
  H. Matthews, Chairman

Dr. Terence Matthews has
  been Chairman of Mitel Networks since February 2001. Dr. Matthews has also been
  Chairman of March Networks Corporation since June 2000 and CEO of March Networks
  Corporation from June 2000 to March 2004, and was the Chairman and CEO of Newbridge
  Networks Corporation (Newbridge) from June 1986 until May 2000.

Peter D. Charbonneau,
Director and Vice-Chairman

Peter Charbonneau has been a General
Partner of Skypoint Capital Corporation since January 2001. From June 2000 until December
2000, Mr. Charbonneau was Executive Vice-President of March Networks Corporation. From
January 1987 until May 2000, Mr. Charbonneau held various positions, including CFO, COO,
President and Vice-Chairman of Newbridge.

Kirk Mandy,
  Director

Kirk Mandy has been an independent
Management Consultant and Vice Chairman of Zarlink since May 2001. Mr. Mandy also holds
Chairman positions with several privately held



| | - 53
- | 
| | ------ | 

---

companies. Prior to May 2001,
  Mr. Mandy held various senior management positions at Zarlink, the last of which
  was President and Chief Executive Officer from 1998 to 2001.

Sir David Rowe-Beddoe,
  Director

Sir David Rowe-Beddoe has been
Chairman of the Wales Millennium Centre since 2001. Sir David Rowe-Beddoe was Chairman of
the Welsh Development Agency from 1993 to 2001, Chairman of the Development Board for
Rural Wales from 1994 to 1998, President of Morgan Stanley  GFTA Ltd. from 1983 to
1991 and President of GFTA Trendanalysen BGA Herrdum & Co. from 1981 to 1987.

Guthrie Stewart,
  Director

Guthrie Stewart has been a Partner of
EdgeStone Capital Partners since 2001; from 1992 to 2001 Mr. Stewart was Executive Vice
President Teleglobe Inc.

Gilbert S.
  Palter, Director

Gilbert Palter has been the COO and Managing
Partner of EdgeStone Capital Partners since May 1999.

Donald W. Smith,
  Director and Chief Executive Officer

Donald Smith has been Chief Executive
Officer of Mitel Networks since April 2001. From January 2000 until March 2001, Mr. Smith
was President, Optical Internet, Nortel Networks Corporation (Nortel) and from
December 1998 until January 2000, he was the Vice-President and General Manager of Optera
Solutions at Nortel. From 1996 until December 1998, Mr. Smith was President and Chief
Executive Officer of Cambrian Systems Corporation.

Paul A.N. Butcher,
  Director, President and Chief Operating Officer

Paul Butcher has been President and Chief
Operating Officer of Mitel Networks since February 2001. From 1999 until February 2001,
Mr. Butcher was Senior Vice President and General Manager of the Predecessor Business, and
from 1997 until 1999, Mr. Butcher was Managing Director of the Predecessor Business, for
the Europe, Middle East and Africa region.

Steven Spooner,
  Chief Financial Officer

Steven Spooner has been Chief
Financial Officer of Mitel Networks since June 2003. From 1984 to 2003, Mr. Spooner held
progressively senior positions, in both publicly traded and privately held high technology
companies. From January 2003 to June 2003, Mr. Spooner was COO of Wysdom Inc. From March
2002 to December 2002, Mr. Spooner was a management consultant for technology companies.
From March 2000 to February 2002, Mr. Spooner was President and CEO of Stream Intelligent
Networks Corporation. From February 1995 to February 2000, Mr. Spooner held the position
of CFO of CrossKeys Systems Corporation, a publicly traded company since 1998. Prior to
that, Mr. Spooner was Vice President Finance and Corporate Controller of SHL Systemhouse
Inc., a publicly traded company.



| | - 54
- | 
| | ------ | 

---

James Davies,
  Chief Technology Officer

James Davies has been Chief
Technology Officer of Mitel Networks since June 2003. From June 2002 to June 2003, Mr.
Davies was Vice-President, SME Solutions of Mitel Networks. From September 2001 until June
2002, Mr. Davies was Vice-President, Solutions Management of Mitel Networks. From February
16, 2001, Mr. Davies was Mitel Networks Head of Research and Development. Prior to
that, Mr. Davies held the same position with the Predecessor Business since 1998. From
1988 until 1998, Mr. Davies held various positions with Nortel.

Raymond Brown,
  Vice-President, Client Services

Raymond Brown has been
Vice-President, Client Services since December 2003. Prior to that time, he was
Vice-President, Enterprises Solutions of Mitel Networks from June 2001. From February 16,
2001 until June 2001, Mr. Brown was Mitel Networks Head of the Mainstream Business
Unit and Vice-President, North American direct sales. Prior to that, Mr. Brown held the
same two positions with the Predecessor Business since 1999 and 1998, respectively. From
1988 until 1990, Mr. Brown was Director, Sales and Marketing for the Public Switching
Business Unit of the Predecessor Business and Vice-President, Public Switching Business
Unit from 1990 until the business unit was discontinued in 2000.

Carl Carruthers,
  Vice-President, Operations

Carl Carruthers has been
Vice-President, Operations since May 2002 and was employed by the Predecessor Business
from 1976 until February 2001. From February 16, 2001 until May 2002, Mr. Carruthers was
Vice-President, North American Sales of Mitel Networks. Prior to that, Mr. Carruthers held
the same position for the Predecessor Business since 2000. From 1990 until 1991 Mr.
Carruthers was Vice-President, North American Manufacturing Operations and in 1991 until
2000 the scope of his responsibility was broadened to include worldwide operations of the
Predecessor Business.

Simon Gwatkin,
  Vice-President, Strategic Marketing

Simon Gwatkin has been
Vice-President, Strategic Marketing of Mitel Networks since July 2001. From July 2000
until July 2001, Mr. Gwatkin was Head of the IP Business Unit of the Predecessor Business.
From 1993 until July 2000, Mr. Gwatkin held various senior management positions with the
Predecessor Business, including responsibility for Asia Pacific operations. From 1990
until 1993, Mr. Gwatkin was Managing Director and co-founder of Chough Software Limited.

Graham Bevington,
  Vice-President and Managing Director, Europe, Middle East andAfrica Region

Graham Bevington has been Mitel
Networks Vice-President and Managing Director of the Europe, Middle East and Africa
region since February 2001. Prior to that, Mr. Bevington held the same position for the
Predecessor Business since January 2000. From 1997 until 2000, Mr. Bevington was Managing
Director at DeTeWe Limited. From 1986 until 1997, Mr. Bevington was Sales Director at
Shipton DeTeWe Limited.



| | - 55
- | 
| | ------ | 

---

John Uehling,
  Vice-President, Sales, USA

John Uehling was appointed
Vice-President, Sales, USA in June 2004. From July 2002 to June 2004 he held the position
of Director Regional Sales in the USA and prior to that held the position of Regional
Sales Manager since February 2001. He held the same position with the Predecessor Business
since September 2000 and prior to that the position of Account Executive.

Stephen Grassie,
  Vice-President, Sales, Canada, Caribbean & Latin America

Stephen Grassie was appointed
Vice-President, Sales, Canada, Caribbean & Latin America in June 2004. He was
Vice-President, Americas Sales of Mitel Networks from June 2002 to June 2004. From
February 2001 until June 2002, Mr. Grassie was leading Mitel Networks Canadian Sales
Team. Prior to that, Mr. Grassie held the same position for the Predecessor Business since
1999. From 1980 until 1999, Mr. Grassie held various positions with the Predecessor
Business, including positions with North American customer service, marketing and
operations organizations.

Jerry Sparling,
  Vice-President, Customer Support and Engineering Services

Jerry Sparling has been
Vice-President, Customer Support and Engineering Services since June 2002. From 1999 to
2002, Mr. Sparling led the Predecessor Business and Mitel Networks Design
Quality Team. Prior to that time, Mr. Sparling held various positions within the
Predecessor Business Research and Development department.

Douglas McCarthy,
  Treasurer and Director of Taxation

Doug McCarthy joined Mitel Networks
in November of 2003 as Treasurer and Director of Taxation. Previously, Doug was employed
as Vice President Finance and Treasurer of Alcatel Canada Inc. formerly Newbridge from
1987 to November 2003. He has also served on the Board of Directors of a number of
Newbridge subsidiaries.

Ron Wellard,
  Vice-President Research and Development

Ron Wellard joined Mitel Networks in
December 2003 as Vice-President, Research and Development. Previously, Ron held the
position of Vice-President Research & Development at Nortel from June 2001 to July
2003, with much of his career focused on the leadership of their voice switching and
converged products group. Prior to June 2001, he held various roles within Research &
Development and PLM at Nortel notably as Director of Business & Product Development
Meridian Norstar.

Simon Thompson,
  Vice-President Information Technology

Simon Thompson was appointed to the
position of Vice-President Information Technology in January 2004. He joined Mitel
Networks in June 2002 as Director, Information Technology. From April 2003 until January
2004 he was Head of Global Information Technology. Prior to joining Mitel Networks Mr.
Thompson worked for Ernst & Young from 1997 to 2001 where he was responsible for
delivery of consulting services in North America to certain major telecommunication and
aerospace clients. Prior to 1997 Mr. Thompson worked for Deloitte &



| | - 56
- | 
| | ------ | 

---

Touche in both Africa and Europe
where he was responsible for client service delivery in the process and discrete
manufacturing sectors.

Roger Fung,
  Vice-President and Managing Director, Asia Pacific

Roger Fung joined Mitel Networks in
2002 as Vice-President and Managing Director, Asia Pacific. From 2001 until 2002 Mr. Fung
was employed by March Networks in a similar capacity. Prior to this he was a founding
member of Newbridge Networks Asia Ltd. where he served as President Asia Pacific, helping
to build the business in Asia Pacific from 1987 to 2000.

Kathy Enright,
  Vice-President, Global Human Resources

Kathy Enright has been
Vice-President, Global Human Resources since January 2004. Ms. Enright was Head of Human
Resources of Mitel Networks from February 2001 to January 2004. Prior to that she was
Director of Human Resources, N.A. for the Predecessor Business from 1990.

David Pipkins,
  Head of Product Line Management

David Pipkins was appointed to the
position of Head of Product line Management (PLM) in December 2003. Prior to that Mr.
Pipkins was Director PLM from November 2002 to December 2003. From April 1996 to February
2001 he was employed by the Predecessor Business in the PLM organization. From June 2001
to July 2002, Mr. Pipkins was Vice President, Network Access, for Zarlink.

Steve Davis,
  Vice-President Global Marketing

Steve Davis was appointed to the
position of Vice-president Global Marketing in May 2004. From September 2003 until April
2004, he was Head of Global Marketing of Mitel Networks. He joined the Predecessor
Business in 1993 as European Marketing Director with the Dialler Business Unit. In 1999 he
accepted responsibility for Indirect Sales for the UK and added responsibility for Europe
in 2000. In 2002, he became Head of Marketing for the UK and Europe. Resident in the UK,
Steve is now responsible for marketing on a global basis.

There are no family relationships
between any directors or executive officers. There are no arrangements or understandings
pursuant to which any director or member of senior management was selected as a director
or member of senior management, other than as provided for in the shareholders
agreement described under Item 10.C of this annual report.

B. Compensation

As at April 25, 2004, senior
management of Mitel Networks included: Donald Smith, Paul Butcher, Steven Spooner, Doug
McCarthy, James Davies, Raymond Brown, Graham Bevington, Carl Carruthers, Simon Gwatkin,
Stephen Grassie, Ron Wellard, Simon Thompson, Roger Fung, Steve Davis, Kathy Enright,
David Pipkins, John Uehling and Jerry Sparling. As Chairman, Dr. Matthews has also been
actively involved in establishing the strategic direction of Mitel Networks. The aggregate
annualized salary paid during the fiscal year ended April 25, 2004 to senior management of
Mitel Networks was $3.2 million (CDN$4.3 million).



| | - 57
- | 
| | ------ | 

---

Pursuant to Mitel Networks
employee stock option plan (ESOP) (as defined and described in Item 6.E of
this annual report), a total of 626,700 options to acquire common shares at exercise
prices ranging from $1.47 to $2.02 (CDN$2.00 to CDN$2.75) per share were granted to senior
officers of Mitel Networks during the fiscal year ended April 25, 2004. Senior officers
holding 606,700 of these options that were granted during the fiscal year participated in
a Six Plus One Program offered by the Corporation. The Six Plus
One Program was a program whereby all employee option holders were given the
opportunity to tender their existing outstanding stock options in exchange for a new grant
of stock options issued six months plus one day after the options were tendered. The new
option grant would represent the right to purchase the same number of common shares as the
corresponding options that were tendered. The exercise price of the new option grants was
set by the Board of Directors to be CDN$1.00 per share which was determined to be the fair
market value as of the date of grant. On July 26, 2004, options to purchase 606,700 common
shares were granted to the same individuals pursuant to the ESOP. These stock options vest
over four years and expire on the fifth anniversary of the date of grant.

Directors who are not also officers
of Mitel Networks do not receive cash compensation, however they are reimbursed for any
out-of-pocket expenses incurred in connection with attending directors meetings. In
addition, as previously approved by the shareholders of Mitel Networks, directors of Mitel
Networks are eligible to participate in Mitel Networks ESOP. See Item 6.E of this
annual report for further details on the ESOP. Options to acquire 118,000 common shares at
an exercise price of CDN$2.75 per share were granted to non-employee directors during
Fiscal 2004. These stock options vest over four years and expire on the fifth anniversary
of the date of grant.

Mitel Networks maintains directors
and officers liability insurance in the amount of $15,000,000 for the benefit of directors
and officers of the Company. Mitel Networks annual premium is $177,480 which covers
a one year period from December 1, 2003 to December 1, 2004. No portion of the premium is
paid by the directors and officers of the Company. The policy contains a deductible
ranging from $50,000 to $75,000 depending upon the nature of the claim. The by-laws of the
Company generally provide that Mitel Networks shall indemnify a director or officer
against liability incurred in such capacity including acting at the Companys request
as director or officer of another corporation, to the extent permitted by the Canada
Business Corporations Act (CBCA). The policy contains a number of exclusions and
limitations to the coverage provided, as a result of which the Company may, under certain
circumstances, be obligated to indemnify its directors or officers for certain claims
which do not fall within the coverage provided under the policy. On June 10, 2004, the
board of directors approved a form of Indemnification Agreement and authorized Mitel
Networks to enter into Indemnification Agreements with each of the directors and each of
Steve Spooner (CFO) and Douglas McCarthy (Treasurer) along with certain other corporate
officers designated from time to time by the board of directors.

Employment Contracts:

Mitel Networks has written employment
contracts with Donald Smith and Paul Butcher (see Item 10.C for a summary of these
employment contracts). In addition, each employee of Mitel Networks (including members of
management) executes a letter setting forth the employees



| | - 58
- | 
| | ------ | 

---

position, salary, bonus, benefits,
and customary confidentiality and non-disclosure obligations, as well as termination and
non-compete arrangements, if any.

Indebtedness of Directors, Officers
and Members of Senior Management:

Except as disclosed below, none of
the directors or officers of Mitel Networks, and no associate or affiliate of any of them,
is or has been indebted to Mitel Networks at any time since the beginning of Mitel
Networks last completed fiscal year.

|1. |  | Graham Bevington, Vice-President and Managing Director, Europe, Middle East and
               Africa Region. In February 2002, Mr. Bevington was provided with an interest
               free loan from Mitel Networks. The loan was provided through an employee share
               purchase plan with MNL, made available to all employees of MNL, to purchase
               shares in Mitel Networks (the UK Share Purchase Plan). The balance
               owing on the loan as at April 25, 2004 was $9,645 (£5,457).
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2. |  | Steven Davis Vice-President, Global Marketing. In February 2002, Mr. Davis was
               provided with an interest free loan from Mitel Networks. The loan was provided
               to Mr. Davis through the UK Share Purchase Plan to purchase shares in Mitel
               Networks. The balance owing on the loan as at April 25, 2004 was $13,015
               (£7,363).
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Pension and Retirement
Plans:

Mitel Networks and its subsidiaries
maintain defined contribution pension plans that cover substantially all employees. Mitel
Networks matches the contributions of participating employees to the defined contribution
pension plans on the basis of the percentages specified in each plan. Mitel Networks also
maintains a defined contribution Supplemental Executive Retirement Plan to provide
supplementary retirement benefits to selected members of Mitel Networks executive
management team. Amounts contributed by Mitel Networks pursuant to the foregoing are
included as part of the aggregate compensation disclosed above. There were no material
accrued obligations at April 25, 2004 pursuant to these defined contribution pension
plans.

Mitel Networks United Kingdom
subsidiary, MNL, also maintains a defined benefit pension plan. The defined benefit plan
provides pension benefits based on length of service and final average earnings. The
defined benefit pension costs accrued by Mitel Networks are actuarially determined using
the projected benefits method pro-rated on services and managements best estimate of
the effect of future events. The most recent actuarial valuation of the plan was performed
as at August 1, 2003 and has been updated to March 31, 2004. As at April 25, 2004, the
actuarial present value of the accrued pension benefits of $ 103.4 million exceeded the
fair market value of the net assets available to provide for these benefits of $66.1
million, resulting in an unfunded status of the defined benefit pension plan of $ 37.3
million. The pension liability (including minimum liability) recorded in Mitel
Networks consolidated balance sheet at April 25, 2004 was $24.8 million.

In June 2001, the defined benefit
pension plan was closed to new employees and a defined contribution option was introduced
to participants of the defined benefit pension plan. Participants were given the choice to
continue in the defined benefit plan or to transfer their



| | - 59
- | 
| | ------ | 

---

assets to the defined contribution
plan. All participants opted to continue in the defined benefit plan.

C. Board Practices

The articles of incorporation of
Mitel Networks provide that the board of directors of Mitel Networks shall consist of a
minimum of one and a maximum of eight directors. At a special meeting held on April 20,
2004, the shareholders fixed the number of directors at eight. Under Canadian law, 25% of
Mitel Networks board of directors must be residents of Canada. Directors can be
either elected annually by the shareholders at the annual meeting of shareholders or,
subject to the articles of incorporation of Mitel Networks and applicable law, appointed
by the board of directors between annual meetings. Each director shall hold office until
the close of the next annual meeting of shareholders or until he or she ceases to be a
director by operation of law or until his or her resignation becomes effective. No
director has any contract or arrangement with Mitel Networks entitling him to benefits
upon termination of his directorship. Mitel Networks executive officers are
appointed by, and serve at the discretion of, the board of directors.

Board Committees:

There are two committees of the board
of directors of Mitel Networks: the Audit Committee and the Compensation Committee. These
committees meet regularly and operate under specific terms of reference as approved by the
board of directors.

The Audit Committee consists of four
directors. The committee members are Peter Charbonneau, Kirk Mandy, David Rowe-Beddoe and
Guthrie Stewart. This committee reviews, acts and reports to the board of directors on
various auditing and accounting matters, including the appointment of Mitel Networks
independent accountants, the performance of the independent accountants, the sufficiency
of Mitel Networks internal controls and Mitel Networks accounting and
financial management practices. This committee is also responsible for developing Mitel
Networks approach to governance issues and Mitel Networks response to
corporate governance guidelines of regulatory authorities.

The Compensation Committee consists
of three directors. The committee members are Peter Charbonneau, Kirk Mandy and Sir David
Rowe-Beddoe. This committee is responsible for administering Mitel Networks
executive compensation programs and Mitel Networks pension plan programs.
Responsibilities include developing compensation guidelines and philosophy for executive
management and annually reviewing and approving compensation for executive officers of
Mitel Networks. With respect to long-term incentives, this committee reviews and
recommends periodic grants under the ESOP. This committee also monitors pension plan
activities.

Other Committees:

Mitel Networks has established a
Disclosure Committee in accordance with the recently enacted Sarbanes-Oxley legislation
and with SEC regulations. The Disclosure Committee has been given a mandate to oversee
Mitel Networks disclosure controls and procedures and to report its



| | - 60
- | 
| | ------ | 

---

findings and activities to the CEO
and CFO for their periodic evaluation of the effectiveness of such. The Disclosure
Committee is a standing committee of selected employees including certain members of
senior management appointed by the CEO to ensure compliance with all relevant disclosure
obligations. Individual members serve at the pleasure of the CEO. The Disclosure Committee
also has two subcommittees: (a) a sub-committee charged with the responsibility of
determining the applicability of filing a Form 6-K with the SEC upon the occurrence of
certain events; and (b) a sub-committee charged with the responsibility of assisting
senior management in the preparation and review of this annual report.

D. Employees

Mitel Networks had 2,363 and 2,015
employees at April 28, 2002 and April 27, 2003, respectively. As at April 25, 2004 Mitel
Networks had 1,849 employees of whom 919 were in Canada, 310 were in the U.S. and 620 were
in the U.K. and other countries.

Since the beginning of the fiscal
year ended April 25, 2004 Mitel Networks implemented a restructuring program which
resulted in total workforce reductions of 196 employees globally.

Mitel Networks hires selectively to
support current skill shortages. The turnover rate for the past 10 years (including the
Predecessor Business) was 7%  8% on average, well below the market average of 10%
 12%, and rose to a high of approximately 17% in 2000. It is currently at
approximately 8%.

Mitel Networks compensation
programs include opportunities for regular annual salary reviews, bonus plans and stock
options. For Fiscal 2005, in step with local markets, modest salary increases are
anticipated. Mitel Networks has a long-standing positive working relationship with the
International Brotherhood of Electrical Workers (the IBEW) with respect to
approximately 112 U.S. field technicians who perform installation, maintenance and systems
changes for Mitel Networks. The current contract with the IBEW expires in the fall of
2004.

E. Share Ownership

Dr.          Matthews
beneficially owns 68% of Mitel Networks common or preferred           shares, as
disclosed in Item 7.A of this annual report.

Donald Smith, Mitel Networks
Chief Executive Officer, beneficially owns 1% of Mitel Networks common or preferred
shares. Mr. Smith currently holds options to purchase 5,000,000 common shares of Mitel
Networks. Of this amount, options to purchase 2,000,000 common shares were granted by
Mitel Networks in accordance with Mitel Networks ESOP. Mr. Smith tendered the
2,000,000 stock options, originally granted in March 2001, in the Six Plus One Program,
further described below. These stock options were exchanged for new options on July 26,
2004 with an exercise price of CDN$1.00 per common share. The remaining 3,000,000 options,
which have an exercise price of CDN$3.50 per common share, are options to purchase
outstanding shares of Mitel Networks owned by Wesley Clover, a company indirectly
wholly-owned by Dr. Matthews, which were granted to Mr. Smith by Wesley Clover on March 1,
2002. Upon the exercise of these latter options, the proceeds of the exercise would be
paid



| | - 61
- | 
| | ------ | 

---

directly to Wesley Clover. The
3,000,000 options granted by Wesley Clover on the outstanding shares of Mitel Networks
owned by Wesley Clover were intended to provide an additional incentive to Mr. Smith in
connection with his employment by Mitel Networks. Had such options been issued by Mitel
Networks, the aggregate option grant to Mr. Smith would have been an excessive drain on
the limited pool of shares set aside by Mitel Networks under its ESOP. The options granted
to Mr. Smith on the common shares currently held by Wesley Clover vest in 25% increments
on the first, second, third and fourth anniversaries of Mr. Smiths employment start
date, April 2, 2001, and expire on the fifth anniversary of the employment start date. As
of July 27, 2004, 2,250,000 options at an exercise price of CDN$3.50 per common share have
vested. Mr. Smith has not exercised any stock options to date.

Employee Stock Option
Plan:

The shareholders of Mitel Networks
approved the Mitel Networks Corporation Employee Stock Option Plan, dated March 6, 2001,
amended as of May 8, 2001, and further amended as of August 3, 2001, June 18, 2002,
September 6, 2002, June 13, 2003 and July 15, 2004 (the ESOP). All (i)
non-employee directors of Mitel Networks (Director Participants), and (ii)
fulltime employees or officers of Mitel Networks, any subsidiary and any affiliate,
directors (other than Director Participants) of any subsidiary and any affiliate and
consultants or any consultant company on a worldwide basis (Participants), are
eligible to participate in the ESOP. There are no other service requirements or
prerequisites to participation in the ESOP. The ESOP defines a subsidiary as
any corporation in which Mitel Networks, directly or through one or more corporations
which are themselves subsidiaries of Mitel Networks, owns 50% or more of the shares
eligible to vote at meetings of the Companys shareholders. For the purposes of the
ESOP, a company is an affiliate of another company if one of them is a
subsidiary of the other or if both are subsidiaries of the same company, or if each of
them is controlled by the same person or company. Accordingly, provided that Dr. Matthews
continues to control Mitel Networks, employees, officers and directors of other companies
controlled by Dr. Matthews will be eligible to participate in the Mitel Networks ESOP.

On December 23, 2003, Mitel Networks
offered all eligible employees the opportunity to exchange all of their outstanding,
unexercised options to purchase common shares of the Company, in exchange for grants of
new options (the Six Plus One Program). All of the 10,373,302 options tendered
under the Six Plus One Program were cancelled on January 23, 2004. Mitel Networks granted
an equal number of new options to the participating employees on July 26, 2004 less 96,350
options to employees who terminated within the six month period. The new options vest in
four equal installments commencing one year from the date of grant.

Mitel Networks has reserved 25
million common shares for issuance under the ESOP. As of July 27, 2004, there were
outstanding options to purchase 15,224,789 common shares. Therefore, under the terms of
the ESOP, Mitel Networks is permitted to grant options to purchase additional 9,775,211
common shares. The following table sets forth aggregate options to purchase common shares
held by senior management and directors at July 27, 2004:



| | - 62
- | 
| | ------ | 

---



|Exercise Price | Total Options Outstanding | Total Exercisable Options
|-------------- | ------------------------- | -------------------------
|              
|CDN$ 3.50      |                           | 4,000                    
|CDN$ 2.75      |                           | 282,000                  
|CDN$ 2.00      |                           | 30,000                   
|CDN$ 1.00      |                           | 5,790,000                
|              
|               |                           | 6,106,000                
|              

Mitel Networks board of
directors may terminate the ESOP (or any options thereunder) at any time. Options may only
be granted pursuant to the ESOP within the ten-year period from March 6, 2001 to March 5,
2011. The termination of the ESOP has no effect on outstanding options, which continue in
effect in accordance with their terms and conditions and the terms and conditions of the
ESOP, provided that no option granted under the ESOP may be exercised after the tenth
anniversary of the date upon which the option was granted or such other date specified by
Mitel Networks Compensation Committee at the time it grants the option (which date
shall not be prior to the date the Compensation Committee acts to grant the option).

Director Participants are granted
options by Mitel Networks board of directors upon the occurrence of certain
specified events. The number of options granted is calculated at the time of the grant
using a Black-Scholes valuation formula.

Item 7. Major
Shareholders and Related Party Transactions

A. Major Shareholders

Mitel Networks is controlled by Dr.
Matthews who owns 68% of the outstanding shares, directly (40,897,750 Series B Shares or
approximately 21%), indirectly through Wesley Clover (90,000,000 common shares or
approximately 45%) and indirectly through Mitel Knowledge (4,555,169 common shares or
approximately 2%). The following table sets forth certain information as of July 27, 2004
concerning the beneficial ownership of shares of Mitel Networks as to each person known to
the management of Mitel Networks to be the beneficial owner of 5% or more of the
outstanding shares of Mitel Networks:



| | - 63
- | 
| | ------ | 

---



|Class of Shares |  | Identity of Person or
      Group |  | Beneficial
      Amount
      Owned (1) |  | Percentage of
      Class |  | Percentage of
      Voting
      Power | 
|--------------- |  | --------------------------------- |  | --------------------------------------- |  | ------------------------- |  | -------------------------------------- | 
|               
|Series B Shares |  | Dr. Matthews                      |  | 40,920,250                              |  | 61%                       |  | 21%                                    | 
|               
|Common Shares   |  | Wesley Clover                     |  | 90,000,000                              |  | 81%                       |  | 45%                                    | 
|               
|                |  | Total shares owned by             |  | 135,477,419                             |  | N/A                       |  | 68%                                    | 
|                |  | Dr. Matthews                      |  | (2), (3)                                |  |                           |  |                                        | 
|               
|Series A Shares |  | EdgeStone Capital                 |  | 30,000,000                              |  | 100%                      |  | 14%                                    | 
|                |  | Equity Fund II Nominee, Inc.      |  |                                         |  |                           |  |                                        | 
|               
|Series B Shares |  | PTIC                              |  | 16,000,000                              |  | 24%                       |  | 8%                                     | 
|               
|Common Shares   |  | Her Majesty the Queen in          |  | 12,986,968                              |  | 12%                       |  | 6%                                     | 
|                |  | Right of Canada                   |  |                                         |  |                           |  |                                        | 
|               
|Common Shares   |  | Zarlink Semiconductor             |  | 10,000,000                              |  | 9%                        |  | 5%                                     | 
|                |  | Corporation                       |  |                                         |  |                           |  |                                        | 
|               

|(1) | Beneficial Amount Owned includes warrants, options or other convertible
          securities held by the person or group, that are exercisable or convertible
          within 60 days into shares of the Company.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Excludes the impact of vested options granted by Wesley Clover to Donald Smith,
          Paul Butcher and Peter Charbonneau to acquire up to 3,425,000 common shares in
          the aggregate from the holdings of Wesley Clover.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Includes the 90,000,000 common shares owned by Wesley Clover and the 4,555,169
          common shares owned by Mitel Knowledge.
|--- | --------------------------------------------------------------------------------------------------------------------------------

|(4) | The parties to the Shareholders Agreement agreed, among other matters, to act
          and vote from time to time so that on any election of directors by the
          shareholders of the Company, the EdgeStone nominees are elected. See Item 10.C
          of this annual report for discussion of the Shareholders Agreement.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

At July 27, 2004, Dr. Terence H.
Matthews also held 125,934 options to purchase common shares of Mitel Networks at exercise
prices ranging from CDN$1.00 to CDN$2.75 per share, of which 22,500 had vested. Of the
125,934 options, 30,000 expire in July 2007, a further 30,000 options expire in July 2008
and the remaining 65,934 expire in July 2009.

Mitel Networks major
shareholders do not have different voting rights than other shareholders. Mitel Networks
is not aware of any arrangements, the operation of which would result in a change in
control of Mitel Networks.

United States
Shareholders

On July 27, 2004, Mitel Networks had
461 registered shareholders with addresses in the United States holding approximately
1,846,256 common shares and 12 holding 992,114 Series B Shares or combined on an as if
converted to common shares basis approximately 1% of the total



| | - 64
- | 
| | ------ | 

---

number of issued and outstanding
shares. United States residents also hold options to purchase 1,276,150 common shares.
Residents of the United States may beneficially own common shares registered in the names
of non-residents of the United States.

B. Related Party
Transactions

Set forth below is a description of
several transactions between Mitel Networks and persons or entities that are deemed to be
related parties to Mitel Networks. With the exception of the persons and entities referred
to below under Other Transactions, all of such related parties are entities
directly or indirectly controlled by Dr. Matthews.

New Heights Software Corporation
(NewHeights) (a corporation controlled by Owen Matthews, who is related to Dr.
Matthews) may be deemed a related party because Dr. Matthews indirectly owns a 11.3%
(approximate) beneficial interest in that company.

Encore Networks, Inc.
(Encore) may be deemed to be a related party because Dr. Matthews directly or
indirectly owns a 73.5% (approximate) beneficial interest in that company.

MKC Corporation (MKC) may
be deemed to be a related party because Dr. Matthews directly or indirectly owns a 82.2%
(approximate) beneficial interest in that company.

Natural Convergence Inc.
(NCI) may be deemed to be a related party because Dr. Matthews directly or
indirectly owns a 10.4% (approximate) beneficial interest in that company.

There are a significant number of
related party transactions principally as a result of the structure that was adopted in
order to effectuate Dr. Matthews acquisition of the communications systems division
of Zarlink. That transaction was negotiated at arms length between Dr. Matthews and
Zarlink. The parties agreed upon the aggregate consideration to be paid for the
communications systems division, which consisted of cash and Zarlinks retained
interest in Mitel Networks, which was then 10%. The decision to effectuate the purchase
partially through the acquisition of Zarlinks Canadian real property by MRPC and
substantially all of the intellectual property assets of the Predecessor Business by Mitel
Knowledge was made, and the resulting agreements between Mitel Networks and such other
entities were entered into, in order to structure the transaction in the most
tax-efficient manner and to maximize the economic benefits of such transaction to the
purchaser.

Outsourcing of Manufacturing and
Repair Operations:

On August 31, 2001, in an effort to
rationalize its operations and focus on core competencies, Mitel Networks sold its
manufacturing and repair operations, comprising plant, equipment, workforce and certain
liabilities to BreconRidge, a company in which Dr. Matthews holds a 33% beneficial
interest, for total net consideration of $5.0 million in the form of long-term promissory
notes receivable of $5.4 million and promissory notes payable of $0.4 million. The total
net consideration approximated the fair value of the disposed manufacturing tangible net
assets. The long-term promissory notes receivable were secured by a first charge on the
manufacturing assets transferred and bore interest at LIBOR rate plus 1.5 percent. The
promissory notes payable were unsecured, bore interest at LIBOR rate plus 1.5 percent and
were partially set off against the promissory notes receivable on August 31, 2002 pursuant
to an agreement with



| | - 65
- | 
| | ------ | 

---

BreconRidge. The transaction
  resulted in a loss on disposal of $1.5 million that was recorded in operating
  expenses in Fiscal 2002. The promissory notes receivable, net of the promissory
  notes payable, were paid in full on February 27, 2003. During Fiscal 2004 BreconRidge
  vacated premises that had been subleased from Mitel Networks pursuant to the
  disposal of the manufacturing operations. It became evident therefore that sublease
  income over the lease renewal period, which was originally included in the estimated
  loss on disposal, will no longer be realized. As a result an amount of $0.6
  was recorded in the Fiscal 2004 Consolidated Statement of Operations as an additional
  loss arising on the disposal activity.

In connection with the disposal
  of the manufacturing operations, Mitel Networks entered into a supply agreement
  dated August 31, 2001 whereby BreconRidge agreed to provide certain products
  and services under terms and conditions reflecting prevailing market conditions
  at the time the agreement was entered into. Pursuant to an amendment dated February
  27, 2003, the initial term of the agreement was extended to December 31, 2007,
  and will be automatically renewed thereafter for additional consecutive one-year
  periods. Under the terms of the supply agreement, BreconRidge is required to
  purchase Mitel Networks raw material inventory, before turning to third
  party suppliers for raw material procurement. During Fiscal 2004, Mitel Networks
  purchased $84.9 million (2003  $115.7 million; 2002  $81.3 million)
  of products and services and sold $2.7 million (2003  $6.4 million; 2002
   $22.1 million) of raw material inventory under this agreement. As at
  April 25, 2004, balances payable pursuant to this agreement amounted to $15.4
  million and balances receivable pursuant to this agreement amounted to $1.7
  million (April 27, 2003  $8.5 million and $1.4 million, respectively).

Pursuant to the terms of
  the supply agreement, Mitel Networks is required to purchase from BreconRidge
  certain tools used in the manufacturing process. These manufacturing tools are
  capitalized by Mitel Networks as part of fixed assets and are depreciated over
  their estimated useful lives. During Fiscal 2004, manufacturing tools purchased
  from BreconRidge amounted to $0.1 million (2003  $1.2 million; 2002 
  $0.1 million).

On August 31, 2001, Mitel
  Networks also entered into service agreements with BreconRidge to provide facilities
  management services for the period covering the term of the premise lease agreements
  (described below), as well as human resource and information systems support
  services. Amounts charged to BreconRidge were equal to, and recorded as a reduction
  of, the costs incurred to provide the related services in the consolidated statement
  of operations. During Fiscal 2004, Mitel Networks provided services valued at
  $3.3 million (2003  $4.7 million; 2002  $5.9 million) under these
  agreements. As at April 25, 2004, there was no receivable balance outstanding
  pursuant to these agreements.

Currently, four of the eight members
of the Board of Directors of Mitel Networks, namely, Dr. Matthews, Peter Charbonneau,
Gilbert Palter and Guthrie Stewart, are also members of the board of directors of
BreconRidge.

Leased Properties:

In March 2001, Mitel Networks entered
into a lease agreement for its Ottawa-based headquarters facilities of 512,391 square feet
with MRPC under terms and conditions reflecting prevailing



| | - 66
- | 
| | ------ | 

---

market conditions at the time the
lease was entered into. The lease agreement is for 10 years expiring in March 2011.

On August 31, 2001 and in
  connection with the outsourcing of its manufacturing and repair operations,
  Mitel Networks entered into sublease agreements with BreconRidge whereby BreconRidge
  leases certain office and manufacturing facilities in Ottawa and in the United
  Kingdom totaling 256,967 square feet under terms and conditions reflecting prevailing
  market conditions at the time the leases were entered into. The Ottawa sublease
  agreement is for a term of five years expiring in August 31, 2006 and the United
  Kingdom lease agreement is for a term of fifteen years expiring in August 2016
  with cancellation options on the fifth and tenth years available to MNL and
  BreconRidge. During Fiscal 2004, Mitel Networks incurred $6.6 million (2003
   $6.0 million; 2002  $6.1 million) of rent expense in connection
  with the leased Ottawa headquarters facilities and has earned rental income
  of $4.2 million (2003  $3.7 million; 2002  $2.6 million) in connection
  with the BreconRidge sublease agreement.

Strategic Alliance Agreement with
March Networks:

In September 2001, Mitel
  Networks entered into a strategic alliance agreement with March Networks, a
  company controlled by Dr. Matthews, to broaden its product portfolio and its
  distribution channel. Under the terms of the agreement, the parties have agreed
  to cooperate in the performance of joint development activities and each party
  bears its own costs arising in connection with the performance of its obligations.
  Both parties share common costs incurred in the performance of joint activities.
  During Fiscal 2004, Mitel Networks purchased $1.0 million (2003  $2.4
  million; 2002  $1.5 million) in products and services from March Networks
  and had an insignificant balance payable (April 27, 2003  $0.1 million)
  recorded in the due to related parties pursuant to this agreement at April 25,
  2004.

Financing of
Operations:

Since February 16, 2001, Mitel
Networks has borrowed, from time to time, funds from companies controlled by Dr. Matthews
to finance its operations and working capital requirements.

During Fiscal 2003 and Fiscal 2002
Mitel Networks borrowed an aggregate of $28.9 million from Wesley Clover, a company
controlled by Dr. Matthews. These unsecured demand promissory notes were subordinated to
bank debt. In connection with certain of the notes Mitel Networks entered into an
agreement with Wesley Clover and EdgeStone. Pursuant to the agreement, EdgeStone had the
option to (i) exchange all or a portion of its equity interest in the other company for a
corresponding portion of Mitel Networks demand loans payable to Wesley Clover, and
(ii) convert the amount of the demand loans payable into securities of Mitel Networks
offered in the first offering subsequent to February 27, 2003, other than an offering to
employees or existing shareholders, at a conversion price per share no greater than
CDN$1.50, which was the fair value of Mitel Networks common shares on the date of
the agreement (the Exchange Option Agreement). Unless terminated upon the
consent of the parties, the agreement would terminate upon the earlier of (i) the
completion of the exchange, and (ii) the closing of the offering. During Fiscal 2004 the
entire balance of the promissory notes outstanding of $31.0 million were converted into
20,448,875 common shares of the Company



| | - 67
- | 
| | ------ | 

---

shares at the then fair value of the
common shares of CDN$2.00 per common share. In April 2004: (a) the Exchange Option
Agreement was terminated pursuant to an Exchange Option Termination Agreement entered into
by the parties; and (b) pursuant to an Exchange and Release Agreement between Mitel
Networks and Wesley Clover, all of the 20,448,875 common shares were exchanged for
40,897,750 Series B Shares at the then fair value of CDN$1.00 per preferred share.

Other Transactions:

Mitel Networks has entered into
technology licensing and distribution agreements with companies related to Dr. Matthews
under terms reflecting prevailing market conditions, including, New Heights, Encore, NCI,
and MKC. These companies develop technology that Mitel Networks integrates with,
distributes and/or sells alone or as part of, its own products.

In the normal course of business,
Mitel Networks enters into purchase and sale transactions with companies related to Dr.
Matthews under terms reflecting prevailing market conditions.

In August 2002, certain of Mitel
Networks directors and members of senior management purchased convertible debentures
in an aggregate amount of $0.3 million. During Fiscal 2004 all of the debentures were
converted into common shares of the corporation at the then fair value of the common
shares of CDN$2.00 per common share, and then later exchanged for Series B Shares at the
then fair value of CDN$1.00 per preferred share.

During Fiscal 2004 Mitel Networks
issued 20,000,000 Series A Shares to EdgeStone, as further described in Section 4.A of
this annual report. See also Item 10.C of this annual report for a description of the
Shareholders Agreement and Registration Rights Agreement arising as a result of the
financing transaction with EdgeStone.

By way of private letter agreements
between Mr. Paul Butcher, Chief Operating Officer of Mitel Networks, Mr. Donald Smith, CEO
of Mitel Networks, and Dr. Matthews dated March 1, 2002, Dr. Matthews granted to Mr.
Butcher and Mr. Smith options to purchase common shares of Mitel Networks owned by Wesley
Clover. Proceeds of the exercise of any such options will be payable by Mr. Smith and Mr.
Butcher to Wesley Clover . Such options vest in 25% increments on the first, second, third
and fourth anniversaries of Mr. Smiths start date (April 2, 2001) and Mr.
Butchers start date (February 16, 2001). A similar, oral agreement was entered into
between Mr. Peter Charbonneau and Dr. Matthews on February 16, 2001. As of July 27, 2004,
none of these options had been exercised.

Sir David Rowe-Beddoe, a director of
the Company, provides advisory services to the Company for which he receives compensation.
During Fiscal 2004, Mitel Networks paid $102,664 to Sir David Rowe-Beddoe as compensation
for advisory services provided during the year.

C. Interests of
Experts and Counsel

Not applicable.



| | - 68
- | 
| | ------ | 

---

Item 8. Financial
Information

# A.              Consolidated
Statements and Other Financial Information

Mitel Networks Financial
Statements, which are set forth in the accompanying index to Consolidated Financial
Statements included in this annual report, are filed as a part of this annual report
pursuant to Item 18.

Legal Proceedings

In October 2003 Mitel Networks was
served with a summons and complaint in a class action lawsuit brought forward by former
employees of the Company. The complaint alleges liabilities for pay in lieu of termination
notice and temporary reduction in hours and pension contributions. A tentative date for
mediation has been scheduled during the second quarter of Fiscal 2005. Mitel Networks is
at the early stages of evaluating this claim, and estimates that its range of loss
relative to this matter may be $0 to $1.5. The Company intends to vigorously defend this
matter.

Mitel Networks is also party to a
small number of legal proceedings, claims or potential claims arising in the normal course
of its business. In the opinion of Mitel Networks, any monetary liability or financial
impact of such claims or potential claims to which the Company might be subject after
final adjudication would not be material to the consolidated financial position of Mitel
Networks or the consolidated results of operations.

Dividend Policy

Mitel Networks has not declared or
paid any cash dividends on its common shares, Series A Shares or Series B Shares. The
Company is also subject to certain restrictions in respect of the declaration and payment
of dividends, which restrictions are contained in the Companys articles of
incorporation and its banking facilities. Mitel Networks currently intends to retain any
future earnings for use in the operation and expansion of its business. Mitel Networks
does not anticipate paying any cash dividends on its common shares, Series A Shares or
Series B Shares in the foreseeable future.

B.    
  Significant Changes

No significant change has occurred
since the date of the audited consolidated financial statements included in Item 18.

Item 9. The Offer and
Listing

A.    
  Offer and Listing Details

The common shares, Series A Shares
and Series B Shares of Mitel Networks are not listed for trading on any stock exchange or
any other regulated market.

Since its formation on January 12,
2001:



| | - 69
- | 
| | ------ | 

---



| |  | Mitel Networks had two investment rounds whereby common shares were offered and sold at a
price of CDN$4.00 per share.
|- |  | ----------------------------------------------------------------------------------------------------------------------

| |  | Mitel Networks issued 13,207 common shares upon the exercise of options having an exercise
price ranging from CDN$3.50 to CDN$4.00 per share.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

| |  | Mitel Networks issued 4,555,169 common shares to Mitel Knowledge on November 1, 2002 at a
price of CDN$2.75 per share in consideration for the purchase of intellectual property.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Mitel Networks issued 20,000,000 Series A Shares on April 23, 2004 at an issue price of
CDN$1.00 per preferred share.
|- |  | ---------------------------------------------------------------------------------------------------------------------

See Item 10.B of this annual report
for a description of the common shares, Series A Shares and Series B Shares.

# B.              Plan
of distribution.

Not applicable.

# C.    
  Markets.

The common shares, Series A Shares
and Series B Shares of Mitel Networks are not listed for trading on any United States,
Canadian or other stock exchange, there are currently no plans to list these shares on any
stock exchange, and there is no guarantee that any such listing will be completed in the
future. There is no market through which Mitel Networks common shares, Series A
Shares and Series B Shares may be sold or resold. The shares have not been registered
under the United States Securities Act of 1933, as amended, or any state securities laws,
the securities laws of Canada or any province thereof, or the securities laws of any other
country or governmental subdivision thereof. Therefore, there are significant restrictions
on the resale of Mitel Networks shares.

The shares may not be resold unless
registered under applicable securities laws or an exemption from registration is available
under applicable securities laws. The terms of Mitel Networks articles of
incorporation also prohibit any transfer of shares without the consent of Mitel
Networks board of directors.

# D.              Selling
shareholders.

Not applicable.

# E.    
  Dilution.

Not applicable.

# F.    
  Expenses of the issue.

Not applicable.



| | - 70
- | 
| | ------ | 

---

Item 10. Additional
Information

# A.    
  Share Capital.

Not applicable.

B.    
  Memorandum and Articles of Incorporation

Mitel Networks is incorporated under
the CBCA under company number 385460-4. The date of incorporation is January 12, 2001.

In June 2004, the board of directors of
Mitel Networks approved the repeal of the Companys former general operating by-laws
and adopted By-law No. 1A, a new by-law relating generally to the transactions of the
business and affairs of the Company.

On July 15, 2004, at a meeting of the
shareholders, the shareholders of Mitel Networks ratified the repeal of the previous
general operating by-laws and the adoption of By-law No. 1A.

Mitel Networks certificate and
articles of incorporation do not contain any limitations on Mitel Networks objects
or purposes. The following is a summary of certain provisions of Mitel Networks
certificate and articles of incorporation:

Meetings of
Shareholders

Subject to the CBCA, the annual
meeting of shareholders of Mitel Networks is to held on such day and at such time in each
year as the board, or the chairperson of the board, or the vice-chairperson of the board,
or the president in the absence of the chairperson or vice-chairperson of the board, may
from time to time determine, for the purpose of considering the financial statements and
reports required by the CBCA to be placed before the annual meeting, electing directors,
appointing auditors and for the transaction of such other business as may properly be
brought before the meeting. Pursuant to subsections 133(b) and 155(1) of the CBCA, Mitel
Networks must hold the annual meeting of its shareholders at least once every calendar
year and not later than fifteen months after the preceding ordinary general meeting. Mitel
Networks must place before the shareholders at every annual meeting comparative financial
statements for the immediately preceding financial year along with the report of the
auditor.

In accordance with subsection 143 of
the CBCA the holders of not less than five percent of the issued and outstanding shares of
Mitel Networks that carry the rights to vote may requisition the directors (by sending the
requisition to each director and to the registered office) of Mitel Networks to call a
meeting of shareholders for the purposes stated in the requisition. Upon the requisition
of shareholders, the directors shall proceed to convene the meeting or meetings to be held
in the manner set forth in the by-laws of Mitel Networks or the CBCA, as applicable. The
requisition shall state the business to be transacted at the meeting.

Subject to the CBCA, notice of the
time and place of each meeting of shareholders shall be sent not less than 21 days nor
more than 60 days before the meeting to each shareholder entitled to



| | - 71
- | 
| | ------ | 

---

vote at the meeting, to each director
and to the auditor of Mitel Networks. If a meeting of shareholders is adjourned for less
than 30 days it is not necessary to give notice of the adjourned meeting other than by
announcement at the earliest meeting that is adjourned.

A quorum of shareholders is present
at a meeting of shareholders of Mitel Networks if the holders of 20% of the shares
entitled to vote at the meeting are present in person or represented by proxy, provided
that a quorum shall not be less than two persons.

Section 137 of the CBCA proscribes
the method under which proposals may be made by shareholders entitled to vote. The
shareholder must submit to the Company a notice of any matter that the person proposes to
raise at the meeting. The Company shall set out the proposal in the management proxy
circular and the proposing shareholder may request to include a supporting statement. If
the Company does not include the proposal in the management proxy circular, it must send a
notice of refusal to the proposing shareholder including the reasons why the proposal will
not be included. Either the shareholder and/or the Company may apply to the courts
claiming aggrievance.

Directors

At least twenty-five per cent of the
directors of Mitel Networks must be resident Canadians. However, if the Company has less
than four directors, at least one director must be a resident Canadian. Subject to the
terms of the Shareholders Agreement, the board shall manage or supervise the management of
the business and affairs of Mitel Networks. Section 122 of the CBCA states that every
director and officer of the Company shall act honestly and in good faith with a view to
the best interests of the Company and to exercise care, diligence and skill that a
reasonably prudent person would exercise in comparable circumstances. Subject to its
by-laws and articles, the directors of Mitel Networks may fix the remuneration of the
directors of Mitel Networks.

No director or officer shall be
liable for: (a) the acts, receipts, neglects or defaults of any other director, officer,
employee or agent of Mitel Networks or any other person; (b) any loss, damage or expense
happening to Mitel Networks through the insufficiency or deficiency of title to any
property acquired by, for, or on behalf of Mitel Networks, or for the insufficiency or
deficiency of any security in or upon which any of the moneys of Mitel Networks shall be
loaned out or invested; (c) any loss or damage arising from the bankruptcy, insolvency or
tortious act of any person, firm or Company, including any person, firm or Company with
whom any moneys, securities or other assets belonging to Mitel Networks shall be lodged or
deposited; (d) any loss, conversion, misapplication or misappropriation of or any damage
resulting from any dealings with any moneys, securities or other assets belonging to Mitel
Networks; (e) any other loss, damage or misfortune whatever which may happen in the
execution of the duties of the directors or officers respective office or in
relation thereto, relieve a director or officer from the duty to act in accordance with
the CBCA or relieve such director or officer from liability for a breach of the CBCA.

Mitel Networks shall indemnify a
director or officer of the Company, a former director or officer of the Company or another
individual who acts or acted at the Companys request as a director or officer, or an
individual acting in a similar capacity, of another entity against all costs, charges



| | - 72
- | 
| | ------ | 

---

and expenses, including an amount
paid to settle an action or satisfy a judgment, reasonably incurred by such individual in
respect of any civil, criminal or administrative, investigative or other proceeding (a
proceeding) in which the individual is involved because of that association
with the Company or other entity. The Company may not indemnify an individual in
connection with the previous sentence unless the individual: (a) acted honestly and in
good faith with a view to the best interests of the Company or other entity for which the
individual acted as a director or officer or in a similar capacity at the Companys
request, as the case may be; and (b) in the case of a criminal or administrative action or
proceeding that is enforced by a monetary penalty, had reasonable grounds for believing
that his conduct was lawful.

A director or officer of Mitel
Networks who is a party to a material transaction or material contract, or proposed
material transaction or material contract with the Company, is a director or an officer
of, or acts in a capacity similar to a director or officer of, or has a material interest
in any person who is a party to a material transaction or material contract or proposed
material transaction or material contract with the Company shall disclose the nature and
extent of his/her interest at the time and in the manner provided in the CBCA. Except as
provided in the CBCA, no such director of the Company shall vote on any resolution to
approve any transaction. If a material transaction or material contract is made between
the Company and one or more of its directors or officers, or between the Company and
another person of which a director or officer of the Company is a director or officer or
in which he has a material interest, the transaction is neither void nor voidable by
reason only of that relationship, or by reason only that a director with an interest in
the transaction or contract is present at or is counted to determine the presence of a
quorum at a meeting of directors or committee of directors that authorized the
transaction, if the director or officer disclosed his interest in accordance with the
provisions of the CBCA and the transaction or contract was approved by the directors or
the shareholders and it was reasonable and fair to the Company at the time it was
approved.

Capital Stock

Pursuant to its articles of
incorporation, as amended, Mitel Networks authorized capital consists of an
unlimited number of common shares without par value, and, as described below, an unlimited
number of Class A Convertible Preferred Shares, issuable in series, and an unlimited
number of Class B Convertible Preferred Shares, issuable in series. Each common share
ranks equally as to dividends, voting rights and as to the distribution of assets on
winding-up for liquidation. Holders of common shares are entitled to one vote for each
share held of record on all matters to be acted upon by the shareholders.

The articles also provide
  that no shares of Mitel Networks may be transferred without the consent of the
  directors of Mitel Networks evidenced by a resolution passed by them and recorded
  in the books of Mitel Networks. However, Mitel Networks may be prohibited from
  having this restriction if, under the CBCA regulations, it is deemed to be a
  distributing corporation. A distributing corporation
  includes a corporation that has filed a prospectus or registration statement
  under provincial legislation or under the laws of a jurisdiction outside Canada.
  Mitel Networks has filed a registration statement with the United States Securities
  and Exchange Commission under the United States Securities Exchange Act of
  1934. If such registration statement is also considered to be a registration
  statement for purposes of the



| | - 73
- | 
| | ------ | 

---

CBCA regulations, Mitel Networks
would be deemed to be a distributing corporation for purposes of the CBCA. Given that
Mitel Networks securities are not listed on any stock exchange and no market exists
for such securities, Mitel Networks proposes to make an application under the CBCA for a
determination that it is not a distributing corporation for purposes of the CBCA. In the
absence of such determination, Mitel Networks expects it would file articles of amendment
to delete the share transfer restriction from its articles, in accordance with previously
obtained shareholder approval.

By-law No. 1A provides that,
  subject to the CBCA and the Companys articles, shares may be issued at
  such times and to such persons and for such consideration as the directors may
  determine.

On April 22, 2004 Mitel Networks
filed Articles of Amendment amending its authorized capital to create two classes of
preferred shares, the Class A Convertible Preferred Shares and the Class B Convertible
Preferred Shares, each issuable in series. On April 23, 2004 Mitel Networks filed Articles
of Amendment to designate the first series of Class A Convertible Preferred Shares as the
Class A Convertible Preferred Shares, Series 1 (or Series A Shares, as they
are referred to in this annual report) and to designate the first series of Class B
Convertible Preferred Shares as the Class B Convertible Preferred Shares, Series 1 (or
Series B Shares, as they are referred to in this annual report).

The rights, privileges, restrictions
and conditions attaching to the Class A Convertible Preferred Shares and the Class B
Convertible Preferred Shares are set out in the Articles of Amendment dated April 22, 2004
and attached as Exhibit 1.2 to this annual report.

The rights, privileges, restrictions
and conditions attached to the Series A Shares and the Series B Shares are set out in the
Articles of Amendment dated April 23, 2004 and attached as Exhibit 1.3 to this annual
report.

The following summarizes the key
rights, privileges, restrictions and conditions attached to the Series A Shares and Series
B Shares:

Series A Shares:

(a)              Liquidation
Preference  Upon the occurrence of a liquidation, dissolution           or
winding-up of the Company, or a change of control of the Company
          (as defined in the Series A Share provisions), holders of Series A Shares will
          be entitled to receive from the Company, in preference to any distribution to
          holders of Series B Shares (or any other series of Class B Convertible
Preferred           Shares) or common shares, an amount, in respect of each Series A
Share, equal to           the original issue price of CDN$1.00 per share plus any
declared but unpaid           dividends on such share (the Series A Liquidation
Preference),           subject to customary adjustments. After payment (whether in
cash or other           consideration) of the Series A Liquidation Preference, and
payment (whether in           cash or other consideration) of the Series B Liquidation
Preference as described           below, the holders of the Series A Shares are entitled
to receive the amount           (the Series A Participation Amount) resulting
from the remaining           assets of the Company available



| | - 74
- | 
| | ------ | 

---

for distribution being distributed to
the shareholders of the Company rateably on an as-if-converted to common shares basis.

Notwithstanding the above, if the
liquidation, dissolution, winding-up or change of control occurs within the first two
years from the date the Series A Shares were originally issued:

| |  | if Series A Participation Amount per share would be equal to or greater than the sum of
two times the original issue price of the Series A Shares plus declared but unpaid
dividends, the holders of Series A Shares will not be entitled to receive the Series A
Liquidation Amount and will only receive the Series A Participation Amount; and
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | if Series A Participation Amount per share is less than the sum of two times the original
issue price of the Series A Shares plus declared but unpaid dividends, then the maximum
amount per Series A Share that the holders are entitled to receive shall be the sum of two
times the original issue price of the Series A Shares plus declared but unpaid dividends.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(b)              Voting
 The Series A Shares have voting rights on an as-if-converted to           common
shares basis, and shall vote together with the holders of common shares           and
Series B Shares.

(c)              Conversion
 The Series A Shares are convertible, at the option of the           holder, and
automatically in certain circumstances, into common shares of the           Company, on
the basis of one common share for each Series A Share so converted,           subject to
customary adjustments for events such as stock splits and the           anti-dilution
protection described below. Events that will trigger the automatic           conversion
of Series A Shares into common shares include: (i) the completion of           an initial
public offering meeting certain pre-conditions; and (ii) the vote of           the
holders of a certain percentage of the outstanding Series A Shares to           require
conversion.

In addition, if the conversion occurs
after two years from the original issuance date of the Series A Shares, holders of Series
A Shares will also receive, in respect of each Series A Share, an additional number of
common shares (the Additional Common Shares) equal to the original issue price
(as adjusted) of the Series A Shares, divided by the fair market value of a Common Share
at the time of such conversion. Further, in the event of a conversion in connection with
an initial public offering that does not meet certain pre-conditions within the first two
years from the original issuance date, holders of Series A Shares shall also be entitled
to receive certain additional common shares, determined, with respect to each Series A
Share so converted by a fraction, where the numerator is the difference between two times
the issue price less the greater of (i) the issue price and (ii) the IPO offering price;
and the denominator is the IPO offering price.

(d)              Anti-Dilution
Protection  The Series A Shares have full           ratchet anti-dilution
protection, such that if the Company issues common           shares (or securities
exercisable for, convertible into or exchangeable for           common shares) at a price
per common share which is less than the issue price           (as adjusted) of the Series
A Shares, then the number of common shares into           which the Series A Shares will
then be convertible will thereafter be calculated           on the basis of the lowest
price at which the common shares (or securities           exercisable for, convertible
into or exchangeable for common shares) were           issued.



| | - 75
- | 
| | ------ | 

---



|(e)    
      Redemption  The Series A Shares have redemption rights, which entitle
      the holders of a certain percentage of the outstanding Series A Shares,
      at any time following five years and one day from the last date that shares
      are issued in connection with the Financing, to require the Company to redeem
      the Series A Shares. Subject to the availability of sufficient funds for
      redemption, upon any such redemption, holders of Series A Shares will be
      entitled to receive from the Company an amount equal to the sum of (i) the
      number of Series A Shares outstanding multiplied by the sum of the issue
      price and the per share amount of any declared but unpaid dividends; and
      (ii) the then fair market value of the common shares into which such Series
      A Shares are then convertible.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Series B Shares:

The Series B Shares are substantially
the same as the Series A Shares, except that the Series B Shares rank junior to the Series
A Shares (but senior to the common shares) with respect to entitlements on a liquidation,
dissolution or winding up of the Company or a change of control of the Company and, where
there are insufficient assets available to fully redeem the Series A Shares and Series B
Shares, with respect to priorities to certain redemption payments.

C.    
  Material Contracts

The following summary of Mitel
Networks material agreements, which agreements are filed as exhibits to this annual
report, does not purport to be complete and is subject to, and qualified in its entirety
by reference to, all the provisions of those agreements.

a)          Subscription
Agreement between Mitel Networks and EdgeStone

On April 23, 2004, Mitel
  Networks entered into a Subscription Agreement with EdgeStone, setting out the
  terms and conditions pursuant to which EdgeStone subscribed for Series A Shares,
  a Series 1 Warrant and the Series 2 Warrant. See Item 4.A to this annual report
  for further details in respect of the Subscription Agreement.

b) Shareholders Agreement
  between Mitel Networks, Mitel Systems Corporation (now Wesley Clover), Zarlink
  , PTIC, Dr. Matthews, Mitel Knowledge, WCC (now Wesley Clover) and EdgeStone:

Mitel Networks, Wesley Clover,
Zarlink and PTIC were parties to an amended and restated shareholder agreement dated
August 31, 2001. Each of the parties subsequently entered into a Waiver and Termination
Agreement dated April 23, 2004 thereby terminating such amended and restated shareholders
agreement. On April 23, 2004, in connection with the Financing, Mitel Networks, Wesley
Clover, Zarlink, PTIC, Dr. Matthews, Mitel Knowledge and EdgeStone entered into a new
shareholders agreement (the Shareholders Agreement). The Shareholders
Agreement contains provisions relating to the entitlement of EdgeStone to appoint two
directors to the board of directors of the Company, and various other provisions
respecting the management of Mitel Networks and dealings with the securities of Mitel
Networks held by the shareholders which are parties to the Shareholders Agreement. Certain
parties to the



| | - 76
- | 
| | ------ | 

---

Shareholders Agreement, namely,
Wesley Clover and Mitel Knowledge, are corporations controlled directly or indirectly by
Dr. Matthews.

The Shareholders Agreement also
contains put rights in favour of certain of the shareholders, as follows:

| |  | If Mitel Networks has not completed an initial public offering by September 1, 2006,
Zarlink shall have the right, exercisable for 90 days after September 1, 2006, to require
Mitel Networks to repurchase all or any portion of the 10,000,000 common shares held by
Zarlink (subject to appropriate adjustment for events such as stock splits) at a purchase
price of CDN$2.85 per share.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | If Mitel Networks has not completed an initial public offering by September 1, 2006, PTIC
shall have the right, exercisable for 90 days after September 1, 2006, to require Mitel
Networks to repurchase all or any portion of the 16,000,000 Series B Shares (subject to
appropriate adjustment for events such as stock splits) held by it on the date of the
Shareholders Agreement (or the common shares issued on the conversion thereof). The
purchase price shall be with respect to each Series B Shares, CDN$1.00 per share (subject
to appropriate adjustments) and, with respect to each common share issued on the
conversion of a Series B Share, equal to CDN$1.00 divided by the number of common shares
issued upon conversion of such Series B Share, in either case together with an amount
equal to the interest on the aggregate amount payable for such shares at a rate of 7% per
annum commencing August 31, 2001 and compounded semi-annually.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | If either of Zarlink or PTIC exercises its put rights as described above, EdgeStone shall
also have the right to require the Company to repurchase all but not less than all of the
Series A Shares then held by EdgeStone, for a purchase price equal to the sum of (i)
CDN$1.00 per share (subject to appropriate adjustment for events such as stock splits)
plus an amount equal to any declared but unpaid dividends on such shares; plus (ii) the
issuance of that number of common shares equal to the number of common shares then
issuable on the conversion of the Series A Shares then held by EdgeStone. Following the
purchase of such Series A Shares from EdgeStone by Mitel Networks upon the exercise of
such put rights by EdgeStone, EdgeStone shall also have the right, upon certain sale
events or after five years plus one day after the date of the Financing, to require the
Company to repurchase all or any of its common shares or convertible securities then held,
for a purchase price based on the then fair market value of such securities.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Where EdgeStone and one or more of
the other shareholders exercises their put rights, EdgeStone shall have priority, such
that the Company will be required to repurchase all of EdgeStones securities which
are the subject of the exercise of its put right, before any payments are made to Zarlink
and/or PTIC. Thereafter, where both Zarlink and PTIC have exercised their put rights,
their put rights shall rank pari passu.



| | - 77
- | 
| | ------ | 

---

c)           Registration Rights
Agreement between Mitel Systems (now Wesley Clover),           Zarlink, PTIC, Mitel
Knowledge, WCC (now Wesley Clover) and EdgeStone

In connection with the Financing,
Mitel Networks also entered into a registration rights agreement (the Registration
Rights Agreement) with Wesley Clover, Zarlink, PTIC, Mitel Knowledge and EdgeStone
dated April 23, 2004. Pursuant to the Registration Rights Agreement, Mitel Networks
covenanted to make certain arrangements with respect to the registration and/or the
qualification for distribution of the shares held by such shareholders under the
applicable securities laws of the United Shares and/or Canada.

d)           Receivables Purchase
Agreement between the Mitel Group and The Canada Trust           Company

The Mitel Group have entered into a
Receivable Purchase Agreement with The Canada Trust Company (the Purchaser)
with an effective date of April 16, 2004, whereby certain qualifying non-interest bearing
trade receivables in Canada and the United States may be purchased from the Mitel Group by
the Purchaser and transferred to a securitization trust.

e)           Amended and Restated
Loan Agreement between Mitel Networks, the Lenders from           time to time and the
Bank of Montreal as Administrative Agent

Mitel Networks, as borrower, has
entered into an Amended and Restated Credit Agreement with the Bank of Montreal as
administrative agent and lead arranger (the Bank), effective as of April 21,
2004, and amended on July 24, 2004, whereby a revolving credit facility of $22 million
(CDN$30 million) has been made available to Mitel Networks upon and subject to the terms
and conditions therein set forth (the 2004 Bank Facility). See Item 5.B
Liquidity and Capital Resources for additional discussion of this loan facility. The 2004
Bank Facility amends and restates an Amended and Restated Credit Agreement made as of
February 27, 2003, as amended by amending agreements made as of June 12, 2003 and February
24, 2004.

f)           Loan Agreement with
Export Development Canada (EDC)

MNL, a wholly-owned subsidiary of
Mitel Networks, entered into a loan agreement dated March 4, 2003 with EDC in the amount
of £4.1 million that was subject to a borrowing base. The facility bore interest at
LIBOR plus 3.5%. The facility was secured by a general assignment of Mitel Networks
accounts receivable and a general security interest in the remaining assets of Mitel
Networks and its two U.S. wholly-owned subsidiaries, each of which was a guarantor. EDC
also held £683,470 in cash collateral to support the loan. The loan facility
contained certain restrictions and financial covenants. The remaining balance outstanding
on the loan £4,117,590.23 (including accrued interest) was repaid to EDC in full on
April 19, 2004, and on April 19, 2004 £703,229.77, being cash collateral (including
accrued interest) held by EDC was repaid to Mitel Networks, in full, and certain
underlying security and guarantees in connection with the credit facility were discharged.

g)           Chattel Mortgage Loan
Facility with Barclays Bank PLC

On October 22, 2001, MNL entered into
a loan with Barclays Bank PLC in the amount of £5.0 million, secured by certain
United Kingdom equipment. The mortgage bears interest at 7.7%, is



| | - 78
- | 
| | ------ | 

---

payable in monthly installments and
is due in October 2004. See Item 5.B Liquidity and Capital Resources for additional
discussion of this loan facility.

h)           Chattel Mortgage Loan
Facility with Barclays Bank PLC

On April 25, 2003, MNL entered into a
loan with Barclays Bank PLC in the amount of £0.8 million, secured by certain United
Kingdom equipment. The mortgage bears interest at 6.3%, is payable in monthly installments
and is due in April 2006. See Item 5.B Liquidity and Capital Resources for additional
discussion of this loan facility.

i)           Real Property Loan
Facility with Barclays Bank PLC

Pursuant to a facility letter dated
December 13, 2001 and a legal charge dated January 24, 2002, MNL entered into a real
property loan facility with Barclays Bank PLC in the amount of £7.5 million, which
is secured by the real property located in the Mitel Business Park, Portskewett,
Monmouthshire. See Item 5.B Liquidity and Capital Resources for additional discussion of
this loan facility.

j)           Business Overdraft and
Ancillary Facilities with Barclays Bank PLC

On June 24, 2002, MNL and Barclays
Bank PLC entered into an overdraft facility of £1 million and ancillary facilities
totaling £3.0 million. See Item 5.B Liquidity and Capital Resources for additional
discussion of this loan facility.

Agreements with
BreconRidge:

a) Supply Agreement with BreconRidge

On August 31, 2001 Mitel Networks and
two of its wholly-owned subsidiaries entered into a supply agreement with BreconRidge,
under which BreconRidge supplies certain products and services to Mitel Networks. Pursuant
to an amendment dated February 27, 2003, the initial term of the agreement was extended to
December 31, 2007, and will be automatically renewed thereafter for additional one-year
periods unless terminated. Either party has the right to terminate the agreement by giving
prior written notice of one hundred and eighty (180) days at any time during a renewal
term, or to give notice of its intent not to renew no less than one hundred and eighty
(180) days prior to the expiration of a renewal term. Subject to certain exceptions, the
supply agreement is exclusive during the initial term with respect to current products and
new product introductions. Under the terms of the supply agreement, BreconRidge
manufactures the majority of Mitel Networks products and provides repair and other
related services.

The supply agreement with BreconRidge
does not contain any minimum purchase requirements. Under the terms of the supply
agreement, Mitel Networks is not obligated to purchase products from BreconRidge in any
specific quantity, unless and until a binding purchase order has been issued. Mitel
Networks may be obligated to purchase certain excess inventory levels from BreconRidge
that could result from Mitel Networks actual sales varying from forecast.
Furthermore, BreconRidge is required to purchase Mitel Networks raw material
inventory, before turning to third party suppliers for raw material procurement.
BreconRidge has



| | - 79
- | 
| | ------ | 

---

committed to certain cost reductions
through August 1, 2004 on purchases of traditional communications platform products.

BreconRidge is prohibited from
discontinuing its manufacture of any products or from refusing for any reason other than
an event of force majeure or in the event of an uncured default to manufacture and supply
the products to Mitel Networks. The agreement may be terminated by either party at any
time following the expiration of the initial term on not less than 180 days prior notice
or in the event of an uncured material breach by or change in control of the other party.

b)           Sublease Agreement
between Mitel Networks and BreconRidge

On August 31, 2001 Mitel Networks
entered into a sublease agreement to lease to BreconRidge certain of its Ottawa
manufacturing and office facility totaling 158,780 square feet. The term of the agreement
is five years expiring on August 31, 2006. BreconRidge has the option to extend the
sublease for an additional five years. The annual base rent is CDN$1,573,020.

The sublease agreement was amended on
May 31, 2002 to include additional space of 4,026 square feet thereby increasing the
annual base rent to CDN$1,625,358.

c)           Lease Agreement between
MNL and the U.K. subsidiary of BreconRidge

On September 14, 2001, MNL entered
into a lease agreement with the U.K. subsidiary of BreconRidge for 94,161 square feet
(8,751 square meters) of office and manufacturing space located in the Portskewett
Business Park located in Portskewett, Monmouthshire, U.K. The term of the lease is fifteen
years expiring on August 30, 2016 with cancellation options on the fifth and tenth years
available to Mitel Networks and BreconRidge. The annual base rent is £517,884.

Agreements with Mitel
Knowledge:

a)           Transfer of Mitel
Knowledge intellectual property to Mitel Networks, and           termination of certain
related Licensing and Research and Development Cost           Sharing Agreements

On November 1, 2002, Mitel Networks
exercised its Call Right under the MNC R&D Agreement (defined below). In connection
with the Call Right, Mitel Networks and Mitel Knowledge entered into an (Intellectual
Property) Purchase and Sale Agreement, also dated November 1, 2004, whereby all of Mitel
Knowledges right, title and interest in and to the IP (as defined below) was
transferred to Mitel Networks. The purchase price for the IP was CDN$12.5 million payable
to Mitel Knowledge in 4,555,169 common shares of Mitel Networks.

In connection with the exercise of
the Call Right and IP Purchase and Sale Agreement, on November 1, 2002, the following
agreements were terminated by mutual consent of the parties thereto:

| | (i) |  | Research
and Development Agreement between Mitel Knowledge and Mitel Networks                dated
March 27, 2001 (the MNC R&D Agreement);
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------

| | Under
the MNC R&D Agreement between Mitel Networks and Mitel Knowledge (which at that time
was the owner of substantially all of the intellectual property
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| | - 80
- | 
| | ------ | 

---



| | (excluding
trademarks) utilized by Mitel Networks in its products (the IP)): (A) Mitel
Knowledge retained Mitel Networks services to perform R&D in consideration for
which Mitel Knowledge funded certain of Mitel Networks R&D activities; (B) Mitel
Knowledge granted to Mitel Networks a license to exploit the intellectual property in
Canada, South and Central America, Mexico and the Caribbean in exchange for a license fee;
(C) Mitel Networks agreed to transfer to Mitel Knowledge any investment tax credits, but
in no event less than CDN$10 million, earned on the R&D activities to the extent that
such investment tax credits were not required to reduce Mitel Networks Canadian
federal tax payable; (D) Mitel Networks was granted a call right (the Call
Right) pursuant to which it had the right to require Mitel Knowledge to sell all of
its rights, title, interest in, and benefits from, the IP, including improvements and new
technology, to Mitel Networks upon the occurrence of the earliest of the following events:
(1) the third anniversary of the agreement; (2) Mitel Networks passing a resolution to
proceed with an initial public offering of its shares in Ontario or any other jurisdiction
which results in the listing of its shares on a recognized stock exchange; or (3) the
termination of the agreement on its terms. The MNC R&D Agreement provided that the
purchase price for the IP would be paid by the issuance of common shares from Mitel
Networks treasury with the number of shares to be determined in accordance with a
formula described in the MNC R&D Agreement.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (ii) |  | Research
and Development Agreement between Mitel Networks and Mitel Overseas, a
               wholly-owned subsidiary of Mitel Networks dated March 27, 2001 (the MNOC
R&D Agreement);
| | ---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Under
 the MNOC R&D Agreement, the parties agreed to undertake joint R&D and to
share in the costs associated therewith. The agreement provided that Mitel Knowledge
would own all intellectual property developed by either party. In exchange for Mitel
Overseas bearing certain of the jointly incurred R&D costs, Mitel Knowledge granted
to Mitel Networks Overseas Limited a royalty-free, exclusive license to exploit the
intellectual property in the United States, Europe, Middle East, Africa and Asia Pacific
regions.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (iii) |  | Intellectual
Property License Agreement between Mitel Knowledge and Mitel                Overseas
dated March 27, 2001 (the MNOC License Agreement);
| | ----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------

| | Under
the MNOC License Agreement, Mitel Knowledge granted Mitel Overseas an exclusive, fully
paid-up license to exploit the IP in the United States for total consideration of
CDN$26.6 million in the form of a promissory note. The promissory note bore interest at
the rate of 7.4%, compounded semi-annually, payable to Mitel Knowledge on demand.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - 81
- | 
| | ------ | 

---

Agreements with Other Affiliates of
Dr. Matthews:

a)          Demand
Promissory Notes payable to Wesley Clover

The following table sets forth demand
promissory notes outstanding at July 18, 2003, issued to finance Mitel Networks
operations and working capital requirements. These notes were subordinated to bank debt.

|              | Principal | Currency     | Date of issuance | Interest rate
|------------- | --------- | ------------ | ---------------- | -------------
|             
|Wesley Clover |           | $6 million   |                  | CDN          
|Wesley Clover |           | $4 million   |                  | CDN          
|Wesley Clover |           | $5 million   |                  | CDN          
|Wesley Clover |           | $5 million   |                  | CDN          
|Wesley Clover |           | $1 million   |                  | CDN          
|Wesley Clover |           | $10 million  |                  | CDN          
|Wesley Clover |           | $7.5 million |                  | USD          

In October 2003 the entire loan
outstanding at that date of $31.0 million (CDN$ 40.9 million) was converted (and the debt
discharged) into 20,448,875 common shares of the Company at their then fair value of CDN$2
per common share. On April 23, 2004, pursuant to an Exchange and Release Agreement entered
into between the Company and Wesley Clover in connection with the Financing, all of the
common shares issued on conversion of the loan were exchanged for 40,897,750 Series B
Shares of the Company at their then fair value of CDN$1 per preferred share.

b)           Lease Agreement between
Mitel Networks and MRPC

On March 27, 2001, Mitel Networks and
MRPC entered into a lease agreement pursuant to which Mitel Networks leases its
headquarters facilities located in Ottawa, Ontario totaling 512,391 square feet. The
initial term of the lease is ten years expiring on February 15, 2011. The terms of the
lease reflect current market conditions. Annual base rent is CDN$13.00 per square foot for
office space and CDN$9.00 per square foot for non-office space. Mitel Networks is
responsible for the payment of operating costs in addition to the base rent.

c)          Alliance
Agreement between Mitel Networks, March Networks, MNL and Mitel           Networks
International Limited, subsidiaries of Mitel Networks

The agreement is effective September
21, 2001 with an initial term of two years which may be extended for additional subsequent
one-year periods upon mutual consent of the parties. The Alliance Agreement was extended
for one (1) year, expiring on September 21, 2004, unless extended for additional one-year
periods upon mutual consent of the parties. Each party may terminate the agreement for its
convenience on 60 days prior written notice.

The agreement provides for joint
development of new projects to be determined by the parties, and marketing of each of
Mitel Networks and March Networks IP-based products and services.



| | - 82
- | 
| | ------ | 

---

The parties are to establish an
Alliance Management Committee comprised of three representatives from each of Mitel
Networks and March Networks. The Alliance Management Committee is responsible for the
overall management of the alliance to determine joint activities in the areas of product
development, product marketing, and product and system integration to ensure where
appropriate interoperability between the product portfolios of Mitel Networks and March
Networks. With regard to any of these activities the Alliance Management Committee is also
responsible for monitoring joint activities, reviewing promotional activities, approving
specifications and pricing for any jointly developed products, and to allocate each
parties liability for shared expenses.

Either party has the ability to
propose joint product development to the Alliance Management Committee which will then
evaluate and approve or reject the proposal. If the committee approves a proposal, then
the parties will negotiate a binding Joint Development Agreement setting out, among other
matters, the technology to be developed, each partys responsibilities, ownership of
intellectual property to be developed under the project if such arising intellectual
property is not to be jointly owned.

Mitel Networks and March Networks
will jointly brand, promote, market and distribute each others IP-based products and
services. The terms and conditions under which each party will distribute the other
partys products are set out in a separate Global Marketing and Distribution
Agreement.

Agreements with
Zarlink:

a)          Amended
Supply Agreement between Mitel Networks and Zarlink

Mitel Networks entered into a
non-exclusive supply agreement dated February 16, 2001 with Zarlink pursuant to which
Zarlink supplies semiconductor components to Mitel Networks. The initial term of the
agreement is ten years with subsequent automatic annual renewals

Zarlink is obligated to place all of
its know how, improvements and new technology with respect to the manufacture of hybrid
devices and VoIP products in escrow. The escrowed materials are to be released in the
event of: bankruptcy; receivership; issuance of a last-time buy notification;
discontinuance of manufacture; transfer of the hybrid or VoIP business in whole or in part
to another party, if the party fails to assume the obligations of Zarlink with respect to
the hybrid or VoIP products; a material breach of the agreement by Zarlink that adversely
affects the continuing supply of products, which remains uncured 30 days after written
notification of the breach.

Under the terms of the supply
agreement, Zarlink granted to Mitel Networks a license in the Zarlink intellectual
property, Zarlink improvements, and Zarlink developed new technology relating to the
supplied components. Mitel Networks has the right to grant sublicenses only to
semiconductor second source suppliers for hybrid and semiconductor components to be used
in specified Mitel Networks products and VoIP products, to the extent that Zarlink
intellectual property has been incorporated into the components and used by Mitel
Networks. The supply agreement was amended by letter agreement dated October 24, 2001. The
amending agreement provides for an expansion of the foregoing license grant in that it
allows Mitel Networks, in the



| | - 83
- | 
| | ------ | 

---

case of licensed intellectual
property existing as of February 16, 2001 or created thereafter, to: (a) complete the
development of the MT92102 VoIP device, (b) sublicense such intellectual property to a
third party foundry to permit the manufacture of the MT92102 VoIP device (i) for sale by
the foundry to Mitel Networks, and (ii) for sales by the foundry to its customers but
restricted to applications based on Mitel Networks converged access products.

The amending agreement further
provided for payment of non-recurring engineering expenses to Zarlink for the completion
of the MT92102 device.

The supply agreement was further
amended by Amending Agreement dated April 23, 2004, whereby clause 21(A)(ii) of the supply
agreement, which had required prior approval from Zarlink in connection with amendments to
Mitel Networks constating documents, was deleted in its entirety.

b)          Lease
Between MNL and Zarlink Semiconductor Limited, a subsidiary of Zarlink

MNL, a wholly-owned subsidiary of
Mitel Networks, entered into a lease agreement dated February 2, 2001 with a wholly-owned
subsidiary of Zarlink, pursuant to which the subsidiary leases 49,500 square feet at
MNLs premises at Portskewett Business Park, Portskewett Monmouthshire, on terms
reflecting prevailing market conditions. The term of the lease is five years. Both parties
have the right to terminate the lease on February 2, 2004, or at any time thereafter upon
at least twelve months prior written notice. The base rent is £272,250 per annum.

c)          Intellectual
Property License Agreement between Zarlink and Mitel Networks

On February 16, 2001, Mitel Networks
and Zarlink entered into an Intellectual Property License Agreement dated February 16,
2001 pursuant to which Zarlink licensed to Mitel Networks the intellectual property
retained by Zarlink. Under the agreement, Zarlink granted to Mitel Networks a non
personal, limited, assignable, royalty free, perpetual, non exclusive worldwide license
for the licensed intellectual property to make, use, develop, offer for sale, or otherwise
exploit for the licensed products. Zarlink is precluded from assigning any of the licensed
intellectual property in whole or in part, or from granting a security interest therein,
to any party engaged in the sale of products or services that are competitive with Mitel
Networks. Mitel Networks is authorized to grant sublicenses of the intellectual property
to permit it to carry on its business, except that it cannot sublicense the licensed
intellectual property to allow the manufacturing of semiconductors other than for use in
its business.

The term of the license is for the
entire term of the property rights under which the licenses are granted. If Zarlink is
wound up or otherwise ceases its operations, ceases to carry on business, or takes any
material steps with regard to bankruptcy proceedings, then all right, title and interest
in and to the licensed intellectual property shall be deemed to be transferred over to
Mitel Networks.

The Intellectual Property License
between Zarlink and Mitel Networks dated February 16, 2001 was amended on October 24,
2001. The amendment provides for an expansion of the license granted to Mitel Networks
with respect to licensed intellectual property existing as of February 16, 2001 or created
thereafter to complete the development of the MT92102 VoIP device in that



| | - 84
- | 
| | ------ | 

---

it allows Mitel Networks to
sublicense such intellectual property to a third party foundry to permit the manufacture
of the MT92102 VoIP device for sale by such foundry to Mitel Networks for its business, as
well as to the foundrys other customers for their business requirements, but
restricted to applications based on Mitel Networks converged access products.

d)          Non
Competition and Non Solicitation Agreement between Zarlink and its
          subsidiaries, Mitel Systems (now Wesley Clover), Mitel Networks and its
          subsidiaries, MRPC, Mitel Knowledge and Dr. Matthews dated February 16, 2001

The Non Competition and Non
Solicitation Agreement provides that (a) Zarlink, on behalf of itself and its
subsidiaries, will not, for a period of five years carry on or be associated with any
undertaking which is competitive with Mitel Networks, except that Zarlink (and its
subsidiaries) may hold securities in a competitive business provided such securities do
not exceed 5% of the outstanding equity securities of such company; and (b) Mitel Networks
will not, for a period of five years, grant or permit in any manner any firm to compete
with the semiconductor business of Zarlink , or permit any party to use any of
Zarlinks licensed intellectual property except as permitted under the Intellectual
Property License Agreement between Zarlink and Mitel Networks dated February 16, 2001. The
foregoing restriction does not preclude Mitel Networks from investing in a corporation,
firm or entity which competes with Zarlink or any entity within Zarlinks
semiconductor group provided that such interest does not exceed 33% of the outstanding
voting equity and provided that no use of licensed intellectual property is granted other
than as is permitted pursuant to the Intellectual Property License Agreement.

Agreements with Key
Employees:

a)          Amended
and Restated Employment Agreement between Mitel Networks and Paul           Butcher

Effective as of February 16, 2001,
Mitel Networks executed an Amended and Restated Employment Agreement with Paul Butcher
pursuant to which Mr. Butcher was employed as President and Chief Operating Officer of
Mitel Networks, reporting to the CEO. The agreement is for an indefinite term, subject to
termination in accordance with its terms. In addition to a base salary, car allowance,
stock options and senior management benefits and perquisites, Mr. Butcher is entitled to
receive a bonus payment on each anniversary of his February 16th start date provided that
specific objectives, to be defined by Mitel Networks, are met. The agreement details the
compensation that Mr. Butcher would receive were his employment to terminate under various
circumstances, and contains provisions addressing confidentiality, non-disclosure,
non-competition and ownership of intellectual property.

By way of a private letter agreement
between Mr. Butcher and Dr. Matthews dated March 1, 2002, Dr. Matthews granted to Mr.
Butcher options to purchase common shares in Mitel Networks from the holdings of Wesley
Clover. Such options vest in 25% increments on the first, second, third and fourth
anniversaries of Mr. Butchers February 16, 2001 start date.

b)          Amended
and Restated Employment Agreement between Mitel Networks and Donald           Smith

Effective as of April 17, 2001, Mitel
Networks executed an Amended and Restated Employment Agreement with Donald Smith pursuant
to which Mr. Smith was employed as CEO of Mitel Networks, reporting to the Chairman of the
board of directors of Mitel Networks. The



| | - 85
- | 
| | ------ | 

---

agreement is for an indefinite term,
subject to termination in accordance with its terms. In addition to a base salary, car
allowance, stock options and senior management benefits and perquisites, Mr. Smith is
entitled to receive an annual bonus payment in an amount determined by the Compensation
Committee of Mitel Networks board of directors. The agreement details the
compensation that Mr. Smith would receive were his employment to terminate under various
circumstances, and contains provisions addressing confidentiality, non-disclosure,
non-competition and ownership of intellectual property.

By way of a private letter agreement
between Mr. Smith and Dr. Matthews dated March 1, 2002, Dr. Matthews granted to Mr. Smith
options to purchase common shares in Mitel Networks from the holdings of Wesley Clover.
Such options vest in 25% increments on the first, second, third and fourth anniversaries
of Mr. Smiths April 2, 2001 start date.

Agreements with Others:

a)           Union Agreement between
Mitel Networks Solutions, Inc. (MNSI) and           the IBEW

Mitel Networks indirect
wholly-owned U.S. subsidiary, MNSI, has negotiated a national union contract with the IBEW
which assures Mitel Networks of obtaining the services of its unionized field technician
employees in the U.S. and includes a provision which precludes the employees from going on
strike. The terms and conditions of the contract are typical in the industry. The current
contract expires in the Fall of 2004 and Mitel Networks US subsidiary, MNSI, and the
IBEW will enter into good faith collective bargaining in Summer 2004 with the intent of
consummating a new multi-year agreement.

b)           Integrated
Communications Solutions R&D Project Agreement between Mitel           Networks,
Mitel Knowledge, March Networks and Her Majesty the Queen in Right of           Canada.

On October 10, 2002, Mitel Networks,
March Networks and Mitel Knowledge signed an agreement with the Government of Canada (the
TPC Agreement) that provides for financing, through the Technology
Partnerships Canada program, of up to CDN$60 million for certain March Networks and
Mitel Networks R&D activities over a three year period. Each party is severally
liable for its portion of the R&D work described in the TPC Agreement. The TPC
Agreement contains certain restrictions on the exploitation outside of Canada of the
intellectual property developed through the project. In exchange for the financing
received by Mitel Networks under the TPC Agreement, Mitel Networks is required, as of
September 30th in each of 2002, 2003 and 2004, to issue warrants to Her Majesty the Queen
in Right of Canada. The warrants are exercisable on a one-for-one basis for common shares
for no additional consideration. The number of warrants to be issued is equal to the
amount of contributions paid to Mitel Networks under the TPC Agreement in the immediately
preceding 12-month period, divided by the fair market value of Mitel Networks common
shares as of the applicable date.

The original expiry date of the TPC
Agreement was extended by the parties, from September 30, 2004 to March 31, 2005, by an
Amendment Agreement entered into between the parties dated April 27, 2004.



| | - 86
- | 
| | ------ | 

---

c)          Agreement
between Mr. Peter Charbonneau and Dr. Matthews

By way of an oral agreement between
Mr. Peter Charbonneau and Dr. Matthews on February 16, 2001, Dr. Matthews granted to Mr.
Charbonneau options to purchase common shares in Mitel Networks from the holdings of
Wesley Clover. Such options vest in 25% increments on the first, second, third and fourth
anniversaries of the grant date.

D. Exchange Controls

There are no government laws, decrees
or regulations in Canada which restrict the export or import of capital or, subject to the
following sentence, which affect the remittance of dividends or other payments to
nonresident holders of Mitel Networks common shares. However, any such remittance to
a resident of the United States is generally subject to non-resident tax pursuant to
Article X of the 1980 Canada-United States Income Tax Convention. See Item 10.E
Taxation for additional discussion on tax matters.

There are currently no limitations
  of general application imposed by Canadian federal or provincial laws on the
  rights of non-residents of Canada to hold or vote Mitel Networks common
  shares. There are also no such limitations imposed by the articles of incorporation
  with respect to Mitel Networks common shares. There are, however, certain
  requirements on the acquisition of control of Mitel Networks securities
  by non-residents of Canada. The Investment Canada Act requires notification
  to and, in certain cases, advance review and approval by, the Government of
  Canada, of the acquisition by a non-Canadian of control
  of a Canadian business, all as defined in the Investment Canada
  Act. Generally speaking, in order for an acquisition to be subject to advance
  review and approval, the asset value of the Canadian business being acquired
  must meet or exceed certain monetary thresholds.

E. Taxation

The following discussion is not
intended to be, nor should it be construed to be, legal or tax advice to any holder or
prospective holder of common shares of Mitel Networks and no opinion or representation
with respect to the Canadian or United States federal, state, provincial, local or other
income tax consequences to any such holder or prospective holder is made. Accordingly,
holders and prospective holders of common shares of Mitel Networks should consult their
own tax advisors about the federal, state, provincial, local and foreign tax consequences
of purchasing, owning and disposing of common shares of Mitel Networks.

CANADIAN FEDERAL INCOME TAX
CONSEQUENCES

This summary is based upon the
current provisions of the Income Tax Act (Canada), the regulations thereunder, the current
publicly announced administrative and assessing policies of the Canada Revenue Agency, and
all specific proposals (the Tax Proposals) to amend the Income Tax Act and
regulations announced by the Minister of Finance (Canada) prior to the date hereof. This
discussion is not exhaustive of all possible Canadian federal income tax consequences and,
except for the Tax Proposals, does not take into account or anticipate any changes in law,
whether by legislative, governmental or judicial action, nor does it take into account
provincial or foreign tax considerations which may differ significantly from those
discussed herein.



| | - 87
- | 
| | ------ | 

---

The summary applies to beneficial
owners of common shares who, for the purposes of the Income Tax Act, are residents of the
United States and are not resident in Canada, and who hold common shares of Mitel Networks
as capital property.

Dividends

The Income Tax Act provides that
dividends and other distributions deemed to be dividends paid or deemed to be paid by a
Canadian resident corporation (such as Mitel Networks) to a non-resident of Canada shall
be subject to a non-resident withholding tax equal to 25% of the gross amount of the
dividend or deemed dividend.

Provisions in the Income Tax Act
relating to dividend and deemed dividend payments to and capital gains realized by
non-residents of Canada who are residents of the United States are subject to the 1980
Canada-United States Income Tax Convention.

Article X of the 1980 Canada-United
States Income Tax Convention provides that the rate of Canadian non-resident withholding
tax on dividends or deemed dividends paid to a United States corporation that beneficially
owns at least 10% of the voting shares of the corporation paying the dividend shall not
exceed 5% of the dividend or deemed dividend, and in any other case, the rate of
non-resident withholding tax shall not exceed 15% of the dividend or deemed dividend.

Disposition of Shares

The Income Tax Act provides that a
non-resident person is subject to tax in Canada on the disposition of taxable
Canadian property. Common shares of Mitel Networks are considered to be
taxable Canadian property as defined in the Income Tax Act. Therefore, under
the Income Tax Act, a non-resident would be subject to tax in Canada on the disposition of
common shares of Mitel Networks. Article XIII of the 1980 Canada-United States Income Tax
Convention provides that gains realized by a United States resident on the disposition of
shares of a Canadian corporation may not generally be taxed in Canada unless the value of
the Canadian corporation is derived principally from real property situated in Canada.

Generally, certain filing and
reporting obligations exist where a non-resident of Canada disposes of taxable Canadian
property. In particular, the non-resident must make an application to the Canada Revenue
Agency in advance of the disposition for the purpose of obtaining a certificate issued by
the Canada Revenue Agency pursuant to section 116 of the Income Tax Act. If the
non-resident fails to secure such certificate from the Canada Revenue Agency in advance of
the disposition, the purchaser is required to withhold and remit to the Canada Revenue
Agency 25% of the amount otherwise payable to the non-resident.

UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES

The following discussion is based on
the U.S. Internal Revenue Code of 1986, as amended (the Code), existing and
proposed Treasury Regulations, published Internal Revenue Service rulings, published
administrative positions of the Internal Revenue Service and court decisions that are
currently applicable, any or all of which could be materially and adversely changed,
possibly on a retroactive basis, at any time. In addition, this discussion does not
consider the potential effects, both adverse and beneficial, of any recently proposed
legislation that, if



| | - 88
- | 
| | ------ | 

---

enacted, could be applied, possibly
on a retroactive basis, at any time. In addition, this discussion does not cover any
state, local or foreign tax consequences. The following is a discussion of United States
federal income tax consequences, under current law, generally applicable to a U.S. Holder
(as defined below) of common shares of Mitel Networks who holds such shares as capital
assets. This discussion does not address all potentially relevant federal income tax
matters and it does not address consequences peculiar to persons subject to special
provisions of federal income tax law, such as those described below that are excluded from
the definition of a U.S. Holder.

U.S. Holder

As used herein, a U.S.
Holder includes a holder of common shares of Mitel Networks who is a citizen or
resident of the United States, a corporation created or organized in or under the laws of
the United States or of any political subdivision thereof, any United States entity which
is taxable as a corporation for United States tax purposes and any other person or entity
whose ownership of common shares of Mitel Networks is effectively connected with the
conduct of a trade or business in the United States. A U.S. Holder does not include
persons subject to special provisions of federal income tax law, such as tax-exempt
organizations, qualified retirement plans, financial institutions, insurance companies,
real estate investment trusts, regulated investment companies, broker-dealers, nonresident
alien individuals or foreign corporations whose ownership of common shares is not
effectively connected with the conduct of a trade or business in the United States and
shareholders who acquired their shares through the exercise of employee stock options or
otherwise as compensation.

Dividends

Except as otherwise discussed below
under Passive Foreign Investment Company Considerations, U.S. Holders
receiving dividend distributions (including constructive dividends) with respect to common
shares of Mitel Networks are required to include in gross income for United States federal
income tax purposes the gross amount of such distributions to the extent that Mitel
Networks has current or accumulated earnings and profits, without reduction for any
Canadian income tax withheld from such distributions. Such Canadian tax withheld may be
credited, subject to certain limitations, against the U.S. Holders United States
federal tax liability or, alternatively, may be deducted in computing the U.S.
Holders federal taxable income (but in the case of individuals, only if they itemize
deductions). See Foreign Tax Credit. To the extent that distributions exceed
current or accumulated earnings and profits of Mitel Networks, they will be treated first
as a return of capital up to the U.S. Holders adjusted basis in the common shares
(which adjusted basis must therefore be reduced) and thereafter as a gain from the sale or
exchange of the common shares. Preferential tax rates for long-term capital gains are
applicable to a U.S. Holder that is an individual, estate or trust. Moreover,
qualified dividends received by U.S. Holders who are individuals, during tax
years beginning before January 1, 2009, from any qualified foreign corporation
are subject to a preferential tax rate, provided such individual U.S. Holder meets a
certain holding period requirement. A qualified foreign corporation is
generally any corporation formed in a foreign jurisdiction which has a comprehensive
income tax treaty with the United States or, if not, the dividend is paid with respect to
stock that is readily tradable on an established United States market. However, a
qualified foreign corporation excludes a foreign corporation that is a foreign
personal holding



| | - 89
- | 
| | ------ | 

---

company, a foreign investment
company, or a passive foreign investment company for the year the dividend is paid or the
previous year. Mitel Networks believes that it qualifies as a qualified foreign
corporation. There are currently no preferential tax rates for a U.S. Holder that is
a corporation.

In general, dividends paid on common
shares of Mitel Networks will not be eligible for the same dividends received deduction
provided to corporations receiving dividends from certain United States corporations. A
U.S. Holder which is a corporation may, under certain circumstances, be entitled to a 70%
deduction of the United States source portion of dividends received from Mitel Networks
(unless Mitel Networks is a foreign personal holding company as defined in
Section 552 of the Code, or a passive foreign investment company as defined
below) if such U.S. Holder owns shares representing at least 10% of the voting power and
value of Mitel Networks. The availability of this deduction is subject to several complex
limitations that are beyond the scope of this discussion.

Foreign Tax Credit

A U.S. Holder who pays (or has
withheld from distributions) Canadian or other foreign income tax with respect to the
ownership of common shares of Mitel Networks may be entitled, at the election of the U.S.
Holder, to either a tax credit or a deduction for such foreign tax paid or withheld. This
election is made on a year-by-year basis and generally applies to all foreign income taxes
paid by (or withheld from) the U.S. Holder during that year. There are significant and
complex limitations that apply to the credit, among which is the general limitation that
the credit cannot exceed the proportionate share of the U.S. Holders United States
income tax liability that the U.S. Holders foreign source income bears to his or its
worldwide taxable income. In the determination of the application of this limitation, the
various items of income and deduction must be classified into foreign and domestic
sources. Complex rules govern income such as passive income, high
withholding tax interest, financial services income, shipping
income and certain other classifications of income. In addition, U.S. Holders that
are corporations and that own 10% or more of the voting stock of Mitel Networks may be
entitled to an indirect foreign tax credit under Section 902 of the Code with
respect to the payment of dividends by Mitel Networks under certain circumstances and
subject to complex rules and limitations. The availability of the foreign tax credit and
the application of the limitations on the foreign tax credit are fact specific and holders
and prospective holders of common shares should consult their own tax advisors regarding
their individual circumstances.

Disposition of Shares

Except as otherwise discussed below
under Passive Foreign Investment Company Considerations, a gain or loss
realized on a sale of common shares will generally be a capital gain or loss, and will be
long-term if the shareholder has a holding period of more than one year. The amount of
gain or loss recognized by a selling U.S. Holder will be measured by the difference
between (i) the amount realized on the sale and (ii) his or its tax basis in the common
shares. Gains and losses are netted and combined according to special rules in arriving at
the overall capital gain or loss for a particular tax year. Deductions for net capital
losses are subject to significant limitations. Individual U.S. Holders may carryover
unused capital losses to offset capital gains realized in subsequent years. For U.S.
Holders that are corporations (other than



| | - 90
- | 
| | ------ | 

---

corporations subject to Subchapter S
of the Code), any unused capital losses may only be carried back three and forward five
years from the loss year to offset capital gains until such net capital losses are
exhausted.

Foreign Personal
Holding Company Considerations

Special rules apply to a U.S. Holder
of a foreign personal holding company or FPHC as defined in
Section 552 of the Code. Mitel Networks will not be classified as a FPHC for U.S. federal
income tax purposes unless (i) five or fewer individuals who are U.S. citizens or
residents own or are deemed to own more than 50% of the total voting power of all classes
of stock entitled to vote or the total value of Mitel Networks stock; and (ii) at least
60% (or 50% in certain cases) of Mitel Networks gross income consists of
foreign personal holding company income, which generally includes passive
income such as dividends, interest, gains from the sale or exchange of stock or
securities, certain rents, and royalties. Mitel Networks believes that it is not a FPHC;
however, no assurance can be provided that Mitel Networks will not be classified as a FPHC
in the future.

Passive Foreign
Investment Company Considerations

If Mitel Networks is a passive
foreign investment company or PFIC as defined in Section 1297 of the
Code, U.S. Holders will be subject to U.S. federal income taxation under one of two
alternative tax regimes at the election of each such U.S. Holder. Section 1297 of the Code
defines a PFIC as a corporation that is not formed in the United States and either (i) 75%
or more of its gross income for the taxable year is passive income, which
generally includes interest, dividends and certain rents and royalties or (ii) the average
percentage, by fair market value (or, if Mitel Networks elects, adjusted tax basis), of
its assets that produce or are held for the production of passive income is
50% or more. The rules applicable to a FPHC take priority over the rules applicable to a
PFIC, so that amounts includable in gross income under the FPHC rules will not be taxable
again under the PFIC rules. Mitel Networks does not believe that it will be a PFIC for the
current fiscal year or for future years. Whether Mitel Networks is a PFIC in any year and
the tax consequences relating to PFIC status will depend on the composition of Mitel
Networks income and assets, including cash. U.S. Holders should be aware, however,
that if Mitel Networks becomes a PFIC, it may not be able or willing to satisfy
record-keeping requirements that would enable U.S. Holders to make an election to treat
Mitel Networks as a qualified electing fund for purposes of one of the two
alternative tax regimes applicable to a PFIC. U.S. Holders or potential shareholders
should consult their own tax advisor concerning the impact of these rules on their
investment in Mitel Networks.

F. Dividends and
Paying Agents

Not applicable.

G. Statement by Experts

Not applicable.



| | - 91
- | 
| | ------ | 

---

H. Documents on Display

Mitel Networks is subject to the
informational requirements of the United States Securities Exchange Act of 1934, as
amended, such as to file reports and other information with the SEC. Shareholders may read
and copy any of Mitel Networks reports and other information at, and obtain copies
upon payment of prescribed fees from, the Public Reference Room maintained by the SEC at
450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330.

Mitel Networks is not required to
file reports and other information with any securities commissions in Canada.

As a foreign private issuer, Mitel
Networks is exempt from the rules under the United States Securities Exchange Act of 1934,
as amended, prescribing the furnishing and content of proxy statements to shareholders.
Mitel Networks has included in this annual report certain information disclosed in its
proxy statement prepared under applicable Canadian law.

Mitel Networks will provide without
charge to each person, including any beneficial owner, on the written or oral request of
such person, a copy of any or all documents referred to above which have been or may be
incorporated by reference in this annual report (not including exhibits to such
incorporated information that are not specifically incorporated by reference into such
information). Requests for such copies should be directed to Mitel Networks at the
following address: Mitel Networks Corporation, 350 Legget Drive, Ottawa, Ontario, Canada,
K2K 2W7 Attention: Corporate Secretary, telephone number: 613-592-2122.

I. Subsidiary
Information

Not applicable.

# Item 11.
 Quantitative and Qualitative Disclosures About Market Risk

Market risk represents the potential
risk of loss in the future earnings of Mitel Networks due to adverse changes in financial
markets. Mitel Networks is exposed to market risk from changes in its common share price,
foreign exchange rates and interest rates. Inflation has not had a significant impact on
Mitel Networks results of operations.

Equity Price Risk

As described in Item 4.A of this
annual report and in the notes to the consolidated financial statements contained in Item
18 of this annual report, during Fiscal 2004 Mitel Networks issued convertible, redeemable
preferred shares of the Company which are redeemable at the holders option. The
redemption price, other than on the exercise of put rights, is equal to a cash payment of
CDN$1 per preferred share, plus any declared but unpaid dividends, plus the then current
fair market value of the common shares into which the preferred shares are convertible.
The redemption feature that is indexed to the common share price of the Company, which is
recorded as a derivative instrument in the financial statements, will be marked to market
in each reporting period, with changes in fair value recorded in the consolidated
statement of operations. At April



| | - 92
- | 
| | ------ | 

---

25, 2004, a hypothetical 73% increase
in the common share price of Mitel Networks, which is based on the historical one year
volatility of the Company, would increase net loss by $21 million while a 73% decrease in
the common share price would decrease net loss by an equivalent amount (April 27, 2003
 not applicable).

Foreign Currency Risk

To manage its foreign currency risk,
Mitel Networks uses certain derivative financial instruments including foreign exchange
forward contracts and foreign exchange swap contracts from time to time, that have been
authorized pursuant to policies and procedures approved by the board of directors. Mitel
Networks does not hold or issue financial instruments for trading or speculative purposes.
Mitel Networks currently uses foreign currency forward and swap contracts to reduce the
exposure to foreign currency risk. The most significant foreign exchange exposures for
Mitel Networks relate to the U.S. dollar and the U.K. pound sterling. At April 25, 2004,
Mitel Networks recorded unrealized gains of $0.2 million (April 27, 2003  $0.3
million) on its forward contracts. The unrealized gains and losses are 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 April 25, 2004, if it became necessary
to unwind these contracts. Additional potential losses in the net fair value of these
contracts, assuming a 5% appreciation in the Canadian dollar against all currencies, at
April 25, 2004, would have been immaterial (April 27, 2003  immaterial). Management
believes that the established hedges are effective against its foreign currency
denominated assets and liabilities, and that potential future losses from these hedges
being marked to market would be largely offset by gains on the underlying hedged
positions.

Interest Rate
  Risk

In accordance with Company policy,
cash equivalent and short-term investment balances are primarily comprised of high-grade
commercial paper and money market instruments with original maturity dates of less than
one month. Due to the short-term maturity of its investments, Mitel Networks is not
subject to significant interest rate risk.

Mitel Networks is exposed to interest
rate risk on borrowings from its credit and loan facilities, and in Fiscal 2003 was
exposed to additional interest rate risk on demand loans from companies controlled by Dr.
Matthews. In Fiscal 2004 the related party demand loans were converted to common shares of
the Company, and thus no longer present an interest risk exposure as at April 25, 2004.
The credit and loan facilities bear interest based on LIBOR, U.S. base rate, Canadian
dollar prime rate, or Canadian dollar Bankers Acceptances. The related party loans
bore interest based on prime rate. Based on projected advances under the credit and loan
facilities, adverse changes in interest rates of 100 basis points and 200 basis points
would not have a material adverse effect on Mitel Networks financial position or
result of operations. The interest rates on Mitel Networks obligations under capital
leases and mortgage loans are fixed and therefore not subject to interest rate risk.

The estimated potential losses
discussed previously assume the occurrence of certain adverse market conditions. They do
not consider the potential effect of favorable changes in market factors and do not
represent projected losses in fair value that Mitel Networks expects to incur.



| | - 93
- | 
| | ------ | 

---

Any future financial impact would be
based on actual developments in global financial markets. Management does not foresee any
significant changes in the strategies used to manage interest and foreign exchange rate
risks in the near future.

# Item 12.  Description
of Securities Other than Equity Securities

Not applicable.

PART II

# Item 13.  Defaults,
Dividend Arrearages and Delinquencies

Not applicable.

# Item 14. Material
Modifications to the Rights of Security Holders and Use of  Proceeds

Not applicable.

Item 15. Controls and
Procedures

Mitel Networks management
carried out an evaluation, with the participation of the CEO and CFO, of the effectiveness
of Mitel Networks disclosure controls and procedures as of April 25, 2004. Based
upon that evaluation, Mitel Networks CEO and CFO concluded that Mitel Networks
disclosure controls and procedures were effective to ensure that information required to
be disclosed by Mitel Networks in reports that it files or submits under the United States
Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within
the time periods specified in the rules and forms of the United States Securities and
Exchange Commission.

There has not been any change in
Mitel Networks internal control over financial reporting in connection with the
evaluation required by Rule 13A-15(d) under the Exchange Act that occurred during the
fiscal year ended April 25, 2004 that has materially affected, or is reasonably likely to
materially affect, Mitel Networks internal control over financial reporting.

Item 16. [Reserved]

Item 16A. Audit
Committee Financial Expert

Mitel Networks Board of
Directors has determined that Peter Charbonneau, member of the audit committee of the
Board of Directors, is an audit committee financial expert as defined by the SEC, and is
independent as defined in the listing standards of the New York Stock Exchange.



| | - 94
- | 
| | ------ | 

---

Item 16B. Code of
Ethics

Mitel Networks has adopted a code of
ethics that applies to all of its employees, including its CEO, CFO and Controller. Mitel
Networks will provide without charge to each person, on the written or oral request of
such person, a copy of such code of ethics. Requests for such copies should be directed to
Mitel Networks at the following address: Mitel Networks Corporation, 350 Legget Drive,
Ottawa, Ontario, Canada, K2K 2W7 Attention: Corporate Secretary, telephone number:
613-592-2122. As of the date hereof, there has not been any amendment or waiver of any
provision of the code of ethics.

Item 16C. Principal
Accountant and Fees

Aggregate audit fees, audit-related
fees, tax fees and the aggregate of all other fees billed to Mitel Networks by Deloitte
& Touche LLP during the fiscal years ending April 25, 2004 and April 27, 2003 amounted
to the following:

|                  
|------------------
|
|                  
|                  
|Audit Fees        
|Audit-Related Fees
|Tax Fees          
|All Other Fees    
|                  
|Total             
|                  

Audit fees relate to the audit of the
Companys annual consolidated financial statements.

Audit-related fees relate to the
audit of the Companys defined benefit and defined contribution pension plans in
Canada, the United States, and United Kingdom. It also includes fees for accounting
consultations and advisory services with respect to Sarbanes-Oxley internal controls and
disclosure assistance.

Tax fees relate to assistance with
tax compliance, expatriate tax return preparation, tax planning and various tax advisory
services.

All other fees relate primarily to
advisory services performed with respect to the Companys stock option cancellation
and regrant.

Audit committee pre-approval process:

From time to time, management of the
Company recommends to and requests approval from the audit committee for audit and
non-audit services to be provided by the Companys auditors. The audit committee
considers such requests on a quarterly basis, and if acceptable, pre-approves such audit
and non-audit services. During such deliberations, the audit committee assesses, among
other factors, whether the services requested would be considered prohibited
services as



| | - 95
- | 
| | ------ | 

---

contemplated by the US Securities and
Exchange Commission, and whether the services requested and the fees related to such
services could impair the independence of the auditors.

Since the implementation of the audit
committee pre-approval process in December 2003, all audit and non-audit services rendered
by the Companys auditors have been pre-approved by the audit committee.

# Item 16D.  Exemptions
from the Listing Standards for Audit Committees

Not applicable.

# Item 16E. Purchases
of Equity Securities by the Issuer and Affiliated Purchasers

Not applicable.

PART III

Item 17. Financial
Statements

Not applicable, as Mitel Networks has
elected to provide financial statements pursuant to Item 18. Financial
Statements.

Item 18. Financial
Statements

Mitel Networks consolidated
financial statements commence on page F-1 of this annual report. These financial
statements are expressed in United States dollars and were prepared in accordance with
U.S. GAAP.



| | - 96
- | 
| | ------ | 

---

Item 19. Exhibits

|1. |  | Articles
of Incorporation and bylaws as currently in effect:
|-- |  | ------------------------------------------------------------

| | 1.1 |  | Articles of
      Incorporation and amendments thereto prior to April 22, 2004
| | --- |  | ------------------------------------------------------------------------------

| | 1.2 |  | Articles
of Amendment dated April 22, 2004
| | --- |  | ------------------------------------------

| | 1.3 |  | Articles
of Amendment dated April 23, 2004
| | --- |  | ------------------------------------------

| | 1.4 |  | Bylaws
| | --- |  | ------

|2. |  | Instruments
defining the rights of holders of equity securities being           registered:
|-- |  | -------------------------------------------------------------------------------------------

| | 2.1 |  | See
Articles of Incorporation described above in Exhibit 1.1, Articles of Amendment dated
April 22, 2004 described above in Exhibit 1.2, and Articles of Amendment dated April 23,
2004 described above in Exhibit 1.3
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2.2 |  | Specimen
Common Share certificate*
| | --- |  | ----------------------------------

| | 2.3 |  | Specimen
Series A Share certificate
| | --- |  | -----------------------------------

| | 2.4 |  | Specimen
Series B Share certificate
| | --- |  | -----------------------------------



| | - 97
- | 
| | ------ | 

---



|4. |  | Material
contracts:
|-- |  | -------------------

| | 4.1 |  | Shareholders
      Agreement between Mitel Networks, Mitel Knowledge, PTIC, Zarlink, Mitel
      Systems (now Wesley Clover), WCC (now Wesley Clover), EdgeStone, and Dr.
      Matthews, dated April 23, 2004**
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.2 |  | Class A
      Convertible Preferred Share Subscription Agreement between Mitel Networks
      and EdgeStone dated April 23, 2004++**
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------

| | 4.3 |  | Registration
Rights Agreement between Mitel Networks, Mitel Knowledge, PTIC, Zarlink, EdgeStone, Mitel
Systems (now Wesley Clover) and WCC (now Wesley Clover), dated April 23, 2004**
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.4 |  | Receivables
Purchase Agreement between the Mitel Group and The             Canada Trust Company
effective date of April 16, 2004++
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------

| | 4.5 |  | Amended
and Restated Credit Agreement between Mitel Networks, the Lenders from time to time and
Bank of Montreal as Administrative Agent dated April 21, 2004++, as amended July 24,
2004
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.6 |  | Loan
Agreement between MNL and Export Development Canada dated March 4, 2003, as amended***
| | --- |  | -------------------------------------------------------------------------------------------

| | 4.7 |  | Chattel
Mortgage Loan Agreement between MNL and Barclays Bank PLC dated October 22, 2001*
| | --- |  | -----------------------------------------------------------------------------------------

| | 4.8 |  | Chattel
Mortgage Loan Agreement between MNL and Barclays Bank PLC dated April 25, 2003***
| | --- |  | -----------------------------------------------------------------------------------------

| | 4.9 |  | Real
Property Loan Facility between MNL and Barclays Bank PLC dated December 13, 2001, secured
by a legal charge dated January 24, 2002*
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------

| | 4.10 |  | Business
Overdraft and Ancillary Facility Agreement between MNL and Barclays Bank PLC dated August
30, 2002***
| | ---- |  | --------------------------------------------------------------------------------------------------------------

| | 4.11 |  | Supply
Agreement between Mitel Networks and its subsidiaries and BreconRidge and its
subsidiaries dated August 30, 2001, and related amendment dated February 27, 2003.*+
| | ---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.12 |  | Amendment
to the Supply Agreement between Mitel Networks and its subsidiaries and BreconRidge and
its subsidiaries dated February 27, 2003***
| | ---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

| | 4.13 |  | Sublease
Agreement between Mitel Networks Corporation and BreconRidge dated August 31, 2001 and
First Amendment of Sublease Agreement between Mitel Networks and BreconRidge dated May
31, 2002*+
| | ---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - 98
- | 
| | ------ | 

---



| | 4.14 |  | Lease Agreement
      between MNL and BreconRidge dated September 14, 2001*
| | ---- |  | ---------------------------------------------------------------------------

| | 4.15 |  | Asset
Sale Agreement between Mitel Networks and BreconRidge MSCdated August 31, 2001 *+
| | ---- |  | ---------------------------------------------------------------------------------------

| | 4.16 |  | Supply
Agreement between Mitel Networks and Zarlink (formerly Mitel Corporation) dated February
16, 2001 and related amendment dated October 24, 2001*+, amended by Amending Agreement
dated April 23, 2004
| | ---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.17 |  | Lease Agreement
      between MNL and Zarlink Semiconductor Limited (formerly Mitel Semiconductor Limited),
      a subsidiary of Zarlink dated February 2, 2001*
| | ---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.18 |  | Intellectual
Property License Agreement between Mitel Networks and Zarlink (formerly Mitel
Corporation) dated February 16, 2001* +
| | ---- |  | ----------------------------------------------------------------------------------------------------------------------------------

| | 4.19 |  | Amendment
to the Intellectual Property License Agreement between             Mitel Networks and
Zarlink dated October 24, 2001*
| | ---- |  | -------------------------------------------------------------------------------------------------------------------------------

| | 4.20 |  | Non
 Competition  and Non  Solicitation  Agreement  between  Zarlink             (formerly Mitel
  Corporation),   Mitel   Semiconductor   V.N.  Inc.,   Mitel             Semiconductor
Limited, Mitel Semiconductor Inc., 3755461 Canada Inc.             (now Wesley  Clover),
 Mitel  Networks  and MRPC dated  February 16, 2001*
| | ---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.21 |  | Lease
Agreement between Mitel Networks and MRPC dated March 27,             2001*
| | ---- |  | ---------------------------------------------------------------------------------

| | 4.22 |  | Strategic
Alliance Agreement between Mitel Networks and March Networks dated September 21, 2001*,
as amended September 20, 2003
| | ---- |  | -------------------------------------------------------------------------------------------------------------------------------

| | 4.23 |  | Amended
and Restated Employment Contract between Mitel Networks and Donald Smith dated April 17,
2001* +
| | ---- |  | --------------------------------------------------------------------------------------------------------

| | 4.24 |  | Amended
and Restated Employment Contract between Mitel Networks and Paul Butcher dated February
16, 2001* +
| | ---- |  | -----------------------------------------------------------------------------------------------------------

| | 4.25 |  | Union
Agreement between MNSI (formerly Mitel Communications Solutions,  Inc.)             and IBEW
expiring on September 30,  
      2004* +
| | ---- |  | --------------------------------------------------------------------------------------------------------------------------------------------

| | 4.26 |  | Integrated
Communications Solutions R&D Project Agreement between Mitel Networks, Mitel
Knowledge, March Networks and Her Majesty the Queen in Right of Canada dated October 10,
2002 *+, as amended on March 27, 2003 and May 2, 2004 respectively
| | ---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|8.1 |  | Subsidiaries
of Mitel Networks Corporation*
|--- |  | -------------------------------------------



| | - 99
- | 
| | ------ | 

---



| | 12.1 |  | Certification
by CEO pursuant to Section 302 of the Sarbanes-Oxley             Act of 2002
| | ---- |  | ------------------------------------------------------------------------------------------

| | 12.2 |  | Certification
by CFO pursuant to Section 302 of the Sarbanes-Oxley             Act of 2002
| | ---- |  | ------------------------------------------------------------------------------------------

| | 13.1 |  | Certification
by CEO pursuant to Section 906 of the Sarbanes-Oxley             Act of 2002
| | ---- |  | ------------------------------------------------------------------------------------------

| | 13.2 |  | Certification
by CFO pursuant to Section 906 of the Sarbanes-Oxley             Act of 2002
| | ---- |  | ------------------------------------------------------------------------------------------

| | * |  | Filed
as an exhibit to the Registration Statement on Form 20-F, as amended       (File No.
0-49984) of Mitel Networks and incorporated herein by reference.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------

| | ** |  | Filed
on May 3, 2004 as an exhibit to a Schedule 13D (Mitel Networks as       issuer) by
EdgeStone Capital Equity Fund II-A, L.P.; EdgeStone Capital       Equity Fund II-US,
L.P.; EdgeStone Capital Equity Fund II-US-Inst., L.P.;       National Bank Financial & Co.
Inc.; EdgeStone Capital Equity Fund II-A GP,       L.P.; EdgeStone Capital Equity Fund II
US GP, L.P.; EdgeStone Capital       Equity Fund II-US-Inst. GP, L.P.; EdgeStone Capital
Equity Fund II-A GP,       Inc.; EdgeStone Capital Equity Fund II-US Main GP, Inc.;
EdgeStone Capital       Equity Fund II-US-Inst. GP, Inc.; Samuel L. Duboc; Gilbert S.
Palter;       Bryan W. Kerdman; Sandra Cowan; and EdgeStone Capital Equity Fund II-B GP,
      Inc. and incorporated herein by reference.
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | *** |  | Filed
as an exhibit to the annual report on Form 20-F of Mitel Networks for the year ended
April 27, 2003 and incorporated herein by reference.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------

| | + |  | Portions
of this document have been granted Confidential Treatment by the Secretary of
the Securities and Exchange Commission.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------

| | ++ |  | Portions
of this document are subject to a pending Confidential Treatment Request filed with the
Secretary of the Securities and Exchange Commission.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



| | - 100
- | 
| | ------- | 

---

Index to Financial
Statements

Mitel Networks Audited Consolidated
Financial Statements for the fiscal years ended April 25, 2004, April 27, 2003 and April
28, 2002 :

|                                     |  |                                                                                                                                                                                                                  
|------------------------------------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                    |  | Independent Auditors Report -
      Deloitte & Touche LLP                                                                                                                                                       
|                                    
|                                    |  | Consolidated Balance Sheets                                                                                                                                                                                      
|                                     |  |                                                                                                                                                                                                                  
|                                    |  | Consolidated Statements of Operations                                                                                                                                                                            
|                                     |  |                                                                                                                                                                                                                  
|                                    |  | Consolidated Statements of Shareholders
      Equity                                                                                                                                                            
|                                     |  |                                                                                                                                                                                                                  
|                                    |  | Consolidated Statement of Cash Flows                                                                                                                                                                             
|                                     |  |                                                                                                                                                                                                                  
|                                    |  | Notes to Consolidated Financial Statements                                                                                                                                                                       
|                                     |  |                                                                                                                                                                                                                  
|Financial
      Statement Schedules: |  |                                                                                                                                                                                                                  
|                                     |  |                                                                                                                                                                                                                  
|                                    |  | (Note:
      Schedules other than that listed below are omitted as they are not applicable
      or not required, or the information is included in the consolidated financial
      statements or notes thereto)
|                                     |  |                                                                                                                                                                                                                  
|                                    |  | Schedule
      II - Valuation of Qualifying Accounts                                                                                                                                                             
|                                     |  |                                                                                                                                                                                                                  





| | - 101
- | 
| | ------- | 

---

|Consolidated Financial Statements -
In millions of US Dollars (except share and per share amounts) |  | US GAAP
|-------------------------------------------------------------------------------------------------- |  | -------
|                                                                                                  

|MITEL
      NETWORKS 
      CORPORATION
|---------------------------------------



|CONSOLIDATED FINANCIAL STATEMENTS 
      (in accordance with U.S. GAAP)
|-----------------------------------------------------------------------



|FOR THE YEAR ENDED 
      APRIL 25, 2004
|----------------------------------------

(Audited)



| | F-1 | 
| | --- | 

---



|Consolidated Financial Statements -
In millions of US Dollars (except share and per share amounts) |  | US GAAP
|-------------------------------------------------------------------------------------------------- |  | -------
|                                                                                                  

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Directors and Shareholders of
Mitel Networks Corporation:

We have audited the consolidated
balance sheets of Mitel Networks Corporation and subsidiaries as of April 25, 2004 and
April 27, 2003 and the related consolidated statements of operations, shareholders
(deficiency) equity and cash flows for each of the years in the three year period ended
April 25, 2004. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements
based on our audits.

We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, these consolidated
financial statements present fairly, in all material respects, the financial position of
Mitel Networks Corporation and subsidiaries as of April 25, 2004 and April 27, 2003, and
the results of their operations and cash flows for each of the years in the three year
period ended April 25, 2004 in conformity with accounting principles generally accepted in
the United States of America.

On June 3, 2004, we reported
separately to the shareholders of Mitel Networks Corporation on our audits, conducted in
accordance with Canadian generally accepted auditing standards, of financial statements
for the same periods, prepared in accordance with Canadian generally accepted accounting
principles.

As described in note 3 to the
financial statements, the Company adopted Statement of Financial Accounting Standard No.
142, Goodwill and Other Intangible Assets, effective April 29, 2002.

| | /s/
Deloitte & Touche LLP                                  
| | -----------------------------------------------------------
| | Deloitte
      & Touche LLP 
       Chartered
  Accountants

Ottawa, Canada 
  June
  3,
2004



| | F-2 | 
| | --- | 

---



|Consolidated Financial Statements -
In millions of US Dollars (except share and per share amounts) |  | US GAAP
|-------------------------------------------------------------------------------------------------- |  | -------
|                                                                                                  

Mitel Networks
Corporation(incorporated under
the laws of Canada)CONSOLIDATED
BALANCE SHEETS 
  (in
  millions of United States dollars, except share amounts)

As atApril 25, 2004
      April 27, 2003ASSETSCurrent assets:Cash and cash equivalents
      $   26.7
      
      $   22.3Restricted cash
      0.9
      
      0.8Accounts receivable
        (net of allowance of $2.7 in 2004 and $2.7 in 2003)
      76.5
      
      67.6Due from related parties
      0.3
      
      0.3Inventories
      14.5
      
      25.7Deferred tax asset
      1.5
      
      Other receivables
      8.3
      
      11.2Prepaid expenses and
        other assets
      13.0
      
      15.0141.7
      
      142.9Long-term receivables
      0.3
      
      0.7Property and equipment
      20.3
      
      25.3Goodwill
      5.6
      
      5.2Intangible assets
      1.5
      
      1.4$ 169.4
      
      $ 175.5LIABILITIES, REEDEMABLE SHARES
        AND SHAREHOLDERS DEFICIENCYCurrent liabilities:Bank indebtedness
      $     7.1
      
      $   23.9Accounts payable and
        accrued liabilities
      46.0
      
      42.7Income and other taxes
        payable
      5.3
      
      2.4Deferred revenue
      27.0
      
      24.7Due to related parties
      13.7
      
      37.2Current portion of long-term
        debt
      4.1
      
      4.9103.2
      
      135.8Long-term debt
      10.8
      
      13.4Long term portion of lease termination
        obligations
      4.7
      
      2.5Convertible debentures
      
      
      7.2Derivative instrument
      29.2
      
      Pension liability
      24.8
      
      24.6172.7
      
      183.5Commitments and contingenciesRedeemable common shares, without
        par value  10,000,000 shares authorized,issued and outstanding at
        April 25, 2004 (2003  14,000,000)
      17.8
      
      29.0Convertible, redeemable preferred
        shares, without par value  Authorized: unlimited;
      33.5
      
      Issued and outstanding:
        Series A: 20,000,000 shares at April 25, 2004(2003-nil);
        Series B; 67,060,988 shares at April 25, 2004 (2003  nil)51.3
      
      29.0Shareholders deficiency:Common shares, without
        par value  Authorized: unlimited; Issued andoutstanding:
        101,782,757 shares at April 25, 2004 (2003  101,400,213)
      184.8
      
      183.4Warrants
      29.8
      
      17.6Deferred stock-based
        compensation
      (0.2
      )
      (0.4
      )Accumulated deficit
      (247.1
      )
      (218.2
      )Accumulated other comprehensive
        loss
      (21.9
      )
      (19.4
      )(54.6
      )
      (37.0
      )$ 169.4
      
      $ 175.5


| | (The
accompanying notes are an integral part of these consolidated financial statements)
| | ----------------------------------------------------------------------------------------



| | F-3 | 
| | --- | 

---



|Consolidated Financial Statements -
In millions of US Dollars (except share and per share amounts) |  | US GAAP
|-------------------------------------------------------------------------------------------------- |  | -------
|                                                                                                  

Mitel Networks
  Corporation 
  (incorporated under the laws of Canada)         
  CONSOLIDATED STATEMENTS OF OPERATIONS 
  (in millions of United States dollars, except share and per share amounts)

|                                                                              
|------------------------------------------------------------------------------
|                                                                              
|                                                                              
|                                                                              
|Revenues:                                                                     
|Products                                                                      
|Services                                                                      
|                                                                              
|                                                                              
|                                                                              
|Cost of revenues                                                              
|Products                                                                      
|Services                                                                      
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|Gross margin                                                                  
|                                                                              
|Expenses:                                                                     
|Selling, general and administrative                                           
|Research and development                                                      
|Special charges                                                               
|Loss on sale of manufacturing operations                                      
|Amortization of acquired intangibles                                          
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|Operating loss                                                                
|                                                                              
|Interest expense                                                              
|Beneficial conversion feature 
          on convertible debentures            
|Other income (expense), net                                                   
|                                                                              
|Loss before income taxes                                                      
|                                                                              
|Current income tax expense (recovery)                                         
|Deferred income tax recovery                                                  
|                                                                              
|                                                                              
|Net loss                                                                      
|                                                                              
|                                                                              
|Net loss per common share:                                                    
|Basic and diluted                                                             
|                                                                              
|                                                                              
|Weighted average number of common shares 
         outstanding during the year
|Basic and diluted                                                             
|                                                                              



| | (The
accompanying notes are an integral part of these consolidated financial statements)
| | ----------------------------------------------------------------------------------------



| | F-4 | 
| | --- | 

---



|Consolidated Financial Statements -
In millions of US Dollars (except share and per share amounts) |  | US GAAP
|-------------------------------------------------------------------------------------------------- |  | -------
|                                                                                                  

Mitel Networks
  Corporation
  (incorporated under the laws of Canada)
  CONSOLIDATED STATEMENTS OF SHAREHOLDERS DEFICIENCY 
  (in millions of United States dollars, except share amounts)

|                                                                         
|-------------------------------------------------------------------------
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Balances at April 27, 2001                                               
|                                                                         
|Non-cash capital contribution                                            
|Common shares issued:                                                    
|Cash                                                                     
|Acquisitions                                                             
|Professional services received                                           
|Exercise of stock options                                                
|Employee stock purchase
      plan                                       
|Common share issue costs                                                 
|Share purchase loans                                                     
|Share purchase loan repayments                                           
|Redeemable common shares
      reclassified to mezzanine equity          
|Redeemable common share accretion                                        
|Stock based dividends                                                    
|Deferred stock-based compensation                                        
|Amortization of deferred stock-based
      
         compensation        
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Net loss                                                                 
|Other comprehensive income                                               
|Foreign currency translation
      adjustments                           
|                                                                         
|                                                                         
|Comprehensive loss                                                       
|                                                                         
|Balances at April 28, 2002                                               
|                                                                         
|                                                                         
|Common shares issued:                                                    
|Acquisition of intellectual
      property 
           from related party
|Professional services
      received                                     
|Exercise of stock
      options                                          
|Common share issue
      costs                                           
|Share purchase loan
      repayments                                     
|Shares repurchased                                                       
|Accretion of interest on redeemable
      shares                         
|Stock-based dividends                                                    
|Amortization of deferred stock-based
      
          compensation       
|Issuance of warrants                                                     
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|                                                                         
|Net loss                                                                 
|Other comprehensive income                                               
|Foreign currency translation
      adjustments                           
|Minimum pension liability
      adjustments                              
|                                                                         
|                                                                         
|Comprehensive loss                                                       
|                                                                         
|                                                                         
|Balances at April 27, 2003                                               
|                                                                         

| | (The
accompanying notes are an integral part of these consolidated financial statements)
| | ----------------------------------------------------------------------------------------



| | F-5 | 
| | --- | 

---



|Consolidated Financial Statements -
In millions of US Dollars (except share and per share amounts) |  | US GAAP
|-------------------------------------------------------------------------------------------------- |  | -------
|                                                                                                  

Mitel Networks
  Corporation
    (incorporated under the laws of Canada) 
  CONSOLIDATED STATEMENTS OF SHAREHOLDERS DEFICIENCY (continued)
   (in millions of United States dollars, except share amounts)

|                                                                                                           |               |          |                                                       |                           |                                                                   |                                                             |      | 
|---------------------------------------------------------------------------------------------------------- | ------------- | -------- | ----------------------------------------------------- | ------------------------- | ----------------------------------------------------------------- | ----------------------------------------------------------- | ---- | 
|                                                                                                          
|                                                                                                           | Common Shares | Warrants | Deferred
      
      Stock-based 
      Compensation | Accumulated
      Deficit | Accumulated
      
      Other Comprehensive 
      Income (Loss) | Total
      
      Shareholders 
      Equity (Deficiency)
|Shares                                                                                                     | Amount       
|                                                                                                          
|Balances at April 27, 2003                                                                                 | 101,400,213   |          | $                                                     | 183.4                     |                                                                   | $                                                           | 17.6 | 
|                                                                                                          
|                                                                                                           |               |          |                                                       |                           |                                                                   |                                                             |      | 
|Common shares issued:                                                                                      |               |          |                                                       |                           |                                                                   |                                                             |      | 
|Conversion of convertible
      debentures                                                                 | 5,445,775     |          |                                                       | 8.3                       |                                                                   |                                                             |     | 
|Conversion of related party
      loans                                                                    | 20,448,875    |          |                                                       | 31.0                      |                                                                   |                                                             |     | 
|Professional services received                                                                             | 33,591        |          |                                                       | 0.1                       |                                                                   |                                                             |     | 
|Exercise of stock options                                                                                  | 5,950         |          |                                                       |                          |                                                                   |                                                             |     | 
|Reallocation of share issue
        costs to convertible, redeemable
        preferred shares              |              |          |                                                       | 0.3                       |                                                                   |                                                             |     | 
|Exchange of common shares for
      convertible, redeemable preferred shares                               | (25,530,494   | )        |                                                       | (38.7                     | )                                                                 |                                                             |     | 
|Share purchase loan repayments                                                                             |              |          |                                                       | 0.4                       |                                                                   |                                                             |     | 
|Shares repurchased                                                                                         | (21,153       | )        |                                                       | (0.1                      | )                                                                 |                                                             |     | 
|Beneficial conversion feature
      on Series
       A preferred shares                                    |              |          |                                                       |                          |                                                                   |                                                             |     | 
|Deemed dividend relating to
      beneficial
       conversion feature on Series A
       preferred shares |              |          |                                                       |                          |                                                                   |                                                             |     | 
|Stock-based dividends                                                                                      |              |          |                                                       | 0.1                       |                                                                   |                                                             |     | 
|Issuance of warrants                                                                                       |               |          |                                                       |                           |                                                                   |                                                             | 12.2 | 
|Amortization of deferred stock
       based compensation                                                   |              |          |                                                       |                          |                                                                   |                                                             |     | 
|Accretion of interest on redeemable
       common and preferred shares                                     |              |          |                                                       |                          |                                                                   |                                                             |     | 
|Beneficial conversion feature
      on 
       convertible debentures                                      |              |          |                                                       |                          |                                                                   |                                                             |     | 
|                                                                                                          
|                                                                                                           | 101,782,757   |          |                                                       | 184.8                     |                                                                   |                                                             | 29.8 | 
|                                                                                                           |               |          |                                                       |                           |                                                                   |                                                             |      | 
|Net loss                                                                                                   |              |          |                                                       |                          |                                                                   |                                                             |     | 
|Other comprehensive income                                                                                 |               |          |                                                       |                           |                                                                   |                                                             |      | 
|Foreign currency translation
      adjustments                                                             |              |          |                                                       |                          |                                                                   |                                                             |     | 
|Minimum pension liability
      adjustments                                                                |              |          |                                                       |                          |                                                                   |                                                             |     | 
|                                                                                                          
|Comprehensive loss                                                                                         |              |          |                                                       |                          |                                                                   |                                                             |     | 
|                                                                                                          
|Balance at April 25, 2004                                                                                  | 101,782,757   |          | $                                                     | 184.8                     |                                                                   | $                                                           | 29.8 | 
|                                                                                                          



| | (The
accompanying notes are an integral part of these consolidated financial statements)
| | ----------------------------------------------------------------------------------------



| | F-6 | 
| | --- | 

---



|Consolidated Financial Statements -
In millions of US Dollars (except share and per share amounts) |  | US GAAP
|-------------------------------------------------------------------------------------------------- |  | -------
|                                                                                                  

Mitel Networks
  Corporation 
  (incorporated under the laws of Canada) 
  CONSOLIDATED STATEMENTS OF CASH FLOWS 
  (in millions of
United States dollars)

|                                                                              
|------------------------------------------------------------------------------
|                                                                              
|                                                                              
|                                                                              
|CASH PROVIDED BY (USED IN)                                                    
|                                                                              
|Operating activities:                                                         
|Net loss                                                                      
|Adjustments to reconcile net loss
      to net cash from operating activities:
|Amortization
      and depreciation                                           
|Beneficial
      conversion feature on convertible debentures                 
|Stock-based
      compensation                                                
|Increase
      in deferred income taxes                                       
|Change
      in pension liability                                             
|Special
      charges                                                         
|Loss
      on sale of manufacturing operations                                
|Loss
      on sale of property and equipment                                  
|Unrealized
      foreign exchange gain                                        
|Non-cash
      movements in provisions                                        
|Change
      in non-cash operating assets and liabilities, net                
|                                                                              
|Net cash provided by (used in) operating
      activities                     
|                                                                              
|Investing activities:                                                         
|Additions to capital and intangible
      assets                              
|Cash acquired in business acquisition                                         
|Proceeds from repayment of related
      party notes receivable               
|Realized foreign exchange loss
      on hedging activities                    
|Realized foreign exchange gain
      on hedging activities                    
|                                                                              
|Net cash used in investing activities                                         
|                                                                              
|Financing activities:                                                         
|(Repayment of) proceeds from bank
      indebtedness                          
|Debt issue costs                                                              
|Proceeds from issuance of convertible,
      redeemable preferred shares      
|Proceeds from related party loans
      payable                               
|Repayment of related party loans
      payable                                
|Proceeds from sale lease-back                                                 
|Repayment of capital lease liabilities                                        
|Proceeds from long-term debt                                                  
|Repayment of long-term debt                                                   
|Proceeds from issuance of warrants                                            
|Proceeds from issuance of convertible
      debentures                        
|Proceeds from issuance of redeemable
      common shares                      
|Proceeds from issuance of common
      shares                                 
|Proceeds from repayments of employee
      share purchase loans               
|Share issue costs                                                             
|                                                                              
|Net cash (used in) provided by financing
      activities                     
|                                                                              
|Effect of exchange rate changes on
      cash and cash equivalents            
|                                                                              
|Increase (decrease) in cash and cash
      equivalents                        
|                                                                              
|Cash and cash equivalents, beginning
      of year                            
|                                                                              
|Cash and cash equivalents, end of
      year                                  
|                                                                              



| | (The
accompanying notes are an integral part of these consolidated financial statements)
| | ----------------------------------------------------------------------------------------



| | F-7 | 
| | --- | 

---



|Consolidated
      Financial Statements - In millions of US Dollars (except share and per share
      amounts) |  | US
      GAAP
|-------------------------------------------------------------------------------------------------------------- |  | -------------
|                                                                                                              

MITEL NETWORKS
  CORPORATIONincorporated under the laws of Canada)
  NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (in millions of United States dollars, except share and per share amounts)

1.    
  NATURE OF OPERATIONS

| | Mitel
Networks Corporation (the Company) is a global provider of next-generation IP
telephony, video and data solutions that creates advanced communication solutions and
applications in the areas of speech recognition, wireless mobility, unified messaging, and
customer interaction solutions. Through direct and indirect channels as well as strategic
technology partnerships, the Company currently serves a wide range of vertical markets,
including the education, hospitality, healthcare, and government segments, principally in
the United States, Europe, Canada, the Asia/Pacific region and Latin America regions.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2.    
  BACKGROUND AND BASIS OF PRESENTATION

| | The
Company was incorporated under the Canada Business Corporations Act on January 12, 2001.
On February 16, 2001, the Company acquired the Mitel name and substantially
all of the assets and subsidiaries of the Communications Systems Division (the
Division) of Zarlink Semiconductor Inc. (Zarlink), formerly Mitel
Corporation, excluding the Canadian real estate and most intellectual property assets.
Zarlink, which retained its semiconductor division, sold 90 percent (or 90,000,000 common
shares) of the Company to Mitel Systems Corporation (Systems), a private
company and unaffiliated third party, for total consideration of $151.5. Zarlink retained
a 10 percent ownership (or 10,000,000 common shares) in the Company (see also note 18). At
the same time, the intellectual property assets related to the Division were acquired by a
company (the Funding Company) controlled by the Companys controlling
shareholder and Chairman of the Board of Directors (the Principal
Shareholder). The Companys assets and liabilities were revalued using
push-down accounting to reflect the purchase price adjustments recorded by Systems. The
purchase price adjustments were based on fair values assigned to net assets as determined
by an independent valuation firm using standard valuation techniques. The fair market
values of patents, developed and in-process technologies were determined using the income
approach, which discounts managements best estimate of future cash flows to present
value using a discount rate of 16% for developed technology and 21% for in-process
technology, as adjusted to reflect additional risks inherent in the development life
cycle. The fair market value of the acquired customer base was estimated based on market
prices in actual transactions and on asking prices for assets currently available for
sale. The fair market value of the acquired workforce was estimated based on a replacement
cost approach. Acquired intangible assets are amortized on a straight-line basis over
their estimated useful life of two years. The approximate fair value of the assets and
liabilities acquired amounted to $231.5 (including $13.4 of acquired in-process
technology) and $80.0, respectively and are detailed as follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Current assets         | $ | 113.0 | 
| | ---------------------- | - | ----- | 
| | Fixed assets           |   | 23.4  | 
| | Intangible assets      |   | 92.2  | 
| | Other long-term assets |   | 2.9   | 
|
| | Total assets           |   | 231.5 | 
|
| |                        |   |       | 
| | Current liabilities    |   | 73.9  | 
| | Pension liability      |   | 6.1   | 
|
| | Total liabilities      |   | 80.0  | 
|
| |                        |   |       | 
| | Cash consideration     | $ | 151.5 | 
|



| | F-8 | 
| | --- | 

---



|Consolidated
      Financial Statements - In millions of US Dollars (except share and per share
      amounts) |  | US
      GAAP
|-------------------------------------------------------------------------------------------------------------- |  | -------------
|                                                                                                              



| | The
effects of the push-down accounting adjustments on the book value of the Companys
major classes of assets and shareholders equity accounts are as follows:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Current assets         | $ | (10.5 | )
| | ---------------------- | - | ----- | -
| | Fixed assets           |   | (22.6 | )
| | Intangible assets      |   | 100.8 |  
| | Other long-term assets |   | (1.4  | )
| | Total assets           |   | 66.3  |  
|
| |                        |   |       |  
| | Current liabilities    |   | (6.1  | )
| | Pension liability      |   | (4.8  | )
|
| | Common stock           | $ | 55.4  |  
|



| | The
results of operations of the acquired business have been included from the date of
acquisition.
| | ---------------------------------------------------------------------------------------------------

3.    
  ACCOUNTING POLICIES

| | These
consolidated financial statements have been prepared by the Company in accordance with
United States generally accepted accounting principles (GAAP).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------

| | Amounts
less than fifty thousand dollars are deemed to be insignificant in these financial
statements.
| | ------------------------------------------------------------------------------------------------------

|a) | Fiscal
  Year End
|-- | -----------------

| | The
Companys fiscal year end is the last Sunday in April. Normally this results in a
fifty-two week year with four thirteen week quarters.
| | -------------------------------------------------------------------------------------------------------------------------------------------

|b) | Basis of Consolidation
|-- | ----------------------

| | The
consolidated financial statements include the accounts of the Company and of its
majority-owned subsidiary companies. Intercompany transactions and balances have been
eliminated on consolidation.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|c) | Use
  of Estimates
|-- | ------------------

| | The
preparation of the Companys consolidated financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting periods.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Estimates
and assumptions are used for, but not limited to, the determination of the allowance for
doubtful accounts, inventory allowances, special charges, depreciation and amortization,
warranty costs, sales returns, pension costs, taxes, loss contingencies, goodwill
impairment, and the valuation of stock options, warrants and derivatives. Estimates and
assumptions are reviewed periodically and the effects of revisions are reflected in the
consolidated financial statements in the period they are determined to be necessary. In
the opinion of management, these consolidated financial statements reflect all adjustments
necessary to present fairly the results for the periods presented. Actual results and
outcomes could differ from these estimates.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|d) | Reporting
  Currency and Foreign Currency Translation
|-- | -----------------------------------------------------

| | Reporting
Currency
| | ------------------

| | During
fiscal 2004, the Company adopted the United States (US) dollar as its reporting currency.
As a result of the change in reporting currency, the financial statements for all periods
presented were translated from Canadian dollars to US dollars in accordance with SFAS No.
52, Foreign Currency Translation. Income statement balances were translated using weighted
average exchange rates over the relevant periods, assets and liabilities were translated
at the exchange rate as of the balance sheet dates, and shareholders equity balances
were translated at the exchange rates in effect on the date of each transaction. The
Company made this change to enhance the
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | F-9 | 
| | --- | 

---



|Consolidated Financial Statements -
In millions of US Dollars (except share and per share amounts) |  | US GAAP
|-------------------------------------------------------------------------------------------------- |  | -------
|                                                                                                  



| | communication
of its financial results with its shareholders and potential investors using the currency
that is familiar to both groups. This presentation is also more consistent with the
presentation of the financial results of its industry counterparts and competitors. There
has been no change in the functional currencies used in preparing these consolidated
financial statements.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Foreign
Currency Translation

| | The
financial statements of the parent company and its subsidiaries are measured using their
local currency as the functional currency. Assets and liabilities of the Companys
foreign operations are translated from foreign currencies into Canadian dollars at the
exchange rates in effect at the balance sheet date while revenue, expenses and cash flow
amounts are translated at weighted average exchange rates for the period. The resulting
unrealized gains or losses are recorded as a component of accumulated other comprehensive
income (loss) in shareholders deficiency until there is a reduction in the net
investment in a foreign operation.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Other
monetary assets and liabilities, which are denominated in currencies foreign to the local
currency of any one operation, are translated to the local currency at the exchange rates
in effect at the balance sheet date, and transactions included in earnings are translated
at weighted average exchange rates during the period. Exchange gains and losses resulting
from the translation of these accounts are included in other expense, net, in the
Consolidated Statements of Operations.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|e) | Revenue
  Recognition
|-- | ---------------------

| | The
Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has
occurred, title and risk of loss have been transferred to the customer, the fee is fixed
or determinable, and collection is reasonably assured.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Indirect
channels

| | The
Company makes sales to distributors and resellers based on contracts with terms ranging
from one to three years. For products sold through these distribution channels, revenue is
recognized at the time the risk of loss is transferred according to contractual terms and
if all contractual obligations have been satisfied. These arrangements usually involve
multiple elements, including post-contract technical support and training. Costs related
to insignificant technical support obligations, including second-line telephone support
for certain products, are accrued. For other technical support and training obligations,
revenue from product sales is allocated to each element based on vendor specific objective
evidence of relative fair values, generally representing the prices charged when the
element is sold separately, with any discount allocated proportionately. Revenue
attributable to undelivered elements is deferred and recognized upon performance or
ratably over the contract period.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys standard warranty period extends fifteen months from the date of sale and
extended warranty periods are offered on certain products. At the time product revenue is
recognized an accrual for estimated warranty costs is recorded as a component of cost of
sales based on prior claims experience. Sales to the Companys resellers do not
provide for return or price protection rights while sales to distributors provide for such
rights. Product return rights are limited to a percentage of sales over a maximum
three-month period. A reserve for estimated product returns and price protection rights
based on past experience is recorded as a reduction of sales at the time product revenue
is recognized. The Company offers various cooperative marketing programs to assist its
distribution channels to market the Companys products. Allowances for such programs
are recorded as marketing expenses at the time of shipment based on contract terms and
prior claims experience.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Direct
channels

| | The
Company sells products, including installation and related maintenance and support
services, directly to customers. For product sold through direct channels, revenue is
recognized at the time of delivery and at the time risk of loss is transferred, based on
prior experience of successful compliance with customer specifications. Revenue from
installation is recognized as services are rendered and when contractual obligations,
including customer acceptance, have been satisfied. Revenue is also derived from
professional service contracts with terms that range from two to six weeks for standard
solutions and for longer periods for customized solutions. Revenue from customer support,
professional services and maintenance contracts is recognized ratably over the contractual
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | F-10 | 
| | ---- | 

---



|Consolidated Financial Statements -
In millions of US Dollars (except share and per share amounts) |  | US GAAP
|-------------------------------------------------------------------------------------------------- |  | -------
|                                                                                                  



| | period,
generally one year. Billings in advance of services are included in deferred revenue.
Revenue from installation services provided in advance of billing is included in unbilled
accounts receivable. Certain arrangements with direct customers provide for free customer
support and maintenance services extending twelve months from the date of installation.
Customer support and maintenance contracts are also sold separately. When customer support
or maintenance services are provided free of charge, such amounts are unbundled from the
product and installation revenue at their fair market value based on the prices charged
when the element is sold separately and recognized ratably over the contract period.
Consulting and training revenues are recognized upon performance.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company provides long-term outsourcing services of communication systems. Under these
arrangements, systems management services (Managed Services) and communication
equipment are provided to customers for terms that typically range from one to ten years.
Revenue from Managed Services is recognized ratably over the contract period. The Company
retains title and risk of loss associated with the equipment utilized in the provision of
the Managed Services. Accordingly, the equipment is capitalized as part of property and
equipment and is amortized to cost of sales over the contract period.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|f) | Cash
  and Cash Equivalents
|-- | ---------------------------

| | Cash
and cash equivalents are highly liquid investments that have terms to maturity of three
months or less at the time of acquisition, and generally consist of cash on hand and
marketable securities. Cash equivalents are carried at cost, which approximates their fair
value.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|g) | Restricted
  Cash
|-- | -----------------

| | Restricted
cash represents cash provided as collateral in connection with certain customer bid and
performance related bonds.
| | -----------------------------------------------------------------------------------------------------------------------------

|h) | Allowance
  for Doubtful Accounts
|-- | ---------------------------------

| | The
allowance for doubtful accounts represents the Companys best estimate of probable
losses that may result from the inability of its customers to make required payments. The
Company regularly reviews accounts receivable and uses judgment to assess the
collectibility of specific accounts and based on this assessment, an allowance is
maintained for those accounts that are deemed to be uncollectible. For the remaining
amounts that are not specifically identified as being uncollectible, an allowance is
estimated based on the aging of the accounts, the Companys historical collection
experience, and other currently available evidence.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|i) | Securitizations
  and Transfers of Financial Instruments
|-- | --------------------------------------------------------

| | The
Company entered into a Receivables Purchase and Sale Agreement on April 16, 2004, whereby
non-interest bearing trade receivables are transferred to a securitization trust. As at
April 25, 2004, no receivables had been transferred under the above noted agreement and
there were no securitized receivables outstanding at year-end. However the Company expects
such receivables will be transferred in future years. These transfers will be accounted
for as sales when the Company is considered to have surrendered control over the
transferred receivables and receives proceeds from the trust, other than a beneficial
interest in the assets sold. Losses on these transactions will be recognized as other
expenses at the date of the receivables sale, and will be dependent in part on the
previous carrying amount of the receivables transferred which is allocated between the
receivables sold and the retained interest, based on their relative fair value at the date
of transfer. Fair value is generally estimated based on the present value of expected
future cash flows using managements best estimates of key assumptions such as
discount rates, weighted average life of accounts receivable, and credit loss ratios. The
Company expects to recognize a servicing liability on the date of the transfer and expects
to amortize this liability to income over the expected life of the transferred
receivables.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|j) | Inventories
|-- | -----------

| | Inventories
are valued at the lower of cost (calculated on a first-in, first-out basis) or net
realizable value for finished goods, and current replacement cost for raw materials. The
Company provides inventory allowances based on estimated excess and obsolete inventories.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | F-11 | 
| | ---- | 

---



|Consolidated Financial Statements -
In millions of US Dollars (except share and per share amounts) |  | US GAAP
|-------------------------------------------------------------------------------------------------- |  | -------
|                                                                                                  

|k) | Property
  and Equipment
|-- | ------------------------

| | Property
and equipment are initially recorded at cost. Depreciation is provided on a straight-line
basis over the anticipated useful lives of the assets. Estimated lives range from three to
ten years for equipment and twenty-five years for buildings. Amortization of leasehold
improvements is computed using the shorter of the remaining lease terms or five years. The
Company performs reviews for the impairment of property and equipment in accordance with
Statement of Financial Accounting Standards (SFAS) 144 whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability is assessed based on the carrying value of the asset and its
fair value which is generally determined based on the discounted cash flows expected to
result from the use and the eventual disposal of the asset. An impairment loss is
recognized when the carrying amount is not recoverable and exceeds fair value.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Assets
leased on terms that transfer substantially all of the benefits and risks of ownership to
the Company are accounted for as capital leases, as though the asset had been purchased
outright and a liability incurred. All other leases are accounted for as operating leases.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|l) | Goodwill
  and Intangible Assets
|-- | --------------------------------

| | Intangible
assets include patents, trademarks, and acquired technology. Amortization is provided on a
straight-line basis over five years for patents and over two years for other intangible
assets with finite useful lives. The carrying value of these assets is periodically
reviewed by management for potential permanent impairment. The Company evaluates
intangible assets for impairment in accordance with SFAS 144 whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable.
Recoverability is assessed based on the carrying value of the asset and its fair value
which is generally determined based on the discounted cash flows expected to result from
the use and the eventual disposal of the asset. An impairment loss is recognized when the
carrying amount is not recoverable and exceeds fair value.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Goodwill
represents the excess of the purchase price over the estimated fair value of net tangible
and intangible assets acquired in business combinations. In June 2001, the Financial
Accounting Standards Board (FASB) issued SFAS 142, Goodwill and Other
Intangible Assets, which the Company adopted at the beginning of Fiscal 2003. Under
SFAS 142 goodwill is not amortized, but is subject to annual impairment tests, or more
frequently if circumstances indicate that it is more likely than not that the fair value
of the reporting unit is below its carrying amount. Prior to Fiscal 2003 the amount
representing goodwill was amortized on a straight line basis over two years. The Company
completed the transitional and annual goodwill impairment tests, and determined that no
impairment existed as of the date of adoption and as of the balance sheet dates.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | This
change in accounting policy in Fiscal 2003 was not applied retroactively and the amounts
presented for the prior year have not been restated for this change. The following table
presents the impact of this change on net loss and on basic and diluted loss per common
share as if the policy had been applied retroactively to the beginning of Fiscal 2002:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |                                                                  | Year Ended 
        April 28, 2002
| | ---------------------------------------------------------------- | ----------------------------------
|
| | Net loss, as reported                                            | $                                 
| | Add: Amortization of goodwill from continuing
        operations |                                   
|
| | Adjusted net loss                                                | $                                 
|
| | Reported basic and diluted loss per common
        share         | $                                 
|
| | Adjusted basic and diluted loss per common
        share         | $                                 
|

|m) | Derivative
  Financial Instruments
|-- | ----------------------------------

| | The
Company uses derivatives, including foreign currency forward and swap contracts, to
minimize the short-term impact of currency fluctuations on foreign currency receivables
and payables. These financial instruments are recorded at fair market value with the
related foreign currency gains and losses recorded in other expense, net, in the
consolidated statements of operations. The Company does not hold or issue derivative
financial instruments for
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | F-12 | 
| | ---- | 

---



|Consolidated Financial Statements -
In millions of US Dollars (except share and per share amounts) |  | US GAAP
|-------------------------------------------------------------------------------------------------- |  | -------
|                                                                                                  



| | speculative
or trading purposes. The Company also utilizes non-derivative financial instruments
including letters of credit and commitments to extend credit.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
explained in Note 19, the Company has issued convertible, redeemable preferred shares to
investors. The preferred shares give the investors the right, at any time after five years
to redeem the shares for cash. The redemption amount is equal to the original issue price
of $1.00 per preferred share times the number of Series A and Series B Preferred Shares
outstanding, plus any declared but unpaid dividends, plus the then current fair market
value of the common shares into which the Series A and Series B Preferred Shares are
convertible. The requirement to redeem the shares on an as-if-converted-to-common shares
basis qualifies as an embedded derivative under SFAS133. Accordingly, the proceeds
received from the issuance of the preferred shares were allocated between the embedded
derivative and the preferred shares. The embedded derivative is then marked to market
throughout the period to redemption with changes in value recorded in the consolidated
statement of operations.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|n) | Income Taxes
|-- | ------------

| | Income
taxes are accounted for using the asset and liability method. Under this approach,
deferred tax assets and liabilities are determined based on differences between the
carrying amounts and the tax basis of assets and liabilities, and are measured using
enacted tax rates and laws. Deferred tax assets are recognized only to the extent that it
is more likely than not, in the opinion of management, that the future tax assets will be
realized in the future.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o) | Research
  and Development
|-- | --------------------------

| | Research
costs are charged to expense in the periods in which they are incurred. Software
development costs are deferred and amortized when technological feasibility has been
established, or otherwise, are expensed as incurred. The Company has not deferred any
software development costs to date.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|p) | Defined
  Benefit Pension Plan
|-- | ------------------------------

| | Pension
expense is actuarially determined using the projected benefit method prorated on service
and managements best estimate assumptions. Pension plan assets are valued at fair
value. The excess of any cumulative net actuarial gain (loss) over ten percent of the
greater of the benefit obligation and the fair value of plan assets is amortized over the
average remaining service period of active employees. The Company periodically assesses,
and adjusts as necessary, the minimum pension liability recorded on the consolidated
balance sheet to equal the amount by which the accumulated benefit obligation exceeds the
fair value of the plan assets.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|q) | Stock-Based
  Compensation Plan
|-- | -------------------------------

| | The
Company has a stock-based compensation plan described in note 22. The Company generally
grants stock options for a fixed number of shares to employees and non-employees with an
exercise price equal to the fair market value of the shares at the date of grant. The
Company accounts for employee stock option grants in accordance with Accounting Principles
Board Opinion No. 25 (APB 25), Accounting for Stock Issued to
Employees, and related interpretations. Under APB 25, options granted to employees
and directors will result in the recognition of compensation expense only if the exercise
price is lower than the market price of common shares on the date of grant. Under SFAS No.
123 (SFAS 123), Accounting for Stock-Based Compensation, the
Company recognizes compensation expense in connection with grants to non-employees and
former employees by applying the fair value based method of accounting and also applies
variable plan accounting to such unvested grants. Had compensation cost for the
Companys stock option plan been determined as prescribed by SFAS 123, pro forma net
loss and pro forma net loss per share would have been as follows, using the following
weighted average assumptions:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | F-13 | 
| | ---- | 

---



|Consolidated Financial Statements -
In millions of US Dollars (except share and per share amounts) |  | US GAAP
|-------------------------------------------------------------------------------------------------- |  | -------
|                                                                                                  



| |                                                                          | Year Ended              |                         |                        
| | ------------------------------------------------------------------------ | ----------------------- | ----------------------- | -----------------------
| |                                                                          | April 25, 
        2004 | April 27, 
        2003 | April 28, 
        2002
|
| | Net loss available to common shareholders,
        as reported (note 22) | $(33.4                  | )                       | $(71.2                 
| | Estimated additional stock-based compensation                            | (1.6                    | )                       | (2.1                   
|
| | Pro forma net loss available to common shareholders                      | (35.0                   | )                       | (73.3                  
| |                                                                          |                         |                         |                        
| | Net loss per share, as reported - basic and
        diluted              | $(0.26                  | )                       | $(0.63                 
| | Pro forma net loss per share - basic and
        diluted                 | $(0.27                  | )                       | $(0.65                 
|
| |                                                                          |                         |                         |                        
| | Risk-free interest rate                                                  | 3.7%                    |                         | 4.1%                   
| | Dividends                                                                | 0%                      |                         | 0%                     
| | Expected life of the options                                             | 5 years                 |                         | 5 years                



| | Pro
forma results disclosed are based on the provisions of SFAS 123 using a minimum value
option pricing model, which assumes no volatility, to calculate the fair value of employee
stock options. Changes in the subjective input assumptions can materially affect the fair
value estimate, and therefore the model used above does not necessarily provide reliable
pro forma results.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|r) | Earnings
  (Loss) per Common Share
|-- | ----------------------------------

| | Basic
earnings (loss) per common share is computed using the weighted average number of common
shares outstanding during the period. Diluted earnings (loss) per common share is computed
using the treasury stock method and assumes that, if a dilutive effect is produced, all
dilutive securities had been exercised at the later of the beginning of the fiscal period
and the security issue date.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|s) | Other
  Comprehensive Loss
|-- | --------------------------

| | Other
comprehensive loss is recorded directly to a separate section of shareholders
deficiency in accumulated other comprehensive loss and includes unrealized gains and
losses excluded from the Consolidated Statements of Operations. These unrealized gains and
losses consist of foreign currency translation adjustments, which are not adjusted for
income taxes since they primarily relate to indefinite investments in non-Canadian
subsidiaries, and minimum pension liability adjustments.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|t) | Advertising
  Costs
|-- | -------------------

| | The
cost of advertising is expensed as incurred, except for cooperative advertising
obligations which are expensed at the time the related sales are recognized. Advertising
costs are recorded as part of selling, general and administrative expenses. The Company
incurred $8.1, $7.5 and $8.4 in advertising costs during the years ended April 25, 2004,
April 27, 2003 and April 28, 2002, respectively, recorded in selling, general and
administrative expenses.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|u) | Product
  Warranties
|-- | --------------------

| | The
Companys product warranties generally range from one to five years. At the time
revenue is recognized, a provision for estimated warranty costs is recorded as a component
of cost of sales. The warranty accrual represents the Companys best estimate of the
costs necessary to settle future and existing claims on products sold as of the balance
sheet date based on the terms of the warranty, which vary by customer and product,
historical product return rates and estimated average repair costs. The Company
periodically assesses the adequacy of its recorded warranty provisions and adjusts the
amounts as necessary.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|v) | Comparative
  Figures
|-- | ---------------------

| | Certain
of the comparative figures have been reclassified to conform to the current years
presentation.
| | --------------------------------------------------------------------------------------------------------



| | F-14 | 
| | ---- | 

---



|Consolidated Financial Statements -
In millions of US Dollars (except share and per share amounts) |  | US GAAP
|-------------------------------------------------------------------------------------------------- |  | -------
|                                                                                                  

|w) | Recent
  Accounting Pronouncements
|-- | ----------------------------------

| | In
December 2003, the Staff of the SEC issued Staff Accounting Bulletin No. 104,
Revenue Recognition, (SAB 104) which superseded SAB 101,
Revenue Recognition in Financial Statements. SAB 104s primary purpose is
to rescind accounting guidance contained in SAB 101 related to multiple element revenue
arrangements, superseded as a result of the issuance of EITF 00-21, Accounting for
Revenue Arrangements with Multiple Deliverables. Additionally, SAB 104 rescinds the
SECs Revenue Recognition in Financial Statements Frequently Asked Questions and
Answers (the FAQ) issued with SAB 101 that had been codified in SEC Topic 13, Revenue
Recognition. Selected portions of the FAQ have been incorporated into SAB 104. While the
wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue
recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104. The
adoption of SAB 104 did not materially affect the Companys revenue recognition
policies, results of operations, financial position or cash flows.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
April 2004, the EITF issued Statement No. 03-06 Participating Securities and the
Two-Class Method Under FASB Statement No. 128, Earnings Per Share (EITF
03-06). EITF 03-06 addresses a number of questions regarding the computation of
earnings per share by companies that have issued securities other than common stock that
contractually entitle the holder to participate in dividends and earnings of a company
when, and if, it declares dividends on its common stock. The issue also provides further
guidance in applying the two-class method of computing earnings per share once it is
determined that a security is participating, including how to allocate undistributed
earnings to such a security. EITF 03-06 is effective for fiscal periods beginning after
March 31, 2004. The Company is currently evaluating the effect of adopting EITF 03-06.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
May 2003, the FASB issued SFAS 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity. For non-public entities, SFAS
150 is effective for fiscal years beginning after December 15, 2003. SFAS 150 establishes
standards for the Companys classification in the financial statements of instruments
that have characteristics of both liabilities and equity. Specifically, mandatorily
redeemable financial instruments, which embody an unconditional obligation requiring the
issuer to redeem the instrument, are required to be recorded as liabilities in the
financial statements. Financial instruments that embody a conditional obligation to redeem
the instrument upon an event that is not certain to occur will become mandatorily
redeemable, and therefore classified as a liability, if the event occurs, the condition is
resolved, or the event becomes certain to occur. The adoption of this standard may affect
the classification of the Companys redeemable common and preferred shares, which are
currently classified between the liabilities section and the equity section of the
Consolidated Balance Sheet. On adoption of the standards, these instruments will have to
be assessed at each reporting date to determine whether redemption of the instruments is
no longer conditional. An assessment that redemption of the shares is unconditional will
require that the shares be reclassified within liabilities as Shares Subject to
Mandatory Redemption and related accreted interest recorded as interest expense in
the Consolidated Statement of Operations on a prospective basis with no restatement of
prior periods presented.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

4.    
  RELATED PARTY TRANSACTIONS

| | Significant
related party transactions with companies controlled by or related to the Principal
Shareholder, not otherwise disclosed in the financial statements, include the following:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Research
and development

| | Effective
February 16, 2001, the Company entered into a research and development agreement with a
company controlled by the Principal Shareholder (the Funding Company), under
which the Company received funding to perform research and development until November 1,
2002, the date on which the two parties mutually agreed to terminate the agreement. During
the term of the agreement, the Funding Company owned the intellectual property for the
products developed and licensed certain of the intellectual property rights to the Company
in exchange for royalties based on a percentage of sales of products developed under the
programs. From March 27, 2001 until November 1, 2002, a wholly-owned subsidiary of the
Company and the Funding Company were parties to a research and development cost-sharing
agreement pursuant to which they agreed to share the costs of research and development and
in exchange the Company obtained a license to additional intellectual property rights. In
addition, the Company transferred to the Funding Company investment tax credits
(ITCs) earned on the research and development activity performed during the
period of the research and development agreement.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | F-15 | 
| | ---- | 

---



|Consolidated Financial Statements -
In millions of US Dollars (except share and per share amounts) |  | US GAAP
|-------------------------------------------------------------------------------------------------- |  | -------
|                                                                                                  



| | On
November 1, 2002, the Company acquired the intellectual property from the Funding Company
at a price of $8.0 that was satisfied by the issuance of 4,555,169 common shares from
treasury with a fair value of CDN$2.75 per share, which was based upon an independent
valuation. As a result, the research and development agreement and the research and
development cost-sharing agreement have been terminated. This transaction resulted in the
settlement of the liability to issue common shares of $14.7 (April 28, 2002  $10.0)
classified in the due to related parties, an increase of $0.1 to the carrying value of
intangible assets and an increase of $14.8 to the carrying value of common shares.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
Fiscal 2004, the Company received $nil (2003  $4.4; 2002  $6.6) of research
and development funding from the Funding Company related to these agreements, which was
recorded as part of due to related parties, and incurred royalty expenses of $nil (2003
 $0.3; 2002  $0.2) payable to the Funding Company.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Disposal
  of manufacturing operations

| | On
August 31, 2001, the Company sold its manufacturing operations, comprising plant,
equipment, workforce and certain liabilities to a company in which the Principal
Shareholder holds a significant interest (the Supplier) for total net
consideration of $5.0 in the form of long-term promissory notes receivable of $5.4 and
promissory notes payable of $0.4. The total net consideration approximated the fair value
of the disposed manufacturing tangible net assets. The long-term promissory notes
receivable were secured by a first charge on the manufacturing assets transferred, bore
interest at LIBOR rate plus 1.5 percent and were repaid in February 2003. Interest income
related to the promissory notes receivable amounted to $nil in Fiscal 2004 (2003 
$0.1; 2002  $0.2). The promissory notes payable bore interest at LIBOR rate plus 1.5
percent and were set off against the promissory notes receivable on August 31, 2002
pursuant to an agreement with the Supplier. Interest expense recorded in connection with
these promissory notes payable in Fiscal 2004 and Fiscal 2003, was insignificant. The
transaction resulted in a loss on disposal of $1.5 that was recorded in operating expenses
of Fiscal 2002. During Fiscal 2004 the Supplier vacated premises that had been subleased
from the Company pursuant to the disposal of the manufacturing operations. It became
evident therefore that sublease income over the lease renewal period, which was originally
included in the estimated loss on disposal, will no longer be realized. As a result an
amount of $0.6 was recorded in the Fiscal 2004 Consolidated Statement of Operations as an
additional loss arising on the disposal activity.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
connection with the disposal of the manufacturing operations, the Company entered into a
supply agreement dated August 31, 2001 whereby the Supplier will provide certain products
and services under terms and conditions reflecting prevailing market conditions at the
time the agreement was entered into. The term of the agreement is six years (2002 
initial term of three years) and will be, unless otherwise terminated, automatically
renewed on the same terms and conditions for additional consecutive one-year periods.
Under the terms of the supply agreement, the Supplier is required to purchase the
Companys raw material inventory, before turning to third party suppliers for raw
material procurement. During Fiscal 2004, the Company purchased $84.9 (2003  $115.7;
2002  $81.3) of products and services and sold $2.7 (2003  $6.4; 2002 
$22.1) of raw material inventory under this agreement. As at April 25, 2004, balances
payable pursuant to this agreement amounted to $15.4 (2003  $8.5) and balances
receivable pursuant to this agreement amounted to $1.7 (2003  $1.4).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Under
the terms of the supply agreement, the Company is required to purchase from the Supplier
certain tools used in the manufacturing process. These manufacturing tools are capitalized
as part of fixed assets and are depreciated over their estimated useful lives. During
Fiscal 2004, manufacturing tools purchased from the Supplier amounted to $0.1 (2003 
$1.2; 2002  $0.1).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
August 31, 2001, the Company also entered into service agreements with the Supplier to
provide facilities management services for the period covering the term of the premise
lease agreements, as well as human resource and information systems support services.
Amounts charged to the Supplier were equal to, and recorded as a reduction of, the costs
incurred to provide the related services in the consolidated statement of operations.
During Fiscal 2004, the Company provided services valued at $3.3 under these agreements
(2003  $4.7; 2002  $5.9) for which there was no receivable balance outstanding
at April 25, 2004 or April 27, 2003.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Leased
properties

| | In
March 2001, the Company entered into a lease agreement for its Ottawa-based headquarter
facilities of 512,391 square feet with a company controlled by the Principal Shareholder,
under terms and conditions reflecting prevailing market conditions at the time the lease
was entered into. The lease agreement is for 10 years expiring in March 2011.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F-16 | 
| | ---- | 

---



|Consolidated Financial Statements -
In millions of US Dollars (except share and per share amounts) |  | US GAAP
|-------------------------------------------------------------------------------------------------- |  | -------
|                                                                                                  



| | On
August 31, 2001, the Company entered into sublease agreements with the Supplier for
certain office and manufacturing facilities in Ottawa and in the United Kingdom totaling
252,941 square feet under terms and conditions reflecting prevailing market conditions at
the time the leases were entered into. The sublease agreement was amended on May 31, 2002
to increase leased space by 4,026 square feet, bringing the total space subleased by the
Company to 256,967 square feet. The Ottawa sublease agreement is for a term of five years
expiring on August 31, 2006 and the United Kingdom lease agreement is for a term of
fifteen years expiring in August 2016 with cancellation options on the fifth and tenth
years available to the Company and the Supplier.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | See
note 16 for disclosure of related party rental expense, sublease income, committed future
minimum lease payments and future sublease income. As at April 25, 2004, balances due to
the company controlled by the Principal Shareholder and related to the lease agreement
were insignificant (2003  $0.6).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Financing

| | During
the fiscal years ended April 27, 2003 and April 28, 2002, the Company borrowed funds, from
time to time, from a company controlled by the Principal Shareholder (the Financing
Affiliate) to finance its operations. The loans bore interest at prime rate, and
interest expense incurred on these related party loans amounted to $0.7 in Fiscal 2004
(Fiscal 2003  $0.6; 2002  $1.2). At April 25, 2004, demand loans payable to
the Financing Affiliate amounted to $nil (April 27, 2003  $29.1).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
October 2003 the entire carrying value of the demand loans of $31.0 was converted into
20,448,875 common shares of the Company at the then fair value of the common shares of
CDN$2.00 per common share. The fair value of the common shares issued upon extinguishment
of the loans was equal to the carrying value of the demand loans on the date of
extinguishment, therefore no gain or loss resulted from the transaction. In April 2004,
all of the 20,448,875 common shares were exchanged for 40,897,750 Series B Convertible,
Redeemable Preferred Shares at the then fair value of CDN$1.00 per preferred share (see
note 19).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Other

| | In
September 2001, the Company entered into a strategic alliance agreement and a global
distribution agreement with a company (the Partner Company) controlled by the
Principal Shareholder to broaden its product portfolio and its distribution channel. Under
the terms of the agreement, the parties agree to cooperate in the performance of joint
development activities and each party will bear its own costs arising in connection with
the performance of its obligations. Both parties will share common costs incurred in the
performance of joint activities. The Partner Company develops, manufactures and
distributes broadband integrated technology solutions enabling businesses and service
providers to deliver enhanced multimedia communication services. During Fiscal 2004, the
Company purchased $1.0 (2003  $2.4; 2002  $1.5) of products and services from
the Partner Company and had an insignificant balance payable recorded in the due to
related parties pursuant to this agreement at April 25, 2004 (2003  $0.1).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Other
sales to, purchases from and net balances receivable from companies related to the
Principal Shareholder and arising in the normal course of the Companys business
amounted to $0.3, $0.7 and $0.2, respectively for the year ended April 25, 2004 (2003
 $0.9, $0.5 and $0.3, respectively; 2002  $0.2, $0.3 and $0.5, respectively).
In addition, in Fiscal 2003 certain of the Companys directors and members of senior
management purchased convertible debentures in an aggregate amount of $0.3. In Fiscal 2004
these convertible debentures were converted to common shares of the Company and later
exchanged for Series B Convertible, Redeemable Preferred Shares, as described in Note 19.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | F-17 | 
| | ---- | 

---



|Consolidated Financial Statements -
In millions of US Dollars (except share and per share amounts) |  | US GAAP
|-------------------------------------------------------------------------------------------------- |  | -------
|                                                                                                  

5.    
  SPECIAL CHARGES

| | During
Fiscal 2004, the Company implemented additional workforce reduction programs in a
continued effort to realign spending levels with the lower sales volumes experienced in
the year. Accordingly, pre-tax special charges of $11.7, net of reversals of prior
years charges of $0.3, were recorded in Fiscal 2004. The components of the Fiscal
2004 charges include $8.5 of employee severance and benefits and associated legal costs
incurred in the termination of 196 employees throughout the world, $3.2 of non-cancelable
lease costs related to excess facilities and $0.3 of loss on disposal of capital assets.
Payment of the workforce reduction liabilities are expected to be completed during Fiscal
2005. The lease termination obligation will be reduced over the remaining term of the
leases, which range from one year to ten years. Accordingly, $4.7 of the balance of the
lease termination obligation has been recorded under long term liabilities.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
Fiscal 2003, the Company executed restructuring programs to reduce its workforce across
all functions. Accordingly, pre-tax special charges of $13.7, net of reversals of prior
years charges of $2.2, were recorded in Fiscal 2003. The components of the Fiscal
2003 charges included $12.6 of employee severance and benefits associated with 265
terminated employees throughout the world, $3.0 of non-cancelable lease costs related to
excess facilities and $0.3 of loss on disposal of capital assets. Although these
restructuring programs were completed at April 27, 2003, payments of the workforce
reduction liabilities were completed during Fiscal 2004. The lease termination obligation
will be reduced over the remaining term of the leases, which range from two years to
eleven years. Accordingly, $2.5 of the balance of the lease termination obligation has
been recorded under long term liabilities.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
Fiscal 2002, the Company executed restructuring programs to reduce its sales, marketing,
administrative and R&D workforce. In August 2001, the Network Access Solutions R&D
program was cancelled based on the decision to exit non-core operations. Accordingly,
pre-tax special charges of $7.4 related to these actions were recorded in Fiscal 2002. The
workforce reduction costs included in the special charges related to severance and
benefits associated with 278 terminated employees throughout the world. These
restructuring programs were completed in the first quarter of Fiscal 2003. As a result of
the workforce reduction, the Company recorded a loss on disposal of capital assets of
$0.4.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following table summarizes details of the Companys special charges and related
reserve during Fiscal 2004 and Fiscal 2003:
| | -------------------------------------------------------------------------------------------------------------------------------



| | Description                                   | Workforce 
      Reduction | Lease 
      Termination 
      Obligation | Loss on 
      Disposal of 
      Capital Assets | Legal 
      costs | Total
| | --------------------------------------------- | -------------------------- | ------------------------------------------ | ------------------------------------------------ | ------------------ | -----
|
| | Balance of reserve as of April 28,
      2002 | 2.1                        |                                            |                                                 |                    |     
| |                                               |                            |                                            |                                                  |                    |      
| | Fiscal 2003:                                  |                            |                                            |                                                  |                    |      
| | Charges                                       | 12.6                       |                                            | 3.0                                              |                    | 0.3  
| | Adjustments                                   | (2.0                       | )                                          | (0.1                                             | )                  |     
| | Cash payments                                 | (11.9                      | )                                          | (0.4                                             | )                  |     
| | Asset loss on disposal                        |                           |                                            |                                                 |                    | (0.3 
| | Foreign currency impact                       | (0.2                       | )                                          | 0.1                                              |                    |     
|
| | Balance of reserve as of April 27,
      2003 | $  0.6                     |                                            | $ 2.6                                            |                    | $   
|
| | Fiscal 2004:                                  |                            |                                            |                                                  |                    |      
| | Charges                                       | 8.1                        |                                            | 3.2                                              |                    | 0.3  
| | Adjustments                                   | (0.3                       | )                                          |                                                 |                    |     
| | Cash payments                                 | (6.5                       | )                                          | (0.7                                             | )                  |     
| | Asset loss on disposal                        |                           |                                            |                                                 |                    | (0.3 
| | Foreign currency impact                       | 0.2                        |                                            | 0.2                                              |                    |     
|
| | Balance of reserve as of April 25,
      2004 | $ 2.1                      |                                            | $ 5.3                                            |                    | $   
|



| | F-18 | 
| | ---- | 

---



|Consolidated Financial Statements -
In millions of US Dollars (except share and per share amounts) |  | US GAAP
|-------------------------------------------------------------------------------------------------- |  | -------
|                                                                                                  

6.    
  SEGMENT INFORMATION

General
description

| | The
Company reports its operations in two segments: the Communications Solutions segment
(Solutions) and the Customer Services segment (Services). The
Solutions segment represents the Companys core business, consisting of enterprise
voice, video and data communications systems and software as well as communications
applications. These Solutions are provided through the Companys dealer and reseller
network and are used by large enterprises, small and medium businesses as well as
government, education and healthcare organizations. The Services segment consists of
direct product sales and services, professional services, maintenance and technical
support services. These services are provided through the Companys direct sales
offices throughout North America and the United Kingdom.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys Chief Executive Officer (CEO) has been identified as the chief
operating decision maker. The CEO evaluates the performance of the segments and allocates
resources based on information provided by the Companys internal management system
which reports segmented operating income (loss) representing sales less the cost of sales
and direct expenses incurred within the operating segments. The Company does not allocate
general and administrative expenses, amortization of acquired intangibles, stock-based
compensation expense and one-time charges to its segments as management does not use this
information to measure the performance of the operating segments. These unallocated
expenses are included in corporate and other in the reconciliation of operating results.
In addition, total asset information by segment is not presented because the CEO does not
use such segmented measure to allocate resources and assess performance. Depreciation of
property and equipment is allocated to each segment based on available segmented property
and equipment information. Inter-segment sales are based on fair market values and are
eliminated on consolidation. The accounting policies of reported segments are the same as
those described in the summary of significant accounting policies.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Business
segments

The
following table sets forth information by business segment:



| | F-19 | 
| | ---- | 

---





|Consolidated Financial Statements -
In millions of US Dollars (except share and per share amounts) |  | US GAAP
|-------------------------------------------------------------------------------------------------- |  | -------
|                                                                                                  



|                                                | Solutions | Services | Corporate
      
      and Other | Total
|----------------------------------------------- | --------- | -------- | -------------------------------- | -----
|                                               
|Year ended April 25, 2004                       |           |          |                                  |      
|External revenue                                | $ 174.9   |          | 165.8                            |      
|Inter-segment revenue                           | 27.5      |          |                                 |      
|                                               
|Total revenue                                   | 202.4     |          | 165.8                            |      
|                                               
|Goodwill                                        | 3.3       |          | 2.3                              |      
|                                               
|Depreciation of property and equipment          | 2.7       |          | 2.7                              |      
|Segment operating income (loss)                 | (27.5     | )        | 40.2                             |      
|Corporate and unallocated shared
      expenses |          |          |                                 |      
|Stock-based compensation                        |          |          |                                 |      
|Special charges                                 |          |          |                                 |      
|Amortization of intangible assets               |           |          |                                  |      
|                                               
|Operating income (loss)                         | $(27.5    | )        | 40.2                             |      
|                                               
|Year ended April 27, 2003                       |           |          |                                  |      
|External revenue                                | $164.8    |          | $187.4                           |      
|Inter-segment revenue                           | 30.0      |          |                                 |      
|                                               
|Total revenue                                   | 194.8     |          | 187.4                            |      
|                                               
|Goodwill                                        | 3.1       |          | 2.1                              |      
|                                               
|Depreciation of property and equipment          | 4.6       |          | 3.0                              |      
|                                               
|Segment operating income (loss)                 | (47.1     | )        | 41.1                             |      
|Corporate and unallocated shared
      expenses |          |          |                                 |      
|Stock-based compensation                        |          |          |                                 |      
|Special charges                                 |          |          |                                 |      
|Amortization of intangible assets               |          |          |                                 |      
|                                               
|Operating income (loss)                         | $(47.1    | )        | $  41.1                          |      
|                                               
|Year ended April 28, 2002                       |           |          |                                  |      
|External revenue                                | $158.9    |          | $199.1                           |      
|Inter-segment revenue                           | 32.9      |          |                                 |      
|                                               
|Total revenue                                   | 191.8     |          | 199.1                            |      
|                                               
|Goodwill                                        | 2.9       |          | 2.0                              |      
|                                               
|Depreciation of property and equipment          | 5.1       |          | 2.9                              |      
|                                               
|Segment operating income (loss)                 | (61.4     | )        | 34.6                             |      
|Corporate and unallocated shared
      expenses |          |          |                                 |      
|Stock-based compensation                        |          |          |                                 |      
|Special charges                                 |          |          |                                 |      
|Loss on sale of manufacturing operations        |          |          |                                 |      
|Amortization of intangible assets               |          |          |                                 |      
|                                               
|Operating income (loss)                         | $(61.4    | )        | $34.6                            |      
|                                               



| | F-20 | 
| | ---- | 

---



Product
information

| | The
following table sets forth net sales for groups of similar products and services:
| | -------------------------------------------------------------------------------------

| |                                                       | Year Ended
| | ----------------------------------------------------- | ----------
|
|
| | Products:                                             |           
| | Communications platforms and
      desktop appliances | $191.3    
| | Software applications                                 | 22.3      
| | OEM products                                          | 14.3      
| | Other (1)                                             | 3.0       
|
| |                                                       | 230.9     
|
| | Services:                                            
| | Maintenance and support                               | 94.5      
| | Managed services                                      | 10.6      
| | Professional services                                 | 4.7       
|
| |                                                       | 109.8     
|
| | Total                                                 | $340.7    
|

|(1) |  | Other products include mainly Network Access Solutions products representing one
               percent, one percent and four percent of total revenue in Fiscal 2004, Fiscal
               2003, and Fiscal 2002, respectively.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Geographic
information

| | Revenues
from external customers are attributed to geographic areas based on location of the
customers. The following table sets forth external revenue by geographic areas:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Year Ended
| | ----------
|
|
| | $  25.2   
| | 162.8     
| | 124.2     
| | 28.5      
|
| | $340.7    
|



| | Geographic
long-lived asset information is based on the physical location of the assets as at the end
of each fiscal period. The following table sets forth long-lived assets by geographic
areas:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Year Ended April 25, 2004 | Year Ended April 27, 2003
| | ------------------------- | -------------------------
|
|
| | Canada                    |                          
| | United States             |                          
| | United Kingdom            |                          
| | Barbados                  |                          
| | Other foreign countr      |                          
|
| |                           |                          
|



| | F-21 | 
| | ---- | 

---



|Consolidated Financial Statements -
In millions of US Dollars (except share and per share amounts) |  | US GAAP
|-------------------------------------------------------------------------------------------------- |  | -------
|                                                                                                  

Concentrations

| | The
Company sells its products and services to a broad set of enterprises ranging from large,
multinational enterprises, to small and mid-sized enterprises, government agencies, health
care organizations and schools. Management believes that the Company is exposed to minimal
concentration risk since the majority of its business is conducted with companies within
numerous industries. The Company performs periodic credit evaluations of its
customers financial condition and generally does not require collateral for its
accounts receivable. In some cases, the Company will require payment in advance or
security in the form of letters of credit or third-party guarantees. No single customer
accounted for more than 10 percent of the Companys revenue for the years ended April
25, 2004, April 27, 2003 and April 28, 2002.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a result of the disposal of the manufacturing operations described in note 4, the Supplier
exclusively manufactures substantially all of the Companys Communications Solutions
products at facilities located in Canada, the United States and the United Kingdom. The
Company is not obligated to purchase products from the Supplier in any specific quantity,
except as the Company outlines in forecasts or orders for products required to be
manufactured by the Supplier. In addition, the Company may be obligated to purchase
certain excess inventory levels from the Supplier that could result from the
Companys actual sales of product varying from forecast. As at April 25, 2004, there
was excess inventory of $1.0 (2003  $nil) for which the Company was liable, and has
been recorded in the due to related parties amount. The Companys supply agreement
with the Supplier results in a concentration that, if suddenly eliminated, could have an
adverse effect on the Companys operations. While the Company believes that
alternative sources of supply would be available, disruption of its primary source of
supply could create a temporary, adverse effect on product shipments.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

7.    
  OTHER RECEIVABLES

| | Included
in other receivables is an amount of $3.2 (2003  $6.8) for unbilled accounts.
| | ---------------------------------------------------------------------------------------

8.    
  PREPAID EXPENSES AND OTHER ASSETS

| | Included
in prepaid expenses and other assets is an amount of $8.2 (2003  $9.6) for assets
used by the Company in the provision of maintenance and support services in its Customer
Services segment.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

9.    
  INVENTORIES

| | April 25,
      2004 | April 27,
      2003
| | -------------------- | --------------------
|
| | Raw materials        |                     
| | Finished goods       |                     
|
| |                      |                     
|



| | F-22 | 
| | ---- | 

---



|Consolidated Financial Statements -
In millions of US Dollars (except share and per share amounts) |  | US GAAP
|-------------------------------------------------------------------------------------------------- |  | -------
|                                                                                                  

10.    
  PROPERTY AND EQUIPMENT

| | April 25,
      2004           | April 27,
      2003
| | ------------------------------ | --------------------
|
| | Cost:                          |                     
| | Land                           |                     
| | Buildings                      |                     
| | Equipment                      |                     
|
| |                                |                     
|
| | Less accumulated depreciation: |                     
| | Buildings                      |                     
| | Equipment                      |                     
|
| |                                |                     
|
| |                                |                     
|

| | As
at April 25, 2004, equipment included leased assets with cost of $2.9 (2003  $2.8)
and accumulated depreciation of $2.2 (2003  $1.2) and equipment utilized in the
provision of Managed Services (see note 3(e)) with cost of $11.6 (2003  $11.6) and
accumulated depreciation of $7.2 (2003  $6.1). Depreciation expense recorded in
Fiscal 2004 amounted to $10.8 (2003  $12.7; 2002  $13.2).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11.    
  GOODWILL

|                                     | April 25,
2004 | April 27,
2003
|------------------------------------ | -------------- | --------------
|                                    
|Balance,
      beginning of the year |                | $5.2          
|Foreign
      currency impact        |                | 0.4           
|                                    
|Balance,
      end of the year       |                | $5.6          
|                                    
|                                     |               

| | Effective April
      29, 2002, the Company reclassified acquired workforce with net book value
      of $4.9 to goodwill in accordance with the SFAS No. 142, Goodwill
      and Other Intangible Assets. The Company has designated its third
      quarter as the date for the annual impairment test. The Company performed
      the required impairment tests of goodwill in Fiscal 2004 and Fiscal 2003
      and based on these tests, goodwill is not considered to be impaired.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12.    
  INTANGIBLE AND OTHER ASSETS

| | April 25,
      2004                | April 27,
      2003
| | ----------------------------------- | --------------------
|
| | Acquired technology                 | $2.1                
| | Patents, trademarks and
      other | 3.2                 
|
| |                                     | 5.3                 
|
| | Less accumulated amortization:     
| | Acquired technology                 | 2.1                 
| | Patents, trademarks and
      other | 1.7                 
|
| |                                     | 3.8                 
|
| | Net intangible and other assets     | $1.5                
|

| | Amortization
      of intangible assets was $0.2, $29.1, and $43.8 in each of Fiscal 2004,
      Fiscal 2003 and Fiscal 2002 respectively. The estimated amortization expense
      related to intangible assets in existence as at April 25, 2004, over the
      next five years is as follows: 
      FY05  $0.6; FY06  $0.6; FY07- $0.3; FY08 and beyond  $nil.
      The Company does not allocate intangible assets to its segments, as management
      does not use this information to measure the performance of the operating
      segments.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | F-23 | 
| | ---- | 

---



|Consolidated Financial Statements -
In millions of US Dollars (except share and per share amounts) |  | US GAAP
|-------------------------------------------------------------------------------------------------- |  | -------
|                                                                                                  

13.    
  BANK INDEBTEDNESS

| | The
Company has a 364 day revolving credit facility of $22.0 that is subject to a borrowing
base. The facility bears interest at the prime rate or U.S. base rate plus 1.5 percent or
LIBOR or Bankers Acceptances plus 2.5 percent and is secured by a general assignment
of substantially all the Companys accounts receivable and a general security
interest in the remaining assets of the Company. The credit facility is also personally
guaranteed by the Principal Shareholder. The credit facility matures on June 30, 2005 and
contains certain restrictions and financial covenants. At April 25, 2004, the Company was
in compliance with these financial covenants. At April 27, 2003 the Company was not in
compliance with the financial covenants however bank waivers were obtained on the breached
financial covenants. At April 25, 2004, the Company had borrowed cash of $6.6 under this
facility (2003  $12.3) and $1.0 was committed under letter of credit arrangements
(2003  $0.8).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys United Kingdom (U.K) subsidiary has a $1.8 (£1.0)
overdraft facility bearing interest at the banks base rate plus 1.5%, and indemnity
facilities totaling $5.3 (£3.0) available for letters of credit and other
guarantees. At April 25, 2004, $2.3 of the U.K. facilities was committed under letters of
credit and other indemnities (2003  $1.7). The U.K subsidiary also has additional
available credit facilities of $6.6 (£ 3.8) of which $nil was borrowed at April 25,
2004 (2003  $nil).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the years ended April 25, 2004 and April 27, 2003 the Companys U.K. subsidiary had a
$6.5 (£4.1) loan facility that was subject to a borrowing base. The facility bore
interest at LIBOR plus 3.5 percent, which would decrease to LIBOR plus 2.5 percent upon
receipt of net proceeds of at least CDN$20.0 from an equity offering. The principal amount
of the loan was payable on March 4, 2004 and interest payable quarterly starting in June
2003. The facility was secured by a general assignment of the Companys account
receivable and a general security interest in the remaining assets of the Canadian parent
company and its two U.S. wholly-owned subsidiaries. The loan facility contained certain
restrictions and financial covenants. At April 27, 2003, the Company was not in compliance
with certain of the financial covenants, however bank waivers were obtained on the
breached covenants. At April 27, 2003, the Company had borrowed the total amount available
under this facility. During the year ended April 25, 2004 the Company repaid the entire
balance of the loan and the credit facility was cancelled.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

14.    
  ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

| | 2004                                               | 2003
| | -------------------------------------------------- | ----
|
| | Trade payable                                      |     
| | Employee-related payables                          |     
| | Restructuring, warranty and other
      provisions |     
| | Other accrued liabilities                          |     
|
| |                                                    |     
|



| | F-24 | 
| | ---- | 

---



|Consolidated Financial Statements -
In millions of US Dollars (except share and per share amounts) |  | US GAAP
|-------------------------------------------------------------------------------------------------- |  | -------
|                                                                                                  

15.    
  LONG-TERM DEBT

| | 2004                                                                | 2003
| | ------------------------------------------------------------------- | ----
|
| | Capital leases, at interest rates varying
      from 9.1% to 11.4%, |     
| | payable in monthly installments, with
      maturity dates ranging  |     
| | from 5 to 46 months, secured by the
      leased assets             |     
|
| | Chattel mortgage loan, bearing interest
      at 7.7%, payable in   |     
| | monthly installments and due in October
      2004, secured by      |     
| | certain United Kingdom equipment                                    |     
|
| | Chattel mortgage loan, bearing interest
      at 6.3%,              |     
| | payable in monthly installments and
      due in April 2006,        |     
| | secured by certain United Kingdom
      equipment                   |     
|
| | Mortgage loan, bearing interest at
      7.4% until December 2006,  |     
| | with an option to select a fixed or
      variable interest rate    |     
| | thereafter, payable in quarterly installments
      of £0.3         |     
| | fixed until December 2006 with the
      balance due in December    |     
| | 2011, secured by the United Kingdom
      real estate properties    |     
|
| |                                                                     |     
| | Less: current portion                                               |     
|
| |                                                                     |     
|

| | Pursuant
to the terms of the building mortgage agreement, the Companys U.K. subsidiary must
comply with certain financial covenants. At April 25, 2004 and April 27, 2003, the
subsidiary was in compliance with these financial covenants.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Interest
expense related to long-term debt, including obligations under capital leases, was $1.3 in
Fiscal 2004 (2003  $1.4; 2002  $0.6). Future minimum lease payments under
capital leases total $1.2 of which $1.0, $0.1, $0.1 and $nil relate to fiscal years 2005
to 2008, respectively. Interest costs of $0.1 are included in the total future lease
payments. Scheduled principal mortgage repayments during the next five fiscal years are:
2005  $3.2; 2006  $1.8; 2007  $1.2; 2008  $1.4; 2009 and beyond
 $6.2.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | F-25 | 
| | ---- | 

---



|Consolidated Financial Statements -
In millions of US Dollars (except share and per share amounts) |  | US GAAP
|-------------------------------------------------------------------------------------------------- |  | -------
|                                                                                                  

16.    
  COMMITMENTS AND GUARANTEES

Operating
leases

| | The
Company leases certain equipment and facilities under arms-length operating leases. The
Company is also committed under related party leases and subleases for certain facilities
(see note 4). Rental expense and income on operating leases were as follows:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Year Ended    
| | --------------
|
|
| | Rental expense
| | Arms-length   
| | Related party 
|
| | Total         
|
| | Rental income 
| | Arms-length   
| | Related party 
|
| | Total         
|

| | Future
operating minimum lease payments and future sublease income are as follows:
| | ----------------------------------------------------------------------------------

| | Future Lease Payments | Future Lease Income
| | --------------------- | -------------------
|
|
| | 2005                  |                    
| | 2006                  |                    
| | 2007                  |                    
| | 2008                  |                    
| | 2009                  |                    
| | Thereafter            |                    
|
| | Total                 |                    
|

Capital
expenditures

| | As
at April 25, 2004, capital expenditure commitments to the Supplier amounted to $0.1 (2003
 $0.5).
| | -----------------------------------------------------------------------------------------------------

Guarantees

| | The
Company has the following major types of guarantees that are subject to the accounting and
disclosure requirements of FIN 45:
| | ---------------------------------------------------------------------------------------------------------------------------------



| | F-26 | 
| | ---- | 

---



|Consolidated Financial Statements -
In millions of US Dollars (except share and per share amounts) |  | US GAAP
|-------------------------------------------------------------------------------------------------- |  | -------
|                                                                                                  

Product
warranties:

| | The
Company provides all customers with standard warranties on hardware and software for
periods up to fifteen months. Customers can upgrade the standard warranty and extend the
warranty up to five years on certain products. The following table details the changes in
the warranty liability:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | April 25,
      2004           | April 27,
      2003
| | ------------------------------ | --------------------
|
| | Balance, beginning of year     | $ 1.9               
| | Warranty costs incurred        | (0.7                
| | Warranties issued              | 0.4                 
| | Changes to accruals related to
| | pre-existing warranties        | 0.5                 
|
| | Balance, end of year           | $ 2.1               
|

Intellectual
property indemnification obligations:

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

Bid
and performance related bonds:

| | The
Company enters into bid and performance related bonds related to various customer
contracts. Performance related bonds usually have a term of twelve months and bid bonds
generally have a much shorter term. Potential payments due under these may be related to
the Companys performance and/or the Companys resellers performance under
the applicable contract. Under FIN 45, the Company must measure and recognize a liability
equal to the fair value of bid and performance related bonds involving the performance of
the Companys resellers. At April 25, 2004, the liability recognized in accounts
payable and accrued liabilities related to these bid and performance related bonds, based
on past experience of managements best estimate, was insignificant. At April 25,
2004, the total maximum potential amount of future payments the Company could be required
to make under bid and performance related bonds was $8.1.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

17.    
  CONTINGENCIES

| | In
October 2003 the Company was served with a summons and complaint in a class action lawsuit
brought forward by former employees of the Company. The complaint alleges liabilities for
pay in lieu of termination notice and temporary reduction in hours and pension
contributions. A tentative date for mediation has been scheduled during the second quarter
of Fiscal 2005. The Company is at the early stages of evaluating this claim, and estimates
that its range of loss relative to this matter may be $0 to $1.5. The Company intends to
vigorously defend this matter.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company is also party to a small number of legal proceedings, claims or potential claims
arising in the normal course of its business. In the opinion of the Companys
management and legal counsel, any monetary liability or financial impact of such claims or
potential claims to which the Company might be subject after final adjudication would not
be material to the consolidated financial position of the Company, its results of
operations, or its cash flows.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | F-27 | 
| | ---- | 

---



|Consolidated Financial Statements -
In millions of US Dollars (except share and per share amounts) |  | US GAAP
|-------------------------------------------------------------------------------------------------- |  | -------
|                                                                                                  

18.    
  REDEEMABLE COMMON SHARES

| | Pursuant
to a subscription agreement dated August 31, 2001 (the Commencement Date)
entered into with an unrelated private corporation (the Investor), the Company
issued 4,000,000 common shares for cash consideration of $10.3. Under the terms of the
subscription agreement, within thirty days following the occurrence of certain triggering
events, including (i) the Companys failure to complete an initial public offering of
its common shares (IPO) on or before the fifth anniversary of the subscription
agreement; (ii) a change in the Principal Shareholders status as an officer or
director of the Company prior to an IPO; (iii) the disposal by the Principal Shareholder
of more than twenty-five percent of his investment in the Company to an unrelated party
prior to an IPO, or (iv) the disposal by the Principal Shareholder of any common shares
held in the Company at a price below CDN$4.00 per share prior to an IPO, the Investor has
the right (the Put Right) to require the Company to redeem all or part of its
common shares at a price of CDN$4.00 per share plus interest accrued at an annual rate of
7 percent commencing on August 31, 2001 and compounded semi-annually. Accordingly, the
common shares, including an aggregate amount of $2.1 (2003  $1.2) accreted for
accrued interest since the Commencement Date, were recorded in the mezzanine section of
the Consolidated Balance Sheets. The accreted interest was recorded as an increase to
accumulated deficit.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
August 31, 2001 agreement with the Investor provided that if, at any time prior to the
Company having completed a single equity or equity component financing of at least
CDN$20.0, the Company issues common shares or common share equivalents (the
Securities) to any party under terms that are more favourable than the rights
of the Investor under the amended and restated shareholders agreement, the Investor
had the right to exchange its shares for that number of such Securities as would be issued
at a CDN$4.00 subscription price per share, with certain additional rights attaching to
the Securities. If, at any time prior to the Company completing an aggregate CDN$40.0 in
equity financing subsequent to the Commencement Date, the Company issued Securities to any
party at a price or exercise price below CDN$4.00 per share, the Investor had the right to
require the Company to issue, for nominal consideration, an additional number of
Securities necessary to maintain the then current ownership percentage of the Investor in
the Company.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
April 23, 2004 in connection with the $15.0 (CDN$20.0) financing further described in Note
19 below, the Investor reached an agreement with the Company whereby all 4,000,000 common
shares were exchanged for 16,000,000 Series B Convertible Redeemable Preferred Shares of
the Company at their then fair value of CDN$1.00 per preferred share. Because the
preferred shares are redeemable they continue to be classified in the mezzanine section of
the April 25, 2004 consolidated balance sheet. As a result of the share exchange on April
23, 2004, the August 31, 2001 subscription agreement described above was terminated.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Pursuant
to the new shareholders agreement dated April 23, 2004, within ninety days (original
agreement dated February 16, 2001  30 days) following the failure by the Company to
complete an IPO of its common shares on or prior to September 1, 2006, the Investor has a
right (the put right) to request redemption of the preferred shares at a price
of CDN$1.00 per preferred share, plus interest accrued at an annual rate of 7 percent
commencing on August 31, 2001 and compounded semi-annually. Upon failure to complete an
IPO by September 1, 2006, Zarlink, a major shareholder of the Company, also has the right
to require the Company to redeem for cash all or part of its 10,000,000 common shares held
in the Company at a price of CDN$2.85 per common share. Accordingly, the common shares
held by Zarlink with an original carrying value of $16.9 are classified in the mezzanine
section of the Consolidated Balance Sheets as redeemable common shares. In addition, an
aggregate amount of $1.0 (2003  $0.6) accreted for the excess of the redemption
amount over the original carrying value was recorded as at April 25, 2004. The accreted
amount was recorded as an increase in accumulated deficit.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following table summarizes the changes in redeemable common shares during the year:
| | ---------------------------------------------------------------------------------------

| | April 25, 2004                         | April 27, 2003
| | -------------------------------------- | --------------
|
| | Balance, beginning of the year         | $ 29.0        
| | Interest accreted during the year      | 1.3           
| | Exchange of redeemable common shares, 
| | including accreted interest,
      for | (12.5         
| | Series B preferred shares             
|
| | Balance, end of year                   | $ 17.8        
|



| | F-28 | 
| | ---- | 

---



|Consolidated Financial Statements -
In millions of US Dollars (except share and per share amounts) |  | US GAAP
|-------------------------------------------------------------------------------------------------- |  | -------
|                                                                                                  

19.    
  CONVERTIBLE, REDEEMABLE PREFERRED SHARES

Series
A Preferred Shares

| | On
April 23, 2004 the Company issued 20,000,000 Class A Series 1 Convertible and Redeemable
Preferred Shares (Series A Preferred Shares) for cash consideration of
CDN$1.00 per preferred share, together with attached common stock purchase warrants. The
warrants entitle the Series A holders to purchase 5,000,000 common shares of the Company
at an exercise price of CDN$1.25 per share. The warrants are immediately exercisable and
expire 7 years from the original issuance date. The net proceeds were allocated between
the Series A Preferred Shares and the warrants based upon their relative fair values. This
allocation resulted in an assignment of proceeds of $1.0 to the warrants and the remainder
to the Series A Preferred Shares.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Series A Preferred Shares are subject to non-cumulative dividends as and when declared by
the Board of Directors of the Company. The amount, if any, of any such dividends is at the
absolute discretion of the Board. No dividends have been declared as at April 25, 2004.
The holders of the Series A Preferred Shares are entitled to elect two members of the
Board of Directors of the Company, and at least one of the members of certain committees
of the Board of Directors, and are entitled to vote as a single class with each share of
Series B Preferred Shares and Common Shares.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Series A Preferred Shares are convertible at any time at the option of the holders without
payment of any additional consideration into common shares at a conversion value of
CDN$1.00 per share, plus any declared but unpaid dividends. The terms of the agreement
provide that, if the Company subsequently issues common shares or common share equivalents
at a price less than the conversion value in effect prior to such issuance (subject to
certain excluded transactions), the conversion value of the Series A Preferred Shares will
be reduced accordingly. The Series A Preferred Shares also have the following additional
conversion features: i) the shares will automatically convert into common shares upon the
closing of a qualified IPO or upon a vote or written consent of the majority of the Series
A shareholders; ii) if the Series A shareholders convert after 2 years from the original
issue date, in addition to the common shares otherwise issuable upon conversion, the
Series A shareholders will also receive an additional number of common shares equal to the
issue price of CDN$1.00 per preferred share divided by the fair market value of the common
shares on the date of conversion iii) if the shares are converted pursuant to a
non-qualified IPO the Series A shareholders will receive an additional number of common
shares based on a fraction of the excess, if any, of two times the original Series A issue
price over the IPO price. During the year ended April 25, 2004 the Company recognized a
deemed dividend of $1.4 that increased the net loss attributable to common shareholders.
This charge was calculated based on the difference between the accounting conversion price
of the Series A preferred shares and the fair market value of Companys common shares
on the commitment date.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | At
any date after 5 years from the original issuance date, or at any date prior to a partial
sale event other than a public offering, the majority holders of the Series A Preferred
Shares have a right to require the Company to redeem the shares for cash. The redemption
amount is equal to the original issue price of CDN$1.00 per preferred share times the
number of Series A Preferred Shares outstanding, plus any declared but unpaid dividends,
plus the then current fair market value of the common shares into which the Series A
Preferred Shares are convertible (other than common shares issuable under additional
conversion features). The Series A shareholders will also have a right to request the
redemption of the Series A shares upon the exercise of put rights by certain shareholders.
In the event of an exercise of put rights, the redemption amount will be equal to the
original issue price of CDN$1.00 per preferred share times the number of Series A
Preferred Shares outstanding, plus any declared but unpaid dividends, plus the issuance of
the number of common shares into which the Series A Preferred Shares are convertible. At
April 25, 2004 management has estimated that the fair market value of the Companys
common shares was equivalent to the fair value of preferred shares at CDN$1.00 per share.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a portion of the redemption price of the preferred shares is indexed to the common share
price of the Company, an embedded derivative exists which must be bifurcated and accounted
for separately, under SFAS 133. The derivative component relating to the Series A
Preferred Shares was valued at $6.7, and has been recorded as a liability. The remaining
value of the Series A Preferred Shares of $5.8, after allocation of proceeds between
warrants and the derivative instrument, has been classified in the mezzanine section of
the consolidated balance sheet as at April 25, 2004. The difference between the carrying
amount and the redemption amount is being accreted over the five year period to
redemption. For the year ended April 25, 2004, the amount of accreted interest was
insignificant.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | F-29 | 
| | ---- | 

---



|Consolidated Financial Statements -
In millions of US Dollars (except share and per share amounts) |  | US GAAP
|-------------------------------------------------------------------------------------------------- |  | -------
|                                                                                                  

Series
B Preferred Shares

| | On
April 23, 2004, pursuant to the issuance of the Series A Preferred Shares, certain common
shareholders of the Company exchanged 29,530,494 common shares for 67,060,988 Class B
Series 1 Convertible and Redeemable Preferred Shares (Series B Preferred
Shares) of the Company at CDN$1.00 per preferred share.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Series B Preferred Shares carry the same rights and privileges with respect to dividends
and votes as the Series A Preferred Shares, except that the Series B Preferred Shares rank
junior to the Series A Preferred Shares, but senior to the holders of common shares or any
other class of shares, in the event of payment of preferential amounts required upon a
liquidation or change of control.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Series B Preferred Shares carry the same conversion rights, and in the same conversion
amounts, as the Series A Preferred Shares.
| | -------------------------------------------------------------------------------------------------------------------------------------

| | At
any date after 5 years from the original issuance date, or at any date prior to a partial
sale event other than a public offering, the majority holders of the Series B Preferred
Shares have a right to require the Company to redeem the shares for cash. The redemption
amount is equal to the original issue price of CDN$1.00 per preferred share times the
number of Series B Preferred Shares outstanding, plus any declared but unpaid dividends,
plus the then current fair market value of the common shares into which the Series B
Preferred Shares are convertible (other than common shares issuable under additional
conversion features). At April 25, 2004 management has estimated that the fair market
value of the Companys common shares was equivalent to the fair value of preferred
shares at CDN$1.00 per share.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a portion of the redemption price of the preferred shares is indexed to the common share
price of the Company, an embedded derivative exists which must be bifurcated and accounted
for separately, under SFAS 133. The derivative component relating to the Series B
Preferred Shares was valued at $22.4 and has been recorded as a liability. The remaining
value of the Series B Preferred Shares, after allocation of proceeds to the derivative
instrument, has been classified in the mezzanine section of the consolidated balance sheet
as at April 25, 2004. The difference between the carrying amount and the redemption amount
is being accreted over the five year period to redemption.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following table summarizes the allocation of the convertible, redeemable preferred shares,
net of share issue costs, among its different elements:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------

| | Series A                                                      | Series B | Total
| | ------------------------------------------------------------- | -------- | -----
|
| | Convertible, redeemable preferred shares                      |          |      
| | (all net of share issue costs):                              
| | Issued for cash                                               | $ 13.5   |      
| | Issued in exchange for
      common shares                    |         |      
| | Issued in exchange for
      redeemable common shares         |         |      
| | Less: amount allocated to warrants                            | (1.0     | )    
| | Less: amount allocated to derivative
      instrument         | (6.7     | )    
| | Beneficial conversion feature on Series
      A preferred    
| | shares                                                        | (1.4     | )    
| | Deemed dividend relating to beneficial
      conversion      
| | feature on Series A preferred shares                          | 1.4      |      
| | Accreted interest on redeemable common
      shares exchanged
| | for Series B preferred shares                                 |         |      
|
| | Carrying value of convertible, redeemable
      preferred     | $   5.8  |      
| | shares                                                       
|



| | F-30 | 
| | ---- | 

---



|Consolidated Financial Statements -
In millions of US Dollars (except share and per share amounts) |  | US GAAP
|-------------------------------------------------------------------------------------------------- |  | -------
|                                                                                                  

20.    
  CONVERTIBLE DEBENTURES

| | 2004                                             | 2003 
| | ------------------------------------------------ | -----
|
| | Convertible debentures - beginning of
      year | $ 7.2
| | Convertible debentures issued in the
      year  |     
| | Plus: accrued interest                           | 0.2  
| | Foreign currency impact                          | 0.9  
| | Conversion of debentures to common
      shares  | (8.3 
|
| | Convertible debentures - end of year             | $   
|

| | On
August 16, 2002, the Company closed a private offering of debentures convertible into
shares of the Company that resulted in total cash proceeds of $6.5. The maturity date of
the convertible debentures was July 27, 2003. The debentures provided for interest to
accrue at the rate of 6.5% per annum payable on the maturity date or upon conversion of
the debentures and accrued interest into common shares of the Company. The principal
amount of the debentures, together with accrued interest outstanding under the debentures
was subject to mandatory conversion, and would automatically convert into shares in the
Company (i) if an equity financing pursuant to which equity securities which are, or which
are convertible into, common shares in the Company were issued during the term, at an
equivalent price per share, or (ii) if no such financing occurred during the term, at the
end of the term, into fully-paid and non-assessable common shares of the Company, at a
price per common share equal to the lesser of CDN$3.00 per share and the price per share
determined by an independent valuation.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
Fiscal 2004 the term of the debentures was extended from July 27, 2003 to October 31,
2003. On October 31, 2003 the Company reached an agreement with the debenture holders
whereby the entire carrying value of the debentures of $8.3 was converted to 5,445,775
common shares of the Company at CDN$2.00 per common share. As the conversion price was
lower than the fair market value of the Companys common shares of CDN$2.75 per share
on the commitment date (August 16, 2002), a beneficial conversion feature was triggered
resulting in a non-cash expense of $3.1 recorded in the Fiscal 2004 Consolidated Statement
of Operations.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
April 2004 5,081,619 of the common shares issued upon conversion of the debentures were
exchanged for 10,163,238 Series B Preferred Shares of the Company.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------

21.    
  WARRANTS

| | The
following table outlines the carrying value of warrants outstanding at April 25, 2004 and
April 27, 2003:
| | -------------------------------------------------------------------------------------------------------------

| | 2004                                                                   | 2003  
| | ---------------------------------------------------------------------- | ------
|
| | i) Warrants issued re government funding                               |       
| | Balance
      at beginning of the year                                 | $17.6 
| | Government
      funding received in year  warrants issued            | 2.4   
| | Government
      funding received in year  no warrants issued         | 5.5   
| | Accrued
      government funding receivable  no warrants             
| | issued                                                                 | 3.2   
|
| | Balance
      at end of the year                                       | $28.7 
| | ii) Warrants issued in connection
      with Series A Preferred Shares | $  1.0
| | iii) Warrants issued to financing
      agent                          | 0.1   
|
| | Total warrants outstanding                                             | $29.8 
|



| | F-31 | 
| | ---- | 

---



|Consolidated Financial Statements -
In millions of US Dollars (except share and per share amounts) |  | US GAAP
|-------------------------------------------------------------------------------------------------- |  | -------
|                                                                                                  

|i) | During Fiscal
      2003, the Company, in conjunction with the Partner Company and the Funding
      Company, signed an agreement for funding from the Canadian Government for
      up to CDN$60.0 of the Funding Companys, the Partner Companys
      and the Companys research and development activities over a three
      year period. Pursuant to the terms of the agreement, in exchange for funding
      received from the Government of Canada, the Company has committed to issue
      warrants to Her Majesty the Queen in Right of Canada exercisable into common
      shares for no additional consideration. The number of warrants to be issued
      on September 30 in each of 2002, 2003 and 2004 is determined based on the
      funding received and the fair market value of the common shares at the date
      of issuance. The warrants have no expiry date.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In Fiscal
      2003 the Company issued warrants to acquire 6,182,588 common shares related
      to $10.8 of the cash received. The number of warrants issued was calculated
      based on a fair value of CDN$2.75 per share, as determined by an independent
      valuation. In Fiscal 2004, an additional 6,804,380 warrants were issued
      at the then fair value of CDN$2.00 per share, of which 5,099,112 warrants
      related to $6.8 of government funding that was receivable and received during
      Fiscal 2003. Warrants relating to the remaining $8.7 of government funding
      received and receivable during Fiscal 2004 will be issued in September 2004
      according to the terms of the agreement.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|ii) | In connection
      with the issuance of Series A Preferred Shares in Fiscal 2004, the Company
      issued to the holders of the Series A Preferred Shares warrants to acquire
      5,000,000 common shares of the Company. The warrants are exercisable at
      CDN$1.25 per common share and have a seven year life.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|iii) | In connection
      with the issuance of Series A Preferred Shares in Fiscal 2004, the Company
      issued warrants to the placement agent to acquire 1,000,000 common shares
      of the Company, as consideration for services rendered in connection with
      the financing transaction. The fair value of the warrants was estimated
      based on the fair value of services received. The warrants are exercisable
      at CDN$1.00 per share and have a five year life.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

22.    
  SHARE CAPITAL

| | The
Companys authorized capital stock consists of an unlimited number of common shares,
and an unlimited number of Series A Preferred Shares and Series B Preferred Shares created
in Fiscal 2004 (refer to Note 19). The holders of common shares are entitled to one vote
per share and are entitled to dividends when and if declared by the Board of Directors.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
Fiscal 2004, the Company issued 33,591 shares (2003  10,487 shares; 2002 
62,709) for total consideration of $0.1 (2003  $0.1; 2002  $0.2) in the form
of professional services received. The carrying value of the shares represents the fair
market value of the services received.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Equity
offerings

| | On
      June 8, 2001, February 15, 2002 and on February 28, 2002, the Company completed
      three equity offerings to certain employees and eligible investors. The
      Company issued 5,606,180 common shares for total consideration of $14.6,
      of which $8.8 was received in cash and $5.9 was covered by employee interest-free
      loans repayable to the Company over a two-year period from the date of each
      offering. The repayment of certain of the loans was suspended during Fiscal
      2003 and reinstated during Fiscal 2004. As at April 25, 2004, outstanding
      employee share purchase loans receivable, in the amount of $0.3 (2003 
      $0.7), were recorded against shareholders equity.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Employee
Share Purchase Plan

| | In
May 2001, the Company and its shareholders approved an Employee Stock Purchase Plan
(ESPP) allowing U.S. employees to purchase common shares of the Company
through a single lump sum payment and/or payroll deductions. Of the 6,000,000 common
shares authorized under the ESPP, 3,000,000 common shares were available for purchase at
CDN$4.00 (U.S. $2.58) per share during a first offering period that started on May 14,
2001 and ended April 28, 2002. As at April 28, 2002, employees purchased 645,032 common
shares under the plan for total cash consideration of $1.7. The existing plan expired on
April 30, 2003 with no additional offerings made under a second and final optional period.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | F-32 | 
| | ---- | 

---



|Consolidated Financial Statements -
In millions of US Dollars (except share and per share amounts) |  | US GAAP
|-------------------------------------------------------------------------------------------------- |  | -------
|                                                                                                  

Stock
Option Plan

| | In
March 2001, the Companys shareholders approved the Mitel Networks Corporation
Employee Stock Option Plan (the Plan) applicable to the Companys
employees, directors, consultants and suppliers and authorized 25,000,000 shares for
issuance thereunder. The options are granted at no less than the fair market value of the
common shares of the Company on the date of grant and may generally be exercised in equal
portions during the years following the first, second, third and fourth anniversaries of
the date of grant, and expire on the earlier of the fifth anniversary and termination of
employment. Available for grant at April 25, 2004 were 20,517,736 options (2003 
8,962,846).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
December 23, 2003 the Company put forth an offer to all eligible employees to exchange all
of their outstanding, unexercised options to purchase common shares of the Company, in
exchange for grants of new options. All of the 10,373,302 options tendered in the exchange
were cancelled on January 23, 2004. An equal number of new options will be granted to the
participating employees after July 26, 2004. The new options will vest in four equal
installments commencing one year from the date of grant, and will have an exercise price
to be determined by the Board of Directors of the Company, but which will not be lower
than the fair value of a common share on the date of the grant.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Following
is a summary of the Companys stock option activity and related information. The
exercise price of stock options was based on prices in Canadian dollars translated at the
year-end exchange rate.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                     | Year Ended April 25, 2004 | Year Ended April 27, 2003 | Year Ended April 28, 2002
|---------------------------------------------------- | ------------------------- | ------------------------- | -------------------------
|
|                                                    
|Outstanding
      options:                           |                           |                           |                          
|Balance,
      beginning of 
                 period |                           | 16,037,154                |                          
|Granted                                              |                           | 1,337,087                 |                          
|Exercised                                            |                           | (5,950                    | )                        
|Forfeited                                            |                           | (1,527,436                | )                        
|Expired                                              |                           | (985,289                  | )                        
|Cancelled                                            |                           | (10,373,302               | )                        
|                                                    
|Balance,
      end of period                         |                           | 4,482,264                 |                          
|                                                    
|Number
      of options                              |                          
|exercisable                                          |                           | 2,462,636                 |                          
|                                                    
|Weighted
      average fair                          |                          
|value
      of options granted                       |                          
|during
      the year using the                      |                          
|minimum
      value option                           |                          
|pricing
      model                                  |                           |                           |                          
|                                                    

| | A
summary of options outstanding at April 25, 2004 is as follows:
| | -----------------------------------------------------------------

| |       | Total outstanding | Total exercisable
| | ----- | ----------------- | -----------------
|
|
| | $1.47 |                   | 204,500          
| | $2.02 |                   | 815,750          
| | $2.57 |                   | 2,546,244        
| | $2.94 |                   | 915,770          
|
| |       |                   | 4,482,264        
|



| | F-33 | 
| | ---- | 

---



|Consolidated Financial Statements -
In millions of US Dollars (except share and per share amounts) |  | US GAAP
|-------------------------------------------------------------------------------------------------- |  | -------
|                                                                                                  

Earnings
(loss) per share

| | The
following table sets forth the computation of basic and diluted loss per share:
| | -----------------------------------------------------------------------------------

| | Year Ended                                              
| | --------------------------------------------------------
|
|
| | Net loss, as reported                                   
| | Stock-based dividend                                    
| | Accreted interest on redeemable common
      shares     
| | (see note 18)                                           
| | Deemed dividend relating to beneficial
      conversion 
| | feature on Series A preferred
      shares (see note 19)
|
| | Net loss available to common shareholders               
|
| | Weighted average number of common
      shares          
| | outstanding during the year                             
|
| | Loss per common share  basic
      and diluted         
|

| | As
a result of the net losses for each of the following fiscal periods, the following
potentially dilutive securities have not been included in the calculation of diluted loss
per common share, because to do so would have been anti-dilutive:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (number of shares)                             | Year Ended 
      April 25, 2004 | April 27, 2003 | April 28, 2002
| | ---------------------------------------------- | -------------------------------- | -------------- | --------------
|
| | Stock options                                  | 19,888                           |                |              
| | Warrants                                       | 11,278,329                       |                | 5,254,920     
| | Convertible debentures                         | 2,029,111                        |                | 4,885,389     
| | Convertible, redeemable preferred
      shares | 477,047                          |                |              
| | Shares issuable to the Funding Company        
| | (see note 4)                                   |                                 |                |              
|
| | Total                                          | 13,804,375                       |                | 10,140,309    
|

| | Options
that are anti-dilutive because the exercise price is greater than the average market price
of the common shares, are not included in the computation of diluted earnings per share.
For Fiscal 2004, 4,277,764 stock options were excluded from the above computation of
diluted EPS because they were anti-dilutive (2003  15,538,533 stock options; 2002
 3,242,762 stock options).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Stock-based
compensation

| | In
Fiscal 2002, the Company applied the intrinsic value based method to record stock
compensation expense of $0.1 as part of selling, general and administrative expense in
connection with 174,072 stock options granted to employees in May 2001 at an exercise
price per share of CDN$3.50 when the fair value of the underlying common shares, based on
third party cash transactions during similar time periods, was CDN$4.00 per share. For all
other stock options granted to employees in the periods disclosed, the exercise price of
each stock option granted was equal to the fair value of the underlying common share at
the date of grant.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
Fiscal 2003, the Company granted 30,000 (2002  320,749) stock options at an exercise
price of CDN$2.75 (2002  CDN$3.50 and CDN$4.00) per share to consultants and
advisory directors, as well as employees who, subsequent to the options grants, became
former employees of the Company as a result of the disposal of the manufacturing
operations and other outsourcing actions. The fair market value of these stock options was
determined using a Black-Scholes model based on the fair value of the common shares at the
vesting date and, for the unvested shares, as at April 25, 2004. The following assumptions
were used: five-year life, interest rate of 4.0 percent, volatility of 149 percent and no
dividends. Unvested stock options granted to non-employees must be
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | F-34 | 
| | ---- | 

---



|Consolidated Financial Statements -
In millions of US Dollars (except share and per share amounts) |  | US GAAP
|-------------------------------------------------------------------------------------------------- |  | -------
|                                                                                                  

| | accounted
for based on variable plan accounting. Under variable plan accounting, compensation
expense is measured as of each reporting date as the amount equal to the change in fair
value of the stock options. Deferred stock compensation of $0.6 was recorded and is being
amortized over the vesting period of four years from the date of grant, with $0.2 (2003
 $0.1; 2002  $0.1) amortized into selling, general and administrative expense
for the year ended April 25, 2004. The amount of deferred stock compensation expense to be
recorded in future periods could decrease if options for which accrued but unvested
compensation has been recorded are forfeited.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition, during Fiscal 2004, there were 88,000 (2003  20,000; 2002 
1,358,421) stock options granted to employees of the Supplier and other companies
controlled by the Principal Shareholder. The fair market value of the unvested stock
options at the grant date was determined to be $0.1 (2003  insignificant; 2002
 $2.5) based on a Black-Scholes model and recognized as a dividend to the Principal
Shareholder. The following assumptions were used in Fiscal 2004: five-year life, interest
rate of 4.0 percent, volatility of 149 percent and no dividends (Fiscal 2003 
five-year life, interest rate of 4.1 percent, volatility of 156 percent and no dividends).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

23.    
  OTHER INCOME (EXPENSE), NET

| | Year Ended                          
| | ------------------------------------
|
|
| | Foreign exchange gains (losses), net
| | Interest income                     
|
| |                                     
|

## 



| | F-35 | 
| | ---- | 

---



|Consolidated Financial Statements -
In millions of US Dollars (except share and per share amounts) |  | US GAAP
|-------------------------------------------------------------------------------------------------- |  | -------
|                                                                                                  

24.    
  INCOME TAXES

Details
of income taxes are as follows:

| | Year Ended                    
| | ------------------------------
|
|
| | Loss before income taxes:     
| | Canadian                      
| | Foreign                       
|
| |                               
|
| | Income tax (expense) recovery:
| | Current                       
| | Canadian                      
| | Foreign                       
|
| |                               
| | Deferred                      
| | Canadian                      
| | Foreign                       
|
| |                               
|

| | The
income tax (expense) recovery reported differs from the amount computed by applying the
Canadian rates to the loss before income taxes. The reasons for these differences and
their tax effects are as follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Expected tax rate | 36.3%                                                    | 38%    | 41%
|----------------- | -------------------------------------------------------- | ------ | ---
|                 
|                  | Expected tax benefit                                     | $ 12.8 |    
|                  | Foreign tax rate differences                             | (9.1   | )  
|                  | Tax effect of losses and temporary
      differences not
|                  | recognized                                               | (5.9   | )  
|                  | Tax effect from the recognition of
      previously     
|                  | unrecognized losses                                      |       |    
|                  | Permanent differences                                    | 0.1    |    
|                  | Tax refunds and other adjustments                       
|                  | related to prior years                                   | 1.8    |    
|                 
|                  | Income tax (expense) recovery                            | $(0.3  | )  
|                 

| | The
tax effect of components of the deferred tax assets and liabilities are as follows:
| | ---------------------------------------------------------------------------------------

| | April 25,
      2004                                                        | April 27,
      2003
| | --------------------------------------------------------------------------- | --------------------
|
| | Assets:                                                                     |                     
| | Net operating loss carryforwards                                            | $ 47.9              
| | Allowance for doubtful
      accounts                                       | 2.7                 
| | Inventory                                                                   | 1.2                 
| | Restructuring and other
      accrued liabilities                           | 8.1                 
| | Pension                                                                     | 7.6                 
| | Lease obligations and
      long-term debt                                  | 0.4                 
| | Property and equipment                                                      | 2.9                 
| | Intangible and other assets                                                 | 10.1                
| | Other                                                                       |                    
|
| | Total deferred tax assets                                                   | 80.9                
|
|
| | Deferred tax liabilities                                                    |                    
|
| | Total gross deferred tax assets net
      of total deferred tax liabilities | 80.9                
| | Valuation allowance                                                         | (79.4               
|
| | Total deferred tax assets                                                   | $   1.5             
|



| | F-36 | 
| | ---- | 

---



|Consolidated Financial Statements -
In millions of US Dollars (except share and per share amounts) |  | US GAAP
|-------------------------------------------------------------------------------------------------- |  | -------
|                                                                                                  

| | A valuation
      allowance of $79.4 (2003  $69.2) has been established due to uncertainty
      regarding the realization of the future benefit relating to that amount.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
at April 25, 2004, the Company and its subsidiaries had tax loss carryforwards of
approximately $256.1 (2003  $217.1) available to reduce future years income
for tax purposes. These tax loss carryforwards relate to operations in Canada, United
States, United Kingdom, Italy, Hong Kong and Barbados and expire as follows: 2005 
$8.3; 2006  $0.7; 2007  $4.0; 2008  $36.5; 2009 to 2019  $206.6.
As a result of the acquisition of the Company on February 16, 2001, there are restrictions
on the use of certain of these losses to offset taxable income in future periods.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
at April 25, 2004, the Company had a Canadian ITC carryforward balance of approximately
$11.6, which may offset future federal income taxes payable. The ITCs expire in 2013 and
2014.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company does not expect the unremitted earnings of its subsidiaries will be subject to
income tax or withholding taxes as it plans to reinvest the earnings of its subsidiaries
indefinitely. Accordingly, no provision has been made for potential income tax or
withholding taxes on repatriation of subsidiary earnings. For the year ended April 25,
2004, the loss before income taxes attributable to all foreign operations was $20.2 (2003
 $64.3).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

25.    
  PENSION PLANS

| | The
Company and its subsidiaries maintain defined contribution pension plans that cover
substantially all employees and the Companys U.K. subsidiary also maintains a
defined benefit pension plan. The Company matches the contributions of participating
employees to the defined contribution pension plans on the basis of the percentages
specified in each plan. The costs of the defined contribution pension plans are expensed
as incurred. The defined benefit plan provides pension benefits based on length of service
and final average earnings. The pension costs of the defined benefit pension plan are
actuarially determined using the projected benefits method pro-rated on services and
managements best estimate of the effect of future events. Pension plan assets are
valued at fair value. The most recent actuarial valuation of the plan was performed as at
August 1, 2003 and has been updated to March 31, 2004.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
June 2001, the defined benefit pension plan was closed to new employees and a defined
contribution option was introduced to members of the defined benefit pension plan. Members
were given the choice to continue in the defined benefit plan or transfer their assets to
the defined contribution plan.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
Fiscal 2003, the decline in global capital markets and interest rates had a negative
impact on the Companys defined benefit pension plan assets and obligations. As a
result, the Company was required to adjust the minimum pension liability, representing the
amount by which the accumulated benefit obligation less the fair value of the plan assets
was greater than the liability previously recognized in the consolidated balance sheet.
The after-tax effect of this adjustment was to increase the pension liability and increase
accumulated other comprehensive loss by $16.5, respectively. During Fiscal 2004 given
strengthening markets and better returns on plan assets, the minimum pension liability
decreased to $15.2, resulting in an adjustment of $3.5 to pension liability and
accumulated other comprehensive loss.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
Companys net benefit plan expense was as follows:

| | Year Ended                                       
| | -------------------------------------------------
|
|
| | Current service cost  defined
      contribution
| | Interest cost                                    
| | Expected return on plan assets                   
| | Recognized actuarial loss                        
|
| | Net pension plan expense                         
|



| | F-37 | 
| | ---- | 

---



|Consolidated Financial Statements -
In millions of US Dollars (except share and per share amounts) |  | US GAAP
|-------------------------------------------------------------------------------------------------- |  | -------
|                                                                                                  

United Kingdom
  Defined Benefit Pension Plan

|The
      actuarial present value of the accrued pension benefits and the net assets
      available to provide for these benefits, at market value, were as follows:
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                               | April 25,
2004 | April 27,
2003
|---------------------------------------------- | -------------- | --------------
|                                              
|Change in accrued pension benefits:            |                |               
|Benefit obligation at beginning of year        |                | $   86.6      
|Service cost                                   |                | 1.8           
|Interest cost                                  |                | 5.1           
|Plan participants' contributions               |                | 1.6           
|Actuarial (gain) loss                          |                | (0.5          
|Benefits paid                                  |                | (0.8          
|Foreign exchange                               |                | 9.6           
|                                              
|Benefit obligation at end of year              |                | 103.4         
|                                              
|Change in plan assets:                         |               
|Fair value of plan assets at beginning of year |                | 46.8          
|Actual return on plan assets                   |                | 11.0          
|Employer contributions                         |                | 1.8           
|Employee contributions                         |                | 1.6           
|Benefits paid                                  |                | (0.8          
|Foreign exchange                               |                | 5.7           
|                                              
|Fair value of plan assets at end of year       |                | 66.1          
|                                              
|Unfunded status                                |                | (37.3         
|Unrecognized net actuarial loss                |                | 12.5          
|                                              
|Net pension benefit liability                  |                | $(24.8        
|                                              

|The following
      assumptions were used to determine the periodic pension expense and the
      net present value of the accrued pension benefits:
|----------------------------------------------------------------------------------------------------------------------------------------------------

|                                                  | April 25,
      2004 | April 27,
      2003
|------------------------------------------------- | -------------------- | --------------------
|                                                 
|Discount
      rate                               |                      | 5.5                 
|Compensation
      increase rate                  |                      | 2.5                 
|Investment
      returns assumption               |                      | 7.75                
|Average
      remaining service life of employees |                      | 20                  

26.    
  FINANCIAL INSTRUMENTS

Fair
value

| | The
Companys financial instruments include cash and cash equivalents, restricted cash,
accounts receivable, other receivables, long-term receivables, accounts payable, amounts
due to (from) related parties, long-term debt, convertible debentures (fiscal 2003),
foreign exchange forward contracts and foreign exchange swaps. Due to the short-term
maturity of cash and cash equivalents, restricted cash, accounts receivable, accounts
payable, and convertible debentures (fiscal 2003), the carrying value of these instruments
is a reasonable estimate of their fair value. Foreign exchange contracts are carried at
fair value and amounted to $0.3 and $0.1 classified as other current assets and accounts
payable and accrued liabilities, respectively, as at April 25, 2004 (April 27, 2003 
$nil and $0.3, respectively). The fair value of the foreign exchange contracts reflects
the estimated amount that the Company would have been required to pay if forced to settle
all outstanding contracts at year-end. This fair value represents a point-in-time estimate
that may not be relevant in predicting the Companys future earnings or cash flows.
The fair value of long-term receivables and long-term debt was determined by discounting
future cash receipts and future payments of interest and principal, at estimated interest
rates that would be available to the Company at year-end. The fair value of financial
instruments approximate their carrying value with the following exceptions:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | F-38 | 
| | ---- | 

---



|Consolidated Financial Statements -
In millions of US Dollars (except share and per share amounts) |  | US GAAP
|-------------------------------------------------------------------------------------------------- |  | -------
|                                                                                                  

| |                       | April 25, 2004        |   | April 27, 2003  
| | --------------------- | --------------------- | - | ----------------
| |                       | Carrying
      Amount |   | Fair
      Value
|
| | Long-term receivables | $   0.3               |   |                 
| | Long-term debt        | $(14.9                | ) |                 

Credit
risk

| | The
Companys financial assets that are exposed to credit risk consist primarily of cash
and cash equivalents and accounts receivable. Cash and cash equivalents are invested in
government and commercial paper with investment grade credit rating. The Company is
exposed to normal credit risk from customers. However, the Companys orientation is
global with a large number of diverse customers to minimize concentrations of credit risk.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Interest
rate risk

| | The
Company has credit facilities with interest rates subject to fluctuations in the prime
rate or the LIBOR / Bankers Acceptance rate. The Company is not exposed to other
significant interest rate risk due to the short-term maturity of its monetary assets and
current liabilities.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Foreign
currency risk

| | The
Company is exposed to currency rate fluctuations related primarily to its future net cash
flows of U.S. dollars, British pounds and Euro dollars from operations. The Company uses
foreign currency forward contracts and foreign currency swaps to minimize the short-term
impact of currency fluctuations on foreign currency receivables, payables and intercompany
balances. These contracts are not entered into for speculative purposes, and are not
treated as hedges for accounting purposes. Foreign currency contracts are recorded at fair
market value. Related foreign currency gains and losses are recorded in other expense,
net, in the consolidated statements of operations and offset foreign exchange gains or
losses from the revaluation of intercompany balances and other current assets and
liabilities denominated in currencies other than the functional currency of the reporting
entity.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys foreign exchange contracts mature within one month. For the year ended
April 25, 2004, other expense, net included a net unrealized gain of $0.2 (2003 
gain of $0.3; 2002  loss of $0.1) for changes in the fair value of foreign exchange
contracts. As of April 25, 2004, the Company had outstanding foreign exchange contracts
requiring (i) to exchange British Pounds for Canadian dollars with aggregate notional
amounts of CDN$30.7 (2003  CDN$22.6), (ii)to exchange U.S. dollars for Canadian
dollars with a notional amount of CDN$35.8 (2003  CDN$13.0), (iii) to exchange Euro
dollars for Canadian dollars with aggregate notional amounts of CDN$6.1 (2003  $nil)
and (iv) to exchange Euro dollars and U.S. dollars for British Pounds with aggregate
notional amounts of £nil (2003  £7.6).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Non-derivative
and off-balance sheet instruments

| | Requests
for providing commitments to extend credit and financial guarantees are reviewed and
approved by senior management. Management regularly reviews all outstanding commitments,
letters of credit and financial guarantees, and the results of these reviews are
considered in assessing the adequacy of the Companys reserve for possible credit and
guarantee losses. At April 25, 2004 and at April 27, 2003, there were no outstanding
commitments to extend credit to third parties or financial guarantees outstanding other
than letters of credit. Letters of credit amounted to $3.2 as of April 25, 2004 (April 27,
2003  $2.5). The estimated fair value of letters of credit, which is equal to the
fees paid to obtain the obligations, was insignificant as of April 25, 2004 (April 27,
2003  insignificant).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | F-39 | 
| | ---- | 

---



|Consolidated Financial Statements -
In millions of US Dollars (except share and per share amounts) |  | US GAAP
|-------------------------------------------------------------------------------------------------- |  | -------
|                                                                                                  

27.    
  SUPPLEMENTARY CASH FLOW INFORMATION

| |                                                            | Year Ended
| | ---------------------------------------------------------- | ----------
|
|
| | Change in non-cash operating assets
      and liabilities: |           
| | Accounts receivable                                        | $(5.2     
| | Other receivables                                          | 5.4       
| | Inventories                                                | 8.4       
| | Prepaid expenses                                           | 1.9       
| | Long-term receivables                                      | 0.4       
| | Accounts payable and accrued
      liabilities             | 0.9       
| | Long term portion of lease
      termination obligations   | 2.6       
| | Deferred revenue                                           | 0.7       
| | Due from related parties                                   |          
| | Due to related parties                                     | 5.1       
| | Income and other taxes
      payable                       | 2.8       
|
| |                                                            | $ 23.0    
|
| | Interest payments                                          | $   3.8   
|
| | Income tax payments                                        | $        
|
| | Disclosure of non-cash activities
      during the year   
| | Convertible debentures
      converted to common shares    | $   8.3   
| | Related party loans
      converted to common shares       | 31.0      
| | Exchange of common
      shares for convertible,           | 38.7      
| | redeemable
      preferred shares                         
| | Adjustment to minimum
      pension liability              | (3.5      
| | Warrants issued
      in connection with financing         | 1.0       
| | Warrants issued
      to placement agent                   | 0.1       
| | Issuance of shares
      in exchange for services          | 0.1       
| | Stock-based dividends                                      | 0.1       
| | Deemed dividend
      relating to beneficial conversion   
| | feature on
      Series A preferred shares                 | 1.4       



| | F-40 | 
| | ---- | 

---



|Consolidated Financial Statements -
In millions of US Dollars (except share and per share amounts) |  | US GAAP
|-------------------------------------------------------------------------------------------------- |  | -------
|                                                                                                  

SCHEDULE
  II 
VALUATION OF QUALIFYING ACCOUNTS 
AS AT APRIL 25, 2004 
(in millions of United States dollars)

| |                                 | Additions |  |     
| | ------------------------------- | --------- |  | ----
|
|
| | Allowance for doubtful accounts |           |  |     
| | Fiscal 2002                     | $2.7      |  | $1.7
| | Fiscal 2003                     | 4.0       |  | 0.7 
| | Fiscal 2004                     | 2.7       |  | 1.4 

F-41

SIGNATURE

The registrant hereby certifies that
it meets all of the requirements for filing on Form 20-F and that it has duly caused and
authorized the undersigned to sign this annual report on its behalf.

| | MITEL NETWORKS
      CORPORATION 
      /s/ DONALD W. SMITH
      Name: Donald W. Smith
      Title: Chief Executive Officer
| | ----------------------------------------------------------------------------------------------------------------------------



Date: August 27,
  2004