UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-Q

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

                For the quarterly period ended September 28, 2001
                                       OR

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

                          Commission file number 1-8139

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

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

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

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

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  ( )

The number of common shares outstanding as at October 31, 2001 was 126,624,684.


                                  Page 1 of 24
<PAGE>

                           ZARLINK SEMICONDUCTOR INC.

                                      INDEX

PART I. FINANCIAL INFORMATION (Unaudited)

ITEM 1. FINANCIAL STATEMENTS

            Consolidated Balance Sheets -
            September  28, 2001 and March 30, 2001 .........................  3

            Consolidated Statements of Retained Earnings (Deficit)-
            Three months ended September 28, 2001 and September 29, 2000 ...  4
            Six months ended September 28, 2001 and September 29, 2000 .....  4

            Consolidated Statements of Income (Loss)-
            Three months ended September 28, 2001 and September 29, 2000  ..  5
            Six months ended September 28, 2001 and September 29, 2000 .....  5

            Consolidated Statements of Cash Flows -
            Six months ended September 28, 2001 and September 29, 2000  ....  6

            Notes to the Consolidated Financial Statements .................  7

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS ................................ 14

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
        MARKET RISK ........................................................ 23

PART II. OTHER INFORMATION

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................. 23

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


                                       2
<PAGE>

                           Zarlink Semiconductor Inc.
                     (incorporated under the laws of Canada)
                           CONSOLIDATED BALANCE SHEETS
                        (in millions of Canadian dollars)
                                   (Unaudited)

                                                          Sept. 28,    March 30,
                                                            2001         2001
                                                          ---------    ---------

ASSETS

Current assets:
  Cash and cash equivalents                               $  209.1    $  283.7
  Accounts receivable                                         56.3        85.5
  Inventories (note 4)                                        84.3       133.9
  Investment tax credits recoverable                            --        15.8
  Future income tax assets                                     5.5         1.9
  Prepaid expenses and other                                  23.3        23.5
                                                          --------    --------
                                                             378.5       544.3

Long-term receivables (note 5)                                24.6        15.8
Long-term investments (note 6)                                26.3        24.8
Fixed assets (note 7)                                        209.8       207.0
Acquired intangible assets (note 8)                           17.7        38.1
Other assets                                                   2.5         5.6
                                                          --------    --------

                                                          $  659.4    $  835.6
                                                          ========    ========

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
  Accounts payable and accrued liabilities (note 9)       $  123.6    $  146.5
  Income and other taxes payable                               2.9         7.1
  Future income tax liabilities                                 --         7.3
  Deferred revenue                                             6.4         5.9
  Current portion of long-term debt                            7.3         9.2
                                                          --------    --------
                                                             140.2       176.0
Long-term debt                                                 4.0         7.6
Pension liability                                             17.4        17.2
Future income tax liabilities                                 15.8         7.2
                                                          --------    --------
                                                             177.4       208.0
                                                          --------    --------
Shareholders' equity:
  Capital stock (note 10)
     Preferred shares                                         36.0        36.6
     Common shares                                           638.4       635.2
  Contributed surplus                                          9.1         9.2
  Deficit                                                   (208.5)      (57.7)
  Translation account (note 11)                                7.0         4.3
                                                          --------    --------
                                                             482.0       627.6
                                                          --------    --------
                                                          $  659.4    $  835.6
                                                          ========    ========

        (See accompanying notes to the consolidated financial statements)


                                       3
<PAGE>

                           Zarlink Semiconductor Inc.
             CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (DEFICIT)
                        (in millions of Canadian dollars)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                    Three Months Ended               Six Months Ended
                                                                 Sept. 28,       Sept. 29,       Sept. 28,       Sept. 29,
                                                                   2001            2000            2001            2000
                                                                 ---------       ---------       ---------       ---------
<S>                                                              <C>             <C>             <C>             <C>
Retained earnings (deficit), beginning of period                 $ (174.6)       $  283.3        $  (57.7)       $  262.6

Net income (loss) for the period                                    (33.1)            6.6          (149.2)           28.1
                                                                 --------        --------        --------        --------
                                                                   (207.7)          289.9          (206.9)          290.7

Cost of common share issue                                             --            (0.7)             --            (0.7)

Dividends on preferred shares (note 12)                              (0.8)           (0.8)           (1.6)           (1.6)
                                                                 --------        --------        --------        --------

Retained earnings (deficit), end of period                       $ (208.5)       $  288.4        $ (208.5)       $  288.4
                                                                 ========        ========        ========        ========
</TABLE>

        (See accompanying notes to the consolidated financial statements)


                                       4
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                Three Months Ended          Six Months Ended
                                                                              Sept. 28,    Sept. 29,     Sept. 28,     Sept. 29,
                                                                                2001         2000          2001          2000
                                                                              ---------    ---------     ---------     ---------
<S>                                                                            <C>          <C>          <C>           <C>
Revenue                                                                        $  77.5      $ 194.3      $  182.5      $ 378.1
                                                                               -------      -------      --------      -------

Cost of sales:
  Cost of sales other than amortization (note 4)                                  48.9         82.1         140.3        155.5
  Amortization of manufacturing assets                                             4.9         12.6          12.3         26.0
                                                                               -------      -------      --------      -------
                                                                                  53.8         94.7         152.6        181.5
                                                                               -------      -------      --------      -------
Gross margin                                                                      23.7         99.6          29.9        196.6
                                                                               -------      -------      --------      -------

Expenses:
  Selling and administrative                                                      24.0         33.7          50.0         63.3
  Research and development (net) (note 13)                                        28.7         27.5          60.1         52.0
  Special charge (note 14)                                                          --           --          53.6           --
  Amortization of acquired intangibles  (note 8)                                   5.4         23.9          21.2         24.0
                                                                               -------      -------      --------      -------
                                                                                  58.1         85.1         184.9        139.3
                                                                               -------      -------      --------      -------
Operating income (loss) from continuing operations                               (34.4)        14.5        (155.0)        57.3
Equity loss from investment in Optenia, Inc.                                      (1.4)          --          (2.2)          --
Interest income                                                                    2.3          3.4           5.5          6.4
Interest expense                                                                  (0.3)        (4.8)         (0.6)       (10.1)
Debt issue costs                                                                    --           --            --         (0.6)
                                                                               -------      -------      --------      -------
Income (loss) from continuing operations before income taxes                     (33.8)        13.1        (152.3)        53.0
Income tax recovery (expense)                                                      0.7        (11.9)          3.1        (24.3)
                                                                               -------      -------      --------      -------
Net income (loss) from continuing operations                                     (33.1)         1.2        (149.2)        28.7
                                                                               -------      -------      --------      -------
Income (loss) from discontinued operations                                          --          5.4            --         (0.6)
                                                                               -------      -------      --------      -------

Net income (loss) for the period                                               $ (33.1)     $   6.6        (149.2)     $  28.1
                                                                               =======      =======      ========      =======

Net income (loss) attributable to common shareholders
 after preferred share dividends                                               $ (33.9)     $   5.8      $ (150.8)     $  26.5
                                                                               =======      =======      ========      =======

Net income (loss) per common share from continuing
operations (note 10):
      Basic                                                                    $ (0.27)     $    --      $  (1.20)     $  0.23
                                                                               =======      =======      ========      =======
      Diluted                                                                  $ (0.27)     $    --      $  (1.20)     $  0.22
                                                                               =======      =======      ========      =======

Net income (loss) per common share (note 10):
      Basic                                                                    $ (0.27)     $  0.05      $  (1.20)     $  0.23
                                                                               =======      =======      ========      =======
      Diluted                                                                  $ (0.27)     $  0.05      $  (1.20)     $  0.22
                                                                               =======      =======      ========      =======

Weighted average number of common shares outstanding
(millions):
      Basic                                                                      125.6        121.3         125.4        117.7
                                                                               =======      =======      ========      =======
      Diluted                                                                    127.8        127.1         127.6        122.8
                                                                               =======      =======      ========      =======
</TABLE>

        (See accompanying notes to the consolidated financial statements)


                                       5
<PAGE>

                           Zarlink Semiconductor Inc.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                        (in millions of Canadian dollars)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                     Six Months Ended
                                                                               Sept. 28,           Sept. 29,
                                                                                 2001                2000
                                                                               ---------           ---------
<S>                                                                             <C>                <C>
CASH PROVIDED BY (USED IN)

Operating activities:
  Net income (loss) for the period                                              $ (149.2)          $   28.1
  Amortization of capital and other assets                                          44.3               83.4
  Investment tax credits                                                              --                5.2
  Loss on disposal of capital assets                                                 0.5                2.4
  Loss related to equity investment                                                  2.2                 --
  Future income taxes                                                               (1.6)              (3.4)
  Change in pension liability                                                        0.4                0.3
  Decrease (increase) in working capital (note 17)                                  61.5              (49.4)
                                                                                --------           --------

    Total                                                                          (41.9)              66.6
                                                                                --------           --------

Investing activities:
  Change in short-term investments                                                    --               39.3
  Expenditures for capital and other assets                                        (33.7)             (44.0)
  Proceeds from disposal of capital assets                                           0.3                1.1
  Proceeds from repayment of note receivable                                         6.9                 --
  Acquisitions                                                                        --               10.3
  Proceeds from sale of prior year discontinued operations - net                     2.0                 --
  Increase in long-term investments                                                 (3.1)                --
                                                                                --------           --------

     Total                                                                         (27.6)               6.7
                                                                                --------           --------

Financing activities:
  Repayment of long-term debt                                                       (1.4)             (27.1)
  Repayment of capital lease liabilities                                            (4.1)             (19.3)
  Dividends on preferred shares                                                     (1.6)              (1.6)
  Issue of common shares - net (note 10)                                             3.2                7.0
  Repurchase of common and preferred shares (note 10)                               (0.7)              (0.1)
                                                                                --------           --------

     Total                                                                          (4.6)             (41.1)
                                                                                --------           --------

Effect of currency translation on cash                                              (0.5)              (0.1)
                                                                                --------           --------

Increase (decrease) in cash and cash equivalents                                   (74.6)              32.1

Cash and cash equivalents, beginning of period                                     283.7              195.5
                                                                                --------           --------

Cash and cash equivalents, end of period                                        $  209.1           $  227.6
                                                                                ========           ========
</TABLE>

        (See accompanying notes to the consolidated financial statements)


                                       6
<PAGE>

                           ZARLINK SEMICONDUCTOR INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
           (in millions of Canadian dollars, except per share amounts)
                                   (Unaudited)

1.    In  the  opinion  of  Management,  the  unaudited  consolidated  financial
      statements  reflect  all  adjustments,  which  consist  only of normal and
      recurring adjustments,  necessary to present fairly the financial position
      at  September  28, 2001 and the results of  operations  and the changes in
      financial position for the three and six month periods ended September 28,
      2001 and  September  29,  2000,  in  accordance  with  Canadian  generally
      accepted accounting principles. (See also Note 16).

      These  financial  statements  should  be  read  in  conjunction  with  the
      financial  statements and notes thereto  contained in the Company's Annual
      Report  on Form 10-K for the year  ended  March 30,  2001.  The  Company's
      fiscal year-end is the last Friday in March.

      Due to the cyclical nature of the business,  the results of operations for
      the periods presented are not necessarily  indicative of the results to be
      expected for the full year.

2.    Name change

      On July 25,  2001,  the  Company  formally  changed  its name  from  Mitel
      Corporation to Zarlink  Semiconductor  Inc.  ("Zarlink")  after  receiving
      shareholder approval at its annual general  shareholders'  meeting on that
      date. In connection with the name change,  the Company began trading under
      the  symbol  "ZL" on the New York Stock  Exchange  and the  Toronto  Stock
      Exchange on  September  7, 2001.  All reports  required to be filed by the
      Company under Section 13 or 15(d) of the Securities  Exchange Act of 1934,
      as amended,  prior to  September  7, 2001 were filed under the name "Mitel
      Corporation".

3.    Change in accounting policy

      Effective  March 31,  2001,  the  beginning  of Fiscal  2002,  the Company
      adopted the new  recommendations of Section 3500 of the Canadian Institute
      of Chartered  Accountants  ("CICA") Handbook  "Earnings Per Share" and has
      applied the  provisions  retroactively  with  restatement  of earnings per
      share for all periods presented. The adoption of these recommendations had
      no impact on the earnings per share in Fiscal 2002.

      The  new   recommendations,   which  are  essentially   aligned  with  the
      requirements of the U.S.  Financial  Accounting  Standards Board Statement
      No. 128 on this  subject,  require the use of the  treasury  stock  method
      instead of the imputed  earnings method for calculating  diluted  earnings
      per share.

4.    Inventories:

                                                   Sept. 28,      March 30,
                                                     2001           2001
                                                   ---------     ----------

      Raw materials                                 $ 23.3        $  19.7
      Work-in-process                                 44.3           73.0
      Finished goods                                  16.7           41.2
                                                    ======        =======
                                                    $ 84.3        $ 133.9
                                                    ======        =======

      During the first quarter ended June 29, 2001,  and in light of the current
      semiconductor industry-wide slow down and higher channel inventories,  the
      Company  recorded an excess inventory


                                       7
<PAGE>

      charge to cost of sales amounting to $45.0 for inventories estimated to be
      beyond its needs for the following 12 months.

5.    Long-term receivables

<TABLE>
<CAPTION>
                                                                                       Sept. 28,     March 30,
                                                                                         2001           2001
                                                                                       ---------     ---------
<S>                                                                                     <C>            <C>
        Investment tax credits recoverable                                              $ 23.7         $ 7.8
        Promissory note, bearing interest at 8%, payable annually, due in
        June 2004 (see below) and against which a first deed on real
        property was pledged as security                                                    --           7.1
        Other long-term receivables                                                        0.9           0.9
                                                                                        ------        ------
                                                                                        $ 24.6        $ 15.8
                                                                                        ======        ======
</TABLE>

      The promissory note was fully repaid in advance on July 12, 2001.

6.    Long-term investments

<TABLE>
<CAPTION>
                                                                                       Sept. 28,     March 30,
                                                                                         2001           2001
<S>                                                                                     <C>           <C>
         Investments held at cost:
           Mitel Networks Corporation                                                   $ 17.2        $ 17.2
           Other investments                                                               3.5            --
                                                                                        ------        ------
                                                                                          20.7          17.2
         Equity investment in Optenia, Inc.                                                5.6           7.6
                                                                                        ------        ------
                                                                                        $ 26.3        $ 24.8
                                                                                        ======        ======
</TABLE>

7.    Fixed assets

<TABLE>
<CAPTION>
                                                                                       Sept. 28,     March 30,
                                                                                         2001           2001
                                                                                       ---------     ---------
<S>                                                                                    <C>           <C>
         Cost                                                                          $ 614.8       $ 586.6
         Accumulated amortization                                                       (405.0)       (379.6)
                                                                                       =======       =======
                                                                                       $ 209.8       $ 207.0
                                                                                       =======       =======
</TABLE>

8.    Acquired intangible assets

<TABLE>
<CAPTION>
                                                                                       Sept. 28,     March 30,
                                                                                         2001           2001
                                                                                       ---------     ---------
<S>                                                                                     <C>          <C>
         Cost:
           In-process technology                                                        $  7.6       $   7.6
           Developed technology                                                           34.8          34.8
           Customer base and work force                                                     --           3.1
           Goodwill                                                                         --         233.9
                                                                                        ------       -------
                                                                                          42.4         279.4
                                                                                        ------       -------
         Less accumulated amortization:
           In-process technology                                                           4.4           2.5
           Developed technology                                                           20.3          11.6
           Customer base and work force                                                     --           1.2
           Goodwill                                                                         --         226.0
                                                                                        ------       -------
                                                                                          24.7         241.3

                                                                                        ------       -------
                                                                                        $ 17.7       $  38.1
                                                                                        ======       =======
</TABLE>


                                       8
<PAGE>

      During the first quarter of Fiscal 2002, the Company  determined  that the
      balance of the acquired intangibles  associated with the customer base and
      work  force  and  goodwill  amounting  to  $7.5  was  impaired  due to the
      workforce reduction program (see also Note 14). The write down of $7.5 was
      included  with the regular  amortization  of acquired  intangibles  on the
      income  statement in the six months ended September 28, 2001. In addition,
      fully amortized acquired intangible assets of $237.0 were removed from the
      accounts of the Company at September 28, 2001.

9.    Accounts payable and accrued liabilities

                                                          Sept. 28,    March 30,
                                                             2001           2001
                                                          ---------    ---------

      Trade payables                                       $   15.1     $ 32.3
      Employee-related payables                                18.3       17.5
      Goods received not invoiced                               1.8       13.7
      Provision for disposal of discontinued operations        17.9       20.2
      Restructuring provisions (note 14)                       22.6       10.5
      Other accrued liabilities                                47.9       52.3
                                                           --------     ------
                                                           $  123.6     $146.5
                                                           ========     ======

10.   Capital stock:

      a)                                             Sept. 28,        March 30,
                                                       2001             2001
                                                   ------------      -----------
           Shares outstanding:
             Preferred shares - R&D Series            1,582,000        1,593,900
             Common shares                          126,572,488      126,136,799

      There were 29,300 preferred shares repurchased during the six months ended
      September  28, 2001 for cash  consideration  of $0.7, of which 11,900 were
      cancelled as at September 28, 2001.

      On June 7, 2001,  the Company  announced  its  intention  to continue  its
      normal  course  issuer bid program for up to  6,308,907  common  shares (5
      percent of  126,178,148  common shares issued and  outstanding  at May 28,
      2001) between June 9, 2001 and June 8, 2002. All  repurchased  shares will
      be cancelled.  In the six months ended  September 28, 2001, no shares were
      repurchased under the normal course issuer bid.

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

                                               Six Months Ended
                                             Sept. 28,    Sept. 29,
                                               2001          2000
                                             ---------    ---------

            Outstanding options:
            Balance, beginning of period     9,464,693    9,017,262
            Granted                          1,586,500    1,255,400
            Exercised                         (435,689)  (1,003,086)
            Forfeited                         (902,069)    (406,164)
                                             =========    =========
            Balance, end of period           9,713,435    8,863,412
                                             =========    =========

      Available for grant at September 28, 2001 were 1,295,039 (March 30, 2001 -
      1,979,470) common shares.  The exercise price on outstanding stock options
      ranges from $2.25 to $37.35 per share with exercise  periods  extending to
      January 2008.


                                       9
<PAGE>

      c)    The net income per common share figures were calculated based on net
            income after the  deduction of preferred  share  dividends and using
            the weighted monthly average number of shares outstanding during the
            respective  periods.  Diluted  earnings  per  share is  computed  in
            accordance  with the treasury  stock method and based on the average
            number of common shares and dilutive common share equivalents.  (See
            also note 3).

11.   The following table summarizes changes in the translation account:

<TABLE>
<CAPTION>
                                           Three Months Ended      Six Months Ended
                                          Sept. 28,    Sept. 29,  Sept. 28,  Sept. 29,
                                             2001        2000       2001       2000
                                          ---------    ---------  ---------  ---------
<S>                                         <C>        <C>         <C>        <C>
    Balance, beginning of period            $ (7.5)    $ (13.5)    $  4.3     $  (3.4)
    Increase:
      Movements in exchange rates -
         United Kingdom Pound Sterling         9.3         1.5        3.6       (15.7)
         United States Dollar                  3.0         6.2       (0.6)       11.9
         Swedish Krona                         0.7        (1.7)      (0.8)       (1.8)
         Other currencies                      1.5        (2.7)       0.5        (1.2)
                                            ------     -------     ------     -------
    Balance, end of period                  $  7.0     $ (10.2)    $  7.0     $ (10.2)
                                            ======     =======     ======     =======
</TABLE>

12.   The Company has not declared or paid any  dividends on its common  shares.
      During the second  quarter,  a $0.50 per share  dividend  was declared and
      paid on the preferred shares.

13.   Research and development

      R&D government assistance,  including ITCs, amounted to nil during the six
      month  period ended  September  28,  2001.  In Fiscal  2001,  research and
      development expenses from continuing  operations were net of $1.0 and $2.1
      in R&D government assistance, including ITCs, for the respective three and
      six month periods ended September 29, 2000.

14.   Special charge

      On May 10, 2001, the Company's Board of Directors approved a restructuring
      program to reduce the Company's manufacturing costs and operating expenses
      in  response  to  adverse  market  conditions.  Accordingly,  the  Company
      recorded a pre-tax  special charge of $53.6 related to that program in the
      quarter  ended June 29,  2001.  The special  charge  comprised a workforce
      reduction charge of approximately  $41.4 primarily relating to the cost of
      severance and benefits for the termination of approximately  439 employees
      throughout  the world in Fiscal  2002.  In  addition,  the special  charge
      included  the cost of lease  and  contract  settlements  of  approximately
      $12.2.  As at  September  28,  2001,  the  balance  of  the  restructuring
      provision included in accounts payable and accrued liabilities amounted to
      $22.6 (March 30, 2001 - $10.5).

15.   Information on business segments

      The Company's reportable business segments from continuing  operations are
      comprised of the  Communications and Medical groups.  Reportable  segments
      are  business  units that offer  different  products  and services and are
      managed separately because of these differences.

      The  Communications   business   specializes  in  broadband   connectivity
      solutions  over wired,  wireless  and optical  media.  The  Communications
      business includes network access products that provide connectivity to the
      network's  core  backbone  such as feeder,  aggregation  and  transmission
      applications  and those  that  address  the  multi-protocol  physical  and
      network layers.  In addition,  the  Communications  business includes user
      access products that allow users to


                                       10
<PAGE>

      connect to the network.  These products  include wireless and infotainment
      applications.  The  Communications  business also includes custom products
      that  involve  the  design  of  custom  applications-specific   integrated
      circuits  ("ASICs")  as well  as  custom  foundry  services  for  external
      parties.

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

      The  Company  evaluates  the  performance  of each  business  segment  and
      allocates resources based on operating income from continuing  operations,
      which excludes any  intersegment  sales of products and services.  Zarlink
      does not allocate  amortization of intangibles,  special charges or gains,
      interest  income or  interest  expense or income  taxes to its  reportable
      segments.  In addition,  total assets are not  allocated to each  segment;
      however, depreciation of capital assets is allocated to the segments based
      on the asset usage. The accounting policies of the reportable segments are
      the  same  as  those  described  in Note 3 to the  consolidated  financial
      statements as at March 30, 2001.

<TABLE>
<CAPTION>
                                                                                                         Unallocated
Three Months Ended September 28, 2001                                       Communications    Medical       Costs         Total
                                                                            --------------    -------    -----------      -----
<S>                                                                             <C>           <C>          <C>          <C>
      Revenue                                                                   $  66.2       $  11.3      $   --       $  77.5
      Amortization of buildings and equipment                                      10.1           0.1          --          10.2
      Amortization of acquired intangibles                                           --            --         5.4           5.4
      Segment's operating income (loss) from continuing
      operations                                                                  (33.0)          4.0        (5.4)        (34.4)
</TABLE>

<TABLE>
<CAPTION>
                                                                                                         Unallocated
Three Months Ended September 29, 2001                                       Communications    Medical       Costs         Total
                                                                            --------------    -------    -----------      -----
<S>                                                                            <C>            <C>           <C>        <C>
      Revenue                                                                  $  182.8       $  11.5       $  --      $  194.3
      Amortization of buildings and equipment                                      22.2           0.3          --          22.5
      Amortization of acquired intangibles                                           --            --        23.9          23.9
      Segment's operating income from continuing
      operations                                                                   37.6           0.8       (23.9)         14.5
</TABLE>

<TABLE>
<CAPTION>
                                                                                                         Unallocated
Six Months Ended September 28, 2001                                         Communications    Medical       Costs         Total
                                                                            --------------    -------    -----------      -----
<S>                                                                            <C>            <C>         <C>          <C>
      Revenue                                                                  $  156.8       $  25.7     $   --       $  182.5
      Amortization of buildings and equipment                                      22.9           0.2         --           23.1
      Amortization of acquired intangibles                                           --            --       21.2           21.2
      Excess inventory charge to cost of sales                                       --            --       45.0           45.0
      Special charge                                                                 --            --       53.6           53.6
      Segment's operating income (loss) from continuing
      operations                                                                  (42.9)          7.7     (119.8)        (155.0)
</TABLE>


                                       11
<PAGE>

<TABLE>
<CAPTION>
                                                                                                         Unallocated
Six Months Ended September 29, 2001                                         Communications    Medical       Costs         Total
                                                                            --------------    -------    -----------      -----
<S>                                                                            <C>            <C>           <C>        <C>
      Revenue                                                                  $  355.0       $  23.1       $  --      $  378.1
      Amortization of buildings and equipment                                      43.6           0.5          --          44.1
      Amortization of acquired intangibles                                           --            --        24.0          24.0
      Segment's operating income from continuing
      operations                                                                   78.2           3.1       (24.0)         57.3
</TABLE>

16.   United States accounting principles

      The  consolidated  financial  statements  have been prepared in accordance
      with Canadian generally accepted  accounting  principles  (Canadian GAAP),
      which, in the case of the Company,  conform in all material  respects with
      those in the United States (U.S.  GAAP) and with the  requirements  of the
      Securities and Exchange  Commission  (SEC),  except as fully  described in
      Note 23 to the consolidated financial statements as at March 30, 2001.

      The following  table  reconciles  the net income (loss) as reported on the
      consolidated  statements  of income  (loss) to the net income  (loss) that
      would have been  reported had the  financial  statements  been prepared in
      accordance with U.S. GAAP and the requirements of the SEC:

<TABLE>
<CAPTION>
                                                                                  Three Months Ended            Six Months Ended
                                                                                Sept. 28,     Sept. 29,     Sept. 28,     Sept. 29,
                                                                                  2001           2000          2001          2000
                                                                                ---------     ---------     ---------     ---------
<S>                                                                             <C>           <C>           <C>           <C>
Net income (loss) from continuing operations for the period in
accordance with Canadian GAAP                                                   $   (33.1)    $     1.2     $  (149.2)    $    28.7
Acquirer's redundancy provisions                                                      1.3           0.8           2.6           1.3
Write-off of acquired in-process technology                                            --          (5.9)           --          (5.9)
Amortization of acquired in-process technology                                        0.9           0.5           1.8           1.0
Amortization of goodwill                                                              3.3          (0.9)         16.0          (0.9)
Depreciation of capital assets                                                        2.2            --           4.3            --
Stock compensation expense                                                           (3.7)         (1.7)         (9.7)         (1.7)
Income tax expense                                                                     --            --           1.7            --
Effect of deferral accounting related to foreign exchange contracts                  (1.1)          2.3           8.6           9.9
Translation of foreign currency denominated debt                                     --            (3.2)         --            (6.7)
                                                                                ---------     ---------     ---------     ---------
U.S. GAAP and SEC requirements:
Net income (loss) from continuing operations for the period                         (30.2)         (6.9)       (123.9)         25.7
Loss from discontinued operations                                                      --           5.4            --          (0.6)
                                                                                ---------     ---------     ---------     ---------
Net income (loss) for the period                                                    (30.2)         (1.5)       (123.9)         25.1
Less: dividends on cumulative preferred shares                                        0.8           0.8           1.6           1.6
                                                                                ---------     ---------     ---------     ---------
Net income (loss) attributable to common shareholders                           $   (31.0)    $    (2.3)    $  (125.5)    $    23.5
                                                                                =========     =========     =========     =========

Net income (loss) per common share from continuing operations:
   Basic                                                                        $   (0.25)   $    (0.06)   $    (1.00)   $     0.20
                                                                                =========     =========     =========     =========
   Diluted                                                                      $   (0.25)   $    (0.06)   $    (1.00)   $     0.20
                                                                                =========     =========     =========     =========

Net income (loss) per common share:
   Basic                                                                        $   (0.25)   $    (0.02)   $    (1.00)   $     0.20
                                                                                =========     =========     =========     =========
</TABLE>


                                       12
<PAGE>

<TABLE>
<CAPTION>
                                                                                  Three Months Ended            Six Months Ended
                                                                                Sept. 28,     Sept. 29,     Sept. 28,     Sept. 29,
                                                                                  2001           2000          2001          2000
                                                                                ---------     ---------     ---------     ---------
<S>                                                                             <C>           <C>           <C>           <C>
   Diluted                                                                      $   (0.25)   $    (0.02)   $    (1.00)   $     0.19
                                                                                ---------    ----------    ----------    ----------

Weighted average shares for basic EPS (millions):                                   125.6         121.3         125.4         117.7
Weighted average shares on conversion of stock options (millions)                     1.4           4.7           1.4           4.5
Weighted average issued shares subject to restrictions (millions)                     0.8           1.1           0.8           0.6
                                                                                ---------    ----------    ----------    ----------
Adjusted weighted average shares and share equivalents (millions)                   127.8         127.1         127.6         122.8
                                                                                =========     =========     =========     =========
</TABLE>

      The  following   options  were  excluded  in  the   computation  of  share
      equivalents  because the  options'  exercise  price  exceeded  the average
      market price of the common shares:

      i)    Options outstanding for the three months ended September 28, 2001 to
            purchase  5,306,179  shares of common  stock at an average  price of
            $16.54 per share;

      ii)   Options  outstanding  for the six months ended September 28, 2001 to
            purchase  5,366,492  shares of common  stock at an average  price of
            $16.34 per share;

      iii)  Options  outstanding  for the six months ended September 29, 2000 to
            purchase  189,500  shares of  common  stock at an  average  price of
            $34.64 per share.

      U.S. GAAP earnings  included a foreign exchange loss of $1.1 for the three
      months  ended  September  28,  2001 and a gain of $7.8 for the six  months
      ended  September  28, 2001 (three  months ended  September 29, 2000 - $0.4
      gain; six months ended September 29, 2000 - $4.1 gain).

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

<TABLE>
<CAPTION>
                                                                                 Three Months Ended        Six Months Ended
                                                                               Sept. 28,    Sept. 29,    Sept. 28,    Sept. 29,
                                                                                 2001         2000         2001         2000
                                                                               ---------    ---------    ---------    ---------
<S>                                                                             <C>          <C>         <C>           <C>
 Net income (loss) for the period                                               $ (30.2)     $ (1.5)     $ (123.9)     $  25.1
 Other comprehensive loss:
   Unrealized net derivative gain (losses) on cash flow hedges                      0.9          --          (0.9)          --
   Change in foreign currency translation adjustment                               14.5         3.3           2.7         (6.8)
                                                                                -------      ------      --------      -------

Comprehensive income (loss) for the period                                      $ (14.8)     $  1.8      $ (122.1)     $  18.3
                                                                                =======      ======      ========      =======
</TABLE>

      Balance  sheet items,  which vary,  in  conformity  with U.S. GAAP and SEC
      requirements:

                                                         Sept. 28,    March 30,
                                                           2001         2001
                                                         ---------    ---------
Prepaid expenses and other                               $    20.2    $    12.7
Future income taxes                                      $     5.5    $     1.2
Fixed assets                                             $   163.9    $   154.2
Acquired intangible assets                               $     3.6    $     6.2
Income and other taxes payable                           $     2.9    $     8.1
Redeemable preferred shares                              $    33.2    $    33.8
Shareholders' equity:
  Common shares                                          $ 1,089.2    $ 1,076.3
  Contributed surplus                                    $      --    $      --
  Accumulated other comprehensive income (loss)          $     6.1    $     4.3
  Deficit                                                $  (709.5)   $  (584.0)


                                       13
<PAGE>

      During the second quarter of Fiscal 2002, the Company  recorded a $1.0 net
      reduction in the quarter's  earnings,  representing  loss of $1.1 on hedge
      ineffectiveness  and a gain of  $0.1 on the  change  in the  value  of the
      derivative  instruments  maturing  during the  quarter.  The Company  also
      recorded a gain to other  comprehensive  income for the second  quarter of
      $0.9  which was  attributable  to the  change in the value of  outstanding
      foreign  currency  forward  contracts  related  to the  Company's  hedging
      program that were designated as cash flow hedges.

      During the six months ended  September  28, 2001,  the Company  recorded a
      $2.2 net  reduction in the  earnings,  representing  loss of $2.5 on hedge
      ineffectiveness  and a gain of  $0.3 on the  change  in the  value  of the
      derivative instruments maturing during the quarter.

      The Company  also  recorded a gain to other  comprehensive  income for the
      second quarter of $0.9 which was  attributable  to the change in the value
      of outstanding foreign currency forward contracts related to the Company's
      hedging program that were designated as cash flow hedges (six months ended
      September 28, 2001 - loss of $0.9).

      The  Financial   Accounting  Standards  Board  has  issued  Statements  of
      Financial Accounting  Standards ("SFAS") No. 141, "Business  Combinations"
      and No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires
      all business combinations  subsequent to June 30, 2001 to be accounted for
      under the purchase method of accounting.  The pooling-of-interests  method
      is  no  longer  allowed.   SFAS  No.  142  requires  that  upon  adoption,
      amortization  of goodwill will cease and,  instead,  the carrying value of
      goodwill  will be evaluated  for  impairment  on at least an annual basis.
      SFAS No. 142 is effective for fiscal years  beginning  after  December 15,
      2001. The Company is evaluating the impact of adoption of these  standards
      and has  not yet  determined  the  effect  of  adoption  on its  financial
      position and results of operations.

17.   Net change in  non-cash  working  capital  balances  related to  operating
      activities:

                                                            Six Months Ended
                                                         Sept. 28,     Sept. 29,
                                                           2001          2000
                                                         ---------    ----------
      Accounts receivable                                 $  29.7      $   4.7
      Inventories                                            50.1         (1.2)
      Accounts payable and accrued liabilities              (19.5)       (47.4)
      Deferred revenue                                        0.2         (3.5)
      Other                                                   1.0         (2.0)
                                                          -------      --------
                                                          $  61.5      $ (49.4)
                                                          =======      ========

18.   Comparative figures

      Certain of the Fiscal 2001 comparative  figures have been  reclassified to
      conform to the presentation adopted in Fiscal 2002.

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(in millions of Canadian dollars, except per share amounts)

The Company changed its legal name to Zarlink Semiconductor Inc. after receiving
shareholder  approval at the Company's annual general  shareholders'  meeting on
July 25, 2001.  In  connection  with the name


                                       14
<PAGE>

change,  the Company  began  trading under the symbol "ZL" on the New York Stock
Exchange and the Toronto Stock Exchange on September 7, 2001.

Zarlink  is a global  provider  of  semiconductors  for  voice,  data and  video
networks and for medical applications.  Zarlink's  semiconductor  Communications
business specializes in broadband  connectivity  solutions over wired,  wireless
and  optical  media.   Zarlink's   semiconductor   Medical   business   provides
applications  specific  integrated  circuit ("ASIC")  solutions for applications
such as pacemakers, hearing aids and portable instruments. The Company presently
employs  approximately  2,000  people  worldwide,  including  approximately  500
designers.

The following  discussion and analysis  explains  trends in Zarlink's  financial
condition and results of operations for the three and six months ended September
28, 2001,  compared with the  corresponding  periods in the previous year.  This
discussion is intended to help  shareholders  and other readers  understand  the
dynamics of Zarlink's  business  and the key factors  underlying  its  financial
results.  This discussion  should be read in conjunction  with the  consolidated
financial statements and notes thereto included elsewhere in this Form 10-Q, and
with the Company's audited  consolidated  financial statements and notes thereto
for the fiscal year ended March 30, 2001.

RECENT SIGNIFICANT EVENTS
-------------------------

Recent Industry Slow Down

Beginning  late  in  the  third  quarter  of  Fiscal  2001,  the  communications
semiconductor  industry experienced a significant downturn in sales.  Management
believes that a variety of factors have combined to create market  uncertainties
that will likely  extend  through  most of the 2002 fiscal year.  These  factors
include a large inventory build-up in the  telecommunications and data equipment
sectors,  a reduced  demand  for  infrastructure  equipment  from the  telephone
companies,  especially by Competitive Local Exchange  Carriers  ("CLECs") in the
United States,  and a slowing of the growth rate of the U.S. and world economies
in general.

Special and Excess  Inventory  Charges  Recorded in the First  Quarter of Fiscal
2002

During the first  quarter  ended June 29,  2001,  the Company  recorded  pre-tax
special  and  excess  inventory  charges  to income  amounting  to  $106.1.  The
associated  tax recovery on these  charges  amounts to $6.0.  These  charges are
described in the paragraphs that follow.

On May 10,  2001,  the  Company's  Board of Directors  approved a  restructuring
program to reduce the Company's  manufacturing  costs and operating  expenses in
response to adverse  market  conditions.  Accordingly,  the  Company  recorded a
pre-tax  special  charge of $53.6  related to that program in the quarter  ended
June 29, 2001.  The special  charge  comprised a workforce  reduction  charge of
approximately $41.4 primarily relating to the cost of severance and benefits for
the termination of  approximately  439 employees  throughout the world in Fiscal
2002. In addition,  the special  charge  included the cost of lease and contract
settlements  of  approximately  $12.2.  As at September  28,  2001,  the Company
employed approximately 2,000 people worldwide.

In the first  quarter  ended June 29,  2001,  the  Company  determined  that the
balance of the acquired  intangibles  associated with the customer base and work
force and goodwill amounting to $7.5 was impaired. The impairment was due to the
effects of the Fiscal  2002  workforce  reduction  program on the former  Vertex
Networks,  Incorporated  ("Vertex")  operations  that were  acquired on July 28,
2000.  The write down of $7.5 was  included  with the  regular  amortization  of
acquired  intangibles  on the income  statement in the first quarter and for the
six months ended  September 28, 2001. The carrying value of acquired  intangible
assets was $17.7 as at  September  28,  2001.  Management  believes the carrying
value of the  acquired  intangibles  will be  recovered  from  estimated  future
undiscounted cash flows by directing


                                       15
<PAGE>

Vertex's  acquired  technology  to research  and  development  ("R&D")  programs
focused  on the  convergence  of  Internet  Protocol  ("IP")  and time  division
multiplex ("TDM") switching.

In keeping with Zarlink's  drive to concentrate its R&D resources on high-growth
opportunities,  the R&D team in Irvine,  California,  which  originated from the
Vertex  acquisition last year, has become a Design Center supporting the Network
Access convergence  strategy.  The Irvine Design Center will focus its expertise
in IP  switching  technology  and  Quality of Service  ("QoS") on  speeding  the
development of products that support IP traffic in converged, multi-format, wide
area networks. Management believes that this step strengthens the ability of the
Network  Access group to compete in the WAN  convergence  market,  where Zarlink
already  competes  in such areas as  network  timing  and  synchronization,  TDM
switching,  voice echo  cancellation,  inverse  multiplexing  for ATM (IMA), and
SARs.

During the first quarter ended June 29, 2001, the Company reviewed its inventory
requirements  for the  next 12  months  in light  of the  current  semiconductor
industry-wide  slow down and  higher  channel  inventories.  As a result of this
review,  the  Company  recorded  an  excess  inventory  charge  to cost of sales
amounting  to $45.0 for  inventories  estimated  to be beyond  its needs for the
following 12 months in the first quarter of Fiscal 2002.

Common Share Repurchase Program

On June 7, 2001, the Company announced its Board of Directors had authorized the
continuation  of its normal  course  issuer  bid  program  to  repurchase  up to
6,308,907  common shares,  representing  5 percent of 126,178,148  common shares
issued and  outstanding  at May 28, 2001.  The purchases  will take place on the
open  market  through  the  stock  exchanges  of New  York  and  Toronto  over a
twelve-month  period beginning on June 9, 2001 and ending on June 8, 2002, or on
such  earlier date as the Company may  complete  its  purchases  pursuant to the
notice of  intention to make a normal  course  issuer bid filed with The Toronto
Stock Exchange.  The Company,  which intends to cancel the  repurchased  shares,
believes that at present no director,  senior  officer or insider of the Company
intends to sell any common shares under this program.

RESULTS OF CONTINUING OPERATIONS
--------------------------------

Business Segment Review
-----------------------

Zarlink's continuing  operations as a semiconductor company are comprised of two
reportable  business  segments  Communications  and Medical.  Zarlink  sells its
products  through both direct and  indirect  channels of  distribution.  Factors
affecting the choice of distribution include,  among others,  end-customer type,
the level of  product  complexity  and  integration  requirements,  the stage of
product  introduction,  geographic presence and location of markets,  and volume
levels.

Zarlink's   Communications   business  specializes  in  broadband   connectivity
solutions over wired, wireless and optical media. Network access and user access
products  represent the two major growth  categories  in this business  segment.
Network  access  products  include  products  that  provide  connectivity  to  a
network's   core  backbone  such  as  feeder,   aggregation   and   transmission
applications and products that address the  multi-protocol  physical and network
layers. In simple terms, network access  semiconductor  products connect network
equipment together.  User access products allow users to connect to the network.
These  products   include   wireless  (for  example,   cellular   chipsets)  and
infotainment  applications  (for  example,  set top boxes and digital  TV).  The
Communications business also includes custom products that involve the design of
custom ASICs as well as custom foundry services for external parties.

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


                                       16
<PAGE>

<TABLE>
<CAPTION>
                                                                                  Three Months Ended       Six Months Ended
                                                                                Sept. 28,    Sept. 29,   Sept. 28,    Sept. 29,
(millions Cdn$, except per share amounts)                                         2001         2000        2001         2000
                                                                                ---------    ---------   ---------    ---------
<S>                                                                             <C>          <C>         <C>          <C>
Consolidated revenue from continuing operations                                 $    77.5    $   194.3   $   182.5    $   378.1
Communications segment revenue                                                       66.2        182.8       156.8        355.0
Medical segment revenue                                                              11.3         11.5        25.7         23.1

Operating income (loss) from continuing operations                                  (34.4)        14.5      (155.0)        57.3
Communications segment operating income (loss)                                      (33.0)        37.6       (42.9)        78.2
Medical segment operating income                                                      4.0          0.8         7.7          3.1

Net income (loss) from continuing operations                                        (33.1)         1.2      (149.2)        28.7
Net income (loss) per common share from continuing operations -  Basic              (0.27)          --       (1.20)        0.23
Net income (loss)                                                                   (33.1)         6.6      (149.2)        28.1
Net income (loss) per common share - Basic                                          (0.27)        0.05       (1.20)        0.23
Weighted average common shares outstanding (millions) - Basic                       125.6        121.3       125.4        117.7
</TABLE>

      Revenue from continuing  operations for the quarter totaled $77.5, down 60
      percent from $194.3 in the second quarter of Fiscal 2001.

      Sales continue to be adversely  affected by customer and channel inventory
      adjustments  in the Company's  network and user access  business,  a trend
      that  began  during  the  second  half  of  Fiscal  2001.  Reflecting  the
      semiconductor   communications   industry  in  general,  the  Company  has
      experienced a reduction in the orders  normally  booked and shipped in the
      same  quarter  ("turns"),   as  well  as  increased  order  push-outs  and
      cancellations, both resulting from market uncertainties.  Since the fourth
      quarter of Fiscal 2001, the Company has experienced a significant decrease
      in order push-outs and  cancellations,  with customers  typically  placing
      orders to meet their  short-term  needs.  Management  believes  that these
      adverse industry trends may continue through most of Fiscal 2002.

      During this  slowdown,  the Company  continued  to secure  design wins and
      introduced new products to the market.

      In the six months ended  September  28, 2001,  the Company  recorded a net
      loss from  continuing  operations  of $149.2,  or $1.20 per  share,  after
      excess  inventory and other  charges to cost of sales of $45.0,  a pre-tax
      restructuring charge of $53.6 and the amortization of acquired intangibles
      of $21.2. This compares to net income from continuing operations of $28.1,
      or  $0.23  per  share,  in the  first  half  of  Fiscal  2001,  after  the
      amortization of acquired intangibles of $24.0.

      Communications Segment

                                                          Six Months Ended
                                                        Sept. 28,   Sept. 29,
      (millions Cdn$)                                     2001        2000
                                                        ---------   ---------
      Communications revenue by product:
        Network Access                                  $   70.2    $  166.7
        User Access                                         34.6        68.7
        Custom Products                                     52.0       119.6
                                                        --------    --------
      Total Communications                              $  156.8    $  355.0
                                                        ========    ========


                                       17
<PAGE>

                                                          Six Months Ended
                                                        Sept. 28,   Sept. 29,
      (millions Cdn$)                                     2001        2000
                                                        ---------   ---------
Communications revenue mix by product:
  Network Access                                              45%         47%
  User Access                                                 22%         19%
  Custom Products                                             33%         34%
                                                        --------    --------
Total Communications                                         100%        100%
                                                        ========    ========

Communications operating income (loss)                  $  (42.9)   $   78.2
                                                        ========    ========

Communications sales for the six months ended September 28, 2001 reached $156.8,
representing a decrease of 56 percent over the $355.0 achieved in the first half
of Fiscal  2001.  The  decrease  was  principally  due to the factors  described
elsewhere in this Management's  Discussion and Analysis under Recent Significant
Events - Recent Industry Slowdown.

In the first  half of Fiscal  2002,  Communications  operating  loss was  $42.9,
compared to operating income of $78.2 recorded last year in the same period. The
loss was due to the lower sales volumes across the segment.

Medical Segment

                                                    Six Months Ended
                                                 Sept. 28,     Sept. 29,
(millions Cdn$)                                     2001          2000
                                                 ---------     --------
Revenue:
  Medical                                         $  25.6      $  23.1
                                                  =======      =======
Medical operating income                          $   7.7      $   3.1
                                                  =======      =======

For the six months ended September 28, 2001,  sales reached $25.6, an 11 percent
increase over the $23.1 achieved in the first half of Fiscal 2001 due to growing
markets  and new  product  introductions.  For the first  half of  Fiscal  2002,
Medical  recorded an operating income of $7.7 up from $3.1 last year as a result
of improved sales and margins.

Geographic Revenue

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

                                  Six Months               Six Months
                                    Ended         % of       Ended         % of
(millions Cdn$)                 Sept. 28, 2001    Total   Sept. 29, 2000   Total
                                --------------   -------  --------------   -----

United States                      $   58.2         32      $  159.4         42%
Europe                                 64.6         35         111.0         29
Asia - Pacific                         41.9         23          91.8         24
Canada                                 13.3          8          10.7          3
Other Regions                           4.5          2           5.2          2
                                   --------         --      --------         --
                                   $  182.5        100%     $  378.1        100%
                                   ========        ===      ========        ===

For the six months ended  September 28, 2001, the net movement in exchange rates
from the same period in Fiscal  2001  negatively  impacted  total  revenue  from
continuing operations by 1 percent ($1.2). The


                                       18
<PAGE>

negative  foreign  exchange  impact was  primarily a result of changes in the UK
pound  sterling  and the  Swedish  Krona  exchange  rates,  partially  offset by
positive changes in the U.S. dollar exchange rate.

GROSS MARGIN
------------

<TABLE>
<CAPTION>
                                                                 Three Months Ended        Six Months Ended
                                                               Sept. 28,    Sept. 29,    Sept. 28,    Sept. 29,
(millions Cdn$)                                                  2001          2000        2001         2000
                                                              ----------    ---------    ---------    ---------
<S>                                                             <C>          <C>          <C>          <C>
Gross margin                                                    $ 23.7       $ 99.6       $ 29.9       $ 196.6
As a percent of revenue                                             31%          51%          16%          52%
As a percent of revenue,  excluding excess
inventory and other charges of $45.0                                31%          51%          41%          52%
</TABLE>

During the first quarter ended June 29, 2001, the Company reviewed its inventory
requirements  for the following 12 months in light of the current  semiconductor
industry-wide  slowdown  and  higher  channel  inventories.  As a result of this
review,  the Company recorded an excess inventory charge to cost of sales in the
first quarter of Fiscal 2002 amounting to $45.0 for inventories  estimated to be
beyond its needs for the following 12 months.

Excluding  the effect of the excess  inventory  and other  charge of $45.0,  the
Company's gross margin as a percent of revenue was 41 percent for the six months
ended  September  28,  2001.  The lower gross margin in the first half of Fiscal
2002 compared to the first half of Fiscal 2001 was  principally  attributable to
lower sales volumes in the  communications  segment and the associated  negative
manufacturing variances resulting from lower plant utilization.

OPERATING EXPENSES
------------------

Selling and Administrative ("S&A")

<TABLE>
<CAPTION>
                                                            Three Months Ended                   Six Months Ended
                                                        Sept. 28,         Sept. 29,         Sept. 28,         Sept. 29,
      (millions Cdn$)                                     2001              2000               2001             2000
                                                        ---------         ---------         ---------         ---------
<S>                                                      <C>               <C>               <C>               <C>
      S&A expenses                                       $  24.0           $  33.7           $  50.0           $  63.3
      As a percent of revenue                                 31%               17%               27%               17%
</TABLE>

S&A expenses from continuing  operations increased as a percentage of revenue in
the second quarter and first half of Fiscal 2002 from the respective  periods in
Fiscal 2001 due to the lower sales volumes in Fiscal 2002.  However,  actual S&A
expenses  decreased from last year primarily due to cost reduction  programs and
the effects of the restructuring program implemented mid-way through the quarter
ended June 29, 2001.

Research and Development

<TABLE>
<CAPTION>
                                                            Three Months Ended                   Six Months Ended
                                                        Sept. 28,         Sept. 29,         Sept. 28,         Sept. 29,
      (millions Cdn$)                                     2001              2000               2001             2000
                                                        ---------         ---------         ---------         ---------
<S>                                                      <C>               <C>               <C>               <C>

      R&D expenses                                       $  28.7         $  27.5             $  60.1           $  52.0
      As a percent of revenue                                 37%             14%                 33%               14%
</TABLE>

In light of the current  industry  wide  slowdown and its impact on the expected
Canadian tax position


                                       19
<PAGE>

of the Company, no R&D government assistance,  including investment tax credits,
was recorded during the six month period ended September 28, 2001.

R&D expenses  from  continuing  operations in Fiscal 2001 were net of $1.0 and $
2.1 in R&D government  assistance,  including  investment  tax credits,  for the
respective three and six month periods ended September 29, 2000.

In the communication segment's network access product line, the focus was in the
following areas:

      o     Building network timing and synchronization  products for high speed
            applications;

      o     Delivering   multi-channel   carrier-class   convergence  solutions,
            including TDM/ATM to IP;

      o     Supporting  high-speed access using digital  subscriber line ("DSL")
            solutions;

      o     Providing high quality voice in packet  switching  applications  via
            QoS solutions and,

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

In the  communication  segment's  user access product line, the focus was in the
following areas:

      o     Providing a single chip 2.5G cellular solution;

      o     Providing  a single  chip  solution  incorporating  multiple  tuners
            (three  tuners  on a chip)  for  terrestrial,  satellite  and  cable
            digital tuning; and,

      o     Delivering  chip-based  solutions to integrate  set-top box features
            for Integrated Digital TV ("iDTV").

In medical, the focus was on wearable and implantable devices, including:

      o     Digital  hearing aids for improved  sound quality that is matched to
            the patient;

      o     Pacemakers  with the ability to record and track the  performance of
            the heart; and,

      o     Application-specific standard products ("ASSPs") as opposed to ASICs
            for portable and pacing applications.

The  increased  R&D  expenses  in the  first  half of  Fiscal  2002  were due to
incremental R&D resulting from the  consolidation of Vertex,  which was acquired
on July 28,  2000,  coupled with the  increased  R&D activity in the network and
user access product lines. Management expects that R&D spending will continue at
similar levels through the rest of Fiscal 2002.

Amortization of Acquired Intangibles

Amortization of acquired intangibles  decreased in the first half of Fiscal 2002
to $21.2 from $24.0 in Fiscal 2001. The lower  amortization in the first half of
Fiscal 2002 was due to Fiscal 2001 fourth quarter  write-downs of the investment
in Vertex to reduce the net book value of the intangible assets to be amortized.
In  addition,  the Fiscal 2002 year to date  amortization  of $21.2  includes an
incremental  write down of $7.5  associated  with the impairment of goodwill and
other acquired  intangibles (See Recent  Significant Events - Special and Excess
Inventory  Charges  Recorded in the First Quarter of Fiscal 2002). The Company's
policy is to amortize acquired intangible assets over a two-year period from the
date of acquisition,  which management  believes represents the estimated useful
life.

Other Operating Income and Expense Items

INTEREST INCOME
---------------


                                       20
<PAGE>

Interest income was $2.3 and $5.5 for the respective three and six month periods
ended  September  28, 2001 as compared to $3.4 and $6.4 in the  respective  same
periods in Fiscal  2001.  The  decrease in each period was due to lower  average
cash balances on hand.

INTEREST EXPENSE
----------------

Interest  expense  was $0.3 and $0.6 for the three and six month  periods  ended
September 28, 2001,  compared with $4.8 and $10.1 for the respective  periods in
Fiscal  2001.  Management  expects  interest  expense to decrease in Fiscal 2002
compared to Fiscal 2001 as a result of the full  repayment of the Company's U.S.
dollar denominated long-term debt in the fourth quarter of Fiscal 2001.

INCOME TAXES
------------

Income tax recovery from  continuing  operations for the quarter ended September
28, 2001 was $0.7, compared with income tax expense of $11.9 for the same period
in Fiscal 2001. The year to date income tax recovery of $3.1 includes recoveries
of $6.0 associated with the special and excess  inventory charge recorded in the
first  quarter of Fiscal  2002.  Excluding  the tax  recovery  on these  special
charges,  the Company recorded a tax expense of $2.9 in the first half of Fiscal
2002. The tax expense was recorded as a result of certain income taxes in Canada
, such as the large  corporation  tax,  without the benefit of tax recoveries in
other jurisdictions.

BACKLOG
-------

                                              Sept. 28,    June 29,    March 30,
      (millions Cdn$)                           2001         2001        2001
                                              ---------    --------   ----------

      Backlog from continuing operations       $ 118.1      $ 126.8    $ 177.9

Generally,  manufacturing  lead  times for  semiconductor  products  are  longer
because  of the  nature  of the  production  process.  However,  as  orders  are
sometimes  booked and shipped within the same fiscal quarter (often  referred to
as a "turns"),  order backlog is not  necessarily  indicative of a sales outlook
for the quarter or year.  Most of the backlog is  scheduled  for delivery in the
next twelve months.

The  backlog  decrease  from last year and from the end of the first  quarter of
this fiscal year was  attributable to the recent downturn in the  communications
semiconductor industry,  described elsewhere in this Management's Discussion and
Analysis,  which caused order  push-outs and  cancellations,  principally in the
areas of broadband networking.

NET INCOME (LOSS)
-----------------

The  Company  recorded  a net loss of $33.1,  or $0.27 per share in the  quarter
ended  September  28, 2001.  This  compares to net income of $6.6,  or $0.05 per
share, in the  corresponding  period of Fiscal 2001. The Company  recorded a net
loss of $149.2,  or $1.20 per share in the six months ended  September 28, 2001.
This compares to net income of $28.1, or $0.23 per share,  in the  corresponding
period of Fiscal 2001.

LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

At September 28, 2001, cash, cash equivalent and short-term  investment balances
totaled $209.1,  down from $283.7 at March 30, 2001. All of the cash balances at
each respective date were held in either cash or highly liquid cash equivalents.

Cash outflow from operations  before working capital changes  amounted to $103.4
during the first six months of Fiscal  2002  compared  to an inflow of $116.0 in
the first half of Fiscal 2001 as a result of the  special and other  charges and
lower operating earnings on reduced sales. Since March 30, 2001, the


                                       21
<PAGE>

Company's working capital,  as reflected in the consolidated  statements of cash
flows,  decreased  by $61.5  mostly  due to  lower  receivables  resulting  from
improved collections and to the write-down of inventories. Management expects to
further draw down inventory levels in Fiscal 2002 by reducing  production in the
fabs and  lowering  external  purchases.  As a standard  practice,  the  Company
maintains a minimum of critical  inventory at its foundries to ensure continuity
of supply for its manufacturing requirements.

Cash paid for capital asset additions amounted to $33.7 during the first half of
Fiscal 2002 (six months ended  September 29, 2000 - $44.0).  The additions  were
primarily  related to the  construction of a new building for the Company's head
office  in  Ottawa,  Canada,  and  to  continuing  improvements  to  information
technology resources and design tools.

Long-term debt decreased due to scheduled  repayments against capital leases and
payment of the first annual  installment of $1.4 against the 1996  Canada-Quebec
government loan.

No shares were purchased under the normal course issuer bid described  elsewhere
in this Management's Discussion and Analysis (see Recent Significant Events ).

In addition to cash,  cash  equivalent  and  short-term  investment  balances of
$209.1 as at  September  28,  2001,  the Company had a revolving  global  credit
facility  of  approximately  $25.0,  of which  $2.3 in  letters  of credit  were
outstanding. Accordingly, the Company had unused and available demand bank lines
of credit amounting to $22.7 as at September 28, 2001.  Management  believes the
Company is in a position to meet all  foreseeable  business  cash  requirements,
including  the Fiscal 2002  restructuring  program  described  elsewhere in this
Management's Discussion and Analysis, and debt service from its cash balances on
hand, existing financing facilities and cash flow from operations.

OTHER
-----

Foreign Currency Translation

Management periodically evaluates the financial and operational  independence of
its  foreign  operations  and the  resulting  accounting  classification  of the
foreign subsidiaries as self-sustaining enterprises. Should a foreign subsidiary
cease to be classified as  self-sustaining,  then translation gains or losses on
consolidating the foreign subsidiary's  financial statements would be charged to
operating  income instead of a separate  component of shareholders'  equity.  At
September 28, 2001, the translation  account balance was in a credit position of
$7.0 as compared to a credit  position  of $4.3 at the end of Fiscal  2001.  The
weakened  Canadian  dollar as  measured  against,  principally,  the U.K.  pound
sterling caused the increase in the translation account balance since the end of
last year.

Recently Issued Accounting Standards

The  Financial  Accounting  Standards  Board has issued  Statements of Financial
Accounting  Standards  ("SFAS") No. 141,  "Business  Combinations"  and No. 142,
"Goodwill  and Other  Intangible  Assets".  SFAS No. 141  requires  all business
combinations  subsequent to June 30, 2001 to be accounted for under the purchase
method of accounting. The pooling-of-interests method is no longer allowed. SFAS
No. 142 requires that upon  adoption,  amortization  of goodwill will cease and,
instead,  the carrying  value of goodwill will be evaluated for impairment on at
least an annual  basis.  SFAS No. 142 is effective  for fiscal  years  beginning
after  December 15, 2001.  The Company is  evaluating  the impact of adoption of
these  standards  and has not yet  determined  the  effect  of  adoption  on its
financial position and results of operations.

European Union and the Euro
---------------------------


                                       22
<PAGE>

On January 1, 1999, 11 of 15 member countries of the European Union  established
fixed conversion rates between their existing currencies  ("legacy  currencies")
and one common  currency - the Euro.  The Euro trades on currency  exchanges and
may be used in business  transactions.  The  conversion  to the Euro  eliminates
currency  exchange  rate  risk  between  the  member  countries.  The  Company's
operating  subsidiaries  that were affected by the Euro  conversion  established
plans to address the issues raised by the Euro currency conversion. These issues
included the need to adapt computer and financial systems,  competitive  impacts
of  cross-border  price  transparency,  and  recalculating  currency  risk.  The
required  system  conversion  costs were not material due to Zarlink's  existing
ability to transact in multiple  currencies.  Due to significant  uncertainties,
the Company cannot reasonably estimate the effects one common currency will have
on  pricing  and the  resulting  impact,  if  any,  on the  Company's  financial
condition or its results of operations.

Forward-Looking Statements
--------------------------

Certain  statements  in this  Management's  Discussion  and Analysis  constitute
forward-looking  statements.  Such forward-looking  statements involve known and
unknown  risks,  uncertainties  and other  factors  that may  cause  the  actual
results,  performance or achievements  of Zarlink,  or industry  results,  to be
materially  different  from any  future  results,  performance  or  achievements
expressed   or  implied  by  such   forward-looking   statements.   Such  risks,
uncertainties  and  assumptions  include the  following:  general  economic  and
business  conditions;  demographic  changes;  import  protection and regulation;
rapid technology development and changes;  timing of product introductions;  the
mix of  products/services;  industry  competition,  industry  capacity and other
industry trends; and the ability of Zarlink to attract and retain key employees.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS

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

Zarlink  currently uses forward contracts and foreign currency options to reduce
the exposure to foreign  exchange risk. The most  significant  foreign  exchange
exposures for Zarlink  relate to the U.S.  dollar,  U.K.  pound sterling and the
Euro. As at September 28, 2001,  there were no material  changes in  information
about market risks as disclosed in the  Company's  Form 10-K for the fiscal year
ended March 30, 2001.

PART II - OTHER INFORMATION

ITEM 4. Submission of Matters to a Vote of Security Holders

The Annual  Meeting of  Shareholders  was held on July 25,  2001 at the  Chateau
Laurier Hotel, Ottawa, Canada. At the Annual Meeting, the following matters were
presented to shareholders for approval:

Motion 1:   In respect of the election of directors;

Motion 2:   In respect of the appointment of Ernst & Young LLP as auditors;

Motion 3:   Approval  of the  amendments  to the 1991 Stock  Option Plan for Key
            Employees and Non-Employee Directors (WITHDRAWN); and,


                                       23
<PAGE>

Motion 4:   Approval of amendment to the Articles of Incorporation to change the
            name of the corporation to Zarlink Semiconductor Inc.

The results of matters submitted to a vote of shareholders were as follows:

Motion 1:                                  Shares
For                                      75,853,240
Withheld                                  1,208,166

Motion 2:                                  Shares
For                                      77,013,671
Withheld                                     73,645

Motion 3:                                Motion was withdrawn

Motion 4:                                  Shares
For                                      76,652,635
Withheld                                    431,984

The following  nine directors were  re-elected at the 2001 Annual  Meeting:  Mr.
Andre Borrel, Mr. Patrick J. Brockett,  Mr. Jean-Jacques  Carrier, Mr. Hubert T.
Lacroix,  Mr. Kirk K. Mandy, Mr. Donald G. McIntyre,  Mr. Kent H.E. Plumley, Dr.
Henry Simon, and Dr. Semir D. Sirazi.  Mr. Plumley was appointed to the Board on
August 22, 2000 and Mr. Brockett was appointed on April 9, 2001.

ITEM 6. Reports on Form 8-K

a)    Reports on Form 8-K

      The Company  filed a Current  Report on Form 8-K in the three months ended
      September 28, 2001. The Report was dated September 7, 2001 and,  following
      the Company's recent name change to Zarlink Semiconductor Inc., related to
      the Company's new trading symbol,  "ZL", on the New York and Toronto stock
      exchanges.

                                    SIGNATURE

Pursuant to the  requirements  of the  Securities  and Exchange Act of 1934, the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.

                                           ZARLINK SEMICONDUCTOR INC.

November 1, 2001                                JEAN-JACQUES CARRIER
----------------                                --------------------
Date                                            Jean-Jacques Carrier
                                                Senior Vice President of Finance
                                                and Chief Financial Officer


                                       24