Ottawa, Canada, January 29, 2009 -- Zarlink Semiconductor Inc. (TSX:ZL) today issued results for the Fiscal 2009 third quarter ended December 26, 2008, prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP).

In line with guidance, third quarter revenue was US$53.8 million, compared with revenue of US$61.8 million in the Fiscal 2009 second quarter and US$48.6 million in the third quarter of Fiscal 2008. Zarlink recorded net income of US$12.1 million or US$0.09 basic earnings per share in the third quarter, compared with second quarter net income of US$7.2 million or US$0.05 per share, and a net loss of US$8.4 million or US$0.07 per share in Fiscal 2008 third quarter.

"We are aggressively managing through this slowdown to ensure we emerge as a stronger company," said Kirk Mandy, President and CEO, Zarlink Semiconductor. "While we anticipate challenges, we are still seeing opportunities where customers are continuing to invest in products relying on our communication, medical wireless and optical interconnect solutions.  We have taken advantage of our cash holdings to strengthen our long-term financial position and enhance shareholder value, and will maintain firm cost control and are adjusting as necessary to guide Zarlink through this difficult market."

Third quarter results include:

• A non-cash foreign exchange gain of US$10.3 million related mainly to Zarlink's Canadian dollar denominated debenture, based on an exchange rate of CDN$1.00 to US$0.82 at December 26, 2008;
• A gain of US$3.6 million related to the repurchase of debt;
• An impairment of US$3.0 million in pre-paid expenses and receivables from MHS Electronics UK Ltd.;
• An impairment of US$1.2 million related to the fair value of assets held for sale in the United Kingdom, due to softening real estate markets;
• Integration and severance costs of approximately US$0.6 million (US$0.5 million in cost of goods sold and US$0.1 million in S&A).  

At the end of the third quarter, cash and short-term investments totaled US$45.5 million compared with US$46.1 million at the end of the second quarter. During the quarter, the Company used US$2.6 million in cash to repurchase and cancel US$6.5 million principal amount of its convertible debentures and US$0.9 million to repurchase and cancel 3 million common shares. 

Business review

Revenue from Zarlink's Communication Products group was US$33.7 million compared with revenue of US$39.7 million in the previous quarter. The acquisition of Legerity Holdings, Inc. accounted for US$17.3 million in revenue in the third quarter, compared to US$24.6 million in the Fiscal 2009 second quarter.
 
 Medical Products revenue in the third quarter of Fiscal 2009 increased to US$8.2 million, compared with US$7.8 million in the previous quarter. Optical Products revenue in the third quarter was US$5.5 million, compared with US$6.8 million in the Fiscal 2009 second quarter. Custom and Other revenue in the third quarter of Fiscal 2009 was US$6.4 million, compared with Fiscal 2009 second quarter revenue of US$7.5 million.

The Company made several important technology announcements in the third quarter, including:

• A complete next-generation line card access solution that links Zarlink's VoiceEdge VE792 Next-Generation Carrier Chipset (NGCC) with Mindspeed's voice processing expertise to efficiently deliver voice service over packet networks;
• The successful design and testing of an in-body microgenerator that converts heartbeat energy into power for implanted medical devices;
• New ZLynx active optical cables with quad small form-factor (QSFP) and hybrid CX4-QSFP terminations for high-performance data center and computer cluster interconnect.   

On January 29, 2009, Zarlink declared a quarterly dividend of CDN$0.50 per share on its preferred shares (TSX:ZL.PR.A) payable on March 27, 2009 to preferred shareholders of record as of March 6, 2009. This dividend is fully eligible for Canadian tax purposes.

Review of Operations

Gross margin in the third quarter was 49%, which included integration costs of US$0.5 million. This compares with gross margin of 50% in the previous quarter, which included integration costs of US$0.8 million. 

R&D expenses in the third quarter were US$10.4 million or 19% of revenue. This compares with R&D expenses in the previous quarter of US$11.2 million or 18% of revenue, which included integration costs of US$0.1 million. 

S&A expenses in the third quarter were US$11.0 million or 20% of revenue, which included integration costs of US$0.1 million. This compares with Fiscal 2009 second quarter S&A expenses of US$13.6 million or 22% of revenue, which included proxy contest costs of US$1.2 million and severance and integration costs of US$0.3 million.

Restructuring Plans

Zarlink also announced planned restructuring actions to help maintain profitability. The Company will be reducing its workforce by 6-8 percent. Zarlink's current workforce is approximately 630 employees. No current development projects will be impacted by these actions.  Annualized savings of approximately US$8-10 million are expected as a result of this restructuring. Zarlink expects to record severance and other costs of US$5-7 million, or US$0.04 - US$0.06 per share, in the fourth quarter of Fiscal 2009. 

Fourth Quarter Fiscal 2009 Guidance

The opening backlog at the start of the Fiscal 2009 fourth quarter was approximately US$54 million, compared with an opening backlog of US$53 million at the start of the third quarter. The opening backlog is based on customer requests for products to be delivered within a 90-day period. A portion of the current backlog includes customer product request dates in advance of posted delivery schedules, meaning the Company does not anticipate being able to ship all of these products in the current quarter.

As a result of this, and in combination with continuing economic uncertainties, Zarlink is forecasting Fiscal 2009 fourth quarter revenue will be between US$50 million and US$52 million. Gross margins are expected to be 49% to 51% and operating expenses are expected to be approximately US$22 million to US$23 million excluding amortization of intangibles. Excluding any potential impact of foreign exchange gains/losses related to the Company's Canadian dollar denominated debenture, Zarlink expects fourth quarter earnings of approximately break-even before restructuring costs.
 
About Zarlink Semiconductor
 
For over 30 years, Zarlink Semiconductor has delivered semiconductor solutions that drive the capabilities of voice, enterprise, broadband and wireless communications. The Company's success is built on its technology strengths including voice and data networks, optoelectronics and ultra low-power communications. For more information, visit http://www.zarlink.com/.
Shareholders and other individuals wishing to receive, free of charge, copies of the reports filed with the U.S. Securities and Exchange Commission and Regulatory Authorities, should visit the Company's web site at http://www.zarlink.com/ or contact Investor Relations.
 
Certain statements in this press release constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance or achievements of the Company 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, among others, the following: our dependence on the successful development and market introduction of new products; our ability to integrate any business, technologies, product lines or services that we have or will acquire; our dependence on revenue generation from our legacy products in order to fund development of our new products; current market conditions, including the lack of liquidity in the markets and economic slowdown, may increase our operating costs or reduce our revenue, thereby negatively impacting our operating results; our ability to operate profitably and generate positive cash flows in the future; the impact of the current economic crisis on our suppliers and customers and our ability to transfer parts to other suppliers; our dependence on our foundry suppliers and third-party subcontractors; order cancellations and deferrals by our customers; our substantial indebtedness could adversely affect our financial position; the cost and accounting implications of compliance with new accounting standards; and other factors referenced in our Annual Report on Form 20-F. Investors are encouraged to consider the risks detailed in this filing.

Zarlink and the Zarlink Semiconductor logo are trademarks of Zarlink Semiconductor Inc.

An open conference call for analysts will be held today beginning at 5:00 p.m. EDT. Access the call by dialing 1-800-732-6179 or 416-644-3415. Investors, media and other parties are listen-only. For a replay, call 1-877-289-8525, passcode 21295025#  or 416-640-1917, passcode 21295025#. The replay is available until midnight February 12th, 2009. A live audio webcast will be available through http://www.marketwire.com/ (Marketwire) or from the Company's website at http://www.zarlink.com/.

For further information:

Ed Goffin    
Media Relations and Investor Relations    
613 270-7112     
edward.goffin@zarlink.com 

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