Ottawa, Canada, October 28, 2009 -- Zarlink Semiconductor (TSX: ZL) today issued its second quarter Fiscal 2010 results for the three-month period ended September 25, 2009. As a supplement to Zarlink's consolidated financial statements presented in accordance with U.S. Generally Accepted Accounting Principles (GAAP), the Company has provided additional non-GAAP measures for operating income, net income (loss), basic and diluted net income (loss) per share. Zarlink believes the additional non-GAAP measures are useful to investors for the purpose of financial analysis. However, non-GAAP measures are neither stated in accordance with, nor are they a substitute for, GAAP measures. For a full reconciliation of GAAP to non-GAAP measures, please refer to the schedule included with this release. All figures are in U.S. dollars unless otherwise noted.

"Our ability to generate solid cash flow and achieve profitability at current revenue levels highlights the success we have had to date in enhancing the efficiency of our operations," said Kirk K. Mandy, President and CEO, Zarlink Semiconductor. "The steps we have taken to improve our cost structure and expand our gross margin are driving bottom-line growth. We believe these efforts, combined with increasing demand for new medical wireless and next-generation timing products and strong relationships with customers in emerging markets, position Zarlink for continuing growth in the coming quarters."

Second quarter revenue was $53.6 million, at the high end of the Company's guidance range of $52 million to $54 million, compared with revenue of $53.6 million in Q1 Fiscal 2010 and $61.8 million in Q2 Fiscal 2009.

For Q2 Fiscal 2010, revenue from Zarlink's Communication Products group increased to $34.2 million from $32.6 million in Q1 Fiscal 2010, due to growing demand for next-generation timing and telecom networking products. Revenue from Zarlink's Communication Products group in Q2 Fiscal 2009 was $39.7 million. 

Medical Products revenue for Q2 Fiscal 2010 was $7.8 million, compared with Q1 Fiscal 2010 revenue of $9.0 million, with growing demand for new medical wireless products offset by expected seasonality and decreased shipments for legacy hearing aid products. Revenue from Zarlink's Medical Products group in Q2 Fiscal 2009 was $7.8 million.

Optical Products revenue in Q2 Fiscal 2010 was $3.8 million, compared with revenue of $4.0 million in Q1 Fiscal 2010, due to a continuing slowdown in enterprise communication spending. Revenue from Zarlink's Optical Products group in Q2 Fiscal 2009 was $6.8 million. Custom and Other revenue in Q2 Fiscal 2010 was $7.8 million, compared with Q1 Fiscal 2010 revenue of $8.0 million and Q2 Fiscal 2009 revenue of $7.5 million.

Gross margin in Q2 Fiscal 2010 was 50% of revenue, which included $0.9 million in supply chain harmonization costs. In comparison, gross margin in Q1 Fiscal 2010 was 50%, which included $1.1 million in supply chain harmonization costs. Gross margin in Q2 Fiscal 2009 was 49%, which included integration costs of $0.8 million.   

R&D expenses in Q2 Fiscal 2010 were $10.6 million, or 20% of revenue. This compares with Q1 Fiscal 2010 R&D expenses of $9.5 million, or 18% of revenue. In Q2 Fiscal 2009, R&D expenses were $11.2 million or 18% of revenue, which included integration costs of $0.1 million.

S&A expenses in Q2 Fiscal 2010 were $10.1 million, or 19% of revenue. This compares with Q1 Fiscal 2010 S&A expenses of $10.3 million, or 19% of revenue. In Q2 Fiscal 2009, S&A expenses were $13.6 million or 22% of revenue, which included proxy contest costs of $1.2 million and severance and integration costs of $0.3 million.

On a GAAP basis, Q2 Fiscal 2010 operating income was $5.2 million, compared to Q1 Fiscal 2010 operating income of $4.4 million and Q2 Fiscal 2009 operating income of $3.9 million. Net income in Q2 Fiscal 2010 was $0.7 million or break-even per share, which included a non-cash foreign exchange loss of $3 million related primarily to Zarlink's Canadian dollar denominated debenture, based on an exchange rate of CDN$1.00 to US$0.92 at September 25, 2009. Excluding the impact of foreign exchange, earnings per share were at the high end of Q2 guidance of $0.01 to $0.03 per share. In Q1 Fiscal 2010, Zarlink recorded a net loss of $0.5 million, or $0.01 per share. In Q2 Fiscal 2009, Zarlink recorded net income of $7.2 million, or $0.05 per share. 

On a non-GAAP basis, operating income for Q2 Fiscal 2010 was $7.4 million, compared to Q1 Fiscal 2010 non-GAAP operating income of $8.5 million and Q2 Fiscal 2009 non-GAAP operating income of $7.6 million. Non-GAAP net income in Q2 Fiscal 2010 was $6.3 million, or $0.05 basic earnings per share and $0.04 diluted earnings per share. For Q1 Fiscal 2010, non-GAAP net income was $7.5 million, or $0.06 basic earnings per share and $0.05 diluted earnings per share. For Q2 Fiscal 2009 non-GAAP net income was $9.0 million, or $0.07 basic earnings per share and $0.06 diluted earnings per share.

In Q2 Fiscal 2010, cash and short-term investments increased by $8.6 million to $55.7 million as at September 25, 2009 compared with $47.1 million as at June 26, 2009. 

The Company made several important technology announcements in Q2 Fiscal 2010, including:

• Gigaset Communications is using Zarlink's VE880 VoicePort Series in an innovative fixed mobile convergence system that merges wireless voice service and the wired home phone network;
• Zarlink's VoiceEdge VE792 Next Generation Carrier Chipset (NGCC) and a testing solution from Tollgrade Communications provides a collaborative solution that helps telecom carriers improve triple play service reliability while reducing operating costs;
• Expanded line test capabilities for the VE890 chipset series that help voice-over-IP (VoIP) service providers lower operating costs and deliver voice services with the same reliability as traditional telephone network operators;

On October 28, 2009, Zarlink declared a quarterly dividend of CDN$0.50 per share on its preferred shares (TSX:ZL.PR.A) payable on December 30, 2009 to preferred shareholders of record as of December 4, 2009. Dividends paid by Zarlink to Canadian residents are eligible dividends for Canadian income tax purposes.

Third Quarter Fiscal 2010 Guidance
The opening backlog at the start of Q3 Fiscal 2010 was approximately $45 million, compared with an opening backlog of $49 million at the start of Q2 Fiscal 2010.

Zarlink is forecasting for Q3 Fiscal 2010:

• Revenue between $52 million and $54 million;
• Gross margins between 50% to 52%, excluding supply chain harmonization costs of approximately $0.7 million;   
• Operating expenses between $21 million to $22 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 Q3 earnings of $0.01 to $0.03 per share.

Analyst Conference Call
An open conference call for analysts will be held on October 28, 2009 beginning at 5:00 p.m. EDT. Access the call by dialing 1-866-250-4877. Investors, media and other parties are listen-only. For a replay, call 1-877-289-8525, passcode 4173770# or 416-640-1917, passcode 4173770#. The replay is available until midnight November 11, 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/.

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.

For further information:

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

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