UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-K



For the fiscal year ended March 31, 2008
                       Commission File Number :  001-13748

ZiLOG, Inc.(Exact name of Registrant as specified in its Charter)

|Delaware                                                       | 13-3092996                             
|-------------------------------------------------------------- | ---------------------------------------
|(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number)
|6800 Santa Teresa Boulevard, San Jose, CA                      | 95119                                  
|(Address of principal executive offices)                       | (Zip Code)                             

Registrant's telephone number, including area code: (408) 513-1500

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Securities registered pursuant to Section 12(b) of the Act:



|Title of Each ClassCommon Stock, $0.01 per share par value | Name of Each Exchange on Which RegisteredThe NASDAQ Stock Market LLC(NASDAQ Global Market)
|---------------------------------------------------------- | ------------------------------------------------------------------------------------------

Securities registered pursuant to Section 12(g) of the Act: NONE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Exchange Act.

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.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.

|Large accelerated filer     o | Accelerated filer    o | Non-accelerated filer    o (Do not check if a smaller reporting company) | Smaller reporting company    x
|----------------------------- | ---------------------- | ------------------------------------------------------------------------ | ------------------------------

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES    o NO    xAs of September 30, 2006, the aggregate market value of the Registrant's Common Stock held by non-affiliates of the
Registrant was approximately $60,497,133 based on the closing sale price for shares of the Registrant's Common Stock as reported on the NASDAQ
Global Market. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock
have been excluded in that such persons may deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination
for other purposes.

Indicate by check mark whether the Registrant has filed all documents and reports required to be filed by section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.   YesxNoo

At May 31, 2008, 16,925,960 shares of the Registrant's Common Stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The Registrant's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on September 11, 2008 is
incorporated by reference in Part III of this Form 10-K to the extent stated herein.








Note:PDF provided as a courtesy

TABLE OF CONTENTS



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|         |                                                                                                              | Page
|         |                                                                                                             
|PART I   |                                                                                                             
|         |                                                                                                              |     
|Item 1.  | Business                                                                                                     | 4   
|         |                                                                                                              |     
|Item 1A. | Risk Factors                                                                                                 | 11  
|         |                                                                                                              |     
|Item 1B. | Unresolved Staff Comments                                                                                    | 23  
|         |                                                                                                              |     
|Item 2.  | Properties                                                                                                   | 24  
|         |                                                                                                              |     
|Item 3.  | Legal Proceedings                                                                                            | 25  
|         |                                                                                                              |     
|Item 4.  | Submission of Matters to a Vote of Security Holders                                                          | 25  
|         |                                                                                                             
|PART II  |                                                                                                             
|         |                                                                                                              |     
|Item 5.  | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 26  
|         |                                                                                                              |     
|Item 6.  | Selected Consolidated Financial Data                                                                         | 28  
|         |                                                                                                              |     
|Item 7.  | Management's Discussion and Analysis of Financial Condition and Results of Operations                        | 30  
|         |                                                                                                              |     
|Item 7A. | Quantitative and Qualitative Disclosures About Market Risk                                                   | 46  
|         |                                                                                                              |     
|Item 8.  | Financial Statements and Supplementary Data                                                                  | 46  
|         |                                                                                                              |     
|Item 9.  | Changes in and Disagreements with Accountant on Accounting and Financial Disclosures                         | 74  
|         |                                                                                                              |     
|Item 9A. | Controls and Procedures                                                                                      | 74  
|Item 9B. | Other Information                                                                                            | 74  
|         |                                                                                                              |     
|         |                                                                                                             
|PART III |                                                                                                             
|         |                                                                                                              |     
|Item 10. | Directors and Executive Officers of the Registrant                                                           | 75  
|         |                                                                                                              |     
|Item 11. | Executive Compensation                                                                                       | 75  
|         |                                                                                                              |     
|Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               | 75  
|         |                                                                                                              |     
|Item 13. | Certain Relationships and Related Transactions                                                               | 75  
|         |                                                                                                              |     
|Item 14. | Principal Accounting Fees and Services                                                                       | 75  
|         |                                                                                                             
|PART IV  |                                                                                                             
|         |                                                                                                              |     
|Item 15. | Exhibits and Financial Statement Schedules                                                                   | 76  

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FORWARD-LOOKING STATEMENTSSome of the statements under the sections entitled "Risk Factors" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and elsewhere in this Form 10-K, constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. In some
cases, you can identify forward-looking statements by terminology such as "may", "will", "should", "expects",
"anticipates", "believes", "estimates", "potential", "continue", or the negative terms or other
comparable terminology.  These statements include:


estimates of market growth;capital expenditures;the adequacy of available cash;the cost or outcome of any litigation pending or threatened;the impact on recent accounting pronouncements;any gross margin improvement resulting from our research and development effort; andthe cost of compliance with environmental laws.These statements relate to future events or our future financial performance and involve known and may involve unknown risks, uncertainties and
other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by forward-looking statements including, but not limited to, prospects for future market
growth. Other factors that may cause or contribute to differences include, but are not limited to, continued availability of third-party foundry and assembly
services with commercially-reasonable quality and prices; under-absorption of manufacturing costs in our test and manufacturing support facilities from
under-utilization of capacity; our distributors and customers significantly reducing their existing inventories before ordering new products and the costs
associated with the Microchip lawsuit. In evaluating these statements, you should specifically consider various factors, including the risks outlined under
"Risk Factors."

Although we believe that the expectations in the forward-looking statements contained in this Form 10-K are reasonable, we cannot guarantee future
results, levels of activity, and performance achievements. These forward-looking statements are based on our current expectations, and we disclaim any
obligation to update these forward-looking statements for subsequent events or to explain why actual results differ unless otherwise required by law. You
should not place undue reliance on these forward-looking statements.

Unless otherwise specified as a forward-looking statement, the information contained in this report is historical in nature and speaks as of the date of
this report unless otherwise clearly indicated.  We disclaim any obligation to update this information for subsequent events.Period ComparisonsEffective December 29, 2005, we changed our fiscal year end from December 31 to March 31. Our interim results are
based on fiscal quarters of thirteen weeks in duration ending on the last Saturday of each calendar quarter, with the exception of the last quarter, which
ends on March 31 beginning in fiscal 2006.  The operating results for any interim period are not necessarily indicative of results for any subsequent
period or the full fiscal year.Based in San Jose, California, we were incorporated in California in September 1973 and merged with a subsidiary of
Exxon (which subsidiary changed its name to ZiLOG, Inc.) in November 1981.  We were reacquired by an affiliate of Warburg Pincus and Management in
1989 and reincorporated in Delaware in April 1997. We were acquired by an affiliate of Texas Pacific Group in 1998 and we were reorganized in
bankruptcy in 2002. In this report, "ZiLOG," "the Company," "our," "us," "we," and similar
expressions refer to ZiLOG, Inc. and its subsidiaries.  However, when these expressions are used throughout this report in connection with ZiLOG, Inc.'s
reorganization under Chapter 11 of the U.S. bankruptcy code, they are referring only to the parent company, ZiLOG, Inc., and not to any of its
subsidiaries.  EZ80ACCLAIM!, CRIMZON, Zatara, ZiLOG, Z8, Z80, eZ80, Z8 ENCORE!, Encore!XP and Zneo are registered trademarks of ZiLOG, Inc.,
in the United
States and in other countries. ARM is a registered trademark of ARM Limited in the EU and other countries. Other product and or service
names mentioned herein may be trademarks of the companies with which they are associated.

3PART I


ITEM 1.	BUSINESSBUSINESSOur BusinessWe are a fabless semiconductor supplier of microprocessor and microcontroller semiconductor products. A microcontroller
is a computer-on-a-chip that is optimized to control electronic devices, such as motors, remote controllers and user interfaces on appliances. A
microcontroller typically includes a central processing unit, non-volatile program memory, random access memory for data storage and various peripheral
capabilities. The microcontroller is offered as a complete solution because it incorporates application-specific software provided by the customer and may
include specialized peripheral device controllers and internal or external non-volatile memory components to enable the storage and access of additional
program software.

ZiLOG was founded in 1973 by Federico Faggin who co-invented the microprocessor.  We design, develop, test and market a portfolio of these
devices for a variety of applications used in consumer electronics, home appliances, security systems, point-of-sale terminals, personal computer
peripherals, personal health and medical products.

We introduced our first products in the mid-1970's and have since established a globally recognized brand. We sell our devices indirectly through
contract manufacturers or directly to a diverse customer base of Original Equipment Manufacturers ("OEMs") and Original Design
Manufacturers ("ODMs") for general purpose use or for use in application specific end markets.   Additionally, we sell our devices to
distributors who generally provide logistical and post sales support to these customers.

We continue to invest in the development of new microcontroller and microprocessor products, including; derivatives of our Z8 Encore!, Z8Encore!XP,
Motor control and eZ80 Acclaim! product families which are designed to incorporate reprogrammable flash memory and enhanced peripherals with
features that may allow such functionality as power management, sensing secure transactions and connectivity.  We also continue to develop new
products, software features and expanded database coverage for our universal remote control solutions. Recently, we announced our new line of
Crimzon products with embedded flash capabilities for this market. Additionally, we continue to expand our product offering of integrated 32-bit ARM
based microprocessors. This Zatara family of products provides secured transaction capabilities in a single chip solution and is initially focused on the
point-of-sale market.

Our Industry

Microcontroller and microprocessor devices have been incorporated into a wide variety of products in markets
including consumer electronics, home appliances, security systems, point-of-sale terminals and personal computer peripherals, as well as industrial and
automotive applications.  Microcontrollers are generally segmented by word length, which is measured in bits ranging from 4-bit through 32-bit
architectures. Although 4-bit microcontrollers are relatively inexpensive, they generally lack the minimum performance and features required for product
differentiation and are typically used only to produce basic functionality in products. While traditional 16 and 32-bit architectures are typically higher
performance, they can be too expensive for many high-volume embedded control applications, typically costing two to four times the cost of an 8-bit
microcontroller. Manufacturers will choose the appropriate microcontroller or microprocessor based on cost, performance and functionality requirements.
Microcontrollers are used broadly in over 100 different market categories for specific and general purpose applications.

Analysts estimate the 8-bit market to be in excess of $4 billion per year with the fastest growing element of that market being embedded flash. We
believe that 8-bit microcontrollers are generally perceived as the most cost-effective embedded control solution for high volume requirements. High-
volume microcontrollers available today are Read Only Memory ("ROM") or One-Time Programmable ("OTP"), which typically
require longer delays and greater costs in order to implement customer application code changes as compared to embedded flash with reprogrammable
capabilities. ROM and OTP products generally result in longer lead times for delivery of such microcontrollers. In addition to delayed product introduction,
these longer lead times can result in potential inventory obsolescence and disruptions to customers' factory production when changes in the application
code are required by the customer. To address some of these issues, suppliers may offer OTP-based microcontrollers that can be configured by the
customer in the customer's manufacturing line, thus minimizing lead-time and inventory risks if the customer's application code requires changes.
Furthermore, flash memory offers the flexibility of in-product re-programmability. While these flash-based microcontrollers were initially expensive
relative to ROM and OTP-based microcontrollers, manufacturing technology has evolved over the past years to the point where the premium for flash
microcontrollers over ROM and OTP-based microcontrollers can be minimal thereby making flash based microcontrollers the fastest growing technology
segment in the 8-bit microcontroller market


4The 32-bit market for our products is large and diverse. Today our 32-bit Zatara family of products focus on faster speeds, more complex integration
and more advanced security requirements than our 8-bit portfolio of products. The current 32-bit products we offer are application specific standard
products designed for the secured transaction point-of-sale market.  As our development continues with ARM based cores, including ARM 9 and Cortex,
we expect to broaden our product offerings to support adjacent markets as well as traditional markets where we have experience and which require and
can afford greater levels of integrated technologies.

Our Strategy

The key elements of our strategy are:

Deliver Complete Solutions to Our Customers

We are focused on providing advanced semiconductor solutions that assist our customers in adding functionality and enhancing the
performance of their products.  We currently serve three major markets with our product portfolio: 8 and 16-bit microcontrollers, universal remote control
solutions and 32-bit secured transaction microprocessors


Partner with Third Party Manufacturers to Leverage Scale

Our manufacturing strategy is to utilize third-party wafer foundries to manufacture our devices. We believe outsourcing the manufacturing process
enables us to access advanced technologies and reduce our manufacturing costs. This strategy allows us to focus greater resources on product design,
systems and software development and customer support. In line with this strategy, during 2002 and 2004 we closed our wafer manufacturing facilities in
Nampa, Idaho, and migrated production of these products to our wafer foundry suppliers.  Our new products are sourced from TSMC and UMC in Taiwan
and our classic products are sourced from X-FAB in Lubbock, Texas.


Products and ApplicationsWe design, develop, and market a broad portfolio of micrologic semiconductor devices for embedded control and
communication applications used in consumer electronics, home appliances, security systems, point-of-sale terminals, personal computer peripherals and
industrial and automotive applications.

Our products offer our customers the ability to integrate peripheral functions (such as network connectivity, timers, serial communication, analog to
digital conversion, infrared data transmission and display drivers) on our micrologic devices. These additional functions enhance the capabilities of the
customer's end product, which can lower their overall systems costs. These peripherals incorporate functionality, which may otherwise be found in a
separate chip, on the printed circuit board to which the micrologic device is attached.

We combine different microprocessors, memories and peripheral functions to create devices specifically tailored to meet the requirements of targeted
vertical markets.

Customers, Sales and MarketingIntroduction

To market our products, we utilize a well-trained, direct and distribution sales force, a
customer-centric website, technical documentation that includes product specifications and application notes, development tools and reference designs,
sales promotional materials, targeted advertising and public relations activities, and involvement in key trade shows and technical conferences in the
Americas, Europe and Asia. Our direct sales force and our sales representatives cover various geographic locations in the Americas, Europe and
Asia.

Sales Process

Through direct sales and distributors we have developed relationships with customers, including large OEMs, ODM's and
end users.  By collaborating with customers in an interactive product design and development process, we have been able to establish long-standing
relationships, which help us solidify our customer base and define our next generation products.

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We work closely with our customers in identifying opportunities for the customer to pursue end product designs using our devices. The customer's
decision to design an end product using our devices is based upon technical and financial factors, including microprocessor performance, memory,
peripheral options, pre-existing customer relationships, financial stability, pricing and technology roadmaps. Typically, a customer's product architects and
design engineers will use our proprietary development tools over a period of many months, or longer, to design an end product and test the design using
our devices before making a decision.



We classify a design win as the point at which the customer has placed orders to purchase a minimum level of product. Once we have achieved a
design win, we deliver a limited production of the device to our customer. Product prototypes are then created and tested. If the decision is made to
produce the product for sale, we will begin to receive full production orders over time. The entire cycle from design win to full production typically takes
between 12 and 18 months, although it may take much longer. After a design win is achieved, our sales are generally made pursuant to short-term
cancelable purchase orders that can be cancelled upon 30 to 60 days notice. As a result, design wins are not necessarily an accurate or reliable
indication of future net sales.

Direct Sales Force

Our direct sales force focuses on the Americas, Europe and Asia. We have offices located in the metropolitan areas of
San Jose, Hong Kong, London, Munich, Seoul, Shenzhen (China), Singapore, Taipei and Toronto. For each of the twelve months ended March 31, 2008,
March 31, 2007 and March 31, 2006, the percentage of net sales derived from sales to direct customer accounts is 44%, including one direct customer,
SMK, which represented 11%, 15% and 10% of net sales for the twelve months ended March 31, 2008, March 31, 2007 and March 31, 2006,
respectively. Additionally, from time to time we engage sales representative firms to further augment our own direct sales force.

We provide direct customer support through our field application engineers, who are located in our sales offices around the world and work
directly with local customers in close consultation with our factory-based technical specialists. Field application engineers typically develop technology
expertise in a market segment that is most prominent in their geographic areas. These engineers provide significant aid to the customer throughout the
design process. Customer support is provided locally or through our global support organization in Manila, Philippines.

Distribution Partners

We entered into a distributor agreement with Future Electronics effective October 23, 2002. This agreement provides that
Future Electronics will be our exclusive full-service distributor within North America and will also serve as a non-exclusive distributor for the rest of the
world. Either party may terminate the agreement upon 30 days prior written notice to the other party. Future Electronics is a private Canadian-based
company with an extensive and well-integrated international distribution infrastructure. Their ability to cover a broad spectrum of market opportunities,
especially in embedded flash-based products, continues to provide significant value and opportunities for our flash product portfolio. Future Electronics'
value-added services to us have not increased our costs, and include a significant number of sales representatives focused on our business, seminars
and workshops to train design engineers about our products, direct mail advertising, collateral materials and web site pages dedicated to our products.
For each of the twelve months ended March 31, 2008, March 31, 2007 and March 31, 2006, the percentage of net sales through our distribution channel
is 56% including Future Electronics which accounted for approximately 25%, 23% and 24% of net sales, respectively.   Additionally, we use various
distributors to support both our Asia and European markets.  Distributors in these regions generally specialize based on the country serviced and have
rights of return and/or price protection on unsold merchandise held by them.  We have no exclusive arrangements in these regions and have distributor
agreements for the supply and support of product sales to their customers.

Manufacturing and Sourcing

Our manufacturing strategy is to utilize third-party wafer foundries to manufacture our devices. We believe outsourcing
manufacturing enables us to access advanced process technology and reduce our research and development and manufacturing costs. We source our
wafer requirements from third-party foundries located in Taiwan and the United States. Generally, wafers for our new products are supplied by TSMC and
UMC and our classic products are provided by X-FAB in Lubbock, Texas. Our product package assembly operations are performed by subcontractors
located throughout Asia including Indonesia, Thailand and the Philippines.  Wafer test and final product testing is conducted at our test and global support
facility located in Manila, Philippines. Beginning in fiscal 2009, a significant portion of our production test activities will be supplied by third party
manufacturing partners.

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The SGS International Certification Services AG of Zurich, Switzerland granted an ISO 9001 certification to our Philippines test facility. ISO
certifications reflect the stringent quality standards to which all of our products are manufactured. We believe that these certifications enhance the
reputation and quality of our products.

Research and Development

Our research and development expenditures have been focused on the design and development of our 8 and 16-bit
embedded flash-based microcontrollers, including our Z8 Encore! Z8 Encore XP, Z8 Encore MC, ZNEO and eZ80 Acclaim! families of products, our
Crimzon family of devices for the universal remote control market and our portfolio of 32-bit ARM based products for the secured transactions
point-of-sale market.

Research and development expenditures were $16.5 million, $20.5 million and $21.0 million for the twelve months ended March 31, 2008, March 31,
2007, and March 31, 2006, representing 25%, 25% and 27% of net sales, respectively. During the twelve months ended March 31, 2008, March 31,
2007,and March 31, 2006, our research and development expenditures were focused on; i) our embedded flash products including our family of 8 pin
flash-based 8-bit microcontrollers, ii) new devices and software features for our Crimzon line of consumer solution products concentrated in the universal
remote control market segment and iii) our 32-bit ARM based family of products, which are initially focused on the secured transactions point-of-sale
market.

Our research and development expenses decreased in fiscal 2008 as compared to fiscal 2007 as a result of our decision in April, 2007 to consolidate
our research and development sites, whereby we subsequently closed our Seattle, Washington and Shanghai, China facilities. We currently have
approximately 161 employees in engineering focused on hardware and circuitry design, software development including database capture and
development tools. Our development activities are performed in the U.S. at our Meridian, Idaho and San Jose, California facilities.  Our software design
and support activities are performed primarily in our Bangalore, India facility.

Competition

The semiconductor industry is highly competitive and is characterized by price erosion and the rapid technological changes
in many markets. The industry consists of major domestic and international semiconductor companies, many of which have substantially greater
resources than we do with which to pursue engineering, manufacturing, marketing and distribution of their products. Emerging companies are also
expected to increase their participation in the semiconductor market.

We compete on a global basis with other micrologic device manufacturers who target the same specific market segments. We believe the primary
basis for competition include: price, technological sophistication, customer relationships, support tools, familiarity with micrologic architecture and existing
customer investment in system software based on a particular architecture. In many instances, our competitors have similar competitive strengths to us
and have significantly more resources than we do. Many of our competitors are much larger than we are, with broad product offerings in many sectors.

Our current and future products compete with, or may compete with, products offered by Atmel, Cypress Semiconductor, Freescale, Microchip,
Renasas, Samsung, STMicroelectronics and Universal Electronics, Inc., among others.

Backlog

Our total backlog of cancelable customer orders was $8.7 million at March 31, 2008, $10.0 million at March 31, 2007
and

Patents and Licenses

We currently have 200 U.S. and non-U.S. patents as of March 31, 2008, which expire between fiscal years 2009 and 2026.

We employ a combination of patents, copyrights, mask-work rights, trademarks and trade secrets, as well as contractual restrictions, to protect
the proprietary aspects of our business and devices. In addition to our own intellectual property, we license technologies and products from others, as
necessary, to provide second sources for standard products or to obtain rights to cores, cells or other technology. We often enter into agreements to
incorporate into our designs the

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intellectual property of third parties. Such agreements may impose certain obligations or limitations on our use or
disclosure of, such intellectual property or the enforcement of our own intellectual property. We hold numerous U.S. and foreign patents and have
additional U.S. and foreign patent applications pending. We also hold numerous mask works, copyrights to protect proprietary software employed in our
devices and trademarks. We intend to continue investing in the protection of our intellectual property through the filing of patent applications and, if
appropriate, the registration of copyrights, mask-works and trademarks. Nevertheless, we believe that our continued success depends primarily on the
technological skills and innovative abilities of our personnel and our ability to rapidly commercialize product developments. Thus, we believe that the loss
of any one of our patents or trade secrets would not materially affect our core business.

The extent and value of our intellectual property is necessarily uncertain. While we intend to protect our intellectual property rights vigorously,
our efforts may not be successful. Despite our precautions, a third party may copy, or otherwise obtain, our devices or technology without authorization,
requiring patent litigation to enforce our rights. Patent litigation is, by its nature, expensive and unpredictable. If litigated, one or more of our patents may
be found invalid or unenforceable or to have claims of such narrow scope as to be of little economic value. Third parties may design around our patents.
Third parties may independently develop technology similar to our trade secrets. In addition, the laws of some foreign countries where we have patent
and trademark rights may not protect our intellectual property rights to the same extent as the laws of the United States.  Additionally, our pending and
future patent applications should not be relied upon as they may not issue as patents, and even if they do issue, such future patents may not be of
sufficient scope or strength to provide meaningful economic or competitive value.

The semiconductor industry is characterized by frequent litigation regarding patent and other intellectual property rights, both defensive and
offensive. From time to time we have received, and may in the future receive communications from third parties asserting that a product offered by us, or
an aspect of our business, infringes a patent held by the third party and/or require a license thereto. With respect to those third party communications that
are currently pending but which have not yet been filed as a lawsuit, we believe, after having consulted with counsel, that either (i) we have meritorious
defenses, (ii) based on license terms previously offered to us or typically available in the industry, we can obtain any necessary licenses on commercially
reasonable terms, or (iii) we can modify our products to avoid such rights, but in any case, we may be sued and assessed damages for past infringement.
Indeed, licenses may not be available on commercially reasonable terms, or at all. In addition, we have certain indemnification obligations to customers
with respect to such claims of infringement of third party intellectual property rights by our devices. Should it become necessary to engage in litigation to
defend against such assertions, such litigation could be expensive and time consuming. There can be no assurance that the ultimate resolution of these
matters would not have a material adverse affect on our business.

On August 11, 2005, Microchip Technology, Inc. ("Microchip") filed a patent infringement claim against us in the
U.S. District Court of Arizona (case number CV05-2406-PHX-MHM). Microchip alleges that we have infringed,
and currently infringe, its patents numbered 5,847,450, 6,696,316 and 6,483,183. Microchip claims that unspecified
products of ours, including the Z8 Encore! XP 4K Series of products, infringe these patents and is seeking
preliminary and permanent injunctive relief, unspecified damages and costs, including attorneys' fees. We filed a
response to the claims on September 15, 2005 generally denying the claims and challenging the validity of the
patents. On January 10, 2006, we filed a request for patent re-examination with the U.S. PTO, which was granted in
February and March 2006 for all 3 patents. On April 11, 2008, we received a notice that all of Microchip's claims
under these three patents have been rejected by the U.S. PTO. Notwithstanding this favorable ruling, because
Microchip has a right to appeal the patent office's decision, we do not believe it is feasible to predict or determine
the outcome or resolution of this litigation at this time. We believe we have meritorious defenses and will defend
ourselves against these claims vigorously. We may incur substantial expenses in our defense against these claims. In
the event of a determination adverse to us, we may incur substantial monetary liabilities and be required to change
our business practices. Either of these could have a material adverse effect on our financial position, results of
operations and/or cash flows.

On December 1, 2006, we filed a patent infringement claim against Altera Corporation ("Altera") and Actel Corporation
("Actel")  in the U.S. District Court of California (civil docket number 4:06-cv-07388-SBA). We allege that Altera and Actel have infringed,
and currently infringe, our patent numbered 4,670,749 which we believe to be the fundamental patent for programmable logic. We claim that Altera's and
Actel's products infringe these patents and we are seeking unspecified damages and costs, including attorneys' fees.  Actel settled their case with
us on June 11, 2007 for an undisclosed amount.  The case against Altera is currently on stay pending reexamination of the patent in suit.

On May 23, 2008, Altera Corporation ("Altera") filed a patent infringement claim against us in the U.S. District Court of Texas (civil action
number 2:08-CV-218). Altera alleges that we have infringed, and currently infringe, its patents numbered 6,097,211, 6,147,511 and 6,314,550. Altera
claims that unspecified products of ours, including the eZ80 and Zneo series of products, infringe these patents and is seeking preliminary and
permanent injunctive relief, unspecified damages and costs, including attorneys' fees. We do not believe it is feasible to predict or determine the outcome
or resolution of this litigation at this time. We will defend ourselves against these claims vigorously. We may incur substantial expenses in our defense

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against these claims. In the event of a determination adverse to us, we may incur substantial monetary liabilities and be required to change our business
practices. Either of these could have a material adverse effect on our financial position, results of operations and/or cash flows.

Intellectual property lawsuits are subject to inherent uncertainties due to the complexity of the technical issues involved, and we may not be
successful in defending ourselves against intellectual property claims. The cost of defending against patent infringement or other intellectual property
litigation, in terms of management time and attention, legal fees and product delays, could be substantial, whatever the outcome. If any patent or other
intellectual property claims against us are successful, we may be prohibited from using the technologies subject to these claims, and if we are unable to
obtain a license on acceptable terms, license a substitute technology, or design new technology to avoid infringement, we could be prohibited from using
or selling the infringing products or technologies and be required to pay substantial damages. Such a result could have a material adverse effect on our
business. Conversely, we also enforce our intellectual property rights where appropriate, consistent with business considerations.  The exercise of this
right to protect our intellectual property in a patent may result in an offender challenging the validity of a patent we seek in order to protect and/or develop
its own patent infringement claims against us.

Employees

As of March 31, 2008, we had 528 full time employees, comprised of approximately 241 in manufacturing-related
activities, 161 in engineering, 58 in sales and marketing and 68 in general and administrative functions, including Finance, HR, IT and facilities, of which a
total of 37 are located in our global support facility in Manila, Philippines.

Our employees are not represented by any collective bargaining organization.

Environmental

Any failure by us to control the use of, or adequately restrict the discharge of, hazardous substances could subject us to
future liabilities that could materially harm our business, including under laws and regulations that impose liability and clean-up responsibility for releases
of hazardous substances into the environment. Until 2005, we operated wafer fabrication activities in our Nampa, Idaho facilities. Until February 2006, we
owned an 8-inch wafer manufacturing facility and until April 2007, we owned a 5-inch wafer manufacturing facility.  Our manufacturing processes at these
facilities required us to use various hazardous substances, and, as a result, we were subject to a variety of environmental laws and regulations governing
the storage, use, emission, discharge and disposal of, and human exposure to, such substances.  In particular, the process of manufacturing silicon
wafers used large amounts of corrosive and other hazardous chemicals and huge quantities of distilled, de-ionized water.  Subsequent to the ceasing of
wafer manufacturing activities in these facilities, the facilities were cleaned and prepared for sale and the equipment was decommissioned and sold.  We
no longer conduct manufacturing activities in Nampa, Idaho.

Recently, laws and regulations have been enacted in several European Union member countries, including several jurisdictions in which we operate,
restricting the presence of certain substances in electronic products and holding producers of those products financially responsible for the collection,
treatment, recycling and disposal of certain products.  Specifically, the European Union has enacted the Restriction of the Use of Certain Hazardous
Substances in Electrical and Electronic Equipment, or RoHS, and the Waste Electrical and Electronic Equipment, or WEEE, directives.  The RoHS
directive prohibits the use of certain substances, including lead, mercury, cadmium and chromium, in covered products placed on the market after July 1,
2006.  The WEEE directive obligates parties that place electrical and electronic equipment onto the market in the European Union to clearly mark the
equipment, register with and report to European Union regulators regarding distribution of the equipment, and provide a mechanism to recall and properly
dispose of the equipment.  Each European Union member country has enacted, or is expected to soon enact, legislation clarifying what is and what is not
covered by the WEEE directive in that country.  However, there is still some uncertainty in certain European Union countries as to which party involved in
the manufacture, distribution and sale of electronic equipment will be ultimately held responsible.  If we are deemed to be a manufacturer of covered
products, we may be required to register as a producer in certain European Union countries, and incur financial responsibility with respect to products
sold within the European Union, including products of other manufacturers that have been replaced by our products.  We may also incur substantial costs
to change our contract partners manufacturing processes, redesign or reformulate, and obtain substitute components for, our products that are deemed
covered products under the ROHS directive.  If we fail to timely provide RoHS-compliant products, we will not be able to offer our products within the
European Union, and we may be subject to civil or criminal liabilities.  Similar laws have been proposed and may be enacted in other locations where we
sell our products, including various jurisdictions within the United States and China. We will need to ensure that we comply with such laws and regulations
as they are enacted, and ensure, as appropriate or required, that our component suppliers also timely comply with such laws and regulations.  If we fail to
timely comply with such laws, we could face sanctions for such noncompliance and our customers

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further may refuse to purchase our products, which
would have a material adverse effect on our business, financial condition and results of operations.

With respect to environmental remediation, we could incur substantial costs for the clean up of contaminated properties, either those we own or
operate or to which we have sent wastes in the past. Under certain of these laws and regulations, current or previous owners or operators of property may
be liable for cleanup costs and other damages without regard to whether they knew of, or caused, the contamination.  The presence of, or failure to
remediate, contamination could materially adversely affect the value of, and the ability to transfer or encumber, our property.  In addition, we may be
required to incur significant expense in connection with governmental investigation of environmental or employee health and safety matters. Currently, we
are not aware of any such actions or notices against us.

Available Information

The Company's annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on form 8-K and all amendments to those
reports are available free of charge on the Company's website through

Alternatively, you may read and copy any materials filed with the SEC at the SEC's Public Reference Room at 450 Fifth
Street, NW. Washington, DC 20549 or access the information on the SEC's website at

In addition, you may request a copy of these filings (including exhibits) at no cost by writing us at our principal offices at
6800 Santa Teresa Blvd., San Jose, CA 95119, attention: Investor Relations, or by calling (408)513-1500.

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ITEM 1A.	RISK FACTORSRISK FACTORS
Risks Related to Our Business and Industry
The following risk factors should be considered carefully in addition to the other information in the Form 10-K.  The risks described below are
the ones we deem to be material to our business, but are not the only ones we face.  Additional risks we are not presently aware of or that we currently
believe are immaterial may also impair our business operations. If any of these risks actually occur, our business could be harmed materially.
We have experienced declines in net sales, and, if we fail to implement our new product strategy, we may continue to experience declines in
sales and gross margins.

In each of the past five years, our net sales have fluctuated significantly and our future financial results are anticipated to
be subject to substantial fluctuations. Our total net sales were $67.2 million for the twelve months ended March 31, 2008, $82.0 million for the twelve
months ended March 31, 2007 and $78.8 million for the twelve months ended March 31, 2006. We anticipate that sales of our classic products may
continue to decline over time. Our future financial performance and success are largely dependent on our ability to implement our new product strategy,
which consists partly of refocusing our business on microcontroller products built around our core 8-bit micrologic architecture, beginning with the
Z8 Encore! and eZ80 Acclaim! flash products.  Since 2002, we have launched our new series of 8-bit embedded flash microcontrollers, universal
remote control solutions and 32-bit Zatara microprocessors. These products typically have a long lead time from design to production, which can range
from twelve months to thirty-six months. These new products represented approximately 54% of our net sales for the twelve months ended March 31,
2008 compared to 45% of our net sales for the twelve months ended March 31, 2007, and we currently expect the contribution of these products to
continue to grow.  If we are unable to develop new products in a manner that timely meets changing market requirements, or if we are not able to achieve
significant sales of our 8-bit microcontroller products for any reason, our product strategy may fail and our net sales and operating results may continue to
decline or not grow as currently expected.  In addition, as we introduce new products we experience additional start up costs and unfavorable
manufacturing prices due to low volume. In addition, we do not expect margins on our 8-bit embedded flash products to be as strong as those on our
classic products. Consequently, the introduction of new products could have a negative impact on our gross margin even if sales from such new products
offset declining revenues from our classic products.

If we are unable to obtain adequate production capacity or quality, our business will be harmed.

We rely on independent third-party foundry manufacturers, including X-FAB, TSMC and UMC, to fabricate wafers for all of our product needs.
Industry-wide shortages in foundry capacity could harm our financial results.  If we are unable to obtain the requisite foundry capacity to manufacture our
products, or if we have to pay higher than anticipated prices to foundries in periods of tight capacity, we may not be able to meet our customers' demand
for our products.  Any delay in initiating production at third-party foundries, any inability to have new products manufactured at such foundries, or any
failure to meet our customers' demands, could damage our relationships with our customers and may decrease our sales.

Other significant risks associated with relying on these third-party foundries include:

- reduced control over the cost of our products, delivery schedules, capacity constraints and product quality;
- limited warranties on wafers or products supplied to us;
- increased exposure to potential misappropriation of our technology;
- yield or quality issues with the supplier which could result in us being unable to supply product to customers or providing product that does not meet
their quality or performance standards;
- vulnerability to third-party foundries' financial, operations or production difficulties; and
- the time and cost associated with switching or sourcing alternate foundries.

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We may require additional capital in the future and additional funds may not be available on terms acceptable to us.

Based on our existing financial plans and forecasts, we believe that our existing cash and cash equivalents will be sufficient to meet our
planned capital needs for the next twelve months. However, it is possible that we may need to raise additional capital to fund our future activities.  We
may be able to raise these funds by selling securities to the public or selected investors, or by borrowing money. We may not be able to obtain additional
funds on favorable terms, or at all. If adequate funds are not available on acceptable terms, we may be required to curtail our operations significantly,
reduce planned capital expenditures and research and development, make selective dispositions of our assets or obtain funds through arrangements with
strategic partners or others that may require us to relinquish rights to certain technologies or potential markets, or otherwise impair our ability to remain
competitiv

We could be required to incur significant capital expenditures for test and information technology and equipment to
remain competitive, the failure, inadequacy or delayed implementation of which, could harm our ability to effectively operate our business.

Our capital expenditures were $3.4 million for the twelve months ended March 31, 2008, $2.1 million for the twelve months ended March 31,
2007 and $4.2 million for the twelve months ended March 31, 2006. We may be required to increase our future capital expenditures to meet increased
demand.

Semiconductor manufacturing has historically required, and in the future is likely to continue to require, a constant upgrading of process technology to
remain competitive, as new and enhanced semiconductor processes are developed which permit smaller, more efficient and more powerful
semiconductor devices.  Even though we outsource a significant amount of our manufacturing, we are required to spend funds on mask designs and
process technology improvements to remain competitive.  We maintain certain of our own test facilities which have required, and may continue to require,
investments in test technology and equipment.

We also may incur significant costs to implement new test equipment and information technologies to increase our productivity and efficiency. Any
such implementation, however, can be negatively impacted by failures or inadequacies of the new test or information technology and unforeseen delays
in its implementation, any of which may require us to spend additional resources to correct these problems or, in some instances, to conclude that the
new technology implementation should be abandoned. In the case of abandonment, we may have to recognize losses for amounts previously expended
in connection with such implementation that have been capitalized on our consolidated balance sheets.

There can be no assurances that we will have sufficient capital resources to make necessary investments in test equipment or information technology
and equipment.

Interruptions in information technology systems could affect our business.

We rely on the efficient and uninterrupted operation of complex information technology systems and networks to operate our business,
especially between the Philippines and our San Jose, California headquarters. Any significant system or network disruption, including but not limited to
computer viruses, security breach and energy blackouts, could have a material adverse impact on our operations, sales and operating results. We have
implemented measures to manage our risks related to such disruptions, but such disruptions could negatively impact our operations and financial results.
In addition, we may incur additional costs to remedy the damages caused by these disruptions or security breaches.

If we are unable to prevail in a patent litigation lawsuit we may incur substantial monetary liability and may be required to change our business
practices.

On August 11, 2005, Microchip Technology, Inc. ("Microchip") filed a patent infringement claim against us in the
U.S. District Court of Arizona (case number CV05-2406-PHX-MHM). Microchip alleges that we have infringed,
and currently infringe, its patents numbered 5,847,450, 6,696,316 and 6,483,183. Microchip claims that unspecified
products of ours, including the Z8 Encore! XP 4K Series of products, infringe these patents and is seeking
preliminary and permanent injunctive relief, unspecified damages and costs, including attorneys' fees. We filed a
response to the claims on September 15, 2005 generally denying the claims and challenging the validity of the
patents. On January 10, 2006, we filed a request for patent re-examination with the U.S. PTO, which was granted in
February and March 2006 for all 3 patents. On April 11, 2008, we received a notice that all of Microchip's claims
under these three patents have been rejected by the U.S. PTO. Notwithstanding this favorable ruling, because
Microchip has a right to appeal the patent office's decision, we do not believe it is feasible to predict or determine
the outcome or resolution of this litigation at this time. We believe we have

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meritorious defenses and will defend
ourselves against these claims vigorously. We may incur substantial expenses in our defense against these claims. In
the event of a determination adverse to us, we may incur substantial monetary liabilities and be required to change
our business practices. Either of these could have a material adverse effect on our financial position, results of
operations and/or cash flows.

On December 1, 2006, we filed a patent infringement claim against Altera Corporation ("Altera") and Actel Corporation ("Actel")
 in the U.S. District Court of California (civil docket number 4:06-cv-07388-SBA). We allege that Altera and Actel have infringed, and currently
infringe, our patent numbered 4,670,749 which we believe to be the fundamental patent for programmable logic. We claim that Altera's and Actel's
products infringe these patents and are seeking unspecified damages and costs, including attorneys' fees.  Actel settled their case with us on June
11, 2007 for an undisclosed amount.  The case against Altera is currently on stay pending reexamination of the patent in suit.

On May 23, 2008, Altera Corporation ("Altera") filed a patent infringement claim against us in the U.S. District Court of Texas (civil action
number 2:08-CV-218). Altera alleges that we have infringed, and currently infringe, its patents numbered 6,097,211, 6,147,511 and 6,314,550. Altera
claims that unspecified products of ours, including the eZ80 and Zneo series of products, infringe these patents and is seeking preliminary and
permanent injunctive relief, unspecified damages and costs, including attorneys' fees. We do not believe it is feasible to predict or determine the outcome
or resolution of this litigation at this time. We will defend ourselves against these claims vigorously. We may incur substantial expenses in our defense
against these claims. In the event of a determination adverse to us, we may incur substantial monetary liabilities and be required to change our business
practices. Either of these could have a material adverse effect on our financial position, results of operations and/or cash flows.

We depend on third-party assemblers throughout Asia, including Indonesia, Thailand and the Philippines, and the failure of these third parties
to continue to provide services to us on sufficiently favorable terms could harm our business.

We use outside contract assemblers in Indonesia, Thailand and the Philippines for packaging our products.  We are also in the process of
outsourcing our test operations to third party suppliers and partners in the Philippines and Indonesia. These countries have been subject to political
instability and terrorist activities. The packaging and testing of semiconductors is a complex process requiring, among other things, a high degree of
technical skill and advanced equipment.  If we are unable to obtain additional assembly and test capacity on sufficiently favorable terms, our ability to
maintain or grow our net sales could be impaired.  Shortages in contract assembly and test capacity could cause shortages in our products and could also
result in the loss of customers as a result of delays.  Because we rely on these third parties, we also have less control over our costs, delivery schedules
and quality of our products and our technology is at greater risk of misappropriation.

Our success depends on our ability to introduce new products on a timely basis.

Our operating results depend on our ability to introduce and sell new products on a timely basis that can compete
effectively based on price and performance and that address customer requirements. Rapidly changing technologies and industry standards, along with
frequent new product introductions, characterize the industries that are currently the primary end-users of semiconductors. As these industries evolve and
our customers and potential customers introduce new products, our success will depend on our ability to adapt to such changes in a timely and
cost-effective manner by designing, developing, manufacturing, marketing and providing customer support for new products and technologies. Our ability to
introduce and sell new products successfully depends on several factors, including:

- development of support tools and technical documentation that make complex products easy for engineers to understand and use;
- proper new product selection;
- timely completion and introduction of new product designs;
- support from our foundry service providers;
- complexity of the new products to be designed and manufactured; and
- market acceptance of our products and our customers' products.

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The emphasis of our new product development is on products built on our 8, 16 and 32-bit microcontroller architectures. If market demand for these
products does not develop as we anticipate, our product development strategy could fail. Because our products are complex, we may not meet the design
and introduction schedules for any new products or any additions or modifications to our existing products, and these products may not achieve market
acceptance. In addition, we may not be able to sell these products at prices that are favorable to us.

We may be unable to make the substantial research and development investments required to remain competitive in our
business

The semiconductor industry requires substantial investment in research and development in order to develop and bring to market new and enhanced
technologies and products. We intend to maintain spending on new product development in order to stay competitive in our markets. There can be no
assurances that we will have sufficient resources to maintain the level of investment in research and development that is required to remain
competitive.

Our industry is highly competitive, and we may not be able to compete effectively.

The semiconductor industry is intensely competitive and is characterized by price erosion, rapid technological change and
heightened competition in many markets. The industry consists of major domestic and international semiconductor companies, many of which have
substantially greater financial and other resources than we do with which to pursue engineering, manufacturing, marketing and distribution of their
products. Emerging companies are also increasing their participation in the semiconductor industry. Our current and future products compete with, or may
compete with, products offered by Atmel, Cypress Semiconductor, Microchip, Freescale, Renasas, Samsung, ST Microelectronics and Universal
Electronics, Inc., among others. Some of our principal products, such as the Z80 microprocessor, are licensed by our competitors, or are in the public
domain, and can be manufactured and sold to our customers by our competitors, possibly with added features or at lower prices than we charge. Our
ability to compete successfully in our markets depends on factors both within and outside of our control, including:

- our ability to design and manufacture new products that implement new technologies, including our 8-bit microcontrollers, universal remote control
solutions and our Zatara 32-bit ARM based product families;
- our ability to protect our products by effectively utilizing intellectual property laws;
- our product quality, reliability, ease of use and price;
- the diversity of our product line and feature sets within our products;
- our efficiency of production;
- our ability to obtain adequate supplies of raw materials and other supplies at acceptable prices;
- the availability of subcontractors for the wafer fabrication, assembly and test of our products;
- the pace at which customers incorporate our devices into their products; and
- the success of our competitors' products and general economic conditions.

Our quarterly operating results are likely to fluctuate and may fail to meet expectations, which may cause the price of our securities to decline.

Our quarterly operating results have fluctuated in the past and will likely continue to fluctuate in the future. If
our quarterly operating results fail to meet expectations, the price of our securities could fluctuate or decline significantly. In addition, significant
proportions of our costs are fixed, due

- our ability to introduce and sell new products and technologies on a timely basis;
- any shortage of wafer, test or assembly manufacturing capacity at our third-party vendors;
- competitive developments, including pricing pressures;
- technological change and product obsolescence;
- changes in product mix or fluctuations in manufacturing yields;

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- variability of our customers' product life cycles;
- the level of orders that we receive and can ship in a quarter and customer order patterns, which may be especially difficult to predict on our newer
products;
- seasonality;
- inventory write-downs or asset impairments;
- restructuring charges;
- increases in the cost or scarcity of raw materials; and
- gain or loss of significant customers.

We depend on orders that are received and shipped in the same quarter, and therefore our results of operations may be subject to significant
variability from quarter to quarter.

Our net sales in any given quarter depend upon a combination of orders received in that quarter for
shipment in that quarter and shipments from backlog. Our backlog at the beginning of each quarter does not include all sales needed to achieve expected
revenues for that quarter. Consequently, we are dependent on obtaining orders to be shipped in the same quarter that the order is received for a
significant portion of net sales in that quarter. Moreover, customers may reschedule shipments and production difficulties could delay shipments.
Accordingly, we have limited visibility into future product shipments and our results of operations may be subject to significant variability from quarter to
quarter.

We operate in the highly cyclical semiconductor industry and have experienced a downturn in the business cycle, which has
materially adversely affected our revenues and cash generation.

The semiconductor industry is highly cyclical and has experienced significant economic downturns, often in connection with, or in anticipation
of, maturing product cycles (for semiconductors and for the end-user products in which they are used) and declines in general economic conditions.
These downturns have been characterized by diminished product demand, erosion of average selling prices, production over-capacity and high inventory
levels. For example, beginning in the quarter ended December 31, 2000, we experienced a three-year downturn in our business cycle. We are currently
experiencing another down-turn in our business cycle and may experience downturns in the future. We believe that, in light of these events, some of our
customers curtailed and may in the future delay or further curtail spending on technology, which could negatively affect our quarterly results or financial
condition in the future.  Similar economic downturn in the semiconductor industry could increase pressure on us to reduce our prices, which could impair
our revenues, gross margins and operating cash flow. From time to time, the semiconductor industry also has experienced periods of increased demand
and production capacity constraints. We have in the past experienced substantial period-to-period declines in operating results, and will likely in the future
experience substantial period-to-period fluctuations in operating results that are attributable to semiconductor industry conditions or events occurring in
the general economy

Average selling prices in the semiconductor industry typically decline over time, which directly affects our revenue and
margins.

Historically, average selling prices in the semiconductor industry have decreased over the life of any particular product. To
the extent that our products achieve market acceptance, competitors typically seek to offer competitive products or embark on discount pricing strategies.
We have in the past and may in the future be required to reduce selling prices in response to competition. From time to time, technology and
manufacturing changes have the impact of lower average selling prices, such as the conversion of hardware to software modems and packaged to die
only sales.  If we are unable to offset any reductions in the selling prices of our products by introducing new products at higher prices or by reducing our
costs, our revenues, gross margins and operating results could be impaired.  In addition, if the price at which we can sell products in our inventory
declines below the cost of such products, we may be required to write down the value of such inventory.

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A significant amount of our revenues comes from relatively few distributors, and any decrease of revenues from these customers and
distributors, or the loss of their business, could significantly harm our financial results.

Historically we have been, and we expect to continue to be, dependent on a relatively small number of distributors for a significant portion of our
revenues. We depend on third-party distributors to market and sell our products, and these third-party distributors collectively accounted for approximately
56% of our net sales in each of the twelve months ended March 31, 2008, March 31, 2007 and March 31, 2006. In addition, our five largest distributors
accounted for approximately 47% of our net sales for the twelve months ended March 31, 2008, 46% for the twelve months ended March 31, 2007and
44% of our net sales for the twelve months ended March 31, 2006. One distributor accounted for approximately 25% of our net sales for the twelve
months ended March 31, 2008, 23% for the twelve months ended March 31, 2007 and 24% for the twelve months ended March 31, 2006. Our distributors
decide whether to include our products among those that they sell, and they may carry and sell product lines that are competitive with ours. Because our
distributors are not required to make a specified minimum level of purchases from us, we cannot be sure that they will prioritize selling our products. We
also rely on our distributors to accurately report to us on a timely basis their sales of our products and provide certain support services to our customers.
Our inability to obtain accurate and timely reports and to successfully manage these relationships could materially adversely affect our business and
financial reports. Our distributors may not continue to effectively market, sell or support our products.



Our ten largest customers, excluding our distributors, accounted for approximately 39% of our net sales for the twelve months ended March
31, 2008, 36% for the twelve months ended March 31, 2007 and 33% for the twelve months ended March 31, 2006.   For the twelve months ended March
31, 2008, March 31, 2007 and March 31, 2006, we had one direct customer that accounted for 11%, 15% and 10% of our net sales, respectively. In
addition, for the twelve months ended March 31, 2008, March 31, 2007 and March 31, 2006, we had one distributor that accounted for 25%, 23%and 24%
of our net sales, respectively.

Concentration of net sales to particular customers may change from period to period, but we expect that sales to a limited number of customers will
continue to account for a significant percentage of our revenues in any particular period for the foreseeable future. We have very few long-term contracts
with our customers, and, like us, our customers typically compete in cyclical industries. We routinely purchase inventory based on customers' estimates of
demand for their products, which is difficult to predict.  Thus, our customers may decide not to purchase our products at all, to purchase fewer products
than they did in the past, or to alter their purchasing patterns on short notice, particularly because substantially all of our sales are made on a purchase
order or sales order acknowledgment basis, which permits our customers to cancel, change or delay product purchase commitments.

Any of our large customers may choose to exit the business we supply, or partner with, or acquire product from our competitors. Should this occur,
our results of operations would likely be harmed. The loss of one or more major customers or any reduction, delay or cancellation of orders by any of
these customers or our failure to market successfully to new customers, could result in a significant reduction in net sales during one or more periods,
excess inventory or write-downs of inventory.

Our revenue may decline if customers for whom we are sole source providers seek alternative sources of supply.

We serve as the sole (or primary) source provider for some of our direct customers. Those customers may choose to reduce their
dependence on us by seeking second sources of supply, which could reduce our revenue. To remain a sole (or primary) source provider, we must
continue to demonstrate to our customers that we have adequate alternate sources for components, that we maintain adequate alternatives for production
and that we can deliver value added products on a timely basis

Our international operations subject us to risks inherent in doing business with countries outside the United States
that could impair our results of operations.

Approximately 60 - 65% of our net sales for each of the twelve months ended March 31, 2008, the twelve months ended March 31, 2007 and
the twelve months ended March 31, 2006, were made to countries outside the United States. These sales to non-U.S. customers will continue to
represent a significant portion of our net sales in the future. We maintain significant operations, or rely on a number of contract manufacturers, in the
Philippines, Indonesia, Taiwan, Thailand, India and other locations in Asia. There can be no assurances that we will be successful in overcoming the risks
that relate to, or arise from, operating in international markets. Risks inherent in doing business on an international level include:

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- economic and political instability;
- changes in regulatory requirements, tariffs, customs, duties and other trade barriers;
- transportation delays;
- power supply shortages and shutdowns;
- difficulties in staffing and managing foreign operations and other labor problems;
- existence of language barriers and cultural distinctions;
- acts of God, including floods, typhoons and earthquakes;
- taxation of our earnings and the earnings of our personnel; and
- other uncertainties relating to the administration of, or changes in, or new interpretation of, the laws, regulations and policies of the jurisdictions in
which we conduct our business.

In addition, our activities outside the United States are subject to risks associated with fluctuating currency values and exchanges rates, hard
currency shortages and controls on currency exchange.  While our sales are primarily denominated in U.S. dollars, worldwide semiconductor pricing is
influenced by currency rate fluctuations, and such fluctuations could harm our operating results materially.

The risks inherent in our international operations have been increased by the threat of terrorist attacks.  These attacks, coupled with an international
military response, have created an uncertain economic environment, and we cannot predict the impact of these political threats or any related military
action, on our customers or our business

We have had a history of losses, and we may not be profitable in the future.

We have had a history of losses since the one-time gain on extinguishment of debt and fresh-start adjustments in 2002. We may not
be profitable in the future.

We depend on key personnel, and the loss of our current personnel or our failure to hire and retain additional personnel could harm our
business.

We depend on our ability to attract and retain highly skilled technical and managerial personnel. We believe that our future success
in developing marketable products and achieving a competitive position will depend in large part on our ability to identify, recruit, hire, train, retain and
motivate highly skilled technical, executive, managerial, marketing and customer service personnel. Competition for these personnel is intense, especially
in Northern California, where our headquarters are located, and we may not be able to successfully recruit, assimilate or retain sufficiently qualified
personnel. Our failure to recruit and retain necessary technical, executive, managerial, marketing and customer service personnel could harm our
business and our ability to obtain new customers and develop new products. In addition, our history of losses and our 2002 bankruptcy reorganization
could impair our ability to recruit and retain employees.  We do not have employment contracts with any of our executive officers.  We have recently
received unsolicited proposals to acquire our company including one solicitor who has requested a nominee to our Board of Directors.  Our ability to
recruit and retain key personnel may be negatively impacted by uncertainties relating to potential future changes in the ownership and control of our
company.

For a portion of our employee incentives, we issue common stock options that generally have exercise prices at the market value at time of the grant
and that are subject to vesting.  At times, our stock price has declined, reducing the effectiveness of these incentives.

We may fail to protect our proprietary rights, and the cost of protecting those rights, whether we are successful or not, may harm our ability to
compete.

The extent and value of our intellectual property is necessarily uncertain, and our efforts to protect our intellectual property rights
may not be successful. Despite our precautions, a third party may copy or otherwise obtain our devices or technology without authorization, requiring
patent litigation to enforce our rights. Patent litigation is, by its nature, expensive and unpredictable. If litigated, one or more of our patents may be found
invalid or unenforceable or to have claims of such narrow scope as to be of little economic value. Third parties may design around our patents. Third
parties may independently develop technology similar to our trade secrets. In addition, the laws of some foreign countries where we have patent and
trademark rights may not protect our intellectual property rights to the same extent as the laws of the United States.

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Additionally, our pending and future patent applications should not be relied upon as they may not
issue as patents, and even if they do issue, such future patents may not be of sufficient scope or strength to provide meaningful economic or competitive
value.



The semiconductor industry is characterized by frequent litigation regarding patent and other intellectual property rights, both defensive
and offensive.

In addition to the Microchip lawsuit and Altera claim described elsewhere, from time to time we have received, and may in the future receive,
communications from other third parties asserting that a product offered by us, or an aspect of our business, infringes a patent held by the other third
party and/or requires a license thereto. With respect to those other third party communications that are currently pending, we believe, after having
consulted with counsel, that either (i) we have meritorious defenses, (ii) based on license terms previously offered to us or typically available in the
industry, we can obtain any necessary licenses on commercially reasonable terms, or (iii) we can modify our products to avoid such rights, but if this is not
the case, we may be sued and assessed damages for past infringement. Indeed, licenses may not be available on commercially reasonable terms, or at
all. In addition, we have certain indemnification obligations to customers with respect to the infringement of third party intellectual property rights by our
devices.

We have received in the past a letter from an electronic equipment manufacturer that makes products that are competitive to certain of our key
products, asserting that the sale of certain of our key products may be infringing certain patents owned by them. After having consulted with counsel, we
believe that we have meritorious defenses to the assertions set forth in the letter. However, should it become necessary to engage in litigation to defend
against such assertions, such litigation could be expensive and time consuming. There can be no assurance that the ultimate resolution of this matter
would not have a material adverse affect on our business.

Intellectual property lawsuits are subject to inherent uncertainties due to the complexity of the technical issues involved, and we may not be
successful in defending ourselves against intellectual property claims. The cost of defending against patent infringement or other intellectual property
litigation, in terms of management time and attention, legal fees and product delays, could be substantial, whatever the outcome. If any patent or other
intellectual property claims against us are successful, we may be prohibited from using the technologies subject to these claims, and if we are unable to
obtain a license on acceptable terms, license a substitute technology, or design new technology to avoid infringement, we could be prohibited from using
or selling the infringing products or technologies and be required to pay substantial damages. Such a result could have a material adverse effect on our
business.



Because the design and production process for semiconductors is highly complex, we may produce products whose design deviates
from published specifications. In addition, one or more of our products may be found to contain production defects after we have already shipped such
products. These production defects could be caused by either raw materials or errors in
the production process. If errors or production defects are
discovered after we have already shipped one or more of our products in volume, we could be materially adversely affected in one or more of the
following ways:

- replacements or recalls could impose substantial costs on us;
- rumors, false or otherwise, may be circulated by the press and other media, which could cause a decrease in sales of our products; and
- customers or end users may file suits, or assert other legal claims against us, alleging damages caused by defective products or errors in products. If
we do not successfully defend such suits, we could be required to pay substantial damages. Even if we prevail in suits filed by customers or end users,
we may be required to expend significant funds in defense.

18

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Changes in technologies or consumption patterns could reduce the demand for our products.

As a result of technological changes, from time to time our customers change the design of their products so as not to include our products,
which may have a negative impact on our net sales. Because we do not have long-term supply contracts with most of our customers, changes in the
designs of their products can have sudden and significant impacts on our sales. Reduced sales due to customer design changes have harmed us in the
past, and additional customer design changes could result in lower revenues in the future.

We may forecast the future demand for our products incorrectly and produce excess or insufficient inventories of particular products, which may
adversely affect our results of operations.

Since we must order products and build inventory substantially in advance of product shipments, we may forecast incorrectly and produce
excess or insufficient inventories of particular products. The ability of our customers to reschedule or cancel orders without significant penalty could
adversely affect our liquidity, as we may be unable to adjust our purchases from our wafer suppliers to match any customer changes and cancellations.
As part of our business strategy, we maintain a substantial inventory of sorted wafers in a die bank but limit our investment in finished goods. We may
have adequate wafer inventory to meet customer needs but may be unable to finish the manufacturing process prior to the delivery date specified by the
customer. Demand for our products is volatile and customers often place orders with short lead times. Our inventory may not be reduced by sufficient
demand of customer orders and in the future we may produce excess quantities of our products.

It is our policy to fully write down all inventories that we do not expect to be sold in a reasonable period of time. We may suffer reductions in values of
our inventories in the future and we may be unable to liquidate our inventory at acceptable prices. To the extent we have excess inventories of particular
products, our operating results could be adversely affected by charges to cost of revenues that we would be required to recognize due to significant
reductions in demand for our products or rapid declines in the market value of our inventory, resulting in inventory write downs or other adverse
consequences.

We have implemented measures to consolidate our activities and/or significantly reduce our costs, and we may be required to implement
additional measures depending upon our future revenues and operating results.

In the past, we have implemented measures designed to consolidate our activities and/or reduce our costs, including during the four years ended
March 31, 2008. These cost reduction efforts have included:

- transferring our production test operations currently performed in our Philippines facility to third party suppliers;
- consolidation of our research and development activities including the closure of design and development sites in Shanghai, China and Seattle,
Washington;
- restructuring our manufacturing operations, which has included closing and subsequently outsourcing all of our wafer fabrication and assembly
operations and consolidating probe and final test operations, as well as certain customer service and accounting functions at our Philippines site;
- refocusing our strategic priorities;
- reallocating personnel and responsibilities to better utilize human resources;
- reducing our workforce; and
- instituting temporary office and facility shutdowns.

Cost reduction measures may not increase our efficiency or lead to profitability.  In the past, we have reduced our spending on research and
development.  Reducing research and development spending could harm our ability to introduce new products in the future. If our revenue or operating
results significantly decline in the future, we may be required to institute further cost reduction measures.

From time to time, we evaluate our strategic alternatives with respect to our facilities and we may take actions which may result in the occurrence of
accounting charges. Some or all of these charges may be non-cash. Such charges would have a negative impact on our GAAP profitability and may have
a negative impact on our cash balance.

We are subject to various environmental laws and regulations that could have a material adverse effect on us.

Until 2005, we operated wafer fabrication activities in our Nampa, Idaho facilities. Until February 2006, we owned an 8-inch
wafer manufacturing facility and until April 2007, we owned a 5-inch wafer manufacturing facility. Our manufacturing processes required us to use various
hazardous substances, and, as a result, we are subject to a variety of environmental laws and regulations governing the storage, use, emission,
discharge and disposal of, and human exposure to, such substances.  In

19

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particular, the process of manufacturing silicon wafers used large amounts of
corrosive and other hazardous chemicals and huge quantities of distilled, de-ionized water.  Any failure by us to control the use of, or adequately restrict
the discharge of, hazardous substances could subject us to future liabilities that could materially harm our business, have a materially adverse affect on
our financial condition and results of operations, including under laws and regulations that impose liability and clean-up responsibility for releases of
hazardous substances into the environment. Subsequent to the ceasing of wafer manufacturing activities in these facilities, the facilities were cleaned and
prepared for sale and the equipment was decommissioned and sold. We no longer conduct manufacturing activities in Nampa, Idaho.

Recently, laws and regulations have been enacted in several European Union member countries, including several jurisdictions in which we operate,
restricting the presence of certain substances in electronic products and holding producers of those products financially responsible for the collection,
treatment, recycling and disposal of certain products.  Specifically, the European Union has enacted the Restriction of the Use of Certain Hazardous
Substances in Electrical and Electronic Equipment, or RoHS, and the Waste Electrical and Electronic Equipment, or WEEE, directives.  The RoHS
directive prohibits the use of certain substances, including lead, mercury, cadmium and chromium, in covered products placed on the market after July 1,
2006.  The WEEE directive obligates parties that place electrical and electronic equipment onto the market in the European Union to clearly mark the
equipment, register with and report to European Union regulators regarding distribution of the equipment, and provide a mechanism to recall and properly
dispose of the equipment.  Each European Union member country has enacted, or is expected to soon enact, legislation clarifying what is and what is not
covered by the WEEE directive in that country.  However, there is still some uncertainty in certain European Union countries as to which party involved in
the manufacture, distribution and sale of electronic equipment will be ultimately held responsible.  If we are deemed to be a manufacturer of covered
products, we may be required to register as a producer in certain European Union countries, and incur financial responsibility with respect to products
sold within the European Union, including products of other manufacturers that have been replaced by our products.  We may also incur substantial costs
to change our contract partners manufacturing processes, redesign or reformulate, and obtain substitute components for, our products that are deemed
covered products under the ROHS directive.  If we fail to timely provide RoHS-compliant products, we will not be able to offer our products within
European Union, and we may be subject to civil or criminal liabilities.  Similar laws have been proposed and may be enacted in other locations where we
sell our products, including various jurisdictions within the United States and China. We will need to ensure that we comply with such laws and regulations
as they are enacted, and ensure, as appropriate or required, that our component suppliers also timely comply with such laws and regulations.  If we fail to
timely comply with such laws, we could face sanctions for such noncompliance and our customers further may refuse to purchase our products, which
would have a materially adverse effect on our business, financial condition and results of operations.

With respect to environmental remediation, we could incur substantial costs for the clean up of contaminated properties, either those we own or
operate or to which we have sent wastes in the past. Under certain of these laws and regulations, current or previous owners or operators of property may
be liable for cleanup costs and other damages without regard to whether they knew of, or caused, the contamination.  The presence of, or failure to
remediate, contamination could materially adversely affect the value of, and the ability to transfer or encumber, our property.  In addition, we may be
required to incur significant expense in connection with governmental investigation of environmental or employee health and safety matters.

We may engage in acquisitions and other forms of business combinations or partnerships that could materially adversely affect our operating
results, dilute our stockholders' equity, or cause us to incur additional debt or assume contingent liabilities.

To increase our business and maintain our competitive position, we have made acquisitions in the past and may do so in the future.
 Acquisitions and other forms of business combinations or partnerships involve a number of risks that could harm our business and result in the
acquired business not performing as expected, including:

- insufficient experience with technologies and markets in which the acquired or combined business is involved, which may be necessary to
successfully operate and integrate the business;
- problems integrating the acquired or combined operations, personnel, technologies or products with the existing business and products;
- diversion of management time and attention from our core business to the acquired or combined business;
- potential failure to retain key technical, management, sales and other personnel of the acquired or combined business;
- difficulties in retaining relationships with suppliers and customers of the acquired or combined business; and
- subsequent impairment of the acquired or combined assets, including intangible assets.

20

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In addition, acquisitions and other forms of business combinations or partnerships could require investment of significant financial resources and may
require us to obtain additional equity financing, which may dilute our stockholders' equity, or to incur additional indebtedness

Potential continuing uncertainty resulting from recent unsolicited acquisition proposals received from Universal Electronics
Inc. and Riley Investment Partners Master Fund, L.P. and IXYS Corporation and related matters may adversely affect our business.

On January 11, 2008, we received an unsolicited proposal from Universal Electronics Inc., or UEI, to acquire all of our outstanding shares of
common stock.  Also on January 11, 2008, UEI and Riley Investment Partners Master Fund, L.P. entered into an agreement with respect to this potential
acquisition of ZiLOG.  In the case of a successful acquisition, under the agreement, subject to the terms and conditions set forth therein, UEI would
acquire our remote control assets and Riley Investment Partners Master Fund would acquire our remaining assets.  On February 4, 2008, our Board
announced that, after carefully reviewing the proposal, it unanimously concluded that the proposal was not in the best interests of ZiLOG and its
stockholders.  On February 6, 2008, Riley Investment Management, LLC wrote a letter to Darin Billerbeck, our Chief Executive Officer, expressing its
displeasure with the decision of our board of directors regarding the UEI proposal.  On May 22, 2008, Riley Investment Management notified us of its
intent to nominate two individuals for election to ZiLOG's board of directors at the upcoming annual meeting of our stockholders.  In addition, on May 16,
2008, we received an unsolicited proposal from IXYS Corporation, or IXYS, to acquire all of the outstanding shares of our common stock.  On May 28,
2008, and prior to a formal response by our board of directors, IXYS filed a Schedule 13D/A indicating that it was withdrawing its unsolicited proposal.
The review and consideration of these abovementioned proposals and related matters have required, and may continue to require, the expenditure of
significant time and resources by us.  There can be no assurance that UEI, Riley Investment Partners Master Fund, Riley Investment Management or
IXYS or other potential suitors will not take other actions to acquire us, which may create continuing uncertainty for our employees, customers, distributors
and other business partners.  This continuing uncertainty could negatively impact our business and our ability to recruit and retain key employees.

Acts of war or terrorism could harm our business.

The long-term effects of potential terrorist attacks on the world economy and our business are unknown, but could be material to our
business. Terrorist acts or acts of war, whether in the United States or abroad, also could cause damage or disruption to our business, our suppliers, our
freight carriers, or our customers, or could create political or economic instability, any of which could have a material adverse effect on our business.

Failure to achieve and maintain effective internal control over financial reporting could have a material adverse effect on our
business and stock price.

Failure to achieve and maintain effective internal control over financial reporting in accordance with rules of the Securities and Exchange
Commission promulgated under Section 404 of the Sarbanes-Oxley Act, or failure to maintain adequate disclosure controls and procedures, could harm
our business and operating results and/or result in a loss of investor confidence in our financial reports, which could in turn have a material adverse effect
on our business and stock price.

Change in fiscal calendar and Sarbanes-Oxley Section 404 report.

On December 29, 2005, our Board of Directors unanimously adopted resolutions to change our fiscal year end from December 31 to March
31. We revised our fiscal year so that our audit work could be performed during non-peak periods with our independent registered public accountants,
which has resulted in and we believe will result in cost savings over the long-term. During the on-going reviews of our control environment and our internal
controls, as part of our review for the three-month period ended December 31, 2005, we identified deficiencies in our information technology controls,
including the need to better segregate duties as it relates to the use of our Oracle Information Systems modules and to improve our General Computing
Controls compliance and documentation. We have completed a thorough review of our control environment and have made improvements to our
information technology controls in the areas where these deficiencies were identified. Although we believe we have adequately remediated our
information technology environment and controls and results of our testing have not uncovered any errors, misstatements or acts of fraud that would lead
us to conclude that we have any material weaknesses as of March 31, 2008, our auditors have not performed a formal review of our control environment
and it is possible that material weaknesses or deficiencies exist.

21

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Changes in securities laws and regulations may increase our costs.

The Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act") has previously required us to make changes to some of our
corporate governance practices.  The Sarbanes-Oxley Act requires annual management assessments of the effectiveness of a company's internal
controls over financial reporting and also a report by a company's independent registered public accounting firm assessing the effectiveness of such
company's internal controls over financial reporting. The Securities and Exchange Commission extended the dates for initial compliance with the internal
control reporting requirements mandated by Section 404 of the Sarbanes-Oxley Act for filers that do not meet the definition of either an "accelerated
filer" or a "large accelerated filer."  Under the extension, a company that does not meet the definition of either an "accelerated
filer" or a "large accelerated filer," as these terms are defined in Rule 12b-2 under the Exchange Act, is not required to comply with the
requirement to provide the auditor's attestation report on internal auditing over financial reporting until it files an annual report for its first fiscal year ending
on or after December 15, 2009.  The measurement criteria for determining filing status, was based on our market capitalization as of September 29, 2007,
at which time, our market capitalization was below the defined threshold for accelerated filers.  For the fiscal year ended March 31, 2008, we did not meet
the definition of either an "accelerated filer" or a "large accelerated filer," as those terms are defined in Rule 12b-2 under the
Securities Exchange Act of 1934, as amended, for the purposes of compliance with Section 404 of the Sarbanes-Oxley Act. Thus, under the extension,
beginning with our fiscal year 2010, we will be required to provide an auditor's attestation report on internal controls over financial reporting, which will
substantially increase our general and administrative expenses.

Changes in accounting principles generally accepted in the United States may materially adversely affect our reported financial results or
otherwise harm our business.

We prepare our financial statements in conformity with accounting principles generally accepted in the United States. These accounting
principles are subject to interpretation by the Financial Accounting Standards Board, the American Institute of Certified Public Accountants, the Securities
and Exchange Commission and various bodies formed to interpret and create appropriate accounting policies. A change in these policies or
interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the
announcement of a change.

Changes in our business conditions could result in impairment of our goodwill.

In accordance with Statement of Financial Accounting Standards No.142, "Accounting for Goodwill and Other Intangible Assets"
(SFAS 142), the Company must perform at least an annual testing of the Company's stated value of its net assets including goodwill and other intangible
assets in relation to the implied fair market value of the Company.  If the Company's market capitalization or fair market value declines, we may be
required to record financial adjustments to the stated values of our goodwill and other intangible assets, resulting in a material adverse effect on our
financial condition and results of operations.

Our North American distributor could emphasize competing products, and we may lose some of our customers as a result.







- providing for a classified board of directors with staggered terms;
- limiting the persons who may call special meetings of stockholders; and
- prohibiting stockholders from taking action by written consent.

22

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In addition, provisions of Delaware law may discourage, delay or prevent someone from acquiring or merging with us.

Our directors, named executive officers and our two largest stockholders, who beneficially own approximately 32% of our
common stock in the aggregate, may have interests that conflict with the interests of our other stockholders.

Our directors and named executive officers, together with two large stockholders, UBS Willow Management, L.L.C., and funds managed by
Capital Research and Management Company, beneficially owned approximately 32% of our outstanding common stock, in the aggregate, as of March 31,
2008.  As a result of their ownership and positions, our directors and named executive officers, together with UBS Willow Management and Capital
Research and Management Company, collectively are able to significantly influence all matters requiring stockholder approval, including the election of
directors and approval of significant corporate transactions. Such concentration of ownership may also have the effect of delaying or preventing a change
in control. If the ownership of our common stock continues to be highly concentrated, it may prevent you and other stockholders from influencing
significant corporate decisions. The investment objectives of our largest institutional stockholders may differ from those of our other stockholders.

ITEM 1B.	UNRESOLVED STAFF COMMENTS

None.

GN="CENTER">                                               23

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ITEM 2.	PROPERTIES

San Jose, California

Our corporate headquarters are located in an approximately 40,000 square foot facility in San Jose, California,
which we occupied effective July 2007 under a lease term of five years with an option to renew for two, three-year periods. The lease includes an
expansion opportunity for an additional 7,000 square feet, upon which we have right of first refusal.

Meridian, Idaho

In May of 2004, we entered into a 5 year lease for a 15,500 square foot facility in Meridian, Idaho, which may be
extended at our option for an additional three years.  This facility is used as our Idaho Technology Center and supports our foundry supplier partnerships,
product and design engineering, failure analysis and customer manufacturing support activities.



Bangalore, India

We currently lease 17,710 square feet of space in a multi-tenant facility in Bangalore, India. The space is leased
under three separate lease agreements expiring in April 2010, November 2013 and October 2014, respectively. This facility is used as our India Design
Center and supports our software engineering and tools development activities.

Manila, Philippines

In October 2003, we entered into a lease agreement for a 140,000 square foot facility in the Philippines expiring in
March 2009. We are currently reviewing our options and alternatives as it relates to this facility including an extension of the lease or the lease of an
alternative facility. This facility is used for product testing, test development and global support activities which includes inventory warehousing and
management, logistics, customer service and support, manufacturing planning, Finance and IT.

El Dorado Hills, CA

In May 2008, we entered into a 2 year  lease for a 3,000 square foot facility in El Dorado Hills, California, expiring in June
2010 with the option to renew for an additional 3 years.  The facility is used for marketing and applications activities.

Short-Term Leases

We have short-term leases for sales offices located in the U.S., Canada, England, Germany, Korea, Malaysia, and the People's Republic of
China (including Hong Kong), Singapore and Taiwan.

Currently, we believe that all of our properties are adequate to meet our needs.

Liquidation of ZiLOG MOD III, Inc.

Following the closure of our MOD III facility, in February 2006, ZiLOG MOD III, Inc. completed the sale of its
remaining assets to Micron Technology, Inc. for a total consideration net of closing costs of $4.6 million. These assets included the dormant 8" wafer
fabrication facility and associated land owned by ZiLOG MOD III, Inc. and 19.9 acres of vacant land owned by ZiLOG, Inc.  ZiLOG MOD III, Inc.
shareholders voted to liquidate the special purpose entity and distribute the remaining net proceeds to its Series A Preferred shareholders at the
conclusion of that process. The distribution of the net proceeds to ZiLOG, Inc. includes $1.1 million for the vacant property and $0.7 million for
reimbursement of sustaining and maintenance costs incurred. The remaining $2.8 million was distributed to holders of ZiLOG MOD III, Inc. Series A
Preferred Stock upon the liquidation of ZiLOG MOD III, Inc.

MOD II Facility Closure and Sale of Assets

In July 2004, our manufacturing operations within MOD II ceased. In October 2004 we sold substantially all of our manufacturing assets, which
were located within the MOD II facility for $5.9 million. As mentioned previously, in February 2006, we sold 19.9 acres of undeveloped land to Micron
Technologies, Inc. In December 2006 in preparation for the final sale of the facility, we completed decommissioning activities in the MOD II facility for a
cost of $1.4 million. In May 2007, we completed the sale of MOD II including a 108,000 square foot building and 13.03 total acres of developed land
located in Nampa, Idaho, for a net sales price of $3.1 million.

24

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ITEM 3.	LEGAL PROCEEDINGS


On August 11, 2005, Microchip Technology, Inc. ("Microchip") filed a patent infringement claim against us in the
U.S. District Court of Arizona (case number CV05-2406-PHX-MHM). Microchip alleges that we have infringed,
and currently infringe, its patents numbered 5,847,450, 6,696,316 and 6,483,183. Microchip claims that unspecified
products of ours, including the Z8 Encore! XP 4K Series of products, infringe these patents and is seeking
preliminary and permanent injunctive relief, unspecified damages and costs, including attorneys' fees. We filed a
response to the claims on September 15, 2005 generally denying the claims and challenging the validity of the
patents. On January 10, 2006, we filed a request for patent re-examination with the U.S. PTO, which was granted in
February and March 2006 for all 3 patents. On April 11, 2008, we received a notice that all of Microchip's claims
under these three patents have been rejected by the U.S. PTO. Notwithstanding this favorable ruling, because
Microchip has a right to appeal the patent office's decision, we do not believe it is feasible to predict or determine
the outcome or resolution of this litigation at this time. We believe we have meritorious defenses and will defend
ourselves against these claims vigorously. We may incur substantial expenses in our defense against these claims. In
the event of a determination adverse to us, we may incur substantial monetary liabilities and be required to change
our business practices. Either of these could have a material adverse effect on our financial position, results of
operations and/or cash flows.On December 1, 2006, we filed a patent infringement claim against Altera Corporation ("Altera") and Actel Corporation ("Actel")
 in the U.S. District Court of California (civil docket number 4:06-cv-07388-SBA). We allege that Altera and Actel have infringed, and currently
infringe, our patent numbered 4,670,749 which we believe to be the fundamental patent for programmable logic. We claim that Altera's and Actel's
products infringe these patents and we are seeking unspecified damages and costs, including attorneys' fees.  Actel settled their case with us on
June 11, 2007 for an undisclosed amount.  The case against Altera is currently on stay pending reexamination of the patent in suit.

On May 23, 2008, Altera Corporation ("Altera") filed a patent infringement claim against us in the U.S. District Court of Texas (civil action
number 2:08-CV-218). Altera alleges that we have infringed, and currently infringe, its patents numbered 6,097,211, 6,147,511 and 6,314,550. Altera
claims that unspecified products of ours, including the eZ80 and Zneo series of products, infringe these patents and is seeking preliminary and
permanent injunctive relief, unspecified damages and costs, including attorneys' fees. We do not believe it is feasible to predict or determine the outcome
or resolution of this litigation at this time. We will defend ourselves against these claims vigorously. We may incur substantial expenses in our defense
against these claims. In the event of a determination adverse to us, we may incur substantial monetary liabilities and be required to change our business
practices. Either of these could have a material adverse effect on our financial position, results of operations and/or cash flows.We are participating in other litigation and responding to claims arising in the ordinary course of business.  We intend to
defend ourself vigorously in these other matters.  Our management believes that it is unlikely that the outcome of these other matters will have a material
adverse effect on our consolidated financial statements, although there can be no assurance in this regard.





ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSNone

25PART IIITEM 5.	MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIESPRICE RANGE OF COMMON STOCKOur Common StockOur common stock is traded on the NASDAQ Global Market under the symbol "ZILG." The following table sets
forth the high and low per share trading prices by quarter on the NASDAQ Global Market.

|                                                    |   |      |  |   |     
|--------------------------------------------------- | - | ---- |  | - | ----
|                                                    |   | High |  |   | Low 
|                                                    |   |      |  |   |     
|2007 Fiscal Year                                    |   |      |  |   |     
|First Quarter   April 1 - July 1, 2006              | $ | 3.88 |  | $ | 2.95
|Second Quarter   July 2 - September 30, 2006        | $ | 3.80 |  | $ | 3.04
|Third Quarter   October 1 - December 30, 2006       | $ | 4.49 |  | $ | 3.25
|Fourth Quarter   December 31, 2006 - March 31, 2007 | $ | 4.56 |  | $ | 3.80
|                                                    |   |      |  |   |     
|2008 Fiscal Year                                    |   |      |  |   |     
|First Quarter   April 1 - June 30, 2007             | $ | 6.08 |  | $ | 4.30
|Second Quarter   July 1 - September 29, 2007        | $ | 5.50 |  | $ | 3.20
|Third Quarter   September 30 - December 29, 2007    | $ | 3.73 |  | $ | 2.30
|Fourth Quarter   December 30, 2007 - March 31, 2008 | $ | 3.90 |  | $ | 2.68

EQUITY COMPENSATION PLAN INFORMATION

The following is a summary of the shares reserved for issuance
pursuant to outstanding options, rights or warrants granted under our equity compensation plans as of March 31, 2008:

|Plan Category                                                |  | Number ofsecurities to beissued uponexercise ofoutstandingoptions, warrantsand rightsColumn A |  |   | Weighted-average exerciseprice ofoutstandingoptions, warrantsand rightsColumn B |  | Number of securitiesremaining availablefor future issuanceunder equitycompensation plans(excluding securitiesreflected inColumn A)
|------------------------------------------------------------ |  | --------------------------------------------------------------------------------------------- |  | - | ------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------
|Equity compensation plans approved by security holders (1&2) |  | 2,082,736                                                                                     |  | $ | 4.89                                                                            |  | 2,148,718                                                                                                                         
|Equity compensation plans not approved by security holders   |  | -                                                                                             |  |   | -                                                                               |  | -                                                                                                                                 
|Total                                                        |  | 2,082,736                                                                                     |  | $ | 4.89                                                                            |  | 2,148,718                                                                                                                         

_______________

(1)	The ZiLOG 2002 Omnibus Stock Incentive Plan was originally approved under the terms of our plan of
reorganization on May 13, 2002.

(2)	The ZiLOG 2004 Omnibus Stock Incentive Plan was approved by stockholders on February 12, 2004 and the amended ZiLOG 2004 Omnibus
Stock Incentive Plan was approved by stockholder of September 6, 2007.

In September 2007, the Company repurchased 73,151 shares from its Chief Financial Officer, Perry J. Grace to satisfy an
outstanding loan plus interest payable to the Company in the amount of $0.3 million. See Note 12 of notes to the consolidated financial statements for a
discussion of related party transactions.

As of March 31, 2008, we had approximately 14 holders of record of our common stock. We have not paid any dividends and currently intend to retain
any future earnings for investment in our business.

26

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PERFORMANCE MEASUREMENT COMPARISON

The following graph shows the change in our cumulative total stockholder return for the period from June 20, 2003, the date we
became a public reporting company, until the end of fiscal 2008, based upon the market price of our common stock, compared with: (i) the cumulative
total return on the Nasdaq Stock Market Index and (ii) the Philadelphia Stock Exchange Semiconductor Sector Index. The graph assumes a total initial
investment of $100 as of June 20, 2003, and shows a "Total Return" that assumes reinvestment of dividends, if any, and is based on market
capitalization at the beginning of each period. The performance on the following graph is not necessarily indicative of future stock price performance.



|Legend         
|---------------
|Symbol         
|__________     
|__ __ __ __    
|- - - - - - - -

The performance graph above shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act
of 1934, as amended (the "Exchange Act") or otherwise subject to the liabilities under that Section and shall not be deemed to be incorporated
by reference into any filing of ZiLOG under the Securities Act of 1933, as amended or the Exchange Act.

27

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ITEM 6.	SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data set forth below should be read in conjunction with the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of Operations," our consolidated financial statements and the
notes to those statements appearing elsewhere in this Form 10-K. The consolidated statement of operations data for the twelve months ended March 31,
2008, March 31, 2007 and March 31, 2006, and the consolidated balance sheets data as of March 31, 2008 and  March 31, 2007 are derived from our
respective consolidated financial statements included elsewhere in this Form 10-K, which have been audited by Armanino McKenna LLP, an independent
registered public accounting firm.

Effective December 29, 2005, we changed our fiscal year end from December 31 to March 31. Our interim results are
based on fiscal quarters of approximately thirteen weeks in duration ending on the closest Saturday to each calendar quarter end, with the exception of
the last quarter, which ends on March 31 beginning in fiscal 2006.  The operating results for any interim period are not necessarily indicative of results for
any subsequent period or the full fiscal year.

28

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|                                                                                  |  | Twelve Months Ended
|--------------------------------------------------------------------------------- |  | -------------------
|                                                                                  |  | Mar. 31,           
|(In thousands, except per share data)                                             |  | 2008               
|Consolidated Statements of Operations Data:                                       |  |                    
|                                                                                  |  |                    
|Net sales                                                                         |  | $67,221            
|Cost of sales                                                                     |  | 36,335             
|Gross margin                                                                      |  | 30,886             
|Gross margin percent of sales                                                     |  | 45.9%              
|                                                                                  |  |                    
|Operating expenses:                                                               |  |                    
|Research and development                                                          |  | 16,491             
|Selling, general and administrative                                               |  | 19,921             
|Special charges, credits and reorganization items(1), net                         |  | 1,974              
|Amortization of intangible assets                                                 |  | 961                
|Total operating expenses                                                          |  | 39,347             
|Operating loss                                                                    |  | (8,461)            
|                                                                                  |  |                    
|Other income (expense):                                                           |  |                    
|Interest income                                                                   |  | 819                
|Interest expense                                                                  |  | -                  
|Other income (expense), net                                                       |  | (350)              
|Total other income (expense)                                                      |  | 469                
|Loss before reorganization items and provision (benefit) for income taxes         |  | (7,992)            
|Provision (benefit) for income taxes                                              |  | 1,299              
|Net loss                                                                          |  | ($9,291)           
|                                                                                  |  |                    
|Basic and diluted net loss per share                                              |  | ($0.55)            
|                                                                                  |  |                    
|Weighted-average shares used in computing basic and diluted net loss per share(2) |  | 16,893             

(1)	Special charges, credits and reorganization items consist of asset impairments, restructuring charges, net
reimbursement of MOD III sustaining and maintenance costs and debt restructuring fees in all periods presented.

(2)      Share data has been restated for a 1 for 2 reverse split effected in 2004.

|                                  |  | Mar. 31, | Mar. 31, |  | Mar. 31, |  | Dec. 31, |  | Dec. 31,
|--------------------------------- |  | -------- | -------- |  | -------- |  | -------- |  | --------
|(In thousands)                    |  | 2008     | 2007     |  | 2006     |  | 2004     |  | 2003    
|Consolidated Balance Sheets Data: |  |          |          |  |          |  |          |  |         
|Cash and cash equivalents         |  | $16,625  | $19,390  |  | $26,954  |  | $37,678  |  | $22,045 
|Long term investments             |  | $1,925   | -        |  | -        |  | -        |  | -       
|Working capital                   |  | $13,763  | $21,901  |  | $24,603  |  | $41,711  |  | $21,124 
|Total assets                      |  | $47,840  | $55,803  |  | $71,630  |  | $98,073  |  | $133,865
|Current liabilities               |  | $20,035  | $19,407  |  | $23,875  |  | $24,844  |  | $27,303 
|Total liabilities                 |  | $20,961  | $21,056  |  | $29,773  |  | $34,083  |  | $43,139 
|Stockholders' equity              |  | $26,879  | $34,747  |  | $41,857  |  | $63,990  |  | $60,726 

29

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ITEM 7.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONSSome of the statements under this heading may constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Our actual
results may differ materially from those anticipated in these forward-looking statements as a result of various factors including those set forth in the
section entitled "Risk Factors" and in other sections of this Form 10-K.

The following is management's discussion and analysis of financial condition and results of operations of the Company
and its subsidiaries for the twelve months ended March 31, 2008, March 31, 2007 and March 31, 2006.

We prepare and release quarterly unaudited financial statements prepared in accordance with generally accepted
accounting principles or GAAP. We present EBITDA amounts to reflect non-GAAP measure of liquidity. EBITDA reflects our Earnings Before Interest,
Taxes, Depreciation and Amortization. We believe the disclosure of such information helps investors more meaningfully evaluate our liquidity position by
the elimination of non-cash related items, such as depreciation and amortization. We believe our investor base regularly uses EBITDA as a measure of
the liquidity of our business.  Our management uses EBITDA as a supplement to cash flow from operations as a way to assess the cash generated from
our business available for capital expenditures and debt service.  However, we recommend that investors carefully review the GAAP financial information
included as part of our Quarterly Reports on Form 10-Q, our annual reports on Form 10-K and our quarterly earnings release, compare GAAP financial
information with the non-GAAP financial results disclosed in our quarterly earnings releases and investor calls, and read the associated
reconciliation.

Effective December 29, 2005, we changed our fiscal year end from December 31 to March 31. Our interim results are
based on fiscal quarters of thirteen weeks in duration ending on the last Saturday of each calendar quarter with the exception of the last quarter, which
ends on March 31 beginning in fiscal 2006.   The operating results for any interim period are not necessarily indicative of results for any subsequent
period or the full fiscal year.

Overview

Founded in 1973, we are a global supplier of 8-bit micrologic semiconductor devices. We design, develop and market
various families of devices in this market segment. Using proprietary technology that we have developed over our 30-year operating history, we provide
semiconductor integrated circuit devices that our customers design into their end products. Our devices often include related application software and
typically combine a microprocessor with memory and various peripheral functions on a single device. Our products enable a broad range of consumer
and industrial electronics manufacturers to control the functions and performance of their products. For example, some typical applications include
devices that control the speed of a motor, universal remote controls, security systems and battery chargers. In addition to our micrologic devices, we sell
other integrated circuit devices that have a wide variety of uses, including the processing and transmission of information for communications and
consumer electronics products. These devices include serial communication controllers, modems, IrDA transceivers, TV display controllers and personal
computer peripheral controllers. Historically, we performed wafer fabrication foundry services for third parties, which were terminated in 2004.

During 2000, we began to experience declining sales. During the first half of calendar year 2001, James M. Thorburn
joined the Company as Chief Executive Officer ("CEO") and Chairman of the Board of Directors to restructure our operations, financials and
product portfolio with the goals of: i) eliminating the high interest debt that we had at that time, ii) positioning the Company for growth, iii) transferring and
outsourcing manufacturing to third party suppliers and partners and iv) returning the Company to profitability. In 2002, we completed our recapitalization
whereby we eliminated the debt and established the MOD III special purpose subsidiary as a result of our voluntary pre-packaged plan of reorganization
under Chapter 11 of the United States Bankruptcy Code.  In 2002 and 2004 we closed our wafer manufacturing facilities in Nampa, Idaho and completed
the transfer of wafer production to third party suppliers in the U.S. and Taiwan. In 2004, we issued stock, raised approximately $24.4 million in capital and
registered our stock to trade on the Nasdaq under the ticker symbol "ZILG".  In August 2006, Mr. Thorburn resigned his position as CEO and
Chairman of the Board of Directors.

30

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In January 2007, under the leadership of our new CEO, Darin Billerbeck, we completed a comprehensive strategic plan update. One of the key
actions resulting from this plan update was the decision to consolidate our engineering activities in order to better concentrate our core competencies and
improve our product development cycle time while reducing our overall research and development spending. Our business model is structured around our
fabless manufacturing approach and our market focus will be on those opportunities were we can best leverage our technology.  We will continue to
service the 8 and 16-bit markets where more complexity and greater value can be obtained by the customer. Our design and development resources are
also focused on our universal remote control solutions, our broad based family of Crimzon microcontrollers and our 32-bit ARM based portfolio of
products which support secured transaction opportunities in the point-of-sale market and adjacent markets where these solutions have the greatest value
and can be best leveraged.

Stock Repurchase Programs

On April 17, 2003, our Board of Directors approved the 2003 stock repurchase program under which we could repurchase
up to 500,000 shares of our outstanding common stock at market value.

On July 29, 2004, our Board of Directors approved the 2004 stock repurchase program under which we could repurchase up to
$5.0 million in market value of our outstanding shares of common stock. Pursuant to this program, during 2004 we purchased 572,100 shares of our
common stock at a net aggregate cost of $4.4 million.

Other stock repurchases were approved by the Board of Directors and include the repurchase of 92,735 shares of common
stock from a former officer in 2004 at a fair market purchase price of $6.20 per share in consideration for the repayment of loans payable to us totaling
$0.6 million, the repurchased 17,389 shares from former employees during fiscal 2006, as consideration for the repayment of loans payable to us totaling
less than $0.1 million and the repurchase of 73,151 shares during fiscal 2007 from our Chief Financial Officer, Perry J. Grace, as consideration for the
repayment of loans payable to us totaling less than $0.3 million

As of March 31, 2008, other stock repurchases totaled 183,275 shares and total stock repurchases under all plans were 1,160,539 with a net
aggregate cost of $7.5 million as summarized below:

|                        |  |  | Treasury Shares Outstanding
|----------------------- |  |  | ---------------------------
|                        |  |  | Mar. 31,                   
|                        |  |  | 2008                       
|2003 Repurchase Program |  |  | 405,164                    
|2004 Repurchase Program |  |  | 572,100                    
|Other Repurchases       |  |  | 183,275                    
|Ending Balance          |  |  | 1,160,539                  
|                        |  |  |                            
|Net aggregate cost      |  |  | $       7,456              

Critical Accounting Policies and Estimates

We believe our critical accounting policies are as follows:

- estimating sales returns and allowances;
- estimating allowance for doubtful accounts;
- estimating write-downs of excess and obsolete inventories;
- asset impairments;
- stock-based compensation and,
- income taxes and deferred tax estimates.

A brief description of each of these policies is set forth below.

31

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On an on-going basis, we evaluate our estimates, including those related to sales returns, allowance for doubtful accounts,
inventory write-downs and asset impairments. We base our estimates on historical trends and various other assumptions that we believe to be reasonable
at the time the estimates are made. Actual results could differ from those estimates.

Estimating Sales Returns and Allowances

Our net sales to direct customers consist of gross product sales reduced by expected future sales returns and price
allowances. To estimate sales returns and price allowances, we analyze historical returns and allowance activity to establish a baseline reserve level. We
then evaluate whether there are any underlying product quality or other customer specific issues that require additional specific reserves above the
baseline level. Because the reserve for sales returns and price allowances is based on our judgments and estimates, our reserves may not be adequate
to cover actual sales returns and price allowances. If our reserves are not adequate, our net sales and accounts receivable could be materially adversely
affected.

Our net sales to distributors that have rights of return and/or price protection allowances on unsold merchandise held by
them are deferred until such products are resold by the distributors to end users of our devices. At the time that we recognize distributor re-sales as
revenue, we record a reserve for estimated price adjustments that the distributors will reclaim from us on the merchandise they resold to end users.
These reserves are recorded as a reduction to our net sales and a reduction to our accounts receivable. To estimate this distributor price adjustment
reserve, we analyze our historical price adjustment payments, price adjustments taken by distributors but not yet processed by us and pending price
adjustments that have been authorized by us but have not yet been claimed by our distributors. Because our distributor allowance reserve is based upon
our judgments and estimates, such reserves may not be adequate to cover actual distributor price allowances. If our reserves are not adequate, our net
sales and accounts receivable could be materially adversely affected.

Estimating Allowance for Doubtful Accounts

We maintain an allowance for losses we may incur as a result of our customers' inability to make required payments. Any
increase in the allowance results in a corresponding increase in our selling, general and administrative expenses. In establishing this allowance, and then
evaluating the adequacy of the allowance for doubtful accounts, we consider the aging of our accounts receivable, historical bad debts, customer
concentrations, customer credit-worthiness and, to a lesser extent, current economic trends and changes in our customer payment terms. Historically, we
have not experienced material bad debt write-offs. If the financial condition of one or more of our customers unexpectedly deteriorates, resulting in their
inability to make payments, or if we otherwise underestimate the losses we will incur as a result of our customers' inability to pay us, we could be required
to increase our allowance for doubtful accounts which, could materially adversely affect our operating results.

Estimating Write-Downs of Excess and Obsolete Inventories

Each inventory component, excluding raw materials, is assessed for excess or obsolescence by using an algorithm that we
have established. This algorithm is based on historical trends, demand forecasts and inventory age. We review the result of this algorithm and generally
reserve work-in-process inventories based upon aging and finished goods inventory quantities in excess of our current backlog or historical demand. In
addition to analyzing the results of our reserve algorithm calculations, we also review known exposures, market conditions and other relevant factors to
determine whether our inventory reserves are appropriate based on our best estimates. Reserves for excess and obsolete inventories are reflected as a
reduction to inventory values in the accompanying consolidated balance sheets, and an increase in cost of sales in the accompanying consolidated
statements of operations. If actual market conditions or customer demand patterns are less favorable than, or inconsistent with our assumptions, we may
be required to take further write-downs of our inventory value, which could materially adversely impact our cost of sales and operating results.

Asset Impairments

We apply the provisions of SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" and
SFAS 142, "Goodwill and Other Intangible Assets." We evaluate long-lived assets for possible impairment whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include
the following:

- significant changes in the manner of our use of the acquired assets;
- decrease in our market value below our stockholder's equity book value;

32

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- significant changes in the strategy for our overall business;
- significant negative industry or economic trends; and
- periods of operating or cash flow losses.

When we determine that the carrying value of long-lived assets may not be recoverable based upon the existence of one or
more of the above indicators of impairment, and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying
value, the carrying value of the assets are reduced to their estimated fair value. The estimated fair value is usually determined based on an estimate of
discounted future cash flows. Asset impairments are recorded as a reduction in the asset value in our consolidated balance sheets and as special
charges in our consolidated statements of operations.

The intangible assets created by the adoption of fresh-start accounting on our emergence from bankruptcy in 2002, consist
of existing technology and brand name, as well as excess enterprise value, or goodwill. The existing technology and brand name are being amortized
based on a pattern-of-use method in proportion to the forecast discounted cash flows from such assets. The goodwill is not subject to amortization.

We evaluate existing technology and brand name whenever events and circumstances indicate that their fair value may be
less than their carrying value. Additionally, goodwill is tested for impairment at least annually and more often if events and circumstances indicate that its
fair value may be less than its carrying value. We performed the annual impairment test for goodwill in the fourth quarter of fiscal 2008, and we perform
this test each fiscal year unless the existence of triggering events indicates that an earlier review should be performed.

Adjustments to record impairment of long-lived assets or intangible assets could have a material adverse impact on our
financial condition and results of operations in the period or periods in which such impairment is identified.

Stock-Based Compensation

Effective April 1, 2006, the Company adopted Statement of Financial
Standard No. 123,

Accounting for income taxes

As part of the process of preparing our consolidated financial statements we are required to estimate our taxes in each of the jurisdictions in
which we operate. This process involves us estimating our actual current tax exposure together with assessing temporary differences resulting from
differing treatment of items, such as deferred revenue, for tax and accounting purposes. These differences result in deferred tax assets and liabilities,
which are included in our unaudited condensed consolidated balance sheets. We must then assess the likelihood that our deferred tax assets will be
recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we
establish a valuation allowance or increase this allowance in a period, we must record an expense within the tax provision included in the condensed
consolidated statements of operations.

Management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities, and any valuation allowance
recorded against our net deferred tax assets. We have established a full valuation allowance against our deferred tax assets at March 31, 2008 based
upon our determination that it is more likely than not that all of the deferred tax assets may not be realized in the foreseeable future due to historical
operating losses. The net operating losses
and research and development tax credit carryovers that make up the vast majority of the deferred tax asset
will expire at various dates through the year 2024, with the exception of the California tax credit which can be carried forward indefinitely. Going forward,
we will assess the continued need for the valuation allowance. After we have demonstrated profitability for a period of time and begin utilizing a significant
portion of the deferred tax assets, we may reverse the valuation allowance,

33

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likely resulting in a significant benefit to the statement of operations in some
future period. At this time, we cannot reasonably estimate when this reversal might occur, if at all.

Reporting Segments

We conduct our business in one reportable segment to reflect the manner in which our chief operating decision-maker
allocates resources and assesses the performance of our business. For convenience and ease of reference, we disclose net sales by region, by channel
and by product category.

Period Comparisons

Effective December 29, 2005, we changed our fiscal year end from December 31 to March 31. Our interim results are
based on fiscal quarters of approximately thirteen weeks in duration ending on the closest Saturday to each calendar quarter end, with the exception of
the last quarter, which ends on March 31 beginning in fiscal 2006.

Results of Operations

Our net sales by region, by channel and by product category are summarized in dollars for each period indicated, as
follows (in thousands):

|                                                                                                         |   |  | Twelve Months Ended
|-------------------------------------------------------------------------------------------------------- | - |  | -------------------
|                                                                                                         |   |  | Mar. 31,           
|                                                                                                         |   |  | 2008               
|Net sales by region:                                                                                     |   |  |                    
|Americas                                                                                                 | $ |  | 23,336             
|Asia (including Japan)                                                                                   |   |  | 34,632             
|Europe                                                                                                   |   |  | 9,253              
|Net sales                                                                                                | $ |  | 67,221             
|                                                                                                         |   |  |                    
|Net sales by channel:                                                                                    |   |  |                    
|Direct                                                                                                   | $ |  | 29,400             
|Distribution                                                                                             |   |  | 37,821             
|Net sales                                                                                                | $ |  | 67,221             
|                                                                                                         |   |  |                    
|Net Sales by product category:                                                                           |   |  |                    
|New products (1)                                                                                         | $ |  | 36,132             
|8 - bit classic products                                                                                 |   |  | 31,089             
|Net sales                                                                                                | $ |  | 67,221             
|                                                                                                         |   |  |                    
|(1) includes 32-bit Zatara, universal remote control solutions and 8-bit embedded flash microcontrollers |  

Other Key Indices

Other key indices relevant in understanding our business and financial performance include the following metrics:

|                                   |  | As of Mar. 31, | As of Mar. 31, | As of Mar. 31,
|---------------------------------- |  | -------------- | -------------- | --------------
|                                   |  | 2008           | 2007           | 2006          
|Days sales outstanding             |  | 37             | 37             | 44            
|Net sales to inventory ratio       |  | 8              | 9              | 9             
|Weeks of inventory at distributors |  | 12             | 13             | 10            
|Current ratio                      |  | 1.7            | 2.1            | 2.0           

We calculate each of these key metrics based on annual results of operations data and balance sheets data as of the end
of the period indicated. Each of these key metrics is described below.

34

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Days sales outstanding ("DSOs"), is a common metric used to analyze how quickly our customers pay us. This
metric is influenced largely by the timing of our customer billings and collections. DSOs were 37 days at March 31, 2008, 37 days at March 31, 2007 and
44 days at March 31, 2006. The March 31, 2008 DSOs reflects a higher mix of distribution customers that generally tend to pay faster than the average of
our direct customers.

Net sales to inventory ratio is a metric we use to analyze how quickly our investment in inventories is recovered by our
sales. This metric may not be comparable to those other companies use to analyze inventory and is not the same as a typical inventory turns ratio. Our
net sales to inventory ratio decreased from March 31, 2007 to March 31, 2008, on lower sales, at 8 times annual sales, reflecting lower sales and
relatively higher inventories. The decline reflects longer lead times from our wafer foundry suppliers for certain new products to support product ramps
with customers coupled with lower sales than anticipated.

Weeks of inventory at distributors measures the level of inventories on hand at our distributors available for sale to their
end customers, and as such, is relative to the level of sales we record for distribution sales. We do not recognize revenue on shipments to distributors
who have rights of return and/or price protection on unsold merchandise held by them until our distributors resell our products to their end customers. We
generally target 10 to 13 weeks of inventory in the distribution channel to allow these distributors to react to market demand and buffer their cycle time as
they reorder new product from us and await delivery. As of March 31, 2008, our distributor inventory levels were at 12 weeks and were within our target
range.

Current ratio represents current assets divided by current liabilities and is commonly used to assess a company's liquidity.
The Company uses this ratio to make spending determinations on discretionary items.

Comparison of Financial Results

Fiscal Year Ended March 31, 2008 and March 31, 2007

Net Sales

Net sales were $67.2 million for the fiscal year ended March 31, 2008, as compared to net sales of $82.0 million for the fiscal year ended
March 31, 2007.

Net sales of our new products which include our 32-bit Zatara, universal remote control solutions and 8-bit embedded flash microcontrollers
decreased 2% to $36.1 million for the twelve months ended March 31, 2008 compared to $36.8 million for the twelve months ended March 31, 2007. This
decrease was primarily driven by a decrease in sales of our remote control solutions reflecting an inventory correction at one of our key customers in the
first half of fiscal 2008 partially offset by an increase in our 32-bit Zatara product sales for our new secured transactions microprocessors for the point of
sale market and an increase in our embedded flash sales.

Our 8-bit classic products, consisting of our traditional Z8, Z80 and SCC products totaled $31.0 million for the twelve months ended March 31, 2008
as compared to $45.2 million for the twelve months ended March 31, 2007, reflecting a decline in demand for certain consumer, security and
telecommunications applications and lower distribution resales into broad based general purpose market including consumer and industrial market
applications. Compared to year ago levels, we have experienced a reduction in sales of certain security applications reflecting what we believe is the
impact of a slow down in the U.S. economy as it relates to the housing market and lower overall housing starts.

Gross Margin

Cost of sales primarily represents manufacturing costs relating to wafer fabrication, package assembly, product testing operations and
logistics costs. Cost of sales fluctuates, depending on materials and services prices from our vendors, manufacturing productivity, product mix, equipment
utilization and depreciation. Gross margin was 45.9% of net sales for the twelve months ended March 31, 2008, compared to gross margin of 47.5% for
the twelve months ended March 31, 2007. During the twelve months ended March 31, 2008, our gross margin decrease was primarily the result of a lower
mix of our higher margin 8-bit classic products and associated manufacturing variances from lower volumes primarily in the first half of
fiscal 2008. This
was partially offset by improved operating efficiencies and yields as well as reductions in wafer costs for certain of our embedded flash products and the
increased volumes of our 32-bit Zatara product sales.

We have focused on manufacturing cost controls, yield enhancements and price management and have continued to
consolidate and streamline our manufacturing and support activities. We operate with a fully fabless model and outsource all of our wafer manufacturing
needs from foundries in the United States and Taiwan. We have the flexibility to use lower geometry fab processes from our suppliers for design, allowing
us to reduce the physical size of our flash products, which has allowed us to improve our gross margins on these products. We have continued to
multi-source our product assembly

35

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activities with several Asian suppliers to enhance our supply source flexibility and obtain continued competitive vendor
pricing.

Research and Development Expenses

Research and development expenses were $16.5 million and $20.5 million for the twelve months ended March 31, 2008
and March 31, 2007, respectively. Research and development spending for the twelve months ended March 31, 2008 is lower compared to the twelve
months ended March 31, 2007 due to savings from our engineering site consolidation efforts and the completion of certain new product development
activities.

In March 2007, we initiated actions to consolidate our research and development activities from 4 sites to 2 sites by closing our Seattle, Washington
and Shanghai, China design centers. Although we have taken these actions to consolidate our research and development activities which are designed to
reduce our overall spending, our research and development efforts were, and continue to be, primarily directed towards the development of core
micrologic architectures and the associated design tools.  Our design resources are focused on servicing the segments of the 8 and 16-bit markets where
more complexity and greater value can be obtained from our solutions by the customer, our Crimzon consumer solutions family of products targeted at
the universal remote control market and our 32-bit Zatara ARM based portfolio of products initially targeted to support secured transaction opportunities in
the point-of-sale market.



Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased to $19.9 million for the twelve months ended March 31, 2008
down from $22.7 million for the twelve months ended March 31, 2007. Both sales and marketing and general and administrative costs decreased as we
continue to streamline our global support activities thereby reducing our general support costs. Selling, general and administrative expenses for the
twelve months ended March 31, 2008 includes a credit of $0.7 million for the reversal of stock compensation expense related to the cancellation of certain
previously expensed stock options and restricted stock awards.

Special Charges and Credits

Special charges and credits in fiscal 2008, fiscal 2007 and fiscal 2006, were as follows (in thousands):

|                                                         |   | Twelve Months Ended
|-------------------------------------------------------- | - | -------------------
|                                                         |   | Mar. 31,           
|                                                         |   | 2008               
|Asset impairments:                                       |   |                    
|MOD II asset impairment (a)                              | $ | -                  
|                                                         |   |                    
|Restructuring of operations:                             |   |                    
|Reorganization and test operations outsourcing           |   | 1,331              
|Engineering consolidation severance, benefits and other  |   | 921                
|Defined benefit plan refund and other                    |   | (526)              
|MOD II sustaining and other selling costs                |   | 248                
|Other employee severance and termination benefits        |   | -                  
|MOD III sustaining costs for post-closure maintenance    |   | -                  
|MOD III reimbursement of maintenance costs (a)           |   | -                  
|Professional fees (reimbursement) for debt restructuring |   | -                  
|Total special charges and credits                        | $ | 1,974              

(a) Asset impairment items and reimbursements were not included in the provision accruals in the following table

36

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The following table details the beginning accrual balance as of March 31, 2006 and the accrued special charges for the twelve months ended March
31, 2007 and March 31, 2008 (in thousands):

|                              |  |   | Severance   |  |  |   |         |  |   |        
|----------------------------- |  | - | ----------- |  |  | - | ------- |  | - | -------
|                              |  |   | and         |  |  |   | MOD II  |  |   |        
|                              |  |   | Termination |  |  |   | Closure |  |   |        
|                              |  |   | Benefits    |  |  |   | Costs   |  |   | Total  
|Balance at March 31, 2006     |  | $ | 35          |  |  | $ | 85      |  | $ | 120    
|Provisions to special charges |  |   | 1,867       |  |  |   | 612     |  |   | 2,479  
|Cash payments                 |  |   | (687)       |  |  |   | (697)   |  |   | (1,384)
|Balance at March 31, 2007     |  |   | 1,215       |  |  |   | -       |  |   | 1,215  
|Provisions to special charges |  |   | 1,726       |  |  |   | 248     |  |   | 1,974  
|Cash payments                 |  |   | (2,452)     |  |  |   | (248)   |  |   | (2,700)
|Balance at March 31, 2008     |  | $ | 489         |  |  | $ | -       |  | $ | 489    

Special charges and credits totaled $2.0 million for the twelve months ended March 31, 2008 and $2.5 million for the twelve months ended March 31,
2007.

Fiscal 2008 Activities

As part of our ongoing efforts to reduce costs and streamline activities, in November 2007, we initiated a plan to outsource our test
production operations currently performed in our Philippines facility to third parties which is expected to be completed by September 2008. We also
reorganized certain of our sales offices and relocated our corporate headquarters to a new facility in San Jose, California. During fiscal 2008, we incurred
$1.3 million of severance, benefits related costs, transition, conversion and equipment costs related to our test outsourcing activity and other
reorganization costs including the relocation to our new corporate headquarters facility, $0.9 million for severance, benefits and other costs related to our
research and development site consolidation activities, $0.3 million of period expenses were incurred to sustain the dormant MOD II facility until it was
sold in May 2007 for a net sales price of $3.1 million, partially offset by $0.5 million credit primarily representing a refund received from our Philippines
defined benefit plan.

Fiscal 2007 Activities

As part of the our ongoing efforts to reduce costs and streamline activities, in March 2007, we initiated a plan to consolidate certain
research and development activities and transfer certain of these activities from our Shanghai, China and Seattle, Washington facilities to our San Jose,
California and Meridian, Idaho facilities. During fiscal 2007, we incurred $1.0 million of severance and benefits costs related to this activity,
which



During fiscal 2008, we recognized $0.8 million of stock-based compensation expense, as compared to $1.4 million during
fiscal 2007. Our stock-based compensation expense is primarily related to the award of restricted stock and stock options to certain executives and
employees including a credit of $0.7 million in fiscal 2008 for previously expensed stock based compensation related to terminated employees. Stock-
based compensation expense for employee stock awards was measured on the award date and is being recognized over the vesting period of these
awards. This non-cash stock-based compensation expense is included in our cost of sales, research and development and selling, general and
administrative expenses.

We expect our stock based compensation expense to increase significantly in the fiscal year ending March 31, 2009 as we implement an incentive
compensation plan that rewards management and certain other employees through the use of restricted stock instead of cash. The total incentive
amounts and related stock-based compensation expense is dependent upon the achievement of the first and second fiscal half goals as defined on which
these incentives are measured.

37

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Amortization of Intangible Assets

We have adopted the provisions of SFAS 142, "Goodwill and Other Intangible Assets" under which, goodwill
and intangible assets with indefinite lives are not amortized, but are reviewed annually or more frequently if impairment indicators arise. Separable
intangible assets that are deemed to have defined lives will continue to be amortized over their useful lives. In connection with our fresh-start reporting,
separable intangible assets based on independent valuations were created with deemed defined lives. These intangible assets are being amortized
utilizing the pattern-of-use method over their estimated useful lives of 3 to 7 years for current technology and ten years for brand name. We evaluate
existing technology and brand name whenever events and circumstances indicate that their fair value may be less than their carrying value and, if
appropriate, record an impairment charge. Additionally, goodwill is tested for impairment at least annually and more often if events and circumstances
indicate that its fair value may be less than its carrying value. We performed the annual impairment test for goodwill at March 31, 2008, and no
impairment charge was recorded as no impairment of the carrying value was indicated. We perform this each fiscal year unless the existence of triggering
events indicates that an earlier review should be performed.

The separable intangible assets identified in connection with fresh-start accounting and included in the consolidated
balance sheet are as follows (in thousands):

The anticipated amortization schedule for the remaining years of these separable, intangible assets is as follows (in thousands):

|            |  |   | Existing   |  |   | Brand |  |   | Total       
|----------- |  | - | ---------- |  | - | ----- |  | - | ------------
|Fiscal Year |  |   | Technology |  |   | Name  |  |   | Amortization
|2009        |  | $ | 48         |  | $ | 753   |  | $ | 801         
|2010        |  |   | -          |  |   | 680   |  |   | 680         
|2011        |  |   | -          |  |   | 617   |  |   | 617         
|2012        |  |   | -          |  |   | 430   |  |   | 430         
|            |  | $ | 48         |  | $ | 2,480 |  | $ | 2,528       

The amortization expense for intangible assets in fiscal 2008 was $1.0 million as compared to $1.3 million in fiscal
2007. Amortization expense was recorded on a consistent basis with the schedules and amounts determined in May 2002.

Other Expense

There was $0.4 million of other expense in fiscal 2008 as compared $34,000 of other expense in fiscal 2007. Other
expense includes income or loss on the sale of securities, currency translation gains and losses and other miscellaneous items.

Interest Income and Interest Expense

Interest income was $0.8 million and $1.1 million for the twelve months ended March 31, 2008 and March 31, 2007,
respectively.  Interest income was earned on our short term investment portfolio and auction rate securities at an average rate of 4.6% in fiscal 2008. In
fiscal 2007, interest income was earned on our short term investment portfolio at an average rate of 5.0%.

There was no interest expense in fiscal 2008 and fiscal 2007.

Income Taxes



For the twelve months ended March 31, 2008 and March 31, 2007, our income tax provision was $1.3 million and $2.2 million, respectively. For the
twelve months ended March 31, 2008, our income tax provision reflects the amortization of deferred charges, which have been fully amortized as of
March 31, 2008, provisions for taxes in certain profitable foreign jurisdictions and the release of a 2003 tax reserve on which the statute of limitation
expired during the quarter ended September 29, 2007. For the twelve months ended March 31, 2007, our income tax provision reflects the amortization of
deferred charges and provisions for taxes in certain profitable foreign jurisdictions. We have operated at a loss for U.S. tax purposes and we provide for
income tax expense in foreign jurisdictions where the foreign subsidiaries operations generate profits that are taxable.

38

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Deferred tax assets have been recorded net of valuation allowances. A valuation allowance is required to be recorded if in management's judgment,
and based on available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.  Based on
available evidence, we have concluded that a valuation allowance is necessary and have reduced our net deferred tax assets to the extent of our deferred
tax liabilities.

Fiscal Year Ended March 31, 2007 and March 31, 2006

Net Sales

Net sales were $82.0 million in fiscal year 2007, as compared to net sales of $78.8 million in fiscal year 2006.

Our new product net sales increased by $9.9 million or 37%, driven by an increase of $6.0 million or 88% in embedded flash net sales and an
increase of $3.8 million or 19% in our remote control solutions. The increase in our embedded flash products reflects higher levels of sales in Z8Encore!,
Z8Encore!XP and EZ80 Acclaim devices.

Net sales of our 8-bit classic products decreased by $6.7 million or 13% reflecting a $2.9 million decrease in TV product net sales, $2.5 million
decrease in our Z8 and Z80 net sales, $0.9 million decrease in our serial communications controllers net sales and a decrease of $0.3 million in net sales
of modem and other products, driven by a technology migration by our largest modem direct customer from a hardware-driven solution to an internally
developed software-operated modem. The TV, peripheral and other classic products have continued to decline as customers have migrated away
from 8-bit analog devices to alternative solutions including digital TV.

Gross Margin

Gross margin as a percent of net sales was 47.5% in fiscal 2007 as compared to 42.4% in fiscal 2006. Our gross margin
improvement in fiscal 2007 reflects higher volumes on new products and lower associated supplier costs, as well as design and manufacturing
improvements, resulting in lower unit costs. Gross margins on our flash products continue to improve as sales demand and volumes grow, allowing us to
obtain lower wafer pricing from our suppliers.

Research and Development Expenses

Research and development expenses were $20.5 million in fiscal 2007, as compared to $21.0 million in fiscal 2006.
Research and development expenses in fiscal 2007 include approximately $0.3 million in stock based compensation expense as a result of our adoption
of SFAS 123R at the beginning of the fiscal year.  The overall reduction in our research and development expenses in fiscal 2007 was the result of lower
variable program costs as product platform development activity was completed.

Selling, General and Administrative Expenses

Selling, general and administrative ("SG&A") expenses were $22.7 million in fiscal 2007, as compared to
$23.7 million in fiscal 2006. SG&A costs were lower in fiscal 2007 even after including a $1.0 million increase in stock-based compensation expense
as a result of our adoption of SFAS 123R at the beginning of the fiscal year. The decrease in SG&A expenses is primarily due to savings from cost
reduction programs to reduce headcount in our sales and marketing support functions, as well as savings from the consolidation of certain administrative
functions in our Philippines operations. These savings were partially offset by higher marketing costs associated with new products and their market
introductions and costs to support intellectual property activity.

Special Charges and Credits

Special charges and credits were $2.5 million and $2.4 million in fiscal 2007 and 2006, respectively.

Fiscal 2007 Activities

As part of the our ongoing efforts to reduce costs and streamline activities, in March 2007, we initiated a plan to consolidate certain
research and development activities and transfer certain of these activities from our Shanghai, China and Seattle, Washington facilities to our San Jose,
California and Meridian, Idaho facilities. During fiscal 2007, we incurred $1.1 million of severance and benefits costs related to this activity,
which

39

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Fiscal 2006 Activities

In April 2005, we initiated a plan of action to consolidate certain support activities and transfer certain of these activities to our Philippines operations.
Total severance and benefits costs of $1.7 million related to a reduction-in-force and support activity consolidation were recorded as special charges
during fiscal 2006, and the remaining amount was recorded over the terminated employee's required service periods completed during the quarter ended
June 30, 2006. During fiscal 2006, we incurred $2.4 million of special charges, including the net reimbursement of $0.8 million of MOD III sustaining and
maintenance costs and period expenses of $0.7 million to sustain the dormant MOD II facility which is included in assets held for sale of $1.8 million on
the consolidated balance sheet as of March 31, 2006.



During fiscal 2007, we recognized $1.4 million of stock-based compensation expense, as compared to $0.7 million during
fiscal 2006, primarily in connection with the award of restricted stock and stock options to certain executives and employees. Stock-based compensation
expense for employee stock awards was measured on the award date and is being recognized over the vesting period of these awards. This non-cash
stock-based compensation expense is included in our research and development and selling, general and administrative expenses.

Amortization of Intangible Assets

We evaluate existing technology and brand name whenever events and circumstances indicate that their fair value may be
less than their carrying value and, if appropriate, record an impairment charge. Additionally, goodwill is tested for impairment at least annually and more
often if events and circumstances indicate that its fair value may be less than its carrying value. We performed the annual impairment test for goodwill at
March 31, 2007, and no impairment charge was
recorded as no impairment of the carrying value was indicated. We perform this test each fiscal year
unless the existence of triggering events indicates that an earlier review should be performed.

The amortization expense for intangible assets in fiscal 2007 was $1.3 million as compared to $1.9 million in fiscal
2006. Amortization expense was recorded on a consistent basis with the schedules and amounts determined in May 2002.

Other Expense

There was $34,000 of other expense in fiscal 2007 as compared to $0.1 million in fiscal 2006. Other expense includes
income or loss on the sale of securities, currency translation gains and losses and other miscellaneous items.

Interest Income and Interest Expense

Interest income was $1.1 million and $0.9 million for the twelve months ended March 31, 2007 and March 31, 2006,
respectively.  Interest income was earned on our short term investment portfolio at an average rate of 5.0% and 3.2% in fiscal 2007 and 2006,
respectively.

There was no interest expense in fiscal 2007 and $15,000 in fiscal 2006.

Income Taxes

For the twelve months ended March 31, 2007 and March 31, 2006, our income tax provision was $2.2 million and $1.9
million, respectively. For each of the twelve months ended March 31, 2007 and March 31, 2006, respectively, our income tax provision reflects the
amortization of deferred charges and provisions for taxes in certain profitable foreign jurisdictions, as well as foreign withholding taxes and state minimum
taxes.

40

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Quarterly Results (Unaudited)

The following table presents unaudited quarterly financial information for each of the quarters in the eight-quarter period
ended March 31, 2008. The Company's fiscal year-end is March 31 effective with the reporting dates after our transition period ending on March 27, 2005.
Interim results are based on fiscal quarters of thirteen weeks of duration ending on the last Saturday of each quarter.

|                                    |  |   | For the Quarters Ended               
|----------------------------------- |  | - | -------------------------------------
|                                    |  |   | Mar. 31,                             
|                                    |  |   | 2008                                 
|                                    |  |   | (in thousands, except per share data)
|Net sales                           |  | $ | 16,743                               
|Cost of sales                       |  |   | 8,982                                
|Gross margin                        |  |   | 7,761                                
|Gross margin as a percentage of     |  |   |                                      
|net sales                           |  |   | 46%                                  
|Operating Expenses:                 |  |   |                                      
|Research and development            |  |   | 3,932                                
|Selling, general and administrative |  |   | 4,950                                
|Special charges and credits         |  |   | 510                                  
|Amortization of intangible assets   |  |   | 208                                  
|Operating loss                      |  |   | (1,839)                              
|Other income (expense):             |  |   |                                      
|Interest income                     |  |   | 154                                  
|Other, net                          |  |   | (130)                                
|Loss before provision for           |  |   |                                      
|income taxes                        |  |   | (1,815)                              
|Provision for income taxes          |  |   | 129                                  
|Net loss                            |  | $ | (1,944)                              
|                                    |  |   |                                      
|Net loss per share -                |  |   |                                      
|basic & diluted                     |  | $ | (0.11)                               

Our net sales generally decline in the December quarter reflecting the seasonality of our consumer based product sales and the timing of distributor
inventory management cycles.

Overall, our gross margin as a percentage of net sales generally decreased on a sequential quarterly basis from the
quarter ended July, 1, 2006 through the quarter ended March 31, 2008. Gross margins on our embedded flash products continue to improve as sales
demand and volumes increase allowing us to obtain lower wafer pricing from our suppliers.

Our research and development expenses have generally decreased sequentially since the quarter ended July 1, 2006
reflecting our savings related to the consolidation of our research and development sites as we continue our product development efforts to support our
embedded flash-based microcontroller devices, our remote control devices and our new 32-bit Zatara products. We have expanded our Bangalore, India
software development center for the increased needs of our growing remote control product portfolio and opened a new technology development center in
Meridian, Idaho to support our design capabilities and our wafer fabrication sourcing strategies.

Our selling, general and administrative expenses were generally lower during the quarterly periods of fiscal 2008 as compared with
fiscal 2007 primarily due to savings from our cost reduction programs to reduce headcount in our sales and marketing support functions, as well as
savings from the transition and consolidation of certain administrative functions in our Philippines global support facility. These savings were partially
offset by costs to support Sarbanes-Oxley activities and incremental costs associated with the Microchip lawsuit.

Our special charges and credits for the eight quarterly periods ended March 31, 2008 are summarized below (in thousands):

|                                    |  |   | For the Quarters Ended | 
|----------------------------------- |  | - | ---------------------- | 
|                                    |  |   | Mar. 31,               | 
|                                    |  |   | 2008                   | 
|                                    |  |   | (in thousands)        
|Restructuring of operations:        |  |   |                        | 
|Engineering consolidation severance |  |   |                        | 
|and  termination  benefits          |  | $ | 7                      | 
|Test operations outsourcing         |  |   |                        | 
|and reorganziation                  |  |   | 626                    | 
|Reimbursement from defined          |  |   |                        | 
|benefit plan and other              |  |   | (122)                  | 
|MOD II sustaining costs for         |  |   |                        | 
|post-closure maintenance            |  |   | -                      | 
|                                    |  | $ | 511                    | 

41

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As previously discussed, we have focused our business around our core microcontroller solutions and moving to a fabless
model for manufacturing. The special charges over these periods have generally been aligned around this strategy. Additionally, we have continued to
resize our support organizations to a lower sales base in an effort to scale down these organizations and focus the activities around these strategies.

Liquidity and Capital Resources

At March 31, 2008, we had $0.7 million of bank borrowings outstanding primarily reflecting borrowings under a short term
bank arrangement utilized to finance a three-year license agreement for engineering development software. Approximately 75% of the total three-year
cost is required to be paid in the first seven months of the agreement beginning January 1, 2008.

At March 31, 2008, we had cash and cash equivalents of $16.6 million, which includes the cash proceeds we received subsequent to March 31, 2008
from the redemption at par of $2.0 million of our auction rate preferred securities ("ARPS"). In February 2008, tightening of the U.S. liquidity
markets caused the auction rate process to default and ARPS could not be successfully sold. At that time, we had $3.9 million invested in ARPS. Our
remaining investment in ARPS of $1.9 million has been classified as long term investments at full par value on our consolidated balance sheet as of
March 31, 2008.  Refer to Note 13 of notes to the consolidated financial statements for details on the classification of our cash and cash equivalents and
ARPS. At March 31, 2008, our $16.6 million of cash and cash equivalents when combined with our remaining $1.9 million of ARPS, classified as long
term investments, totaled $18.5 million. Cash and cash equivalents were $19.4 million at March 31, 2007 and $27.0 million at March 31, 2006. Cash and
cash equivalents consist primarily of cash in bank accounts and money market accounts, which are readily convertible to cash and have maturities of
three months or less at the time of acquisition.

Cash Flows from Operating Activities

During fiscal 2008, net cash used in operating activities was $1.6 million compared to net cash used of $1.7 million in fiscal 2007.   The net
cash used in operating activities in fiscal 2008 primarily includes our net loss of $9.3 million, partially offset by non-cash charges of $5.1 million and
changes in certain assets and liabilities of $2.6 million. Non-cash charges include amortization of fresh-start intangibles of $1.0 million, depreciation and
other amortization of $3.0 million, stock-based compensation expense of $0.8 million and a loss on disposal of fixed assets of $0.3 million.  An increase in
accounts payable of $2.3 million, reduction of net accounts receivable of $1.2 million, reduction in inventories of $0.1 million, and a reduction in prepaid
expenses and other current and non-current assets of $1.7 million all provided cash from operating activities and were offset by decreases in deferred
income on shipments to distributors of $1.2 million and accrued and other current and non-current liabilities of $1.4 million.

During fiscal 2007, net cash used in operating activities was $1.7 million as compared to net cash used of $6.4 million
during fiscal 2006. The $4.7 million decrease in net cash used is primarily the result of  higher net sales of $3.2 million, higher gross margins of $5.5
million, lower operating expenses of $2.3 million primarily driven by lower headcount costs, all of which contributed to our lower net loss of $9.0 million as
compared to a net loss of $16.9 million in fiscal 2006, an increase in non-cash charges of $2.7 million including an adjustment to decrease goodwill for tax
reserves on which the statute of limitations expired during fiscal 2007, partially offset by certain net asset and liability changes of $5.8 million including an
increase in inventory changes of $4.0 million to support the increase in sales of embedded flash products and an increase in accounts payable changes
of $2.1 million primarily associated with our lower operating expenses.

During fiscal 2006, net cash used in operating activities of $6.4 million primarily reflected our net loss of $16.9 million, partially offset by non-cash
charges of $7.7 million and certain net asset and liability changes of $2.8 million.  Non-cash charges include amortization of fresh-start intangibles of $2.0
million, $2.6 million of depreciation and other amortization, goodwill adjustments of $1.9 million, stock-based compensation expense of $0.7 million and
an asset impairment charge on our remaining assets held for sale of $0.5 million.  Reduction of inventories of $3.0 million, reduction of net accounts
receivable of $2.9 million, and a reduction of prepaid expenses and other current and non-current assets of $2.1 million all provided cash from operating
activities and were offset by decreases in accounts payable of $1.7 million and accrued and other current and non-current liabilities of $3.7 million.

42

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Cash Flows from Investing Activities

During fiscal 2008, net cash used in investing activities of $2.1 million includes capital expenditures of $3.4 million, our
investment in auction rate securities classified as long term investments of $1.9 million partially offset by net proceeds from assets held for sale of $3.2
million.

During fiscal 2007, net cash used in investing activities was $6.4 million, an increase of $6.1 million as compared to $0.3 million in fiscal 2006. Cash
used in investing activities in fiscal 2007, primarily reflects the $2.8 million payment to ZiLOG MOD III, Inc. Series A Preferred shareholders for the
remaining net proceeds upon liquidation of the special purpose entity, capital expenditures of $2.1 million and costs of $1.4 million incurred for the
decommissioning of primarily land and buildings of our MOD II facility, which is classified as assets held for sale on the consolidated balance sheets as of
March 31, 2007.  The capital expenditures primarily reflect the addition of test equipment to support increased demand for our embedded flash products
and system and software upgrades to support Oracle systems and applications.

Net cash used in investing activities in fiscal 2006 of $0.3 million reflected capital expenditures of $4.2 million and the reimbursement of MOD III
sustaining costs of $0.7 million, offset by the proceeds from the disposal of MOD III assets and assets held for sale of $4.7 million.  The capital
expenditures primarily reflect the addition of test capacity driven by increased demand of our new embedded flash products and software purchases
related to the upgrade of manufacturing software and hardware and software related to continued research and development investments.

Cash Flows from Financing Activities

Net cash provided by financing activities was $0.9 million in fiscal 2008, $0.5 million in fiscal 2007 and $0.1 million in fiscal
2006.

Net cash provided by financing activities of $0.9 million in 2008 includes the receipt of cash under our short term financing arrangement of $0.7
million, proceeds from the issuance of common stock under employee stock plans of $0.5 million, partially offset by the repurchase of restricted shares
from our Chief Financial Officer as consideration for payment on an outstanding loan plus interest payable to us of $0.3 million.

Net cash provided by financing activities of $0.5 million in 2007 includes proceeds from the issuance of common stock under employee stock plans.

Net cash provided by financing activities of $0.1 million in 2006 includes proceeds from the issuance of common stock under employee stock plans of
$0.2 million, offset by cash used for the repurchase of restricted stock of $0.1 million.

Off-Balance Sheet Arrangements

As of March 31, 2008, we were not involved in any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC
Regulation S-K.

Non-GAAP EBITDA Measure

The EBITDA figures presented below reflect a non-GAAP measure of our liquidity. EBITDA reflects our net income
adjusted for certain non-cash items, interest and income taxes.

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Our reconciliation of net loss to EBITDA and our reconciliation of EBITDA to net cash provided by (used in) operating
activities (the most directly comparable measure of liquidity under generally accepted accounting principles) for each unaudited period presented, is as
follows (in thousands):

|                                                 |  |   | For the Quarters Ended | 
|------------------------------------------------ |  | - | ---------------------- | 
|                                                 |  |   | Mar. 31,               | 
|                                                 |  |   | 2008                   | 
|                                                 |  |   | (in thousands)        
|Reconciliation of net loss                       |  |   |                        | 
|to EBITDA:                                       |  |   |                        | 
|Net loss                                         |  | $ | (1,944)                | 
|Depreciation and amortization                    |  |   | 954                    | 
|Interest income                                  |  |   | (154)                  | 
|Provision for income taxes                       |  |   | 129                    | 
|EBITDA                                           |  | $ | (1,015)                | 
|                                                 |  |   |                        | 
|Reconciliation of EBITDA to net                  |  |   |                        | 
|cash provided by (used in) operating activities: |  |   |                        | 
|                                                 |  |   |                        | 
|EBITDA                                           |  | $ | (1,015)                | 
|Interest income                                  |  |   | 154                    | 
|Provision for income taxes                       |  |   | (129)                  | 
|Goodwill adjustment                              |  |   | -                      | 
|Stock-based compensation                         |  |   | (116)                  | 
|Loss on disposition of operating assets          |  |   | 74                     | 
|Changes in operating assets and                  |  |   |                        | 
|liabilities                                      |  |   | 3,219                  | 
|                                                 |  |   |                        | 
|Net cash provided by (used in)                   |  |   |                        | 
|operating activities                             |  | $ | 2,187                  | 

As of March 31, 2008, we had $0.3 million of outstanding firm commitments for capital expenditures. We currently estimate
fiscal 2009 capital expenditures will range from 2% - 4% of net sales, and may include purchases of test equipment, leasehold improvements, internal use
software and other items. Decisions related to how much cash is used for investing are influenced by the expected amount of cash to be provided by
operations. We currently anticipate that available cash and cash equivalents will be adequate to satisfy our cash requirements for at least the next twelve
months.

Contractual Obligations

We lease certain of our facilities and equipment under non-cancelable operating leases, which expire in fiscal 2009 through
fiscal 2014. The facility lease agreements generally provide for base rental rates, which increase at various times during the terms of the leases and also
provide for renewal options at fair market rental value. We are also responsible for common area maintenance charges on certain office leases, which are
not included in the table below. These charges are generally less than 10% of base rents. Total operating lease expense, including month-to-month
rentals, were approximately $1.9 million, $2.1 million and $2.4 million, for the twelve months ended March 31, 2008, March 31, 2007 and March 31, 2006
respectively.

We generally make purchases under cancelable purchase orders and do not enter into long-term supply agreements.
Certain of our wafer foundry, assembly, materials suppliers, software vendors and support tool manufacturers require non-cancelable purchase orders
since they often provide products and services tailored to our specifications. Summarized in the table below are minimum future commitments under
operating leases and non-cancelable purchase obligations as of March 31, 2008 (in thousands):

|                            |  |   |        |  |   | Payment due by period
|--------------------------- |  | - | ------ |  | - | ---------------------
|                            |  |   |        |  |   | Within               
|                            |  |   | Total  |  |   | 1 year               
|Operating lease obligations |  | $ | 4,447  |  | $ | 1,615                
|Purchase obligations        |  |   | 6,716  |  |   | 4,821                
|Total                       |  | $ | 11,163 |  | $ | 6,436                

From time to time, we have agreed to indemnify and hold harmless certain customers for potential allegations of
infringement of intellectual property rights and patents arising from the use of our products. During the ordinary course of business, in certain limited
circumstances, we have agreed to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally parties with which
we have commercial relations, in connection with certain intellectual

44

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property infringement claims by any third party with respect to its products and
services. We have indemnification arrangements that limit our net contingent obligation to pay for defense costs, if any, up to a maximum of $500,000. To
date, there have not been any costs incurred in connection with such indemnification arrangements; therefore, there is no accrual of such amounts at
March 31, 2008. We disclose indemnification liabilities according to FASB Staff Position FIN45-1, "Accounting for Intellectual Property Infringement
Indemnifications under SFAS Interpretation No. 45." Under SFAS No. 5, "Loss Contingencies," a claim would be accrued when a loss is
probable and the amount can be reasonably estimated. At March 31, 2008, no such amounts are accrued.

Effects of Inflation and Changing Prices

We believe that inflation and/or deflation had a minimal impact on our overall operations during the periods presented in
this report.

Seasonality

Sales typically increase in the June quarter and peak in the September quarter driven by increased holiday demand from
our customers in the home entertainment and consumer products markets, while sales are generally lower in the March and December quarters as
compared to the June and September quarters, although our trends have fluctuated considerably in the most recent periods. Our sales have been
impacted by non-seasonal trends including sales reductions by certain direct customers and declines in our classic business. Additionally, general world-
wide economic, political and regional instabilities may impact our results of operations in any given period.

Recent Accounting Pronouncements

In September 2006, the FASB issued Statement No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 defines
fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value
measurements.  SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those
fiscal years.

In February 2007, the Financial Accounting Standards Board ("FASB") issued FASB Statement No. 159, "The Fair Value Option for Financial Assets
and Financial Liabilities" ("SFAS 159"), which permits entities to choose to measure many financial instruments and certain other items at fair value. The
objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related
assets and liabilities differently without having to apply complex hedge accounting provisions. The fair value option established by this SFAS 159 permits
all entities to choose to measure eligible items at fair value at specified election dates. A business entity shall report unrealized gains and losses on items
for which the fair value option has been elected in earnings (or another performance indicator if the business entity does not report earnings) at each
subsequent reporting date.  SFAS 159 is effective as of the beginning of each reporting entity's first fiscal year that begins after November 15, 2007.  We
are currently evaluating the impact of adopting SFAS 159 and expect there will be no material impact of this adoption on our financial statements.





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ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates primarily to our short-term investment portfolio. We do not
use derivative financial investments in our investment portfolio. Our primary investment objectives are to preserve capital and maintain liquidity. These
objectives are met by investing in high-quality credit issuances and limiting the amount of credit exposure to any one company. Our policy is to mitigate
default risk by investing in only the highest quality securities and monitoring the credit ratings of such investments. As of March 31, 2008, our cash and
cash equivalents of $16.6 million were invested in bank time deposits and money market funds. Cash and cash equivalents combined with long term
investments totaled $18.5 million at March 31, 2008.  We have no significant cash flow exposure due to rate changes for our cash equivalents as these
instruments have near term maturities.

The table below presents principal amounts and related interest rates for our cash equivalents and long term investments
as of March 31, 2008 (dollars in thousands):

|                                     |  |  |  |  |  |  |  |   | Carrying |  |   | Fair  
|------------------------------------ |  |  |  |  |  |  |  | - | -------- |  | - | ------
|As of March 31, 2008                 |  |  |  |  |  |  |  |   | Value    |  |   | Value 
|Cash Equivalents:                    |  |  |  |  |  |  |  |   |          |  |   |       
|Fixed rate                           |  |  |  |  |  |  |  | $ | 16,625   |  | $ | 16,625
|Long Term Investments:               |  |  |  |  |  |  |  |   |          |  |   |       
|Fixed rate - auction rate securities |  |  |  |  |  |  |  |   | 1,925    |  |   | 1,925 
|Average interest rate                |  |  |  |  |  |  |  |   | 4.6%     |  |   |       

At March 31, 2008, we had cash and cash equivalents of $16.6 million, which includes the cash proceeds we received subsequent to March 31, 2008
from the redemption at par of $2.0 million of our auction rate preferred securities ("ARPS"). In February 2008, tightening of the U.S. liquidity
markets caused the auction rate process to default and ARPS could not be successfully sold. At that time, we had $3.9 million invested in ARPS. Our
remaining investment in ARPS of $1.9 million has been classified as long term investments at full par value on our consolidated balance sheet as of
March 31, 2008.  Refer to Note 13 of notes to the consolidated financial statements for details on the classification of our cash and cash equivalents and
ARPS. At March 31, 2008, our $16.6 million of cash and cash equivalents when combined with our remaining $1.9 million of ARPS, classified as long
term investments, totaled $18.5 million. Cash and cash equivalents were $19.4 million at March 31, 2007 and $27.0 million at March 31, 2006. Cash and
cash equivalents consist primarily of cash in bank accounts and money market accounts, which are readily convertible to cash and have maturities of
three months or less at the time of acquisition.

Foreign Currency Exchange Risk

We transact business in various foreign countries, but the vast majority of our consolidated net sales and purchases are denominated in U.S. dollars.
Currently, we do not employ a foreign currency hedging program to mitigate our foreign currency exchange risk related to foreign currency transactions
and we believe the risks to date have not been significant. We maintain local currency bank accounts in our international offices to facilitate payment of
local operating costs.

ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following financial statements and supplementary data are provided herein:



|                                                                                                  |     
|------------------------------------------------------------------------------------------------- | ----
|                                                                                                  | Page
|                                                                                                  |     
|Report of Armanino McKenna LLP, Independent Registered Public Accounting Firm                     | 47  
|                                                                                                  |     
|Consolidated Balance Sheets as of March 31, 2008 and 2007                                         | 48  
|                                                                                                  |     
|Consolidated Statements of Operations for the year ended March 31, 2008, 2007, and 2006           | 49  
|                                                                                                  |     
|Consolidated Statements of Cash Flows for the year ended March 31, 2008, 2007, and 2006           | 50  
|                                                                                                  |     
|Consolidated Statements of Stockholders' Equity for the year ended March 31, 2008, 2007, and 2006 | 51  
|                                                                                                  |     
|Notes to Consolidated Financial Statements                                                        | 52  

48

---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMThe Board of Directors and Stockholders of ZiLOG, Inc.We have audited the accompanying consolidated balance sheets of ZiLOG, Inc. and subsidiaries (the
"Company") as of March 31, 2008 and March 31, 2007 and the related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the three-year period ended March 31, 2008. In connection with our audits of the consolidated financial statements, we
have also audited the financial statement schedule listed in Item 15a (2). These consolidated financial statements and related financial statement
schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and
financial statement schedule based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of
material misstatement. We were not engaged to perform an audit of the Company's internal controls over financial reporting. An audit includes
consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.  Accordingly, we express no such
opinion.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of ZiLOG, Inc. and subsidiaries as of March 31, 2008 and March 31, 2007 and the results of their operations and their cash flows
for each of the three years in the three-year period
ended March 31, 2008, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the consolidated financial statements taken as a whole, presents fairly, in all material aspects, the information set
forth therein./s/    Armanino McKenna LLPSan Ramon, California 
   June 23, 2008


47ZiLOG, INC.
                  CONSOLIDATED BALANCE SHEETS 
                  (Amounts in thousands, except shares)

Mar. 31,


Mar. 31,2008


2007ASSETSCurrent assets:Cash and cash equivalents

$
16,625

$
19,390Accounts receivable, less allowance for doubtful accounts of $145at March 31, 2008 and $133 at March 31, 2007


6,834


8,002Inventories, net


8,413


8,497Assets held for sale


-


3,237Deferred tax assets


263


409Prepaid expenses and other current assets


1,663


1,773Total current assets


33,798


41,308Long term investments


1,925


-Property, plant and equipment, net


6,604


6,518Goodwill


2,211


2,211Intangible assets, net


2,528


3,489Other assets


774


2,277Total assets

$
47,840

$
55,803LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities:Short term debt

$
720

$
-Accounts payable


8,375


6,077Income taxes payable


535


583Accrued compensation and employee benefits


2,444


2,821Other accrued liabilities


2,094


2,841Deferred income on shipments to distributors


5,867


7,085Total current liabilities


20,035


19,407Deferred tax liabilities


263


409Other non-current tax liabilities


663


1,240Total liabilities


20,961


21,056Stockholders' equity:Common stock, $0.01 par value; 60.0 million shares authorized:16.9 million and 16.8 million shares issued andoutstanding at March 31, 2008 and March 31, 2007, respectively


185


183Additional paid-in capital


125,838


124,558Treasury stock


(7,456)


(7,174)Other comprehensive income


102


-Accumulated deficit


(91,790)


(82,820)Total stockholders' equity


26,879


34,747Total liabilities and stockholders' equity

$
47,840

$
55,803See accompanying notes to the consolidated financial statements.

48ZiLOG, INC.CONSOLIDATED STATEMENTS OF OPERATIONS 
                  (In thousands, except per share data)

Twelve Months EndedMar. 31,


Mar. 31,


Mar. 31,2008


2007


2006Net sales

$
67,221

$
82,049

$
78,820Cost of sales


36,335


43,080


45,391Gross margin


30,886


38,969


33,429Operating expenses:Research and development


16,491


20,473


21,069Selling, general and administrative


19,921


22,669


23,693Special charges and credits


1,974


2,471


2,416Amortization of intangible assets


961


1,284


1,984Total operating expenses


39,347


46,897


49,162Operating loss


(8,461)


(7,928)


(15,733)Other income (expense):Interest income


819


1,112


898Interest expense


-


-


(15)Other, net


(350)


(34)


(125)Total other income (expense), net


469


1,078


758Loss before provision for income taxes


(7,992)


(6,850)


(14,975)Provision for income taxes


1,299


2,188


1,912Net loss

$
(9,291)

$
(9,038)

$
(16,887)Basic and diluted net loss per share

$
(0.55)

$
(0.54)

$
(1.03)Weighted-average shares used in computing basicand diluted net loss per share


16,893


16,665


16,388See accompanying notes to the consolidated financial statements.


49ZiLOG, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS 
                  (In thousands) 

Twelve Months EndedMar.  31,


Mar.  31,


Mar.  31,2008


2007


2006Cash Flows from Operating Activities:Net loss

$
(9,291)

$
(9,038)

$
(16,887)Adjustments to reconcile net loss to net cashused in operating activities:Amortization of fresh-start intangible assets


961


1,284


1,984Depreciation and other amortization


2,970


3,114


2,588Goodwill adjustment


-


4,529


1,859Loss on disposal of fixed assets


318


8


13Asset impairments


-


-


490Stock-based compensation


803


1,432


716Changes in operating assets and liabilities:Accounts receivable, net


1,168


1,570


2,898Inventories


84


(914)


3,055Prepaid expenses and other current and non-current assets


1,716


2,204


2,116Accounts payable


2,298


(3,776)


(1,652)Deferred income on shipments to distributors


(1,218)


972


104Accrued and other current and non-current liabilities


(1,428)


(3,064)


(3,730)Net cash used in operating activities


(1,619)


(1,679)


(6,446)Cash Flows from Investing Activities:Assets held for sale - vacant property


-


(1,437)


-Payable to ZiLOG Mod III, Inc. Series A Preferred shareholders


-


(2,848)


-Proceeds from sale of assets


3,237


-


3,954Long term investments


(1,925)


-


-Capital expenditures


(3,375)


(2,097)


(4,235)Net cash used in investing activities


(2,063)


(6,382)


(281)Cash Flows From Financing Activities:Short term debt


720


-


-Repurchase of restricted shares


(282)


-


(80)Proceeds from issuance of common stock under employee stock plans


479


497


172Net cash provided by financing activities


917


497


92Net decrease in cash and cash equivalents


(2,765)


(7,564)


(6,635)Cash and cash equivalents at beginning of period


19,390


26,954


33,589Cash and cash equivalents at end of period

$
16,625

$
19,390

$
26,954Supplemental Disclosure of Cash Flow Information:Income taxes paid during the period

$
345

$
340

$
244Supplemental Disclosure of Non-Cash Investing andFinancing Activities:Value of shares repurchased through employee loanrepayments

$
282

$
-

$
-See accompanying notes to the consolidated financial statements.

50ZiLOG, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY 
                  (In thousands)

Common Stock


Deferred 
Stock
Compen-


Additional
Paid-in


Treasury


Other
Compre-hensive


Accumu-
lated


Total
Stock-
holders'Shares


Amount


sation


Capital


Stock


Income


Deficit


EquityBalance at March 27, 2005

16,270

$
177

$
(404)

$
122,150

$
(7,094)

$
-

$
(56,895)

$
57,934Issuance of restricted shares

220


-


(570)


570


-


-


-


-Issuance of common stock under employee stockpurchase plan

65


2


-


168


-


-


-


170Deferred stock compensation cancellations

-


-


72


(72)


-


-


-


-Amortization of restricted shares

-


2


79


-


-


-


-


81Purchase of treasury shares

(17)


-


-


-


(80)


-


-


(80)Stock-based compensation expense

47


-


257


382


-


-


-


639Net loss and comprehensive loss

-


-


-


-


-


-


(16,887)


(16,887)Balance at March 31, 2006

16,585


181


(566)


123,198


(7,174)


-


(73,782)


41,857Issuance of common stock under stock option plans

121


1


-


247


-


-


-


248Issuance of restricted shares

91


-


-


-


-


-


-


-Issuance of common stock under employee stock






















-purchase plan

93


1


-


247


-


-


-


248Restricted shares cancelled

(76)


-


-


-


-


-


-


-Stock-based compensation expense

26


-


-


1,432


-


-


-


1,432Adoption of FAS123R

-


-


566


(566)


-


-


-


-Net loss and comprehensive loss

-


-


-


-


-


-


(9,038)


(9,038)Balance at March 31, 2007

16,840


183


-


124,558


(7,174)


-


(82,820)


34,747Adoption of FIN48

-


-


-


-


-


-


321


321Issuance of common stock under stock option plans

101


2


-


311


-


-


-


313Issuance of common stock under employee stock






















-purchase plan

53


-


-


166


-


-


-


166Restricted shares cancelled

(25)


-


-


-


-


-


-


-Repurchase of treasury shares

(73)











(282)


-





(282)Stock-based compensation expense

27


-


-


803


-


-


-


803Comprehensive loss:Other comprehensive income - defined benefit plan

-


-


-


-


-


102


-


102Net loss



















(9,291)


(9,291)Total comprehensive loss

-


-


-


-


-





-


(9,189)Balance at March 31, 2008

16,923

$
185

$
-

$
125,838

$
(7,456)

$
102

$
(91,790)

$
26,879See accompanying notes to the consolidated financial statements.

51ZiLOG, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNOTE 1.	DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESNature of BusinessZiLOG, Inc. ("ZiLOG" or the "Company") is a worldwide supplier of semiconductor products. The
Company designs, develops and markets various families of products in support of the micrologic semiconductor market segment. Using proprietary
technology, ZiLOG provides semiconductor devices that its customers design into their end products. These devices typically combine a microprocessor
memory, and input and output functions on a single device. ZiLOG's micrologic devices enable a broad range of consumer and industrial electronics
manufacturers to control the functions and performance of their products. ZiLOG's other devices have a wide variety of uses including the processing and
transmission of information for data communications, telecommunications and consumer electronics companies.Basis of PresentationThe consolidated financial statements include the accounts of ZiLOG, Inc. and its subsidiaries. All significant transactions
and accounts between the Company and these subsidiaries have been eliminated in consolidation. Certain reclassifications have been made to
prior-period balances to present the consolidated financial statements on a consistent basis with the current year presentation. Any reference to year pertains
to the fiscal year unless otherwise indicated.Change in Fiscal Year End


Effective December 29, 2005, the Company changed its
fiscal year end from December 31 to March 31 with interim results based on fiscal quarters of approximately thirteen weeks in duration ending on the
closest Saturday to each calendar quarter end, with the exception of the last quarter, which ends on March 31 beginning in fiscal 2006.   The
operating results for any period are not necessarily indicative of results for any subsequent period or the full fiscal year.
Revenue RecognitionRevenue from product sales to direct customers is recognized when evidence of an agreement exists, customers or
their agents receive the product and title transfers, and collection of amounts due is reasonably assured.   Appropriate allowances for returns, discounts
and warranty costs are recorded concurrent with revenue recognition.The Company also licenses technology for certain of its products and receives payment in the form of royalties. Typically,
licensees provide shipment and royalty information when the payment is remitted, usually 60 days subsequent to the end of the quarter in which
shipments are made. The Company records royalty revenues as net sales when the cash is received from the licensees.Revenue on shipments to distributors who have rights of return and/or price protection on unsold merchandise held by
them is deferred until products are resold by the distributors to end users. Although revenue is deferred until it is resold, title of products sold to
distributors transfers upon shipment. Accordingly, shipments to distributors are reflected in the consolidated balance sheets as accounts receivable and a
reduction of inventories at the time of shipment. Deferred revenue and the corresponding cost of sales on shipments to distributors are reflected in the
consolidated balance sheets on a net basis as "Deferred income on shipments to distributors."Cash and Cash EquivalentsCash and cash equivalents consist of bank deposits and money market funds, which are readily convertible to cash and
have maturities of three months or less at the time of acquisition. As of March 31, 2008, the Company had $3.9 million invested in auction rate preferred
securities ("ARPS").  Subsequent to March 31, 2008, the Company has received $2.0 million in cash from redemptions at par of its ARPS.
These redemption proceeds are included in cash and cash equivalents on the consolidated balance sheet as of March 31, 2008. The Company's
remaining investment in ARPS of $1.9 million is classified as long term investments at full par value on the consolidated balance sheet as of March 31,
2008.   Refer to Note 13 of notes to consolidated financial statements for details regarding the classification and subsequent event.

52Accounts Receivable and AllowancesThe Company maintains an allowance for losses it may incur as a result of its customers' inability to make required
payments. Any increase in the allowance results in a corresponding increase in selling, general and administrative expenses. In establishing this
allowance and evaluating the adequacy of the allowance for doubtful accounts, the Company considers the aging of accounts receivable, historical bad
debts, customer concentrations, customer credit-worthiness and, to a lesser extent, current economic trends and changes in customer payment terms.
The Company's sales to direct customers consist of gross product sales reduced by expected future sales returns and price
allowances. To estimate sales returns and price allowances, the Company analyzes historical returns and allowance activity to establish a baseline
reserve level. The Company then evaluates whether there are any underlying product quality or other customer specific issues that require additional
specific reserves above the baseline level.The Company's sales to distributors that have rights of return and/or price protection allowances on unsold merchandise
held by them are deferred until such products are resold by the distributors to end users. At the time that the Company recognizes distributor re-sales as
revenue, it records a reserve for estimated price adjustments that the distributors may reclaim from the Company on the merchandise they resold to end
users. These reserves are recorded as a reduction to sales and a reduction to accounts receivable. To estimate this distributor price adjustment reserve,
the Company analyzes its historical price adjustment payments, price adjustments taken by distributors but not processed by the Company and pending
price adjustments that have been authorized by the Company but have not yet been claimed by its distributors.

Fair Value of Financial Instruments, Concentration of Credit RiskCash and cash equivalents consist primarily of cash in bank accounts and money market accounts. The carrying value of the Company's
financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and current liabilities, approximates fair value due to
their relatively short maturities. Financial instruments that subject the Company to concentrations of credit risk consist primarily of cash and cash
equivalents and accounts receivable. The Company maintains its cash and cash equivalents and investments with high quality financial institutions.

As of March 31, 2008 the Company held $3.9 million in auction rate securities ("ARPS"). Since February 2008, due to various factors
including the tightening of liquidity in the financial market, regularly held auctions for these ARPS have been unsuccessful. Subsequent to March 31,
2008, the Company has received $2.0 million from redemptions of its ARPS which have been included in cash and cash equivalents as of March 31,
2008. The remaining $1.9 million have been classified as long term investments and accrue interest pending their redemption or sale. The issuers
reported collateralized asset value ranges which exceed the value of ARPS held by the Company by 200 to 300 percent. The Company believes the
ARPS values are not impaired and as such, no impairment has been recognized against the investment. If the issuers are unable to successfully close
future auctions and their credit rating continues to deteriorate, the Company may be required to record an impairment charge against the value of its
ARPS holdings.

The Company's customer base is located primarily in North America, Europe and Asia. The Company performs ongoing credit evaluations of its
customers' financial condition and limits its exposure to financial losses by limiting the amount of credit extended whenever deemed necessary and
generally does not require collateral. As of March 31, 2008 and March 31, 2007, respectively, there were two customers with net accounts receivable
comprising more than 10% of total net accounts receivable.InventoriesInventories are stated at the lower of cost (which approximates actual cost on a first-in, first-out basis) or market.
Provisions, when required, are made to reduce inventory values from cost to their estimated net realizable values. It is possible that estimates of net
realizable value can change in the short-term. Inventory reserves for excess or obsolete inventory are released only upon sale, scrap or other disposition
of reserved inventory. Inventories, net of provisions, consist of the following (in thousands):

Mar. 31,


Mar. 31,2008


2007Raw materials

$
447

$
594Work-in-process


5,924


5,920Finished goods


2,042


1,983Net Inventory

$
8,413

$
8,49753Property, Plant and Equipment and IntangiblesDepreciation is computed using the straight-line method over the estimated economic lives of the assets, which are
generally between three and seven years for machinery and equipment.
Amortization of leasehold improvements is computed using the shorter of the remaining terms of the leases or the estimated
economic lives of the improvements. Depreciation expense for property, plant and equipment was $3.0 million, $3.1 million and $2.6 million for the twelve
months ended March 31, 2008, twelve months ended March 31, 2007 and twelve months ended March 31, 2006, respectively. The Company did not
have any assets leased under capital leases during the periods indicated.

Property, plant and equipment consist of the following (in thousands):

Mar. 31,


Mar. 31,2008


2007Property, plant and equipment at cost:Land, buildings and leasehold improvements

$
2,789

$
2,813Machinery and equipment


9,735


12,00812,524


14,821Less accumulated depreciation and amortization


(5,920)


(8,303)Net property, plant and equipment

$
6,604

$
6,518We apply the provisions of SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" and SFAS 142, "Goodwill
and Other Intangible Assets." We evaluate long-lived assets for possible impairment whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include the following:

significant changes in the manner of our use of the acquired assets;





When we determine that the carrying value of long-lived assets may not be recoverable based upon the existence of one or
more of the above indicators of impairment, and the undiscounted cash flows estimated to be generated by those assets are less than the asset's carrying
value, the carrying value of the assets are reduced to their estimated fair value. The estimated fair value is usually determined based on an estimate of
discounted future cash flows. Asset impairments are recorded as a reduction in the asset value in our consolidated balance sheets and as special
charges in our consolidated statements of operations.

The intangible assets created by the adoption of fresh-start accounting on our emergence from bankruptcy in 2002 consist
of existing technology and brand name, as well as excess enterprise value, or goodwill. The existing technology and brand name are being amortized
based on a pattern-of-use method in proportion to the forecast discounted cash flows from such assets. The goodwill is not subject to amortization.

We evaluate existing technology and brand name whenever events and circumstances indicate that their fair value may be
less than their carrying value. Additionally, goodwill is tested for impairment at least annually and more often if events and circumstances indicate that its
fair value may be less than its carrying value. We performed the annual impairment test for goodwill in the third quarter of 2008, and we perform this test
in the fourth quarter of each fiscal year unless the existence of triggering events indicates that an earlier review should be performed.

Adjustments to record impairment of long-lived assets or intangible assets could have a material adverse impact on our
financial condition and results of operations in the period or periods in which such impairment is identified.

54

---

Other Accrued LiabilitiesThe following table further details "other accrued liabilities" (in thousands):

Mar. 31,


Mar. 31,2008


2007Accrued audit fees

$
30

$
180Accrued legal costs


876


876Accrued special charges


489


1,215Other


699


570Other accrued liabilities

$
2,094

$
2,841Use of EstimatesThe preparation of consolidated financial statements in conformity with accounting principles generally accepted in the
United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of net sales and expenses during the
reporting periods. Significant estimates made in preparing these financial statements include, but are not limited to, excess and obsolete inventories, tax
valuation allowance, allowance for doubtful accounts and sales returns and allowances. Actual results could differ from those estimates.

Advertising Expenses

The Company accounts for advertising costs as an expense in the period in which they are incurred. Advertising expenses
were approximately $0.5 million, $0.5 million and $1.4 million for the twelve months ended March 31, 2008, March 31, 2007 and March 31, 2006,
respectively. Advertising costs are included in selling, general and administrative expenses in the accompanying consolidated statements of operations.

Shipping Costs

Shipping costs are included in cost of sales.



The Company's policy is to record all research and development expenditures with no future alternative use, as period expenses, when incurred.
Research and development expenditures incurred and expensed were $16.5 million for the twelve months ended March 31, 2008, $20.5 million for the
twelve months ended March 31, 2007 and $21.1 million for the twelve months ended March 31, 2006.

Stock Awards



55

---

Prior to the adoption of SFAS 123R, the Company accounted for employee equity awards in accordance with APB 25 and
SFAS 123 and related interpretations, including FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation--an
Interpretation of APB 25," issued in March 2000, to account for its fixed plan options. Under this method, compensation expense is recorded on the date
of grant only if the current market price of the underlying stock exceeds the exercise price. SFAS 123, "Accounting for Stock-Based Compensation," as
amended by SFAS 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure," established accounting and disclosure requirements
using a fair-value method of accounting described below. For purposes of both financial statement and proforma disclosure, the amortization of the
stock-based compensation was allocated over the vesting period on a straight-line basis.  The Company had applied the principles of Financial Technical
Bulletin 97-1, "Accounting under Statement 123 for Certain Employee Stock Purchase Plans with a Look-Back Option." Under this technical
bulletin, the fair value method of accounting was used to account for shares issued to employees under the Company's employee stock purchase plan.

The following table illustrates the effect on net loss and net loss per common share as if we had applied the fair value recognition provisions of SFAS
123R to stock-based compensation during the twelve months ended March 31, 2006, (in thousands, except per share data):

Stock OptionsTwelve Months EndedMar. 31,2006Net loss, as reported

$
(16,887)Add: stock-based employee compensation expenseincluded in reported net loss


716Deduct: total stock-based employee compensationexpense determined under fair-value-based methodfor all awards


(1,996)Net loss, pro forma

$
(18,167)Net loss Per ShareBasic and diluted - as reported

$
(1.03)Basic and diluted - pro forma

$
(1.11)Number of shares used in computing net loss per shareBasic and diluted - as reported


16,388Basic and diluted - pro forma


16,388For the twelve months ended March 31, 2006, stock based compensation expense was $0.3 million and would have been $0.7 million if we had
applied SFAS123R. As a result of adopting SFAS 123R, the Company's net loss before income taxes and net loss for the twelve months ended March 31,
2006 would be $1.0 million greater than if it had continued to account for share-based compensation under APB 25 and SFAS 123. Basic and diluted net
loss per share for the twelve months ended March 31, 2006 would be $0.06 greater, than if the Company had continued to account for share-based
compensation under APB 25 and SFAS 123.

The fair value of options granted was estimated at the date of grant using the Black-Scholes option pricing model. The following weighted-average
assumptions were used:

Stock Options

Twelve Months EndedMar. 31,


Mar. 31,


Mar. 31,2008


2007


2006Annual average risk-free interest rate


3.8%


4.7%


4.9%Estimated life in years


5


5


5Dividend yield


0.0%


0.0%


0.0%Volatility


45.3%


45.9%


54.2%56The weighted-average exercise price of options granted and the weighted-average fair value of employee stock purchases are as follows:

Twelve Months EndedMar. 31,


Mar. 31,


Mar. 31,2008


2007


2006Weighted-average exercise price of options grantedduring the period

$
3.49

$
4.07

$
2.80Weighted-average fair value of employee stockpurchases under employee stock purchase planduring the period

$
3.18

$
2.66

$
3.05The fair value of shares purchased under the 2004 Employee Stock Purchase Plan was estimated at the date of each
offering period using the Black-Scholes pricing model. The following assumptions were used:

Employee Stock Purchase PlanTwelve Months EndedMar. 31,


Mar. 31,


Mar. 31,2008


2007


2006Risk-free interest rate


3.5%


4.8%


3.9%Estimated life in years


0.8


0.6


0.5Dividend yield


0.0%


0.0%


0.0%Volatility


38.6%


50.6%


54.2%Recent Accounting Pronouncements

In September 2006, the FASB issued Statement No. 157, "Fair Value Measurements" ("SFAS 157").
SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands
disclosures about fair value measurements.  SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years.

In February 2007, the Financial Accounting Standards Board ("FASB") issued FASB Statement No. 159, "The Fair Value Option for Financial Assets
and Financial Liabilities" ("SFAS 159"), which permits entities to choose to measure many financial instruments and certain other items at fair value. The
objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related
assets and liabilities differently without having to apply complex hedge accounting provisions. The fair value option established by this SFAS 159 permits
all entities to choose to measure eligible items at fair value at specified election dates. A business entity shall report unrealized gains and losses on items
for which the fair value option has been elected in earnings (or another performance indicator if the business entity does not report earnings) at each
subsequent reporting date.  SFAS 159 is effective as of the beginning of each reporting entity's first fiscal year that begins after November 15, 2007.  The
Company is currently evaluating the impact of adopting SFAS 159 and expects there will be no material impact of this adoption on the Company's
financial statements.

NOTE 2. GOODWILL AND INTANGIBLE ASSETS

The Company has adopted the provisions of SFAS 142, under which goodwill and intangible assets with indefinite lives are
not amortized, but are reviewed annually or more frequently if impairment indicators arise. In connection with its reorganization in 2002, the Company
recorded a valuation allowance against deferred tax assets and recorded deferred income tax liabilities and income tax contingencies in accordance with
Statement of Financial Accounting Standards No. 5, "Accounting for Contingencies." These tax contingencies were primarily attributable to the
Company's reorganization of MOD III. During the periods presented, the Company reassessed and updated its deferred income tax liabilities and income
tax contingencies requirements and reduced the associated liabilities as an adjustment to goodwill as presented in the table below. In addition, reductions
in the valuation allowance that were established as liabilities on the consolidated balance

57

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sheets under fresh-start reporting in 2002 have been recorded
as a reduction in the carrying value of goodwill as shown in the table as follows (in thousands):

|                                 |  |   | Goodwill
|-------------------------------- |  | - | --------
|                                 |  |   |         
|Balance at March 31, 2006        |  | $ | 6,740   
|Goodwill adjustments during 2007 |  |   | (4,529) 
|Balance at March 31, 2007        |  |   | 2,211   
|Goodwill adjustments during 2008 |  |   | -       
|Balance at March 31, 2008        |  | $ | 2,211   

Intangible assets established in connection with the Company's fresh-start reporting, separable intangible assets that are
deemed to have defined lives (primarily related to existing technology and brand name), are being amortized utilizing the pattern-of-use method over
estimated useful lives ranging from 3 to 10 years. Changes in the carrying value of separable intangible assets for the periods indicated are as follows (in
thousands):

|                                |  |   | Existing   |  |   | Brand |  |   | Total      
|------------------------------- |  | - | ---------- |  | - | ----- |  | - | -----------
|                                |  |   | Technology |  |   | Name  |  |   | Intangibles
|Balance at March 31, 2006       |  | $ | 523        |  | $ | 4,250 |  | $ | 4,773      
|Amortization during fiscal 2007 |  |   | (351)      |  |   | (933) |  |   | (1,284)    
|Balance at March 31, 2007       |  |   | 172        |  |   | 3,317 |  |   | 3,489      
|Amortization during fiscal 2008 |  |   | (124)      |  |   | (836) |  |   | (960)      
|Balance at March 31, 2008       |  | $ | 48         |  | $ | 2,481 |  | $ | 2,529      

The anticipated amortization schedule for the remaining years of these separable intangible assets is as follows (in thousands):

|            |  |   | Existing   |  |   | Brand |  |   | Total       
|----------- |  | - | ---------- |  | - | ----- |  | - | ------------
|Fiscal Year |  |   | Technology |  |   | Name  |  |   | Amortization
|2009        |  | $ | 48         |  | $ | 753   |  | $ | 801         
|2010        |  |   | -          |  |   | 680   |  |   | 680         
|2011        |  |   | -          |  |   | 617   |  |   | 617         
|2012        |  |   | -          |  |   | 430   |  |   | 430         
|            |  | $ | 48         |  | $ | 2,480 |  | $ | 2,528       

NOTE 3.  MOD III LAND, BUILDING, AND EQUIPMENT AND MOD II EQUIPMENT

We adopted FASB Interpretation No. 46R, "Consolidation of Variable Interest Entities" ("FIN 46R")
on January 1, 2004, which resulted in the de-consolidation of our subsidiary, ZiLOG MOD III, Inc. ("MOD III").  Subsequently, a significant
portion of the assets were sold and management received authorization from the shareholders of MOD III to sell the remaining assets without further
shareholder approval, and consequently, the final results of MOD III were included in our financial results.

In April 2004, the Company announced the closure of its MOD II 5-inch wafer manufacturing facility in Nampa, Idaho. In association with this decision,
the Company recorded net special charges of $6.9 million reflecting the impairment of long-lived assets and costs to cease operations, and $1.8 million
for employee severance costs. MOD II production ceased on July 9, 2004, whereby the majority of the products previously manufactured in MOD II were
transferred to X-FAB in Lubbock, Texas. The Company is now operating under our stated strategy as a fabless semiconductor company.

In July 2004, MOD III sold its production equipment to STMicroelectronics, Inc. At the completion of the sale in September
2004, ZiLOG, Inc. received approximately $4.9 million for reimbursement of sustaining costs incurred, which was recorded as an offset to special charges
and credits.

In September 2004, the Company sold all of its wafer manufacturing equipment and certain other manufacturing support-related assets of our MOD II
facility in Nampa, Idaho to STMicroelectronics, Inc. for an aggregate cash

58

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consideration of $5.9 million, net of selling costs and expenses. The Company
recorded a net gain of $1.7 million in connection with the sale. The remaining assets of MOD II primarily consist of land and buildings, which were
classified as assets held for sale on the Company's consolidated balance sheets. In May 2007, the Company sold the MOD II facility for a net sales price
of $3.1 million.

In February 2006, MOD III completed the sale of its remaining assets to Micron Technology, Inc. for a total consideration, net of closing costs, of $4.6
million. These assets included the dormant 8-inch wafer fabrication facility and associated land owned by MOD III and vacant property owned by ZiLOG,
Inc.  MOD III shareholders voted to liquidate the special purpose entity and distribute the remaining net proceeds to its Series A Preferred shareholders at
the conclusion of that process. The distribution of the net proceeds included $1.1 million to ZiLOG, Inc. for the vacant property and $0.7 million to ZiLOG,
Inc. for reimbursement of sustaining and maintenance costs, respectively.  The remaining $2.8 million was distributed in October 2006 to holders of MOD
III Series A Preferred stock upon the liquidation of MOD III.

NOTE 4. SPECIAL CHARGES AND CREDITS

Fiscal 2008 Special Charges and Credits Analysis

As part of the Company's ongoing efforts to reduce costs and streamline activities, in November 2007, the Company initiated a plan to
outsource its test operations currently performed in its Philippines facility to third parties. The Company also reorganized certain of its sales offices and
relocated its corporate headquarters to a new facility in San Jose, California. During fiscal 2008, the Company incurred $1.3 million of severance, benefits
related costs, transition, conversion and equipment costs related to its test outsourcing activity and other reorganization costs including the relocation to
its new corporate headquarters facility, $0.9 million for severance, benefits and other costs related to its research and development site consolidation
activities, $0.3 million of period expenses were incurred to sustain the dormant MOD II facility until it was sold in May 2007 for a net sales price of $3.1
million, partially offset by $0.5 million credit primarily representing a refund received from its Philippines defined benefit plan.

Fiscal 2007 Special Charges and Credits Analysis

As part of the Company's ongoing efforts to reduce costs and streamline activities, in March 2007, a plan of action was initiated to consolidate certain
research and development activities and transfer certain of these activities from its Shanghai, China and Seattle, Washington facilities to its San Jose,
California and Meridian, Idaho facilities. During fiscal 2007, the Company incurred $1.0 million of severance and benefits costs related to this restructuring
activity, which

Fiscal 2006 Special Charges and Credits Analysis

In April 2005, the Company initiated a plan of action to consolidate certain of its support activities and transfer certain of these activities to its
Philippines operations. These activities have resulted in lower overall support costs.  Total severance and benefits costs of $1.7 million related to a
reduction-in-force and support activity consolidation were recorded as special charges during fiscal 2006; the remaining amount was recorded over the
terminated employees' required service periods, which was ultimately completed during the quarter ended June 30, 2006. During fiscal 2006, the
Company incurred $2.4 million of special charges, including the net reimbursement of $0.8 million of MOD III sustaining and maintenance costs and
period expenses of $0.7 million to sustain the dormant MOD II facility until it was sold.

59

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The following table details the beginning balance as of March 31, 2006 and the accrued special charges for the periods
indicated (in thousands):

|                              |  |   | Severance   |  |  |   |         |  |   |        
|----------------------------- |  | - | ----------- |  |  | - | ------- |  | - | -------
|                              |  |   | and         |  |  |   | MOD II  |  |   |        
|                              |  |   | Termination |  |  |   | Closure |  |   |        
|                              |  |   | Benefits    |  |  |   | Costs   |  |   | Total  
|Balance at March 31, 2006     |  | $ | 35          |  |  | $ | 85      |  | $ | 120    
|Provisions to special charges |  |   | 1,867       |  |  |   | 612     |  |   | 2,479  
|Cash payments                 |  |   | (687)       |  |  |   | (697)   |  |   | (1,384)
|Balance at March 31, 2007     |  |   | 1,215       |  |  |   | -       |  |   | 1,215  
|Provisions to special charges |  |   | 1,726       |  |  |   | 248     |  |   | 1,974  
|Cash payments                 |  |   | (2,452)     |  |  |   | (248)   |  |   | (2,700)
|Balance at March 31, 2008     |  | $ | 489         |  |  | $ | -       |  | $ | 489    

Special charges and credits in fiscal 2008, fiscal 2007 and fiscal 2006 were as follows (in thousands):

|                                                         |   | Twelve Months Ended
|-------------------------------------------------------- | - | -------------------
|                                                         |   | Mar. 31,           
|                                                         |   | 2008               
|Asset impairments:                                       |   |                    
|MOD II asset impairment (a)                              | $ | -                  
|                                                         |   |                    
|Restructuring of operations:                             |   |                    
|Reorganization and test operations outsourcing           |   | 1,331              
|Engineering consolidation severance, benefits and other  |   | 921                
|Defined benefit plan refund and other                    |   | (526)              
|MOD II sustaining and other selling costs                |   | 248                
|Other employee severance and termination benefits        |   | -                  
|MOD III sustaining costs for post-closure maintenance    |   | -                  
|MOD III reimbursement of maintenance costs (a)           |   | -                  
|Professional fees (reimbursement) for debt restructuring |   | -                  
|Total special charges and credits                        | $ | 1,974              

a) Asset impairment items and reimbursements were not included in the provisions to special charges in the first table

NOTE 5. RETIREMENT AND PENSION PLANS

The Company has an employee savings plan that qualifies as a deferred salary arrangement under Section 401(k) of the
Internal Revenue Code (the "401(k) Plan"). Under the 401(k) Plan, participating U.S. employees may defer a portion of their pretax earnings,
up to the Internal Revenue Service annual contribution limit. The Company may make matching contributions on behalf of each participating employee in
an amount equal to 100% of the participant's deferral contribution, up to 1.5% of the participant's compensation on a quarterly basis. The Company may
also make additional discretionary contributions to the 401(k) Plan. Matching contributions to the 401(k) Plan were $0.2 million for the twelve months
ended March 31, 2008, $0.1 million for the twelve months ended March 31, 2007 and approximately $0.2 million for the twelve months ended March 31,
2006. There were no discretionary contributions made in the twelve months ended March 31, 2008, twelve months ended March 31, 2007 and the twelve
months ended March 31, 2006, respectively.

The Company's Philippines subsidiary maintains a defined benefit pension plan for local employees, which is consistent with local statutes and
practices. As of March 31, 2008, the pension plan was over-funded by approximately $0.1 million which is classified as other assets on the consolidated
balance sheet.  The over-funded position generally reflects a decline in the number of employees who are eligible for entitlements under the plan, coupled
with increased returns on the plan assets that are greater than the increase in the employees' entitlement liabilities.  In April 2007, the Company
requested, and was granted, certain contribution refunds and in May 2007, the Company received $0.7 million. The cash refund was recorded as a credit
in the consolidated statements of operations in the quarter ending June 30, 2007.

60

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During fiscal 2008, $0.1 million is included as a reclassification adjustment of other comprehensive income as a result of being recognized as a
component of net periodic benefit costs for fiscal 2008. The amount recognized in other comprehensive income includes $0.7 million of net actuarial loss
and no prior service costs or credits.  During fiscal 2008, the net transition obligation recognized as a reclassification adjustment of other comprehensive
income as a result of being recognized as a component of net periodic benefit costs is approximately $3,000.  During fiscal 2009, the Company expects to
receive approximately $0.7 million of plan assets as entitlement benefits for terminated employees related to the Company's restructuring and outsourcing
activities in its Philippines operations.

The Company adopted SFAS 158, which supersedes the previous accounting under SFAS 87 and its associated literature, for the fiscal year ended
March 31, 2008.

NOTE 6. STOCK-BASED COMPENSATION AND STOCKHOLDERS' EQUITY

Common Stock

The following description summarizes information regarding the Company's capital stock after confirmation of the plan of
reorganization. This information is subject in all respects to applicable provisions of ZiLOG's amended and restated certificate of incorporation and its
amended and restated bylaws.

General

The Company's authorized capital stock consists of 60,000,000 shares of common stock, par value $0.01 per share. The
holders of outstanding shares of common stock are entitled to receive dividends or distributions as may be lawfully declared by the Board of Directors. In
the event that the corporation is dissolved, the holders of common stock would be entitled to share ratably in all assets that may be available for
distribution after the satisfaction of all liabilities. The common stock has no preemptive or conversion rights and is not subject to redemption. All
outstanding shares of common stock are fully paid and non-assessable.

Voting

The holders of common stock are entitled to one vote per share on all matters submitted to a vote of stockholders. The
holders of a majority of the outstanding shares of common stock must approve all matters brought before the stockholders, except as otherwise required
by the Delaware General Corporation Law and except as otherwise set forth below.

Employee Stock Purchase Plan

The 2004 Employee Stock Purchase Plan ("2004 ESPP") was adopted by the Compensation Committee of the
Company's Board of Directors on December 17, 2003 and was approved by the Company's stockholders on February 12, 2004. The 2004 ESPP became
effective on May 15, 2004. A total of 1,250,000 shares of common stock have been reserved for issuance under the 2004 ESPP to eligible employees.
These shares will be either authorized as un-issued shares, or shares that have been reacquired by the Company. The 2004 ESPP is implemented by 12-
month offering periods, each of which is composed of four 3-month purchase periods. Four overlapping offering periods generally commence during each
fiscal year, with an offering period commencing on the first day of each fiscal quarter. Four purchase periods also commence during each fiscal year, with
a purchase period commencing on the first day of each fiscal quarter. An eligible employee is granted an option at the start of the offering period to
purchase shares of the Company's common stock with payroll deductions ranging from 1% to 15% of their eligible compensation during the offering
period. The payroll deductions are accumulated and, at the end of each purchase period, applied to purchase shares of common stock, unless the
employee withdraws from the 2004 ESPP prior to such date. The purchase price is the lower of 85% of the fair market value of the common stock either
on the first business day of the applicable offering period or the last business day of the purchase period within such offering period.

At March 31, 2008, a total of

Stock Repurchase Programs

The Company's Board of Directors approved the 2003 stock repurchase program on April 17, 2003, under which the
Company may repurchase up to 500,000 shares of its outstanding common stock. As of March 31, 2008, the Company had repurchased 405,164 shares
of its common stock under this program from employees, former employees and others, pursuant to repurchase rights, at an aggregate cost of $2.1
million.

61

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The Company's Board of Directors approved the 2004 stock repurchase program on July 29, 2004, pursuant to which the
Company may repurchase up to $5.0 million in market value of its outstanding shares of common stock. As of March 31, 2008, the Company had
repurchased 572,100 shares under this program at an aggregate cost of $4.4 million.Other stock repurchases were approved by the Board of Directors and include the repurchase of  92,735 shares of
common stock from a former officer in 2004 at a fair market purchase price of $6.20 per share in consideration for the repayment of loans payable to the
Company  totaling $0.6 million, the repurchase of 17,389 shares from former employees during fiscal 2006, as consideration for the repayment of loans
payable to the Company  totaling less than $0.1 million and the repurchase of 73,151 shares during fiscal 2007 from the Company's Chief Financial
Officer, Perry J. Grace, as consideration for the repayment of loans payable to the Company totaling less than $0.3 million.As of March 31, 2008, stock repurchases for the 2003 and 2004 stock repurchase programs and other stock repurchases
totaled 1,160,539 shares with a net aggregate cost of $7.5 million, which are comprised of the following:

Treasury Shares OutstandingMar. 31,


Mar. 31,


Mar. 31,2008


2007


20062003 Repurchase Program


405,164


405,164


405,1642004 Repurchase Program


572,100


572,100


572,100Other Repurchases


183,275


110,124


110,124Ending Balance


1,160,539


1,087,388


1,087,388Net aggregate cost


$       7,456


$      7,174


$       7,1742004 Omnibus Stock Incentive PlanThe 2004 Omnibus Stock Incentive Plan (the "2004 Plan") was adopted by the Compensation Committee of the
Company's Board of Directors on December 17, 2003 and was approved by the Company's stockholders on February 12, 2004. The 2004 Plan became
effective on March 10, 2004. The 2004 Plan was amended and approved by the Company's stockholders on September 6, 2007. Under the 2004 Plan,
the committee may grant incentive stock options ("ISO"), non-statutory stock options ("NSO") or restricted shares to certain
employees, officers, directors, advisors and consultants of the Company who may purchase up to 3,000,000 shares of the Company's common stock, par
value $0.01 per share.In general, the options and shares granted pursuant to the 2004 Plan are exercisable at such time or times, and subject to
such terms and conditions (including the vesting schedule, period of exercisability and expiration date) as the Compensation Committee determines, in
the applicable option agreement. The exercise price per share, payable upon the exercise of an option, is established by the committee at the time of the
grant and is not less than the par value per share of common stock on the date of the grant and in the case of an ISO generally is not less than 100% of
the fair market value per share on the date of grant.In general, restricted stock awards granted pursuant to the 2004 Plan are subject to the restricted stock award agreement
that reflects the terms, conditions and restrictions related to the restricted stock award. The agreement includes, among other things, the period during
which the restricted stock is subject to forfeiture, the imposition of any performance-based conditions or other restrictions on the award, if any.2002 Omnibus Stock Incentive PlanCommon StockThe 2002 Omnibus Stock Incentive Plan (the "Omnibus Plan") was adopted by the Board of Directors in May
2002. Subject to adjustment pursuant to the terms of the Omnibus Plan, the Compensation Committee of the Board of Directors may grant options to
purchase up to an aggregate of 1,058,140 shares of the Company's common stock. Stock options granted under the Omnibus Plan were permitted to be:
(1) incentive stock options or non-qualified stock options, or (2) EBITDA-linked options and/or non-EBITDA linked options. The term of a
non-EBITDA-linked option is determined by the Compensation Committee at the time of grant, but will not exceed ten years.Each EBITDA-linked option will be immediately exercisable on the date of grant and cliff-vest on the sixth anniversary from
the date of grant. Vesting can be accelerated for EBITDA-linked options based on the "adjusted EBITDA," as defined, reported for the
immediately preceding 12-month period as follows: (1) one-third if the Company reports adjusted EBITDA for the previous 12 months in excess of $17.2
million, (2) two-thirds if the Company reports adjusted EBITDA for
the previous 12 months in excess of $25.7 million, and (3) 100% if the Company
reports adjusted EBITDA for the previous 12 months in excess of $30.0 million.

62In accordance with Securities and Exchange Commission guidelines, EBITDA figures presented in this Form 10-K
represent a non-GAAP measure of liquidity. EBITDA reflects net income (loss) adjusted for non-cash items, interest and income taxes. Management uses
a separate "adjusted EBITDA" calculation for purposes of determining certain employees' incentive compensation and, subject to meeting
specified adjusted EBITDA amounts, for accelerating the vesting of EBITDA-linked options. This measure of adjusted EBITDA was approved as part of
the plan of reorganization. Adjusted EBITDA excludes interest, income taxes, effects of changes in accounting principles and equity adjustments and
non-cash charges such as depreciation, amortization, in-process research and development, and stock-based compensation expense. It also excludes cash
and non-cash charges associated with special charges and credits, which represent operational restructuring charges, including asset write-offs,
employee termination costs, and lease termination costs. The differences between EBITDA and ZiLOG's adjusted EBITDA relate to the following
cash-settled reorganization and special items that are added-back in adjusted EBITDA computations:

Employee retention bonuses, severance pay and termination benefits;









At March 31, 2008, 123,309 shares of common stock out of a total of 181,753 EBITDA-linked options outstanding (granted,
net of cancellations and exercises) were vested. EBITDA-linked options vested as of May 15, 2008, even though the adjusted EBITDA thresholds have
not been satisfied. The per share exercise price of shares purchasable under an EBITDA-linked option is $5.52 and each such option will be exercisable
for ten years after the date such option is granted, unless earlier terminated. In general, non-EBITDA-linked options granted pursuant to the Omnibus
Plan will be exercisable at such time or times and subject to such terms and conditions (including the vesting schedule, period of exercisability and
expiration date) as the Compensation Committee determines, in the applicable award agreements or thereafter. The exercise price per share payable
upon the exercise of an option will be established by the committee, in its sole discretion, at the time of grant.

Restricted Stock

The Company is permitted to grant up to 1,220,930 restricted shares of common stock under the Omnibus Plan. The
restricted shares granted vest in accordance with the terms stipulated for each individual grant as approved by the Compensation Committee of the
Company's Board of Directors at the time of grant.

The Omnibus Plan was amended by the Company's Board of Directors on October 18, 2002, subsequent to the passing of
the Sarbanes-Oxley Act of 2002, and no longer allows the Compensation Committee to make loans available to participants with respect to certain
restricted stock awards for the payment of any federal or state income tax attributable to the restricted stock award.

When a holder of restricted shares exercises their right of ownership before the restricted share is vested, the holder will
receive shares of restricted stock equal to the number of shares exercised. If the holder terminates employment or service before the restrictions on the
restricted stock have lapsed, then the Company has the right to repurchase these shares.

There were no outstanding loans to officers of the Company at March 31, 2008. At March 31, 2007 aggregate employee
loans outstanding were $0.3 million and this amount is classified as other assets in the accompanying consolidated balance sheets.

Stock-based Compensation

For the twelve months ended March 31, 2008, March 31, 2007 and March 31, 2006, respectively, the Company recorded
$0.8 million, $1.4 million and $0.7 million, respectively, of stock-based compensation expense. This included stock-based compensation expense
associated with the awards of restricted stock during May 2002 to certain employees, executives and consultants at purchase prices below their deemed
fair market value at the date of grant. The restrictions on the shares of restricted stock lapsed 25% on the award date, which was May 15, 2002, and 25%
on each of the first three anniversaries following the award date. Compensation expense for employee stock awards was measured on the award date
and was recognized over three years as these restrictions have since lapsed. Compensation expense for stock awards to consultants was re-measured at
each balance sheet date until the awards were fully vested and the expense recognized over the vesting periods.

63

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Stock Plan Activity

A summary of the Company's stock plan activity for the periods indicated is as follows:

|                              |  |  |           |  |  |             |  |  |                |  |  | Weighted-         |  |  |                
|----------------------------- |  |  | --------- |  |  | ----------- |  |  | -------------- |  |  | ----------------- |  |  | ---------------
|                              |  |  |           |  |  |             |  |  | Weighted-      |  |  | Average           |  |  |                
|                              |  |  | Shares    |  |  |             |  |  | Average        |  |  | Remaining         |  |  | ($000's)       
|                              |  |  | Available |  |  | Options     |  |  | Exercise Price |  |  | Contractural Term |  |  | Aggregate      
|                              |  |  | for Grant |  |  | Outstanding |  |  | (per share)    |  |  | (in years)        |  |  | Intrinsic Value
|Balance as of March 27, 2005  |  |  | 1,031,867 |  |  | 2,142,610   |  |  | $  7.57        |  |  | 8.62              |  |  | $451           
|Restricted shares granted     |  |  | (267,176) |  |  | -           |  |  | 0.01           |  |  |                   |  |  |                
|Options granted               |  |  | (401,615) |  |  | 401,615     |  |  | 2.80           |  |  |                   |  |  |                
|Options cancelled             |  |  | 740,916   |  |  | (740,916)   |  |  | 7.71           |  |  |                   |  |  |                
|Restricted shares repurchased |  |  | 17,389    |  |  | -           |  |  | 4.60           |  |  |                   |  |  |                
|Balance as of March 31, 2006  |  |  | 1,121,381 |  |  | 1,803,309   |  |  | 6.45           |  |  | 8.02              |  |  | $ 247          
|Restricted shares granted     |  |  | (116,386) |  |  | -           |  |  | 0.01           |  |  |                   |  |  |                
|Options granted               |  |  | (777,050) |  |  | 777,050     |  |  | 4.07           |  |  |                   |  |  |                
|Options exercised             |  |  | -         |  |  | (122,067)   |  |  | 2.04           |  |  |                   |  |  |                
|Options cancelled             |  |  | 672,235   |  |  | (672,235)   |  |  | 6.88           |  |  |                   |  |  |                
|Restricted shares cancelled   |  |  | 75,500    |  |  | -           |  |  | 0.01           |  |  |                   |  |  |                
|Balance as of March 31, 2007  |  |  | 975,680   |  |  | 1,786,057   |  |  | 5.55           |  |  | 7.99              |  |  | $ 782          
|Approved shares added to plan |  |  | 1,500,000 |  |  | -           |  |  | -              |  |  |                   |  |  |                
|Restricted shares granted     |  |  | (27,114)  |  |  | -           |  |  | -              |  |  |                   |  |  |                
|Options granted               |  |  | (761,923) |  |  | 761,923     |  |  | 3.49           |  |  |                   |  |  |                
|Options exercised             |  |  | -         |  |  | (100,670)   |  |  | 3.08           |  |  |                   |  |  |                
|Options cancelled             |  |  | 364,574   |  |  | (364,574)   |  |  | 5.73           |  |  |                   |  |  |                
|Restricted shares cancelled   |  |  | 24,350    |  |  | -           |  |  | -              |  |  |                   |  |  |                
|Restricted shares repurchased |  |  | 73,151    |  |  | -           |  |  | -              |  |  |                   |  |  |                
|Balance as of March 31, 2008  |  |  | 2,148,718 |  |  | 2,082,736   |  |  | $ 4.89         |  |  | 7.98              |  |  | $ 323          

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (i.e., the difference between the Company's closing stock
price on the last trading day of its fiscal year ended March 31, 2008 and the exercise price, times the number of shares) that would have been received
from the option holders had all option holders exercised their options on March 31, 2008. This amount is expected to change as the fair market value of
the Company's stock fluctuates. There were 100,670 options exercised during the twelve months ended March 31, 2008 with a total intrinsic value of $0.3
million. Total intrinsic value of options vested and expected to vest is approximately $0.3 million as of March 31, 2008.

The following table summarizes information about stock options outstanding as of March 31, 2008:

|                         |  | Options Outstanding |  | Options Exercisable
|------------------------ |  | ------------------- |  | -------------------
|                         |  |                     |  | Weighted-          
|                         |  |                     |  | Average            
|                         |  | Number              |  | Remaining          
|                         |  | Shares              |  | Contractual        
|Range of Exercise Prices |  | Outstanding         |  | Life (in years)    
|$2.16-$2.85              |  | 215,438             |  | 8.18               
|$3.16-$3.16              |  | 433,283             |  | 9.69               
|$3.22-$3.85              |  | 226,702             |  | 9.05               
|$3.91-$4.29              |  | 154,114             |  | 7.76               
|$4.31-$4.31              |  | 400,000             |  | 8.83               
|$4.41-$5.43              |  | 87,813              |  | 8.35               
|$5.52-$5.52              |  | 301,796             |  | 5.27               
|$6.20-$12.44             |  | 252,640             |  | 5.85               
|$13.58-$13.58            |  | 9,200               |  | 5.85               
|$14.30-$14.30            |  | 1,750               |  | 5.81               
|$2.16-$14.30             |  | 2,082,736           |  | 7.98               

Options that were exercisable as of March 31, 2008, 2007 and 2006 were 724,393, 625,922 and 874,230, respectively.

64

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Stock-Based Compensation

The Company has a stock-based compensation program that includes non-statutory stock option awards and restricted stock awards
("RSAs").  Stock options are generally time-based, vesting 25% on the first anniversary of the grant-date and monthly thereafter over four
years and expire ten years from the grant-date.



The following table sets forth the total stock-based compensation expense resulting from stock options, restricted stock awards and ESPP included in
the respective expense categories of the Company's consolidated statements of operations (in thousands):

|                                    |  |   | Twelve Months Ended
|----------------------------------- |  | - | -------------------
|                                    |  |   | Mar. 31,           
|Expense Category                    |  |   | 2008               
|                                    |  |   |                    
|Cost of sales                       |  | $ | 126                
|Research and development            |  |   | 264                
|Selling, general and administrative |  |   | 413                
|                                    |  | $ | 803                

No income tax benefit was realized from stock option exercises during the twelve months ended March 31, 2008, 2007 and 2006. In accordance with
SFAS 123R, the Company presents excess tax benefits from the exercise of stock options, if any, as financing cash flows rather than operating cash
flows.

The weighted-average exercise price of options granted for the twelve months ended March 31, 2008, 2007 and 2006, were $3.49, $4.07
and

The fair value of stock-based awards was estimated on the date of grant using the Black-Scholes valuation pricing model based on the following
weighted-average assumptions:

|                                       |  |  | Twelve Months Ended
|-------------------------------------- |  |  | -------------------
|                                       |  |  | Mar. 31,           
|                                       |  |  | 2008               
|Annual average risk-free interest rate |  |  | 3.8%               
|Estimated life in years                |  |  | 5                  
|Dividend yield                         |  |  | 0.0%               
|Volatility                             |  |  | 45.3%              

The weighted-average exercise price of options granted and the weighted-average fair value of employee stock purchases are as follows:

|                                                   |  |   | Twelve Months Ended
|-------------------------------------------------- |  | - | -------------------
|                                                   |  |   | Mar. 31,           
|                                                   |  |   | 2008               
|Weighted-average exercise price of options granted |  |   |                    
|during the period                                  |  | $ | 3.49               
|Weighted-average fair value of employee stock      |  |   |                    
|purchases under employee stock purchase plan       |  |   |                    
|during the period                                  |  | $ | 3.18               

65

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The fair value of employee stock purchases was estimated using the Black-Scholes valuation pricing model based on the following weighted-average
assumptions:

|Employee Stock Purchase Plan |  |  |                     |  |  |          |  |  |         
|---------------------------- |  |  | ------------------- |  |  | -------- |  |  | --------
|                             |  |  | Twelve Months Ended
|                             |  |  | Mar. 31,            |  |  | Mar. 31, |  |  | Mar. 31,
|                             |  |  | 2008                |  |  | 2007     |  |  | 2006    
|Risk-free interest rate      |  |  | 3.5%                |  |  | 4.8%     |  |  | 3.9%    
|Estimated life in years      |  |  | 0.8                 |  |  | 0.6      |  |  | 0.5     
|Dividend yield               |  |  | 0.0%                |  |  | 0.0%     |  |  | 0.0%    
|Volatility                   |  |  | 38.6%               |  |  | 50.6%    |  |  | 54.2%   

The computation of expected volatility for the twelve months ended March 31, 2008 is based on a blended calculation of historical and market-based
implied volatility. The computation of expected life is based on a combination of historical and expected exercise patterns. The interest rate for
periods within the contractual life of the award is based on the U.S. Treasury yield curve in effect at the time of grant.

As of March 31, 2008, $1.8 million of total unrecognized compensation costs related to stock options are expected to be recognized over a weighted-
average remaining period of 2.8 years.  The total unrecognized compensation costs related to RSAs as of March 31, 2008 of $0.2 million are expected to
be recognized over a weighted-average remaining period of 1.0 years.

NOTE 7. MINORITY INTEREST

Effective January 1, 2004, the Company adopted the provisions of FIN 46R. Under the provisions of FIN 46R, the Company's
investment in ZiLOG MOD III, Inc. ("MOD III"), a special purpose subsidiary created largely for the economic benefit of the Company's former
bondholders, was determined to be a variable interest entity; however, the Company was not determined to be the primary beneficiary. Accordingly, as
prescribed by FIN 46R, the Company's adoption of this pronouncement:

- Was recorded as a cumulative effect of a change in accounting principle and not as a restatement to any previous
period consolidated financial statements;
- Effected elimination of both the $30.0 million of MOD III assets held for sale and the corresponding $30.0 million
minority interest in MOD III on the consolidated balance sheets; and
- Resulted in no impact to the results of operations.

Subsequent to the adoption of FIN 46R, which resulted in the de-consolidation of MOD III, ZiLOG, Inc. management
received authorization from the shareholders MOD III to sell the remaining assets without further shareholder approval, and consequently, the final results
of MOD III were included in the Company's consolidated financial results.

Substantially all of the equipment of MOD III was sold on July 16, 2004. The remaining assets of MOD III consisted primarily of land and a building.
Under the terms of the MOD III Series A Preferred stock liquidation preference, approximately $4.9 million of historical costs incurred by the Company on
behalf of MOD III to maintain its assets in saleable condition was reimbursed to the Company from the net proceeds received from the sale of MOD III's
equipment. Such reimbursement is included in special charges and credits in the Company's consolidated statements of operations for the twelve months
ended December 31, 2004.

On February 16, 2006, MOD III completed the sale of its remaining assets to Micron Technology, Inc. for a total consideration of $3.8 million. These
assets included the dormant 8" wafer fabrication facility and associated land owned by MOD III.  The cost of the transaction was $0.4 million and
has been apportioned on a prorated basis to the related assets sold.

This transaction represented the sale of the remaining assets of MOD III and, as such, the shareholders voted to liquidate the special purpose entity
and distribute the remaining net proceeds to its Series A Preferred shareholders at the conclusion of that process. The remaining net proceeds of $2.8
million were distributed to holders of MOD III Series A Preferred stock upon the liquidation of the subsidiary in October 2006.  The distribution to the MOD
III shareholders was net of reimbursement to ZiLOG, Inc. for costs incurred to maintain the facility.

66

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NOTE 8. SHORT TERM DEBT

During the fiscal year ended March 31, 2008, the Company entered into a short term financing agreement totaling $1.4 million. Borrowings on the
agreement bear interest at a rate per annum equal, at the Company's option, to the Lender's stated prime rate or LIBOR, plus 1.75%. As of March 31,
2008, the Company had $0.7 million of borrowings outstanding under this agreement and $0.3 million of standby letters of credit, respectively, issued to
vendors.  The Company had no borrowings or letters of credit outstanding as of March 31, 2007 and 2006.

NOTE 9.  NET LOSS PER SHARE

The following table presents the calculation of basic and diluted
net loss per share of common stock for the periods indicated (in thousands, except per share data):

|                                                    |  |   | Twelve Months Ended
|--------------------------------------------------- |  | - | -------------------
|                                                    |  |   | Mar. 31,           
|                                                    |  |   | 2008               
|Net loss, as reported                               |  | $ | (9,291)            
|                                                    |  |   |                    
|Weighted-average shares outstanding                 |  |   | 16,893             
|Less: Weighted-average shares subject to repurchase |  |   | -                  
|Weighted-average shares used in computing basic     |  |   |                    
|and diluted net loss per share                      |  |   | 16,893             
|                                                    |  |   |                    
|Basic and diluted net loss per share                |  | $ | (0.55)             

At March 31, 2008, March 31, 2007 and March 31, 2006, options to purchase $2.1 million, 1.8 million and 1.8
million shares of common stock, respectively, are excluded from the determination of diluted net loss per
share, as the effect of such shares is anti-dilutive.

NOTE 10. INCOME TAXES

The components of loss before provision for income taxes are as follows (in thousands):

|                                             |  |   | Twelve Months Ended
|-------------------------------------------- |  | - | -------------------
|                                             |  |   | Mar. 31,           
|                                             |  |   | 2008               
|United States                                |  | $ | (1,152)            
|Foreign                                      |  |   | (6,840)            
|Total loss before provision for income taxes |  | $ | (7,992)            

The provision for income taxes consists of the following (in thousands):

|                                 |  |   | Twelve Months Ended
|-------------------------------- |  | - | -------------------
|                                 |  |   | Mar. 31,           
|                                 |  |   | 2008               
|Federal                          |  |   |                    
|Current                          |  | $ | 1,069              
|Deferred                         |  |   | -                  
|                                 |  |   | 1,069              
|                                 |  |   |                    
|Foreign                          |  |   |                    
|Current                          |  |   | 230                
|                                 |  |   | 230                
|                                 |  |   |                    
|Total provision for income taxes |  | $ | 1,299              

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The provision for income taxes differs from the amount computed by applying the
statutory income tax rate of 34% to income (loss) before taxes. The provision and tax effects of the differences are as follows (in thousands):

|                                           |  |   | Twelve Months Ended
|------------------------------------------ |  | - | -------------------
|                                           |  |   | Mar. 31,           
|                                           |  |   | 2008               
|Computed expected benefit                  |  | $ | (2,708)            
|Foreign taxes                              |  |   | 2,614              
|Foreign losses (benefited) not benefited   |  |   | -                  
|Deferred tax assets not benefited          |  |   | 1,278              
|Amortization of deferred income tax charge |  |   | 1,320              
|Stock-based compensation not deductible    |  |   | -                  
|Non-deductible items                       |  |   | -                  
|Other                                      |  |   | (1,205)            
|Total provision for income taxes           |  | $ | 1,299              

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets are as follows (in
thousands):

|                                                 |  |  |  |  |   | Mar. 31, |  |   | Mar. 31,
|------------------------------------------------ |  |  |  |  | - | -------- |  | - | --------
|                                                 |  |  |  |  |   | 2008     |  |   | 2007    
|Deferred tax liabilities:                        |  |  |  |  |   |          |  |   |         
|Intangible assets                                |  |  |  |  | $ | (1,791)  |  | $ | (2,235) 
|Other                                            |  |  |  |  |   | (838)    |  |   | -       
|Total deferred tax liabilities                   |  |  |  |  |   | (2,629)  |  |   | (2,235) 
|                                                 |  |  |  |  |   |          |  |   |         
|                                                 |  |  |  |  |   |          |  |   |         
|Deferred tax assets:                             |  |  |  |  |   |          |  |   |         
|Net operating loss carryforwards                 |  |  |  |  |   | 16,403   |  |   | 13,500  
|Accruals and allowances not currently deductible |  |  |  |  |   | 3,186    |  |   | 2,131   
|Deferred revenue                                 |  |  |  |  |   | 1,219    |  |   | 1,738   
|Tax credit carryforwards                         |  |  |  |  |   | 271      |  |   | 4,416   
|Property, plant and equipment                    |  |  |  |  |   | 3,018    |  |   | 4,190   
|Total deferred tax assets                        |  |  |  |  |   | 24,097   |  |   | 25,975  
|Net deferred tax assets                          |  |  |  |  |   | 21,468   |  |   | 23,740  
|Valuation allowance                              |  |  |  |  |   | (21,468) |  |   | (23,740)
|Deferred income taxes                            |  |  |  |  | $ | -        |  | $ | -       

Balance Sheet Presentation - Deferred Tax Assets & Liabilities:

|                                                   |  |  |  |  |   | Mar. 31, |  |   | Mar. 31,
|-------------------------------------------------- |  |  |  |  | - | -------- |  | - | --------
|                                                   |  |  |  |  |   | 2008     |  |   | 2007    
|Total deferred tax assets:                         |  |  |  |  | $ | 2,629    |  | $ | 2,235   
|Less: non-current portion - deferred tax asset     |  |  |  |  |   | (2,366)  |  |   | (1,826) 
|Net current deferred tax assets                    |  |  |  |  | $ | 263      |  | $ | 409     
|                                                   |  |  |  |  |   |          |  |   |         
|Total deferred tax liabilities:                    |  |  |  |  | $ | (2,629)  |  | $ | (2,235) 
|Less: non-current portion - deferred tax liability |  |  |  |  |   | 2,366    |  |   | 1,826   
|Net current deferred tax liability                 |  |  |  |  | $ | (263)    |  | $ | (409)   

68

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A valuation allowance is required to be recorded if in management's judgment, based on available evidence, it is more
likely than not that some portion or all of the deferred tax assets will not be realized.  Based on available evidence, management has concluded
that a valuation allowance is necessary to reduce the net deferred tax asset.  Accordingly, deferred tax assets have been recognized only to the
extent of deferred tax liabilities. The valuation allowance decreased by approximately $2.3 million for the twelve months ended March 31, 2008 as
compared to the twelve months ended March 31, 2007. This net decrease was primarily attributable to the increases in the FIN 48 reserve for tax credits.

The Company has federal and state net operating loss carry forwards ("NOLs") of $36.2 million and $61.4 million, respectively. The
federal NOLs will begin to expire in 2024 if not utilized, and the state NOLs will begin to expire in 2013, if not utilized.

The Company has federal and state research and development tax credit carry forwards of approximately $2.7 million and $1.4 million, respectively.
If not utilized, the federal tax credit carry forward will begin to expire in 2025.  The California tax credit can be carried forward indefinitely.

The Company adopted the provisions of Financial Standards Accounting Board Interpretation No. 48, "Accounting for Uncertainty in Income
Taxes - an interpretation of FASB Statement No. 109 ("FIN48") effective April 1, 2007. In connection with the adoption of FIN 48, the Company has
analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these
jurisdictions. As a result of the implementation of FIN 48, the Company recorded a cumulative effect adjustment in the twelve months ended March 31,
2008 related to the adoption of FIN 48 resulting in a decrease in the liability for unrecognized tax benefits of $0.6 million and a corresponding decrease in
accumulated deficit. As of March 31, 2008, the total amount of unrecognized tax benefits was approximately $5.2 million of which $4.6 million recorded as
a deferred tax asset that is fully offset by a valuation allowance and $0.7 million which if recognized, would affect the Company's effective tax rate. The
calculation of unrecognized tax benefits involves dealing with uncertainties in the application of complex global tax regulations. Management assesses the
Company's tax positions in light of legislative, bilateral tax treaty, regulatory and judicial developments in the countries in which the Company does
business.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: (in thousands)

|                                                                                           |       
|------------------------------------------------------------------------------------------ | ------
|Balance at April 1, 2007                                                                   | $3,262
|Additions based on tax positions related to the current year                               | 54    
|Additions for tax positions of prior years                                                 | 102   
|Reduction for tax positions of prior years                                                 | (797) 
|Other - Gross DTA reserve with full valuation allowance that was not identified previously | 2,546 
|Balance at March 31, 2008                                                                  | $5,167

The Company recognizes interest in accordance with Paragraph 15 of FIN48 and recognizes penalties in accordance with
Paragraph 16 of FIN48 which are classified as part of income taxes.  The total amount of interest and penalty recognized in the twelve months ended
March 31, 2008 is $0.1 million.

The Company's operations are subject to income and transaction taxes in the United States and in multiple foreign jurisdictions.  Significant
estimates and judgments are required in determining its worldwide provision for income taxes.  Some of these estimates are based on
interpretations of existing tax laws or regulations and as a result the proper amount of tax liability may be uncertain.

Tax authorities may challenge the allocation of profits between the Company's subsidiaries and may challenge certain tax benefits claimed on its tax
returns, and the Company may not prevail in any such challenge.  If the Company were not to prevail, it could be subject to higher tax rates or lose
certain tax benefit that could result in a higher tax rate.

The Company is subject to taxation in the United States and various states and foreign jurisdictions.  There are no ongoing examinations by taxing
authorities at this time.  The Company's various tax years beginning in 2001 through 2007 remain open in various taxing jurisdictions.

69

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The Company provides for U.S. income taxes on the earnings of foreign subsidiaries unless they are considered permanently reinvested outside of
the U.S. At March 31, 2008, the cumulative amount of earnings upon which U.S. income tax has not been provided is approximately $6.8 million as such
earnings are considered permanently reinvested. It is not practicable to determine the U.S. income tax liability that would be payable if such earnings are
not reinvested indefinitely.

In connection with its reorganization in 2002, the Company recorded income tax contingencies in accordance with Statement of
Financial Accounting Standards No. 5, "Accounting for Contingencies." These contingencies were attributable to the Company's
reorganization and included contingent liabilities related to the establishment of the MOD III special purpose subsidiary. The Company reverses the
contingent liabilities previously recorded as the statute of limitations expires.  For the twelve months ended March 31, 2008 and the twelve months ended
March 31, 2007, the Company recorded a reversal of zero and $4.5 million, respectively, of these contingencies from long-term liabilities, with a resulting
reduction in goodwill from $6.7 million as of March 31, 2006, to $2.2 million as of March 31, 2007 and March 31, 2008.

During the twelve months ended March 31, 2008, the twelve months ended March 31, 2007 and the twelve months ended March 31, 2006 the
Company's income tax provision was $1.3 million, $2.2 million and $1.9 million, respectively, which primarily reflects amortization of deferred charges,
which have been fully amortized as of March 31, 2008 and provisions for taxes in certain profitable foreign jurisdictions.  The Company provides for
income tax expense in foreign jurisdictions where its foreign subsidiaries operations generate profits that are taxable.  The Company's income tax
expense reflects the estimated annual effective tax rate at that time based on projections of operations.

NOTE 11. COMMITMENTS AND CONTINGENCIES

Some of the Company's leases for facilities and equipment are under non-cancelable operating leases, which expire in
fiscal year 2009

Minimum future lease payments under these non-cancelable operating leases at March 31, 2008 are as follows (in
thousands):

|                             |  |   | Operating
|---------------------------- |  | - | ---------
|Fiscal Year                  |  |   | Leases   
|2009                         |  | $ | 1,615    
|2010                         |  |   | 989      
|2011                         |  |   | 695      
|2012                         |  |   | 725      
|2013                         |  |   | 423      
|Thereafter                   |  |   | 69       
|Total minimum lease payments |  | $ | 4,516    

Commitments



The Company generally makes purchases under cancelable purchase orders and does not enter into long-term supply agreements. Certain of its
wafer foundry, assembly, materials suppliers, software vendors and support tool manufacturers require non-cancelable purchase orders since they often
provide products and services tailored to the Company's specifications. Summarized in the table below are minimum future commitments under operating
leases and non-cancelable purchase obligations as of March 31, 2008 (in thousands):

|                            |  |   |        |  |   | Within |  |   |           |  |   |          
|--------------------------- |  | - | ------ |  | - | ------ |  | - | --------- |  | - | ---------
|                            |  |   | Total  |  |   | 1 year |  |   | 1-3 years |  |   | 3-5 years
|Operating lease obligations |  | $ | 4,447  |  | $ | 1,615  |  | $ | 1,684     |  | $ | 1,148    
|Purchase obligations        |  |   | 6,716  |  |   | 4,821  |  |   | 1,865     |  |   | 30       
|Total                       |  | $ | 11,163 |  | $ | 6,436  |  | $ | 3,549     |  | $ | 1,178    

70

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Contingencies

On August 11, 2005, Microchip Technology, Inc. ("Microchip") filed a patent infringement claim against the
Company in the U.S. District Court of Arizona (case number CV05-2406-PHX-MHM). Microchip alleges that the
Company has infringed, and currently infringes, its patents numbered 5,847,450, 6,696,316 and 6,483,183.
Microchip claims that unspecified products of the company, including the Z8 Encore! XP 4K Series of products,
infringe these patents and is seeking preliminary and permanent injunctive relief, unspecified damages and costs,
including attorneys' fees. The Company filed a response to the claims on September 15, 2005 generally denying the
claims and challenging the validity of the patents. On January 10, 2006, the Company filed a request for patent
re-examination with the U.S. PTO, which was granted in February and March 2006 for all 3 patents. On April 11,
2008, the Company received a notice that all of Microchip's claims under these three patents have been rejected by
the U.S. PTO. Notwithstanding this favorable ruling, because Microchip has a right to appeal the patent office's
decision, the Company does not believe it is feasible to predict or determine the outcome or resolution of this
litigation at this time. The Company believes it has meritorious defenses and will defend itself against these claims
vigorously. The Company may incur substantial expenses in its defense against these claims. In the event of a
determination adverse to the Company, it may incur substantial monetary liabilities and be required to change our
business practices. Either of these could have a material adverse effect on its financial position, results of operations
and/or cash flows.

On December 1, 2006, the Company filed a patent infringement claim against Altera Corporation ("Altera") and Actel Corporation
("Actel")  in the U.S. District Court of California (civil docket number 4:06-cv-07388-SBA). The Company alleges that Altera and Actel
have infringed, and currently infringe, its patent numbered 4,670,749 which the Company believes to be the fundamental patent for programmable logic.
The Company claims that Altera's and Actel's products infringe these patents and are seeking unspecified damages and costs, including attorneys' fees.
 Actel settled their case with the Company on June 11, 2007 for an undisclosed amount.  The case against Altera is currently on stay
pending reexamination of the patent in suit.

On May 23, 2008, Altera Corporation ("Altera") filed a patent infringement claim against the Company in the U.S. District Court of Texas
(civil action number 2:08-CV-218). Altera alleges that the Company has infringed, and currently infringes, its patents numbered 6,097,211, 6,147,511 and
6,314,550. Altera claims that unspecified products of the Company's, including its eZ80 and Zneo series of products, infringe these patents and is
seeking preliminary and permanent injunctive relief, unspecified damages and costs, including attorneys' fees. The Company does not believe it is
feasible to predict or determine the outcome or resolution of this litigation at this time. The Company will defend itself against these claims vigorously. The
Company may incur substantial expenses in its defense against these claims. In the event of a determination adverse to the Company, it may incur
substantial monetary liabilities, and be required to change its business practices. Either of these could have a material adverse effect on its financial
position, results of operations or cash flow.

The Company is participating in litigation and responding to claims arising in the ordinary course of business.  The Company intends to defend itself
vigorously in these matters.  The Company's management believes that it is unlikely that the outcome of these matters will have a material adverse effect
on the Company's consolidated financial statements, although there can be no assurance in this regard.

From time to time, the Company has agreed to indemnify and hold harmless certain customers for potential allegations of infringement of intellectual
property rights and patents arising from the use of its products. During the ordinary course of business, in certain limited circumstances, the Company has
agreed to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally parties with which the Company has
commercial relations, in connection with certain intellectual property infringement claims by any third-party with respect to its products and services. The
Company has indemnification arrangements that limit its net contingent obligation to pay for defense costs, if any, up to a maximum of $500,000. To date,
there have not been any costs incurred in connection with such indemnification arrangements; therefore, there is no accrual of such amounts at
March 31, 2008. The Company discloses indemnification liabilities according to FASB Staff Position FIN45-1, "Accounting for Intellectual Property
Infringement Indemnifications under SFAS Interpretation No. 45." Under SFAS No. 5, "Loss Contingencies," a claim would be accrued when
a loss is probable and the amount can be reasonably estimated. At March 31, 2008, no such amounts are accrued.

NOTE 12. RELATED PARTY TRANSACTIONS

In 2002, the Company entered into employment agreements with each of its then named executive officers. In June 2002,
prior to the issuance of the Sarbanes-Oxley Act, loans were made to certain executive officers and certain other employees and consultants to pay the
income taxes due on the restricted shares of common stock that were granted to them. At March 31, 2008 no loans were outstanding to executive
officers, employees or consultants. At March 31, 2007 total loans outstanding were $0.3 million, and are included in other assets on the consolidated
balance sheets. Each loan recipient pledged the shares of restricted stock as collateral for these loans pursuant to their stock pledge agreements. All
such loans come due five years from the date of issuance and bear interest at 5.5% per annum.

71

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In March 2007, the Company's Executive Vice President of Engineering and Operations, Norman G. Sheridan, paid $72,590 in cash to satisfy all of
his outstanding loans and interest.

In May 2007, a former consultant paid cash to satisfy an outstanding loan payable to the Company in the amount of $55,000 plus interest.

In September 2007, the Company repurchased 73,151 shares from its Chief Financial Officer, Perry J. Grace to satisfy an outstanding loan plus
interest payable to the Company in the amount of $0.3 million.

NOTE 13. SUBSEQUENT EVENTS

As of March 31, 2008, the Company had $3.9 million invested in ARPS. In February 2008, tightening of the U.S. liquidity markets caused the auction
rate process to default and ARPS could not be successfully sold. Subsequent to March 31, 2008, the Company received $2.0 million in cash from
redemptions at par of its ARPS. These redemptions have been included in cash and cash equivalents on the consolidated balance sheet as of March 31,
2008. The Company's remaining investment in ARPS of $1.9 million has been classified as long term investments at full par value on its consolidated
balance sheet as of March 31, 2008.  The Company believes the ARPS values are not impaired and as such, no impairment has been recognized against
the investment. If the issuers are unable to successfully close future auctions and their credit rating continues to deteriorate, the Company may be
required to record an impairment charge against the value of its ARPS holdings.

NOTE 14. GEOGRAPHIC AND SEGMENT INFORMATION

Beginning in May 2002, ZiLOG consolidated its business segments into one reportable segment to reflect the change in the
manner in which its chief operating decision maker allocates resources and assesses the performance of the Company's business. The Company
engages primarily in the design, development, manufacture and marketing of semiconductor products. The Company sells its products to distributors and
direct customer accounts including original equipment manufacturers ("OEMs") and original design manufacturers ("ODMs") in a
broad range of market segments. The Company's operations outside the United States consist of a final test and global support facility in the Philippines
and sales and support and design centers in certain foreign countries. Domestic operations are responsible for the design, development and the
coordination of production planning and shipping to meet worldwide customer commitments. The Philippine facility is reimbursed in relation to its value
added with respect to test operations and other functions performed, and certain foreign sales offices receive a commission on export sales within their
territory. Accordingly, for financial statement purposes, it is not meaningful to segregate sales or operating profits for the test and foreign sales office
operations.

The Company has two broad current product categories based on product technologies, referred to as new products and 8-bit classic products.
These two product categories are within the Company's one reportable segment and can be summarized as follows:

|                                                |                                                                                                
|----------------------------------------------- | -----------------------------------------------------------------------------------------------
|Products                                        | Sample Uses                                                                                    
|New products include:                           |                                                                                                
|Embedded flash microcontrollers                 | Motor control, low-power controllers                                                           
|Universal remote control solutions              | Universal remote controls                                                                      
|32-bit Zatara products                          | Point-of-sale terminal, other secured transactions                                             
|8-bit classic products include:                 |                                                                                                
|Core 8-bit Microcontrollers and Microprocessors | Security systems, battery chargers, industrial controllers, communications products, treadmills
|Serial Communications Controllers               | Telephone switches/PBX                                                                         
|Modems                                          | Satellite TV set-top box, POS card validation                                                  
|IrDA transceivers                               | PDAs, cell phones                                                                              
|TV, PC peripheral and other products            | TV, keyboard, pointing device                                                                  

72

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The following table summarizes the Company's net sales by region, by channel, and by product category (in thousands):

|                                                                                                         |   |  | Twelve Months Ended
|-------------------------------------------------------------------------------------------------------- | - |  | -------------------
|                                                                                                         |   |  | Mar. 31,           
|                                                                                                         |   |  | 2008               
|Net sales by region:                                                                                     |   |  |                    
|Americas                                                                                                 | $ |  | 23,336             
|Asia (including Japan)                                                                                   |   |  | 34,632             
|Europe                                                                                                   |   |  | 9,253              
|Net sales                                                                                                | $ |  | 67,221             
|                                                                                                         |   |  |                    
|Net sales by channel:                                                                                    |   |  |                    
|Direct                                                                                                   | $ |  | 29,400             
|Distribution                                                                                             |   |  | 37,821             
|Net sales                                                                                                | $ |  | 67,221             
|                                                                                                         |   |  |                    
|Net Sales by product category:                                                                           |   |  |                    
|New products (1)                                                                                         | $ |  | 36,132             
|8 - bit classic products                                                                                 |   |  | 31,089             
|Net sales                                                                                                | $ |  | 67,221             
|                                                                                                         |   |  |                    
|(1) includes 32-bit Zatara, universal remote control solutions and 8-bit embedded flash microcontrollers |  

Net sales are attributable to the ship-to location of the Company's customers as presented in the following table (in
thousands):

|                          |  |   | Twelve Months Ended
|------------------------- |  | - | -------------------
|                          |  |   | Mar. 31,           
|                          |  |   | 2008               
|United States             |  | $ | 21,286             
|Canada & Mexico           |  |   | 1,481              
|Total North America       |  |   | 22,767             
|Hong Kong (including PRC) |  |   | 12,120             
|Singapore                 |  |   | 10,284             
|Germany                   |  |   | 3,742              
|Taiwan                    |  |   | 4,498              
|Korea                     |  |   | 673                
|Other Foreign Countries   |  |   | 13,137             
|Total International       |  |   | 44,454             
|                          |  |   |                    
|Total Net Sales           |  | $ | 67,221             

The following table shows the location of long-lived assets (in thousands):

|                        |  |   | Mar. 31, |  |   | Mar. 31,
|----------------------- |  | - | -------- |  | - | --------
|                        |  |   | 2008     |  |   | 2007    
|United States           |  | $ | 10,624   |  | $ | 9,740   
|Philippines             |  |   | 446      |  |   | 990     
|Other                   |  |   | 2,972    |  |   | 3,765   
|Total long-lived assets |  | $ | 14,042   |  | $ | 14,495  

73

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Major Customers

For the twelve months ended March 31, 2008, two customers, including one distributor and one direct customer, accounted
for approximately 25% and 11% of net sales, respectively  For the twelve months ended March 31, 2007, two customers, including one distributor and
one direct customer, accounted for approximately 23% and 15% of net sales, respectively. For the twelve months ended March 31, 2006, two customers,
including one distributor and one direct customer, accounted for approximately 24% and 10% of net sales, respectively.

ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANT ON ACCOUNTING AND FINANCIAL DISCLOSURES

There have been no disagreements with our current and predecessor independent registered public accounting firms.

ITEM 9A.	CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures. The Company's management, with the participation of the Company's
Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of March 31,
2008. Based on such evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2008, the
Company's disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required
to be disclosed by the Company in the reports that it files or submits under the Exchange Act and are effective in ensuring that information required to be
disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company's
management, including the Company's Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.

(b)Management's Report on Internal Control Over Financial Reporting. The Company's management is responsible for establishing and
maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Our internal control over financial
reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles.

The Company's management, including the CEO and CFO, conducted an evaluation of the effectiveness of its internal control over financial
reporting based on the Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on the results of this evaluation, the Company's management concluded that its internal control over financial reporting was effective
as of March 31, 2008.

This annual report does not include an attestation report of the company's registered public accounting firm regarding internal control over
financial reporting.  Management's report was not subject to attestation by the company's registered public accounting firm pursuant to temporary rules of
the Securities and Exchange Commission that permit the company to provide only management's report in this annual report.

(c)Internal Control Over Financial Reporting. There have not been any changes in the Company's internal control over financial reporting (as
such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended March 31, 2008 that have materially affected, or
are reasonably likely to materially affect, the Company's internal control over financial reporting.

ITEM 9B.OTHER INFORMATION

None.

74

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PART III

MANAGEMENT

ITEM 10.	DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Executive Officers and Directors

The information required by this item relating to the Company's directors and nominees, and compliance with Section 16(a)
of the Securities Exchange Act of 1934, is incorporated by reference from ZiLOG's Proxy Statement for its September 11, 2008 Annual Meeting of
Stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended March 31, 2008.

Code of Ethics

We have adopted a Code of Business Conduct and Ethics that applies to our Chief Executive Officer, Chief Financial
Officer and Controller and a Code of Ethics for Chief Executive and Senior Financial Officers. The Code of Business Conduct and Ethics and the Code of
Ethics for the Chief Executive and Senior Financial Officers are available on our website at

If any substantive amendments to either the code of Business Conduct and Ethics or the Code of Ethics for the Chief Executive and Senior Financial
Officers are made or any waivers are granted, including any implicit waiver, from a provision of either draft to its Chief Executive Officer, Chief Financial
Officer or Controller, the Company will disclose the nature of such amendment or waiver on the Company's website at

ITEM 11.	EXECUTIVE COMPENSATION

Incorporated by reference from ZiLOG's Proxy Statement for its September 11, 2008 Annual Meeting of Stockholders to be
filed with the SEC within 120 days after the end of the fiscal year ended March 31, 2008.

ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Incorporated by reference from ZiLOG's Proxy Statement for its September 11, 2008 Annual Meeting of Stockholders to be
filed with the SEC within 120 days after the end of the fiscal year ended March 31, 2008.

ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Incorporated by reference from ZiLOG's Proxy Statement for its September 11, 2008 Annual Meeting of Stockholders to be
filed with the SEC within 120 days after the end of the fiscal year ended March 31, 2008.

ITEM 14.	PRINCIPAL ACCOUNTING FEES AND SERVICES

Incorporated by reference from ZiLOG's Proxy Statement for its September 11, 2008 Annual Meeting of Stockholders to be
filed with the SEC within 120 days after the end of the fiscal year ended March 31, 2008.

75

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PART IV

ITEM 15.	EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)	The following documents are filed as part of this report:

1.	Consolidated Financial Statements ans Supplementary Data:



|                                                                                                  | Page
|------------------------------------------------------------------------------------------------- | ----
|                                                                                                  |     
|Report of Armanino McKenna LLP, Independent Registered Public Accounting Firm                     | 49  
|                                                                                                  |     
|Consolidated Balance Sheets as of March 31, 2008 and 2007                                         | 50  
|                                                                                                  |     
|Consolidated Statements of Operations for the year ended March 31, 2008, 2007, and 2006           | 51  
|                                                                                                  |     
|Consolidated Statements of Cash Flows for the year ended March 31, 2008, 2007, and 2006           | 52  
|                                                                                                  |     
|Consolidated Statements of Stockholders' Equity for the year ended March 31, 2008, 2007, and 2006 | 53  
|                                                                                                  |     
|Notes to Consolidated Financial Statements                                                        | 54  

2.	Financial Statement Schedule:



|Schedule II—Valuation and Qualifying Accounts | 80
|--------------------------------------------- | --

All other schedules are omitted because the information required to be set forth therein is not applicable or is contained in
the consolidated financial statements or notes to the consolidated financial statements.

(b)	Not Required.

(c)	Exhibits:

The exhibits listed in the accompanying exhibit index are filed or incorporated by reference (as stated therein) as part of
this annual report.

(d)	Financial Statements Schedule:

See Item 15 (a)(2) above.

76

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SCHEDULE IIZiLOG, INC. 
                            VALUATION AND QUALIFYING ACCOUNTS 
                                        (In thousands)


Additions(Reductions)Balance at


Charged to




Balance atBeginning


Costs and




Endingof Period


Expenses


Deductions

of PeriodTwelve months ended March 31, 2008:Allowance for doubtful accounts

$
133

$
12

$
-
$
145Twelve months ended March 31, 2007:Allowance for doubtful accounts

$
170

$
(20)

$
(17)
$
133Twelve months ended March 31, 2006:Allowance for doubtful accounts

$
232

$
117

$
(179)
$
17077SignaturesPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly
caused the report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 30th day of June 2008.


ZiLOG, INC.By:
/s/    Darin G. BillerbeckDarin G. Billerbeck
                  President, Chief Executive Officer and Director

Power of Attorney

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints Darin Billerbeck and Perry J. Grace, his/her attorneys-in-fact, each with the power of substitution, for him/her in any and all capacities, to sign
any amendments to this Report on Form 10-K, and to file the same, with Exhibits thereto and other documents in connection therewith with the Securities
and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or substitute or substitutes may do or cause to be done
by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates indicated:

|                                              |                                                                                    |              
|--------------------------------------------- | ---------------------------------------------------------------------------------- | -------------
|Signature                                     | Title                                                                              | Date         
|                                              |                                                                                    |              
|/s/    DARIN G. BILLERBECKDarin G. Billerbeck | President, Chief Executive Officer and Director                                    | June 30, 2008
|                                              |                                                                                    |              
|/s/    PERRYJ. GRACEPerry J. Grace            | Executive Vice President, Chief Financial Officer and Principal Accounting Officer | June 30, 2008
|                                              |                                                                                    |              
|/s/    FEDERICOFAGGINFederico Faggin          | Director                                                                           | June 30, 2008
|                                              |                                                                                    |              
|/s/    RICHARDL. SANQUINIRichard L. Sanquini  | Director                                                                           | June 30, 2008
|                                              |                                                                                    |              
|/s/    ROBINA. ABRAMSRobin A. Abrams          | Director                                                                           | June 30, 2008
|                                              |                                                                                    |              
|/s/    DAVIDG. ELKINSDavid G. Elkins          | Director                                                                           | June 30, 2008

78

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EXHIBIT INDEX

|ExhibitNumber | Description                                                                                                                                 
|------------- | --------------------------------------------------------------------------------------------------------------------------------------------
|2.1(a)        | Joint Reorganization Plan, as confirmed by order of the U.S. Bankruptcy Court for the Northern District of California, dated April 30, 2002.
|              |                                                                                                                                             
|3.1(b)        | Amended and Restated Certificate of Incorporation of ZiLOG, Inc., as amended and corrected.                                                 
|              |                                                                                                                                             
|3.2(c)        | Amended and Restated Bylaws of ZiLOG, Inc.                                                                                                  
|              |                                                                                                                                             
|4.1(d)        | Form of common stock certificate.                                                                                                           
|              |                                                                                                                                             
|4. 2(e)       | Form of Restricted Stock Purchase Agreement.                                                                                                
|              |                                                                                                                                             
|4.3(e)        | Form of Non-Qualified EBITDA-Linked Option Grant Agreement.                                                                                 
|              |                                                                                                                                             
|4.4(f)        | Form of Non-Qualified Non-EBITDA-Linked Option Grant Agreement.                                                                             
|              |                                                                                                                                             
|4.5(g)        | Form of Non-Qualified Option Grant Agreement, Date of Grant (pursuant to the 2004 Omnibus Stock Incentive Plan).                            
|              |                                                                                                                                             
|4.6(g)        | Form of Non-Qualified Option Grant Agreement, Date of Hire (pursuant to the 2004 Omnibus Stock Incentive Plan).                             
|              |                                                                                                                                             
|4.7(g)        | Form of Non-Qualified Option Grant Agreement, Fully Vested Date of Grant (pursuant to the 2004 Omnibus Stock Incentive
Plan).               
|              |                                                                                                                                             
|10.1(h)       | Contract of Lease, dated October 15, 2003, by and between ZiLOG Electronics Philippines, Inc. and Fruehauf Electronics Phils.
Corporation.  
|              |                                                                                                                                             
|10.2(i)       | Lease, dated as of December 21, 2001, between ZiLOG, Inc. and the Sobrato Group.                                                            
|              |                                                                                                                                             
|10.3(j)       | Distributor Agreement, dated October 23, 2002, between ZiLOG, Inc. and Future Electronics, Inc.                                             
|              |                                                                                                                                             
|10.4(j)       | Form of Full-Recourse Promissory Note.                                                                                                      
|              |                                                                                                                                             
|10.5(j)       | Form of Stock Pledge Agreement.                                                                                                             
|              |                                                                                                                                             
|10.6(k)       | ZiLOG, Inc. 2002 Omnibus Stock Incentive Plan.                                                                                              
|              |                                                                                                                                             
|10.7(l)       | ZiLOG, Inc. 2004 Omnibus Stock Incentive Plan, as amended and restated.                                                                     
|              |                                                                                                                                             
|10.8(m)       | ZiLOG, Inc. 2004 Employee Stock Purchase Plan.                                                                                              
|              |                                                                                                                                             
|10.9(n)       | Amendment No. 1 to the ZiLOG, Inc. 2004 Employee Stock Purchase Plan.                                                                       
|              |                                                                                                                                             
|10.10(n)      | Form of Indemnification Agreement between ZiLOG, Inc. and its Directors and Officers.                                                       
|              |                                                                                                                                             
|10.11(o)      | Employment Offer Letter dated January 3, 2007 between ZiLOG, Inc. and Darin Billerbeck.                                                     
|              |                                                                                                                                             
|10.12(p)      | Form of Change of Control Agreement.                                                                                                        
|              |                                                                                                                                             
|10.13(q)      | Change in Control Agreement with Perry J. Grace.                                                                                            
|              |                                                                                                                                             
|10.14(q)      | Change in Control Agreement with Norman G. Sheridan.                                                                                        
|              |                                                                                                                                             
|10.15(r)      | Change in Control Agreement with Darin G. Billerbeck.                                                                                       
|              |                                                                                                                                             
|21.1          | Subsidiaries of ZiLOG, Inc.    PDF                                                                                                          
|              |                                                                                                                                             
|23.1          | Consent of Armanino McKenna LLP, independent registered public accounting firm.    PDF                                                      
|              |                                                                                                                                             
|24.1          | Power of Attorney (see the signature pages of this Annual Report).                                                                          

79

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|ExhibitNumber | Description                                                                                                                                                                                                       
|------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|31.1          | Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, dated June 30, 2008.    PDF            
|              |                                                                                                                                                                                                                   
|31.2          | Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules13a-14 and 15d-14 as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002, dated June 30, 2008.    PDF             
|              |                                                                                                                                                                                                                   
|32.1          | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 18 U.S.C Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley act of 2002, dated June 30, 2008.    PDF
|              |                                                                                                                                                                                                                   

__________________

(a)	Incorporated herein by reference to Exhibit 99.1 to the Company's current report on Form 8-K filed with the Commission on
May 15, 2002.

(b)	Incorporated herein by reference to Exhibit 3.1 to the Company's annual report on Form 10-K for the fiscal year ended December 31, 2003.

(c) 	Incorporated herein by reference to Exhibit 3.1 to the Company's current report on Form 8-K filed with the Commission on November 21,
2007.

(d)	Incorporated herein by reference to the item of the same name filed as an exhibit to the Company's registration statement on Form S-1/A (File
No. 333-98529) filed with the Commission on November 5, 2002.

(e)	Incorporated herein by reference to the item of the same name filed as an exhibit to the Company's quarterly report on Form 10-Q filed with
the Commission on August 16, 2002.

(f)	Incorporated by reference to Exhibit 4.3 to the quarterly report on Form 10-Q filed with the Commission on August 14, 2007.

(g)	Incorporated herein by reference to the item of same name filed as an exhibit to the Company's quarterly report on Form 10-Q with the
Commission on November 10, 2004.

(h)	Incorporated herein by reference to the item of the same name filed as an exhibit to the Company's quarterly report on Form 10-Q filed with
the Commission on November 12, 2003.

(i)	Incorporated herein by reference to the item of the same name filed as an exhibit to the Company's annual report on Form 10-K for the fiscal
year ended December 31, 2001.

(j)	Incorporated herein by reference to the item of the same name filed as an exhibit to the Company's registration statement on Form S-1/A (File
No. 333-98529) filed with the Commission on November 5, 2002.

(k)	Incorporated herein by reference to the item of the same name filed as an exhibit to the Company's registration statement on Form S-8 (File
No. 333-88416) filed with the Commission on May 15, 2002.

(l)	Incorporated herein by reference to Exhibit 99.1 to the Company's current report on Form 8-K filed with the Commission on September 12,
2007.

(m)	Incorporated herein by reference to Exhibit 10.33 of the S-1/A (File No. 333-111471) filed with the Commission on February 24, 2004.

(n)	Incorporated herein by reference to the item of the same name filed as an exhibit to the Company's annual report on Form 10-K for the fiscal
year ended December 31, 2004.

(o)	Incorporated herein by reference to Exhibit 10.1 to the Company's current report on Form 8-K filed with the Commission on January 8,
2007.

(p)	Incorporated herein by reference to Exhibit 99.1 to the Company's current report on Form 8-K filed with the Commission on December 20,
2005.

(q)	Incorporated herein by reference to the item of the same name filed as an exhibit to the Company's current report on Form 8-K filed with the
Commission on October 16, 2007.

(r)	Incorporated herein by reference to the item of the same name filed as an exhibit to the Company's current report on Form 8-K filed with the
Commission on December 21, 2007.



80

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