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

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FORM 10-Q

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(Mark One)


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

For the quarterly period ended September 27, 2008

OR



For the transition period from ________to _________

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, California     95119

(408) 513-1500

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 reports), and (2) has been subject to such filing
requirements for the past 90 days.  YES    x NO     ̈

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      ̈ | Accelerated filer     ̈ | Non-accelerated filer     ̈ (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). (Check one):
YES     ̈ NO    x 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.   
YES    x NO     ̈ Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date.

|Class                                   | Outstanding at October 24, 2008
|--------------------------------------- | -------------------------------
|Common Stock, $0.01 par value per share | 16,961,541 shares              








Note:PDF provided as a courtesy

FORWARD-LOOKING STATEMENTS

Some 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-Q, 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, without
limitation:















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, assembly and test services with commercially-reasonable quality and prices; under-absorption of manufacturing costs in
the remaining 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" in our Form 10-K for the fiscal year ended March 31, 2008.

Although we believe that the expectations in the forward-looking statements contained in this Form 10-Q 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.

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.

2

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ZILOG, INC.
                  QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 27, 2008
                  TABLE OF CONTENTS

|PART I. FINANCIAL INFORMATION                                                                                                                                 | Page
|------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----
|Item 1.Financial Statements                                                                                                                                   |     
|Unaudited Condensed Consolidated Statements of Operations for the three and six months ended
                 ended September 27, 2008 and September 29, 2007 | 4   
|Unaudited Condensed Consolidated Balance Sheets at September 27, 2008 and March 31, 2008                                                                      | 5   
|Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended 
                 ended September 27, 2008 and September 29, 2007          | 6   
|Unaudited Condensed Consolidated Statements of Stockholders' Equity for the six months
          ended September 27, 2008 and September 29, 2007              | 7   
|Notes to Unaudited Condensed Consolidated Financial Statements                                                                                                | 8   
|Item 2.Management's Discussion and Analysis of Financial
Condition and Results of Operations                                                                  | 18  
|Item 3.Quantitative and Qualitative Disclosures About Market
Risk                                                                                             | 27  
|Item 4.Controls and
Procedures                                                                                                                                | 27  
|                                                                                                                                                              |     
|PART II. OTHER INFORMATION                                                                                                                                    |     
|Item 1.Legal Proceedings                                                                                                                                      | 28  
|Item 1A.Risk Factors                                                                                                                                          | 29  
|Item 2.Unregistered Sales of Equity Securities and Use of
Proceeds                                                                                            | 30  
|Item 3.Defaults Upon Senior Securities                                                                                                                        | 30  
|Item 4.Submission of Matters to a Vote of Security Holders                                                                                                    | 30  
|Item 5.Other Information                                                                                                                                      | 30  
|Item 6.Exhibits                                                                                                                                               | 31  
|                                                                                                                                                              |     

3

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PART I
                  FINANCIAL INFORMATION

Item 1.  Financial Statements

ZILOG, INC.

                    UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                          (in thousands, except per share data)

|                                                              |  |   | Three Months Ended |  |   |           | Six Months Ended
|------------------------------------------------------------- |  | - | ------------------ |  | - | --------- | ----------------
|                                                              |  |   | Sept. 27,          |  |   | Sept. 29, |                 
|                                                              |  |   | 2008               |  |   | 2007      |                 
|Net sales                                                     |  | $ | 19,026             |  | $ | 16,659    |                 
|Cost of sales                                                 |  |   | 10,215             |  |   | 8,915     |                 
|Gross margin                                                  |  |   | 8,811              |  |   | 7,744     |                 
|                                                              |  |   |                    |  |   |           |                 
|Operating expenses:                                           |  |   |                    |  |   |           |                 
|Research and development                                      |  |   | 3,953              |  |   | 3,923     |                 
|Selling, general and administrative                           |  |   | 5,861              |  |   | 5,133     |                 
|Special charges and credits                                   |  |   | 554                |  |   | 471       |                 
|Amortization of intangible assets                             |  |   | 209                |  |   | 251       |                 
|Total operating expenses                                      |  |   | 10,577             |  |   | 9,778     |                 
|                                                              |  |   |                    |  |   |           |                 
|Operating loss                                                |  |   | (1,766)            |  |   | (2,034)   |                 
|                                                              |  |   |                    |  |   |           |                 
|Other income:                                                 |  |   |                    |  |   |           |                 
|Other income (expense)                                        |  |   | 272                |  |   | (18)      |                 
|Interest income                                               |  |   | 49                 |  |   | 233       |                 
|Loss before provision for income taxes                        |  |   | (1,445)            |  |   | (1,819)   |                 
|Provision for income taxes                                    |  |   | 112                |  |   | 93        |                 
|Net loss                                                      |  | $ | (1,557)            |  | $ | (1,912)   |                 
|                                                              |  |   |                    |  |   |           |                 
|Basic and diluted net loss per share                          |  | $ | (0.09)             |  | $ | (0.11)    |                 
|                                                              |  |   |                    |  |   |           |                 
|Shares used in computing basic and diluted net loss per share |  |   | 16,949             |  |   | 16,913    |                 

See accompanying notes to unaudited condensed consolidated financial statements.

4

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ZILOG, INC.

                     UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

                          (in thousands, except share data)

|                                                                  |  |   | Sept. 27, |  |   | March 31,
|----------------------------------------------------------------- |  | - | --------- |  | - | ---------
|                                                                  |  |   | 2008      |  |   | 2008     
|ASSETS                                                            |  |   |           |  |   |          
|Current assets:                                                   |  |   |           |  |   |          
|Cash and cash equivalents                                         |  | $ | 16,899    |  | $ | 16,625   
|Accounts receivable, less allowance for doubtful accounts of $131 |  |   |           |  |   |          
|at September 27, 2008 and $145 at March 31, 2008                  |  |   | 7,263     |  |   | 6,834    
|Inventory                                                         |  |   | 7,608     |  |   | 8,413    
|Deferred tax assets                                               |  |   | 263       |  |   | 263      
|Prepaid expenses and other current assets                         |  |   | 1,617     |  |   | 1,663    
|Total current assets                                              |  |   | 33,650    |  |   | 33,798   
|                                                                  |  |   |           |  |   |          
|Long term investments                                             |  |   | 1,450     |  |   | 1,925    
|Property, plant and equipment, net                                |  |   | 7,749     |  |   | 6,604    
|Goodwill                                                          |  |   | 2,211     |  |   | 2,211    
|Intangible assets, net                                            |  |   | 2,111     |  |   | 2,528    
|Other assets                                                      |  |   | 863       |  |   | 774      
|Total assets                                                      |  | $ | 48,034    |  | $ | 47,840   
|                                                                  |  |   |           |  |   |          
|LIABILITIES AND STOCKHOLDERS' EQUITY                              |  |   |           |  |   |          
|Current liabilities:                                              |  |   |           |  |   |          
|Short term debt                                                   |  | $ | 1,039     |  | $ | 720      
|Accounts payable                                                  |  |   | 8,264     |  |   | 7,258    
|Other current liabilities, including license agreements           |  |   | 1,214     |  |   | 525      
|Income taxes payable                                              |  |   | 224       |  |   | 535      
|Accrued compensation and employee benefits                        |  |   | 3,403     |  |   | 2,444    
|Other accrued liabilities                                         |  |   | 2,175     |  |   | 2,094    
|Deferred income on shipments to distributors                      |  |   | 5,012     |  |   | 5,867    
|Total current liabilities                                         |  |   | 21,331    |  |   | 19,443   
|                                                                  |  |   |           |  |   |          
|Deferred tax liabilities                                          |  |   | 263       |  |   | 263      
|Other long term liabilities, including license agreements         |  |   | 1,597     |  |   | 592      
|Other non-current tax liabilities                                 |  |   | 754       |  |   | 663      
|Total liabilities                                                 |  |   | 23,945    |  |   | 20,961   
|                                                                  |  |   |           |  |   |          
|Stockholders' equity:                                             |  |   |           |  |   |          
|Common stock, $0.01 par value; 60.0 million shares authorized:    |  |   |           |  |   |          
|16.9 million shares issued and outstanding at                     |  |   |           |  |   |          
|September 27, 2008 and March 31, 2008, respectively               |  |   | 185       |  |   | 185      
|Additional paid-in capital                                        |  |   | 126,346   |  |   | 125,838  
|Treasury stock                                                    |  |   | (7,456)   |  |   | (7,456)  
|Other comprehensive income                                        |  |   | 102       |  |   | 102      
|Accumulated deficit                                               |  |   | (95,088)  |  |   | (91,790) 
|Total stockholders' equity                                        |  |   | 24,089    |  |   | 26,879   
|Total liabilities and stockholders' equity                        |  | $ | 48,034    |  | $ | 47,840   

See accompanying notes to unaudited condensed consolidated financial statements.

5

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ZILOG, INC.

               UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                          (in thousands)

|                                                                                                 |   | Six Months Ended
|------------------------------------------------------------------------------------------------ | - | ----------------
|                                                                                                 |   | Sept. 27,       
|                                                                                                 |   | 2008            
|Cash Flows from Operating Activities:                                                            |   |                 
|Net loss                                                                                         | $ | (3,298)         
|Adjustments to reconcile net loss to net cash provided by                                        |   |                 
|(used in) operating activities:                                                                  |   |                 
|Depreciation and other amortization                                                              |   | 1,723           
|Loss (gain) on disposition of operating assets                                                   |   | (31)            
|Stock-based compensation                                                                         |   | 760             
|Amortization of fresh-start intangible assets                                                    |   | 418             
|Changes in operating assets and liabilities:                                                     |   |                 
|Accounts receivable, net                                                                         |   | (429)           
|Inventory                                                                                        |   | 805             
|Prepaid expenses and other current and non-current assets                                        |   | (42)            
|Accounts payable                                                                                 |   | 1,006           
|Accrued compensation and employee benefits                                                       |   | 613             
|Deferred income on shipments to distributors                                                     |   | (855)           
|Accrued and other current and non-current liabilities                                            |   | (846)           
|Net cash used in operating activities                                                            |   | (176)           
|                                                                                                 |   |                 
|Cash Flows from Investing Activities:                                                            |   |                 
|Disposal of assets held for sale - MOD II property                                               |   | -               
|Redemption of long term investments                                                              |   | 475             
|Capital expenditures                                                                             |   | (437)           
|Net cash provided by investing activities                                                        |   | 38              
|                                                                                                 |   |                 
|Cash Flows From Financing Activities:                                                            |   |                 
|Short term debt                                                                                  |   | 319             
|Repurchase of restricted shares                                                                  |   | -               
|Proceeds from issuance of common stock under employee stock 
          and option purchase plans |   | 93              
|Net cash provided by financing activities                                                        |   | 412             
|                                                                                                 |   |                 
|Net increase in cash and cash equivalents                                                        |   | 274             
|Cash and cash equivalents at beginning of period                                                 |   | 16,625          
|Cash and cash equivalents at end of period                                                       | $ | 16,899          
|                                                                                                 |   |                 
|Supplemental Disclosure of Non-Cash Investing and Financing Activities:                          |   |                 
|Purchase of development licenses through long term                                               |   |                 
|payment arrangement                                                                              | $ | 2,400           

See accompanying notes to unaudited condensed consolidated financial statements.

5

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ZILOG, INC.

               UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                                    (in thousands)



|                                                           |  | Common Stock |  |   | Additional   
Paid-in |  |   | Treasury |  |   | Other     
Comprehensive |  |   | Accumulated |  |   | Total    
Stock-   
holders'
|---------------------------------------------------------- |  | ------------ |  | - | --------------------- |  | - | -------- |  | - | ------------------------ |  | - | ----------- |  | - | ----------------------------
|                                                           |  | Shares       |  |   | Amount                |  |   | Capital  |  |   | Stock                    |  |   | Income      |  |   | Deficit                     
|Balance at March 31, 2007                                  |  | 16,840       |  | $ | 183                   |  | $ | 124,558  |  | $ | (7,174)                  |  | $ | -           |  | $ | (82,820)                    
|Cumulative affect of accounting change - adoption of FIN48 |  | -            |  |   | -                     |  |   | -        |  |   | -                        |  |   | -           |  |   | (87)                        
|Issuance of common stock under stock option plans          |  | 68           |  |   | 1                     |  |   | 224      |  |   | -                        |  |   | -           |  |   | -                           
|Issuance of common stock under employee stock              |  |              |  |   |                       |  |   |          |  |   |                          |  |   |             |  |   |                             
|purchase plan                                              |  | 35           |  |   | -                     |  |   | 115      |  |   | -                        |  |   | -           |  |   | -                           
|Stock-based compensation expense - director shares         |  | 11           |  |   | -                     |  |   | 50       |  |   | -                        |  |   | -           |  |   | -                           
|Stock-based compensation expense                           |  | -            |  |   | -                     |  |   | 741      |  |   | -                        |  |   | -           |  |   | -                           
|Restricted Shares Cancelled                                |  | (20)         |  |   | -                     |  |   | -        |  |   | -                        |  |   | -           |  |   | -                           
|Repurchase  of  common stock                               |  | (73)         |  |   | -                     |  |   | -        |  |   | (282)                    |  |   | -           |  |   | -                           
|Comprehensive loss:                                        |  |              |  |   |                       |  |   |          |  |   |                          |  |   |             |  |   |                             
|Other comprehensive income - defined benefit plan          |  | -            |  |   | -                     |  |   | -        |  |   | -                        |  |   | 81          |  |   | -                           
|Net Loss                                                   |  | -            |  |   | -                     |  |   | -        |  |   | -                        |  |   | -           |  |   | (4,961)                     
|Total comprehensive loss                                   |  | -            |  |   | -                     |  |   | -        |  |   | -                        |  |   | -           |  |   | -                           
|Balance at September 29, 2007                              |  | 16,861       |  | $ | 184                   |  | $ | 125,688  |  | $ | (7,456)                  |  | $ | 81          |  | $ | (87,868)                    
|                                                           |  |              |  |   |                       |  |   |          |  |   |                          |  |   |             |  |   |                             
|Balance at March 31, 2008                                  |  | 16,923       |  | $ | 185                   |  | $ | 125,838  |  | $ | (7,456)                  |  | $ | 102         |  | $ | (91,790)                    
|Issuance of common stock under stock option plans          |  | 5            |  |   | -                     |  |   | 18       |  |   | -                        |  |   | -           |  |   | -                           
|Cancellation of restricted shares                          |  | (13)         |  |   | -                     |  |   | -        |  |   | -                        |  |   | -           |  |   | -                           
|Issuance of common stock under employee stock              |  |              |  |   |                       |  |   |          |  |   |                          |  |   |             |  |   |                             
|purchase plan                                              |  | 28           |  |   | -                     |  |   | 75       |  |   | -                        |  |   | -           |  |   | -                           
|Stock-based compensation expense - directors shares        |  | 18           |  |   | -                     |  |   | 56       |  |   | -                        |  |   | -           |  |   | -                           
|Stock-based compensation expense                           |  | -            |  |   | -                     |  |   | 359      |  |   | -                        |  |   | -           |  |   | -                           
|Comprehensive loss:                                        |  |              |  |   |                       |  |   |          |  |   |                          |  |   |             |  |   |                             
|Net loss                                                   |  | -            |  |   | -                     |  |   | -        |  |   | -                        |  |   | -           |  |   | (3,298)                     
|Total comprehensive loss                                   |  | -            |  |   | -                     |  |   | -        |  |   | -                        |  |   | -           |  |   | -                           
|Balance at September 27, 2008                              |  | 16,961       |  | $ | 185                   |  | $ | 126,346  |  | $ | (7,456)                  |  | $ | 102         |  | $ | (95,088)                    

See accompanying notes to unaudited condensed consolidated financial statements.

7

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ZILOG, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.	BASIS OF PRESENTATION

The accompanying interim financial information is unaudited.  In the opinion of ZiLOG,
Inc.'s ("ZiLOG" or the "Company") management, all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of interim results have been included. The results for interim periods are not necessarily indicative of results to
be expected for the full fiscal year. These unaudited condensed consolidated financial statements and notes should be read in conjunction with
the Company's annual consolidated financial statements and notes thereto contained in the Company's 2008 Annual Report filed on Form 10-K
(File Number 001-13748) for the fiscal year ended March 31, 2008, filed on June 30, 2008 with the Securities and Exchange Commission.The Company's fiscal year ends 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 fiscal fourth
quarter, which ends on March 31.  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.
The operating results for any period are not necessarily indicative of results for any subsequent period or the full fiscal year.The condensed consolidated balance sheet at March 31, 2008 was derived from audited financial statements at
that date, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for
complete financial statements.NOTE 2.  	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESA summary of the Company's significant accounting policies is described in its Annual Report for the 2008 fiscal year ended March 31,
2008, filed on Form 10-K with the Securities and Exchange Commission on June 30, 2008. The Company's significant accounting policies remain
unchanged from those disclosed on Form 10-K for the fiscal year ended March 31, 2008, except for the following:Adoption of Accounting Standards.Effective April 1, 2008, the Company
adopted SFAS No. 159 "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS
No. 159"). The Company did not elect to adopt the fair value option under this pronouncement which permits entities to choose to
measure many financial instruments and certain other items at fair value on a contract by contract basis.

Effective April 1, 2008, the Company adopted SFAS No. 157, "Fair Value Measurements"
("SFAS No. 157"). In February 2008, the Financial Accounting Standards Board ("FASB") issued Staff
Position No. FAS 157-2, "Effective Date of FASB Statement No. 157," which provides a one-year deferral of the effective
date of SFAS No. 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial
statements at fair value at least annually. In September 2008, the FASB issued Staff Position No. FAS 157-3, "Determining the Fair Value
of a Financial Asset When the Market for That Asset is Not Active", which clarifies the application of SFAS No. 157 in a market that is not
active.  The Company has adopted the provisions of SFAS No. 157 with respect to its financial assets and liabilities only. SFAS
No. 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances
disclosures about fair value measurements. Fair value is defined under SFAS No. 157 as the exchange price that would be received for an
asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction
between market participants on the measurement date. Valuation techniques used to measure fair value under SFAS No. 157 must
maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on the
following three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair
value:

|•    Level 1  - | Quoted prices in active markets for identical assets or liabilities;                                                                                                                                                                                                                                                                       
|--------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|•    Level 2  - | Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted
prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the assets or liabilities; and

8

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|•    Level 3  - | Unobservable inputs that are supported by little or no market activity and that are
significant to the fair value of the assets or liabilities.
|--------------- | -----------------------------------------------------------------------------------------------------------------------------------------------

In accordance with SFAS 157, the following table represents the Company's fair value hierarchy for its financial assets (cash equivalents
and available for sale investments) as of September 27, 2008 (unaudited, in thousands):

|                                  | Sept. 27, 2008     
|--------------------------------- | -------------------
|                                  | Fair Value         
|Money market funds                | $            11,197
|Commercial paper                  | 296                
|Auction rate preferred securities | 1,450              
|Total                             | $            12,943

Since February 2008, due to various factors including the tightening of liquidity in the financial market, regularly held auctions for Auction
Rate Preferred Securities ("ARPS"), have been unsuccessful. Following the failure of these auctions, the Company has received $2.5
million from redemptions of its ARPS. The remaining ARPS balance of $1.45 million as of September 27, 2008, has been classified as long-term
investments and accrues interest pending their redemption or sale.

In determining fair value, the Company uses various valuation techniques, including market and income approaches to value available-for-sale
investments.  The availability of observable inputs can vary from instrument to instrument and to the extent that valuation is based on inputs
that are less observable or unobservable in the market, the determination of fair value requires more judgment. The degree of judgment
exercised by the Company's management in determining fair value is greatest for instruments categorized in Level 3. All of the Company's ARPS
have AAA credit ratings, are 100% collateralized and continue to pay interest in accordance with their contractual terms. Additionally, the issuers
reported collateralized asset value ranges which exceed the value of ARPS held by the Company by 200 to 300 percent. Accordingly, the
remaining ARPS balance of $1.45 million is categorized as Level 2 for fair value measurement under FAS 157 and has been recorded at full par
value on the consolidated balance sheet as of September 27, 2008. The Company currently believes the ARPS values are not impaired and as
such, no impairment has been recognized against the investment. If future auctions fail to materialize and the credit rating of the issuers
deteriorates, the Company may be required to record an impairment charge against the value of its ARPS.

NOTE 3.	INVENTORY

Inventories 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 the
reserved inventory. Inventories, net of provisions, consist of the following (unaudited, in thousands):

|                 |  |   | Sept. 27, |   | March 31,
|---------------- |  | - | --------- | - | ---------
|                 |  |   | 2008      |   | 2008     
|Raw materials    |  | $ | 248       | $ | 447      
|Work-in-progress |  |   | 5,351     |   | 5,924    
|Finished goods   |  |   | 2,009     |   | 2,042    
|Inventory, net   |  | $ | 7,608     | $ | 8,413    

9

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NOTE 4.	SPECIAL CHARGES AND CREDITS

The components of special charges and credits are as follows (unaudited, in thousands):

|                                                   |   | Three Months Ended |  |   | Six Months Ended
|-------------------------------------------------- | - | ------------------ |  | - | ----------------
|                                                   |   | Sept. 27,          |  |   | Sept. 29,       
|                                                   |   | 2008               |  |   | 2007            
|Restructuring of operations:                       |   |                    |  |   |                 
|Engineering consolidation severance                |   |                    |  |   |                 
|and termination costs                              | $ | -                  |  | $ | 124             
|MOD II maintenance and selling costs               |   | -                  |  |   | -               
|Manufacturing test outsources:                     |   |                    |  |   |                 
|Employee severance and other costs                 |   | 263                |  |   | 311             
|Other                                              |   | 291                |  |   | 36              
|Reimbursement of retirement benefits - Philippines |   |                    |  |   |                 
|defined benefit plan                               |   | -                  |  |   | -               
|Total special charges and credits                  | $ | 554                |  | $ | 471             

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 production test operations currently performed in its Philippines facility to third party manufacturing partners. Previously, the
Company also reorganized certain of its sales offices, relocated its corporate headquarters to a new facility in San Jose, California in July 2007.
Additionally, in April 2007, the Company consolidated certain research and development activities from its Shanghai, China and Seattle,
Washington facilities to its San Jose, California and Meridian, Idaho facilities.

During the three and six months ended September 27, 2008, the Company incurred $0.6 million and $1.1 million, respectively, in special
charges.  Special charges include severance and other costs related to the Company's test outsourcing activities.

During the three and six months ended September 29, 2007, the Company incurred $0.5 million and $1.3 million, respectively, for severance,
lease termination costs and other closure costs related to the consolidation of its research and development efforts and test outsource activities.
During the six months ended September 29, 2007, the Company incurred period expenses of $0.2 million related to maintenance costs and
subsequent costs associated with the sale of its MOD II facility. Additionally in May 2007, the Company received a refund of $0.7 million from its
Philippines defined benefit plan related to its prior over funded status. The refund was recorded as a credit to special charges during the six
months ended September 29, 2007.

The following table summarizes activity in accrued special charges which is included in other accrued liabilities on the condensed
consolidated balance sheets (unaudited, in thousands):

|                          |   | Accrued
|------------------------- | - | -------
|                          |   | Special
|                          |   | Charges
|Balance at March 31, 2008 | $ | 489    
|Accruals                  |   | 548    
|Cash payments             |   | (469)  
|Balance at Sept. 27, 2008 | $ | 568    

10

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NOTE 5.	GEOGRAPHIC AND SEGMENT INFORMATION

Segment Information. The Company's business is comprised of one operating segment. 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.  The new products category includes universal remote control solutions, Zatara 32-bit secured transaction processors and 8-bit
embedded flash microcontrollers. Classic products primarily reflect sales of Z8 microcontrollers including both ROM and OTP, Z80
microprocessors and serial communications controllers.

Sales by Product Category. The following table represents the Company's net sales by product category for each of the
periods indicated (unaudited, in thousands):

|                               |  |   | Three Months Ended |  |   | Six Months Ended
|------------------------------ |  | - | ------------------ |  | - | ----------------
|                               |  |   | Sept. 27,          |  |   | Sept. 29,       
|                               |  |   | 2008               |  |   | 2007            
|Net sales by product category: |  |   |                    |  |   |                 
|New Products                   |  | $ | 12,048             |  | $ | 8,304           
|8-bit classic products         |  |   | 6,978              |  |   | 8,355           
|Total Net Sales                |  | $ | 19,026             |  | $ | 16,659          

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

|                      |  |   | Three Months Ended |  |   | Six Months Ended
|--------------------- |  | - | ------------------ |  | - | ----------------
|                      |  |   | Sept. 27,          |  |   | Sept. 29,       
|                      |  |   | 2008               |  |   | 2007            
|Net sales by region:  |  |   |                    |  |   |                 
|Americas              |  | $ | 6,084              |  | $ | 4,798           
|Asia                  |  |   | 10,604             |  |   | 9,519           
|Europe                |  |   | 2,338              |  |   | 2,342           
|Total net sales       |  | $ | 19,026             |  | $ | 16,659          
|                      |  |   |                    |  |   |                 
|Net sales by channel: |  |   |                    |  |   |                 
|Direct                |  | $ | 9,400              |  | $ | 6,693           
|Distribution          |  |   | 9,626              |  |   | 9,966           
|Total net sales       |  | $ | 19,026             |  | $ | 16,659          

Major customers:  For the three and six months ended September 27, 2008, one distributor and two customers each
individually accounted forgreater than 10% of the Company's total net sales.  The distributor accounted for approximately 24% of
net sales during the three and six months ended September 27, 2008. For the three months ended September 27, 2008, two customers each
accounted for approximately 13% of net sales.  For the six months ended September 27, 2008, two customers accounted for approximately 14%
and 12% of net sales.

11

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Forthe three and six months ended September 29, 2007, one distributor accounted forgreater than
10%

NOTE 6.      STOCK, OPTIONS AND STOCK-BASED COMPENSATION

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 the next three years and expire ten years from the grant-date. As of September 27, 2008, the
Company had 2,125,577 shares available for grant under all plans.

Additionally, the Company has an Employee Stock Purchase Plan ("ESPP") that allows employees to purchase shares of
common stock at 85% of the fair market value at the lower of either the date of enrollment or the date of purchase. In addition to the shares
available for issuance under the stock option and restricted stock plans, the
Company had approximately 942,378 shares of common stock reserved for future issuance under its ESPP plan as of September 27, 2008.



The Company has a fiscal 2009 Employee Stock Incentive Program ("SIP")
that provides eligible employees an incentive award based upon the Company's achievement of goals related to revenue growth and product and
customer program development. The incentive award is calculated as a fixed dollar amount in the first and second half of fiscal 2009 and is
settled in the form of restricted stock awards. The classification of obligations and expense recognition related to these awards is recognized in
accordance with FASB Statement 150 "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and
Equity" and SFAS 123R "Share Based Payments". During the three and six months period ended September 27, 2008, the
Company recognized $0.2 million and $0.1 million, respectively of stock compensation expenses related to the SIP.  The total value of the
SIP earned by eligible employees for the first half of fiscal 2009 was $0.7 million with an unrecognized portion of $0.4 million that will be
recognized ratably through the expected final vesting date of May 8, 2009. SIP stock awards for the first half of fiscal 2009 were made at the
market price on September 27, 2008.  Currently, the estimated shares expected to be issued are 234, 612 at the closing market price of
$3.19 per share.

During the three and six month periods ended September 27, 2008, the Company recorded $0.3 million and $0.8 million in stock
compensation expense which includes the applicable compensation expenses for the Company's fiscal 2009 stock incentive plan, respectively.
In comparison, for the three and six months ended September 29, 2007, the Company recorded $0.4 million and $0.8 million of stock
compensation expense, respectively.

The following table sets forth the total stock-based compensation expense resulting from equity plans and incentive programs included in the
Company's unaudited condensed consolidated statements of operations (unaudited, in thousands):

|                                       |  |  |  | Three Months Ended |           | Six Months Ended
|-------------------------------------- |  |  |  | ------------------ | --------- | ----------------
|                                       |  |  |  |                    | Sept. 27, |                 
|                                       |  |  |  |                    | 2008      |                 
|Cost of sales                          |  |  |  | $                  | 30        |                 
|Research and development               |  |  |  |                    | 85        |                 
|Selling, general and administrative    |  |  |  |                    | 211       |                 
|Total stock-based compensation expense |  |  |  | $                  | 326       |                 

12

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

|Stock Options                                       |  |   | Three Months Ended |  |   | Six Months Ended
|--------------------------------------------------- |  | - | ------------------ |  | - | ----------------
|                                                    |  |   | Sept. 27,          |  |   | Sept. 29,       
|                                                    |  |   | 2008               |  |   | 2007            
|Expected life (in years)                            |  |   | 4.8                |  |   | 5.2             
|Interest rate                                       |  |   | 3.3%               |  |   | 4.3%            
|Volatility                                          |  |   | 49.1%              |  |   | 45.0%           
|Dividend yield                                      |  |   | -                  |  |   | -               
|Weighted-average per share fair value at grant date |  | $ | 1.53               |  | $ | 1.77            



|Employee Stock Purchase Plan                        |  |   | Three Months Ended |  |   | Six Months Ended
|--------------------------------------------------- |  | - | ------------------ |  | - | ----------------
|                                                    |  |   | Sept. 27,          |  |   | Sept. 29,       
|                                                    |  |   | 2008               |  |   | 2007            
|Expected life (in years)                            |  |   | 0.7                |  |   | 0.9             
|Interest rate                                       |  |   | 1.9%               |  |   | 5.0%            
|Volatility                                          |  |   | 64.7%              |  |   | 38.6%           
|Dividend yield                                      |  |   | -                  |  |   | -               
|Weighted-average per share fair value at grant date |  | $ | 0.91               |  | $ | 0.89            

The computation of expected volatility for the three and six months ended September 27, 2008 and September 29, 2007 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.

Stock option activity for the six months ended September 27, 2008, is as follows (unaudited):

|                                        |  |  |         |  |                     |  | Weighted-        |  |                       
|--------------------------------------- |  |  | ------- |  | ------------------- |  | ---------------- |  | ----------------------
|                                        |  |  |         |  | Weighted-           |  | Average          |  |                       
|                                        |  |  |         |  | Average             |  | Remaining        |  | Aggregate             
|                                        |  |  | Shares  |  | Exercise Price      |  | Contractual Term |  | Intrinsic Value       
|                                        |  |  | (000's) |  | (per share)         |  | (years)          |  | (000's)               
|Outstanding at March 31, 2008           |  |  | 2,083   |  | $              4.89 |  |                  |  |                       
|Grants                                  |  |  | 26      |  | $              3.43 |  |                  |  |                       
|Exercises                               |  |  | (3)     |  | $              2.70 |  |                  |  |                       
|Forfeitures or expirations              |  |  | (19)    |  | $              7.07 |  |                  |  |                       
|Outstanding at June 28, 2008            |  |  | 2,087   |  | $              4.85 |  |                  |  |                       
|Grants                                  |  |  | 42      |  | $              3.38 |  |                  |  |                       
|Exercises                               |  |  | (2)     |  | $              2.70 |  |                  |  |                       
|Forfeitures or expirations              |  |  | (31)    |  | $              4.40 |  |                  |  |                       
|Outstanding at September 27, 2008       |  |  | 2,096   |  | $              4.83 |  | 7.5              |  | $                 108 
|                                        |  |  |         |  |                     |  |                  |  |                       
|Outstanding Vested and Expected to Vest |  |  |         |  |                     |  |                  |  |                       
|at September 27, 2008                   |  |  | 1,880   |  | $              4.97 |  | 7.4              |  | $                   98
|                                        |  |  |         |  |                     |  |                  |  |                       
|Exercisable at September 27, 2008       |  |  | 982     |  | $              6.17 |  | 6.1              |  | $                   50

13

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The aggregate intrinsic value in the table above represents the total pretax intrinsic value, that is, the difference between the Company's
closing stock price on the last trading day of the period and the exercise price times the number of shares that would have been received by the
option holders had all option holders exercised their options on September 27, 2008. This amount will change based on fluctuations of the fair
market value of the Company's stock. The total intrinsic value of options vested and expected to vest is approximately $98,000 at September 27,
2008.

There were 2,449 and 5,240 stock option exercises

No income tax benefit was realized from stock option exercises during the three and six months ended September 27, 2008 and September
29, 2007. 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.

As of September 27, 2008, $1.18 million of total unrecognized compensation costs related to stock options is expected to be recognized over
a weighted-average remaining period of 2.66 years.  The total unrecognized compensation cost related to restricted shares granted as of
September 27, 2008 is less than $0.1 million, which is expected to be recognized over a weighted-average remaining period of 0.4 years.

NOTE 7.	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 vigorously against these claims. 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 is 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 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 vigorously against these
claims. 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

14

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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 other litigation and responding to other 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 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 $2 million. To date, there have not been any costs incurred in connection with such indemnification
arrangements; therefore, there is no accrual of such amounts at September 27, 2008. The Company discloses indemnification liabilities
according to FASB Staff Position FIN 45-1, "Accounting for Intellectual Property Infringement Indemnifications under FAS Interpretation
No. 45." Under FAS No. 5, "Loss Contingencies," a claim would be accrued when a loss is probable and the
amount can be reasonably estimated. At September 27, 2008, no such amounts are accrued.

In connection with the lease in July 2007 for its new corporate headquarters located in San Jose, California, the Company established an
Irrevocable Letter of Credit in the amount of $0.3 million with its bank for the security deposit.

NOTE 8.      SHORT-TERM DEBT AND LICENSE AGREEMENTS

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% which
was 5.0% at September 27, 2008. As of September 27, 2008, the Company had $1.0 million of borrowings outstanding under this agreement
payable through June, 2009. As noted previously, the Company had $0.3 million of standby letters of credit with its bank as of September 27,
2008 and September 29, 2007, respectively.

In October 2007, the Company entered into a three year development software license agreement beginning December 30, 2007 for a total
of license fee of $2.2 million.  The Company retains perpetual use of the software at the end of the agreement. The total unpaid portion of $0.6
million has been included in short and long-term liabilities on the Company's consolidated balance sheet as of September 27, 2008.

In April 2008, the Company entered into a three-year agreement to license certain technologies to further develop its 32-bit ARM core based
technology. The total cost of this agreement was $2.4 million and the unpaid portion of $2.2 million has been included in short and long-term
liabilities on the Company's consolidated balance sheet as of September 27, 2008.

NOTE 9.	INCOME TAXES

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 of September 27, 2008, the total amount of unrecognized tax benefits was approximately $5.4 million of which $4.6 million is recorded as
a deferred tax asset that is fully offset by a valuation allowance and $0.8 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

15

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tax positions in light of legislative, bilateral tax treaty, regulatory and judicial developments in the countries in which the
Company does business.

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 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.  As of September 27, 2008, the Company had approximately $0.1 million of accrued interest
and penalties related to uncertain tax positions.

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.

During the three and six months ended September 27, 2008, the Company's income tax provision was $0.1 million and $0.2 million,
respectively, which primarily reflects provisions for taxes in certain profitable foreign jurisdictions. During the three and six months ended
September 29, 2007, the Company's income tax provision was $0.1 million and $0.6 million, respectively, which primarily reflects amortization of
deferred charges 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. 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.

NOTE 10.   RETIREMENT AND BENEFIT PLANS

U.S. 401(k) retirement plan: 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 less than $0.1 million for the six months ended September 27, 2008 and the six months ended September 29, 2007,
respectively. There were no discretionary contributions made in the six months ended September 27, 2008 and the six months ended September
29, 2007, respectively.

Philippine defined benefit plan: The Company's Philippines subsidiary maintains a defined benefit pension plan for local
employees, which is consistent with local statutes and practices. The Company has adopted SFAS 158, which supersedes the previous
accounting under SFAS 87. As of September 27, 2008 based on its actuarial report 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.  During the six months ended September 27, 2008, the net periodic benefit
costs were immaterial.

16

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During the six months ended September 27, 2008, the Company received $0.7 million of plan assets as entitlement benefits for terminated
employees, which was included in the net severance payments related to the Company's restructuring and outsourcing activities in its Philippines
operations.

Additionally in May 2007, the Company received a refund of $0.7 million from its Philippines defined benefit plan related to its prior over
funded status. The refund was recorded as a credit to special charges during the six months ended September 29, 2007.













17

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ITEM 2.	 Management's Discussion and Analysis of Financial Condition and Results of Operations

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" in our Form 10-K for the year ended March 31, 2008 and in other sections of this
quarterly report.

Overview

The following is management's discussion and analysis of financial condition and results of our operations and those of our subsidiaries
for the three-month and six-month periods ended September 27, 2008 and September 29, 2007.  This discussion and analysis should be read in
conjunction with the unaudited condensed consolidated financial statements and notes thereto included elsewhere herein and in our 2008 annual
report on Form 10-K.  Management's discussion and analysis provides information concerning our business environment, consolidated
results of operations and liquidity and capital resources.

Our fiscal year ends on 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 fourth quarter, which ends on March 31.  The operating
results for any interim period are not necessarily indicative of results for any subsequent period or the full fiscal year.

Critical Accounting Estimates

Our critical accounting policies are disclosed in the Annual Report on Form 10-K for the year ended March 31, 2008 and have not
changed materially as of September 27, 2008, with the exception of the following:

On an on-going basis, we evaluate our estimates and assumptions, including those related to sales returns, allowance for
doubtful accounts, inventory write-downs, asset impairments, stock-based compensation expense and deferred taxes.  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 may differ
from those estimates.  Critical accounting estimates are described in our Form 10-K for the 2008 fiscal year ended March 31, 2008, filed on June
30, 2008.

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.

18

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Results of Operations

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

|                      |  |   | Three Months Ended |  |   | Six Months Ended
|--------------------- |  | - | ------------------ |  | - | ----------------
|                      |  |   | Sept. 27,          |  |   | Sept. 29,       
|                      |  |   | 2008               |  |   | 2007            
|Net sales by region:  |  |   |                    |  |   |                 
|Americas              |  | $ | 6,084              |  | $ | 4,798           
|Asia                  |  |   | 10,604             |  |   | 9,519           
|Europe                |  |   | 2,338              |  |   | 2,342           
|Total net sales       |  | $ | 19,026             |  | $ | 16,659          
|                      |  |   |                    |  |   |                 
|Net sales by channel: |  |   |                    |  |   |                 
|Direct                |  | $ | 9,400              |  | $ | 6,693           
|Distribution          |  |   | 9,626              |  |   | 9,966           
|Total net sales       |  | $ | 19,026             |  | $ | 16,659          



|                               |  |   | Three Months Ended |  |   | Six Months Ended
|------------------------------ |  | - | ------------------ |  | - | ----------------
|                               |  |   | Sept. 27,          |  |   | Sept. 29,       
|                               |  |   | 2008               |  |   | 2007            
|Net sales by product category: |  |   |                    |  |   |                 
|New Products                   |  | $ | 12,048             |  | $ | 8,304           
|8-bit classic products         |  |   | 6,978              |  |   | 8,355           
|Total Net Sales                |  | $ | 19,026             |  | $ | 16,659          

19

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Key Metrics

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

|                                          |  |  | Three Months Ended
|----------------------------------------- |  |  | ------------------
|                                          |  |  | Sept. 27,         
|                                          |  |  | 2008              
|Days sales outstanding                    |  |  | 34                
|Net sales to inventory ratio (annualized) |  |  | 10.0              
|Weeks of inventory at distributors        |  |  | 10                
|Current ratio                             |  |  | 1.6               

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

Days sales outstanding, DSO, 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, collections, and individual payment terms. At September 27, 2008, our DSO was 34 days as compared to 43 days
at September 29, 2007. This improvement in DSO is largely due to increased linearity of our shipments in the quarter ended September 27, 2008
versus the comparable quarter a year ago, thus allowing a higher portion of customer receivables to be collected during the quarter in which they
were sold.

Net sales to inventory ratio is a metric we use to analyze how quickly our investment in inventories is recovered by our sales and is
calculated by dividing ending inventory into sales for the quarter annualized. This metric may not be comparable to other companies who use
inventory ratios to analyze inventory and is not the same as a typical inventory turns ratio. Our annualized net sales to inventory ratio increased to
10 from 7.7 in the quarter ended September 27, 2008 compared to the quarter ended September 29, 2007 reflecting lower inventory levels on
significantly higher sales. We have continued to manage inventories closely and improve the overall mix of the products as compared to revenue
and revenue forecasts.

Weeks of inventory at distributors measures how quickly our distributors sell the inventories that we sell to them.  We do not recognize
revenue on shipments to distributors until our distributors resell our products. Although our distributors in various regions of the world
maintain

Current ratio represents current assets divided by current liabilities and is commonly used to assess a company's liquidity. We use this ratio
to make spending determinations on discretionary items.  Our current ratio as of September 27, 2008 was 1.6 a decrease from 2.1 as of
September 29, 2007. This decrease is primarily due to a decrease in cash which was used for working capital needs and the reclassification of
our ARPS from cash and cash equivalents to long-term investments, offset by a decline in deferred income on shipments to our distributors as
their inventory levels decreased.

Three Months Ended September 27, 2008 Compared to Three Months Ended September 29, 2007

Net Sales.  Net sales were $19.0 million for the quarter ended September 27, 2008, an increase of 14 percent as compared to net
sales of $16.7 million for the quarter ended September 29, 2007.

Net sales of our new products which include our 32-bit Zatara secured transactions microprocessors, universal remote control solutions and
8-bit embedded flash microcontrollers increased 45 percent to $12.0 million for the three months ended September 27, 2008 compared to $8.3
million for the three months ended September 29, 2007. This increase reflects an increase in our 32-bit Zatara product sales for the point of sale
market, an increase in sales

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of our remote control solutions reflecting continued customer expansion and existing customer growth with new
programs, including shipments of our new low power CrimzonTMproducts, partially offset by a decrease in our embedded flash
sales reflecting lower sales to customers primarily in the consumer market.

Net sales of our 8-bit classic products, consisting of our traditional Z8, Z80 and SCC products decreased by 16% to $7.0 million for the
quarter ended September 27, 2008, from $8.3 million for the quarter ended September 29, 2007, reflecting a decline in demand for certain
consumer, security and telecommunications applications and lower distribution resales into the broad based general purpose market including
industrial market applications.

Compared to year ago levels, we have continued to experience a reduction in sales
reflecting the impact of  the global economic crisis, especially as it relates to the sales of our consumer based products.



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 as a percent of net sales was 46 percent of sales for the quarter
ended September 27, 2008 relatively consistent with gross margin percent for the quarter ended September 29, 2007.  Overall gross margin was
higher in the quarter than for the comparable quarter a year ago reflecting higher shipment volumes and overall higher revenues. Costs and
associated margins can be influenced by the variation in the mix of products sold.

Research and Development Expenses.

Selling, General and Administrative Expenses.  Selling, general and administrative expenses increased to $5.9 million for the quarter
ended September 27, 2008 from $5.1 million for the quarter ended September 29, 2007.  Both sales and marketing and general and
administrative costs increased reflecting costs to support new sales and marketing programs, professional fees associated with our proxy contest
and our strategic alternatives review as well as the incremental costs of the fiscal 2009 employee incentive plans and expenses associated with
first half scores for the plans versus the pre-established incentive goals that included revenue growth and product and customer program
development.

Special Charges and Credits.  Special charges and credits for the periods indicated were as follows (unaudited, in thousands):

|                                                   |   | Three Months Ended |  |   | Six Months Ended
|-------------------------------------------------- | - | ------------------ |  | - | ----------------
|                                                   |   | Sept. 27,          |  |   | Sept. 29,       
|                                                   |   | 2008               |  |   | 2007            
|Restructuring of operations:                       |   |                    |  |   |                 
|Engineering consolidation severance                |   |                    |  |   |                 
|and termination costs                              | $ | -                  |  | $ | 124             
|MOD II maintenance and selling costs               |   | -                  |  |   | -               
|Manufacturing test outsources:                     |   |                    |  |   |                 
|Employee severance and other costs                 |   | 263                |  |   | 311             
|Other                                              |   | 291                |  |   | 36              
|Reimbursement of retirement benefits - Philippines |   |                    |  |   |                 
|defined benefit plan                               |   | -                  |  |   | -               
|Total special charges and credits                  | $ | 554                |  | $ | 471             

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During the quarter ended September 27, 2008, special charges totaled $0.6 million representing costs associated with our manufacturing test
operations outsource activities.  During the quarter ended September 29, 2007, special charges totaled $0.5 million representing severance and
termination costs associated with the consolidation of our research and development sites.

Amortization of Intangible Assets.

We performed our annual impairment test of goodwill and intangible assets during the quarter ended March 31, 2008.  As of September 27,
2008, there was no indication of impairment of our intangible assets' carrying value.

Separable intangible assets that are deemed to have defined lives have been recorded and continue to be amortized over their useful lives.
These intangible assets are being amortized utilizing the pattern-of-use method over their estimated useful lives of six years for current
technology and ten years for brand name.

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

|                                         |  |   | Current    |   | Brand |   |       
|---------------------------------------- |  | - | ---------- | - | ----- | - | ------
|                                         |  |   | Technology |   | Name  |   | Total 
|Gross carrying amount, recorded May 2002 |  | $ | 16,959     | $ | 9,243 | $ | 26,202
|Accumulated amortization                 |  |   | 16,943     |   | 7,148 |   | 24,091
|Book value at September 27, 2008         |  | $ | 16         | $ | 2,095 | $ | 2,111 

The anticipated remaining amortization schedule for these assets is as follows (unaudited, in thousands):

|                            |  |   | Current    |   | Brand |   |      
|--------------------------- |  | - | ---------- | - | ----- | - | -----
|Fiscal Year                 |  |   | Technology |   | Name  |   | Total
|2009 - remaining 2 quarters |  | $ | 16         | $ | 368   | $ | 384  
|2010                        |  |   | -          |   | 680   |   | 680  
|2011                        |  |   | -          |   | 617   |   | 617  
|2012                        |  |   | -          |   | 430   |   | 430  
|Total                       |  | $ | 16         | $ | 2,095 | $ | 2,111

Interest and Other Income (Expense).  Interest income relates to interest earned on our cash and cash equivalents included in our
short-term investment portfolio and auction rate preferred securities.  Cash equivalents are primarily invested in money market funds and high-grade
commercial paper with maturities of 90 days or less. Interest income for the quarter ended September 27, 2008, was $0.1 million as compared to
$0.2 million for the quarter ended September 29, 2007

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Income Taxes.  For the quarter ended September 27, 2008, our income tax provision reflects provisions for taxes in certain
profitable foreign jurisdictions.  For the quarter ended September 29, 2007, the income tax provision reflects the amortization of deferred charges
and provisions for taxes in certain profitable foreign jurisdictions.  The amortization of deferred charges is now complete and as such, no
amortization charges were required to be recorded in the quarter ended September 27, 2008. We anticipate operating at a loss for U.S. tax
purposes for the fiscal year ending March 31, 2009 however, we provide for income tax expense in foreign jurisdictions where the foreign
subsidiaries' operations generate profits that are taxable.

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.

Six Months Ended September 27, 2008 Compared to Six Months Ended September 29, 2007

Net Sales.  Net sales were $37.2 million for the six months ended September 27, 2008, an increase of 11 percent as compared to
net sales of $33.4 million for the six months ended September 29, 2007.

Net sales of our new products which include our 32-bit Zatara secured transactions microprocessors, universal remote control solutions and
8-bit embedded flash microcontrollers increased 34 percent to $23.1 million for the six months ended September 27, 2008 compared to $17.2
million for the six months ended September 29, 2007. This increase reflects an increase in our 32-bit Zatara product sales for the point of sale
market, an increase in sales of our remote control solutions reflecting continued customer expansion and existing customer growth with new
programs, including shipments of our new low power CrimzonTMproducts, partially offset by a decrease in our embedded flash
sales.

Net sales of our 8-bit classic products, consisting of our traditional Z8, Z80 and SCC products decreased by 13% to $14.0 million for the six
months ended September 27, 2008, from $16.3 million for the six months ended September 29, 2007, reflecting a decline in demand for certain
consumer, security and telecommunications applications and lower distribution resales into the broad based general purpose market including
industrial market applications.

Compared to year ago levels, we have continued to experience a reduction in sales reflecting the impact of  the global economic crisis,
especially as it relates to the sales of our consumer based products.

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 46.7 percent of net sales for the six months ended September 27, 2008,
compared to gross margin of 45.2 percent for the six months ended September 29, 2007.

Research and Development Expenses. Research and development expenses were $7.9 million for the six months ended
September 27, 2008 as compared to $8.4 million for the six months ended September 29, 2007. Research and development spending for the six
months ended September 27, 2008 is lower compared to the six months ended September 29, 2007 reflecting overall lower variable costs
associated with the development programs as certain of the programs came to completion.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased to $11.5 million for the six
months ended September 27, 2008 from $10.1 million for the six months ended September 29, 2007. The increase in our selling, general and
administrative spending reflects overall higher sales support costs for

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the field and distribution channel and increased marketing costs in
promotion and support of market development. General and administrative costs were higher reflecting higher professional costs associated with
the proxy contest and the strategic alternatives review. Additionally, S,G&A was higher for the six months ended September 27, 2008
reflecting the fiscal 2009 employee incentive compensation plans and expenses associated with first half scores for the plans versus the
pre-established incentive goals that included revenue growth and product and customer program development.

Special Charges and Credits. Specials charges and credits totaled $1.1 million for the six months ended September 27, 2008 as
compared to $0.9 million for the six months ended September 29, 2007. The 2008 charges primarily reflect the manufacturing test operations
outsource and the 2007 special charges include the consolidation of the research and development sites. Additionally, the 2007 charges included
$0.2 million for the MOD II facility held for sale and the associated maintenance and selling costs of that site in Nampa, Idaho. This was offset by
a $0.7 million refund received from our Philippines defined benefit plan as the plan was in an overfunded position.

Interest Income and Expense. Interest income relates to interest earned on our cash and cash equivalents. Cash equivalents are
primarily invested in a mixture of treasury backed securities, money market funds and high-grade commercial paper with maturities of 90 days or
less. Interest income for the six months ended September 27, 2008 was $0.1 million as compared to $0.5 million for the six months ended
September 29, 2007. The lower interest income is the result of a lower cash balance as well as the investment in treasury guaranteed short term
investments yielding lower interest rates. During 2008, with the anomalies in the financial market and the uncertainty caused by tightening of
liquidity requirements, including the failure of the ARPS, we moved a considerable amount of our cash and cash equivalents to government
guaranteed securities to ensure availability and safety. Other income expense was $0.4 million income for the six months ended September 27,
2008 as compared to $0.1 million expense for the six months ended September 29, 2007. The income in 2008 primarily reflects currency
exchange gains on the strengthening US dollar versus the currencies of India and the Philippines versus currency losses in 2007.

Income Taxes. For the six months ended September 27, 2008 and September 29, 2007 our income tax provisions were $0.2 million
and $0.6 million, respectively. For the six months ended September 27, 2008, our income tax provision reflects the provisions for taxes in certain
profitable foreign jurisdictions. For the six months ended September 29, 2007, our income tax provision reflects the amortization of deferred
charges, provisions for taxes in certain profitable foreign jurisdictions and the release of a 2003 tax reserve on which the statue of limitation
expired during the quarter ended September 29, 2007.  We have operated at a cumulative 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.

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.



Liquidity and Capital Resources

As of September 27, 2008, we had $1.0 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. As of September 29, 2007, we had no
debt or bank borrowings outstanding. Additionally, in April 2008, we entered into a three-year agreement to license certain technologies to further
develop our 32-bit ARM core based technology. The total cost of this agreement was $2.4 million and the unpaid portion of $2.2 million has been
included in short and long-term liabilities on our consolidated balance sheet as of September 27, 2008.

We had $0.3 million in standby letters of credit as of September 27, 2008 and as of September 29, 2007 related to the lease for our corporate
headquarters facility in San Jose, California.

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At September 27, 2008, we had cash and cash equivalents of $16.9 million, compared to $16.6 million as of March 31, 2008.  We classified
$1.45 million of our Auction Rate Preferred Securities ("ARPS"), as long-term investments as of September 27, 2008, due to the
continued disruption in the credit markets that resulted in widespread failed auctions.  Those failed auctions resulted in a loss of liquidity for
sellers but did not constitute a default by the issuer of the underlying security.  As of March 31, 2008 we held $3.9 million in ARPS and
subsequently have received $2.5 million from the redemptions of our ARPS, which have been included in cash and cash equivalents as of
September 27, 2008.

We adopted SFAS No. 157 (SFAS 157), "Fair Value Measurements," on April 1, 2008. SFAS 157 establishes a fair
value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad categories for disclosure to show the
extent and level of judgment used to estimate fair value measurements.  In determining fair value, we use various valuation techniques,
including market and income approaches to value available-for-sale investments.  The availability of observable inputs can vary from instrument
to instrument and to the extent that valuation is based on inputs that are less observable or unobservable in the market, the determination of fair
value requires more judgment. The degree of judgment exercised by our management in determining fair value is greatest for instruments
categorized in Level 3.  All of our ARPS have AAA credit ratings, are 100% collateralized and continue to pay interest in accordance with their
contractual terms. The issuers reported collateralized asset value ranges which exceed the value of ARPS held by us by 200 to 300 percent.
Accordingly, our remaining ARPS balance of $1.45 million has been categorized as Level 2 for fair value measurement and has been recorded at
full par value on our consolidated balance sheet as of September 27, 2008. We believe the ARPS values are not impaired and as such, no
impairment has been recognized against the investment. If the investment bankers are unable to successfully close future auctions and their
credit rating continues to deteriorate, we may be required to record an impairment charge against the value of our ARPS investments.

We believe that existing cash, cash equivalents and investments, together with any cash generated from operations will be sufficient to meet
normal operating requirements including capital expenditures for the next twelve months.

Cash Flows From Operating Activities.

Cash Flows From Investing Activities.

Cash Flows From Financing Activities.  During each of the six month periods ended September 27, 2008 and September 29,
2007, $0.4 million and $0.1 million in net cash were provided by financing activities, respectively.  During the six months ended September 27,
2008, our financing activities included the receipt of cash under our short term financing arrangement of $0.6 million offset by payments of $0.3
million and $0.1 million from proceeds from the issuance of common stock under employee stock purchase and stock option plans. During the six
months ended September 29, 2007, $0.3 million of cash was provided by proceeds from the issuance of common stock under employee stock
option and stock purchase plans.

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Contractual Obligations. We lease certain of our facilities and equipment under non-cancelable operating leases, which expire in
fiscal 2009 through fiscal 2014. These facility lease agreements generally provide for base rental rates, which may 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.

|                            |  |   |        |  |   | Payment due by period (unaudited, in thousands)
|--------------------------- |  | - | ------ |  | - | -----------------------------------------------
|                            |  |   |        |  |   |                                                
|                            |  |   |        |  |   | Within                                         
|                            |  |   | Total  |  |   | 1 year                                         
|Operation lease obligations |  | $ | 5,421  |  | $ | 1,647                                          
|                            |  |   |        |  |   |                                                
|Purchase obligations        |  |   | 5,996  |  |   | 4,612                                          
|                            |  |   |        |  |   |                                                
|Total                       |  | $ | 11,417 |  | $ | 6,259                                          

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.

On September 24, 2008, we renewed the lease of our global support facility in the Philippines. The lease extension period is from April 1,
2009 through March 31, 2012 with total lease payment commitments of $1.8 million. We have options to extend the lease at its expiration in
2012.

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 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 $2
million. To date, there have not been any costs incurred in connection with such indemnification arrangements; therefore, there is no accrual of
such amounts at September 27, 2008. We disclose indemnification liabilities according to FASB Staff Position FIN45-1, "Accounting for
Intellectual Property Infringement Indemnifications under FAS Interpretation No. 45." Under FAS No. 5, "Loss Contingencies," a
claim would be accrued when a loss is probable and the amount can be reasonably estimated. At September 27, 2008, no such amounts have
been accrued.

Off-Balance Sheet Arrangements

As of September 27, 2008, we are not involved in any off-balance sheet arrangements, as defined in Item 303(a) (4) (ii) of
SEC Regulation S-K

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. Our 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.

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Item 3.  Quantitative and Qualitative Disclosure 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 September 27, 2008, our cash and cash equivalents of $16.9 million were invested in treasury backed bank time deposits and money
market funds.

In February 2008, tightening of the U.S. liquidity markets caused the auction rate process to default and our Auction Rate
Preferred Securities ("ARPS") could not be successfully sold. At that time, we had $3.9 million invested in ARPS. Subsequently, we
have received cash proceeds from the redemption at par of $2.5 million of our ARPS. As of September 27, 2008 our remaining investment in
ARPS of $1.45 million has been classified as long-term investments at full par value on our consolidated balance sheet.

Foreign Currency Exchange Risk

We transact business in various foreign countries of which a significant portion 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 as we believe the
risks to date have not been significant or economically viable to conduct such activities. We maintain local currency bank accounts in our
international offices to facilitate payment of local operating costs.

Item 4. 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 September 27, 2008. Based on such evaluation, the Company's  Chief Executive Officer and Chief Financial Officer have
concluded that, as of September 27, 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) Internal Control Over Financial Reporting. There have been no 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 September 27, 2008 that have
materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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PART II

OTHER INFORMATION

Item 1.  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 vigorously against these claims. 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 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 our 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 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 ourselves
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.

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Item 1A. Risk Factors

Risk Factors.

In addition to the other information set forth in this report, you should consider the risk factors discussed in Part I "Item
1A. Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended March 31, 2008, which could materially affect our business,
financial condition or future results. The risk factors in our Form 10-K have not materially changed. The risk factors described in our Form 10-K,
are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial
also may materially adversely affect our business, financial conditions and/or operating results.

Our business may be negatively impacted by the volatility and disruption of the capital and credit markets,
and adverse changes in the global economy.

Current uncertainty in global economic conditions poses a risk to the overall economy as consumers and businesses may
defer purchases in response to restricted access to credit and negative financial news, which could negatively affect product demand and other
related matters.  Consequently, demand could be different from our expectations due to factors including changes in business and economic
conditions; conditions in the credit market that could affect consumer confidence; customer acceptance of our and our competitors' products;
changes in customer order patterns including order cancellations; and changes in the level of our customers' inventory.  Credit market conditions
also may slow our collection efforts as customers experience increased difficulty in obtaining requisite financing, leading to higher than normal
accounts receivable.  This could result in greater expense associated with collection efforts and increased bad debt expense.  In addition, credit
conditions may impair our vendors' ability to finance the portion of raw materials or general working capital needs to support our production
requirements, resulting in a delay or non-delivery of inventory shipments.

Our ability to find investments that are both safe and liquid and that provide a reasonable return may be impaired. This could result in lower
interest income, longer investment terms and/or higher impairments.

Additionally, the inability of our customers or distributors to access capital efficiently could cause disruptions in their businesses, thereby
negatively impacting ours.  For example, if our customers or distributors do not have sufficient liquidity, they could reduce or limit new purchases,
which could result in lower demand for our products and/or we may be at risk for any trade credit we have extended to them, due to their inability
to repay us.  This risk may increase if there is a general economic downturn affecting significant customers or a large number of our other
customers and they are not able to adequately manage their business risks or  do not properly disclose their financial condition to us.

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;

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- reallocating personnel and responsibilities to better utilize human resources;
- reducing our workforce; and
- instituting temporary office and facility shutdowns.

In light of the slowing global economy we expect lower revenues and may be required to cut costs to preserve our cash and reach cash flow
break even.   Cost reduction measures may not increase our efficiency, lead to profitability or result in the cash savings anticipated.  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 we reduce our sales staff it could also result in lower revenue.   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 cost structure 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.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.  Defaults Upon Senior Securities

None

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

We held our Annual Meeting of stockholders on October 6, 2008. At the meeting, the stockholders elected each of Mr. David G. Elkins (with
13,999,702 shares voting for, zero against and 433,440 abstaining) to serve as a Group III Director and Mr. Eric Singer (with 14,348,186 shares
voting for, zero against and 84,956 abstaining) to serve as a Group III Director each for a three-year term expiring at the Annual Meeting of
stockholders in 2011. Richard L. Sanquini and Robin A. Abrams, each an incumbent Group I Director, and Darin Billerbeck and Federico Faggin,
each a Group II Director, will continue serving as directors.

Additionally, the stockholders ratified the appointment of Armanino McKenna LLP as our independent auditors for the fiscal year ending
March 31, 2009 (with 14,414,131 shares voting for, 12,501 against and 6,510 abstaining).

Item 5.  Other Information

None.

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Item 6.  Exhibits

a)	Exhibits are filed or incorporated herein by reference as indicated below:

|Exhibit
Number | Description                                                                                                                                                                                                             
|-------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1 (a)        | Amended and Restated Certificate of Incorporation of ZiLOG, Inc., as amended and corrected.                                                                                                                             
|3.2 (b)        | Amended and Restated Bylaws of ZiLOG, Inc.                                                                                                                                                                              
|3.3 (c)        | Amendment to Amended and Restated Bylaws of ZiLOG, Inc.                                                                                                                                                                 
|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 November 12, 2008.
    PDF             
|31.2           | Certifications of Chief Financial 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 November 12, 2008.
    PDF            
|32             | 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 November 12, 2008.
    PDF

_____________

|(a) | 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, 2003.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(b) | 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.                               
|(c) | Incorporated herein by reference to Exhibit 3.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 26, 2008 (filed August 12, 2008).               

31

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ZiLOG, Inc.

SIGNATURES

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



| |                          
| | -------------------------
| | ZiLOG, Inc.  (Registrant)



| |                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------
| | /s/ Perry J. Grace
      
           Perry J. GraceExecutive Vice President and Chief Financial Officer         (Duly Authorized Officer)



| |                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------
| | /s/ Darin G. Billerbeck
      
           Darin G. BillerbeckPresident, Chief Executive Officer and Director         (Duly Authorized Officer)

Date:  November 12, 2008

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