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

---

FORM 10-Q

---

(Mark One)


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

For the quarterly period ended December 30, 2006

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)

532 Race Street
San Jose, California      95126

(408) 558-8500

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. (Check one):

Large accelerated filer      ̈ Accelerated filer     ̈ Non-accelerated filer    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 January 31, 2007
|--------------------------------------- | -------------------------------
|Common Stock, $0.01 par value per share | 16,790,809 shares              








Note:PDF provided as a courtesy

Some of the statements under 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. 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, statements relating to the general direction of our
business, our expected liquidity, capital expenditures and expense levels in future periods.  Other factors that may
cause or contribute to differences include, but are not limited to:  continued availability of third-party foundry and
assembly services with commercially-reasonable quality and prices; under-absorption of manufacturing costs in our
test and manufacturing support facilities from under-utilization of capacity; our distributors and customers
significantly reducing their existing inventories before ordering new products; anticipated costs in connection with
the decommissioning of our MOD II facility in Nampa, Idaho and our ability to sell and /or recover its estimated
carrying value that is included in assets held for sale.  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. In evaluating these statements, you should
specifically consider various factors, including the risks outlined under "Risk Factors" in this Form 10-Q and in our
Form 10-K for our fiscal year ended March 31, 2006.

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.

Based in San Jose, California, we were incorporated in California in December 1981 and reincorporated in Delaware
in April 1997.  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.  ZiLOG, eZ80, Z8Encore!, Z8Encore!XP, Z8Encore!MC,
ZNEO and eZ80TM are registered trademarks of ZiLOG, Inc. and eZ80Acclaim! is a trademark of ZiLOG, Inc.ZiLOG, INC.
                  QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED DECEMBER 30, 2006
                  TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
PageItem 1.Financial StatementsUnaudited Condensed Consolidated Statements of Operations for the three and nine months ended December 30,
2006 and December 31, 2005
3Unaudited Condensed Consolidated Balance Sheets at December 30, 2006 and March 31, 2006
4Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended December 30,
2006 and December 31, 2005
5Notes to Unaudited Condensed Consolidated Financial Statements
6Item 2.Management's Discussion and Analysis of
Financial Condition and Results of Operations
15Item 3.Quantitative and Qualitative Disclosures About
Market Risk
23Item 4.Controls
and Procedures
23PART II. OTHER INFORMATIONItem 1.Legal Proceedings
24Item 1A.Risk Factors
24Item 2.Unregistered Sales of Equity Securities and Use of
Proceeds
25Item 3.Defaults Upon Senior Securities
25Item 4.Submission of Matters to a Vote of Security
Holders
25Item 5.Other Information
25Item 6.Exhibits
262PART I
                  FINANCIAL INFORMATION

Item 1.  Financial Statements




ZiLOG, Inc.

                    UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                          (in millions, except per share data)


Three Months Ended


Nine Months EndedDec. 30,


Dec. 31,


Dec. 30,


Dec. 31,2006


2005


2006


2005Net sales

$
20.7

$
17.6

$
62.9

$
58.7Cost of sales


11.0


9.7


32.9


34.1Gross margin


9.7


7.9


30.0


24.6Gross margin %


47%


45%


48%


42%Operating expenses:Research and development


5.2


5.2


15.4


16.0Selling, general and administrative


5.3


5.0


17.1


17.7Special charges and credits


0.1


0.3


1.1


2.5Amortization of intangible assets


0.3


0.6


1.0


1.6Total operating expenses


10.9


11.1


34.6


37.8Operating loss (1)


(1.2)


(3.2)


(4.6)


(13.2)Other income:Interest income


0.3


0.2


0.9


0.6Other, net


(0.1)


(0.1)


(0.1)


(0.1)Loss before provison for income taxes


(1.0)


(3.1)


(3.8)


(12.7)Provision for income taxes


0.6


-


1.6


1.3Net loss

$
(1.6)

$
(3.1)

$
(5.4)

$
(14.0)Basic and diluted net loss per share

$
(0.10)

$
(0.19)

$
(0.33)

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


16.7


16.4


16.6


16.3(1)  Includes stock based compensation charges asfollows (fiscal 2007 amounts reflect adoption of FAS123R):Research and development

$
0.1

$
-

$
0.3

$
-Selling, general and administrative


0.3


0.1


0.8


0.6Total stock based compensation included in operating loss

$
0.4

$
0.1

$
1.1

$
0.6

See accompanying notes to unaudited condensed consolidated financial statements.


3ZiLOG, Inc.

                     UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

                                      (in millions)


Dec. 30,


Mar. 31,2006


2006ASSETSCurrent assets:Cash and cash equivalents

$
21.0

$
27.0Accounts receivable, net


8.8


9.6Inventories, net


9.5


7.6Deferred tax assets


0.4


0.4Prepaid expenses and other current assets


2.1


2.2Total current assets


41.8


46.8Assets held for sale


3.1


1.8Property, plant and equipment, net


7.0


7.5Goodwill


6.7


6.7Intangible assets, net


3.7


4.8Other assets


2.9


4.0Total assets

$
65.2

$
71.6LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities:Accounts payable

$
9.0

$
9.9Income taxes payable


0.5


0.5Accrued compensation and employee benefits


2.8


2.5Estimate due to ZiLOG-Mod III Inc. Series APreferred shareholders on liquidation of subsidiary


-


2.5Other accrued liabilities


2.0


2.4Deferred income on shipments to distributors


6.9


6.1Total current liabilities


21.2


23.9Deferred tax liabilities


0.4


0.4Other non-current tax liabilities


5.7


5.5Total liabilities


27.3


29.8Stockholders' equity:Common stock


0.2


0.2Deferred stock compensation


-


(0.6)Additional paid-in capital


124.1


123.2Treasury stock


(7.2)


(7.2)Accumulated deficit


(79.2)


(73.8)Total stockholders' equity


37.9


41.8Total liabilities and stockholders' equity

$
65.2

$
71.6

See accompanying notes to unaudited condensed consolidated financial statements.

4

---



ZiLOG, Inc.

               UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                                    (in millions)



|                                                                         |  |   | Nine Months Ended
|------------------------------------------------------------------------ |  | - | -----------------
|                                                                         |  |   | Dec.  30,        
|                                                                         |  |   | 2006             
|Cash Flows from Operating Activities:                                    |  |   |                  
|Net loss                                                                 |  | $ | (5.4)            
|Adjustments to reconcile net loss to net cash                            |  |   |                  
|used in operating activities:                                            |  |   |                  
|Amortization of fresh-start intangible assets                            |  |   | 1.0              
|Depreciation and amortization                                            |  |   | 2.3              
|Stock-based compensation                                                 |  |   | 1.1              
|Changes in operating assets and liabilities:                             |  |   |                  
|Accounts receivable, net                                                 |  |   | 0.7              
|Inventories, net                                                         |  |   | (1.9)            
|Prepaid expenses and other current and non-current assets                |  |   | 1.4              
|Accounts payable                                                         |  |   | (0.9)            
|Accrued compensation and employee benefits                               |  |   | 0.3              
|Other accrued liabilities, deferred income on shipments to distributors, |  |   |                  
|income taxes and accrued special charges                                 |  |   | 0.6              
|Net cash used in operating activities                                    |  |   | (0.8)            
|                                                                         |  |   |                  
|Cash Flows from Investing Activities:                                    |  |   |                  
|Assets held for sale                                                     |  |   | (1.3)            
|Due to Mod III Preferred Series A shareholders                           |  |   | (2.6)            
|Capital expenditures                                                     |  |   | (1.7)            
|Net cash used in investing activities                                    |  |   | (5.6)            
|                                                                         |  |   |                  
|Cash Flows From Financing Activities:                                    |  |   |                  
|Proceeds from issuance of common stock under employee stock plans        |  |   | 0.4              
|Repurchase of common stock                                               |  |   | -                
|Net cash provided by financing activities                                |  |   | 0.4              
|                                                                         |  |   |                  
|Net decrease in cash and cash equivalents                                |  |   | (6.0)            
|Cash and cash equivalents at beginning of period                         |  |   | 27.0             
|Cash and cash equivalents at end of period                               |  | $ | 21.0             

See accompanying notes to unaudited condensed consolidated financial statements.

5

---

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 entire year.  These 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 2006 Annual Report filed
on Form 10-K Commission File Number 001-13748 for the 2006 fiscal year ended March 31, 2006, filed on June 26, 2006.

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

The condensed consolidated balance sheet at March 31, 2006 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 POLICIES

Please refer to the summary of significant accounting policies described in our Form 10-K for the 2006 fiscal year ended March
31, 2006, filed on June 26, 2006.
Adoption of Accounting Standards.  Effective April 1, 2006, the Company adopted
the provisions of FASB Statement of Financial Accounting Standards ("SFAS") No. 123R, "Share-Based
Payments", requiring the recording of expenses related to the fair value of its stock-based compensation awards. The Company
elected to adopt the modified prospective transition method utilizing the single option attribution approach as permitted by SFAS 123R.
Under this transition method, stock-based compensation expense for the three month and nine month periods ended December 30,
2006 includes compensation expense for all stock-based compensation awards granted prior to, but not vested as of April 1, 2006,
based on the grant date fair value estimated in accordance with the original provisions of SFAS 123 and compensation expense for all
stock-based compensation awards granted subsequent to April 1, 2006, based on the grant-date fair value estimated using the Black-
Scholes option pricing model in accordance with the provisions of SFAS 123R. The total compensation expense recorded for the three
and nine month periods ended December 30, 2006 was $0.4 million and $1.1 million, respectively.  See Note 6 to the Company's
condensed consolidated financial statements.

Stock-based compensation for options or restricted stock awards (RSA's) recorded in periods prior to April 1, 2006 reflects: 1)
the difference between the stock price and the purchase price for options granted or RSA's issued where the grant price
approved by the Board of Directors was lower than the fair market value of the award at the time of grant or 2) the then fair
market value of stock issued to members of the Board of Directors for Board of Director services provided in lieu of cash in
accordance with their shareholder approved compensation plans. Since the Company's bankruptcy reorganization in 2002, the
Company's policy has been to issue options at fair market value.   The only exception to that policy was the exchange of
in-the-money restricted stock held by our former chief executive officer for in-the-money options as previously disclosed in our proxy
statement for the years ended 2003 and 2004.  From time to time the Company has issued shares of restricted stock to
employees below fair market value.

Recent Accounting Pronouncements.

In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans (SFAS 158)". SFAS 158 requires employers to recognize on their balance sheets the funded status of
pension and other postretirement benefit plans - as of December 31, 2006 for calendar year public

6

---



companies. Employers will
recognize actuarial gains and losses, prior service cost, and any remaining transition amounts from the initial application of Statements
87 and 106 when recognizing a plan's funded status, with the offset to accumulated other comprehensive income. The Company has
not yet determined the impact, if any, of adopting SFAS 158.

In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes (FIN 48)".  FIN 48
clarifies the accounting for uncertainty in income taxes recognized in a company's financial statements in accordance with FASB
Statement No. 109, Accounting for Income Taxes.FIN 48 prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  The Company
has not yet determined the impact, if any, of adopting FIN 48.

NOTE 3.	INVENTORIES

Inventories are stated at the lower of cost, determined on a first-in-first-out basis, or market.  Provisions, when required, are made
to reduce excess and obsolete inventories to their estimated realizable values. It is possible that estimates of realizable value can
decline in the short-term. Inventories, net of provisions, consist of the following (unaudited in millions):

|                 |  |   | December 30, |  |   | March 31,
|---------------- |  | - | ------------ |  | - | ---------
|                 |  |   | 2006         |  |   | 2006     
|Raw materials    |  | $ | 0.9          |  | $ | 0.8      
|Work-in-progress |  |   | 8.7          |  |   | 7.3      
|Finished goods   |  |   | 4.4          |  |   | 5.0      
|Gross inventory  |  |   | 14.0         |  |   | 13.1     
|Reserves         |  |   | (4.5)        |  |   | (5.5)    
|Net inventory    |  | $ | 9.5          |  | $ | 7.6      

NOTE 4.	SPECIAL CHARGES AND CREDITS

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

|                                         |  |   | Three Months Ended |  |   | Nine Months Ended
|---------------------------------------- |  | - | ------------------ |  | - | -----------------
|                                         |  |   | Dec. 30,           |  |   | Dec. 31,         
|                                         |  |   | 2006               |  |   | 2005             
|Restructuring of operations:             |  |   |                    |  |   |                  
|Costs associated with CEO resignation    |  | $ | -                  |  | $ | -                
|Employee severance, termination benefits |  |   |                    |  |   |                  
|and transfer costs                       |  |   | -                  |  |   | 0.1              
|MOD II period maintenance costs          |  |   | 0.1                |  |   | 0.1              
|MOD III period maintenance costs         |  |   | -                  |  |   | 0.1              
|                                         |  | $ | 0.1                |  | $ | 0.3              

Following the closure of its remaining wafer manufacturing fab in July 2004 and completion of the conversion to a fully fabless
manufacturing model, the Company consolidated and transferred certain global support activities to its Philippines facility in line with the
expanding business opportunities in the Asia and China markets and streamlined operations to align its overall support costs to current
business levels.

The Company incurred period expenses for the three and nine months ended December 30, 2006 to sustain the remaining assets
of MOD II in a saleable condition. During the three and nine months ended December 31, 2005, the MOD III costs incurred reflect
maintenance costs associated with the MOD III facility that was sold in February 2006, at which time the Company was reimbursed for
its out of pocket expenses for maintaining the facility.  The

7

---



ZiLOG MOD III, Inc. subsidiary has been liquidated and the cash generated
from the sale of the MOD III assets was distributed to the preferred shareholders of the entity in October 2006.  There are no assets or
further costs associated with ZiLOG MOD III, Inc.

NOTE 5.	GEOGRAPHIC AND SEGMENT INFORMATION

Segment Information.  The Company's business is comprised of one operating segment and the Company engages primarily in
the design, development, manufacture, marketing and sales of semiconductor products. The Company sells its products to
distributors and original equipment manufacturers ("OEM") in a broad range of market segments, performs on-going credit
evaluations of its customers and generally requires no collateral.  The Company's operations in the United States include
product design and development, as well as the coordination of production planning, sales, marketing, and general and
administrative functions.  The Company's operations outside the United States consist of a product test and global support
facility in the Philippines, sales and support centers in Asia and Western Europe and design centers in China and India.  The
Philippine test facility is reimbursed for value added services in relation 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.

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

|                                    |  |   | Three Months Ended |  |   | Nine Months Ended
|----------------------------------- |  | - | ------------------ |  | - | -----------------
|                                    |  |   | Dec. 30,           |  |   | Dec. 31,         
|                                    |  |   | 2006               |  |   | 2005             
|Net sales by product category:      |  |   |                    |  |   |                  
|Micrologic:                         |  |   |                    |  |   |                  
|Embedded Flash                      |  | $ | 3.6                |  | $ | 1.9              
|Non-Embedded Flash                  |  |   | 13.8               |  |   | 11.4             
|Micrologic                          |  | $ | 17.4               |  | $ | 13.3             
|                                    |  |   |                    |  |   |                  
|Other Devices                       |  |   |                    |  |   |                  
|Serial Communications Controllers   |  | $ | 2.6                |  | $ | 3.1              
|Modems                              |  |   | 0.2                |  |   | 0.1              
|IrDA transceivers                   |  |   | 0.3                |  |   | 0.3              
|Television, PC peripheral and other |  |   | 0.2                |  |   | 0.8              
|Other Devices                       |  | $ | 3.3                |  | $ | 4.3              
|Total sales                         |  | $ | 20.7               |  | $ | 17.6             

8

---



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

|                      |  |   | Three Months Ended |  |   | Nine Months Ended
|--------------------- |  | - | ------------------ |  | - | -----------------
|                      |  |   | Dec. 30,           |  |   | Dec. 31,         
|                      |  |   | 2006               |  |   | 2005             
|Net sales by region:  |  |   |                    |  |   |                  
|Americas              |  | $ | 9.2                |  | $ | 7.5              
|Asia                  |  |   | 9.5                |  |   | 7.8              
|Europe                |  |   | 2.0                |  |   | 2.3              
|Total sales           |  | $ | 20.7               |  | $ | 17.6             
|                      |  |   |                    |  |   |                  
|Net sales by channel: |  |   |                    |  |   |                  
|OEM                   |  | $ | 10.1               |  | $ | 7.7              
|Distribution          |  |   | 10.6               |  |   | 9.9              
|Total sales           |  | $ | 20.7               |  | $ | 17.6             

Major customers:  For the three months ended December 30, 2006, two customers accounted for greater than 10%
of the Company's total net sales.  These two customers accounted for approximately 19% and 18% of net sales, respectively. For the
nine months ended December 30, 2006, two customers accounted for greater than 10% of the Company's total net sales.  These two
customers accounted for approximately 20% and 14% of net sales, respectively.

NOTE 6.      STOCK-BASED COMPENSATION

The Company has a stock-based compensation program that includes non-statutory stock option awards and Restricted Stock
Awards ("RSA's").  Stock options are generally time-based, vesting 25% on the first anniversary of the grant date and
monthly thereafter over four years and expire ten years from the grant date. 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. As of December 30, 2006, the Company had approximately 1,056,475
shares of common stock reserved for future issuance under its stock option plans and ESPP.

Effective April 1, 2006, the Company adopted the provisions of SFAS 123R, which establishes
valuation and accounting resulting in the Company's recognition of expense related to the fair value of its stock-based compensation
awards. The Company elected to adopt the modified prospective transition method utilizing the single option attribution approach, as
permitted by SFAS 123R, and therefore has not restated its financial results for prior periods. Under this transition method, stock-based
compensation expense for the three and nine month periods ended December 30, 2006 includes compensation expense for all stock-
based compensation awards granted prior to, but not vested as of April 1, 2006, based on the grant date fair value estimated in
accordance with the original provisions of SFAS 123 and compensation expense for all stock-based compensation awards granted
subsequent to April 1, 2006, based on the grant-date fair value estimated using the Black-Scholes option pricing model in accordance
with the provisions of SFAS 123R. The Company recognizes compensation expense for stock option awards on a straight-line basis
over the requisite service period of the award.

As a result of adopting SFAS 123R on April 1, 2006, the Company's net loss before income taxes and net loss for the three and
nine months ended December 30, 2006, were $0.3 million and $1.2 million greater, respectively, than if it had continued to account for
share-based compensation under Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued
to Employees". Basic and diluted earnings per share for the three and nine months ended December 30, 2006 is $0.02 and $0.07
lower, respectively, than if the Company had continued to account for share-based compensation under APB 25.

9

---



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

|                                                          |  |  |  |  |   | Three Months |  |   | Nine Months
|--------------------------------------------------------- |  |  |  |  | - | ------------ |  | - | -----------
|                                                          |  |  |  |  |   | Ended        |  |   | Ended      
|                                                          |  |  |  |  |   | Dec. 30,     |  |   | Dec. 30,   
|                                                          |  |  |  |  |   | 2006         |  |   | 2006       
|Research and development                                  |  |  |  |  | $ | 0.1          |  | $ | 0.3        
|Selling, general and administrative                       |  |  |  |  |   | 0.3          |  |   | 0.8        
|Stock-based compensation expense before income taxes      |  |  |  |  |   | 0.4          |  |   | 1.1        
|Total stock-based compensation expense after income taxes |  |  |  |  | $ | 0.4          |  | $ | 1.1        

There were 115,209 options exercised

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

The following table illustrates the effect on net loss after tax and net loss per common share as if we had applied
the fair value recognition provisions of SFAS 123R to stock-based compensation during the three and nine months ended December
31, 2005 (unaudited in millions, except per share amounts):

10

---



|                                                |  |  |  |  |   | Three Months |  |   | Nine Months
|----------------------------------------------- |  |  |  |  | - | ------------ |  | - | -----------
|                                                |  |  |  |  |   | Ended        |  |   | Ended      
|                                                |  |  |  |  |   | Dec. 31,     |  |   | Dec. 31,   
|                                                |  |  |  |  |   | 2005         |  |   | 2005       
|Net loss - as reported                          |  |  |  |  | $ | (3.1)        |  | $ | (14.0)     
|Add: stock-based employee compensation expense  |  |  |  |  |   |              |  |   |            
|included in reported net loss, net of tax       |  |  |  |  |   | 0.1          |  |   | 0.6        
|Deduct: total stock-based employee compensation |  |  |  |  |   |              |  |   |            
|expense determined under fair-value-based       |  |  |  |  |   |              |  |   |            
|method for all awards                           |  |  |  |  |   | (0.4)        |  |   | (1.8)      
|Net loss - proforma                             |  |  |  |  | $ | (3.4)        |  | $ | (15.2)     
|                                                |  |  |  |  |   |              |  |   |            
|Net loss per share as reported                  |  |  |  |  | $ | (0.19)       |  | $ | (0.86)     
|Net loss per share - proforma                   |  |  |  |  | $ | (0.21)       |  | $ | (0.93)     

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

|Stock Options                             |  |   | Three Months Ended |  |   | Nine Months Ended
|----------------------------------------- |  | - | ------------------ |  | - | -----------------
|                                          |  |   | Dec. 30,           |  |   | Dec. 31,         
|                                          |  |   | 2006               |  |   | 2005             
|Expected life (in years)                  |  |   | 5.2                |  |   | 5.0              
|Interest rate                             |  |   | 4.7%               |  |   | 4.4%             
|Volatility                                |  |   | 46.7%              |  |   | 51.2%            
|Dividend yield                            |  |   | -                  |  |   | -                
|Weighted-average fair value at grant date |  | $ | 4.02               |  | $ | 2.61             



|Employee Stock Purchase Plan              |  |   | Three Months Ended |  |   | Nine Months Ended
|----------------------------------------- |  | - | ------------------ |  | - | -----------------
|                                          |  |   | Dec. 30,           |  |   | Dec. 31,         
|                                          |  |   | 2006               |  |   | 2005             
|Expected life (in years)                  |  |   | 0.5                |  |   | 0.5              
|Interest rate                             |  |   | 4.9%               |  |   | 3.9%             
|Volatility                                |  |   | 51.1%              |  |   | 51.2%            
|Dividend yield                            |  |   | -                  |  |   | -                
|Weighted-average fair value at grant date |  | $ | 2.58               |  | $ | 2.44             

The computation of expected volatility for the three and nine months ended December 30, 2006 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 nine months ended December 30, 2006 is as follows (unaudited in millions,
except per share data and remaining contractual term).

11

---



|                                       |  |  |           |  |   |                |  |  | Average          |  |   |                
|-------------------------------------- |  |  | --------- |  | - | -------------- |  |  | ---------------- |  | - | ---------------
|                                       |  |  |           |  |   | Weighted-      |  |  | Remaining        |  |   |                
|                                       |  |  |           |  |   | Average        |  |  | Contractual Term |  |   | Aggregate      
|                                       |  |  | Shares    |  |   | Exercise Price |  |  | (in years)       |  |   | Intrinsic Value
|Outstanding at April 1, 2006           |  |  | 1,803,309 |  | $ | 6.45           |  |  | 8.02             |  |   | -              
|Grants                                 |  |  | 105,150   |  |   | 3.13           |  |  | -                |  |   | -              
|Exercises                              |  |  | -         |  |   | -              |  |  | -                |  |   | -              
|Forfeitures or expirations             |  |  | (27,621)  |  |   | 6.61           |  |  | -                |  |   | -              
|Outstanding at July 1, 2006            |  |  | 1,880,838 |  | $ | 6.24           |  |  | 7.89             |  | $ | 0.40           
|Grants                                 |  |  | 24,250    |  |   | 3.51           |  |  | -                |  |   | -              
|Exercises                              |  |  | (500)     |  |   | 2.70           |  |  | -                |  |   | -              
|Forfeitures or expirations             |  |  | (589,591) |  |   | 6.98           |  |  | -                |  |   | -              
|Outstanding at September 30, 2006      |  |  | 1,314,997 |  | $ | 5.89           |  |  | 7.38             |  | $ | 0.50           
|Grants                                 |  |  | 161,850   |  |   | 4.02           |  |  | -                |  |   | -              
|Exercises                              |  |  | (115,209) |  |   | 2.00           |  |  | -                |  |   | -              
|Forfeitures or expirations             |  |  | (38,637)  |  |   | 6.55           |  |  | -                |  |   | -              
|Outstanding at December 30, 2006       |  |  | 1,323,001 |  | $ | 5.98           |  |  | 7.57             |  | $ | 0.70           
|                                       |  |  |           |  |   |                |  |  |                  |  |   |                
|Oustanding Vested and Expected to Vest |  |  |           |  |   |                |  |  |                  |  |   |                
|at December 30, 2006                   |  |  | 1,192,755 |  | $ | 6.14           |  |  | 7.52             |  | $ | 0.6            
|                                       |  |  |           |  |   |                |  |  |                  |  |   |                
|Exercisable at December 30, 2006       |  |  | 583,351   |  | $ | 7.18           |  |  | 6.95             |  | $ | 0.2            

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (i.e., the difference between the
Company's closing stock price on the last trading day of its third quarter of fiscal 2007 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 December 30, 2006. This
amount is expected to change as the fair market value of the Company's stock fluctuates. There were 115,209 options and 115,709
options exercised for the three and nine months ended December 30, 2006, respectively. Total intrinsic value of options vested is $0.6
million at December 30, 2006.

As of December 30, 2006, $1.6 million of total unrecognized compensation costs related to stock options is expected to be
recognized over a weighted-average remaining period of 1.4 years.  The total unrecognized compensation costs related to RSA's as of
December 30, 2006 of $0.4 million are expected to be recognized over a weighted-average remaining period of 2.1 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. We filed a response to the claims on September 15, 2005
generally denying the claims and challenging the validity of the patents. A hearing was scheduled for November 17, 2005. 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
for all 3 patents. On March 13, 2006, the Company was informed that its motion to stay with the Federal court of Arizona was granted
until such time as Microchip is informed of the outcome of the re-examinations.

We do not believe it is feasible to predict or determine the outcome or resolution of this litigation at this time. We believe we have
meritorious defenses and will defend ourselves against these claims vigorously. We may incur substantial expenses in our defense
against these claims. In the event of a determination adverse to us, we may incur substantial monetary liability, and be required to
change our business practices. Either of these could have a material adverse effect on our financial position, results of operations or
cash flow.

12

---



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 $500,000. To date, there have not been any costs
incurred in connection with such indemnification arrangements; therefore, there is no accrual of such amounts at December 30, 2006.
The Company discloses 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 December 30, 2006, no such amounts are
accrued.

NOTE 8.	INCOME TAXES

During the three and nine months ended December 30, 2006, the Company's income tax provision was $0.6 and $1.6 million,
respectively, and primarily reflects amortization of deferred charges and provisions for taxes in certain  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.

The net tax expense recorded during the three and nine months ended December 31, 2005

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 balance to zero.  Deferred tax assets
have been recognized only to the extent of deferred tax liabilities.

NOTE 9.  	SHARES OUTSTANDING

At December 30, 2006 and December 31, 2005, there were 16,790,809 and 16,557,684

NOTE 10.   MOD III Liquidation and MOD II Assets Held for Sale

MOD III Liquidation

In February 2006, ZiLOG MOD III, Inc. completed the sale of its remaining assets to Micron Technology, Inc. for a total
consideration, net of closing costs, of $4.6 million. These assets included the dormant 8" wafer fabrication facility and associated
land owned by ZiLOG Mod III Inc. and vacant property owned by ZiLOG, Inc.  ZiLOG MOD III, Inc. was liquidated pursuant to a vote by
its shareholders, and the remaining net proceeds of $2.8 million were distributed to the holders of ZiLOG Mod III, Inc. Series A
Preferred Stock in October 2006.

MOD II Assets Held for Sale

In September 2004, the Company sold all of its wafer manufacturing equipment and certain other manufacturing support-related
assets of its MOD II facility in Nampa, Idaho, to STMicroelectronics for an aggregate cash consideration of $5.9 million, net of selling
costs and expenses. The Company recorded a net gain of $1.7 million in

13

---



connection with these sales.  The remaining assets of MOD II primarily consist of land and buildings and are classified as
assets held for sale with a net carrying value of $3.1 million on the Company's condensed consolidated balance sheet as of
December 30, 2006.  The decommissioning activities to prepare these remaining assets for sale are substantially complete and
for the three and nine months ended December 30, 2006 approximately $0.6 million and $1.3 million of costs have been
incurred, respectively.   The Company plans to sell these remaining assets and makes no guarantee as to the timing, price and
its ability to complete a sale.

14

---



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

Our actual results may differ materially from those anticipated in any forward-looking statements referenced as follows in
management's discussion and analysis of financial condition and results of operations andas a result of various factors
including those set forth in the section entitled "Risk Factors" in this quarterly report and in our Form 10-K for the year ended
March 31, 2006 and in other sections of this quarterly report.

Overview

The following is management's discussion and analysis of financial condition and results of operations of the Company and its
subsidiaries for the three-month and nine-month periods ended December 30, 2006 and December 31, 2005.  This discussion and
analysis should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included
elsewhere herein and the Company's 2006 annual report on Form 10-K. Management's discussion and analysis provides
information concerning our business environment, consolidated results of operations, liquidity and capital resources.

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

Critical Accounting Estimates

We believe our critical accounting estimates are as follows:

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

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 and stock-based compensation expense.  We base our estimates on historical
trends and various other assumptions that we believe to be reasonable at the time the estimates are made.  Actual results could differ
from those estimates.  Please refer to the critical accounting estimates described in our Form 10-K for the 2006 fiscal year ended March
31, 2006, filed on June 26, 2006.

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.

15

---



Results of Operations

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

|                      |  |   | Three Months Ended |  |   | Nine Months Ended
|--------------------- |  | - | ------------------ |  | - | -----------------
|                      |  |   | Dec. 30,           |  |   | Dec. 31,         
|                      |  |   | 2006               |  |   | 2005             
|Net sales by region:  |  |   |                    |  |   |                  
|Americas              |  | $ | 9.2                |  | $ | 7.5              
|Asia                  |  |   | 9.5                |  |   | 7.8              
|Europe                |  |   | 2.0                |  |   | 2.3              
|Total sales           |  | $ | 20.7               |  | $ | 17.6             
|                      |  |   |                    |  |   |                  
|Net sales by channel: |  |   |                    |  |   |                  
|OEM                   |  | $ | 10.1               |  | $ | 7.7              
|Distribution          |  |   | 10.6               |  |   | 9.9              
|Total sales           |  | $ | 20.7               |  | $ | 17.6             



|                                    |  |   | Three Months Ended |  |   | Nine Months Ended
|----------------------------------- |  | - | ------------------ |  | - | -----------------
|                                    |  |   | Dec. 30,           |  |   | Dec. 31,         
|                                    |  |   | 2006               |  |   | 2005             
|Net sales by product category:      |  |   |                    |  |   |                  
|Micrologic:                         |  |   |                    |  |   |                  
|Embedded Flash                      |  | $ | 3.6                |  | $ | 1.9              
|Non-Embedded Flash                  |  |   | 13.8               |  |   | 11.4             
|Micrologic                          |  | $ | 17.4               |  | $ | 13.3             
|                                    |  |   |                    |  |   |                  
|Other Devices                       |  |   |                    |  |   |                  
|Serial Communications Controllers   |  | $ | 2.6                |  | $ | 3.1              
|Modems                              |  |   | 0.2                |  |   | 0.1              
|IrDA transceivers                   |  |   | 0.3                |  |   | 0.3              
|Television, PC peripheral and other |  |   | 0.2                |  |   | 0.8              
|Other Devices                       |  | $ | 3.3                |  | $ | 4.3              
|Total sales                         |  | $ | 20.7               |  | $ | 17.6             

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

|                                          |  |  | Three Months Ended
|----------------------------------------- |  |  | ------------------
|                                          |  |  | Dec. 30,          
|                                          |  |  | 2006              
|Days sales outstanding                    |  |  | 38                
|Net sales to inventory ratio (annualized) |  |  | 8.7               
|Weeks of inventory at distributors        |  |  | 13                
|Current ratio                             |  |  | 2.0               
|                                          |  |  |                   

16

---



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 December 30, 2006, our DSO was 38 days
as compared to 47 days at December 31, 2005. This decrease in DSO is largely due to an increase in our revenues, as well as an
improvement in the linearity of our shipments during the three months ended December 30, 2006 versus the comparable quarter a year
ago, thus allowing a greater 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. 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 net sales to inventory ratio was 8.7 for the three months ended December 30, 2006 compared to 8.8 for the
three months ended December 31, 2005. The ratio is relatively flat and reflects similar sales versus inventory levels for the comparative
periods.

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, which is the ratio of current assets to current
liabilities, was consistent at 2.0 as of December 30, 2006 and December 31, 2005.

Three Months Ended December 30, 2006 Compared to Three Months Ended December 31, 2005

Net Sales.  Net sales were $20.7 million for the three months ended December 30, 2006, an increase of 18% as compared
to net sales of $17.6 million for the three months ended December 31, 2005.

Net sales of our Micrologic devices increased by 31% to $17.4 million for the three months ended December 30, 2006 compared to
$13.3 million for the three months ended December 31, 2005. This increase was primarily driven by increases in sales of our embedded
flash and Universal infra red remote control products.  Embedded flash sales increased by 89% to $3.6 million for the three months
ended December 30, 2006 up from $1.9 million for the three months ended December 31, 2005, reflecting higher product sales of our
Encore and Encore XP product families to support growth in the health & fitness and digital communications markets. Our
non-flash micrologic sales, consisting of our traditional Z8 and Z80 products as well as our Universal infra red remote control solutions,
increased by $2.4 million or 21% to $13.8 million for the three months ended December 30, 2006, up from $11.4 million for the three
months ended December 31, 2005, reflecting a higher level of sales for our remote control solutions related to growth in the home
entertainment and the consumer gaming markets partially offset by a decline in our legacy microcontroller products.

Net sales of our other products for the three months ended December 30, 2006 declined

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 47% for the
three months ended December 30, 2006, up from a gross margin of 45% for the three months ended December 31, 2005.  During the
three months ended December 30, 2006,

17

---



our gross margin improvement was primarily the result of improved operating efficiencies,
including reductions in wafer costs, as we increased our volume purchases from our foundry partners. Additionally, as we have varying
product margins for the different product families we offer to our customers, product margins as a percent of sales will vary as a result
of the change in the respective product mix sold by us.

Research and Development Expenses.  Research and development expenses were $5.2 million for each of
the three months ended December 30, 2006 and December 31, 2005.  Research and development spending for the three months
ended December 30, 2006 as compared to the three months ended December 31, 2005 reflects lower variable project costs, offset by
higher stock compensation expenses associated with the adoption of FAS123R effective April 1, 2006. Variable costs relate to various
programs currently in development, which are in different stages of development and include such costs as engineering wafers,
production masks for new designs to be manufactured in the foundries and engineering proto-costs including test costs for product
verification. These costs can vary considerably depending on the product type and related complexity. We continue our development
efforts on our 8 Bit embedded flash designs and continue to invest in new products supporting our universal infra red remote control
solutions, our 16 Bit Zneo products and our 32 Bit ARM based microprocessor family of products.

Selling, General and Administrative Expenses.  Selling, general and administrative expenses increased to $5.3 million for the
three months ended December 30, 2006 from $5.0 million for the three months ended December 31, 2005, reflecting higher costs
associated with Sarbanes-Oxley compliance as well as higher stock based compensation expense associated with the adoption of
FAS123R effective April 1, 2006, partially offset by a credit for the settlement of a patent infringement suit paid to us.

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

|                                         |  |   | Three Months Ended |  |   | Nine Months Ended
|---------------------------------------- |  | - | ------------------ |  | - | -----------------
|                                         |  |   | Dec. 30,           |  |   | Dec. 31,         
|                                         |  |   | 2006               |  |   | 2005             
|Restructuring of operations:             |  |   |                    |  |   |                  
|Costs associated with CEO resignation    |  | $ | -                  |  | $ | -                
|Employee severance, termination benefits |  |   |                    |  |   |                  
|and transfer costs                       |  |   | -                  |  |   | 0.1              
|MOD II period maintenance costs          |  |   | 0.1                |  |   | 0.1              
|MOD III period maintenance costs         |  |   | -                  |  |   | 0.1              
|                                         |  | $ | 0.1                |  | $ | 0.3              

During the three months ended December 30, 2006, special charges totaled $0.1 million and represent sustaining costs of our
MOD II facility in Idaho, which is classified as assets held for sale on our balance sheet as of December 30, 2006.  During the three
months ended December 31, 2005, employee severance and termination costs totaled $0.1 million, sustaining costs for MOD II totaled
$0.1 million and sustaining costs for MOD III totaled $0.1 million, all of which were recorded through special charges.

Amortization of Intangible Assets.   Under the provisions of  SFAS No. 142, "Goodwill and
Other Intangible Assets", goodwill and intangible assets with indefinite lives are not amortized, but are reviewed annually or more
frequently if impairment indicators arise.  Pursuant to SFAS 142, we perform our annual impairment test in the third quarter of each
fiscal year. As of December 30, 2006, 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 (unaudited in millions):

18

---



|                                         |  |   | Current    |  |   | Brand |  |   |      
|---------------------------------------- |  | - | ---------- |  | - | ----- |  | - | -----
|                                         |  |   | Technology |  |   | Name  |  |   | Total
|Gross carrying amount, recorded May 2002 |  | $ | 17.0       |  | $ | 9.2   |  | $ | 26.2 
|Accumulated amortization                 |  |   | 16.7       |  |   | 5.8   |  |   | 22.5 
|Book value at December 30, 2006          |  | $ | 0.3        |  | $ | 3.4   |  | $ | 3.7  

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

|                                 |  |   | Current    |  |   | Brand |  |   |      
|-------------------------------- |  | - | ---------- |  | - | ----- |  | - | -----
|Year                             |  |   | Technology |  |   | Name  |  |   | Total
|Remaining quarter of fiscal 2007 |  | $ | 0.1        |  | $ | 0.1   |  | $ | 0.2  
|2008                             |  |   | 0.1        |  |   | 0.8   |  |   | 0.9  
|2009                             |  |   | 0.1        |  |   | 0.8   |  |   | 0.9  
|2010                             |  |   | -          |  |   | 0.7   |  |   | 0.7  
|2011                             |  |   | -          |  |   | 0.6   |  |   | 0.6  
|2012                             |  |   | -          |  |   | 0.4   |  |   | 0.4  
|Total                            |  | $ | 0.3        |  | $ | 3.4   |  | $ | 3.7  

Interest Income.   Interest income relates to interest earned on our cash and cash equivalents.  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 three
months ended December 30, 2006 was $0.3 million as compared to $0.2 million for the three months ended December 31,
2005

Income Taxes.   For the three months ended December 30, 2006 and December 31, 2005, our income tax provision
reflects the amortization of deferred charges and provisions for taxes in certain profitable foreign jurisdictions. We have operated at a
loss for U.S. tax purposes and we provide for income tax expense in foreign jurisdictions where the foreign subsidiaries' operations
generate profits that are taxable.  Deferred tax assets have been recorded net of a valuation allowance. 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.

Nine Months Ended December 30, 2006 Compared to Nine Months Ended December 31, 2005

Net Sales.  Net sales were $62.9 million for the nine months ended December 30, 2006, an increase of 7% as compared
to net sales of $58.7 million for the nine months ended December 31, 2005.

Net sales of our Micrologic devices increased by 17% to $51.8 million for the nine months ended December 30, 2006 compared to
$44.4 million for the nine months ended December 31, 2005. This increase was primarily driven by increases in sales of our embedded
flash and Universal infra red remote control products.  Embedded flash sales increased by 87% to $9.7

19

---



Net sales of our other products for the nine months ended December 30, 2006 declined $3.2 million or 22% to $11.1 million
compared to $14.3 million for the nine months ended December 31, 2005.  The decrease in net sales of other products primarily
reflects a decline in sales of our modem and television products. Sales of modem and TV products for the nine month period ended
December 30, 2006 were $1.3 million as compared to $4.1 million for the nine months ended December 31, 2005 and primarily reflect
the move by customers to alternative technology solutions for these 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 48% for the
nine months ended December 30, 2006, up from a gross margin of 42% for the nine months ended December 31,
2005.

Research and Development Expenses.  Research and development expenses were $15.4 million and $16.0
million for the nine months ended December 30, 2006 and December 31, 2005, respectively.  Research and development spending for
the nine months ended December 30, 2006 is lower compared to spending levels for the nine months ended December 31, 2005 due to
lower variable costs associated with various programs currently in development which are in different stages of development and
includes such costs as engineering wafers, production masks for new designs to be manufactured in the foundries and engineering
proto-costs including test costs for product verification. These costs can vary considerably depending on the product type and related
complexity.

Selling, General and Administrative Expenses.    Selling, general and administrative expenses decreased to $17.1 million for
the nine months ended December 30, 2006 down from $17.7 million for the nine months ended December 31, 2005.  The decrease in
our selling, general and administrative spending reflects lower costs associated with Sarbanes-Oxley compliance activities, lower audit
costs and a credit for the settlement of a patent infringement suit paid to us.

Special Charges and Credits.   Special charges and credits totaled $1.1 million for the nine months ended December 30,
2006, representing severance and other costs associated with the resignation of our former CEO and sustaining costs of our MOD II
facility in Idaho, which is classified as assets held for sale on our balance sheet as of December 30, 2006.  During the nine months
ended December 31, 2005, employee severance and termination costs totaled $1.6 million, sustaining costs for MOD II totaled $0.7
million and sustaining costs for MOD III totaled $0.2 million, all of which were recorded through special charges

Interest Income and Expense.

Income Taxes.   For the nine months ended December 30, 2006 and December 31, 2005, our income tax provisions were
1.6 million and $1.3 million, respectively. For the nine months ended December 30, 2006, our income tax provision reflects the
amortization of deferred charges, refunds receivable and provisions for taxes in certain profitable foreign jurisdictions. For the nine
months ended December 31, 2005, our income tax provision reflects the amortization of deferred charges and provisions for taxes in
certain profitable foreign jurisdictions.  We have operated at a loss for U.S. tax purposes and we provide for income tax expense in
foreign jurisdictions where the foreign subsidiaries' operations generate profits that are taxable.

20

---



Deferred tax assets have been recorded net of a valuation allowance. 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 December 30, 2006, we had no debt or bank borrowings outstanding.  We had $0.0 million and $0.1 million standby letters of
credit as of December 30, 2006 and December 31, 2005, respectively.  At December 30, 2006, we had cash and cash equivalents of
$21.0 million, compared to $24.1 million at December 31, 2005.

Cash Flows From Operating Activities.

Cash Flows From Investing Activities.  During the nine months ended December 30,
2006, net cash used in investing activities was $5.6 million, an increase of $1.9 million from $3.7 million for the comparable period in
2005. Cash used in investing activities in the nine months ended December 30, 2006 primarily includes the distribution to the MOD III
Series A Preferred shareholders related to the liquidation of MOD III.  Cash used in investing activities in both of these periods reflects
capital expenditures for building and infrastructure improvements, software, and equipment purchases. During the nine months ended
December 30, 2006, we incurred $1.3 of costs for the decommissioning of our Mod II facility, which is recorded as assets held for sale
on our balance sheet as of December 30, 2006.

Cash Flows From Financing Activities.  Our financing activities include proceeds from the issuance of common
stock under employee stock plans net of repurchases of common stock. During the nine months ended December 30, 2006, $0.4
million was provided by financing activities. There was no net cash provided by or used in financing activities for the nine months ended
December 31, 2005.

Non-GAAP EBITDA Measure.  We present EBITDA amounts to reflect a non-GAAP measure of our liquidity.
EBITDA reflects our earnings before interest, taxes, depreciation and amortization.  We believe the disclosure of such information helps
investors more meaningfully evaluate our liquidity position by the elimination of non-cash related items such as depreciation and
amortization.  We believe that our investor base regularly uses EBITDA as a measure of the liquidity of our business.   Our
management uses EBITDA as a supplement to cash flow from operations as a way to assess the cash generated from our business
available for capital expenditures and debt service.  However, we recommend that investors carefully review the GAAP financial
information included as part of our Quarterly Reports on Form 10-Q, our Annual Reports on Form 10-K, and our quarterly earnings
releases, compare GAAP financial information with the non-GAAP financial results disclosed in our quarterly earnings releases and
investor calls, and read the associated reconciliation.

21

---



Our EBITDA, reconciled to cash used in operations (the most directly comparable measure of operating cash flows under
accounting principles generally accepted in the United States) for each period presented, is as follows (unaudited in millions):

|                                             |  |   | Three Months Ended |  |   | Nine Months Ended
|-------------------------------------------- |  | - | ------------------ |  | - | -----------------
|                                             |  |   | Dec. 30,           |  |   | Dec. 31,         
|                                             |  |   | 2006               |  |   | 2005             
|Reconciliation of net loss to EBITDA:        |  |   |                    |  |   |                  
|Net loss                                     |  | $ | (1.6)              |  | $ | (3.1)            
|Depreciation and amortization                |  |   | 1.1                |  |   | 1.2              
|Interest income                              |  |   | (0.3)              |  |   | (0.2)            
|Provision for income taxes                   |  |   | 0.6                |  |   | -                
|EBITDA                                       |  | $ | (0.2)              |  | $ | (2.1)            
|                                             |  |   |                    |  |   |                  
|Reconciliation of EBITDA to net cash used in |  |   |                    |  |   |                  
|operating activities:                        |  |   |                    |  |   |                  
|EBITDA                                       |  | $ | (0.2)              |  | $ | (2.1)            
|Provision for income taxes                   |  |   | (0.6)              |  |   | -                
|Interest income                              |  |   | 0.3                |  |   | 0.2              
|Stock-based compensation                     |  |   | 0.4                |  |   | 0.1              
|Changes in operating assets and liabilities  |  |   | (1.8)              |  |   | (0.1)            
|Net cash used in operating activities        |  | $ | (1.9)              |  | $ | (1.9)            

Changes in operating assets and liabilities generally reflect changes in working capital as well as certain other non-current assets
and liability amounts. For the three and nine month periods ended December 30, 2006, the changes in operating assets and liabilities
primarily reflect changes in accounts receivable, the increases in our overall inventory position and the change in our deferred income
on shipments to distributors, offset by reductions in accrued liabilities.

Contractual Obligations.

We lease certain of our facilities and equipment under non-cancelable operating leases, which expire in fiscal 2007 through fiscal
2011. These facility lease agreements generally provide for base rental rates, which increase at various times during the terms of the
leases, and also provide for renewal options at fair market rental value. We are also responsible for common area maintenance
charges on certain office leases, which are generally less than 10% of base rents.

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.

Off-Balance Sheet Arrangements

As of December 30, 2006, 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 revenues are generally lower in the March and December
quarters compared to the rest of the year.  We believe that this historical seasonal trend

22

---



could be impacted by general economic
conditions and reduction in sales of our legacy products.  General world-wide economic, political and regional instabilities may impact
our results of operations in any given period.  Introductions of our embedded flash products, universal remote control products and our
ARM based family products may impact this seasonality trend in the future.

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 December 30, 2006, our cash and cash equivalents of $21.0 million were invested in bank time deposits and
money market funds.  We have no significant cash flow exposure due to rate changes for our cash equivalents as these instruments
have very short maturities.  The annualized average fixed interest rate for the three and nine months ended December 30, 2006 was
approximately 5.1% and 4.9%,

Foreign Currency Exchange Risk

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

Item 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 December 30, 2006. Based on such evaluation, the Company's Chief Executive Officer and Chief Financial Officer
have concluded that, as of December 30, 2006, 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 December 30,
2006 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

23

---

PART II

OTHER INFORMATION

Item 1.  Legal Proceedings

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 been infringing 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. We filed a response to the claims on September 15,
2005 generally denying the claims and challenging the validity of the patents. A hearing was scheduled for November 17, 2005.
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 for all 3 patents. On March 13, 2006, the Company was informed that its motion to stay with the Federal court of Arizona was
granted until such time as Microchip is informed of the outcome of the re-examinations.

We do not believe it is feasible to predict or determine the outcome or resolution of this litigation at this time. We believe we have
meritorious defenses and will defend ourselves against these claims vigorously. We may incur substantial expenses in our defense
against these claims. In the event of a determination adverse to us, we may incur substantial monetary liability, and be required to
change our business practices. Either of these could have a material adverse effect on our financial position, results of operations or
cash flow.

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, 2006, which could materially
affect our business, financial condition or future results. The risk factors in our Form 10-K, have not materially changed other than as set
forth below. The risk factors described in our Form 10-K, and those described below, 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.

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

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

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

- reduced control over the cost of our products, delivery schedules, capacity constraints and product quality;
- limited warranties on wafers or products supplied to us;

24

---



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

Changes in securities laws and regulations may increase our costs.

The Sarbanes-Oxley Act of 2002 has previously required us to make changes to some of our corporate
governance practices. For the fiscal year ended March 31, 2006, the Company was a non-accelerated filer for the purposes of
compliance with Sarbanes-Oxley Section 404. The measurement criteria for determining filing status for the fiscal year ended March 31,
2007 was based on the Company's market capitalization as of September 30, 2006. At that time, the Company's market capitalization
was below the defined threshold and as such, the Company will continue to be a non-accelerated filer for the fiscal year ending March
31, 2007.  As such, the Company will not be required to comply with Section 404 of the Sarbanes-Oxley Act, which requires annual
management assessments of the effectiveness of our internal controls over financial reporting and also a report by our independent
registered public accounting firm assessing the effectiveness of our internal controls over financial reporting. The Commission recently
adopted rules extending the initial compliance with Section 404 for non-accelerated filers from fiscal years ending on or after July 15,
2007, until fiscal years ending on or after December 15, 2007.  The Commission also adopted rules extending the date in which
non-accelerated filers must provide an auditor's attestation report on internal controls over financial reporting until fiscal years ending on or
after December 15, 2008.  Thus, under these newly adopted rules, beginning with our fiscal year 2009, we will be required to provide an
auditor's attestation report on internal controls over financial reporting, which will substantially increase our general and administrative
expenses.

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

None.

Item 5.  Other Information

None.

25

---



Item 6.  Exhibits

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



|ExhibitNumber | Description                                                                                                                                                                                                           
|------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1 (a)       | Joint Reorganization Plan, as confirmed by order of the U.S. Bankruptcy
Court for the Northern District of California, dated April 30, 2002.                                                                          
|3.1 (b)       | Amended and Restated Certificate of Incorporation of ZiLOG, Inc., as amended and corrected.                                                                                                                           
|3.2 (c)       | Amended and Restated Bylaws of ZiLOG, Inc.                                                                                                                                                                            
|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 February 9, 2007.    PDF             
|31.2          | Certification 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 February 9, 2007.    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 February 9, 2007.    PDF

_______________

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

(b) Incorporated herein by reference to 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 30, 2003.

(c)       Incorporated herein by reference to Exhibit 99.1 to the Company's current report on Form 8-K filed with the
   Commission on November 17, 2005.

26

---



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 Grace
      
           Perry GraceVice President and Chief Financial Officer         (Duly Authorized Officer)



| |                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------
| | /s/ Darin Billerbeck
      
           Darin BillerbeckChief Executive Officer         (Duly Authorized Officer)

Date:  February 9, 2007

27

---