8-K/A

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

FORM 8-K/A

(Amendment No.1)

CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

Date of Report (Date of earliest event reported):  February 17, 2010

IXYS CORPORATION
(Exact name of registrant as specified in its charter)

Delaware	000-26124	77-0140882
(State or other jurisdiction of incorporation)	(Commission File Number)	(IRS Employer Identification Number)

1590 Buckeye Drive
Milpitas, California 95035

(Address of principal executive offices and zip code)

Registrant's telephone number, including area code: (408) 457-9000

Not Applicable
(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

¨   Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨   Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨   Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨   Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Explanatory Note

On February 22, 2010, IXYS Corporation, or IXYS, filed a Current Report on Form 8-K reporting the completion of its previously announced acquisition of Zilog Inc, or Zilog. This Amendment No. 1 to the initial Form 8-K is being filed to provide the financial statements described under Item 9.01 below.

Item 9.01 Financial Statements and Exhibits

     (a)  Financial Statements of Business Acquired

1. The audited financial statements of Zilog as of March 31, 2009 and 2008 and for the three years ended March 31, 2009 are filed as Exhibit 99.1 and incorporated herein by reference.
2. The unaudited financial statements of Zilog as of December 26, 2009 and for the nine months ended December 26, 2009 and December 27, 2008 are filed as Exhibit 99.2 and incorporated herein by reference.

     (b)  Pro Forma Financial Information

The following unaudited pro forma combined condensed consolidated financial statements of IXYS are filed as Exhibit 99.3 and incorporated herein by reference:

i.   Unaudited pro forma combined condensed consolidated balance sheet as of December 31, 2009.

ii. Unaudited pro forma combined condensed consolidated statement of operations for the nine months ended December 31, 2009.

iii. Unaudited pro forma combined condensed consolidated statement of operations for the year ended March 31, 2009.

iv. Notes to the unaudited pro forma combined condensed consolidated financial statements.

     (d)  Exhibits

23.1	Consent of Independent Registered Public Accounting Firm.
99.1	Audited financial statements of Zilog, Inc., as of March 31, 2009 and 2008 and for the three years ended March 31, 2009.
99.2	Unaudited condensed consolidated financial statements of Zilog, Inc., as of December 26, 2009 and the nine months ended December 26, 2009 and December 27, 2008.
99.3	IXYS Corporation and Zilog, Inc., unaudited pro forma combined condensed consolidated financial statements as of December 31, 2009, the nine months ended December 31, 2009 and the fiscal year ended March 31, 2009 and notes.

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.

Date: May 5, 2010 IXYS CORPORATION

By:
Name:
Title: /s/ Uzi Sasson                 
Uzi Sasson
President and
Chief Financial Officer

INDEX TO EXHIBIT LIST

Exhibit No.	Description
23.1	Consent of Independent Registered Public Accounting Firm.
99.1	Audited financial statements of Zilog, Inc., as of March 31, 2009 and 2008 and for the three years ended March 31, 2009.
99.2	Unaudited condensed consolidated financial statements of Zilog, Inc., as of December 26, 2009 and the nine months ended December 26, 2009 and December 27, 2008.
99.3	IXYS Corporation and Zilog, Inc., unaudited pro forma combined condensed consolidated financial statements as of December 31, 2009, the nine months ended December 31, 2009 and the fiscal year ended March 31, 2009 and notes.

EX-23.1 2 exh23-1.htm CONSENT

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the registration statements (No. 333-163975, 333-147256, 333-139502, 333-109857, 333-96081, 333-92204, 333-66289 and 333-4412) on Form S-8 of IXYS Corporation of our report dated June 27, 2009, with respect to the consolidated balance sheets of ZiLOG, Inc., as of March 31, 2009 and March 31, 2008, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended March 31, 2009, and the related financial statement schedule, which report is incorporated by reference into this Form 8-K/A of IXYS Corporation filed with the Securities and Exchange Commission on May 5, 2010.

ARMANINO MCKENNA LLP

San Ramon, California
May 5, 2010

EX-99.1 3 exh99-1.htm AUDITED FINANCIAL STATEMENTS OF ZILOG, INC., AS OF MARCH 31, 2009 AND 2008 AND FOR THE THREE YEARS ENDED MARCH 31, 2009.

Exhibit 99.1

ZiLOG, INC. FINANCIAL STATEMENTS

The following financial statements are provided:

	Page
Report of Armanino McKenna LLP, Independent Registered Public Accounting Firm	1
Consolidated Balance Sheets as of March 31, 2009 and 2008	2
Consolidated Statements of Operations for the years ended March 31, 2009, 2008 and 2007	3
Consolidated Statements of Cash Flows for the years ended March 31, 2009, 2008 and 2007	4
Consolidated Statements of Stockholders' Equity for the years ended March 31, 2009, 2008 and 2007	5
Notes to Consolidated Financial Statements	6

i

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of ZiLOG, Inc.

We have audited the accompanying consolidated balance sheets of ZiLOG, Inc. and subsidiaries (the "Company") as of March 31, 2009 and 2008 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended March 31, 2009. Our audits also included the financial statement schedule for each of the years in the three year period ended March 31, 2009 listed in Item 15a (2). These consolidated financial statements and related financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal controls over financial reporting. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ZiLOG, Inc. and subsidiaries as of March 31, 2009 and 2008 and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2009, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule for the three years ended March 31, 2009, when considered in relation to the consolidated financial statements taken as a whole, presents fairly, in all material aspects, the information set forth therein.

/s/    Armanino McKenna LLP

San Ramon, California
June 27, 2009

1

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

		Mar. 31,		Mar. 31,
		2009		2008
ASSETS
Current assets:
Cash and cash equivalents	$	32,230	$	16,625
Accounts receivable, less allowance for doubtful accounts of $129
at March 31, 2009 and $139 at March 31, 2008		1,698		2,203
Inventories		4,022		6,908
Deferred tax assets		10		263
Prepaid expenses and other current assets		5,995		1,266
Current assets associated with discontinued operations		960		6,533
Total current assets		44,915		33,798
Long term investments		1,100		1,925
Property, plant and equipment, net		2,347		4,594
Goodwill		2,211		2,211
Intangible assets, net		-		2,528
Other assets		1,079		581
Non current assets associated with discontinued operations		-		2,203
Total assets	$	51,652	$	47,840
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short term debt	$	346	$	720
Accounts payable		4,368		5,508
Income taxes payable		195		513
Accrued compensation and employee benefits		1,349		2,312
Other accrued liabilities		2,550		2,086
Deferred income, net of costs		8,024		5,571
Current liabilities associated with discontinued operations		1,256		2,733
Total current liabilities		18,088		19,443
Deferred tax liabilities		10		263
Other non-current liabilities		1,928		1,255
Total liabilities		20,026		20,961
Stockholders' equity:
Common stock, $0.01 par value; 60.0 million shares authorized:
17.1 million and 16.9 million shares issued and
outstanding at March 31, 2009 and March 31, 2008, respectively		186		185
Additional paid-in capital		127,436		125,838
Treasury stock		(7,563)		(7,456)
Other comprehensive income		173		102
Accumulated deficit		(88,606)		(91,790)
Total stockholders' equity		31,626		26,879
Total liabilities and stockholders' equity	$	51,652	$	47,840

See accompanying notes to the consolidated financial statements.

2

ZiLOG, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)

		Years Ended
		Mar. 31,		Mar. 31,		Mar. 31,
		2009		2008		2007
Net sales	$	36,157	$	44,644	$	58,026
Cost of sales		21,815		25,035		29,513
Gross margin		14,342		19,609		28,513
Gross margin percent of sales		39.7%		43.9%		49.1%
Operating expenses:
Research and development		6,265		8,143		12,528
Selling, general and administrative		19,353		19,279		22,028
Special charges and credits		6,318		1,974		2,471
Amortization of intangible assets		801		961		1,284
Total operating expenses from continuing operations		32,737		30,357		38,311
Operating loss from continuing operations		(18,395)		(10,748)		(9,798)
Other income (expense):
Interest income		188		819		1,112
Interest expense		(40)		-		-
Other, net		378		(332)		(19)
Total other income, net		526		487		1,093
Loss from continuing operations before provision for income taxes		(17,869)		(10,261)		(8,705)
Provision for income taxes		181		853		1,547
Net loss from continuing operations		(18,050)		(11,114)		(10,252)
Net income (loss) from discontinued operations		(372)		1,823		1,214
Gain from sale of discontinued operations, net of tax		21,606		-		-
Net income (loss)	$	3,184	$	(9,291)	$	(9,038)
Basic and diluted net loss per share - continuing operations	$	(1.05)	$	(0.66)	$	(0.61)
Basic and diluted net income (loss) per share - discontinued operations		(0.02)		0.11		0.07
Basic and diluted gain on sale of discontinued operations per share		1.26		-		-
Basic and diluted net income (loss) per share	$	0.19	$	(0.55)	$	(0.54)
Weighted-average shares, basic		17,031		16,893		16,665
Weighted-average shares, diluted		17,114		16,893		16,665

See accompanying notes to the consolidated financial statements.

3

ZiLOG, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

		Years Ended
		Mar. 31,		Mar. 31,		Mar. 31,
		2009		2008		2007
Cash Flows from Operating Activities:
Net loss from continuing operations	$	(18,050)	$	(11,114)	$	(10,252)
Adjustments to reconcile net loss to net cash provided by
(used in) continuing operating activities:
Amortization of fresh-start intangible assets		801		961		1,284
Depreciation and other amortization		1,832		2,092		2,259
Goodwill adjustment		-		-		4,529
Disposition of operating assets		1,032		318		8
Impairment of intangible assets		1,727		-		-
Stock-based compensation		1,324		721		1,347
Changes in operating assets and liabilities:
Accounts receivable, net		505		1,293		2,436
Inventories		759		901		(1,811)
Prepaid expenses and other current and non-current assets		(5,147)		1,926		2,216
Accounts payable		(1,140)		682		(177)
Accrued compensation and employee benefits		(963)		(418)		244
Deferred income		2,453		(1,392)		967
Accrued and other current and non-current liabilities		(138)		(809)		(6,251)
Net cash used in continuing operating activities		(15,005)		(4,839)		(3,201)
Net cash provided by discontinued operating activities		6,078		3,220		1,522
Cash Flows from Investing Activities:
Assets held for sale - vacant property		-		-		(1,437)
Payable to ZiLOG Mod III, Inc. Series A Preferred shareholders		-		-		(2,848)
Proceeds from sale of assets		-		3,237		-
Proceeds from sale of discontinued businesses, net of transaction costs		24,695		-		-
Redemption of long term investments		825		-		-
Investment in long term securities		-		(1,925)		-
Capital expenditures		(626)		(1,299)		(2,097)
Net cash provided by (used in) continuing investing activities		24,894		13		(6,382)
Net cash used in discontinued investing activities		-		(2,076)		-
Cash Flows From Financing Activities:
Proceeds from short term debt		660		720		-
Payments on short term debt		(1,034)		-		-
Repurchase of treasury shares		(54)		(282)		-
Proceeds from issuance of common stock under employee stock
purchase and stock option plans		116		470		497
Net cash provided by (used in) continuing financing activities		(312)		908		497
Net cash provided by (used in) discontinued financing activities		(50)		9		-
Net increase (decrease) in cash and cash equivalents		15,605		(2,765)		(7,564)
Cash and cash equivalents at beginning of period		16,625		19,390		26,954
Cash and cash equivalents at end of period	$	32,230	$	16,625	$	19,390
Supplemental Disclosure of Cash Flow Information:
Income taxes paid during the period	$	186	$	345	$	340
Supplemental Disclosure of Non-Cash Investing and
Financing Activities:
Value of shares repurchased through employee loan
repayments	$	-	$	282	$	-

See accompanying notes to the consolidated financial statements.

4

 ZiLOG, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)

	Common Stock				Deferred Stock Compen-		Additional Paid-in		Treasury		Other Compre- hensive		Accumu- lated		Total Stock- holders'
	Shares		Amount		sation		Capital		Stock		Income		Deficit		Equity
Balance at March 31, 2006	16,585	$	181	$	(566)	$	123,198	$	(7,174)	$	-	$	(73,782)	$	41,857
Issuance of common stock under stock option plans	121		1		-		247		-		-		-		248
Issuance of restricted shares	91		-		-		-		-		-		-		-
Issuance of common stock under employee stock															-
purchase plan	93		1		-		247		-		-		-		248
Restricted shares cancelled	(76)		-		-		-		-		-		-		-
Stock-based compensation expense	26		-		-		1,432		-		-		-		1,432
Adoption of FAS123R	-		-		566		(566)		-		-		-		-
Net loss and comprehensive loss	-		-		-		-		-		-		(9,038)		(9,038)
Balance at March 31, 2007	16,840		183		-		124,558		(7,174)		-		(82,820)		34,747
Adoption of FIN48	-		-		-		-		-		-		321		321
Issuance of common stock under stock option plans	101		2		-		311		-		-		-		313
Issuance of common stock under employee stock															-
purchase plan	53		-		-		166		-		-		-		166
Restricted shares cancelled	(25)		-		-		-		-		-		-		-
Repurchase of treasury shares	(73)								(282)		-				(282)
Stock-based compensation expense	27		-		-		803		-		-		-		803
Comprehensive income:
Other comprehensive income - defined benefit plan	-		-		-		-		-		102		-		102
Net loss	-		-		-		-		-		-		(9,291)		(9,291)
Total comprehensive loss	-		-		-		-		-		-		-		(9,189)
Balance at March 31, 2008	16,923		185		-		125,838		(7,456)		102		(91,790)		26,879
Adoption of FIN48	-		-		-		-		-		-		-		-
Issuance of common stock under stock option plans	5		-		-		15		-		-		-		15
Issuance of common stock under employee stock															-
purchase plan	43		1		-		103		-		-		-		104
Restricted shares cancelled	(79)		-		-		-		-		-		-		-
Restricted shares granted - employee stock incentive plan	235		-		-		549		-		-		-		549
Repurchase of treasury shares	(47)		-		-		-		(107)		-		-		(107)
Stock-based compensation expense	31		-		-		931		-		-		-		931
Comprehensive income:
Other comprehensive income - defined benefit plan	-		-		-		-		-		71		-		71
Net income	-		-		-		-		-		-		3,184		3,184
Total comprehensive income	-		-		-		-		-		-		-		3,255
Balance at March 31, 2009	17,111	$	186	$	-	$	127,436	$	(7,563)	$	173	$	(88,606)	$	31,626

See accompanying notes to the consolidated financial statements.

5

ZiLOG, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

ZiLOG, Inc. ("ZiLOG" or the "Company") is a worldwide supplier of semiconductor products. The Company designs, develops and markets various families of products in support of the micrologic semiconductor market segment. Using proprietary technology, ZiLOG provides semiconductor devices that its customers design into their end products. These devices typically combine a microprocessor memory, and input and output functions on a single device. ZiLOG's micrologic devices enable a broad range of consumer and industrial electronics manufacturers to control the functions and performance of their products. ZiLOG's other devices have a wide variety of uses including the processing and transmission of information for data communications, telecommunications and consumer electronics companies.

Basis of Presentation

The consolidated financial statements include the accounts of ZiLOG, Inc. and its subsidiaries. All significant transactions and accounts between the Company and these subsidiaries have been eliminated in consolidation. Certain reclassifications have been made to prior-period balances to present the consolidated financial statements on a consistent basis with the current year presentation. Any reference to year pertains to the fiscal year unless otherwise indicated.

Revenue Recognition

Revenue from product sales to direct customers is recognized when evidence of an agreement exists, customers or their agents receive the product and title transfers, and collection of amounts due is reasonably assured. Appropriate allowances for returns, discounts and warranty costs are recorded concurrent with revenue recognition.

The Company also licenses technology for certain of its products and receives payment in the form of royalties. Typically, licensees provide shipment and royalty information when the payment is remitted, usually 60 days subsequent to the end of the quarter in which shipments are made. The Company records royalty revenues as net sales when the cash is received from the licensees.

Revenue on shipments to distributors who have rights of return and/or price protection on unsold merchandise held by them is deferred until products are resold by the distributors to end users. Although revenue is deferred until it is resold, title of products sold to distributors transfers upon shipment. Accordingly, shipments to distributors are reflected in the consolidated balance sheets as accounts receivable and a reduction of inventories at the time of shipment. Deferred revenue and the corresponding cost of sales on shipments to distributors are reflected in the consolidated balance sheets on a net basis as "Deferred income, net of costs." Refer to Note 7 of notes to consolidated financial statements for details regarding deferred revenues.

Cash and Cash Equivalents

Cash and cash equivalents consist of bank deposits and money market funds, which are readily convertible to cash and have maturities of three months or less at the time of acquisition. As of March 31, 2009, the Company had $1.1 million invested in auction rate preferred securities ("ARPS") which is classified as long term investments at full par value on the consolidated balance sheet as of March 31, 2009. Refer to Note 13 of notes to consolidated financial statements for details regarding the classification.

Accounts Receivable and Allowances

The Company maintains an allowance for losses it may incur as a result of its customers' inability to make required payments. Any increase in the allowance results in a corresponding increase in selling, general and administrative expenses. In establishing this allowance and evaluating the adequacy of the allowance for doubtful accounts, the Company considers the aging of accounts receivable, historical bad debts, customer concentrations, customer credit-worthiness and, to a lesser extent, current economic trends and changes in customer payment terms.

The Company's sales to direct customers consist of gross product sales reduced by expected future sales returns and price allowances. To estimate sales returns and price allowances, the Company analyzes historical returns and allowance activity to establish a baseline reserve level. The Company then evaluates whether there are any underlying product quality or other customer specific issues that require additional specific reserves above the baseline level.

6

The Company's sales to distributors that have rights of return and/or price protection allowances on unsold merchandise held by them are deferred until such products are resold by the distributors to end users. At the time that the Company recognizes distributor re-sales as revenue, it records a reserve for estimated price adjustments that the distributors may reclaim from the Company on the merchandise they resold to end users. These reserves are recorded as a reduction to sales and a reduction to accounts receivable. To estimate this distributor price adjustment reserve, the Company analyzes its historical price adjustment payments, price adjustments taken by distributors but not processed by the Company and pending price adjustments that have been authorized by the Company but have not yet been claimed by its distributors.

Fair Value of Financial Instruments, Concentration of Credit Risk

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

As of March 31, 2009 the Company held $1.1 million in auction rate preferred securities ("ARPS"). Since February 2008, due to various factors including the tightening of liquidity in the financial market, regularly held auctions for these ARPS have been unsuccessful. The Company has received total redemptions totaling $2.8 million or 72% of the original value in February 2008. The collateralized asset value ranges exceed the value of ARPS held by the Company by 200 to 300 percent. The Company believes the ARPS values are not impaired and as such, no impairment has been recognized against the investment. If the issuers are unable to successfully close future auctions and their credit rating continues to deteriorate, the Company may be required to record an impairment charge against the value of its ARPS holdings. ( See Note 13, Fair Value Measurements)

The Company's customer base is located primarily in North America, Europe and Asia. The Company performs ongoing credit evaluations of its customers' financial condition and limits its exposure to financial losses by limiting the amount of credit extended whenever deemed necessary and generally does not require collateral. As of March 31, 2009 and March 31, 2008, respectively, there were two customers with net accounts receivable comprising more than 10% of total net accounts receivable.

Inventories

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

		Mar. 31,		Mar. 31,
		2009		2008
Raw materials	$	234	$	367
Work-in-process		2,762		4,858
Finished goods		1,026		1,683
Total net inventory	$	4,022	$	6,908

Property, Plant and Equipment and Intangibles

Depreciation is computed using the straight-line method over the estimated economic lives of the assets, which are generally between three and seven years for machinery and equipment.

Amortization of leasehold improvements is computed using the shorter of the remaining terms of the leases or the estimated economic lives of the improvements. Depreciation expense relating to continuing operations for property, plant and equipment was $1.8 million, $2.1 million and $2.3 million for fiscal years ended March 31, 2009, 2008 and 2007, respectively. The Company did not have any assets leased under capital leases during the periods indicated.

7

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

		Mar. 31,		Mar. 31,
		2009		2008
Property, plant and equipment at cost:
Land, buildings and leasehold improvements	$	1,914	$	2,632
Machinery and equipment		20,480		37,632
		22,394		40,264
Less accumulated depreciation and amortization		(20,047)		(35,669)
Net property, plant and equipment	$	2,347	$	4,594

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

• significant changes in the manner of our use of the acquired assets;
• significant changes in the strategy for our overall business; and
• significant negative industry or economic trends.

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

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

We evaluate existing technology and brand name whenever events and circumstances indicate that their fair value may be less than their carrying value. Additionally, goodwill is tested for impairment at least annually and more often if events and circumstances indicate that its fair value may be less than its carrying value. We performed the annual impairment test for goodwill in the fourth quarter of 2009, and we perform this test in the fourth quarter of each fiscal year unless the existence of triggering events indicates that an earlier review should be performed.

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

Other Accrued Liabilities

The following table further details "other accrued liabilities" (in thousands):

		Mar. 31,		Mar. 31,
		2009		2008
Accrued audit fees	$	144	$	30
Accrued legal costs		876		876
Accrued special charges		638		489
Other		892		691
Other accrued liabilities	$	2,550	$	2,086

Accrued miscellaneous other includes accrued liabilities relating to facility rent, other taxes and tax preparation fees, marketing costs and expenses, Board of Directors related expenses as well as other various and sundry items.

8

Use of Estimates

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

Advertising Expenses

The Company accounts for advertising costs as an expense in the period in which they are incurred. Advertising expenses were $0.3 million, $0.5 million and $0.5 million for the fiscal years ended March 31, 2009, 2008 and 2007, respectively. Advertising costs are included in selling, general and administrative expenses in the accompanying consolidated statements of operations.

Shipping Costs

Shipping costs are included in cost of sales.

Research and Development Expenses

The Company's policy is to record all research and development expenditures with no future alternative use, as period expenses, when incurred. Research and development expenditures incurred and expensed were $6.3 million for the fiscal year ended March 31, 2009, $8.1 million for the fiscal year ended March 31, 2008 and $12.5 million for the fiscal year ended March 31, 2007.

Stock Awards

Effective April 1, 2006, the Company adopted SFAS 123R, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options, restricted stock awards and employee stock purchases related to the 2004 Employee Stock Purchase Plan based on estimated fair values. SFAS 123R supersedes the Company's previous accounting under APB 25 and SFAS 123 for periods beginning in fiscal 2007. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 ("SAB 107") relating to SFAS 123R. The Company has applied the provisions of SAB 107 in its adoption of SFAS 123R. The Company elected to adopt SFAS 123R using the modified prospective transition method utilizing the single option attribution approach, which requires the application of the accounting standards as of April 1, 2006, the first day of the Company's fiscal year 2007. In accordance with the modified prospective transition method, the Company's prior periods have not been restated to reflect, and do not include, the impact of SFAS 123R. The Company's consolidated financial statements as of and for the fiscal years ended March 31, 2009, 2008 and 2007 reflect the impact of SFAS 123R. (See Note 6 - - Stock Compensation and Stockholders Equity)

Recent Accounting Pronouncements

In April 2009, the FASB issued FSP FAS No. 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly" (FSP FAS 157-4). FSP FAS 157-4 amends SFAS 157 and provides additional guidance for estimating fair value in accordance with SFAS 157 when the volume and level of activity for the asset or liability have significantly decreased and also includes guidance on identifying circumstances that indicate a transaction is not orderly for fair value measurements. This FSP will be required to be applied prospectively to all fair value measurements where appropriate and will be effective for interim and annual periods ending after June 15, 2009. Zilog will be required to implement the standard during the first quarter of fiscal 2010, which began on April 1, 2009. The Company is currently evaluating this new FSP but does not believe that its adoption will have a significant impact on its consolidated financial condition or results of operations.

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, "Interim Disclosures About Fair Value of Financial Instruments" (FSP FAS 107-1 and APB 28-1). FSP FAS 107-1 and APB 28-1 amends SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," (SFAS 107) to require disclosures about fair value of financial instruments not measured on the balance sheet at fair value in interim financial statements as well as in annual financial statements. Prior to this FSP, fair values for these assets and liabilities were only disclosed annually. This FSP applies to all financial instruments within the scope of SFAS 107 and requires all entities to disclose the method(s) and significant assumptions used to estimate June 15, 2009. FSP FAS

9

the fair value of financial instruments. This FSP will be effective for interim periods ending after 107-1 and APB 28-1 will result in increased disclosures in the Company's interim periods beginning in the first quarter of fiscal 2010 our fiscal quarter ending June 28, 2009.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS No. 141R). SFAS No. 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the business being acquired and the goodwill acquired. SFAS No. 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. In April 2009, the FASB issued FSP FAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies (FSP FAS 141R-1). FSP FAS 141R-1 amends and clarifies SFAS No. 141R to address application issues on initial recognition and measurement, subsequent measurement and accounting and disclosure of assets and liabilities arising from contingencies in a business combination. SFAS No. 141R and FSP FAS 141R-1 are effective for fiscal years beginning after December 15, 2008, and will be adopted by the Company in the first quarter of fiscal 2010, our fiscal quarter ending June 28, 2009. The Company is currently evaluating this new FSP but does not believe that its adoption will have a significant impact on its consolidated financial condition or results of operations.

NOTE 2. GOODWILL AND INTANGIBLE ASSETS

The Company has adopted the provisions of SFAS 142, under which goodwill and intangible assets with indefinite lives are not amortized, but are reviewed annually or more frequently if impairment indicators arise. In connection with its reorganization in 2002, the Company recorded a valuation allowance against deferred tax assets and recorded deferred income tax liabilities and income tax contingencies in accordance with Statement of Financial Accounting Standards No. 5, "Accounting for Contingencies." Since 2002, the Company has reassessed and updated its deferred income tax liabilities and income tax contingencies requirements and reduced the associated liabilities as an adjustment to goodwill. In addition, reductions in the valuation allowance that were established as liabilities on the consolidated balance sheets under fresh-start reporting in 2002 have been recorded as a reduction in the carrying value of goodwill. No such reassessments or adjustments were recorded for the fiscal years ended March 31, 2009 and 2008.

Intangible assets established in connection with the Company's fresh-start reporting, separable intangible assets that are deemed to have defined lives (primarily related to existing technology and brand name), are being amortized utilizing the pattern-of-use method over estimated useful lives ranging from 3 to 10 years. During the fiscal year ended March 31, 2009 the Company recorded an impairment charge of $1.7 million. Changes in the carrying value of separable intangible assets for the periods indicated are as follows (in thousands):

		Existing		Brand		Total
		Technology		Name		Intangibles
Balance at March 31, 2007	$	172	$	3,317	$	3,489
Amortization during fiscal 2008		(124)		(837)		(961)
Balance at March 31, 2008		48		2,480		2,528
Amortization during fiscal 2009		(48)		(753)		(801)
Impairment recorded during fiscal 2009		-		(1,727)		(1,727)
Balance at March 31, 2009	$	-	$	-	$	-

Consistent with SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" and SFAS 142, "Goodwill and Other Intangible Assets", the Company annually reviews the carrying values of its Goodwill and Intangible assets to determine if portions of the carrying value may be impaired. Based upon the Company's analysis, the carrying value of its Goodwill of $2.2 million on March 31, 2009, was not impaired as the market value as determined by market capitalization exceeded book value. Based upon relevant factors including the current economic conditions and the sale of a significant portion of the Company's business in February 2009, estimates and the analysis of associated discounted future cash flows indicated the impairment of the carrying value of the intangible assets as of March 31, 2009.

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NOTE 3. DISCONTINUED OPERATIONS

During fiscal 2009 the company experienced a significant reduction in sales reflecting lower demand for product and the global worldwide recession. Following a review of its strategy in light of an anticipated continuation of contraction in the market place, on February 18, 2009, the Company sold its universal remote control and secured transaction processor businesses to Maxim and UEI for approximately $31 million in cash including $3.1 million that is held in escrow to satisfy any losses incurred by Maxim or UEI that may result from inaccuracies in the Company's representations and warranties in the acquisition agreement or the Company's failure to fulfill certain obligations in the acquisition agreement. The escrow is scheduled to be released 50% after 6 months and 100% after 12 months. A gain on the sale of $21.6 million was recorded. In accordance with Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long Lived Assets", the assets and liabilities, results of operations and cash flows related to the sale businesses, have been classified as discontinued operations in the consolidated financial statements for all periods presented through the date of the sale. Cash flows associated with the sale businesses have been segregated in the consolidated statements of cash flows as separate line items within operating, investing and financing activities. As a result, our historical financial statements have been restated to exclude assets, liabilities and results of operations and cash flows related to the discontinued operations. Restatement of these balances may make reconciliation or reference to previously filed financial statements difficult.

The following table summarizes results from discontinued operations (in thousands):

		Years Ended
		Mar. 31,		Mar. 31,		Mar. 31,
		2009		2008		2007
Net sales	$	23,214	$	22,577	$	24,023
Cost of sales		11,965		11,299		13,567
Gross margin		11,249		11,278		10,456
Operating expenses:
Research and development		7,870		8,348		7,945
Selling, general and administrative		511		643		641
Special charges and credits		3,123		-		-
Total operating expenses		11,504		8,991		8,586
Operating profit (loss)		(255)		2,287		1,870
Total other income (expense), net		11		(18)		(15)
Net profit (loss) before provision for income taxes		(244)		2,269		1,855
Provision for income taxes		128		446		641
Net profit (loss) from discontinued operations		(372)		1,823		1,214
Gain from sale of discontinued operations, net of tax		21,606		-		-
Net income from discontinued operations	$	21,234	$	1,823	$	1,214

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The following table summarizes assets and liabilities classified as discontinued operations (in thousands):

		Mar. 31,		Mar. 31,
		2009		2008
ASSETS:
Current assets:
Accounts receivable, net	$	960	$	4,631
Inventories, net		-		1,505
Prepaid expenses and other current assets		-		397
Total current assets of discontinued operations		960		6,533
Property, plant and equipment, net		-		2,009
Other assets		-		194
Total assets of discontinued operations	$	960	$	8,736
LIABILITIES:
Current liabilities:
Accounts payable	$	1,256	$	2,275
Income taxes payable		-		22
Accrued compensation and employee benefits		-		132
Other accrued liabilities		-		8
Deferred income on shipments to distributors, net		-		296
Total current liabilities of discontinued operations		1,256		2,733
Other non-current tax liabilities		-		-
Total liabilities of discontinued operations	$	1,256	$	2,733

The following table summarizes the gain on sale of discontinued operations (in thousands):

		Mar. 31,
		2009
Gross proceeds from sale	$	31,000
10% Escrow		(3,100)
Reimbursable items		281
Transactions costs		(3,219)
Other charges and expenses including taxes		(1,229)
Cost of inventory related to the sale		(2,127)
Gain (loss) from sale of discontinued operations, net of tax	$	21,606

NOTE 4. SPECIAL CHARGES AND CREDITS

Fiscal 2009 Special Charges and Credits Analysis

Associated with the Company's continued focus to reduce costs and streamline its activities, the Company completed its

plan to outsource its test production operations formerly performed in its Philippines facility to third parties, completed a worldwide workforce reduction including consolidation and elimination of certain office sites, began the outsource of certain IT functions and hardware facilities to third parties and consolidated its Headquarters functions onto one floor of its San Jose facility. During fiscal 2009, the Company incurred $3.1 million of reorganization, severance and termination costs including $1.1 million associated with its test outsource, $1.6 million for its worldwide workforce reduction, and $0.4 million of severance and other costs related to certain office closures and consolidations. The Company also wrote-off certain assets

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totaling $1.5 million, including $0.8 million of lease costs, leasehold improvements and obsolete equipment associated with its San Jose headquarters consolidation and $0.7 million pertaining to facilities, hardware and software costs for its IT outsource plan.

Additionally, the Company incurred an impairment charge of $1.7 million relating to certain intangible assets

originally created by the adoption of fresh-start accounting on its emergence from bankruptcy in 2002. Consistent with SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" and SFAS 142, "Goodwill and Other Intangible Assets", we annually review the carrying values of goodwill and intangible assets to determine if portions of the carrying value may be impaired. Based upon its analysis, the carrying value of goodwill of $2.2 million on March 31, 2009, was not impaired as the market value as determined by market capitalization exceeded book value. Based upon relevant factors including the current economic conditions and the sale of a significant portion of its business in February 2009, the analysis of discounted future cash flows indicated the impairment of the remaining carrying value of its intangible assets as of March 31, 2009. Accordingly the Company recorded charges of $1.7 million to fully impair such remaining intangible assets.

Fiscal 2008 Special Charges and Credits Analysis

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

Fiscal 2007 Special Charges and Credits Analysis

As part of the Company's ongoing efforts to reduce costs and streamline activities, in March 2007, a plan of action was initiated to consolidate certain research and development activities and transfer certain of these activities from its Shanghai, China and Seattle, Washington facilities to its San Jose, California and Meridian, Idaho facilities. During fiscal 2007, the Company incurred $1.0 million of severance and benefits costs related to this restructuring activity, whichhave been recorded as special charges. Other severance and benefit related costs of $0.8 million the Company incurred as a result of changes in Company's CEO position including departure costs for the Company's former CEO and new hire costs for the Company's current CEO, Darin G. Billerbeck. In addition, the Company continued to incur period expenses of $0.6 million to sustain the dormant MOD II facility included in assets held for sale on the consolidated balance sheets as of March 31, 2007. In May 2007, the MOD II facility was sold for a net sales price of $3.1 million.

Special charges and credits in fiscal 2009, fiscal 2008 and fiscal 2007 were as follows (in thousands):

		Years Ended
		Mar. 31,		Mar. 31,		Mar. 31,
		2009		2008		2007
Asset impairments:
Impairment of intangible assets	$	1,727	$	-	$	-
Write-off of property, plant, equipment
and other assets		1,504		-		-
Restructuring of operations:
Reorganization, severance and termination benefits		3,188		2,252		1,859
Defined benefit plan refund and other		(101)		(526)		-
MOD II sustaining and other selling costs		-		248		612
Total special charges and credits	$	6,318	$	1,974	$	2,471

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The following table details the beginning balance as of March 31, 2007 and the accrued special charges for the periods indicated (in thousands):

		Severance
		and		MOD II
		Termination		Closure
		Benefits		Costs		Total
Balance at March 31, 2007	$	1,215	$	-	$	1,215
Provisions to special charges		1,726		248		1,974
Cash payments		(2,452)		(248)		(2,700)
Balance at March 31, 2008		489		-		489
Provisions to special charges		2,160		-		2,160
Cash payments		(2,011)		-		(2,011)
Balance at March 31, 2009	$	638	$	-	$	638

NOTE 5. RETIREMENT AND PENSION PLANS

The Company has an employee savings plan that qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code (the "401(k) Plan"). Under the 401(k) Plan, participating U.S. employees may defer a portion of their pretax earnings, up to the Internal Revenue Service annual contribution limit. The Company may make matching contributions on behalf of each participating employee in an amount equal to 100% of the participant's deferral contribution, up to 1.5% of the participant's compensation on a quarterly basis. The Company may also make additional discretionary contributions to the 401(k) Plan. Matching contributions to the 401(k) Plan were $0.1 million for fiscal year ended March 31, 2009, $0.2 million for the fiscal year ended March 31, 2008 and $0.1 million for the fiscal year ended March 31, 2007. There were no discretionary contributions made in the fiscal years ended March 31, 2009, 2008 and 2007, respectively.

The Company's Philippines subsidiary maintains a defined benefit pension plan for local employees, which is consistent with local statutes and practices. As of March 31, 2009, the pension plan was over-funded by approximately $0.3 million which is classified as other assets on the consolidated balance sheet. The over-funded position reflects a decline in the number of employees who are eligible for entitlements under the plan and the associated projected benefit obligation as compared to the fair value of the plan. During fiscal 2009, $0.2 million is included as a reclassification adjustment of other comprehensive income as a result of being recognized as a component of net periodic benefit costs for fiscal 2009.

In April 2007, the Company requested, and was granted, certain contribution refunds and in May 2007, the Company received $0.7 million.

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

NOTE 6. STOCK-BASED COMPENSATION AND STOCKHOLDERS' EQUITY

Common Stock

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

General

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

14

Voting

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

Employee Stock Purchase Plan

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

At March 31, 2009, a total of 323,054 shares of the Company's common stock have been purchased under the 2004 ESPP, leaving a total of 926,946 shares available to be purchased.

Stock Repurchase Programs

The Company's Board of Directors approved the 2003 stock repurchase program on April 17, 2003, under which the Company may repurchase up to 500,000 shares of its outstanding common stock. As of March 31, 2009, the Company had repurchased 405,164 shares of its common stock under this program from employees, former employees and others, pursuant to repurchase rights, at an aggregate cost of $2.1 million.

The Company's Board of Directors approved the 2004 stock repurchase program on July 29, 2004, pursuant to which the Company may repurchase up to $5.0 million in market value of its outstanding shares of common stock. As of March 31, 2009, the Company had repurchased 572,100 shares under this program at an aggregate cost of $4.4 million.

Other stock repurchases were approved by the Board of Directors and include the repurchase of 92,735 shares of common stock from a former officer in 2004 at a fair market purchase price of $6.20 per share in consideration for the repayment of loans payable to the Company totaling $0.6 million, the repurchase of 17,389 shares from former employees during fiscal 2006, as consideration for the repayment of loans payable to the Company totaling less than $0.1 million and the repurchase of 73,151 shares during fiscal 2007 from the Company's Chief Financial Officer, Perry J. Grace, as consideration for the repayment of loans payable to the Company totaling less than $0.3 million Additionally, during fiscal 2009, the Company repurchased 23,313 shares of common stock from its former Chief Technical Officer, Norm Sheridan and 23,261 shares of common stock from its Chief Financial Officer, Perry Grace having a combined value of approximately $0.1 million to cover withholding taxes in connection with the release of vested shares of common stock.

As of March 31, 2009, stock repurchases for the 2003 and 2004 stock repurchase programs and other stock repurchases totaled 1,207,113 shares with a net aggregate cost of $7.6 million, which are comprised of the following:

	Treasury Shares Outstanding
	Mar. 31,	Mar. 31,	Mar. 31,
	2009	2008	2007
2003 Repurchase Program	405,164	405,164	405,164
2004 Repurchase Program	572,100	572,100	572,100
Other Repurchases	229,849	183,275	110,124
Ending Balance	1,207,113	1,160,539	1,087,388
Net aggregate cost ($000's)	$ 7,563	$ 7,456	$ 7,174

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2004 Omnibus Stock Incentive Plan

The 2004 Omnibus Stock Incentive Plan (the "2004 Plan") was adopted by the Compensation Committee of the Company's Board of Directors on December 17, 2003 and was approved by the Company's stockholders on February 12, 2004. The 2004 Plan became effective on March 10, 2004. The 2004 Plan was amended and approved by the Company's stockholders on September 6, 2007. Under the 2004 Plan, the committee may grant incentive stock options ("ISO"), non-statutory stock options ("NSO") or restricted shares to certain employees, officers, directors, advisors and consultants of the Company who may purchase up to 3,000,000 shares of the Company's common stock, par value $0.01 per share.

In general, the options and shares granted pursuant to the 2004 Plan are exercisable at such time or times, and subject to such terms and conditions (including the vesting schedule, period of exercisability and expiration date) as the Compensation Committee determines, in the applicable option agreement. The exercise price per share, payable upon the exercise of an option, is established by the committee at the time of the grant and is not less than the par value per share of common stock on the date of the grant and in the case of an ISO generally is not less than 100% of the fair market value per share on the date of grant.

In general, restricted stock awards granted pursuant to the 2004 Plan are subject to the restricted stock award agreement that reflects the terms, conditions and restrictions related to the restricted stock award. The agreement includes, among other things, the period during which the restricted stock is subject to forfeiture, the imposition of any performance-based conditions or other restrictions on the award, if any.

2002 Omnibus Stock Incentive Plan

Common Stock

The 2002 Omnibus Stock Incentive Plan (the "Omnibus Plan") was adopted by the Board of Directors in May 2002. Subject to adjustment pursuant to the terms of the Omnibus Plan, the Compensation Committee of the Board of Directors may grant options to purchase up to an aggregate of 1,058,140 shares of the Company's common stock. Stock options granted under the Omnibus Plan were permitted to be: (1) incentive stock options or non-qualified stock options, or (2) EBITDA-linked options and/or non-EBITDA linked options. The term of a non-EBITDA-linked option is determined by the Compensation Committee at the time of grant, but will not exceed ten years.

Each EBITDA-linked option will be immediately exercisable on the date of grant and cliff-vest on the sixth anniversary from the date of grant. Vesting can be accelerated for EBITDA-linked options based on the "adjusted EBITDA," as defined, reported for the immediately preceding 12-month period as follows: (1) one-third if the Company reports adjusted EBITDA for the previous 12 months in excess of $17.2 million, (2) two-thirds if the Company reports adjusted EBITDA for the previous 12 months in excess of $25.7 million, and (3) 100% if the Company reports adjusted EBITDA for the previous 12 months in excess of $30.0 million.

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

• Employee retention bonuses, severance pay and termination benefits;
• Professional fees for debt restructuring;
• Lease termination costs;
• Termination and exit charges; and
• MOD III closure costs.

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At March 31, 2009, 167,285 shares of EBITDA-linked options were vested and outstanding (granted, net of cancellations and exercises) even though the adjusted EBITDA thresholds have not been satisfied. The per share exercise price of shares purchasable under an EBITDA-linked option is $5.52 and each such option will be exercisable for ten years after the date such option is granted, unless earlier terminated. In general, non-EBITDA-linked options granted pursuant to the Omnibus Plan will be exercisable at such time or times and subject to such terms and conditions (including the vesting schedule, period of exercisability and expiration date) as the Compensation Committee determines, in the applicable award agreements or thereafter. The exercise price per share payable upon the exercise of an option will be established by the committee, in its sole discretion, at the time of grant.

Restricted Stock

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

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

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

At March 31, 2009 there were no outstanding loans to officers of the Company.

Stock-based Compensation

For the fiscal years ended March 31, 2009, March 31, 2008 and March 31, 2007, respectively, the Company recorded $1.3 million, $0.7 million and $1.3 million, respectively, of stock-based compensation expense for continuing operations.

Stock based compensation expense, for continuing operations, for the fiscal year ended March 31, 2009 includes the grant of 234,600 shares associated with the first half fiscal 2009 employee incentive plan. No awards were granted in the second half as incentive goals were not achieved. A total of 167,138 shares of restricted stock have been granted for the fiscal 2010 employee incentive plan. Such shares are earned by certain employees and restrictions removed only when certain cash generation targets are achieved or on change in control of the Company.

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Stock Plan Activity

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

					Weighted-
				Weighted-	Average
	Shares			Average	Remaining	($000's)
	Available	Options		Exercise Price	Contractural Term	Aggregate
	for Grant	Outstanding		(per share)	(in years)	Intrinsic Value
Balance as of March 31, 2006	1,121,381	1,803,309	$	6.45	8.02	$247
Restricted shares granted	(116,386)	-		0.01
Options granted	(777,050)	777,050		4.07
Options exercised	-	(122,067)		2.04
Options cancelled	672,235	(672,235)		6.88
Restricted shares cancelled	75,500	-		0.01
Balance as of March 31, 2007	975,680	1,786,057		5.55	7.99	782
Approved shares added to plan	1,500,000	-		-
Restricted shares granted	(27,114)	-		-
Options granted	(761,923)	761,923		3.49
Options exercised	-	(100,670)		3.08
Options cancelled	364,574	(364,574)		5.73
Restricted shares cancelled	24,350	-		-
Restricted shares repurchased	73,151	-		-
Balance as of March 31, 2008	2,148,718	2,082,736		4.89	7.98	323
Approved shares added to plan	-	-		-
Restricted shares granted	(265,268)	-		-
Options granted	(94,139)	94,139		3.21
Options exercised	-	(5,240)		2.70
Options cancelled	356,591	(356,591)		4.57
Restricted shares cancelled	79,595	-		-
Options PP Adj per Valuation Disclosure	481	(481)		4.89
Balance as of March 31, 2009	2,225,978	1,814,563	$	4.87	6.15	$   3

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 each respective fiscal year ended March 31, and the exercise price, times the number of shares) that would have been received from the option holders had all option holders exercised their options on March 31. This amount changes as the fair market value of the Company's stock fluctuates. There were 5,240 options exercised during the years ended March 31, 2009 with a total intrinsic value of $14 thousand. Total intrinsic value of options vested and expected to vest is approximately $3 thousand as of March 31, 2009.

The following table summarizes information about stock options outstanding as of March 31, 2009:

	Options Outstanding				Options Exercisable
		Weighted-		Weighted-			Weighted-
		Average		Average			Average
	Number	Remaining		Exercise			Exercise
Range of Exercise Prices	Shares	Contractual		Price	Shares		Price
per share	Outstanding	Life (in years)		(per share)	Exercisable		(per share)
$2.16-$2.85	189,228	6.12	$	2.69	126,907	$	2.69
$3.14-$3.15	19,750	9.33		3.14	8,438		3.14
$3.16-$3.16	324,663	7.80		3.16	125,168		3.16
$3.19-$3.85	215,320	8.11		3.56	131,981		3.52
$3.91-$4.29	123,398	6.01		4.07	87,984		4.07
$4.31-$4.31	400,000	7.83		4.31	216,667		4.31
$4.41-$5.43	71,500	6.10		4.61	49,417		4.63
$5.52-$5.52	247,954	1.97		5.52	244,204		5.52
$6.20-$12.44	212,600	3.51		11.31	212,600		11.31
$13.58-$14.30	10,150	0.23		13.69	10,150		13.69
$2.16-$14.30	1,814,563	6.15	$	4.87	1,213,516	$	5.47

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Options that were exercisable as of March 31, 2009, 2008 and 2007 were 1,213,516, 724,393 and 625,922, respectively.

Stock-Based Compensation

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

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

		Years Ended
		Mar. 31,		Mar. 31,		Mar. 31,
Expense Category		2009		2008		2007
Cost of sales	$	137	$	126	$	66
Research and development		221		177		205
Selling, general and administrative		966		418		1,076
	$	1,324	$	721	$	1,347

No income tax benefit was realized from stock option exercises during the fiscal years ended March 31, 2009, 2008 and 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.

The weighted-average exercise price of options granted for the fiscal years ended March 31, 2009, 2008 and 2007, were $3.21, $3.49 and $4.07 per share, respectively.

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

Stock Options
	Years Ended
	Mar. 31,	Mar. 31,	Mar. 31,
	2009	2008	2007
Annual average risk-free interest rate	2.6%	3.8%	4.7%
Estimated life in years	4.8	5.0	5.0
Dividend yield	0.0%	0.0%	0.0%
Volatility	51.9%	45.3%	45.9%

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

Employee Stock Purchase Plan
	Years Ended
	Mar. 31,	Mar. 31,	Mar. 31,
	2009	2008	2007
Risk-free interest rate	2.4%	3.5%	4.8%
Estimated life in years	0.7	0.8	0.6
Dividend yield	0.0%	0.0%	0.0%
Volatility	57.6%	38.6%	50.6%

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The Company calculates its expected volatility based on the historical and implied volatility of a peer group of publicly traded entities as the Company has lacked sufficient historical market data on its common stock commensurate with its expected term.  The historical volatility is based on the daily closing common stock prices of the peer group over a period equal to the expected term of the option.  Market-based implied volatility is determined using market data from actively traded options of the peer group's stock. These options are at-or near-the-money traded options and are at a point in time as close to the grant of the employee options as reasonably practical and with similar terms to the employee share options, or a remaining maturity of at least 6 months if no similar terms are available.   The Company does not believe that one estimate is more reliable than any other and as such uses a 50/50 blend of historic and market-based implied volatility to determine volatility when calculating incentive stock compensation expense. Effective April 1, 2009, beginning the Company's 2010 fiscal year, the Company expects to use its own volatility measures as there will be sufficient trading history to cover the expected term of the Company's option grants.

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.

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

		Years Ended
		Mar. 31,		Mar. 31,		Mar. 31,
		2009		2008		2007
Weighted-average exercise price of options granted
during the period	$	3.21	$	3.49	$	4.07
Weighted-average fair value of employee stock options
granted durung the period	$	1.49	$	1.59	$	1.89
Weighted-average fair value of employee stock
purchases under employee stock purchase plan
during the period	$	0.87	$	0.86	$	0.78

As of March 31, 2009, $1.0 million of total unrecognized compensation costs related to stock options are expected to be recognized over a weighted-average remaining period of 2.1 years. The total unrecognized compensation costs related to RSAs as of March 31, 2009 of $25,000 are expected to be recognized over a weighted-average remaining period of 0.2 years.

NOTE 7. DEFERRED INCOME

The Company ships products to distributors who, contractually have rights of return and/or price protection on unsold merchandise held by them. As such, revenue and the associated product costs are deferred until products are resold by the distributors to end users (sell-through method). Although revenue is deferred until it is resold, title of products sold to distributors transfers upon shipment. Accordingly, shipments to distributors are reflected in the consolidated balance sheets as accounts receivable and a reduction of inventories at the time of shipment. Deferred revenue and the corresponding cost of sales on shipments to distributors that are unsold are reflected in the consolidated balance sheets on a net basis as "Deferred income, net of costs".

On February 18, 2009, the Company sold its universal remote control and secured transactions processor businesses. Of the total consideration approximately $3.1 million remains in escrow at March 31, 2009 to account for any unexpected post-transaction discrepancies. The escrow is scheduled to be released 50% after 6 months and 100% after 12 months. This escrow amount is also included in other current assets on the consolidated balance sheet at March 31, 2009.

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The following table represents the details of deferred income for the periods indicated (in thousands):

		Mar. 31,		Mar. 31,
		2009		2008
Deferred gross income on shipments to distributors	$	7,899	$	8,174
Deferred cost associated with shipments to distributors		(2,975)		(2,900)
Deferred income on shipments to
distributors, net		4,924		5,274
Discontinued operations , deferred income
on shipments to distributors, net		-		297
Discontinued operations, deferred
income on escrow		3,100		-
Total deferred income, net	$	8,024	$	5,571

NOTE 8. SHORT TERM DEBT

During the fiscal year ended March 31, 2008, the Company entered into a short term financing agreement totaling $1.4 million. Borrowings on the agreement bear interest at a rate per annum equal, at the Company's option, at the Lender's stated prime rate or LIBOR, plus 1.75%. As of March 31, 2009, the company had $0.3 million of borrowings outstanding and $0.3 million in standby letters of credit, respectively, issued to vendors. As of March 31, 2008, the Company had $0.7 million of borrowings outstanding under this agreement and $0.3 million of standby letters of credit, respectively, issued to vendors.

NOTE 9. NET INCOME (LOSS) PER SHARE

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

		Years Ended
		Mar. 31,		Mar. 31,		Mar. 31,
		2009		2008		2007
Net income (loss), as reported	$	3,184	$	(9,291)	$	(9,038)
Weighted-average shares, basic		17,031		16,893		16,665
Weighted-average shares, diluted		17,114		16,893		16,665
Basic and diluted net income (loss) per share	$	0.19	$	(0.55)	$	(0.54)

At March 31, 2009, March 31, 2008 and March 31, 2007, options to purchase 1.9 million, 1.6 million and 1.3 million shares of common stock, respectively, are excluded from the determination of diluted net income (loss) per share, as the effect of such shares is anti-dilutive.

NOTE 10. INCOME TAXES

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

		Years Ended
		Mar. 31,		Mar. 31,		Mar. 31,
		2009		2008		2007
United States	$	(4,574)	$	(1,152)	$	(2,100)
Foreign		8,081		(6,840)		(4,750)
Total income (loss) before provision for income taxes	$	3,507	$	(7,992)	$	(6,850)

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

		Years Ended
		Mar. 31,		Mar. 31,		Mar. 31,
		2009		2008		2007
Federal
Current	$	(13)	$	1,069	$	(226)
Deferred		-		-		1,760
		(13)		1,069		1,534
Foreign
Current		322		230		654
Total consolidated provision for income taxes	$	309	$	1,299	$	2,188
Total provision for income taxes - continuing operations	$	181	$	853	$	1,547
Total provision for income taxes - discontinued operations		128		446		641
Total consolidated provision for income taxes	$	309	$	1,299	$	2,188

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

		Years Ended
		Mar. 31,		Mar. 31,		Mar. 31,
		2009		2008		2007
Computed expected benefit	$	1,196	$	(2,708)	$	(2,329)
Foreign taxes		(2,859)		2,614		628
Foreign losses (benefited) not benefited		-		-		(93)
Deferred tax assets not benefited		1,814		1,278		1,880
Amortization of deferred income tax charge		-		1,320		1,760
Stock-based compensation not deductible		290		-		488
Non-deductible items		145		-		71
Other		(277)		(1,205)		(217)
Total consolidated provision for income taxes	$	309	$	1,299	$	2,188
Total provision for income taxes - continuing operations	$	181	$	853	$	1,547
Total provision for income taxes - discontinued operations		128		446		641
Total consolidated provision for income taxes	$	309	$	1,299	$	2,188

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

		Mar. 31,		Mar. 31,
		2009		2008
Deferred tax liabilities:
Intangible assets	$	(789)	$	(1,791)
Other		(50)		(838)
Total deferred tax liabilities		(839)		(2,629)
Deferred tax assets:
Net operating loss carryforwards		16,722		16,403
Accruals and allowances not currently deductible		2,212		3,186
Deferred revenue		868		1,219
Tax credit carryforwards		785		271
Property, plant and equipment		3,084		3,018
Total deferred tax assets		23,671		24,097
Net deferred tax assets		22,832		21,468
Valuation allowance		(22,832)		(21,468)
Deferred income taxes	$	-	$	-

Balance Sheet Presentation - Deferred Tax Assets & Liabilities:

		Mar. 31,		Mar. 31,
		2009		2008
Total deferred tax assets:	$	839	$	2,629
Less: non-current portion - deferred tax asset		(829)		(2,366)
Net current deferred tax assets	$	10	$	263
Total deferred tax liabilities:	$	(839)	$	(2,629)
Less: non-current portion - deferred tax liability		829		2,366
Net current deferred tax liability	$	(10)	$	(263)

A valuation allowance is required to be recorded if in management's judgment, based on available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.  Based on available evidence, management has concluded that a valuation allowance is necessary to reduce the net deferred tax asset.  Accordingly, deferred tax assets have been recognized only to the extent of deferred tax liabilities. The valuation allowance decreased by approximately $1.4 million for the fiscal year ended March 31, 2009 as compared to the fiscal year ended March 31, 2008. This net decrease was primarily attributable to the increases in certain tax credits and state and foreign NOLs.

The Company has federal and state net operating loss carry forwards ("NOLs") of $34.5 million and $57.9 million, respectively. The federal NOLs will begin to expire in 2024 if not utilized, and the state NOLs will begin to expire in 2015, if not utilized.

The Company has federal and state research and development tax credit carry forwards of approximately $2.8 million and $2.2 million, respectively. If not utilized, the federal tax credit carry forward will begin to expire in 2025. The California tax credit can be carried forward indefinitely.

In November 2005, the FASB issued Staff Position No. FAS 123(R)-3, "Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards". The Company has elected to adopt the alternative transition method provided in the FASB Staff Position for calculating the tax effects of stock-based compensation pursuant to SFAS 123(R). The alternative transition method includes simplified methods to establish the beginning balance of the additional paid-in capital pool ("APIC pool") related to the tax effects of employee stock-based compensation and to determine the subsequent impact

23

on the APIC pool and Consolidated Statements of Cash Flows of the tax effects of employee stock-based compensation awards that are outstanding upon adoption of SFAS 123(R).

The Company has elected to track the portion of its federal and state net operating loss carryforwards attributable to stock option benefits, in a separate memo account pursuant to SFAS 123(R). Therefore, these amounts are no longer included in the Company gross or net deferred tax assets. Pursuant to SFAS 123(R), the benefit of these net operating loss carryforwards will only be recorded to equity when they reduce cash taxes payable. The amount recorded in the memo account cumulatively as of March 31, 2009 were not material.

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. As of March 31, 2009, the total amount of unrecognized tax benefits including accumulated interest and penalty was approximately $5.4 million of which $4.6 million recorded as a deferred tax asset that is fully offset by a valuation allowance and $0.9 million which if recognized, would affect the Company's effective tax rate. The calculation of unrecognized tax benefits involves dealing with uncertainties in the application of complex global tax regulations. Management assesses the Company's tax positions in light of legislative, bilateral tax treaty, regulatory and judicial developments in the countries in which the Company does business.

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

Balance at April 1, 2008	$5,167
Additions based on tax positions related to the current year	28
Additions for tax positions of prior years	68
Other - foreign exchange	125
Balance at March 31, 2009	$5,388

The Company recognizes interest in accordance with Paragraph 15 of FIN48 and recognizes penalties in accordance with Paragraph 16 of FIN48 which are classified as part of income taxes. The total amount of interest and penalty recognized in the fiscal year ended March 31, 2009 is $0.1 million and the accumulated amount of interest and penalty recognized as of March 31, 2009 is $0.1 million.

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

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

The Company is subject to taxation in the United States and various states and foreign jurisdictions. There are no ongoing examinations by taxing authorities at this time. The Company's various tax years beginning in 2001 through 2008 remain open in various taxing jurisdictions. The Company does not anticipate any significant changes to the FIN48 liability for unrecognized tax benefits within one year of this reporting date of its unrecognized tax benefits.

The Company provides for U.S. income taxes on the earnings of foreign subsidiaries unless they are considered permanently reinvested outside of the U.S. At March 31, 2009, the cumulative amount of earnings upon which U.S. income tax has not been provided is approximately $6.9 million as such earnings are considered permanently reinvested. It is not practicable to determine the U.S. income tax liability that would be payable if such earnings is not reinvested indefinitely.

In connection with its reorganization in 2002, the Company recorded income tax contingencies in accordance with Statement of Financial Accounting Standards No. 5, "Accounting for Contingencies." These contingencies were attributable to the Company's reorganization and included contingent liabilities related to the establishment of the MOD III special purpose subsidiary. The Company reverses the contingent liabilities previously recorded as the statute of limitations expires. For the fiscal years ended March 31, 2009 and 2008, the Company recorded a reversal of zero and zero, respectively, of these

24

contingencies from long-term liabilities, with a resulting reduction in goodwill from $6.7 million as of March 31, 2007, to $2.2 million as of March 31, 2008 and March 31, 2009.

During the fiscal year ended March 31, 2009, the fiscal year ended March 31, 2008 and the fiscal year ended March 31, 2007 the Company's income tax provision was $0.3 million, $1.3 million and $2.2 million, respectively, which primarily reflects amortization of deferred charges, which have been fully amortized as of March 31, 2009 and provisions for taxes in certain profitable foreign jurisdictions. The Company provides for income tax expense in foreign jurisdictions where its foreign subsidiaries operations generate profits that are taxable. The Company's income tax expense reflects the estimated annual effective tax rate at that time based on projections of operations.

NOTE 11. COMMITMENTS AND CONTINGENCIES

Some of the Company's leases for facilities and equipment are under non-cancelable operating leases, which expire in fiscal years 2010through 2014. The facility lease agreements generally provide for base rental rates, which increase at various times during the terms of the leases, and also provide for renewal options at fair market rental value.

Minimum future lease payments under these non-cancelable operating leases at March 31, 2009 are as follows (in thousands):

		Operating
Fiscal Year		Leases
2010	$	1,225
2011		1,146
2012		1,219
2013		321
Total minimum lease payments	$	3,911
There were no non-cancelable operating lease commitments beyond fiscal 2013.

Commitments

The Company is responsible for common area maintenance charges on certain office leases, which are not included in the above table. These charges are generally less than 10% of base rents. Total operating lease expense, including month-to-month rentals, were approximately $1.8 million, $1.9 million and $2.1 million, respectively, for the fiscal years ended March 31, 2009, March 31, 2008 and March 31, 2007.

The Company generally makes purchases under cancelable purchase orders and does not enter into long-term supply agreements. Certain of its wafer foundry, assembly, materials suppliers, software vendors and support tool manufacturers require non-cancelable purchase orders since they often provide products and services tailored to the Company's specifications.

Summarized in the table below are minimum future commitments under operating leases and non-cancelable purchase obligations as of March 31, 2009 (in thousands):

				Within
		Total		1 year		1-3 years		3-5 years		> 5 years
Operating lease obligations	$	3,911	$	1,225	$	2,365	$	321	$	-
Purchase obligations		4,375		3,348		1,027		-		-
Total	$	8,286	$	4,573	$	3,392	$	321	$	-

Contingencies

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.  After this favorable ruling, Microchip filed appeal notices in the U.S. PTO in May 2008. We do not believe it is

25

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

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

From time to time, the Company has agreed to indemnify and hold harmless certain customers for potential allegations of infringement of intellectual property rights and patents arising from the use of its products. During the ordinary course of business, in certain limited circumstances, the Company has agreed to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally parties with which the Company has commercial relations, in connection with certain intellectual property infringement claims by any third-party with respect to its products and services. The Company has indemnification arrangements that limit its net contingent obligation to pay for defense costs, if any, up to a maximum of $500,000. To date, there have not been any costs incurred in connection with such indemnification arrangements; therefore, there is no accrual of such amounts at March 31, 2009. The Company discloses indemnification liabilities according to FASB Staff Position FIN45-1, "Accounting for Intellectual Property Infringement Indemnifications under SFAS Interpretation No. 45." Under SFAS No. 5, "Loss Contingencies," a claim would be accrued when a loss is probable and the amount can be reasonably estimated. At March 31, 2009, no such amounts are accrued.

On February 18, 2009, we sold our universal remote control and secured transaction processor businesses to Maxim and UEI for approximately $31 million in cash including $3.1 million that is held in escrow to satisfy our indemnification obligations for any losses incurred by Maxim or UEI that may result from inaccuracies in our representations and warranties in the acquisition agreement or our failure to fulfill certain obligations in the acquisition agreement. In certain limited circumstances our indemnification obligations are not limited to the escrow amount. The escrow is scheduled to be released 50% after 6 months and 100% after 12 months.

NOTE 12. RELATED PARTY TRANSACTIONS

In 2002, the Company entered into employment agreements with each of its then named executive officers. In June 2002, prior to the issuance of the Sarbanes-Oxley Act, loans were made to certain executive officers and certain other employees and consultants to pay the income taxes due on the restricted shares of common stock that were granted to them. At March 31, 2009 no loans were outstanding to executive officers, employees or consultants. At March 31, 2007 total loans outstanding were $0.3 million, and are included in other assets on the consolidated balance sheets. Each loan recipient pledged the shares of restricted stock as collateral for these loans pursuant to their stock pledge agreements. All such loans come due five years from the date of issuance and bear interest at 5.5% per annum.

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

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

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

NOTE 13. FAIR VALUE MEASUREMENTS

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

26

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
•   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 March 31, 2009 (in thousands):

	Mar. 31, 2009
	Fair Value	Level 1	Level 2	Level 3
Money market funds	$ 5,986	$ 5,986	$ -	$ -
Auction rate preferred securities	1,100	-	1,100	-
Total	$ 7,086	$ 5,986	$ 1,100	$ -

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 $2.8 million from redemptions of its ARPS. The remaining ARPS balances of $1.1 million as of March 31, 2009, have been classified as long-term investments and continue to pay 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 collateralized asset value ranges exceed the value of ARPS held by the Company by 200 to 300 percent. Accordingly, the remaining ARPS balance of $1.1 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 March 31, 2009. 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 14. GEOGRAPHIC AND SEGMENT INFORMATION

Beginning in May 2002, ZiLOG consolidated its business segments into one reportable segment to reflect the change in the manner in which its chief operating decision maker allocates resources and assesses the performance of the Company's business. The Company engages primarily in the design, development, manufacture and marketing of semiconductor products. The Company sells its products to distributors and direct customer accounts including original equipment manufacturers ("OEMs") and original design manufacturers ("ODMs") in a broad range of market segments. The Company's operations outside the United States consist of a final test and global support facility in the Philippines and sales and support

27

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 one broad product category based on product technologies referred to as 8-bit embedded flash and 8-bit classic products. These products within the Company's one reportable segment and can be summarized as follows:

Products	Sample Uses
8-bit products include:
Embedded flash microcontrollers	Motor control, low-power controllers
Core 8-bit Microcontrollers and Microprocessors	Security systems, battery chargers, industrial controllers, communications products, treadmills
Serial Communications Controllers	Telephone switches/PBX
Modems	Satellite TV set-top box, POS card validation
IrDA transceivers	PDAs, cell phones
TV, PC peripheral and other products	TV, keyboard, pointing device

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

		Years Ended
		Mar. 31,		Mar. 31,		Mar. 31,
		2009		2008		2007
Net sales by region:
Americas	$	14,288	$	16,794	$	22,635
Asia (including Japan)		15,079		20,251		26,051
Europe		6,790		7,599		9,340
Net sales	$	36,157	$	44,644	$	58,026
Net sales by channel:
Direct	$	7,507	$	9,671	$	14,658
Distribution		28,650		34,973		43,368
Net sales	$	36,157	$	44,644	$	58,026

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

		Years Ended
		Mar. 31,		Mar. 31,		Mar. 31,
		2009		2008		2007
United States	$	14,168	$	16,794	$	21,283
Other Foreign Countries		9		-		831
Total North America		14,177		16,794		22,114
Hong Kong (including PRC)		3,497		7,202		11,334
Singapore		4,196		4,920		5,509
Germany		3,273		3,780		5,775
Taiwan		4,379		4,441		4,737
Korea		583		649		789
Other Foreign Countries		6,052		6,858		7,768
Total International	$	21,980	$	27,850	$	35,912
Total net sales	$	36,157	$	44,644	$	58,026

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

		Mar. 31,		Mar. 31,
		2009		2008
United States	$	2,470	$	5,885
Philippines		447		446
Other		1,609		2,972
Total long-lived assets	$	4,526	$	9,303

Major Customers

For the year ended March 31, 2009, two distributors accounted for approximately 42% and 11% of net sales, respectively. For the year ended March 31, 2008, two distributors accounted for approximately 37% and 13% of net sales, respectively. For the year ended March 31, 2007, two distributors accounted for approximately 34% and 15% of net sales, respectively.

29

EX-99.2 4 exh99-2.htm UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF ZILOG, INC., AS OF DECEMBER 26, 2009 AND THE NINE MONTHS ENDED DECEMBER 26, 2009 AND DECEMBER 27, 2008.

Exhibit 99.2

ZILOG, INC.
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED DECEMBER 26, 2009

Financial Statements
Unaudited Condensed Consolidated Statements of Operations for the nine months ended        ended December 26, 2009 and December 27, 2008	1
Unaudited Condensed Consolidated Balance Sheets at December 26, 2009 and March 31, 2009	2
Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended        ended December 26, 2009 and December 27, 2008	3
Unaudited Condensed Consolidated Statements of Stockholders' Equity for the nine months        ended December 26, 2009 and December 27, 2008	4
Notes to Unaudited Condensed Consolidated Financial Statements	5

i

Financial Statements

ZILOG, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)

	Nine Months Ended
	Dec. 26,	Dec. 27,
	2009	2008
Net sales from continuing operations	$23,975	$29,113
Cost of sales from continuing operations	13,264	17,436
Gross margin from continuing operations	10,711	11,677
	44.7%	40.1%
Operating expenses:
Research and development	3,462	5,147
Selling, general and administrative	7,196	15,911
Special charges and credits	790	2,840
Amortization of intangible assets	-	627
Total operating expenses	11,448	24,525
Operating loss from continuing operations	(737)	(12,848)
Other income:
Other income (expense)	1,113	464
Interest income	14	143
Income (loss) from continuing operations before provision for income taxes	390	(12,241)
Provision for income taxes	98	183
Net income (loss) from continuing operations	292	(12,424)
Net income (loss) from discontinued operations	386	3,459
Gain from sale of discontinued operations, net of tax	1,564	-
Net income (loss)	$2,242	($8,965)
Basic and diluted net income (loss) from continuing operations per share	$0.02	($0.73)
Basic and diluted net income (loss) from discontinued operations per share	0.02	0.20
Basic and diluted net income from gain on sale of discontinued operations, net of tax per share	0.09	-
Basic and diluted net income (loss) per share	$0.13	($0.53)
Weighted-average shares used in computing basic net income (loss) per share	17,277	16,982
Weighted-average shares used in computing diluted net income (loss) per share	17,278	16,982

See accompanying notes to unaudited condensed consolidated financial statements.

1

ZILOG, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

	Dec. 26,	Mar. 31,
	2009	2009
ASSETS
Current assets:
Cash and cash equivalents	$36,980	$32,230
Accounts receivable, less allowance for doubtful accounts of $12
at December 26, 2009 and $129 at March 31, 2009	3,156	1,698
Receivables under transition services agreement	255	1,696
Escrow receivable related to sold business	1,550	3,100
Inventories	3,285	4,022
Deferred tax assets	10	10
Prepaid expenses and other current assets	1,110	1,199
Current assets associated with discontinued operations	-	960
Total current assets	46,346	44,915
Long term investments	375	1,100
Property, plant and equipment, net	1,856	2,347
Goodwill	1,861	2,211
Other assets	1,320	1,079
Total assets	$51,758	$51,652
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short term debt	$       -	$346
Accounts payable	2,532	1,939
Payables under transition services agreement	1,516	275
Income taxes payable	174	195
Accrued compensation and employee benefits	1,455	1,349
Other accrued liabilities	3,888	3,828
Deferred income including remaining escrow	6,048	8,024
Current liabilities associated with discontinued business	-	1,256
Total current liabilities	15,613	17,212
Deferred tax liability	10	10
Other non-current liabilities	1,536	2,804
Total liabilities	17,159	20,026
Stockholders' equity:
Common stock, $0.01 par value; 60.0 million shares authorized:
17.3 million and 17.1 million shares issued and outstanding at
December 26, 2009 and March 31, 2009, respectively	186	186
Additional paid-in capital	128,131	127,436
Treasury stock	(7,563)	(7,563)
Other comprehensive income	209	173
Accumulated deficit	(86,364)	(88,606)
Total stockholders' equity	34,599	31,626
Total liabilities and stockholders' equity	$51,758	$51,652

See accompanying notes to unaudited condensed consolidated financial statements.

2

ZILOG, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

	Nine Months Ended
	Dec. 26,	Dec. 27,
	2009	2008
Cash Flows from Operating Activities:
Net income (loss) from continuing operations	$292	($12,424)
Adjustments to reconcile net income (loss) from continuing operations to
net cash provided by (used in) continuing operating activities:
Depreciation and other amortization	984	1,380
Disposition of operating assets	-	46
Stock-based compensation	680	1,126
Amortization of fresh-start intangible assets	-	627
Changes in operating assets and liabilities:
Accounts receivable, net	(1,458)	(620)
Receivable under transition services agreement	1,441	-
Escrow receivable related to sold business	1,550	-
Inventories	737	2,400
Prepaid expenses and other current and non-current assets	234	(163)
Accounts payable	593	167
Payables under transition services agreement	1,241	-
Accrued compensation and employee benefits	106	(328)
Deferred income from distributors and escrow	(1,976)	(494)
Accrued and other current and non-current liabilities	(1,229)	1,387
Net cash provided by (used in) continuing operating activities	3,195	(6,896)
Net cash provided by discontinued operating activities	90	3,642
Cash Flows from Investing Activities:
Redemption of long term investments	725	625
Capital expenditures	(494)	(519)
Net cash provided by continuing investing activities	231	106
Net cash provided by sale of discontinued operations	1,564	-
Cash Flows From Financing Activities:
Proceeds from short term debt	-	660
Payments on short term debt	(346)	(692)
Proceeds from issuance of common stock under employee stock      purchase and stock option plans	16	112
Net cash provided by (used in) continuing financing activities	(330)	80
Net cash provided by discontinued financing activities	-	3
Net increase in cash and cash equivalents	4,750	(3,065)
Cash and cash equivalents at beginning of period	32,230	16,625
Cash and cash equivalents at end of period	$36,980	$13,560
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.

3

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		Equity
Balance at March 31, 2008	16,923	$	185	$	125,838	$	(7,456)	$	102	$	(91,790)	$	26,879
Issuance of common stock under stock option plans	5		-		18		-		-		-		18
Restricted shares cancelled	(22)		-		-		-		-		-		-
Issuance of common stock under employee stock purchase plan	40		1		100		-		-		-		101
Stock-based compensation expense - directors shares	18		-		56		-		-		-		56
Stock-based compensation expense	-		-		659		-		-		-		659
Restrictes shares granted - Employee Stock Incentive (SIP)	235		-		539		-		-		-		539
Comprehensive loss:
Other comprehensive income	-		-		-		-		(77)		-		(77)
Net loss	-		-		-		-		-		(8,965)		(8,965)
Total comprehensive loss	-		-		-		-		-		-		(9,042)
Balance at December 27, 2008	17,199	$	186	$	127,210	$	(7,456)	$	25	$	(100,755)	$	19,210
Balance at March 31, 2009	17,111	$	186	$	127,436	$	(7,563)	$	173	$	(88,606)	$	31,626
Issuance of common stock under employee stock purchase plan	8		-		16		-		-		-		16
Restricted shares cancelled	(16)		-		-		-		-		-		-
Restricted shares granted	167		-		-		-		-		-		-
Stock-based compensation expense - directors shares	35		-		86		-		-		-		86
Stock-based compensation expense	-		-		593		-		-		-		593
Comprehensive income:
Other comprehensive income	-		-		-		-		36				36
Net income	-		-		-		-		-		2,242		2,242
Total comprehensive income	-		-		-		-		-		-		2,278
Balance at December 26, 2009	17,305	$	186	$	128,131	$	(7,563)	$	209	$	(86,364)	$	34,599

See accompanying notes to unaudited condensed consolidated financial statements.

4

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 2009 Annual Report filed on Form 10-K (File Number 001-13748) for the fiscal year ended March 31, 2009, filed on June 29, 2009 with the Securities and Exchange Commission (Fiscal 2009 Annual Report).

The Company's 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 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, 2009 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. DECEMBER 4, 2009 MERGER AGREEMENT

The Company and IXYS Corporation (IXYS) signed a merger agreement on December 5, 2009 whereby IXYS agreed to acquire the Company and its outstanding shares for $3.5858 per share in cash with a total value of approximately $62 million, subject to customary closing conditions. A special meeting of the Company's shareholders has been scheduled for February 17, 2010, to approve the merger. The meeting will be held at Zilog's headquarters at 6800 Santa Teresa Blvd., San Jose, CA 95119 at 9:00 a.m. local time.

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A summary of the Company's significant accounting policies is described in Note 1 of "Notes to Consolidated Financial Statements" in the Fiscal 2009 Annual Report. The Company's significant accounting policies for the period ended December 26, 2009 remain unchanged from those disclosed in the Fiscal 2009 Annual Report.

Recent Accounting Pronouncements:

In June 2009, the Financial Accounting Standards Board "FASB" issued the authoritative guidance to eliminate the historical GAAP hierarchy and establish only two levels of U.S. GAAP, authoritative and non-authoritative. When launched on July 1, 2009, the FASB Accounting Standards Codification (ASC) became the single source of authoritative, nongovernmental GAAP, except for rules and interpretive releases of the SEC, which are sources of authoritative GAAP for SEC registrants. The subsequent issuances of new standards will be in the form of Accounting Standards Updates that will be included in the ASC. This authoritative guidance was effective for financial statements for interim or annual reporting periods ended after September 15, 2009. The Company adopted the new codification in the second quarter of fiscal 2010 and it did not have any impact on the Company's condensed consolidated financial statements.

In August 2009, the FASB issued the authoritative guidance to provide additional guidance (including illustrative examples) in FASB ASC 2009-05 "Fair Value Measurements and Disclosures - Measuring Liabilities at Fair Value" that clarifies the measurement of liabilities at fair value. This authoritative guidance became effective for the first reporting period (including interim periods) beginning after its issuance. The guidance became effective at the

5

beginning of the current quarter ended December 26, 2009. The Company adopted the authoritative guidance and its adoption did not have a significant impact on its consolidated financial condition or results of operations.

In January 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This ASU requires some new disclosures and clarifies some existing disclosure requirements about fair value measurement as set forth in Codification Subtopic 820-10. The FASB's objective is to improve these disclosures and, thus, increase the transparency in financial reporting.

ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Early application is permitted. The Company has reviewed ASU 2010-06 and believes there will be no financial implications from its implementation.

NOTE 4. FAIR VALUE MEASUREMENTS

In accordance with FASB ASC 825-10, "Financial Instruments Disclosure" the Company is required to disclose the fair value of financial instruments for which it is practical to estimate fair value. To obtain fair values, observable market prices are used if available. In some instances, observable market prices are not readily available and fair value is determined using present value or other techniques appropriate for a particular financial instrument. These techniques involve judgment and as a result are not necessarily indicative of the amounts the Company would realize in a current market exchange. The use of different assumptions or estimation techniques may have a material effect on the estimated fair value amounts.

The estimated fair values of the Company's financial instruments are as follows (unaudited, in thousands):

	Dec. 26, 2009		Mar. 31, 2009
	Carrying	Fair	Carrying	Fair
	Value	Value	Value	Value
Financial Assets
Cash and cash equivalents	$36,980	$36,980	$32,230	$32,230
Trade receivables, net	3,156	3,156	1,698	1,698
Receivables under transition services agreement	255	255	1,696	1,696
Escrow receivable, sale of businesses	1,550	1,550	3,100	3,100
Auction rate preferred securities	375	375	1,100	1,100
Financial Liabilities
Short term debt	-	-	346	346
Accounts payable	2,532	2,532	1,939	1,939
Payables under transition services agreement	1,516	1,516	275	275
Liabilities associated with disposal activities	1,113	1,113	1,460	1,460

Cash and cash equivalents, trade receivables, receivables under transition services agreement, short term debt, accounts payable and payables under transition services agreement have carrying values that approximate fair values as all are short term maturing in 90 days or less.

Escrow receivables are time based contractual receivables, 50 percent was received in the quarter ended September 26, 2009 and the remaining 50 percent is due in February, 2010. The Company currently has no reason to believe this receivable will not be recovered in full.

6

Auction Rate Preferred Securities (ARPS) are stated at par value based upon observable inputs including historical redemptions received from the ARPS issuers.

Liabilities associated with disposal activities include accrued costs related to non-cancellable minimum payments for test commitments associated with discontinued operations as well as accrued lease costs related to a portion of the Company's headquarters vacated at the time the discontinued operations were sold. Fair value has been estimated including present value discounts on non-current balances. The difference between fair value estimates and carrying value was not material.

In accordance with FASB ASC 820 "Fair Value Measurement and Disclosures", the following table represents the Company's fair value hierarchy for its financial assets (cash equivalents and available for sale investments) measured at fair value on a recurring basis as of December 26, 2009 (in thousands, unaudited):

	Dec. 26, 2009
	Fair Value	Level 1	Level 2	Level 3
U.S. Treasury Bills, Treasury MMF	$30,358	$30,358	$     -	$     -
Auction rate preferred securities	375	-	375	-
Total	$30,733	$30,358	$375	$     -

Since February 2008, due to various factors including the tightening of liquidity in the financial market, regularly held auctions for ARPS have been unsuccessful. Following the failure of these auctions, the Company has received $3.625 million from redemptions of its ARPS. The remaining ARPS balance of $375,000 as of December 26, 2009, 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. The Company has maximized its use of observable inputs in determining the fair value of its ARPS holdings. The Company notes observable inputs that it's ARPS:

• have maintained AAA credit ratings
• are collateralized at greater than 100% of par value
• continue to pay interest in accordance with their contractual terms which are greater than applicable Libor or US treasury yields
• are stated at par value by the investment broker, and
• have a history of redemptions at par value. Over 90% of the Company's original ARPS have been redeemed at par

Accordingly, the remaining ARPS balance of $375,000 is categorized as Level 2 for fair value measurement under FASB ASC 820 and has been recorded at full par value on the unaudited condensed consolidated balance sheet as of December 26, 2009. The Company currently believes the ARPS values are not impaired and as such, no impairment has been recognized against the investment. If the issuers are unable to successfully close future auctions and their credit rating deteriorates, the Company may be required to record an impairment charge against the value of its ARPS.

NOTE 5. DISCONTINUED OPERATIONS AND TRANSITION SERVICES

On February 18, 2009, the Company sold its universal remote control and secured transaction processor businesses to Maxim Integrated Products Inc (Maxim) and Universal Electronics Inc for a total sale price of $31 million of which $3.1 million was placed in escrow. In September 2009, $1.55 million of this escrow amount was received by the Company. The remaining balance is scheduled to be received on February 18, 2010.

7

In accordance with FASB ASC 205 "Presentation of Financial Statements" and FASB ASC 360-10-05 "Impairment or Disposal of Long-Lived Assets", the assets and liabilities, results of operations and cash flows related to the sold businesses, have been classified as discontinued operations in the condensed consolidated financial statements for all periods presented through the date of the sale. Cash flows associated with the sold businesses have been segregated and separately disclosed in the condensed consolidated statements of cash flows as separate line items within operating, investing and financing activities.

The net income from discontinued operations of $386,000 recorded for the nine months ended December 26, 2009, reflects the recognition of certain distribution revenue, and associated gross margin, that was deferred income related to distribution inventory prior to the sale of the discontinued businesses that were not sold as part of the sale transaction. Remaining deferred income for distribution inventory related to the discontinued operations at December 26, 2009, is not material.

The following table summarizes results from discontinued operations (unaudited, in thousands):

	Nine Months Ended
	Dec. 26,	Dec. 27,
	2009	2008
Net sales from discontinued operations	$431	$21,099
Cost of sales	175	10,449
Gross margin	256	$10,650
Other expenses and credits	(130)	7,063
Net income before provision for taxes on discontinued operations	386	3,587
Provision for income taxes	-	128
Net income (loss) from discontinued operations	$386	$3,459

In conjunction with the sale of the discontinued operations, the Company entered into a Transition Services Agreement (TSA) with Maxim to provide certain discontinued operations business support for up to 12 months from the date of the sale. These support activities include manufacturing and shipment support, customer service and support, technical support, services including purchasing, invoicing, collections and information systems. At December 26, 2009 receivables outstanding from Maxim under the TSA were $255,000 primarily related to purchases of goods and services to manufacture and ship product to Maxim or its customers. Additionally, at December 26, 2009 payables outstanding under the TSA were $1.5 million including $1.3 million payable to Maxim and approximately $200,000 payable to suppliers.

NOTE 6. INTELLECTUAL PROPERTY SALE

On May 27, 2009, the Company sold certain intellectual property rights associated with five of the Company's patents. The related patents are 5386469, 5588118, 5781784, 5805834 and 6154793. The patents were sold and assigned to a non practicing entity ("NPE") for a cash payment of $1.0 million. The Company may share in future revenue on these patents. The transaction was recorded as a credit to other income. The terms and conditions of the agreement are confidential.

NOTE 7. DEFERRED INCOME

The Company ships products to distributors who generally have contractual terms and conditions including rights of return and/or price protection on unsold merchandise held by them. As such, revenue and the associated product costs are deferred until products are resold by the distributors to end users (sell-through method). Although revenue is deferred until it is resold, title of products sold to distributors transfers upon shipment. Accordingly, shipments to distributors are reflected in the condensed consolidated balance sheets as accounts receivable and a reduction of

8

inventories at the time of shipment. Deferred revenue and the corresponding cost of sales on shipments to distributors that may be unsold are reflected in the condensed consolidated balance sheets on a net basis as "Deferred income".

On February 18, 2009, the Company sold its universal remote control and secured transactions processor businesses. Of the total consideration, $3.1 million was placed in escrow and recognized as deferred revenue pending resolution of post - transaction requirements. As of December 26, 2009, $1.55 million remains in escrow and is due in February 2010. This remaining escrow amount is included in current assets and deferred income on the condensed consolidated balance sheet at December 26, 2009.

The following table represents the details of deferred income for the periods indicated (unaudited, in thousands):

	Dec. 26,	Mar. 31,
	2009	2009
Deferred gross income on shipments to distributors	$7,267	$7,899
Deferred cost associated with shipments to distributors	(2,769)	(2,975)
Deferred income on shipments to
distributors, net	4,498	4,924
Discontinued operations, deferred
income on escrow	1,550	3,100
Total deferred income	$6,048	$8,024

NOTE 8. INVENTORIES

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 reductions for excess or obsolete inventory are released only upon sale, scrap or other disposition of the reduced inventory. Inventories, net of provisions, consist of the following (unaudited, in thousands):

	Dec. 26,	Mar. 31,
	2009	2009
Raw materials	$131	$234
Work-in-progress	1,772	2,762
Finished goods	1,382	1,026
Inventory, net	$3,285	$4,022

NOTE 9. 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 December 26, 2009, the Company had 2,361,700 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

9

Company had approximately 918,817 shares of common stock reserved for future issuance under its ESPP plan as of December 26, 2009.

The Company records stock-based compensation in accordance with the provisions of FASB ASC 718 "Compensation - Stock Compensation" which establishes valuation and accounting resulting in the Company's recognition of expense related to the fair value of its stock-based compensation awards.

During the nine month periods ended December 26, 2009, the Company recorded $0.7 million, in stock compensation expense for continuing operations which includes the applicable compensation expenses for the Company's fiscal 2010 employee stock incentive plan. In comparison, during the nine month periods ended December 27, 2008, the Company recorded $1.1 million, in stock compensation expense for continuing operations, which included the applicable compensation expenses for the Company's fiscal 2009 stock incentive plan.

The following table sets forth the total non-cash 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)

	Nine Months Ended
	Dec. 26,	Dec. 27,
	2009	2008
Cost of sales	$72	$117
Research and development	87	245
Selling, general and administrative	521	764
Total stock-based compensation expense	$680	$1,126

10

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	Nine Months Ended
	Dec. 26,	Dec. 27,
	2009	2008
Expected life (in years)	4.0	4.8
Interest rate	1.9%	2.8%
Volatility	53.0%	51.5%
Dividend yield	-	-
Weighted-average per share fair value at grant date	$1.00	$1.56

Employee Stock Purchase Plan	Nine Months Ended
	Dec. 26,	Dec. 27,
	2009	2008
Expected life (in years)	0.6	0.7
Interest rate	0.26%	2.5%
Volatility	59.5%	57.5%
Dividend yield	-	-
Weighted-average per share fair value at grant date	$0.70	$0.88

The computation of expected volatility for the nine months ended December 26, 2009 is based on historical 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 26, 2009, is as follows (unaudited):

			Weighted-
		Weighted-	Average
		Average	Remaining	Aggregate
		Exercise Price	Contractual Term	Intrinsic Value
	Shares	(per share)	(years)	(000's)
Outstanding at March 31, 2009	1,814,646	$ 4.87
Grants	93,375	$ 2.35
Forfeitures or expirations	(369,037)	$ 5.69
Outstanding at December 26, 2009	1,538,984	$ 4.52	6.6	$ 341
Outstanding Vested and Expected to Vest
at December 26, 2009	1,504,916	$ 4.55
Exercisable at December 26, 2009	1,117,639	$ 4.92

11

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 December 26, 2009. 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, including current forfeiture rates, is approximately $318,600 at December 26, 2009.

There were no stock option exercises during the nine months ended December 26, 2009. The weighted-average exercise price of options granted for the nine months ended December 26, 2009 and December 27, 2008 was $2.35 and $3.37 per share, respectively.

No income tax benefit was realized from stock option exercises during the nine months ended December 26, 2009. In accordance with FASB ASC 718 "Compensation - Stock Compensation", 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 December 26, 2009, $620,000 of total unrecognized compensation costs related to stock options is expected to be recognized over a weighted-average remaining period of 1.69 years. The total unrecognized compensation cost related to restricted shares granted as of December 26, 2009 is $240,000, is expected to be recognized over a weighted-average remaining period of 1.35 years.

NOTE 10. SPECIAL CHARGES AND CREDITS

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

	Nine Months Ended
	Dec. 26,	Dec. 27,
	2009	2008
Restructuring of operations:
Reorganization, severance and termination benefits	$293	$2,840
Costs and expenses related to merger agreement	497	-
Total special charges and credits	$790	$2,840

During the nine months ended December 26, 2009 the Company incurred special charges of $0.8 million. These charges primarily include $0.5 million in legal costs and expenses associated with a definitive merger agreement with IXYS Corporation signed on December 4, 2009. Additionally, special charges included costs and expenses associated with the Company's consolidation activities following the sale of the discontinued operations. These charges include facility lease costs, supplier commitment expenses as well as remaining severance and other costs related to the Company's workforce reductions in December 2008 and January 2009 which actions were associated with lower demand and sales affected by the global economic crisis.

During the nine months ended December 27, 2008, the Company incurred $2.8 million, in special charges. Special charges include severance and other costs related to the Company's test outsourcing activities.

12

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, 2009	$	638
Accruals		746
Cash payments		(452)
Balance at Dec. 26, 2009	$	932

NOTE 11. 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 test development and global support facility in the Philippines as well as sales and support centers in certain foreign countries. U.S. domestic operations are responsible for the design, development and marketing of the Company's products. The Philippine activity and support is reimbursed in relation to its value added with respect to test development and global support 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 global support and foreign sales office operations.

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

	Nine Months Ended
	Dec. 26,	Dec. 27,
	2009	2008
Net sales by region:
Americas	$9,914	$11,313
Asia, including Japan	10,297	12,509
Europe	3,764	5,291
Total net sales	$23,975	$29,113
Net sales by channel:
Direct	$5,909	$5,658
Distribution	18,066	23,455
Total net sales	$23,975	$29,113

Major customers: For the nine months ended December 26, 2009, two distributors and one customer each individually accounted for greater than 10 percent of the Company's total net sales from continuing operations. The two distributors and one customer accounted for approximately 43 percent, 11 percent, and 10 percent respectively, of total net sales from continuing operations.

13

For the nine months ended December 27, 2008, three distributors accounted for greater than 10 percent of the Company's total net sales from continuing operations. The distributors accounted for 42 percent, 12 percent and 10 percent of total net sales from continuing operations, respectively.

NOTE 12. CONTINGENCIES

Microchip Technology

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. After this favorable ruling, Microchip filed appeal notices in the U.S. PTO in May 2008. The Company does not believe it is feasible to predict or determine the outcome or resolution of this litigation at this time. The Company believes it has meritorious defenses and will defend itself against these claims vigorously. The Company may incur substantial expenses in its defense against these claims. In the event of a determination adverse to the Company, it may incur substantial monetary liabilities and be required to change its business practices. Either of these could have a material adverse effect on its financial position, results of operations and/or cash flows.

Merger Agreement

On December 22, 2009, a plaintiff filed a putative class action entitled Louise Garcia v. Darin Billerbeck et al., Case No. 1-09-CV-159955, in the Superior Court of the State of California, Santa Clara County. The defendants are ZiLOG, and the members of our board of directors (together with ZiLOG, the "ZiLOG Defendants"), IXYS, and Merger Sub (together with IXYS, the "IXYS Defendants"). This action alleges that the individual defendants breached their fiduciary duties to our stockholders in connection with the merger agreement and the transactions contemplated thereby. Specifically, the complaint alleges, among other things, that the proposed transaction arises out of a flawed process, that the individual defendants failed to maximize shareholder value and that the consideration offered in the merger is inadequate and does not fairly reflect our true value. The plaintiff also alleges that the individual defendants agreed to no-solicitation and termination provisions in the merger agreement in order to prevent any potential suitors from making competing proposals. The suit further alleges that we and the IXYS Defendants aided and abetted the individual defendants' breaches of fiduciary duties. The plaintiff seeks, among other things, an order enjoining the ZiLOG Defendants and the IXYS Defendants from consummating the merger, damages in the event the merger is consummated prior to the court's entry of a final judgment, and attorneys' fees.

On December 30, 2009, the plaintiff in this suit filed a first amended complaint, repeating the allegations in her original complaint and adding allegations that the individual defendants are engaged in self-dealing in connection with the merger because they will receive accelerated vesting of certain benefits and/or have change-of-control agreements that will be triggered upon consummation of the merger. The plaintiff also alleges that the preliminary proxy statement filed by us on Schedule 14A on December 29, 2009 contains misleading disclosures and/or omits material information.

On January 19, 2010, the defendants removed the action to the United States District Court for the Northern District of California. On January 27, 2010, the plaintiff filed a second amended complaint, repeating the allegations of her earlier two complaints and adding a claim that the individual defendants violated Section 14(a) of the Securities Exchange Act of 1934 and Rule 14a-9 promulgated thereunder by issuing an allegedly misleading preliminary proxy statement. On January 28, 2010, the plaintiff filed a purported "ex parte" application for expedited discovery and for an order shortening time to be heard on a motion for a preliminary injunction to stop the shareholder vote on the proposed merger. On February 1, the court advised plaintiff that her application did not comply with the court's rules and directed plaintiff to submit her request for relief in the proper form. Later that day, plaintiff filed a motion

14

for expedited discovery and proceedings. Concurrently with the filing of her motion for expedited discovery and proceedings, plaintiff filed a motion for an order shortening time. The motion for an order shortening time asks the court to hear plaintiff's motion for expedited discovery and request for a preliminary injunction before the February 17, 2010 vote of shareholders on the proposed merger. Defendants' responses to plaintiff's motions for an order shortening time and for expedited discovery and proceedings are not yet due. Also on February 1, 2010, the ZiLOG Defendants filed a motion to strike plaintiff's second amended complaint and to dismiss her first amended complaint.

We believe that this action is wholly without merit and intend to defend vigorously against it. However, because this case is in the early stages, we cannot predict the outcome at this time, and we cannot be assured that the action will not delay the consummation of the merger or result in substantial costs; even a meritless lawsuit may potentially delay consummation of the merger.

On January 4, 2010, a putative class action entitled Mark C. Reppa v. ZiLOG, Inc. et al., Case No. 5186-VCL was filed in the Court of Chancery of the State of Delaware against the ZiLOG Defendants and the IXYS Defendants. This action alleges that the individual defendants breached their fiduciary duties to our stockholders in connection with the merger. Specifically, the complaint alleges, among other things, that the proposed transaction arises out of a flawed process, that the individual defendants failed to maximize shareholder value and that the consideration offered in the merger is inadequate and does not fairly reflect the true value of us. The plaintiff also alleges that the individual defendants agreed to no-solicitation and termination provisions in the merger agreement and entered into support agreements, pursuant to which they have agreed to vote in favor of the merger, in order to prevent any potential suitors from making competing proposals. The suit further alleges that we and the IXYS Defendants aided and abetted the individual defendants' breaches of fiduciary duties. The plaintiff seeks, among other things, an order enjoining the ZiLOG Defendants and the IXYS Defendants from consummating the merger, damages in the event the merger is consummated prior to the court's entry of a final judgment, and attorneys' fees.

On January 11, 2010, the ZiLOG Defendants filed a motion for judgment on the pleadings and a brief in support, seeking to dismiss this action in its entirety. On January 21, 2010, the court directed the parties to confer on a schedule for completion of briefing and hearing on the ZiLOG Defendants' motion. On January 27, 2010, the IXYS Defendants filed a notice of motion to dismiss the action. Thereafter, plaintiff agreed to voluntarily dismiss the action, and the parties submitted a stipulation and proposed order dismissing the action with prejudice to the named plaintiff and without prejudice to the putative class. On February 2, the court entered the order dismissing the case.

Other General

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 an indemnification arrangement that limits its net contingent obligation to pay for defense costs, if any, up to a maximum of $2 million. In addition, the Company has agreed to indemnify the purchaser of the Company's remote control and secured transaction processor business for certain liabilities and have remaining $1.55 million in escrow to cover such indemnification obligations. This escrow amount is scheduled to be released in February 2010. 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 26, 2009. The Company discloses indemnification liabilities according to FASB ASC 460 "Guarantees". Under FASB ASC 450 "Contingencies", a claim would be accrued when a loss is probable and the amount can be reasonably estimated. At December 26, 2009, no such amounts are accrued.

15

In connection with the lease in July 2007 for its 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.

NOTE 13. INCOME TAXES

The Company adopted the provisions of FASB ASC 740 "Income Taxes" as they relate to the accounting for the uncertainty in income taxes effective April 1, 2007. In connection with the adoption, 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 December 26, 2009, the total amount of unrecognized tax benefits was approximately $5.6 million of which $4.6 million is recorded as a deferred tax asset that is fully offset by a valuation allowance and $1.0 million which if recognized would affect the Company's effective tax rate. The calculation of unrecognized tax benefits involves dealing with uncertainties in the application of complex global tax regulations. Management assesses the Company's tax positions in light of legislative, bilateral tax treaty, regulatory and judicial developments in the countries in which the Company operates.

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 FASB ASC 740 and recognizes penalties in accordance with FASB ASC 740 which are classified as part of income taxes. For the nine months ended December 26, 2009, accrued interest and penalties related to uncertain tax positions were not material.

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

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 fiscal 2001 through fiscal 2010 remain open in various taxing jurisdictions.

During the nine months ended December 26, 2009, the Company's income tax provision was $0.1 million, which primarily reflects provisions for taxes in certain profitable foreign jurisdictions. During the nine months ended December 27, 2008, the Company's income tax provision was $0.2 million, 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.

16

NOTE 14. 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 nine months ended December 26, 2009 and the nine months ended December 27, 2008, respectively. There were no discretionary contributions made in the nine months ended December 26, 2009 and the nine months ended December 27, 2008, 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 the provisions of FASB ASC 715 "Compensation - Retirement Benefits". As of December 26, 2009 based on the Plan's actuarial report, the pension plan was over-funded by approximately $350,000 which is classified as other assets on the consolidated balance sheet. During the nine months ended December 26, 2009, the net periodic benefit costs were not material.

NOTE 15. NET INCOME (LOSS) PER SHARE

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

	Nine Months Ended
	Dec. 26,	Dec. 27,
	2009	2008
Net income (loss)	$2,242	($8,965)
Weighted-average shares outstanding - basic	17,277	16,982
Weighted-average shares outstanding - diluted	17,278	16,982
Basic and diluted net loss per share	$0.13	($0.53)

At December 26, 2009, and December 27, 2008, options to purchase 1.5 million and 2.0 million shares of common stock, respectively, are excluded from the determination of diluted net income (loss) per share, as the effect of such shares is anti-dilutive.

For the nine months ended December 26, 2009, 1,060 shares, were calculated as dilutive using the treasury stock method of computation. For the nine months ended December 27, 2008, no shares were calculated as dilutive.

NOTE 16. SUBSEQUENT EVENTS

The Company has evaluated all events or transactions that occurred after December 26, 2009 through the filing date of this document and did not have any material subsequent events.

17

EX-99.3 5 exh99-3.htm IXYS CORPORATION AND ZILOG, INC., UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2009, THE NINE MONTHS ENDED DECEMBER 31, 2009 AND THE FISCAL YEAR ENDED MARCH 31, 2009 AND NOTES.

Exhibit 99.3

UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

On February 18, 2010, IXYS Corporation, or IXYS, completed the acquisition of Zilog Inc., or Zilog, pursuant to the Agreement and Plan of Merger dated December 5, 2009.

For the purpose of the unaudited pro forma combined condensed consolidated financial statements, the acquisition was assumed to have occurred as of April 1, 2008 with respect to the unaudited pro forma combined condensed consolidated statements of operations and as of December 31, 2009 with respect to the unaudited pro forma combined condensed consolidated balance sheet. Zilog's fiscal year ended 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 year end. Zilog's third quarter of its March 31, 2010 fiscal year ended on December 26, 2009. For ease of presentation, the historical financial statements of Zilog included in the accompanying unaudited pro forma combined condensed consolidated financial statements have been shown as ending on the last day of the calendar month.

The acquisition has been accounted for in accordance with the authoritative guidance on business combinations. The total purchase consideration has been allocated on preliminary basis to the tangible and intangible assets acquired and liabilities assumed based on their relative fair values. The excess of the purchase consideration over the net tangible and identifiable intangible assets is recorded as goodwill. The purchase price allocation is preliminary since the valuation of the intangible assets is still being finalized. Accordingly, the pro forma adjustments related to the purchase price allocation and certain other adjustments are preliminary and have been made solely for the purpose of providing unaudited pro forma combined condensed financial statements.  

The unaudited pro forma combined condensed consolidated financial information is for informational purposes only and does not purport to represent what the Company's actual results would have been if the acquisition had been completed as of the date indicated above, or that may be achieved in the future. The unaudited pro forma combined condensed consolidated statements of operations do not include the effects of any cost savings from operating efficiencies or synergies that may result from the acquisition.

The unaudited pro forma combined condensed consolidated financial statements, including the notes thereto, should be read in conjunction with the Company's historical financial statements included in the Company's annual report on Form 10-K for the year ended March 31, 2009 and the interim unaudited condensed consolidated financial statements as of and for the nine months ended December 31, 2009, and the audited financial statements of Zilog as of March 31, 2009 and 2008 and for the three years ended March 31, 2009 and the unaudited financial statements of Zilog as of and for the nine months ended December 26, 2009, incorporated by reference in this Current Report on Form 8-K.

1

IXYS CORPORATION
UNAUDITED PROFORMA COMBINED CONDENSED CONSOLIDATED BALANCE SHEET AS OF
DECEMBER 31, 2009
(In thousands)

	Historical		Proforma		Proforma
	IXYS	Zilog	Adjustments	Reference	Combined
ASSETS
Current assets:
Cash and cash equivalents	$ 86,496	$ 36,980	$ (263)	( a )	$ 60,718
			$ (62,495)	( b )
Restricted cash	199	-	263	( a )	462
Accounts receivable, net of allowances	36,542	3,156	(925)	( c )	38,773
Inventories	65,378	3,285	128	( d )	68,791
Prepaid expenses and other current assets	4,791	2,915	(1,550)	( e )	6,156
Deferred income taxes	13,017	10	(168)	( f )	12,859
Total current assets	206,423	46,346	(65,010)		187,759
Property, plant and equipment	47,691	1,856	(46)	( g )	49,501
Other assets	6,445	1,695	(349)	( h )	7,791
Deferred income taxes	8,106	-	168	( f )	14,013
			5,739	( i )
Intangible Assets	2,467	-	14,000	( j )	16,467
Goodwill	690	1,861	6,090	( k )	6,780
			(1,861)	( l )
Total assets	$ 271,822	$ 51,758	$ (41,269)		$ 282,311
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capitalized lease obligations	$ 3,450	$ -	$ -		$ 3,450
Current portion of loans payable	1,498	-	-		1,498
Accounts payable	16,688	2,532	(787)	( m )	18,433
Accrued expenses and other current liabilities	13,689	13,081	(4,498)	( n )	21,509
			(1,550)	( e )
			787	( m )
Total current liabilities	35,325	15,613	(6,048)		44,890
Long term income tax payable	4,845	10	-		4,855
Capitalized lease obligations, net of current portion	2,322	-	-		2,322
Long term loans, net of current portion	32,288	-	-		32,288
Other long term liabilities	-	1,536	125	( o )	1,661
			128	( d )	128
			(526)	( p )	(526)
Pension liabilities	14,360	-	(349)	( h )	14,011
Total liabilities	89,140	17,159	(6,670)		99,629
Commitments and contingencies
Stockholders' equity:
Common stock	367	186	(186)	( q )	367
Additional paid-in capital	181,014	128,131	(128,131)	( q )	181,014
Treasury stock, at cost	(45,662)	(7,563)	7,563	( q )	(45,662)
Retained earnings	39,285	(86,364)	86,364	( q )	39,285
Accumulated other comprehensive income	7,678	209	(209)	( q )	7,678
Total stockholders' equity	182,682	34,599	(34,599)		182,682
Total liabilities and stockholders' equity	$ 271,822	$ 51,758	$ (41,269)		$ 282,311

2

IXYS CORPORATION
UNAUDITED PROFORMA COMBINED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE
NINE MONTHS ENDED DECEMBER 31, 2009
(In thousands, except per share data)

	Historical		Proforma		Proforma
	IXYS	Zilog	Adjustments	Reference	Combined
Net revenues	$ 166,663	$ 23,975	$ -		$ 190,638
Cost of goods sold	128,000	13,264	-		141,264
Gross profit	38,663	10,711	-		49,374
Operating expenses:
Research, development and engineering	14,202	3,462	-		17,664
Selling, general and administrative	25,183	7,196	(699)	( r )	31,680
Restructuring charges	1,042		-		1,042
Special charges and credits		790	(497)	( s )	293
Amortization of intangible assets	-	-	2,020	( t )	2,020
Total operating expenses	40,427	11,448	824		52,699
Operating loss	(1,764)	(737)	(824)		(3,325)
Other income (expense):
Interest income	317	14	-		331
Interest expense	(1,203)		-		(1,203)
Other income (expense), net	(1,702)	1,113	-		(589)
Income (loss) before income tax	(4,352)	390	(824)		(4,786)
Provision for income tax	(347)	(98)	(305)	( u )	(750)
Net income (loss)	$ (4,699)	$ 292	$ (1,129)		$ (5,536)
Net loss per share
Basic	$ (0.15)				$ (0.18)
Diluted	$ (0.15)				$ (0.18)
Weighted average shares used in per share calculation
Basic	30,893				30,893
Diluted	30,893				30,893

3

IXYS CORPORATION
UNAUDITED PROFORMA COMBINED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE
YEAR ENDED MARCH 31, 2009
(In thousands, except per share data)

	Historical		Proforma		Proforma
	IXYS	Zilog	Adjustments	Reference	Combined
Net revenues	$ 273,552	$ 36,157	$ -		$ 309,709
Cost of goods sold	207,594	21,815	-		229,409
Gross profit	65,958	14,342	-		80,300
Operating expenses:
Research, development and engineering	19,931	6,265	-		26,196
Selling, general and administrative	39,613	19,353	-		58,966
Impairment charges	6,440		-		6,440
Special charges and credits		6,318	-		6,318
Amortization of intangible assets		801	(801)	( v )
		-	6,056	( w )	6,056
Total operating expenses	65,984	32,737	5,255		103,976
Operating loss	(26)	(18,395)	(5,255)		(23,676)
Other income (expense):
Interest income	1,098	188	-		1,286
Interest expense	(1,764)	(40)	-		(1,804)
Other income (expense), net	4,256	378	-		4,634
Income (loss) before income tax	3,564	(17,869)	(5,255)		(19,560)
Provision for income tax	(6,913)	(181)	4,531	( x )	(2,563)
Net loss	$ (3,349)	$ (18,050)	$ (724)		$ (22,123)
Net loss per share
Basic	$ (0.11)				$ (0.71)
Diluted	$ (0.11)				$ (0.71)
Cash dividends per share	$ 0.10				$ 0.10
Weighted average shares used in per share calculation
Basic	31,087				31,087
Diluted	31,087				31,087

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NOTES TO UNAUDITED PROFORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Pro Forma Presentation

On February 18, 2010, IXYS Corporation, or IXYS, completed the acquisition of Zilog, Inc., or Zilog, pursuant to the Agreement and Plan of Merger dated December 5, 2009.

The unaudited pro forma combined condensed consolidated balance sheet as of December 31, 2009 is based on historical financial statements of IXYS and Zilog after giving effect to the acquisition adjustments resulting from the acquisition of Zilog. The unaudited pro forma combined condensed consolidated balance sheet is presented as if the acquisition had occurred on December 31, 2009.

The unaudited pro forma combined condensed consolidated statements of operations have been presented for the year ended March 31, 2009 and the nine months ended December 31, 2009. These are based on historical statements of IXYS and Zilog for the year ended March 31, 2009 and the nine months ended December 31, 2009 and December 26, 2009, respectively after giving effect to the acquisition adjustments. The unaudited pro forma combined condensed consolidated statements of operations are presented as if the acquisition had occurred on April 1, 2008. The historical results of Zilog included in the unaudited pro forma combined condensed consolidated statements of operations for the year ended March 31, 2009 and the nine months ended December 31, 2009 exclude the gain and net income (loss) for Zilog's discontinued operations.

2. Purchase Price Allocation

The total consideration for the transaction was $62,495,000, which was fully paid in cash.

The allocation of the purchase price presented in these financial statements is based on the estimated fair values of the assets acquired and liabilities assumed as of December 31, 2009. The purchase price allocation is preliminary and may change upon the completion of our evaluation of the fair values of the acquired assets and liabilities assumed. The final allocation of purchase price will be based upon the fair values of the acquired assets and liabilities assumed as on the date of completing the acquisition. The impact of such changes could be material.

The preliminary allocation of the purchase price based on estimated fair values (in thousands):

Net tangible assets	$ 42,405
Identifiable intangible assets:
Developed intellectual property	4,800
Customer relationships	6,200
Contract backlog	2,000
Trade name	1,000
Goodwill	6,090
Total purchase price	$ 62,495

Following is a reconciliation of the net tangible assets (in thousands):

Net equity per historical financial statements as of 12/31/09	$ 34,599
Adjustments to assets (1)	1,136
Adjustments to liabilities (2)	6,670
Net tangible assets	$ 42,405

______________

(1)   Refer to items ( a ), ( b ), ( c ), ( d ), ( e ), ( f ), ( g ), ( h ), ( i ), ( j ), ( k ), and ( l ) in footnote 3.
(2)   Refer to items ( d ), ( e ), ( h ), ( m ), ( n ), ( o ), and ( p ) in footnote 3.

5

Intangible Assets

The fair value of intangible assets of $14 million is comprised of the following (in thousands):

Identifiable intangible assets (1)	Preliminary Fair Value	First Year Amortization	Amortization for the nine months ended December 31, 2009	Amortization Method	Estimated Useful Life
Developed intellectual property	$ 4,800	$ 800	$ 600	Straight Line	6 years
Customer relationships	6,200	3,089	1,295	Accelerated	37 months
Contract backlog	2,000	2,000	-	Straight line	1 year
Trade name	1,000	167	125	Straight line	6 years
Total	$ 14,000	$ 6,056	$ 2,020

The valuation of the acquired intangibles is classified as a level 3 measurement under authoritative guidance on fair value measurements, because the valuation was based on significant unobservable inputs and involved management judgment and assumptions about market participants and pricing. The following was considered in determining the fair value of the assets:

1. Stage of development - Each asset was fully developed and included in products on sale to commercial customers, and
2. Anticipated future use - IXYS and any likely marketplace participant would continue to produce the product related to each technology asset in a manner similar to that assumed by IXYS.

These assets were valued using Income approach and Royalty savings approach consistent with the guidance in the AICPA Practice Aid titled "Assets Acquired in a Business Combination to Be Used in Research and Development Activities" as well as authoritative accounting guidance. The analysis considers the following major factors:

Forecast - A business forecast was prepared for each technology asset and product line reflecting current and anticipated future sales, cost of goods sold and operating expenses over the expected; remaining life of the asset, including the anticipated technological obsolesce of the asset.

Operating Income - An expected operating income was computed, specific to each asset, using the associated business forecast.

Capital Charges - Capital charges based on significant tangible and intangible assets needed to realize the operating income forecast were computed. For each contributory asset, the fair value of the asset was compared to its required, risk-adjusted return. Cumulative returns were allocated to individual technologies based on revenue and deducted from the operating income to arrive at an incremental income forecast, reflecting the contribution of the technology to the overall operating income.

Risk Adjusted Discount Rate - Each incremental operating income forecast was discounted to present value using a risk adjusted discount rate specific to the assets, its business forecast and the market it addresses. The rates used were compared to the overall implied rate for the transaction (based on the overall forecast and the consideration paid) and to the weighted average rate of all the assets, including the assets to which charges were recognized. Assets for which capital charge were developed and used, included: fixed assets, working capital, and customer relationships. The discount rates ranged from 22% to 27%.

Present Value of Incremental Operating Income - The present value of the incremental operating income was determined using the risk-adjusted discount rate.

Income tax code section 197 Tax Benefit - A benefit was recognized for the tax deductibility of the amount invested in intangible assets per the AICPA Practice Aid. This benefit was added to the present value of incremental operating income to determine the final conclusion of fair value.

6

3. Special charges and credits

Special charges and credits, included in the historical financial statements of Zilog in the unaudited pro forma combined condensed consolidated statement of operations for the nine months ended December 31, 2009, primarily comprise of merger related expenses and severance costs incurred in connection with restructuring activities. The merger related expenses have been eliminated in the pro forma adjustments. The special charges and credits in the historical financial statements of Zilog in the unaudited pro forma combined condensed consolidated statement of operations for the year ended March 31, 2009 are comprised of severance, termination benefits and other costs related to restructuring and of asset impairment charges for impairment and write-off of intangible and tangible assets.

Refer the audited financial statements of Zilog as of and for the three years ended March 31, 2009 and the unaudited financial statements of Zilog as of and for the nine months ended December 26, 2009, incorporated by reference into the Current Report on Form 8-K/A to which this exhibit is attached, for further details on these costs.

4. Other income (expenses)

Other income included in the historical financial statements of Zilog in the unaudited pro forma combined condensed consolidated statement of operations for the nine months ended December 31, 2009 includes the sale of certain intellectual property rights associated with Zilog's patents. Refer to the unaudited financial statements of Zilog as of and for the nine months ended December 26, 2009, incorporated by reference into the Current Report on Form 8-K/A to which this exhibit is attached, for further details of this income.

5. The unaudited pro forma combined condensed consolidated balance sheet gives effect to the following adjustments:
1. To reclassify cash as restricted cash.
2. To reflect the payment of purchase consideration for the acquisition by IXYS.
3. To recognize an additional reserve for price adjustments and stock return rights given to distributors.
4. To reclassify certain inventory reserves as long term liabilities payable to fabrication facilities.
5. To eliminate deferred receivable and deferred revenue recognized by Zilog in connection with certain business discontinued by Zilog prior to acquisition by IXYS.
6. To reclassify short term and long term deferred taxes
7. To adjust the values of certain property, plant and equipment items to reflect the fair values on acquisition.
8. To reclassify pension-related items to pension liabilities.
9. To recognize deferred tax assets recognized on release of valuation allowance on certain net operating losses and temporary differences which were previously fully reserved in Zilog's financial statements.
10. To record the fair value of the acquired identifiable intangible assets.
11. To record preliminary goodwill on allocation of purchase price.
12. To eliminate pre-acquisition goodwill of Zilog.
13. To reclassify certain items from accounts payable to accrued liabilities.
14. To eliminate deferred revenue, as there was no performance obligation assumed to earn this revenue and no fair value was recorded upon acquisition.
15. To recognize the change in the fair value of liabilities assumed in connection with certain lease agreements.
16. To recognize the change in the fair value of the legal reserve.
17. To eliminate items of shareholders equity of Zilog, consisting of common stock, additional paid-in capital, treasury stock balance, retained earnings and current translation adjustments.
6. The unaudited pro forma combined condensed consolidated statements of operations give effect to the following adjustments:
18. To eliminate costs incurred for the merger transaction by IXYS in the nine months ended December 31, 2009.
19. To eliminate costs incurred for the merger transaction by Zilog in the nine months ended December 31, 2009.
20. To record the amortization of newly acquired intangible assets for the nine months ended December 31, 2009.
21. To record the effect of income taxes on the combined net loss.
22. To eliminate the amortization of existing intangible assets recorded by Zilog for the year ended March 31, 2009.
23. To record the amortization of newly acquired intangible assets for the year ended March 31, 2009.
24. To record the effect of income taxes primarily for release of valuation allowance on the deferred tax assets on Zilog's loss for the year.

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-----END PRIVACY-ENHANCED MESSAGE-----

EX-23.1

May 5, 2010 8KA Exhibit 23.1

EX-99.1

May 5, 2010 8KA Exhibit 99.1

EX-99.2

May 5, 2010 8KA Exhibit 99.2

EX-99.3

May 5, 2010 8KA Exhibit 99.3