AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 15, 2005
================================================================================

                       SECURITIES AND EXCHANGE COMMISSION

                              WASHINGTON D.C. 20549
                                 ---------------

                                    FORM 20-F

                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                   For the fiscal year ended DECEMBER 31, 2004

                         COMMISSION FILE NUMBER 5-59311

                                 ---------------

                            DIALOG SEMICONDUCTOR PLC
             (Exact name of Registrant as specified in its charter)

             NOT APPLICABLE                            ENGLAND AND WALES
 (Translation of Registrant's Name Into       (Jurisdiction of Incorporation
                English)                             of Organization)

                                 ---------------
                                 Neue Strasse 95
                     D-73230 Kirchheim/Teck-Nabern, Germany
                    (Address of Principal Executive Offices)

                                 ---------------

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

NONE

Securities registered or to be registered pursuant to Section 12(g) of the Act:

                                                          NAME OF EACH EXCHANGE
                TITLE OF EACH CLASS                        OF WHICH REGISTERED
----------------------------------------------------   -------------------------
ORDINARY SHARES OF GBP 0.10 PER SHARE REPRESENTED       NASDAQ NATIONAL MARKET
BY AMERICAN DEPOSITARY SHARES ORDINARY SHARES          FRANKFURT STOCK EXCHANGE


Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:

NONE

Indicate the number of  outstanding  shares of each of the  issuer's  classes of
capital  or common  stock as of the close of the  period  covered  by the annual
report.

ORDINARY SHARES                                  46,068,930

Indicate  by check  mark  whether  the  registrant:  (1) has filed  all  reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during the  proceeding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.

                                 Yes [X] No [ ]

Indicate by check mark which financial statement item the registrant has elected
to follow.

                            Item 17 [ ] Item 18 [X]

================================================================================



                                TABLE OF CONTENTS


Part I

Item 1.       Identity of Directors, Senior Management and Advisers

Item 2.       Offer Statistics and Expected Timetable

Item 3.       Key Information

Item 4.       Information on the Company

Item 5.       Operating and Financial Review and Prospects

Item 6.       Directors, Senior Management and Employees

Item 7.       Major Shareholders and Related Party Transactions

Item 8.       Financial Information

Item 9.       The Offer and Listing

Item 10.      Additional Information

Item 11.      Quantitative and Qualitative Disclosure about Market Risk

Item 12.      Description of Securities other than Equity Securities

Part II

Item 13.      Defaults, Dividend Arrearages and Delinquencies

Item 14.      Material Modifications to the Rights of Security Holders
              and use of Proceeds

Item 15.      Controls and Procedures

Item 16A.     Audit Committee Financial Expert

Item 16B.     Code of Ethics

Item 16C.     Principal Accountant Fees and Services

Part III

Item 17.      Financial Statements

Item 18.      Financial Statements

Item 19.      Exhibits




<PAGE>



                           FORWARD-LOOKING STATEMENTS

This  annual  report  contains  "forward-looking   statements".  All  statements
regarding our future financial condition,  results of operations and businesses,
strategy,  plans and objectives are forward-looking.  Statements  containing the
words  "believes",  "intends",  "expects" and words of similar  meaning are also
forward-looking.  Such statements involve unknown risks, uncertainties and other
factors that may cause our results, performance or achievements or conditions in
the  markets in which we operate to differ  from those  expressed  or implied in
such statements. These factors include, among others, product demand, the effect
of  general  economic   conditions  and  conditions  in  the  semiconductor  and
telecommunications  markets, exchange rate and interest rate movements,  capital
and credit market developments,  the timing of customer orders and manufacturing
lead times,  the changes in customer order and payment  patterns,  the financial
condition and strategic plans of our major  customers,  insufficient,  excess or
obsolete  inventory,  and the impact of competing  products  and their  pricing,
product development, commercialization and technological difficulties, political
risks in the countries in which we operate or sale and supply constraints. It is
not possible to predict or identify  all such  factors.  Consequently,  any such
list should not be considered to be a complete  statement of all potential risks
or  uncertainties.  We do not assume the  obligations to update  forward-looking
statements.



<PAGE>



                                     PART I

ITEM 1.  IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

NOT APPLICABLE.

ITEM 2.  OFFER STATISTICS AND EXPECTED TIMETABLE

NOT APPLICABLE.

ITEM 3.  KEY INFORMATION

A.       SELECTED FINANCIAL DATA

We  derived  the  following   selected   historical   financial  data  from  our
consolidated  financial  statements.  You  should  read the  following  selected
financial data in conjunction  with our  consolidated  financial  statements and
"Item 5. Operating and Financial Review and Prospects".  We derived the selected
historical  consolidated financial information of Dialog Semiconductor Plc as of
December 31, 2004,  2003,  2002,  2001 and 2000 and for the years ended December
31, 2004,  2003,  2002,  2001 and 2000 from our audited  consolidated  financial
statements,  which have been  audited  by KPMG  Deutsche  Treuhand  Gesellschaft
Aktiengesellschaft   Wirtschaftsprufungsgesellschaft   ("KPMG").   The   audited
consolidated  financial  statements for the years ended December 31, 2004, 2003,
and 2002 are included elsewhere in this annual report.

Our audited  consolidated  financial statements were prepared in accordance with
generally  accepted  accounting  principles in the United States of America ("US
GAAP").



<PAGE>



<TABLE>
<CAPTION>
                                                                      YEAR ENDED DECEMBER 31,
                                             ---------------------------------------------------------------------------
(IN THOUSANDS OF EURO, EXCEPT SHARE AMOUNTS)  2004              2003           2002               2001            2000
                                             ----------------------------------------------------------------------------
STATEMENT OF INCOME (LOSS) DATA:
<S>                                          <C>               <C>              <C>             <C>              <C>
Revenues                                     116,044           92,893           77,104          100,519          214,459
Cost of sales (1)                            (79,783)         (62,374)         (57,409)         (80,574)        (138,879)
                                            ----------------------------------------------------------------------------
GROSS MARGIN                                  36,261           30,519           19,695           19,945           75,580
Selling and marketing expenses                (6,237)          (4,197)          (4,149)          (4,054)          (5,672)
General and administrative expenses           (5,462)          (5,044)          (6,447)          (5,569)          (5,972)
Research and development expenses            (29,071)         (30,590)         (34,530)         (31,256)         (22,898)
Amortization of goodwill and                  (1,520)          (2,073)          (1,975)          (3,202)          (2,651)
 intangible assets
Restructuring and related impairment             (59)          (1,839)            --               --               --
  charges
                                            ----------------------------------------------------------------------------
OPERATING PROFIT (LOSS)                       (6,088)         (13,224)         (27,406)         (24,136)          38,387
Interest income, net                           1,081              757            1,121              898            1,940
Foreign currency exchange gains and             (726)            (454)          (1,918)           1,713            2,789
 losses, net
Recovery (write-down) of investment               54              315           11,969          (42,405)            --
                                            ----------------------------------------------------------------------------
RESULT BEFORE INCOME TAXES                    (5,679)         (12,606)         (16,234)         (63,930)          43,116
Income tax benefit (expense)                     (64)          (7,814)           6,026           22,544          (16,466)
                                            ----------------------------------------------------------------------------
NET INCOME (LOSS)                             (5,743)         (20,420)         (10,208)         (41,386)          26,650
                                            ============================================================================

Basic earnings (loss) per share                (0.13)           (0.46)           (0.23)           (0.94)            0.62
Diluted earnings (loss) per share              (0.13)           (0.46)           (0.23)           (0.94)            0.60

BALANCE SHEET DATA:
Cash and cash equivalents                     13,977            8,109           31,005           32,626           29,879
Working capital (2)                           67,144           71,857           56,082           50,438           70,605
Total assets                                 141,959          140,471          166,073          179,062          247,572
Shareholders' equity                         121,135          126,843          147,495          158,092          199,287

OTHER DATA:
Weighted average number of
 shares outstanding (in thousands):
Basic                                         44,025           43,951           43,888           43,788           42,669
Diluted                                       44,025           43,951           43,888           43,788           44,300
---------------

(1)      Includes  provision for excess  inventory of EUR 1,930 and EUR 10,689 for the years ended  December 31, 2002 and
         2001, respectively.

(2)      Current assets less current liabilities.
</TABLE>



<PAGE>



EXCHANGE RATE INFORMATION

The  following  table  shows,  for  the  dates  indicated,  certain  information
concerning the noon buying rate in New York City in Pounds Sterling as certified
for customs  purposes by the Federal  Reserve Bank of New York,  expressed in US
Dollars per GBP 1.00.

<TABLE>
<CAPTION>
PERIOD                                      PERIOD END      AVERAGE(1)         HIGH            LOW
----------------------------------------- --------------- --------------- --------------- ---------------
YEAR
<C>                                            <C>             <C>             <C>             <C>
2000.............................              1.50            1.52            1.65            1.40
2001.............................              1.45            1.44            1.51            1.37
2002.............................              1.61            1.50            1.61            1.41
2003.............................              1.78            1.64            1.78            1.55
2004.............................              1.92            1.83            1.95            1.75
MONTH


October 2004.....................              1.83            1.81            1.84            1.78
November 2004....................              1.91            1.86            1.91            1.83
December 2004....................              1.92            1.93            1.95            1.91
January 2005.....................              1.89            1.88            1.91            1.86
February 2005....................              1.92            1.89            1.92            1.86
March 2005.......................              1.89            1.90            1.93            1.87
----------

(1)      The average of the noon buying rates on the last day of each period in question.
</TABLE>


On April 7, 2005, the noon buying rate was $1.88 per GBP 1.00.

The  following  table  shows,  for  the  dates  indicated,  certain  information
concerning  the noon  buying  rate in New  York  City in Euro as  certified  for
customs purposes by the Federal Reserve Bank of New York expressed in US Dollars
per EUR 1.00.


<TABLE>
<CAPTION>
PERIOD                                      PERIOD END      AVERAGE(1)         HIGH            LOW
----------------------------------------- --------------- --------------- --------------- ---------------
YEAR
<C>                                            <C>             <C>             <C>             <C>
2000.............................              0.94            0.92            1.03            0.83
2001.............................              0.89            0.90            0.93            0.85
2002.............................              1.05            0.95            1.05            0.86
2003.............................              1.26            1.13            1.26            1.04
2004.............................              1.35            1.24            1.36            1.18
MONTH


October 2004.....................              1.27            1.25            1.28            1.23
November 2004....................              1.33            1.30            1.33            1.27
December 2004....................              1.35            1.34            1.36            1.32
January 2005.....................              1.30            1.31            1.35            1.30
February 2005....................              1.33            1.30            1.33            1.28
March 2005.......................              1.30            1.32            1.35            1.29
----------

(1)      The average of the noon buying rates on the last day of each period in question.
</TABLE>

On April 7, 2005, the noon buying rate was $1.29 per EUR 1.00.

<PAGE>

B.       CAPITALIZATION AND INDEBTEDNESS

NOT APPLICABLE

C.       REASONS FOR THE OFFER AND USE OF PROCEEDS

NOT APPLICABLE

D.       RISK FACTORS

IN ADDITION TO OTHER  INFORMATION  IN THIS ANNUAL REPORT,  YOU SHOULD  CAREFULLY
CONSIDER THE RISKS  DESCRIBED  BELOW  BEFORE  DECIDING TO INVEST IN OUR ORDINARY
SHARES OR ADSS. ANY OF THESE RISK FACTORS COULD  MATERIALLY AND ADVERSELY AFFECT
OUR  BUSINESS,  FINANCIAL  CONDITION OR  OPERATING  RESULTS.  IN THAT CASE,  THE
TRADING PRICE OF OUR ORDINARY SHARES AND ADSS COULD DECLINE,  AND YOU COULD LOSE
ALL OR PART OF YOUR  INVESTMENT.  IT IS NOT  POSSIBLE TO PREDICT OR IDENTIFY ALL
RELEVANT  RISK  FACTORS  AND,  THEREFORE,  THE  FOLLOWING  LIST  SHOULD  NOT  BE
CONSIDERED TO BE A COMPLETE STATEMENT OF ALL POTENTIAL RISKS OR UNCERTAINTIES.

  WE HAVE NOT BEEN PROFITABLE FOR THE LAST FOUR FISCAL YEARS, AND THERE IS NO
                 GUARANTEE THAT WE WILL RETURN TO PROFITABILITY

While we reported an  operating  profit and net income for the 2000 fiscal year,
we incurred  net  losses of  EUR 5,743,000,   EUR 20,420,000,    EUR  10,208,000
and EUR 41,386,000  for fiscal years 2004, 2003, 2002 and 2001,  respectively.
We cannot  assure you that our net losses  will not  continue or increase in the
future  or that we will  return  to being  profitable.  Please  see "Item 3. Key
Information"  and "Item 5.  Operating and Financial  Review and  Prospects"  for
information regarding our financial condition.

              OUR REVENUES, PROFITABILITY AND GROWTH COULD DECLINE
            IF THE GROWTH OF THE WIRELESS COMMUNICATIONS MARKET SLOWS

We derive a substantial portion of our revenue from the wireless  communications
market, which experienced  difficult conditions in 2001, 2002 and the first half
of 2003. Our revenues from wireless  communications  applications  accounted for
78%,  75% and 71% in the years  ended  December  31,  2004,  2003 and 2002.  Our
revenues  increased 25% from EUR 92.9  million for the year  ended  December 31,
2003 to  EUR 116.0   million for the year ended  December 31, 2004 and 20% from
EUR 77.1   million  for the year  ended  December  31, 2002 to EUR 92.9  million
for the year ended December 31, 2003,  primarily due to new products  introduced
to volume  production with more  functionality  and accordingly,  higher selling
prices.  Worldwide  sales of cellular  handsets  increased in the second half of
2003 and 2004  (particularly  in Asia),  but we can give no assurance  that this
trend  will   continue.   In  future   periods,   conditions   in  the  wireless
communications  market may  fluctuate,  which could  result in either  growth or
decline.  Conditions in the wireless  communications market may be influenced by
numerous factors, including:

o        national and regional regulatory environments;

o        general economic conditions;

<PAGE>

o        advances in competing telecommunication and information technologies;

o        manufacturing capacity; and

o        perceived health risks to cellular phone users.

Any  significant  constraints  on the growth of, or  downturns  in, the wireless
communications  market could have a negative  effect on our future  revenues and
profit growth.

               WE MAY BECOME A PASSIVE FOREIGN INVESTMENT COMPANY

We may become a passive foreign investment company.  Whether we become a passive
foreign investment company will depend,  among other things,  upon the amount of
our  passive  income  and the value of our  passive  assets,  the  growth in our
business revenues and our market value in the future.  Since goodwill represents
a substantial part of our non-passive assets, changes in the market value of our
shares,  which have been  significant and could continue to be significant,  can
cause us to become a passive foreign investment  company. If we become a passive
foreign investment  company,  US holders would be subject to additional US taxes
under  special  US  federal   income  tax  rules.   See  "Item  10.   Additional
Information-US Federal Income Taxation-Passive Foreign Investment Company".

  IF WE ARE UNABLE TO ADAPT RAPIDLY TO CHANGING MARKETS AND TECHNOLOGY, WE MAY
              LOSE CUSTOMERS AND BE UNABLE TO DEVELOP NEW BUSINESS

The market in which we compete is  characterized  by continuous  development and
technological  improvement.  As a result,  our success depends on our ability to
develop new designs and products on a  cost-effective,  timely basis. Our future
success  also  depends on our  ability to  anticipate  and respond to new market
trends, to rapidly implement new designs that satisfy customers' desires, and to
keep  abreast  of  technological  changes  within  the  semiconductor   industry
generally.  If we fail to  successfully  design and  develop  new  products  and
product  enhancements  that  respond  to  technological   changes  and  customer
requirements in a timely and cost-effective  manner, we may be unable to respond
to competitive  challenges.  We could also lose customers and experience a lower
demand for our products.

          THE SEMICONDUCTOR INDUSTRY IS HIGHLY CYCLICAL IN NATURE, AND
                      THIS RESULTS IN PERIODIC OVERCAPACITY

The semiconductor industry has historically been highly cyclical and, at various
times,  has  experienced   significant   economic  downturns   characterized  by
production  over-capacity,  reduced  product  demand and erosion of average sale
prices. We and many of our competitors have historically expanded during periods
of  increased  demand,   resulting  in  overcapacity.   See  "Item  4.  Business
Overview-Industry Background."

<PAGE>

          WE FACE INTENSE COMPETITION, AND IF WE ARE UNABLE TO COMPETE
                      EFFECTIVELY, WE COULD LOSE CUSTOMERS

Many  of  our  direct  and   indirect   competitors   are  major   international
semiconductor  companies with  substantially  greater  technical,  financial and
marketing resources and name recognition. In addition, in the future we may face
increased  competition  from  smaller,  niche  semiconductor  design  companies.
Further,  some of our  customers  could  decide to  satisfy  their  applications
specific  integrated circuit ("ASIC") and application  specific standard product
("ASSP") demands through  in-house design and production.  We compete with these
competitors primarily on the basis of the following attributes:

o        price;

o        design cycle time;

o        reliability;

o        performance;

o        customer and logistical support; and

o        reputation.

Our  inability  to compete  effectively  on any of these  bases or others  could
affect the pricing of and demand for our products.  See "Item 4.  Information on
the Company-Competition".

THE LOSS OF ONE OF OUR PRINCIPAL FOUNDRY RELATIONSHIPS OR ASSEMBLY SERVICES OR A
    DELAY IN FOUNDRY OR ASSEMBLY PRODUCTION MAY RESULT IN A MATERIAL LOSS OF
                            PRODUCTION AND REVENUES

A  material  production  delay,   limitation  or  other  detrimental  effect  on
production at one of our principal  foundries could result in a material loss of
revenue until such  production  is restored or until the affected  product lines
are  transferred  to another  foundry.  A foundry's  production  can be delayed,
limited or detrimentally affected by, among other things:

o        difficulties in the manufacturing process;

o        the complexity of individual designs;

o        failure of suppliers to meet delivery dates;

o        shortages in raw materials or silicon impurities; and

o        other factors or circumstances outside our control.

We also outsource our wafer assembly services,  including bonding and packaging,
to  selected  assemblers  in  Europe  and  Asia.  If we lose  one or more of our
assemblers or if any assembler fails to meet its delivery  dates,  fails to meet
quality standards set by us, limits  production  volumes or increases prices due
to capacity  constraints,  we could  experience  significant  delays and loss of
production,  which  could  result  in a  material  loss of  revenues.  For  more
information on outsourcing of production and assembly of our products, see "Item
4. Information on the Company-Our Product Cycle-Manufacture of Wafers".

<PAGE>

OBTAINING ACCESS TO MANUFACTURING CAPACITY AT SEMICONDUCTOR MANUFACTURING PLANTS
    MAY BECOME INCREASINGLY DIFFICULT AND COULD RESULT IN HIGHER COSTS AND A
                           MATERIAL LOSS OF REVENUES

We  outsource  our  silicon  wafer   fabrication  and,   therefore,   access  to
semiconductor  manufacturing  plants,  or "fabs",  is necessary to our business.
Access to fabs, however,  may become  increasingly  difficult in future years as
the semiconductor  industry continues to grow. If we are unable to obtain access
to sufficient  manufacturing  capacity at fabs, we could experience  significant
delays  or a loss of  production,  which  could  result  in a  material  loss of
revenues.  Additionally,  if  there is a  shortage  of  available  manufacturing
capacity at fabs, we may have to pay more for the manufacture of silicon wafers.

    WE CURRENTLY DEPEND ON A FEW CUSTOMERS FOR A SUBSTANTIAL PORTION OF OUR
    REVENUES, AND THE LOSS OF ONE OR MORE OF THESE CUSTOMERS MAY RESULT IN A
                        MATERIAL DECLINE IN OUR REVENUES

We derive a substantial  portion of our revenues from a relatively  small number
of wireless communications manufacturers that require high performance, low cost
semiconductor  products.  Sales to two customers  individually accounted for 65%
and 61% of total revenues in 2004 and 2002, respectively.  Sales to one customer
individually  accounted for 65% of total revenues in 2003. Our revenues declined
for the  years  ended  December  31,  2002 and  2001,  primarily  as a result of
significantly  reduced  revenue  from  one  major  customer.  Although  revenues
increased in 2004 and 2003,  respectively,  the further loss of revenue from one
or more major customers  would result in a material  decrease in our revenues in
future periods.  In addition,  because we depend on a relatively small,  focused
customer  base,  we  are  exposed  to  downward  pricing  pressures  from  those
customers.

  PERCEIVED HEALTH RISKS RELATING TO CELLULAR HANDSETS COULD LEAD TO DECREASED
                                DEMAND FOR ASICS

Some  members  of  the  medical   community  have  expressed  concern  that  the
electromagnetic  signals from cellular  handsets may cause brain tumors,  memory
loss or DNA and genetic damage. The perceived or actual health risks and related
publicity or litigation could reduce the demand for cellular  handsets and ASICs
and, thus, reduce our sales and revenues.

  OUR BUSINESS, FINANCIAL CONDITION AND REPUTATION MAY BE MATERIALLY ADVERSELY
   AFFECTED IF OUR ASICS, OR THE ELECTRONIC SYSTEMS OF WHICH THEY ARE A PART,
                  CONTAIN DEFECTS THAT CAUSE DAMAGE OR INJURY

Our ASICs  form part of larger  complex  products  such as  cellular  phones and
airbag sensors. Defects in our ASICs, or in the electronic systems of which they
are part,  may  directly  or  indirectly  result  in  damage  to third  parties'
property,  physical injury or even death. If such defects occur, they may result
in:

<PAGE>

o        product liability claims;

o        expensive and time-consuming modifications;

o        damaged customer relationships;

o        damage to our reputation; and

o        loss of market share.

Although we carry  insurance,  our  insurance  coverage may not cover  potential
claims to which we are exposed or may not be adequate  to  indemnify  us for all
potential  liability.  In addition,  we may not have sufficient cash reserves to
cover such liabilities. If we do not have sufficient insurance or cash reserves,
we may be forced to sell assets or divert cash that may have otherwise been used
for capital expenditures or operating costs.

    OUR PRODUCTS ARE DIFFICULT TO MANUFACTURE AND MANUFACTURING DEFECTS CAN
                          ADVERSELY AFFECT OUR RESULTS

The manufacture of our products is a precise and complex process. The production
cycle for new products is characterized by the need to achieve increasingly high
yields  from  batches of ASICs.  If we are unable to achieve  increasingly  high
yields, or if one of our products is defective,  this could result in a delay in
the time it takes for our  products to reach the market in  quantity,  a loss of
customers or damage to our business  reputation,  which could materially  affect
our results of operations.

  WE MAY NOT BE ABLE TO REMAIN COMPETITIVE IF WE LOSE ANY OF OUR KEY EXECUTIVES

Our success  depends to a significant  extent upon the continued  service of our
key senior executives,  particularly of our management  members. We rely heavily
on  senior   management's   special   knowledge  and  its  ability  to  maintain
relationships  with  our  key  customers.  If we  lose  any  of our  key  senior
executives,  we may not be able to  retain  our  current  customers  or  develop
business with new customers.

WE MAY NOT BE ABLE TO REMAIN COMPETITIVE IF WE CANNOT HIRE AND RETAIN QUALIFIED
                  ENGINEERS AND SALES AND MARKETING PERSONNEL

Our future success depends on our ability to continue  enhancing and introducing
new generations of technology.  We are therefore  particularly  dependent on our
ability to identify,  attract, motivate and retain qualified design, process and
testing  engineers  with  the  requisite  educational  background  and  industry
experience.  Competition  in the market for  qualified  engineers,  particularly
those  with  significant  industry  experience,   is  intense.  Our  ability  to
successfully  grow will also depend on our  ability to attract and retain  sales
and marketing personnel. The loss of the services of any of our senior engineers
or our inability to attract and retain sales and marketing  personnel could hurt
our product development efforts or business relationships.

<PAGE>

  IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY AND KNOW-HOW FROM BEING
  COPIED OR USED BY OTHERS, OUR COMPETITORS MAY GAIN ACCESS TO ITS CONTENT AND
                                   TECHNOLOGY

We  attempt to  protect  our trade  secrets  and other  proprietary  information
through  confidentiality  agreements  with customers,  suppliers,  employees and
consultants  and through  other  security  measures.  We also rely on copyright,
trade secret and patent laws to protect our intellectual property and know-how.

If we are unable to protect our  intellectual  property,  it may be possible for
someone  to copy  aspects  of our  designs  and  products  or to obtain  and use
information that we regard as proprietary.

The  semiconductor  industry is characterized by frequent  litigation  regarding
intellectual  property  rights.  Questions of infringement in the  semiconductor
field  involve  highly  technical and  subjective  analysis.  Litigation  may be
necessary in the future to enforce our intellectual  property rights, to protect
our trade secrets, to determine the validity and scope of the proprietary rights
of others,  or to defend  against  claims of  infringement  or  invalidity.  Any
litigation, whether or not determined in our favor, would probably be costly and
would divert the efforts and attention of our management and technical personnel
from normal business  operations.  Adverse  determinations  in litigation  could
result  in the  loss  of  our  proprietary  rights,  subject  us to  significant
liabilities or require us to seek licenses from third parties.  Moreover,  there
may not be effective trade mark,  copyright and trade secret protection in every
country  in which our  technology  is or may be used in the  future.  This would
increase the possibility of infringement of our intellectual property.

     THE PROFITABILITY OF OUR BUSINESS MAY BE ADVERSELY AFFECTED BY CURRENCY
 FLUCTUATIONS AND BY THE ECONOMIC AND LEGAL DEVELOPMENTS IN THE COUNTRIES WHERE
                            WE CONDUCT OUR BUSINESS

We sell our  products  primarily  in  Europe,  Asia and the United  States.  Our
operations are subject to risks inherent in international  business  activities,
including:

o        general economic conditions in each country;

o        costs of complying with a variety of regulatory environments;

o        currency conversion risks and the effect of fluctuations in
         currency exchange rates;

o        taxation by multiple government entities;

o        tariffs and other trade barriers; and

o        staffing and managing foreign operations.

We  conduct  our  business  primarily  in  Euro,  which is  financial  statement
reporting currency,  and US Dollars. We may be unable to match US dollar inflows
and outflows  adequately,  which  increases  our  exposure to changing  exchange
rates.  Please see "Foreign  Currencies"  under "Item 5. Operating and Financial
Review and Prospects" for further information on the impact of exchange rates.

<PAGE>

 US-RESIDENT SHAREHOLDERS MAY FIND IT MORE DIFFICULT TO PROTECT THEIR INTERESTS
           THAN THEY WOULD AS SHAREHOLDERS OF A US-BASED CORPORATION

Dialog  Semiconductor  Plc is incorporated  under the laws of England and Wales.
The rights of our  shareholders and the  responsibilities  of the members of the
board of directors of a corporation  under English law are different  from those
under US law.  Furthermore,  a majority of the members of our board of directors
and the majority of our assets are located outside the United States. Therefore,
US-resident  shareholders  may find it more difficult to protect their interests
and enforce a judgment of a US court as compared to  shareholders  of a US-based
corporation.  In  addition,  it may be  difficult  to bring an action  seeking a
remedy under US securities laws in a non-US court.

     OUR FUTURE OPERATING RESULTS COULD BE MATERIALLY AFFECTED IF JUDGMENTS
     UNDERLYING ANY OF OUR ACCOUNTING POLICIES WERE TO SIGNIFICANTLY CHANGE

A number of our accounting  policies  involve  judgments about various  factors,
including our financial and  operating  condition,  the wireless  communications
industry and general economic conditions.  There is a reasonable likelihood that
our future operating  results could be materially  affected if the conditions or
assumptions on which our judgments are based were to significantly  change.  See
"Item 5.  Operating  and  Financial  Review  and  Prospects-Critical  Accounting
Policies and Related Uncertainties".

ITEM 4.  INFORMATION ON THE COMPANY

A.       HISTORY AND DEVELOPMENT OF THE COMPANY

Dialog Semiconductor Plc ("Dialog" or the "Company") is a public limited company
constituted  under the laws of England and Wales.  Our business  originated from
the European  activities of  International  Microelectric  Products,  Inc., a US
company active in the  semiconductor  industry.  On May 20, 1985,  International
Microelectric  Products,  Inc.  incorporated  IMP (Europe)  Limited as a private
limited  company  registered  in England  and Wales.  At the end of 1989 and the
beginning  of 1990,  Daimler-Benz  AG,  now  DaimlerChrysler  AG,  acquired  IMP
(Europe)  Limited,  which became part of a  Daimler-Benz  AG  subsidiary,  Temic
Telefunken  microelectronic  GmbH, now Conti Temic  microelectronic GmbH ("Conti
Temic").  In March 1998,  three of our major  shareholders,  Apax Partners & Co.
Ventures  Ltd.  and  Apax  Partners  &  Co,  Germany  II  L.P.  (together  "Apax
Partners"), Adtran, Inc. ("Adtran") and Ericsson provided funding to finance our
buyout of the business from  Daimler-Benz  AG (now  DaimlerChrysler  AG).  These
shareholders  contributed  approximately  EUR 28.0  million  in cash in exchange
for  ordinary  shares in the amount of  EUR 5.3   million,   additional  paid-in
capital in the amount of EUR 5.3  million and  cumulative  redeemable preference
shares in the amount of EUR 17.5   million.   We then  acquired our  predecessor
business for  EUR 28.0   million.  In connection   with this  acquisition,  Apax
Partners  transferred  some of its shares to members of management and the board
of directors of our company and transferred  additional  shares then owned by it
into the Dialog Seminonductor Plc Employee Benefit Trust (the "Trust") (a Jersey
trust  established  to  purchase  our  shares  from and sell our  shares  to our
employees and directors).

<PAGE>

Our head  office is  located  near  Stuttgart,  Germany  and we have  additional
offices in Swindon,  UK; Clinton, New Jersey, USA; San Diego,  California,  USA;
Graz, Austria; Tokyo, Japan; Taipei, Taiwan; and Heidelberg and Munich, Germany.
Our  principal   executive  office  is  located  at  Neue  Strasse  95,  D-73230
Kirchheim/Teck-Nabern,  Germany,  Tel: 0049 7021 805-0. Our agent for US federal
securities law purposes is Dialog Semiconductor, Inc., Corporation Trust Center,
1209 Orange Street, Wilmington, Delaware 19801.

B.       BUSINESS OVERVIEW

Dialog is a fabless  semiconductor  company that  develops  and  supplies  power
management,  audio and imaging  technology,  delivering  innovative mixed signal
standard  products as well as  application  specific IC solutions  for wireless,
automotive  and  industrial  applications.  A  "fabless"  company  is  one  that
outsources  the  production  of silicon  wafers.  Our  expertise in mixed signal
design,  with  products  manufactured  entirely  in  Complimentary  Metal  Oxide
Semiconductor  ("CMOS")  technology,  enhances the  performance  and features of
wireless,  hand-held and portable  electronic  products.  Our technology is also
used in intelligent control circuits in automotive and industrial  applications.
Production  of these  designs is then  outsourced,  and the final  products  are
returned to us for approval and testing before  delivery to the  customers.  Our
strong track record in delivering  qualified and tested products directly to the
world's leading wireless handset  manufacturers is a result of shipping over 500
million successful  audio-CODEC (a coding/decoding  device) and power management
chips for cellular phones. The technology that optimizes power usage,  processes
audio signals,  and converts analog or digital data in wireless handsets is also
providing competitive solutions in automotive and industrial applications.  With
this  experience  of  delivering  mixed  signal  circuits in CMOS  semiconductor
technology,  Dialog is enabling  advanced  applications and features in consumer
electronics  products and other systems. In 2002 and 2003, we extended the reach
of our technology by introducing  components and systems for embedding  advanced
digital camera and video capability in portable electronic products. In 2003, we
developed a family of devices which drive color  displays in wireless  handsets.
These color STN  (super-twisted  nematic)  liquid crystal  display (LCD) drivers
were introduced to the market and shipped in volume  production  during 2004. In
power management, we launched the DA9030 in May 2004, the first integrated power
management IC (PMIC) to support the Wireless Intel SpeedStep(R)  technology.  In
2004 we also announced a long-term collaboration with Carl Zeiss, a world leader
in the optical and optoelectronics  industry,  to develop and market modules for
high quality camera phones.

INDUSTRY BACKGROUND

SEMICONDUCTORS AND MIXED SIGNAL ASICS

Semiconductors  are essential  building blocks in today's  electronic  products,
including cellular  telephones.  Integrated  circuits are complex  semiconductor
devices that  consist of a single piece of silicon and are commonly  referred to
as a  "chip".  In the past,  standard  integrated  circuits  were  placed  close
together to create a system that met the  requirements of an  application.  This
standardization  in turn has created a foundry industry which produces "wafers",
consisting  of multiple  identical  silicon  chips.  In order to reduce size and
costs and increase  performance  ASICs were  developed.  ASICs  integrate  these
circuits  together on one custom  designed  chip. A mixed signal ASIC  processes
both analog and digital data.

<PAGE>

Analog circuits provide the interface between  electronic  systems and a variety
of real world phenomena such as sound,  light, and temperature.  Digital devices
use a series of on/off states to perform  arithmetic  functions that are used to
process data. Due to the risk of  interference,  it is technically  difficult to
combine  analog and digital  circuits  on a single  chip.  System  manufacturers
historically  addressed mixed signal  requirements  using printed circuit boards
that incorporated individual analog and digital components. However, in response
to  increasing   demand  for  greater   functionality  at  lower  cost,   system
manufacturers  are  actively  seeking  solutions  that  contain  both analog and
digital functions integrated on a single chip.

OUR SOLUTION

We develop and supply mixed signal  components  and system level  solutions  for
wireless communications,  automotive and industrial applications. Our technology
expertise  addresses  power  management,   audio-CODECs  and  imaging.  We  have
developed a considerable  reputation among our customers in creating innovative,
customer-specific  solutions in 100% CMOS technology-fully  tested and delivered
quickly to achieve competitive time-to-market objectives.

The  customer  preference  for  smaller  and more  sophisticated  hand-held  and
portable  devices with advanced  capabilities  such as wireless  communications,
digital  camera,  video and audio all in the same device  places huge demands on
the  battery.  Our highly  integrated,  single chip power  management  and audio
devices ensure the components  within a mobile phone handset or PDA make optimum
use of the battery to prolong usage time,  and also to provide high  performance
audio playback.

DESIGN EXPERTISE AND PRODUCT INNOVATION

We concentrate on designing increasingly complex mixed signal ASIC solutions and
have  accumulated  substantial  know-how in this area. We employ our know-how to
respond to our  customers'  demands and to identify new product  solutions  that
increase performance while lowering overall system costs.

Examples  of the  success of this  approach  can be seen in our  leading  market
positions in audio-CODEC and power management applications.

ALTERNATIVES TO ASICS AND CMOS TECHNOLOGY

We focus our  business  on the  design of ASICs  rather  than  general  purpose,
mass-produced  integrated  circuits on standard  chipsets.  Our larger  cellular
phone manufacturing customers rely primarily on ASIC-based semiconductor designs
to maintain their customized  strategic position in the cellular phone industry,
giving them more control over the design of their  products than they would have
if they used mass produced  standard  chips.  Other  customers tend to rely more
heavily on standard baseband  chipsets.  We supply these customers with standard
designed chips, although this is not a significant part of our business.

<PAGE>

We  supply  ASICs  using  mainstream  CMOS  technology,  the  most  widely  used
semiconductor  manufacturing  technology.  Although  specialist analog (bipolar,
analog  CMOS) as well as mixed  manufacturing  technologies  (BiCMOS)  exist for
analog circuits,  most chip designers use CMOS manufacturing  technology because
unit  production  costs  can be up to 20-25%  lower  than can be  achieved  with
alternative manufacturing technologies for the same or similar functionality. In
addition,  most foundries are designed to use CMOS  production  processes.  As a
semiconductor company that relies on outsourced manufacture of our chips, access
to foundry  capacity  with  comparable  technology is critical to our ability to
compete in the cellular  communications  industry.  Accordingly,  we do not view
BiCMOS technology as a realistic alternative for our business.

COMMITMENT TO SELECTED CUSTOMERS

We have built a core of strong and  growing  relationships  with  selected  high
profile,  high volume customers.  We are a flexible partner for these customers,
who increasingly demand that we, as a preferred  supplier,  serve as an integral
part of their  overall  supply  chain.  We work with our  customers  to  rapidly
develop the appropriate  technical response to changing market trends, and these
collaborative relationships have become increasingly important to us.

OUR STRATEGY

We believe that increased demand for new applications and technical improvements
in the wireless communications market will require handset manufacturers to rely
more on the type of ASICs  that we supply to  achieve  the cost and  performance
demands of the market.

Our  objective is to be the leading  global  supplier of lowest  power,  highest
quality,  mixed signal components and system level solutions to the wireless and
automotive  markets.  To meet  these  objectives,  we have  developed  a clearly
focused strategy.

REMAIN FOCUSED ON EXISTING BUSINESS MODEL

We intend to remain  focused on our  existing  business  model,  which  includes
outsourcing  silicon  wafer  production  to  foundry  manufacturing  plants  and
supplying ASICs using mainstream CMOS  technology.  We maintain control over our
entire  production  process  and ensure  product  quality  through  pre-shipping
testing  of  all  final  products.  We  believe  that  selectively   outsourcing
production  to  foundries  and  assemblers  minimizes  the  substantial  cost of
purchasing  semiconductor  production  equipment  and  allows us to  concentrate
management efforts on our core competencies.


<PAGE>

MARKET STANDARD PRODUCT SOLUTIONS

Aside from our primary focus on ASICs,  we believe that we can adapt some of our
solutions  to more than one  customer  and offer  ASSPs.  By  engaging  in basic
corporate  identity and brand  development  activities  in the  engineering  and
design community worldwide, in prior years we laid the foundations for marketing
ASSPs to a broader customer base than we have previously had.

EXPAND ENGINEERING EXPERTISE

We recognize that one of our key strengths lies in the engineering  expertise of
our employees in design,  product development and testing. Due to the increasing
complexity of mixed signal design and production, it is essential to our ongoing
success that we attract, develop and retain key engineering personnel. We intend
to continue to meet this challenge by offering our technical  staff a variety of
ongoing  educational  and  career   opportunities,   combined  with  performance
incentives and by actively recruiting additional highly skilled individuals. See
"-Sales  and  Marketing"   below.   One  example  is  the  announcement  of  the
availability  of a brand new range of color liquid crystal display (LCD) drivers
providing real innovation for the mobile phone display market in 2004. Delivered
as standard  parts ready for  production,  the DA89xx family  delivers  superior
color  performance  and low power  consumption,  while  providing  mobile  phone
handset  makers the  flexibility  to customize  display  parameters for creating
differentiation.


EXPAND RELATIONSHIPS WITH KEY INDUSTRY LEADERS

We have close  relationships  with a number of high  volume  customers,  many of
which are key  industry  leaders.  We intend to  continue to focus our sales and
marketing  efforts  on a small  number  of high  quality  target  customers.  By
strengthening  these  relationships  and  developing  new ones,  including  with
potential  purchases of ASSPs, we intend to secure our involvement in developing
market segments.

PROACTIVELY REFINE CUSTOMERS' SYSTEM ARCHITECTURE

We work proactively with our customers to refine their system architectures. One
example  of this  approach  is the  integration  of audio and  power  management
functions  onto one chip in order to  increase  power  efficiencies  and  reduce
product  weight  and  size.  We see  particular  opportunities  in the  expected
migration  to 3G  wireless  communications  technology,  which will  demand more
efficient use of system architectures.

SELECTIVELY EXPAND GLOBAL CAPABILITIES

We have  successfully  developed a strong,  focused  customer base in Europe and
Asia.  In order to support and service our growing  customers,  we will consider
expansion through organic growth and selected acquisitions. To this end, we have
established design centers in Graz,  Austria and Tokyo,  Japan. Also, to support
our growing customer base in greater China we recently,  in the first quarter of
2005, opened a new office based in Taipei, Taiwan. This means we can support our
customers  close to where  they need us.  Such  direct  local  support is highly
valued  by our  customers  and  complements  their  development  activities.  In
addition to global presence, effective development work in small teams is one of
the most important benefits of our business model. The individual design centers
frequently  exchange  know-how  enabling them to focus on innovative design work
and,  using  uniform  design  software  and  IT  infrastructure,  drive  product
developments  forward  at  multiple  locations  simultaneously.   See  "Item  5.
Operating and Financial Review and Prospects-Liquidity and Capital Resources".

<PAGE>

OUR PRINCIPAL PRODUCTS

We focus on the  production  and supply of mixed  signal ASICs and ASSPs for the
cellular  communications  market and, to a lesser but increasing extent, for the
automotive  electronics  market.  We also supply  ASICs for other  consumer  and
industrial applications in the lighting systems and data communications markets.
Revenues from our wireless communications  applications accounted for 78% of our
total  revenues for the year ended  December 31, 2004, 75% of our total revenues
for the year ended  December 31, 2003 and 71% of our total revenues for the year
ended December 31, 2002.  Revenues from our industrial  applications sector were
12% of total  revenues  for the  year  ended  December  31,  2004,  16% of total
revenues for the year ended  December 31, 2003 and 21% of our total revenues for
the year ended  December 31, 2002.  Revenues  from our  automotive  applications
sector were 10% of our total  revenues for the year ended  December 31, 2004, 9%
of total  revenues  for the year  ended  December  31,  2003 and 8% of our total
revenues for the year ended December 31, 2002.

Our products are categorized as follows:  power management and audio ICs, camera
modules, liquid crystal display drivers and ASICs.

For  the  year  ended  December  31,  2004,  approximately  56% of our  revenues
originated from Europe (of which  approximately 26% originated outside Germany),
36% originated from Asia and 8% originated from North and South America. For the
year ended December 31, 2003,  approximately 65% of our revenues originated from
Europe (of which  approximately 25% originated outside Germany),  27% originated
from Asia and 8% originated from North America.  For the year ended December 31,
2002,  approximately  68% of our  revenues  originated  from  Europe  (of  which
approximately 40% originated  outside Germany),  24% originated from Asia and 7%
originated from North America.

POWER MANAGEMENT AND AUDIO ICS

The power management subsystem within the phone controls the power supply to all
of the functions in the phone ensuring power is used most  efficiently  and that
all the functions have the optimum operating environment.

Our  power  management  functions  include  Smart  Mirror(TM)  LDO (low  dropout
voltage)  regulators,  high efficiency buck and boost  converters,  programmable
multiple  chemistry  battery chargers for all common battery  technologies  like
NiMH,  L ion and polymer.  Our patented  Smart  Mirror(TM)  technique,  which we
introduced in 2003, allows product designers to minimize current consumption and
simplify  their  designs  by  eliminating  `power-down'  modes.  This was  first
introduced  in our  DA9010  integrated  GSM/GPRS  audio  and  power  controller.
Developed in collaboration with Intel  Corporation,  the DA9010 provides all the
necessary power  management and high  performance  audio functions for the phone
handset chip design, offering a level of integration not previously available in
this class of device.

<PAGE>

The audio part of our ICs is an important part of systems such as mobile phones,
since it determines  voice  quality.  Based on an audio CODEC (coding  /decoding
device),  it provides the interface  between  analog  signals (such as the human
voice) and the digital data processing  circuits inside the system. Our advanced
audio CODEC  functions  have up to 24-bit  capability  for digital  audio player
algorithms  like MP3 and beyond,  and are based on Dialog's  own digital  signal
processing  (DSP) designs  optimized for minimum power  consumption  and silicon
area.  A  range  of  high   performance   analog   interfaces  for  microphones,
loudspeakers and line drivers supports these audio codecs.

In addition to standard  products,  our power management and audio functions are
also available to customers as application  specific ICs (ASICs) as we have been
able to continue these two functions on a single circuit.  The power  management
functions  are also  used in ASICs for  automotive  electronics  and  industrial
lighting systems.

We  continue  to develop new power  management  products  such as the DA9030 and
DA9011 introduced during 2004.


CAMERA MODULES

The use of camera phones and PDAs with cameras is already  widespread and market
analysts predict further growth in this area.  Cameras are also becoming part of
automotive  guidance and collision  avoidance systems. We have developed a range
of CMOS image sensors and standalone  modules for image sensing and  processing,
allowing  manufacturers  to  embed  high  performance,   high-resolution  camera
functionality into next generation consumer products and automotive systems.

The unique XDR(R)  (extended  dynamic range,  one of our registered  trademarks)
technology in our image sensors  ensures clear images are captured  under widely
contrasting  ambient light,  offering the best class of performance in low light
conditions. Key features of our image sensor technology include:

o        Superior video in outdoor uncontrolled lighting

o        High confidence image capture

o        Fast response

o        Very low power and low voltage requirements

o        High resolution still and streaming video modes

Our advanced  embedded  camera-on-a-chip  products range from  stand-alone  CMOS
image  sensors to the complete  module  consisting of sensor,  image DSP,  lens,
housing and connector.  The high  sensitivity and processing  capability down to
each pixel make our image  sensor  technology  the ideal  choice for  automotive
systems, for which near real-time response is required.

In 2004 we announced our collaboration with Carl Zeiss Corporation to initiate a
program of camera module development  utilizing the best of our image sensor and
processing technology, and combining it with a high quality lens in an extremely
small package using optics from Carl Zeiss.

<PAGE>


LIQUID CRYSTAL DISPLAY DRIVERS

In 2004 we announced availability of a new range of color liquid crystal display
(LCD) drivers  providing real  innovation  for the mobile phone display  market.
Delivered as standard  parts ready for  production,  the DA89xx family  delivers
superior color  performance and low power  consumption,  while providing  mobile
phone  handset  makers the  flexibility  to  customize  display  parameters  for
creating differentiation.

Our family of color  display  drivers is  specially  developed  for the  growing
number of wireless  handsets with  high-resolution  color displays and also with
dual displays.  The color STN  (super-twisted  nematic)  liquid crystal  display
(LCD) drivers  provide  resolution of up to 65,000 colors,  and address a demand
for  higher   performance  full  color,  high  speed  moving  images  using  MLA
(multi-line  addressing)  LCD  technology.  This ensures  faster  response  time
compared to conventional  passive matrix displays,  and high-speed moving images
are supported while maintaining very low power consumption.

Products include the new DA8912A and DA8913A, which incorporate fully integrated
graphic display memory with high speed  interfaces and various power  management
functions  to enable a single,  low power chip for  managing the display in next
generation mobile phone handsets and portable electronic  products.  The devices
offer fast display graphic transfer rates, supporting moving images


APPLICATION SPECIFIC ICS

Our background in developing  ASIC  (application  specific  integrated  circuit)
solutions for wireless,  automotive and industrial products allows us to rapidly
develop  leading-edge  application specific solutions for our customers based on
proven in-house technology and the latest CAD (computer-aided design) tools.

In CELLULAR  PHONES for  example,  we have  developed  over 50  different  power
management  designs for the world's leading cellphone  manufacturers.  Our ASICs
are becoming ever more  integrated with many power  management  functions on the
chip - such as high  performance  LDOs (low drop out voltage  regulators),  high
efficiency AC-DC converters,  complete battery charging  circuits,  programmable
LED drivers and USB interfaces. For sophisticated audio capability, we have also
successfully  integrated  audio  functions on to the same chip - exploiting  the
complementary nature of power and audio sub-systems.

<PAGE>

In AUTOMOTIVE  ELECTRONICS,  our ASICs control safety,  engine  management,  and
comfort electronics for the top automobile manufacturers. This exploits Dialog's
competence in power  management  systems and mixed signal design,  together with
knowledge of  integrating  high  performance  analog  circuits and  high-density
digital  logic and high  voltage  circuits on a single  chip in a standard  CMOS
process.  Our partnership with leading automotive  equipment  suppliers has also
resulted in developing  chips able to connect  directly to high voltage circuits
of up to 40V.


In INDUSTRIAL  SYSTEMS,  our single chip  solutions  integrate  high voltage low
power circuits for electronic  ballasts used to control  fluorescent  lamps. Our
customers are using ASICs that  integrate,  for example,  the  functionality  of
power factor  correction  circuits,  lamp management  circuits,  and half bridge
driver.  Our expertise in the  integration  of these circuits forms the basis of
highly  integrated  control  chips for smart power  electronic  systems in other
applications  such as  computer  and  mobile  communications  systems.  Dialog's
solution is ideal for  instances  where the chip must be highly  integrated  yet
have the ability to control high voltages  intelligently  using digital circuits
on the same chip.


Our ASIC solutions are manufactured by leading foundry  partners,  with which we
work in true partnership to ensure our customers can access both the latest CMOS
processes,  as well as foundry capacity. This enables our customers to meet both
costs and  time-to-market  objectives for their  products.  We also have our own
process  engineers  in-house to ensure our customers benefit from extracting the
optimum capability from a process.

PRINCIPAL CUSTOMERS

Our principal customers are recognized wireless communications manufacturers and
automotive equipment manufacturers.  In light of the rapid pace of technological
development  and customer demand for  increasingly  complex  functionality,  our
partnerships  with our  customers  has allowed  them to draw on us as an outside
source of expertise.  For us, the close working  relationship with our customers
provides an  opportunity  to  continually  develop and fine-tune  market leading
technological expertise with a recognized industry leader.

We  have  developed  long-term  relationships  with  our  customers,   including
Ericsson, Motorola and Siemens for wireless communications,  Adtran for wireline
communications  applications,  Bosch and Conti Temic for automotive applications
and Tridonic for industrial applications.

<PAGE>

OUR PRODUCT CYCLE

We design,  develop and supply mixed signal  ASICs and ASSPs.  We outsource  the
actual  manufacture of wafers and assembly to selected foundries and assemblers.
Once the manufacture  and assembly have been completed,  all of our products are
tested, the large majority in-house,  before final delivery to our customers.  A
description of our process from design to delivery can be summarized as follows:

o        design and development;

o        manufacture of wafers;

o        assembly;

o        testing; and

o        delivery.

Due to the fact that we use a  fabless  model,  80 to 90% of the value  chain is
subcontracted.  Prices of raw materials have fallen over the past two years, but
are  expected to increase  in the near  future;  and on average the price of raw
materials  related to silicon wafers and assembly vary by approximately  10% per
year.  However,  the price of silicon wafers of already  quoted  products is not
expected to increase.  In general,  wafer pricing is fairly dependent on overall
capacity utilization in the foundry industry.

DESIGN AND DEVELOPMENT

Our engineering  group consists of 157  professionals  (as of December 31, 2004)
with mixed  signal ASIC  experience.  We use design  tools from  Cadence  Design
Systems, Inc. to increase design automation and top level simulation to identify
system  design  incompatibilities  at an early stage.  Furthermore,  we base our
production around a standard CMOS  semiconductor  technology process in order to
focus the design efforts more  effectively.  See  "Manufacture of wafers" below.
Aside from our primary focus on ASICs,  we believe that we can adapt some of our
solutions  to more than one  customer  and offer  ASSPs.  By  engaging  in basic
corporate  identity and brand  development  activities  in the  engineering  and
design community worldwide, in prior years we laid the foundations for marketing
ASSPs to a broader customer base than we have previously had.

We believe we offer our clients a significant  advantage  through our ability to
rapidly  develop  mixed  signal  ASIC and ASSP  designs.  This  ability has been
fostered  through  many  years  of  design   experience  and  a  highly  skilled
engineering  staff. We keep track of evolving design elements through our design
library  database.  We achieve  rapid  design  cycles  through  our  strategy of
modifying and reusing  previously  designed building blocks. We use the CR16B, a
16 bit  microprocessor  core which we  acquired  under a license  of  indefinite
duration in 2000.  This core,  which utilizes the  CompactRISC(TM)  architecture
developed  by  National   Semiconductor  for  embedded   applications  that  are
integrated with other functions on a single integrated circuit,  provides a high
performance,  general purpose, flexible and power efficient platform that can be
used in a wide  variety  of  designs.  This  technology  enables  us to  develop
system-on-chip  ("SOC") designs  combining analog,  digital and  microcontroller
functions.  We have successfully  integrated  circuits combining complex digital
functions  including  eFlash,  which can  simultaneously  handle 40V in a 0.35-u
technology.
<PAGE>

We assign dedicated design teams to each customer. These teams work closely with
the customer in order to identify and develop customized system solutions.  This
approach builds close customer  relationships  and insures that each design team
develops a detailed  knowledge of the customer's  product enabling it to rapidly
develop innovative applications.

At the start of the design process, a customer typically generates a description
of its  requirements.  We will then propose a variety of possible  solutions and
will also prepare a preliminary  quotation  outlining  pricing details,  time to
market  factors and production  considerations.  This  preliminary  quotation is
usually  prepared  within  one week of the  initial  request  which  we  believe
provides us with a competitive advantage.

The unit  price  for each IC  product  is fixed in the  development  and  supply
agreement  and is  usually  dependent  on the  anticipated  number  of ICs to be
delivered.  Unit price is subject to  negotiation  between us and the  customer.
Generally,  initial deliveries of product are sold at the highest per unit price
and subsequent volume deliveries are sold at reduced unit prices.

MANUFACTURE OF WAFERS

Semiconductors can be manufactured using different process technologies. The two
dominant  processes in use today are bipolar and CMOS. Bipolar devices typically
operate at faster speeds than CMOS devices,  but CMOS devices consume less power
and permit more  transistors  to be integrated  on a single ASIC.  While bipolar
semiconductors  were once used extensively,  CMOS technology has become the more
dominant of the two technologies.  As a result,  most CMOS processes have become
standardized  and the design rules necessary for manufacture are well understood
in the  semiconductor  industry.  This  standardization  has  created  an active
foundry industry.

We have  adopted a strategy  of  outsourcing  our wafer  production  to selected
foundries with a demonstrated  ability to provide high quality products on tight
deadlines.  The principal foundries we currently use are Chartered Semiconductor
Manufacturing  Pte., Ltd. in Singapore  ("Chartered"),  X-FAB UK Ltd. ("X-FAB"),
Taiwan  Semiconductors  Manufacturing  Co., Ltd. ("TSMC") and CSMC Manufacturing
Co. Ltd in China  ("CSMC").  In 2004,  we  outsourced  our wafer  production  as
follows:  approximately 39% with Chartered, 49% with TSMC, 8% with CSMC, 3% with
X-FAB and 1% with other.

We aim to ensure that all steps in the manufacturing  process can be provided by
at least two  suppliers.  Before we appoint  one  foundry  as a  supplier  for a
specific wafer, we provide at least two foundries with technical specifications.
Upon confirmation by both foundries as to the ability to manufacture such wafer,
we  appoint  one of them;  we then can use the other one as a back-up  source of
production  in the  event  that the first  foundry  is  unable  to  provide  its
services.  The goal is to prevent  shortage  or loss of chip  production  due to
market conditions or disasters such as foundry fires.

Since the successful manufacture of silicon wafers is critical to our reputation
and profitability,  we work carefully to identify suitable foundries in order to
maintain  continuity  and security of supply for our  customers.  There are many
factors  which  contribute to our  selection of wafer  suppliers.  The principal
concern is whether the foundry's process  technology can be effectively used for
our designs.  Additionally,  we will consider such factors as capacity, history,
financial  stability,  mixed  signal  experience,  pricing,  location,  customer
support and reputation. Once a foundry has been selected, we then seek to secure
its supply in a variety of ways, including entering into supply contracts to fix
price and reserve  production  capacity and, when deemed  appropriate,  paying a
deposit to a foundry to guarantee  future  production  capacity.  We also place,
when  practicable,  our own process  engineers  directly at the fab  premises to
resolve any  potential  engineering  problems and to ensure both the quality and
timely delivery of the finished product.

<PAGE>

We may, from time to time,  reserve capacity in a foundry.  We have entered into
supply  agreements  with  Chartered and X-FAB.  Under the terms of the Chartered
agreement,  we maintained  deposits  totalling $20 million with Chartered  which
guaranteed  access to certain  quantities of sub-micron  wafers  through  fiscal
2003.  These  deposits were  refunded to the Company in October  2003.  For more
information  on our  agreement  with  Chartered,  see  "Item  5.  Operating  and
Financial  Review and  Prospects-Liquidity  and Capital  Resources - Off Balance
sheet  Arrangements  and  other  commitments"  and  Note 11 to the  consolidated
financial statements. In 2002 we have made an advance payment of $2.5 million to
guarantee access to foundry capacity with X-FAB.

ASSEMBLY

We also outsource final assembly.  During the standard assembly process, a wafer
is sawed,  the individual  chips are mounted on  lead-frames  and substrates and
then connected via bond wires.  Finally there will be an  encapsulation  process
which protects the chip against  environmental stress. There is a large group of
subcontractors  who service this market.  We have qualified the following  eight
assemblers: Orient Semiconductor Electronics, Ltd (Taiwan), Carsem Semiconductor
Sdn. Bhd. (Malaysia), Circuit Electronic Industries Public Co., Ltd. (Thailand),
AIT Pte Limited (Singapore),  ASE Inc. (Taiwan and Korea), King Yuan Electronics
Co. Limited (Taiwan), Siliconware Precision Industrie Co., Ltd (Taiwan) and Hana
Microelectronics  Public  Co.,Ltd.  (Thailand).  Completely  assembled ASICs are
returned to us for final testing  before  delivery to the customer.  We view our
quality  assurance role as critical in order to ensure the success of a business
model that incorporates strategic outsourcing.


TESTING

Following  return of the  assembled  products from its  assemblers,  we test our
products  before  delivery to a customer.  No product is delivered to a customer
unless it has been tested.  This rigorous  testing  approach allows us to ensure
overall  quality  control  of  our  manufactured  products.  The  test  programs
developed by our test engineers are based upon specifications  determined by the
individual customers and are developed in parallel with the design.

Once a testing program has been developed and the chips have been delivered from
the assembly, individual batches of chips are tested in our machines. Twenty-six
of our testing machines are made by Credence Systems Corporation two are made by
Teradyne,  Inc,  and we use a display  test  system  made by  Advantest  America
Corporation. The machines are regularly calibrated to ensure the accuracy of the
test parameters.

<PAGE>

All our chips are tested  in-house.  Any chip that does not  satisfy our testing
criteria is discarded.  We send approved  chips to a tape and reel  manufacturer
who will then return the loaded reels to us for final  packaging and delivery to
the customer.

SALES AND MARKETING

At December  31,  2004,  we had a direct  sales staff of 22, of which eleven are
based in Germany,  five in the United Kingdom, two in the United States three in
Japan and one in Taiwan.

We occasionally use a limited number of independent sales representatives in our
coverage efforts. In 2004, we generated more than 90% of our revenues from sales
directly to customers  through our regional  sales  offices and less than 10% of
our revenues from sales  through  representatives.  Our marketing  department is
responsible for new market research and  development,  competition  analysis and
identifying new target applications.  This ensures that we retain an application
focus on the wireless  communications  and automotive sectors in addition to the
customer focus of our sales team.

Our  marketing   department   provides  input  to  senior  management  in  their
development of strategic planning and business guidelines. This ensures that our
strategy is focused on defined goals.

INTELLECTUAL PROPERTY

We  attempt  to  protect  our  intellectual  property  and  know-how  through  a
combination  of  patents,   copyrights,   trade  secret  laws,   trademarks  and
confidentiality  agreements  with  our  customers,   suppliers,   employees  and
consultants.  In the  past  and to some  extent  at  present,  we  have  created
specialized  designs of mixed  signal ASIC device  products,  which are designed
according to customer specifications. As our designs are customer-specific, they
remain the intellectual property of our customers,  thereby limiting our ability
to patent such inventions. However, where such limitations do not exist, we have
begun and will continue to obtain more patents  covering some basic  concepts in
our  production  fields.  During the year ended December 31, 2002, we acquired a
CMOS imaging patent portfolio from Sarnoff  Corporation and were granted another
6 patents.  In 2003 and 2004 we have been granted 29 patents.  In  addition,  we
currently have more than 150 patents and patent applications pending for various
ASIC  applications.  We intend to apply for patents,  including those for ASSPs,
whenever  practicable  in  the  future.   Operating  in  an  industry  in  which
competitive  position is determined by the ability to maintain a leading edge in
technology, we depend substantially on patents and new manufacturing processes.

To develop a family of color STN (super-twisted  nematic) liquid crystal display
(LCD) drivers, we have licensed multi-line  addressing (MLA) LCD technology from
both Optrex Corporation and Motif Corporation.
<PAGE>

In addition,  we license standard  software from a number of vendors on standard
terms.  We have also licensed the CR16B 16 bit  microprocessor  core, a software
product,  from National  Semiconductor.  This license is of indefinite duration.
While these licenses enhance our ability to design and develop IC solutions, our
business does not depend on such  licenses.  See "Our Product  Cycle-Design  and
Development" above.

COMPETITION

Competition in the semiconductor  market is intense.  There are many competitors
in this  market,  offering  products  that are  similar to ours and are based on
similar  technologies.  We compete in the  wireless  communications  market with
major international  semiconductor  manufacturers,  such as ST Microelectronics,
Texas Instruments and NEC. We also compete in the automotive  electronics market
with major  international  semiconductor  manufacturers,  such as  Motorola,  ST
Microelectronics,   Infineon  and   National   Semiconductor.   For   industrial
applications,  the market is very  fragmented  and we compete  with  competitors
across the spectrum from small design companies to very large companies.

In  general,  we compete  primarily  on the basis of price,  design  cycle time,
reliability,  performance,  customer and logistical support and reputation.  Our
ability to compete  successfully  depends on factors  both within and beyond our
control,   including   successful  and  timely   development  of  new  products,
availability of  future-oriented  manufacturing  process  technologies,  product
performance and quality, manufacturing yields and product availability, customer
service,  pricing,  industry  trends and general  economic  trends.  Many of our
direct and indirect competitors are major international  semiconductor companies
with substantially greater technical, financial and marketing resources and name
recognition.  In addition,  in the future we may face increased competition from
smaller,  niche semiconductor design companies.  Further,  some of our customers
could  decide  to  satisfy  their  ASIC  demands  through  in-house  design  and
production.   See  "Item  3.  Key   Information-Risk   Factors-We  face  intense
competition,  and if we  are  unable  to  compete  effectively,  we  could  lose
customers".

REGULATORY MATTERS

We are  subject  to a  comprehensive  body  of  environmental  laws,  rules  and
regulations  in  each  jurisdiction  in  which  we  operate.  Since  we  have no
manufacturing  facilities,  our  management  believes  that  we are in  material
compliance with all applicable  environmental  laws, rules and  regulations.  In
addition, we have implemented an Environmental  Management System compliant with
the internationally  recognized  International  Organization for Standardization
standard, ISO 14001, requirements.

C.       ORGANIZATIONAL STRUCTURE

<TABLE>
<CAPTION>
                                                                                        PROPORTION OF
                                                                   COUNTRY OF        OWNERSHIP INTEREST
NAME AND REGISTERED OFFICE              AREAS OF BUSINESS         INCORPORATION             (IN %)
------------------------------- ---------------------------------- ---------------- --------------------
<S>                             <C>                               <C>               <C>
Dialog Semiconductor GmbH       Acquisition, sale and marketing    Germany                  100
                                of microelectronic products,
                                especially of ASICs

Dialog Semiconductor (UK)       Design, development and sale of    England and              100
Limited                         semiconductor components           Wales

Dialog Semiconductor, Inc.      Design, development and sale of    United States            100
                                semiconductor components

Dialog Semiconductor K.K.       Design, development and sale of    Japan                    100
                                semiconductor components
</TABLE>


<PAGE>



D.       PROPERTY, PLANTS AND EQUIPMENT

Dialog and its wholly-owned subsidiaries currently use the following properties:


<TABLE>
<CAPTION>
                                                                  APPROXIMATE
LOCATION                      TENURE            TERM               AREA (M2)           PRINCIPAL USE
--------------------------- ----------- ---------------------- ----------------- ------------------------
<S>                         <C>         <C>                         <C>          <C>
Building 15 and 5C,         Leasehold   Fixed until December        5,821        Company
Neue Strasse 95,                        31, 2005                                 headquarters, office
Kirchheim/Teck-Nabern,                                                           operation for
Germany                                                                          design, marketing
                                                                                 and testing

Industriestrasse 1,         Leasehold   Five years, fixed until       530        Office operation for
Munich/Germering,                       September 30, 2005                       design
Germany                                 with option for a
                                        further five year
                                        period

Mannheimer Strasse 1,       Leasehold   Fixed until June              481        Office operation for
Heidelberg,                             30, 2006 with option                     design
Germany                                 for a further five year
                                        period

Kaerntner Strasse 518,      Leasehold   Lease with unlimited          596        Office operation for
Graz-Seiersberg,                        duration, terminable                     design
Austria                                 by  either  party  on
                                        three months' notice to
                                        the end of a quarter

Unit 1 Omega,               Leasehold   24 years from                 780        Office operation for sales,
Windmill Hill Business                  September 29, 1986                       marketing and design
Centre,
Swindon,
Wiltshire,
United Kingdom

54 Old Highway 22,          Leasehold   Fixed until November 30,      661        Office operation for sales,
Clinton,                                2006, with option for a                  marketing and design
New Jersey,                             further two year period
USA

16870 West Bernardo Drive   Leasehold   Fixed until  February 1,       21       Office operation for sales
San Diego                               2006,  with option for a
California                              further one year
USA                                     period

Kishimoto Bldg 10F          Leasehold   Fixed until June              391        Office operation for sales,
2-2-1, Marunouchi,                      30, 2009                                 marketing and design
Chiyodaku,
Tokyo, 100-0005
Japan

809 Room, No 689            Leasehold   Fixed until  December                    Office operation for sales
Sec 5, Zhongxiao Rd                     31, 2005                                 and marketing
Xinyi District
Taipei City 110
Taiwan ROC
</TABLE>


We do not currently own any properties.  Our management believes that our leased
properties and our existing design and administrative  facilities are sufficient
for our  current  requirements  and  provide us with  flexibility  to expand our
facilities in accordance with our current objectives.



<PAGE>



ITEM 5.  OPERATING AND FINANCIAL REVIEW AND PROSPECTS

You should read the following discussion and analysis of our financial condition
and results of operations in conjunction with the audited consolidated financial
statements  included in this annual report. Our audited  consolidated  financial
statements have been prepared in accordance with US GAAP.

                                EXECUTIVE SUMMARY

We are a global  supplier of power  management,  audio and  imaging  technology,
delivering  innovative  mixed signal  standard  products as well as  application
specific   integrated   circuits  for  wireless,   automotive   and   industrial
applications.  To date, we have shipped over 500 million integrated circuits for
cellular  phones.  We operate in intense  competitive  markets and our customers
select us based upon  numerous  factors  including  price,  design  cycle  time,
reliability  and  performance.  Our  customers  purchase  our  products  through
periodic  orders  made  throughout  the year.  The prices  paid for each type of
product or design are  generally  agreed with  customers  on an annual basis for
specified  volumes  of each  design  ordered  by the  customer  during the year.
Potential  price  reductions in subsequent  years are typically  offset by lower
production  costs as a result of improved  yields,  lower wafer costs or smaller
chip sizes.

Critical  success  factors for us include the continued  growth in the worldwide
market for  cellular  handsets,  the  completion  of our new designs on a timely
basis,  customers  acceptance and  implementation  of our designs in large-scale
production,  and continued  demand from our key customers for the development of
new  products.  Partnerships  with  companies  at all  levels  of  business  are
important  for  our  success  in  a  market  dominated  by  major  international
semiconductor  companies.  We rely on our fabless business model that enables us
to focus our research and development activities,  which are essential for us to
respond to our customers'  cutting edge silicon solutions  requirements and also
maintain our competitiveness in our market. Consequently,  it is critical for us
to make  significant  and ongoing  cash  expenditures  to fund our  research and
development activities.  We have also made significant investments in long-lived
assets, primarily for our in-house test equipment.

We have a  significant  amount of  liquid  assets  on hand,  primarily  from the
remaining  sales  proceeds from the issuance of our ordinary  shares in 1999 and
2000, cash generated from operations in previous years and recoveries of certain
of our investments and deposits.  Substantially all of our near term future cash
inflows are expected to come from the sale of our products. We generally collect
cash from our  customers  within 58 days after  product  delivery.  However,  we
derive a substantial  portion of our revenues from a relatively  small number of
wireless  communications  manufacturers.  Sales  to two  customers  individually
accounted for 65% of total revenues in 2004.  Therefore,  the main action we are
taking to minimize the risk of this  dependency is  developing  new products for
new customers; such new products include a range of color liquid crystal display
drivers,  image sensors and camera modules.  Material  opportunities we envision
include  growth in our main  market,  cellular  handsets,  based on the expected
transition  to 3G,  and a  further  worldwide  growth  in  semiconductor  sales,
especially  in Asia.  However,  our  revenues,  profitability  and growth  could
decline if the growth in these markets slows.

<PAGE>

We believe that our key  performance  indicators are revenues,  gross margin and
research and development  costs,  thereby being the main driver of our operating
profit or loss. Accordingly, our Board of Directors and management use operating
profit as a measure of performance.
                              RESULTS OF OPERATIONS

The following table sets forth historical  consolidated statements of operations
of Dialog  for the  fiscal  years  ended  December  31,  2004,  2003 and 2002 in
thousands of Euro and as a percentage of revenues.
<TABLE>
<CAPTION>
                                                                    YEAR ENDED DECEMBER 31,
                                                    --------------------------------------------------------
                                                           2004               2003              2002
                                                    --------------------------------------------------------
                                                                  %                  %                 %
<S>                                                    <C>        <C>       <C>      <C>      <C>     <C>
Revenues                                              116,044    100.0     92,893   100.0    77,104  100.0
Cost of sales                                         (79,783)   (68.8)   (62,374)  (67.2)  (57,409) (74.4)
                                                    --------------------------------------------------------
GROSS MARGIN                                           36,261     31.2     30,519    32.8    19,695   25.6
Selling and marketing expenses                         (6,237)    (5.3)    (4,197)   (4.5)   (4,149)  (5.4)
General and administrative expenses                    (5,462)    (4.7)    (5,044)   (5.4)   (6,447)  (8.4)
Research and development expenses                     (29,071)   (25.0)   (30,590)  (32.9)  (34,530) (44.8)
Amortization of intangible assets                      (1,520)    (1.3)    (2,073)   (2.2)   (1,975)  (2.5)
Restructuring and related impairment charges              (59)    (0.1)    (1,839)   (2.0)      --      --
                                                    --------------------------------------------------------
OPERATING LOSS                                         (6,088)    (5.2)   (13,224)  (14.2)  (27,406) (35.5)
Interest income, net                                     1,081     0.9        757     0.8     1,121    1.5
Foreign currency exchange gains and losses, net          (726)    (0.6)      (454)   (0.5)   (1,918)  (2.5)
Recovery (write-down) of investment                        54        -        315     0.3    11,969   15.5
                                                    --------------------------------------------------------
RESULT BEFORE INCOME TAXES                             (5,679)    (4.9)   (12,606)  (13.6)  (16,234) (21.0)
Income tax benefit (expense)                              (64)    (0.1)    (7,814)   (8.4)    6,026    7.8
                                                    --------------------------------------------------------
NET LOSS                                               (5,743)    (5.0)   (20,420)  (22.0)  (10,208) (13.2)
                                                    ========================================================
</TABLE>
                    YEAR ENDED DECEMBER 31, 2004 COMPARED TO
                        THE YEAR ENDED DECEMBER 31, 2003
REVENUES

Revenues were EUR 116.0  million  for the  year ended December 31, 2004 compared
with EUR 92.9 million for year ended December 31, 2003.  The increase  of 25% in
revenues   primarily   results  from  higher  sales   volumes  in  our  wireless
communication  and  automotive  markets  which  more than  offset a  decline  in
revenues in our industrial  applications  sector during the period.  Revenues in
the wireless  communications  sector were EUR 90.6  million  for  the year ended
December 31, 2004 compared with  EUR 69.9 in 2003,  comprising   78% and 75%  of
our total revenues in the years ended December 31, 2004 and 2003,  respectively.
Revenues from our  automotive  applications  sector were  EUR 11.9   million and
EUR 7.9  million,  representing  10% and 9% of  our total  revenues  in 2004 and
2003,  respectively.  Revenues  from our  industrial  applications  sector  were
EUR 13.5  million or 12%  of  total revenues in  2004  and  EUR 15.1  million or
16% of total revenues in 2003.

Regional growth was particularly strong in Asia where revenue increased from EUR
24.9 million (China EUR 18.2 million,  other Asian countries EUR 6.7 million) to
EUR 42.1  million  (China  EUR 19.7  million,  other  Asian  countries  EUR 22.4
million) for year ended December 31, 2003 and 2004, respectively.

Due to the  shipments  of new  products  in volume  production  to the market we
expect revenues for the year ended December 31, 2005 to be higher than those for
the year ended December 31, 2004.  However,  our forward visibility with respect
to customer  demand is limited and a  successful  introduction  of new  products
depends on the  completion  of new designs on a timely  basis.  Our revenues for
2005 will also be highly  dependent on continued  growth in the worldwide market
for cellular handsets.  We cannot give any assurance that this growth trend will
continue throughout 2005.

COST OF SALES

Cost of sales  consists of the costs of  outsourcing  production  and  assembly,
related  personnel  costs and applicable  overhead and  depreciation of test and
other equipment.  Cost of sales increased by 28% from EUR 62.4 million (67.2% of
our total  revenues)  for the year ended  December  31, 2003 to EUR 79.8 million
(68.8% of our total  revenues)  for year ended  December 31, 2004,  in line with
increased  production  volumes.  In  addition,  as a result of  introducing  new
products to volume  production  in 2004,  per unit  production  costs  increased
during their ramp-up phase and also  increased  cost of sales as a percentage of
total revenues.

SELLING AND MARKETING EXPENSES

Selling and marketing  expenses consist primarily of salaries,  travel expenses,
sales  commissions  and costs  associated  with  advertising and other marketing
activities.  Selling and marketing  expenses  increased from EUR 4.2 million for
year ended December 31, 2003 to EUR 6.2 million for year ended December 31, 2004
due primarily to an increase in sales  commissions  incurred in connection  with
higher sales volumes.  As a percentage of total revenues,  selling and marketing
expenses increased from 4.5% to 5.3%.

GENERAL AND ADMINISTRATIVE EXPENSES

General and  administrative  expenses consist primarily of personnel and support
costs for our finance, human resources, information systems and other management
departments.  General and administrative expenses increased from EUR 5.0 million
for the year  ended  December  31,  2003 to EUR 5.5  million  for the year ended
December  31,  2004,  due  primarily  to legal fees and other costs  incurred in
connection with the filing of patent  applications.  General and  administrative
expenses  decreased  from  5.4% of  total  revenues  to 4.7% of  total  revenues
resulting from the proportionally higher revenue base.
<PAGE>

RESEARCH AND DEVELOPMENT EXPENSES

Research and development  expenses principally consist of design and engineering
related  costs  associated  with the  development  of new  application  specific
integrated  circuits  ("ASICs")  and  application   specific  standard  products
("ASSPs").  Research and development expenses decreased 5% from EUR 30.6 million
for the year ended  December  31,  2003 to EUR 29.1  million  for the year ended
December 31, 2004. The decrease in research and development  expenses  primarily
results  from  continued  cost  savings  following  the  closure of our  Swedish
subsidiary. Research and development expenses decreased from 32.9% to 25.0% as a
percentage of total revenues  resulting both from the absolute  decrease and the
proportionately higher revenue base.

AMORTIZATION OF INTANGIBLE ASSETS

Intangible assets subject to amortization include ASIC design software, a 16-bit
microcontroller,  licenses and certain imaging patents. Amortization expense for
the year ended  December  31,  2004 was EUR 1.5  million as  compared to EUR 2.1
million for the year ended  December 31,  2003, a decrease of 27%.  Amortization
expense  decreased as certain  intangible assets reached the end of their useful
lives.

RESTRUCTURING AND RELATED IMPAIRMENT CHARGES

In the second  quarter of 2003 we closed our Swedish  subsidiary.  In connection
with the closure of the facility,  we recorded  restructuring charges of EUR 1.5
million and impairment charges of EUR 0.3 million,  totaling EUR 1.8 million for
the year ended  December  31,  2003.  In 2004 we settled a lease  obligation  in
connection  with the closure and incurred  additional  costs of EUR 0.1 million.
See Note 3 to the consolidated financial statements for further information.

OPERATING LOSS

We reported an operating loss of EUR 6.1 million for the year ended December 31,
2004 and EUR 13.2  million for the year ended  December  31, 2003, a decrease of
54%. This decrease in operating  loss was primarily due to a higher gross margin
and lower  restructuring  and impairment  charges in the year ended December 31,
2004.

INTEREST INCOME, NET

Interest  income,  net  from the  Company's  investments  (primarily  short-term
deposits and exchange-traded  funds) increased from EUR 0.8 million for the year
ended  December 31, 2003 to EUR 1.1 million for the year ended December 31, 2004
reflecting  higher cash  equivalents and marketable  securities  balances during
2004.

FOREIGN CURRENCY EXCHANGE GAINS AND LOSSES, NET

Foreign  currency  transaction  gains and losses result from amounts  ultimately
realized upon settlement of foreign  currency  transactions  and from the period
end remeasurement of foreign currency denominated receivables,  prepaid expenses
and payables  into Euro.  Foreign  currency  exchange  losses,  net were EUR 0.7
million  for the year ended  December  31, 2004 and EUR 0.5 million for the year
ended December 31, 2003.


<PAGE>


RECOVERY OF INVESTMENT

In the fourth  quarter of 2001,  we  determined  that our ability to recover the
full amount of our  investments in silicon  supplier ESM Holding Limited ("ESM")
was impaired.  Accordingly  we wrote off our  investments in ESM. In March 2002,
International  Rectifier  acquired  ESM. As a result we were able to recover EUR
0.1 million and EUR 0.3 million for the years ended  December 31, 2004 and 2003,
respectively.

INCOME TAXES

Our business is subject to taxation in Germany,  Japan,  the United  Kingdom and
the United  States.  Our  effective tax rate and tax liability are affected by a
number  of  factors,  such as the  amount  of  taxable  income  or loss in these
particular  jurisdictions,  the tax rates in these  jurisdictions,  tax treaties
between   jurisdictions,   the  extent  to  which  we  transfer   funds  between
jurisdictions and income is repatriated,  and future changes in law.  Generally,
because  the  tax   liability   for  each  legal  entity  is   determined  on  a
non-consolidated  basis we may pay  income  taxes in  these  jurisdictions  even
though on a consolidated basis we have incurred a net loss for the period.

Income tax  expense was EUR 0.1  million  for the year ended  December  31, 2004
compared with EUR 7.8 million income tax expense for the year ended December 31,
2003.  The change in income  taxes  mainly  reflects a  valuation  allowance  on
deferred tax assets  recognized in 2003 of EUR 11.8 million primarily related to
the  uncertainty   about  the  future   realizability  of  our  German  tax-loss
carryforwards.  See Note 6 to the consolidated  financial statements for further
information.

NET LOSS

For the reasons described above, we reported net loss of EUR 5.7 million for the
year ended  December 31, 2004 compared with net loss of EUR 20.4 million for the
year ended December 31, 2003.



                    YEAR ENDED DECEMBER 31, 2003 COMPARED TO
                        THE YEAR ENDED DECEMBER 31, 2002

REVENUES

Revenues  were EUR 92.9 million for the year ended  December  31, 2003  compared
with EUR 77.1 million for the year ended  December 31, 2002. The increase of 20%
in revenues is primarily due to new products  introduced to volume production in
the second half of 2002 with more functionality and accordingly,  higher average
selling prices.  Our revenues for 2003 reflected the inclusion of sales of those
new products.  Our increased  revenues in 2003 also reflect the general increase
in  cellular  handset  sales in the second half of 2003  (particularly  in Asian
markets).  Revenues in the wireless communications business sector were EUR 69.8
million for the year ended  December 31, 2003  compared with EUR 54.7 million in
2002,  comprising  75% and 71% of our total revenues in the years ended December
31,  2003 and 2002,  respectively.  Revenues  from our  industrial  applications
business  sector were EUR 12.8 million or 14% of total  revenues in 2003 and EUR
13.7  million or 18% of total  revenues in 2002.  Revenues  from our  automotive
applications  business  sector  were  EUR  7.9  million  and  EUR  6.1  million,
representing  9% and 8% of our total  revenues  in 2003 and 2002,  respectively.
Other revenues were EUR 2.4 million,  or 2% of total revenues,  a decline of EUR
0.2 million when compared to the EUR 2.6 million,  or 3% of total  revenues,  in
2002.

<PAGE>

COST OF SALES

Cost of sales  consists of the costs of  outsourcing  production  and  assembly,
related  personnel  costs and applicable  overhead and  depreciation of test and
other  equipment.  Cost of sales  increased  by 9% from EUR 57.4 million for the
year December 31, 2002 to EUR 62.4 million for the year ended  December 31, 2003
in line with increased  production volumes.  In addition,  as a result of higher
production  volume,  our  internal  testing  operation  has been  running  at an
increased  utilization  level,  which in turn has decreased per unit  production
costs and decreased costs of sales as a percentage of total revenues. Because we
have a number of products  that we expect to introduce to volume  production  in
2004, we expect per unit costs to increase in the near term.

SELLING AND MARKETING EXPENSES

Selling and marketing  expenses consist  primarily of salaries,  travel expenses
and costs  associated with advertising and other marketing  activities.  Selling
and marketing  expenses were  approximately  EUR 4.2 million and EUR 4.1 million
for the year ended December 31, 2003 and 2002, respectively.  As a percentage of
total revenues, selling and marketing expenses decreased from 5.4% to 4.5%.

GENERAL AND ADMINISTRATIVE EXPENSES

General and  administrative  expenses consist primarily of personnel and support
costs for our finance, human resources, information systems and other management
departments.  General and  administrative  expenses decreased 15.8% from EUR 6.4
million  for the year ended  December  31,  2002 to EUR 5.0 million for the year
ended  December  31,  2003,  primarily as a result of the closure of our Swedish
subsidiary.  As a  percentage  of total  revenues,  general  and  administrative
expenses decreased from 8.4% to 5.4%.

RESEARCH AND DEVELOPMENT

Research and development expenses consist principally of unreimbursed design and
engineering  related  costs  associated  with the  development  of new ASICs and
application  specific  products  ("ASSPs").  Research and  development  expenses
decreased 11% from EUR 34.5 million for the year ended  December 31, 2002 to EUR
30.6 million for the year ended  December 31, 2003. The decrease in research and
development  expenses  results  from cost savings  following  the closure of our
Swedish  subsidiary.  Research and development  expenses decreased from 44.8% to
32.9% as a percentage of revenues,  resulting from the absolute decrease and the
proportionately higher revenue base.

<PAGE>

AMORTIZATION OF GOODWILL AND INTANGIBLE ASSETS

Amortization  expenses for the year ended  December 31, 2003 was EUR 2.1 million
as compared to EUR 2.0 million for the year ended December 31, 2002, an increase
of 5%. Amortization expense for intangible assets includes ASIC design software,
a 16 bit  microprocessor  core,  other  intangible  assets and  certain  imaging
patents.

RESTRUCTURING AND RELATED IMPAIRMENT CHARGES

In the second  quarter of 2003 we closed our Swedish  subsidiary.  In connection
with the closure of the facility,  we recorded a restructuring charge of EUR 1.5
million and impairment  charges of EUR 0.3million,  totaling EUR 1.8 million for
the year ended  December 31, 2003.  Restructuring  charges  include  termination
benefits  of EUR 1.0  million  that were paid to all  employees  affected by the
closing  and a  provision  of EUR 0.5  million  for  estimated  costs  that will
continue to be incurred  under an  executory  contract  for its  remaining  term
without  economic  benefit  to the  Company.  See  Note  3 to  the  consolidated
financial statements for further information.

OPERATING LOSS

We reported an operating  loss of EUR 13.2  million for the year ended  December
31, 2003 and EUR 27.4  million for the year ended  December 31, 2002, a decrease
of 52%.  The  decrease in  operating  loss was  primarily  due to a higher gross
margin,  including  the absence of a  provision  for excess  inventory  (EUR 1.9
million in 2002), the impact of which was partially offset by restructuring  and
related impairment charges in the year ended December 31, 2003.

INTEREST INCOME, NET

Interest  income,  net  from the  Company's  investments  (primarily  short-term
deposits)  was EUR 0.8 million for the year ended  December 31, 2003 and EUR 1.1
million for 2002.

FOREIGN CURRENCY EXCHANGE GAINS AND LOSSES, NET

Foreign currency  exchange  losses,  net were EUR 0.5 million for the year ended
December  31,  2003 and EUR 1.9 for the  year  ended  December  31,  2002.  This
decrease was primarily due to the  re-measurement  of our  outstanding US Dollar
advance  payment  for two  wafer  suppliers,  of which the most  significant  is
Chartered  Semiconductor  Manufacturing Pte., Ltd.  ("Chartered").  Such advance
payments are  classified in the balance sheet line item "Prepaid  expenses".  In
the second quarter of 2003 we concluded  that it was  appropriate to account for
our advance  payments as  "monetary  assets"  for the purpose  re-measuring  the
outstanding  balance  into Euro,  with the  resulting  exchange  gains or losses
recorded in the  statement  of  operations.  Accordingly,  certain  prior period
amounts presented have been revised to reflect this  re-measurement  process. We
believe that the impact of this re-measurement,  using the then current exchange
rates applicable for those periods impacted (rather than the historical exchange
rate at the  time we  entered  into  the  relevant  contracts)  does  not have a
material  effect on any financial  statements  previously  issued or on our 2003
financial statements.

<PAGE>

RECOVERY (WRITE-DOWN) OF INVESTMENTS

In the fourth  quarter of 2001,  we  determined  that our ability to recover the
full amount of our  investments in silicon  supplier ESM Holding Limited ("ESM")
was impaired.  Accordingly  we wrote off our  investments in ESM. In March 2002,
International  Rectifier  acquired ESM. As a result, we were able to recover EUR
0.3 million and EUR 12.0 million for the years ended December 31, 2003 and 2002,
respectively.

INCOME TAXES

The income tax expense was EUR 7.8 million for the year ended  December 31, 2003
compared with EUR 6.0 million income tax benefit for the year ended December 31,
2002.  The adverse  change in income tax expense  despite the  reduction  in the
pretax  loss in 2003 is  primarily  due to the EUR  11.8  million  provision  to
recognize a valuation allowance on certain deferred tax assets.

NET LOSS

For the reasons  described  above,  we reported net loss of EUR 20.4 million for
the year ended  December 31, 2003 compared with net loss of EUR 10.2 million for
the year ended December 31, 2002.



                                TREND INFORMATION

GENERAL

The semiconductor industry in general is highly cyclical and has been subject to
significant  economic  downturns  which,  at various  times,  have  resulted  in
production  overcapacity,  reduced product demand and an accelerated  erosion of
average selling prices.

Revenues from our wireless communications  applications accounted for 78% of our
total  revenues for the year ended  December 31, 2004, 75% of our total revenues
for the year ended  December 31, 2003 and 71% of our total revenues for the year
ended December 31, 2002.

According to the  Semiconductor  Industry  Association  (SIA),  strong growth in
sales of personal  computers and wireless  handsets were among the major drivers
of record  chip sales in 2004,  evidenced  by a 28% growth  rate in 2004 for the
total market for  semiconductors  (source:  SIA press release,  31 January 2005,
"Global  semiconductor  sales hit record $213  billion in 2004").  The  wireless
handset  market saw its first real  growth in 3G/WCDMA  (Wideband  code-division
multiple access) phones, with 20 million shipped worldwide in 2004, representing
3% of total handset sales in 2004 (source:  Strategy Analytics press release, 14
February  2005,"20  Million 3G Phones Sold Worldwide in 2004").  This growth was
driven by aggressive  mobile  operator  marketing in Japan and Western Europe to
encourage  millions  of early  adopters  to  upgrade  from their  existing  2.5G
devices.  The top handset  manufacturers in this space expect the market to more
than double in size in 2005 as usability and styling is improved.

<PAGE>

Overall  wireless  handset  shipment  growth  was up last  year,  as a result of
technological  advanced  features such as color  screens,  cameras and clamshell
designs. The markets saw more clamshell handsets with dual displays, larger main
displays to display content,  more sophisticated and higher resolution  cameras,
and high quality audio.  These  developments  were  accompanied by manufacturers
increasingly  using  additional   applications  and  graphics  processors,   and
continually  demanding  even lower  power  consumption  in the same form  factor
despite incorporating more sophisticated features.


MARKET TRENDS

The biggest market trend in the industry that Dialog Semiconductor  addresses is
the convergence of multimedia and mobile communications.  This means we will see
not just camera phones or smart phones, but devices such as PDAs with integrated
phone and  multimedia  capability.  We  believe  there  will  most  likely be an
explosion in other mobile  gaming and  entertainment  possibilities  in the next
three years,  resulting  from the rapid  evolution  of the mobile  handset as we
currently know it.

Camera  phones  alone  will  build  on the  growth  of  200%  in  2004  (source:
In-Stat/MDR press release,  14 December 2004,  "Camera Phone Market Continues to
Boom - 200% Growth in Annual Shipments"). Mobile gaming services are expected to
generate significant additional revenue in future years,  accounting for over 4%
of total  wireless  data revenue in the USA by 2009 (source:  In-Stat/MDR  press
release,  7 September 2004, "Gaming to be Key Contributor to Wireless Data Usage
and Revenues").

Traditional mobile phone handsets will also continue to grow, although not at as
great a rate as in the boom  years  leading  up to 2001.  Gartner  predicts  763
million handsets to be shipped in 2008, compared to 629 million in 2004 (source:
Gartner  Market  Focus  Report:  "Semiconductors  in Mobile  Phones,  Worldwide,
2004-2008", 24 December 2004).

In the  broader  consumer  electronics  sector,  there  has also been a burst of
consumer  interest in devices for playing back  downloaded  digital music.  This
trend is likely to fuel interest and also significant growth in portable digital
music players, even with the different music download standards such as MP3, AC3
or WMA.

In automotive,  complex  electronics  systems were in the past a feature of only
the most prestigious cars. However, the growing trend among the manufacturers of
lower  cost cars is to add more  value to their  cars,  making  the  electronics
systems  almost as  complex as those of the top end cars.  The result  will be a
mass market rather than niche market for complex electronics systems built in to
the car.

We believe one other key trend will be the  growing  use of imaging  electronics
for driver safety features such as geographic  positioning,  navigation systems,
blind spot detection and white lane departure systems.

<PAGE>

GEOGRAPHIC MARKET TRENDS

We allocate  our  revenues to  countries  based on the  location of the shipment
destination.  Changes in  revenues  from period to period  have  differed  among
geographical  regions.  As  our  customers  have  continued  to  increase  their
production  in the  greater  China  region  and by adding  new Asian  customers,
regional growth was particularly strong in Asia in 2004, where revenue increased
by 69% from EUR 24.9  million for the year ended  December  31, 2003 to EUR 42.1
million  for the year ended  December  31,  2004.  Particularly  in  France,  we
experienced  decline in demand for our ASIC products where revenue  decreased by
58% from EUR 4.5 million for the year ended December 31, 2003 to EUR 1.9 million
for the year  ended  December  31,  2004,  due  primarily  to the fact  that our
contract with one customer based in France was not renewed upon  expiration.  In
2003, regional growth was particularly strong in Germany and China where revenue
increased from EUR 31.5 million for the year ended December 31, 2002 to EUR 45.4
million for the year ended  December  31, 2003 and from EUR 13.0 million for the
year ended December 31, 2002 to EUR 18.2 million for the year ended December 31,
2003. In 2003,  particularly in France, we experienced decline in demand for our
ASIC products  where revenue  decreased  from EUR 9.3 million for the year ended
December 31, 2002 to EUR 4.5 million for the year ended December 31, 2003.

GROSS MARGIN TRENDS

Our gross margin  decreased  from 32.8% of revenues for the year ended  December
31,  2003 to 31.2% of  revenues  for the  year  ended  December  31,  2004.  The
weakening  of the US  dollar  against  the  Euro and the  reduction  in price of
wireless  communication  ICs  were  the  primary  factors  contributing  to this
decrease in our gross margin.

RESEARCH AND DEVELOPMENT EXPENDITURE TRENDS

Research and  development  costs  amounted to EUR 29.1 million in 2004, EUR 30.6
million in 2003 and EUR 34.5  million in 2002.  We expect to incur  research and
development  costs  below  the  current  level  based on  certain  cost  savings
measures. Our ability to generate revenues in the long term depends on achieving
technical  feasibility  from  our  research  and  development  programs,  and on
customers accepting our designs and implementing them in large-scale production.

FOREIGN CURRENCY EXCHANGE RATE TRENDS

The reporting  currency for our consolidated  financial  statements is the Euro.
The functional  currency for our  operations is generally the  applicable  local
currency.  Accordingly,  the assets and liabilities, the equity accounts and the
statements of income and cash flow of companies whose functional currency is not
the Euro must be translated into the reporting  currency (the Euro).  See Note 2
to the consolidated  financial  statements for further  information.  Changes in
exchange rates also influence our results of operations. Our sales are primarily
denominated  in US Dollars and Euro,  whereas our purchases of raw materials and
manufacturing services are primarily denominated in US Dollars.

<PAGE>

In order to hedge our foreign  currency  exposure,  primarily the US Dollar,  we
attempt to match cash inflows and outflows in the same currency.

Since its  introduction  on January 1, 1999,  the Euro has  fluctuated  in value
against the US Dollar.  From the date of its  introduction  through December 31,
2001,  the Euro  declined  approximately  25%  against  the US  Dollar.  Through
February 04, 2005 the Euro had recovered to 110% of its original value.  Changes
in the exchange rate between the Euro and other non-Euro currencies, principally
the US Dollar, will affect the translation of our consolidated financial results
into Euro,  and will also affect the value of any amounts that our  subsidiaries
distribute  to us.  Exchange  rate  changes may also  affect our balance  sheet.
Changes  in the  Euro  values  of our  assets  and  liabilities  resulting  from
exchange-rate  movements  may  cause us to  record  foreign  currency  gains and
losses. We do not currently enter into forward or other derivative  transactions
to hedge against exchange rate fluctuations.

For the year ended  December 31, 2004,  55% of our revenues were  denominated in
Euro and 45% were  denominated  in US Dollars,  and 18% of our cost of sales was
denominated in Euro and 82% was denominated in US Dollars.  Due to the weakening
of  the  US  Dollar  in  the  fourth  quarter  and  a  higher  proportion  of US
Dollar-denominated  revenue compared with previous  quarters combined with lower
than expected  uptake from key  customers,  our revenue  growth was lower in the
fourth quarter compared with the first three quarters of the year.

For the year ended  December 31, 2003 78% of our revenues  were  denominated  in
Euro and 22% were  denominated  in US Dollars,  and 25% of our cost of sales was
denominated in Euro and 75% was  denominated  in US Dollars.  For the year ended
December  31, 2002,  76% of our  revenues  were  denominated  in Euro,  23% were
denominated in US Dollars and 1% were denominated in Pounds Sterling, and 25% of
our cost of sales was denominated in Euro and 75% was denominated in US Dollars.

We also have  foreign  currency  risk with  respect  to our net  investments  in
foreign subsidiaries in Japan, the United Kingdom and the United States. Foreign
currency  translation  gains and losses with respect to these  subsidiaries  are
included in other comprehensive income.

                         LIQUIDITY AND CAPITAL RESOURCES

CASH FLOWS

Cash used for operating  activities  was EUR 8.6 million for year ended December
31, 2004 compared with cash provided by operating  activities of EUR 7.6 million
for the year ended  December  31, 2003.  In the year ended  December 31, 2004 we
used  cash  mainly  to  increase  our  inventory  to meet  previously  projected
forecasts of our customers. We expect this level to be reduced in the first half
2005. In the year ended December 31, 2003, our working  capital  (excluding cash
and cash equivalents and marketable  securities) had decreased  primarily due to
contractually required refunds of advance payments from a silicon supplier which
resulted in a related operating cash inflow.

Cash provided by investing  activities  was EUR 14.5 for year ended December 31,
2004 compared  with cash used for  investing  activities of EUR 30.3 million for
year ended December 31, 2003. Cash provided by investing activities for the year
ended December 31, 2004 consisted mostly of a net sale of marketable  securities
of EUR 27.4 million  offset in part by the purchase of test  equipment,  tooling
(masks),  laboratory and EDP equipment of EUR 12.3 million,  and the purchase of
software,  licenses  and  patents of EUR 0.7  million.  Cash used for  investing
activities for the year ended December 31, 2003 consisted mostly of the purchase
of marketable  securities of EUR 45.0 million,  the purchase of test  equipment,
tooling  (masks),  laboratory  and EDP  equipment  of EUR 5.9  million,  and the
purchase of software,  licenses and patents of EUR 1.4 million. In October 2003,
we also  received an early  repayment of our deposit of EUR 21.7 million (USD 20
million) from Chartered.

<PAGE>

LIQUIDITY

At December  31, 2004 we had EUR 14.0 million in cash and cash  equivalents  and
EUR 17.5  million in  marketable  securities.  The working  capital was EUR 67.1
million.

Our primary sources of liquidity have  historically  been cash from  operations,
cash  from  the  issuance  of  ordinary  shares  in 1999  and  2000,  short-term
borrowings,  the recovery of the investment in ESM Limited and in 2003 the early
repayment  of a  deposit  from  Chartered.  As of  December  31,  2004 we had no
long-term  debt.  We expect to  reduce  our  working  capital  in 2005,  thereby
increasing our cash and cash  equivalents  and marketable  securities in 2005. A
decrease in customer  demand for our  products  caused by  unfavorable  industry
conditions or an inability to develop new products in response to  technological
changes could materially reduce the amount of cash generated from operations.

If necessary, we have available for use a short-term credit facility of EUR 12.5
million that bears interest at a rate of EURIBOR + 0.75% per annum.  At December
31, 2004 we had no amounts  outstanding  under this  facility.  Accordingly,  we
believe the funding available from these and other sources will be sufficient to
satisfy our working capital requirements in the near to medium term.

CAPITAL EXPENDITURES AND INVESTMENTS

Purchases of property,  plant and  equipment  were EUR 12.3 million for the year
ended  December 31, 2004 compared to EUR 5.9 million for the year ended December
31, 2003 and EUR 3.9 million for the year ended  December 31, 2002.  Our capital
expenditures  in 2004,  2003 and 2002  consisted  primarily of purchasing new or
replacement  test  systems,  tooling  equipment,   handling  systems  and  other
equipment in the ordinary course of our business.  Capital  expenditures in 2004
increased over that of prior years as we upgraded eight test systems enabling us
to test four ICs in a single test step, and added certain test equipment to test
color display and image sensor ICs. In 2004, 2003 and 2002 we paid  installments
of EUR 0.3,  EUR 0.8 and EUR 1.5  million,  respectively,  for the CMOS  imaging
technology  and  associated  CMOS Active  Pixel Sensor  (APS)  patents  which we
acquired in 2002. We expect  capital  expenditures  in 2005 to be below the 2004
level.

In  future  periods,  we may  make  strategic  investments  or  acquisitions  in
connection with our plans to expand our business internationally.

<PAGE>

OFF-BALANCE SHEET ARRANGEMENTS AND OTHER COMMITMENTS

We have no off-balance sheet arrangements  involving variable interest entities.
We  lease  design  software,  all of our  office  facilities,  office  and  test
equipment,  and vehicles under operating  leases.  Future minimum lease payments
under rental and lease  agreements,  which have  initial or  remaining  terms in
excess of one year at December 31, 2004 are as follows (EUR thousands):


<TABLE>
<CAPTION>
                               2005         2006         2007         2008         2009       Thereafter
                           --------------------------------------------------------------------------------
<S>                           <C>          <C>          <C>          <C>          <C>                  <C>
Operating leases              8,148        6,629        6,399        6,429        3,297                316
</TABLE>


We have no long-term debt,  capital lease  obligations,  unconditional  purchase
obligations or any other long-term obligations that would have a material impact
on our liquidity or financial condition.  We have supply agreements with various
suppliers  and  maintain an  outstanding  balance of advance  payment of EUR 1.2
million with one supplier, which will be refunded in proportion to our purchases
of wafers. See Note 11 to the consolidated financial statements.

CRITICAL ACCOUNTING POLICIES AND RELATED UNCERTAINTIES

We have identified the following  accounting policies and related  uncertainties
with the  accounting  measures  used in  preparing  our  consolidated  financial
statements  that  we  believe  are  essential  to  understanding  the  financial
reporting risks present in the current economic environment.

RECOVERABILITY OF LONG-LIVED ASSETS

GOODWILL

At December 31, 2004,  the carrying  value of our goodwill is EUR 11.8  million.
Since 2002,  goodwill is no longer amortized,  but we have, and will continue to
evaluate  the   recoverability  of  our  goodwill  at  least  annually  or  when
significant  events occur or  circumstances  arise which  indicate that the fair
value of the Company  may be less than its net  shareholders'  equity.  The fair
value of the Company is  determined  by  estimating  the present value of future
cash flows,  which we believe is a more  appropriate  measure to determine  fair
value than the Company's  current market  capitalization  (which is based on the
quoted  market  price  of  the  Company's  ordinary  shares).  For  purposes  of
performing step 1 of the impairments  test, the fair value of the entire company
is determined  based on expected cash flows which are derived from the Company's
strategic plan and forecasts.  The discount rate applied considered  marketplace
participant  assumptions  including a risk-free rate,  market risk premium and a
beta factor that is consistent  with the Company's  market peers.  If it becomes
necessary to change assumptions used to determine the fair value of the company,
we may conclude  that our ability to recover the carrying  value of our goodwill
is impaired.  Such an impairment  charge could have a material adverse impact on
our future result of operations.

<PAGE>

OTHER LONG-LIVED ASSETS

Our  business  is capital  intensive  and has  required,  and will  continue  to
require,  significant  investments  in long-lived  assets,  including  property,
plant,  equipment and intangible  assets (other than goodwill).  At December 31,
2004,  the carrying  amount of our  property,  plant and  equipment was EUR 21.2
million.  As  discussed  in  Note 2 to the  consolidated  financial  statements,
recoverability of these long-lived assets that will continue to be held and used
is evaluated whenever an indication of impairment  exists.  Then we will compare
the carrying amount of the asset or group of assets to the net undiscounted cash
flows expected to be generated by the asset or group of assets.  If the asset or
group of assets is considered impaired, the impairment recognized is measured as
the amount by which the carrying amount of the impaired asset or group of assets
exceeds its fair value.

We do not believe  that our ability to recover the  carrying  value of our other
long-lived assets has been impaired and no significant  impairment  charges have
been  recognized  in any of the past three years.  However,  a general  economic
downturn and,  specifically,  a continued downturn in the semiconductor industry
would  intensify  competitive  pricing  pressure  because of overcapacity in the
industry,  and we could be forced to decrease  production  and reduce  capacity.
Such  events  could  adversely  affect  our  estimates  of future net cash flows
expected to be generated by our  long-lived  assets.  It is reasonably  possible
that our future operating results could be materially and adversely  affected by
an impairment charge related to the recoverability of our long-lived assets.

USEFUL LIFE OF EQUIPMENT

In the fourth  quarter of 2004, we  determined  that the useful life of our test
equipment  should be changed to eight years.  Previously,  we had determined its
useful  life to be five  years.  The  effect of this  change  in our  accounting
estimates resulted in a lower depreciation  charge of EUR 1,349 (EUR 842, net of
tax, or EUR 0.02 per share).

In  determining  the  proper  amount  of annual  depreciation  with  respect  to
equipment  assets,  management  needs to make an estimate of the expected useful
economic  life of such assets.  Ideally,  the end of the useful life of an asset
coincides with the close of the depreciation period.

As a result of changes in our business, we may need to determine the prospective
expected  useful  life of assets in a period  subsequent  to the period in which
those assets were initially put into service.

Specifically,  a decision  to revise  our  capital  spending  plan and invest in
upgrades  which extend the  prospective  useful lives of assets on hand,  rather
than replace  those assets with new  equipment,  would result in a change in the
expected  remaining  useful life of such upgraded  assets.  This change would be
considered on a going-forward basis for depreciation assets.  Similarly,  we may
gain more  experience in estimating  the useful lives of equipment and determine
that we may be able to  continue to use  certain  assets for a longer  period of
time than originally estimated when we put them into service.


<PAGE>

REALIZABLE VALUE OF INVENTORIES

We value inventory at the lower of cost or market. We review the  recoverability
of inventory  based on regular  monitoring  of the size and  composition  of the
inventory  positions,  market  conditions,  current economic events, the pricing
environment  and  projected   future  demand.   This  evaluation  is  inherently
judgmental and requires material  estimates,  including both forecasted  product
demand and pricing environment,  both of which may be susceptible to significant
change.

Changes in estimates  regarding the  realizability  of the carrying value of our
inventory  has resulted in excess  inventory  provision of EUR 1.9 million being
charged to costs of sales in 2002. No excess inventory provision was required in
2004 and 2003. At December 31, 2004,  our total  inventory was EUR 29.8 million.
We believe that the carrying  value of our inventory  will be recovered  through
customer  consumption of goods based on their forecasts and related  contractual
agreements.  However, the demand for our products can fluctuate significantly in
response  to rapid  technological  changes  in the  semiconductor  and  wireless
communications  industries.  It is  reasonably  possible  that future  operating
results  could be  materially  and  adversely  affected if any excess  inventory
charges are needed.

REALIZATION OF DEFERRED TAX ASSETS

Total deferred tax assets, before the recognition of valuation allowances,  were
EUR 31.2 million at December 31, 2004,  which include deferred tax assets of EUR
25.2 million on tax loss  carryforwards.  While the majority of these losses may
be carried forward  indefinitely,  their  realization is dependent on generating
sufficient  taxable  income to utilize the losses.  In December 2003, the German
government enacted new tax legislation, which among other things, limits the use
of German tax-loss  carryforwards  to 60% of the taxable income for fiscal years
starting  from 2004 and  thereafter.  We have  evaluated  our deferred tax asset
position  and the need for a valuation  allowance  as a result of this change in
tax law.  The  assessment  requires  the exercise of judgment on the part of our
management, with respect to, among other things, benefits that could be realized
from  available  tax  strategies  and future  taxable  income,  as well as other
positive and negative  factors.  Our  assessment  considered the weight given to
cumulative  tax losses  incurred in Germany,  as well as detailed  forecasts  of
taxable  income in the  foreseeable  future.  Although we forecasted  generating
future taxable income,  the change in tax law increased the forecasted number of
additional years we had to generate such future taxable income in order to fully
realize these loss carryforward benefits.  Pursuant to SFAS 109 and the inherent
uncertainties in projecting  future taxable income, we concluded that it is more
likely  than not that a  portion  of our tax  losses  could  not  ultimately  be
realized.  Consequently,  we recognized an additional valuation allowance of EUR
1.9 million and EUR 11.8 million as of December 31, 2004 and 2003, respectively,
to reduce the carrying value of our net deferred tax assets to an amount that we
believed was more likely than not expected to be ultimately realized.

<PAGE>


                                    DIVIDENDS

We did not pay dividends in the years ended December 31, 2004, 2003 and 2002. We
do not currently plan to pay dividends in the foreseeable  future.  See "Item 8.
Dividend Policy".

                                    INFLATION

We do not believe that inflation has had a significant  effect on our operations
to date.

                      RECENTLY ISSUED ACCOUNTING STANDARDS

In June 2004, EITF No. 03-1, The Meaning of Other-Than-Temporary  Impairment and
its  Application to Certain  Investment,  was issued which includes new guidance
for evaluating and recording other than temporary  impairment losses on debt and
equity  securities  accounted  for under SFAS No.  115,  Accounting  for Certain
Investments in Debt and Equity Securities and cost method  investments,  as well
as new disclosure requirements for investments that are deemed to be temporarily
impaired.  While the  disclosure  requirements  for  specified  debt and  equity
securities and cost method  investments  are effective for annual periods ending
after December 15, 2003, the FASB Board has directed the FASB staff to delay the
effective date for the measurement and  recognition  guidance  contained in EITF
No.   03-1.   This  delay  does  not  suspend  the   requirement   to  recognize
other-than-temporary   impairments   as  required   by  existing   authoritative
literature.  We do not expect the  adoption  of EITF No. 03-1 to have a material
impact on our consolidated financial statements.

In November 2004, the FASB issued  Statement No. 151,  Inventory Costs, to amend
the  guidance in Chapter 4,  "Inventory  Pricing," of FASB  Accounting  Research
Bulletin No. 43,  Restatement  and Revision of  Accounting  Research  Bulletins.
Statement  151 clarifies the  accounting  for abnormal  amounts of idle facility
expense, freight, handling costs, and wasted material (spoilage).  The Statement
requires that those items be recognized as current-period charges. Additionally,
Statement 151 requires  that  allocation  of fixed  production  overheads to the
costs  of  conversion  be  based  on  the  normal  capacity  of  the  production
facilities.  We do not believe the adoption of SFAS No. 151 will have a material
impact on our consolidated financial statements.

In December 2004, the FASB issued SFAS No. 123(R),  Share-Based  Payment,  which
establishes  standards for  transactions in which an entity exchanges its equity
instruments  for goods or services.  This  standard  requires a public entity to
measure the cost of  employee  services  received  in  exchange  for an award of
equity instruments based on the grant-date fair value of the award based upon an
option-pricing  model and an estimate of the number of awards  expected to vest.
Compensation  cost  will be  recognized  as they  vest,  including  related  tax
effects.  SFAS No.  123(R) will be  effective  for  interim or annual  reporting
periods  beginning on or after June 15, 2005.  The statement  provides for three
alternate transition methods, each having a different reporting implication.  We
previously   accounted  for  our  stock  based   compensation   plan  using  the
intrinsic-value-based  method based on APB Opinion No 25. Under this method,  no
stock-based  compensation  is  reflected  in net income  (loss) (see also "Stock
based compensation" in Note 2 to the consolidated financial statements).  We are
in the process of determining  the  transition  method we are going to adopt and
the potential impact on our financial statements.

<PAGE>


ITEM 6.  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

                                    OVERVIEW

We rely on our board of  directors  to manage our  business.  The  board,  which
consists  of  executive  and  non-executive  directors,  supervises  our general
management  and decides  upon and  oversees  the  implementation  of our central
strategic and operational guidelines.

Each director is required under English law to carry out his or her functions as
a director with the degree of skill and care that may  reasonably be expected of
a person of his or her skill and experience.  Each director is obliged to act in
the  interests  of our  shareholders  as a whole and should  avoid  allowing any
conflicting  interests,  whether  his or  hers  or  those  of the  persons  that
appointed  him or her, to influence his or her judgment in acting as a director.
The board is ultimately  required to manage our affairs in  accordance  with our
memorandum and articles of association  and with the  requirements of local laws
and regulations.

We have seven  non-executive  independent  directors as part of our board. While
these  non-executive  directors  do not  play an  active  role in our day to day
operations,  they provide the board with an  independent  element which brings a
greater  depth  of  skill,  experience  and  objectivity  to the  making  of key
decisions.

We also have six vice-presidents who, together with the executive director,  are
responsible for our day to day business. All directors and senior management can
receive service of process at the business address of the company.

A.       DIRECTORS AND SENIOR MANAGEMENT

The following table sets forth, as of February 27, 2004, the name of each member
of our board of directors  and each of our senior  management,  their ages,  the
dates of their first appointments and their positions:
<PAGE>


<TABLE>
<CAPTION>

                                                   DATE OF
              NAME                   AGE         APPOINTMENT                     POSITION
----------------------------------- --------- --------------------- ----------------------------------
<S>                                    <C>          <C>             <C>
Roland Pudelko                         52     March 1998            Executive Director, CEO and
                                                                    President

Timothy Richard Black Anderson         44     February 1998         Non-executive Director

Michael John Glover                    66     March 1998            Non-executive Director

Aidan Hughes                           44     October 2004          Non-executive Director

John McMonigall                        61     March 1998            Non-executive Director

Michael Risman                         36     August 1999           Non-executive Director

Jan Olof Ingemar Tufvesson             66     March 1998            Non-executive Chairman

Gregorio Reyes                         63     December 2003         Non-executive Director

Gary Duncan                            49     October 1987          Vice-President of
                                                                    Engineering-Imaging

Peter Hall                             53     July 1987             Vice-President of IT and
                                                                    Technical Support

Erwin Hopf                             50     July 2002             Vice-President of Operations

Yoshihiko Kido                         52     November 2001         Vice President of Japan

Martin Kloeble                         45     July 1999             Vice-President of Finance and
                                                                    Controlling

Martin Sallenhag                       36     November 2001         Director of Product Marketing

Richard Schmitz                        48     January 1994          Vice-President of
                                                                    Engineering-Mixed Signal ICs
</TABLE>


The  following is a brief  biography  of each  director,  executive  officer and
senior manager named here.

ROLAND  PUDELKO  joined  us in 1989 as  managing  director  and  has  served  as
Executive Director,  CEO and President since March 1998. Mr. Pudelko has over 20
years  experience in electronics and  microelectronics,  primarily in management
positions within the Daimler-Benz Group. During that time, he was a board member
of a joint venture with the Taiwanese company,  ACER, and for the TEMIC Group he
was responsible for the coordination of worldwide  design and  engineering.  Mr.
Pudelko has a diploma in  communication  technologies.  He is also the  managing
director of Dialog Semiconductor GmbH and our other consolidated subsidiaries.

TIMOTHY RICHARD BLACK ANDERSON joined the board of our  then-holding  company in
1990 and has served as a director since  February 1998. Mr.  Anderson has been a
partner with the London law firm Reynolds Porter  Chamberlain  since 1989, where
he specializes in business law for media and  technology  companies.  He holds a
law degree from  Southampton  University  and is  qualified  as a  solicitor  in
England and Wales.

<PAGE>

MICHAEL JOHN GLOVER joined the board of our then-holding company in 1990 and has
served  as one of our  directors  since  March  1998.  Mr.  Glover  was a senior
executive with technology based companies in the United Kingdom, Europe, the Far
East and North  America  prior to  becoming  involved  in  private  equity  fund
management  in 1985.  He has a  degree  in  economics  from  the  University  of
Birmingham.  Mr. Glover  currently is Managing  Director of Aylestone  Strategic
Management Limited and serves as a director of other companies.

AIDAN  HUGHES  joined us as a  director  in  October  2004.  He  qualified  as a
chartered  accountant  with Price  Waterhouse  in the 1980s before taking senior
accountant  roles at Lex Service Plc and Carlton  Communications  Plc. He served
the Sage Group Plc as finance  director from 1993 until 2000.  Between  December
2001 and August 2004 Hughes was a director of Communisis Plc.

JOHN  MCMONIGALL has served as one of our directors  since March 1998. He joined
Apax  Partners as a director in 1990 and is currently  the director  responsible
for investments in telecommunications, software and related fields. Between 1986
and 1990, Mr.  McMonigall held a variety of senior positions at British Telecom,
including  managing  director of the customer  service  division.  He was also a
member of the management board of British Telecom.  He is currently on the board
of five other public and private companies,  including Crane  Telecommunications
Ltd, Autonomy Corporation plc and Amphion Ltd.

GREGORIO  REYES joined us as a director in December 2003, and has been a private
investor and management  consultant  since 1994 with current board  positions at
companies  including LSI Logic Corp.,  Appshop,  Amphion  Semiconductor,  Astute
Networks,  Future  Trade  Technologies,  and Nuera  Communications.  He has held
various executive positions with National  Semiconductor  (1962-1967),  Motorola
(1967-1968) and Fairchild Semiconductor  (1968-1978).  He was also president and
CEO of  National  Micronetics  (1981-1984),  and  chairman  and CEO of  American
Semiconductor  Equipment Technologies  (1986-1990),  and of Sunward Technologies
(1990-1994).

MICHAEL  RISMAN  joined us as a director in August  1999,  having  been  closely
involved  with our company  since March 1998.  He is a director at Apax Partners
where he is  responsible  for their  European IT investment  activities and is a
member of their International  Approval Committee.  Before joining Apax Partners
in 1995, Mr. Risman worked for Cap Gemini as a consultant and for Jaguar Cars as
a research and  development  engineer.  He earned an MBA from  Harvard  Business
School and an MA (Honors)  degree in Electrical  Engineering and Management from
Cambridge University.  He is also a director of Frontier Silicon (Holdings) Ltd,
Red-M (Communications) Limited and Streamserve Inc.

JAN OLOF INGEMAR TUFVESSON joined the board of our then-holding  company in 1990
and has served as chairman of the board since March 1998.  Between 1972 and 1980
he held senior positions on the Royal Swedish Air Force Board. In 1980 he joined
Ericsson  where he had a  number  of  executive  roles,  the  last  being a vice
president at LM Ericsson corporate,  responsible for all procurement in Ericsson
and for developing  relations with key suppliers.  Mr. Tufvesson  graduated from
the Royal  University  of  Technology  in  Stockholm  with a  masters  degree in
electronic  engineering in 1962. Mr. Tufvesson retired from Ericsson in 1998 and
is now based in Stockholm.

<PAGE>

GARY DUNCAN  joined us in October 1987 and is currently  the  Vice-President  of
Engineering-Imaging.  He obtained a Higher  National  Certificate in electronics
and mathematics in 1978 from Plymouth  Polytechnic and is a chartered  engineer.
Before joining Dialog, Mr. Duncan held various senior engineering and management
positions  at Plessey and ES2 in quality  and  production,  device  engineering,
design software and marketing.

PETER HALL joined us in July 1987 and is currently our Vice-President of Quality
and Technical  Support and is responsible  for all computer  systems and quality
issues.  Before  joining  Dialog  he held  various  management  and  engineering
positions at STC  Semiconductors  and MEM in Switzerland.  Mr. Hall obtained his
BSc  (Honors)  in  electrical  and  electronic  engineering  in  1974  from  the
University of Newcastle  upon Tyne,  his MSc in digital  techniques in 1977 from
the  University of Edinburgh  and his MBA in technology  management in 2003 from
the Open University.

ERWIN  HOPF  joined  us in July  2002 and is  currently  our  Vice-President  of
Operations.  He  received  his  Diploma in  physics  in 1980 from the  Technical
University of Darmstadt.  From 1980 until 2002, he held various  engineering  as
well as research and  development and production  managing  positions at Siemens
Components and Infineon Technologies.

YOSHIHIKO  KIDO  joined us in March  2001 and is  responsible  for our  Japanese
operation.  He was previously a consultant at Overseas Affiliates Pty. Ltd., and
held management  positions at General  Electric,  Act Japan,  Seagate and Nippon
Ericsson.  He obtained his BA in English  Language from  Kanagawa  University in
1976.

MARTIN  KLOEBLE  joined  us in  July  1999  as  Vice-President  of  Finance  and
Controlling.  He holds an MBA from the University of Stuttgart-Hohenheim  and is
qualified  as a tax  consultant  (STEUERBERATER)  as well as a certified  public
accountant  in  Germany  (WIRTSCHAFTSPRUEFER)  and in the United  States  (CPA).
Before joining Dialog, Mr. Kloeble worked with KPMG, and was appointed a partner
at the beginning of 1999.

RICHARD  SCHMITZ  joined  us in 1994  and is  currently  our  Vice-President  of
Engineering-Mixed   Signal   ICs.   Prior  to  joining   us,  he  held   various
design-related positions at Hewlett Packard's instruments division in Boeblingen
and the  Institute  for  Microelectronics,  Stuttgart.  Mr.  Schmitz  received a
diploma  in  engineering  for  communications   electronics  in  1983  from  the
vocational college (FACHHOCHSCHULE) in Trier.

B.       COMPENSATION

We pay non-executive  directors who are not associated with any of our principal
shareholders GBP 5,000 to GBP 35,000.

<PAGE>

We reimburse all of our directors for their reasonable  travel expenses incurred
in connection with attending meetings of the board or committees thereof.  Under
certain circumstances, directors are also eligible to receive stock options.

The  following  table  sets out the  amount of  remuneration  paid by us and our
subsidiaries  to each of our  directors  for services  rendered  during the year
ended December 31, 2004.


<TABLE>
<CAPTION>
                                                                              COMPENSATION (IN EUR)
                                                                                                   LONG-TERM
NAME                          POSITION                            BASE SALARY        BONUS        INCENTIVES
                                                                 -------------- -- -----------   --------------
<S>                            <C>                                 <C>              <C>          <C>
Roland Pudelko                Executive Director, CEO and
                              President                                279,105         33,334                -
Tim Anderson(1)               Non-executive Director                     7,366              -                -
Michael Glover                Non-executive Chairman of the
                              Audit Committee                           51,565              -                -
Aidan Hughes                  Non-executive Director (since
                              October 1, 2004)                          11,050
John McMonigall               Non-executive Director                    29,466              -                -
Gregorio Reyes                Non-executive Director                    44,198              -                -
Michael Risman                Non-executive Director                    29,466              -                -
Jan Tufvesson                 Non-executive Chairman                    51,565              -                -
                                                                 -------------- -- ----------- - --------------
                                                                       503,781         33,334                0
                                                                 ============== == =========== = ==============
---------------

(1)      Tim  Anderson  is  also a  partner  in the  law  firm  Reynolds  Porter
         Chamberlain,  which  frequently  acts  as our  legal  adviser.  Fees to
         Reynolds Porter Chamberlain for legal services rendered during the 2004
         fiscal year amounted to EUR 211,683.

</TABLE>

The  aggregate  compensation  for our CEO and  senior  management  for  2004 was
EUR 1,409,404.

All of our employees participate in a quarterly profit-based bonus scheme, which
pays out if we achieve our agreed financial goals.

A further bonus is available to our sales  employees and senior  management  via
our Management By Objectives "MBO" program.

Under  this  program,  each  sales  person  is  annually  assigned  a number  of
objectives  which  specifically  target  achieving   design-wins  from  selected
customers  within a set period of time.  These  objectives  are  established  by
senior  management  with  input  from the  marketing  department.  We assess the
performance  of each sales  person  against  these  objectives  half-yearly  and
annually.

<PAGE>

For senior management,  key business objectives for their respective departments
are set and agreed by the board of directors.  Performance is measured  formally
on an annual basis and also via quarterly progress reviews.

                                  STOCK OPTIONS

As of March 22, 2005, our directors and senior management held 1,116,400 options
for our ordinary shares which entitle the holders to acquire  1,116,400  shares.
The following table gives stock option  information for the Company's  directors
and senior management.


<TABLE>
<CAPTION>
DIRECTORS AND SENIOR                OPTIONS  EXPIRATION                          EXERCISE
MANAGEMENT                             HELD  DATE                                 PRICE
-----------                         ------------------------                    -----------
<S>                                 <C>                                         <C>
Roland Pudelko                      150,000  February 21, 2009                  GBP   0.20
                                     34,530  May 6, 2009                        GBP   0.40
                                    132,920  July 28, 2009                      GBP   0.60
                                    200,000  November 20, 2013                  EUR   3.45

Gary Duncan                          50,000  February 21, 2009                  GBP   0.20
                                     17,210  May 6, 2009                        GBP   0.40
                                     26,440  July 28, 2009                      GBP   0.60
                                     50,000  November 20, 2013                  EUR   3.45

Peter Hall                           60,000  February 21, 2009                  GBP   0.20
                                     17,210  May 6, 2009                        GBP   0.40
                                     26,440  July 28, 2009                      GBP   0.60
                                     50,000  November 20, 2013                  EUR   3.45

Erwin Hopf                           40,000  June 30, 2012                      EUR   1.48
                                     20,000  November 20, 2013                  EUR   3.45

Yoshihiko Kido                       50,000  November 20, 2013                  EUR   3.45

Martin Kloeble                       45,000  July 28, 2009                      GBP   0.80
                                     50,000  November 20, 2013                  EUR   3.45

Martin Sallenhag                     30,000  November 20, 2013                  EUR   3.45

Richard Schmitz                         210  May 6, 2009                        GBP   0.40
                                     16,440  July 28, 2009                      GBP   0.60
                                     50,000  November 20, 2013                  EUR   3.45
                           -----------------
                                  1,116,400
                           =================
</TABLE>

<PAGE>

C.       BOARD PRACTICES

                    TERM OF OFFICE AND RETIREMENT BY ROTATION

Our  articles of  association  currently  provide  that  one-third  (or a number
nearest to  one-third)  of the  directors  shall retire at every annual  general
meeting; but if any director has at the start of the annual general meeting been
in office  for more  than  three  years  since  his or her last  appointment  or
re-appointment,  he or she shall  retire.  A director  who  retires at an annual
general meeting may, if willing to act, be re-appointed.

                               SERVICE AGREEMENTS

Our CEO and President, Roland Pudelko, has entered into a service agreement with
us that is of unlimited duration. The agreement is terminable by either party on
12 months' notice.  In addition,  our  shareholders  are entitled to dismiss Mr.
Pudelko by virtue of an ordinary  resolution at any time,  without  prejudice to
his right to  remuneration.  Such  dismissal is  considered  termination  of the
contract at the next possible deadline.

Each of our vice-presidents has entered into a service agreement with us and our
subsidiaries. The service agreements are all of unlimited duration. In the cases
of Gary Duncan,  Peter Hall and Erwin Hopf,  their  agreements are terminable by
either  party to the  agreement  on six  months'  written  notice to the  other.
Richard  Schmitz's  agreement is  terminable  by either  party on three  months'
notice to the end of a calendar quarter.  Yoshihiko Kido's agreement has no time
limit and can be terminated by either party on three months'  notice in writing.
Martin Kloeble's agreement is terminable subject to German statutory  provisions
for termination.  Martin Sallenhag's  agreement is terminable subject to Swedish
statutory  provisions for termination.  None of the service  agreements  contain
provisions   subjecting  us  to  onerous   obligations  in  the  case  of  early
termination.

                                BOARD COMMITTEES

We have  established an Audit Committee of the board of directors which reviews,
acts on and reports to the board of directors  with respect to various  auditing
and accounting  matters,  including the selection of our auditors,  the scope of
the annual  audits,  fees to be paid to the  auditors,  the  performance  of our
independent auditors and our accounting practices.  Our Audit Committee consists
of Messrs. Glover, Hughes and Tufvesson.

The Company's  Compensation  Committee of the board of directors  determines the
salaries  and  incentive  compensation  of our CEO  and  senior  management  and
provides  recommendations  for the salaries and incentive  compensation of other
employees and  consultants.  The  Compensation  Committee also  administers  our
various  compensation,  stock and  benefit  plans.  Our  Compensation  Committee
consists of Messrs.  Glover,  Reyes and  Tufvesson.  None of the members of this
Committee was our employee at any time during 2004.

The Nomination  Committee of the Board of Directors reviews the board structure,
size and  composition  and makes  recommendations  to the Board.  The Nomination
Committee is responsible,  amongst other things,  for identifying and nominating
board candidates for approval by the Board. The Nomination  Committee  comprises
Messrs. Glover, Tufvesson and Reyes.

<PAGE>

                        EXEMPTIONS FROM LISTING STANDARDS

We rely on an exemption  from the quorum  requirement  as set forth under Nasdaq
Marketplace Rule 4350(f). This exemption was granted to Dialog on 1 August 2000.
In lieu of following this quorum  requirement,  Dialog's articles of association
provides  for quorum for any  general  meeting  that is no less than two persons
present in person or by proxy entitled to vote on the business to be transacted,
which is in  accordance  with law,  rule,  regulation,  and  generally  accepted
business practices in Dialog's home country of England and Wales.



D.       EMPLOYEES

At December  31,  2004,  we  employed  296  full-time  employees  not  including
trainees/apprentices,  of which  204 were  based in  Germany,  55 in the  United
Kingdom,  22 in the United States, 8 in Austria,  6 in Japan and 1 in Taiwan. Of
the total number, 156 were engaged in engineering  (including design and product
engineering) and 85 were engaged in production (including logistics, quality and
testing).  The average  number of  employees  in 2004 was 282 compared to 273 in
2003 and 285 in 2002.

E.       SHARE OWNERSHIP

As of March 22, 2005, our directors and senior management held 1,398,535 shares.

DIRECTORS AND SENIOR MANAGEMENT               NUMBER        PERCENT OF SHARES
                                                           BENEFICIALLY OWNED
Roland Pudelko                               320,405                *
Timothy Richard Black Anderson                75,166                *
Michael John Glover(1)                       195,000                *
Gregorio Reyes                                35,000                *
Jan Olof Ingemar Tufvesson(2)                175,062                *
Michael Risman                                 1,172                *
Gary Duncan                                  162,105                *
Peter Hall                                   162,415                *
Martin Kloeble                               180,000                *
Richard Schmitz                               92,210                *
                                      ---------------
                                           1,398,535
                                      ===============
---------------

*    Less than 1%

(1)  Includes (i) 40,000 shares owned directly by Mr. Michael John Glover,  (ii)
     90,000  shares  owned by Linda Diane  Glover,  (iii) 5,000  shares owned by
     Matthew James Glover and (iv) 60,000 shares held by Timothy  Thornton Jones
     as trustee for Linda Diane Glover and the sons of Michael John Glover.

(2)  Includes (i) 157,062  shares owned by Mr.  Tufvesson and (ii) 18,000 shares
     held by members of his family.
<PAGE>

                          EMPLOYEE SHARE PURCHASE PLAN

On March 26, 1998, in connection with the acquisition of the Company, we and our
then majority  owner,  Apax Partners,  adopted a Subscription  and  Shareholders
Agreement  under which employees and directors were invited at the discretion of
the Board, to purchase up to 3,456,890  ordinary shares of the Company from Apax
Partners or an established Dialog  Semiconductor Plc Employee Benefit Trust (the
"Trust").  The purchase  price of the shares was equal to their  estimated  fair
value on the date the employee or director  subscribed for those shares.  During
the first quarter of 1999,  the Trust  acquired the remaining  668,800  ordinary
shares from Apax  Partners,  which were not sold to employees  or directors  for
purposes of  distributing  them to employees  under the Employee  Stock Purchase
Plan or for  distribution  in  connection  with the  exercise of employee  stock
options.

On September 24, 2004, the Company completed an offering of 2,000,000 previously
unissued ordinary shares at (pound)0.10 per share to its employee benefit trust,
to make such shares  available  for the exercise of stock option rights that had
previously been granted to employees.

At December 31, 2004, the Trust continued to hold 2,001,559 shares, equaling the
remaining  balance  of the  acquired  668,800  shares and the  2,000,000  shares
acquired in 2004 .


                               SHARE OPTION SCHEME

All of our employees and full time  executive  directors and employees of any of
our consolidated subsidiaries who are required to devote substantially the whole
of their  working time to us and/or any of our  subsidiaries  are eligible to be
granted  options under our share option scheme,  at the discretion of the board.
The scheme was  established  on August 7, 1998. As at December 31, 2004, a total
of  8,129,811  shares  may be  issued  under  the  scheme.  See  Note  17 to the
consolidated  financial  statements.  As of  December  31,  2004 we had  granted
options to purchase  3,299,406  shares.  These options are exercisable at prices
ranging from  (pound)0.20 to EUR 8.00 per share depending on the date of grant
and what type of option they are (see below).  The options  generally  expire 10
years after the date of grant.

Eligible  employees  and  directors  may be  invited  by the  board to apply for
options.  Employees and directors who wish to take up the invitation will have a
period of 14 days (or such longer period as the board  determines) to then apply
for an option.  No payment will be required in applying  for an option.  Options
may be offered by the board  within 42 days of the day on which we announce  the
annual or semi-annual  results or in exceptional  circumstances when approved by
the board.

<PAGE>

The scheme provides for the grant of three categories of options:

o    short options,  which may be exercised,  if at all, within two years of the
     date of grant;

o    long  options,  which may be  exercised  within  five  years of the date of
     grant; and

o    incentive  stock options which are options  granted to a US employee  which
     complies with the relevant terms of the United States Internal Revenue Code
     of 1986.

Options  granted have not been subject to date to a performance  condition (such
as the  achievement of  pre-determined  financial  targets),  although the rules
allow the board to make the exercise of an option subject to the satisfaction of
objective performance conditions.

Options  entitle  the  option  holder  to  acquire  shares  at a price per share
determined by the board. Such price may not be less than the greater of:

o    the nominal value of a share;

o    the market value of a share at the date of grant; or

o    for US participants, who own 10% or more of the total combined voting power
     of any  company  of the group,  110% of the market  value of a share on the
     date of grant.

Fifty percent of the shares  comprised in a short option may be exercised on the
first  anniversary of the date of grant.  Twenty percent of the shares comprised
in a long  option  may be  exercised  on each  anniversary  of the date of grant
together with any unexercised portion from previous years.

An  incentive  stock option held by a US  participant  owning 10% or more of the
total voting power of our company or our  consolidated  subsidiaries  may not be
exercised  later than five years after the date of grant.  For all other  option
holders,  options may be exercised  before the tenth  anniversary of the date of
grant, at the end of which period they will lapse.

Unless the option holder is dismissed  for cause or has filed for  bankruptcy he
or she has one calendar month or such longer period as the board determines from
the date of termination of employment in which to exercise  options.  Otherwise,
any options held will lapse immediately upon termination of employment.

In  the  event  of  the  death  of  an  option  holder,   his  or  her  personal
representatives  may exercise any  subsisting  option in the period of 12 months
from the date of death.

<PAGE>

In the event  that an option  holder,  other  than an option  holder  holding an
incentive stock option,  retires in accordance  with the contractual  retirement
age or  otherwise  at 65, any  subsisting  options may be  exercised  within the
period of six months  following  the date of  retirement.  Holders of  incentive
stock  options must  exercise any  subsisting  options  within the period of one
month following the date of retirement.

Where the  option  holder  leaves our  employment  in  circumstances  of injury,
disability,  redundancy within the meaning of the UK Employment Rights Act 1996,
the  company  for which the  option  holder  works  ceases to be a member of the
Dialog  Semiconductor group or the business for which the option holder works is
transferred out of the Dialog  Semiconductor  group, options will be exercisable
in the period of six months (three months in respect of incentive stock options)
following termination of employment,  whether or not any performance  conditions
which  apply  to  them  have  been  satisfied.  In  the  event  of  a  takeover,
reconstruction  or amalgamation of our company,  options may be exercised in the
period  of six  months  following  such  event.  Alternatively,  options  may be
exchanged for options over shares in an acquiring  company provided that the new
option  confers a right to  acquire a number  of new  shares  that have the same
total  market value as the  subsisting  option,  the total  amount  payable by a
participant is the same under the new option as under the subsisting option, and
the new option is exercisable in the same manner as the corresponding subsisting
option.  In practice the six month  period can be  shortened  by the  compulsory
acquisition procedure under Section 429 of the Companies Act 1985 on a takeover.
In the  event of a  voluntary  winding  up of the  company  the  options  may be
exercised within three months of the passing of a winding up resolution.

In the event of any rights or capitalization issue, sub-division, consolidation,
or  reduction  of our  share  capital,  the  board  may  (subject  to  auditors'
confirmation)  adjust  the number of shares  subject  to  options  and the price
payable on their exercise  provided that (1) the option price for a share is not
less than its nominal value; and (2) the total price for the option has not been
materially altered.

Other   than   options   granted  to  German   participants   (which  are  fully
transferable),  options are not  transferable  and may only be  exercised by the
option  holder  or his or  her  personal  representatives.  Shares  allotted  or
transferred  under the share  option  scheme will rank pari passu with shares of
the same class then in issue (except in respect of entitlements arising prior to
the date of allotment).

No options may be granted over shares under the share option scheme which would,
when combined with options  granted over shares under any other scheme  operated
by us or any of our consolidated  subsidiaries,  exceed 15%, after issue, of the
Company's issued share capital.

ITEM 7.  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A.       MAJOR SHAREHOLDERS

Apax Partners own 8,460,793 of our ordinary  shares or 18.4%.  Apax Partners act
as Manager of Apax Funds Nominees  Limited and Managing  General Partner of Apax
Germany II L.P.,  respectively.  Apax Funds  Nominees  Limited holds shares as a
nominee for certain other Apax Venture  Capital Limited  Partnerships.  Prior to
the  secondary  offering in June 2000,  Apax  Partners  owned  18,091,170 of our
ordinary  shares or 41.2%.  Apax Partners'  voting rights do not differ from the
rights of other shareholders.
<PAGE>

Adtran, through its wholly-owned  subsidiary ADFI, Inc., owns 2,520,960 ordinary
shares or 5.5%.  Prior to the  secondary  offering  in June 2000,  Adtran  owned
5,305,810  ordinary  shares or 12.6%.  Adtran's voting rights do not differ from
the rights of other shareholders.

                           UNITED STATES SHAREHOLDERS

Clearstream  Banking AG ("Clearstream") and a nominee of Clearstream holding two
shares are the current  holders of record of the company's  shares.  Clearstream
issues  bearer  rights  to  these  shares  to  financial  institutions  who  are
participants  in Clearstream and through whom  beneficial  owners  (including US
beneficial  owners)  hold our  shares.  Due to the  secrecy  laws of some of the
jurisdictions  (including  Germany) in which the participants of Clearstream are
located,  these  participants  may  not be  obligated  to  disclose  information
regarding  beneficial  ownership  of our shares  pursuant  to Section 198 of the
Companies Act 1985 or the Nasdaq Europe regulations. Consequently, we are unable
to identify the US beneficial owners of these shares.

B.       RELATED PARTY TRANSACTIONS

Timothy  Anderson,  a member of the  Board,  is also a  partner  in the law firm
Reynolds Porter Chamberlain, which frequently acts as our legal adviser. Fees to
Reynolds Porter  Chamberlain  for legal services  rendered during the three year
period ended December 31, 2004, December 31, 2003 and December 31, 2002 amounted
to EUR 211,684, EUR 162,241 and EUR 267,884, respectively.

ITEM 8.  FINANCIAL INFORMATION

A.       CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION

See "Item 18: Financial Statements" and the Notes thereto.

                                LEGAL PROCEEDINGS

Neither we nor any of our  consolidated  subsidiaries are involved in litigation
or arbitration proceedings that could have a substantial impact on our financial
position or the financial position of any of our consolidated  subsidiaries.  We
have not been involved in such litigation or arbitration proceedings in the past
two years,  nor, to the best of our knowledge,  are such proceedings  pending or
threatened against us or any of our consolidated  subsidiaries.  However,  as is
the case with many companies in the semiconductor  industry, we may from time to
time receive  communications  alleging  possible  infringement  of  intellectual
property rights of others. Irrespective of the validity of such claims, we could
incur  significant  costs with respect to the defense of such claims which could
have a  material  adverse  effect on our  business,  results  of  operations  or
financial condition.  See "Item 3: Risk Factors--If we are unable to protect our
intellectual  property and know-how from copy or use by others,  our competitors
may gain access to our content and technology".
<PAGE>

                                 DIVIDEND POLICY

We have never declared or paid any dividends.  We currently intend to retain all
available earnings generated by our operations for the development and growth of
our  business.  As a result,  we do not  anticipate  paying any dividends in the
foreseeable  future.  You should also refer to "Item 5:  Operating and Financial
Review and Prospects-Liquidity".

B.       SIGNIFICANT CHANGES

NOT APPLICABLE

ITEM 9.  THE OFFER AND LISTING

The German stock exchange (XETRA/Frankfurter Wertpapierborse) and Nasdaq are the
principal trading markets for our ordinary shares and ADSs.

Dialog is listed in the Prime Standard  segment of the Frankfurt  Stock Exchange
and therefore has to comply with the requirements of the Prime Standard:

o    quarterly reporting;

o    application of  international  accounting  standards  (IFRS,  international
     financial reporting standard, or US GAAP);

o    publication of a financial  calendar  listing the most important  corporate
     events;

o    at least one analysts' conference per year; and

o    use  of  the  English  language  for  current   reporting  and  for  ad-hoc
     disclosures required under the German Securities Trading Act.




<PAGE>



                                  MARKET PRICES

The  following  table sets  forth,  for the periods  indicated,  the highest and
lowest   closing  market   quotations  for  the  shares  from  the   Frankfurter
Wertpapierborse (XETRA) and Nasdaq.

DEUTSCHE BORSE (FRANKFURT STOCK EXCHANGE)             ORDINARY SHARES
                                             ----------------------------------
                                               HIGH EURO           LOW EURO
                                             ----------------- ----------------
ANNUAL HIGHS AND LOWS
     2000                                       72.50                  6.86
     2001                                       10.85                  2.75
     2002                                       8.82                   0.70
     2003                                       4.39                   0.82
     2004                                       4.49                   1.63
QUARTERLY HIGHS AND LOWS
2003
     First quarter                              1.31                   0.82
     Second quarter                             1.64                   0.85
     Third quarter                              3.28                   1.56
     Fourth quarter                             4.39                   2.90
2004
     First quarter                              4.49                   3.48
     Second quarter                             4.09                   2.69
     Third quarter                              3.09                   2.46
     Fourth quarter                             2.94                   1.63
MONTHLY HIGHS AND LOWS
2004


     October                                    2.94                   2.57
     November                                   2.67                   2.50
     December                                   2.57                   1.63
2005
     January                                    1.81                   1.58
     February                                   1.98                   1.44
     March                                      2.28                   1.78
---------------

On April 7, 2005 the closing  market  quotation  for our shares on the Frankfurt
Stock Exchange (XETRA) was EUR 1.94.



<PAGE>






NASDAQ(1)                                        ADSs
                                -----------------------------------------
                                  HIGH DOLLAR            LOW DOLLAR
                                ------------------- ---------------------
ANNUAL HIGHS AND LOWS
     2000 (from June 29)            54.88                   6.25
     2001                            9.69                   2.49
     2002                            7.55                   0.64
     2003                            5.52                   0.95
     2004                            5.66                   2.29
QUARTERLY HIGHS AND LOWS
2003
     First quarter                   1.68                   0.95
     Second quarter                  1.93                   0.95
     Third quarter                   3.80                   1.80
     Fourth quarter                  5.52                   3.45
2004
     First quarter                   5.66                   4.40
     Second quarter                  5.00                   2.29
     Third quarter                   3.75                   3.01
     Fourth quarter                  3.57                   2.29
MONTHLY HIGHS AND LOWS
2004
     October                         3.57                   3.08
     November                        3.54                   3.19
     December                        3.42                   2.29
2005
     January                         2.45                   2.10
     February                        2.59                   1.93
     March                           3.03                   2.33
---------------

(1) Our shares were first listed on Nasdaq on June 29, 2000.

On April 7, 2005 the  closing  market  quotation  for our  shares on Nasdaq  was
$2.41.

ITEM 10. ADDITIONAL INFORMATION

A.       SHARE CAPITAL

NOT APPLICABLE.

B.       MEMORANDUM AND ARTICLES OF ASSOCIATION

Incorporated by reference to our  Registration  Statement on Form F-1, which was
filed with the Securities and Exchange Commission on June 27, 2000.
<PAGE>

C.       MATERIAL CONTRACTS

SUPPLY AGREEMENT WITH CHARTERED SEMICONDUCTOR MANUFACTURING PTE., LTD.

Until October 2003, we maintained a deposit of $20 million with Chartered  which
was classified in the balance sheet line item "Deposits". Under the terms of our
supply agreement dated June 30, 2000, the deposit  guaranteed  access to certain
quantities of sub-micron  wafers through fiscal 2003 and several  generations of
process  technologies  ranging from current products at 0.60u and 0.35u and will
extend down to, and beyond 0.18u technologies.  In October 2003, we received the
repayment of the deposit from Chartered. In addition, we had paid $20 million as
advance payments for future wafer deliveries, of which we received a $10 million
refund from Chartered in 2001. At December 31, 2003 the  outstanding  balance of
the  advance  payments  was  classified  in the  balance  sheet  under  "Prepaid
expenses".  In 2004 all remaining  advance payments were refunded to the company
in proportion to our  purchases of wafers from  Chartered.  On October 25, 2001,
the  Securities  and Exchange  Commission  granted our request for  confidential
treatment with respect to wafer prices,  lot quantities and related  proprietary
data contained in the supply agreement. We entered into a temporary modification
of this  agreement  on December  18, 2001  pursuant to which we received the $10
million  refund.  Concurrently  with the  filing of this  Form 20-F in 2001,  we
requested   confidential  treatment  of  aspects  of  this  amendment  agreement
analogous to those for which the  Securities and Exchange  Commission  granted a
request for confidential treatment on October 25, 2001.

D.       EXCHANGE CONTROLS

There are currently no UK laws,  decrees or regulations that restrict the export
or import of capital,  including, but not limited to, foreign exchange controls,
or that affect the remittance of dividends or other payments to non-UK residents
or to US  holders  of our  securities  except as  otherwise  set forth  below in
"Taxation".   There  are  no  limitations  under  our  articles  of  association
restricting voting or shareholding.

E.       TAXATION

The following is a discussion of the material tax consequences to holders of our
shares or ADSs  under the  present  laws of the  United  Kingdom  and the United
States. The discussion addresses only persons who hold shares or ADSs as capital
assets.  It does not address  the tax  treatment  of persons  subject to special
rules.  Among  those  are  banks,   securities  dealers,   insurance  companies,
tax-exempt entities,  partnerships,  holders of 10 percent or more of our voting
shares,  persons  holding  shares as part of a hedge,  straddle,  conversion  or
constructive sale transaction, US holders using a functional currency other than
the US Dollar, persons resident or ordinarily resident in the United Kingdom for
UK tax purposes and persons holding shares or ADSs in connection with a trade or
business  conducted  in the United  Kingdom or some other  place  outside  their
country  of  residence.  The  summary  also  does  not  discuss  the tax laws of
particular states or localities in the United States and other countries.

<PAGE>

This summary does not consider your  particular tax  circumstances.  It is not a
substitute  for tax advice.  WE URGE YOU TO CONSULT YOUR OWN TAX ADVISORS  ABOUT
THE TAX  CONSEQUENCES  TO YOU OF  HOLDING  OUR  SHARES  OR ADSs IN LIGHT OF YOUR
PARTICULAR CIRCUMSTANCES.

As used in this summary,  "US holder" means a beneficial owner of shares or ADSs
that is (1) an individual  who is a US citizen or resident,  (2) a  corporation,
partnership  or other  business  entity  organized  under the laws of the United
States or its political subdivisions, (3) a trust subject to the control of a US
person and the primary supervision of a US court and (4) an estate the income of
which is subject to US federal income tax regardless of its source.

                                   UK TAXATION

DIVIDENDS

Under  current UK  taxation  legislation,  no tax is  required to be withheld at
source  from  cash  dividend   payments  by  Dialog.   See  "US  Federal  Income
Taxation--Distributions"  below for a  discussion  of the  treatment of dividend
payments by Dialog under the UK-US Income Tax Treaty.

CAPITAL GAINS

If you are not resident or  ordinarily  resident in the UK then,  subject to the
comments  below,  you will not be liable for UK tax on capital gains realized on
the disposal of a share or ADS unless, at the time of the disposal, you carry on
a trade,  including  a  profession  or  vocation,  in the UK through a branch or
agency and the share or ADS you dispose of is, or has been, held or acquired for
the purposes of that trade or branch or agency carried on by you in the UK.

A US holder who is an  individual  and who has on or after March 17, 1998 ceased
to be resident or ordinarily resident for tax purposes in the UK for a period of
less than five years of  assessment  and who  disposes  of shares or ADSs during
that period may be liable on his or her return to the UK to UK tax on chargeable
gains, subject to any available exemption or relief,  notwithstanding that he or
she is not  resident  or  ordinarily  resident  in  the  UK at the  time  of the
disposal.

UK INHERITANCE TAX

Shares or ADSs are assets  situated in the UK for the purposes of UK inheritance
tax.  Subject  to the  discussion  of the UK-US  estate  tax  treaty in the next
paragraph,  shares or ADSs beneficially owned by an individual US holder will be
subject to UK  inheritance  tax on the death of the individual or, if the shares
or ADSs are the  subject  of a  lifetime  gift  that  constitutes  a  chargeable
transfer,  including  a  transfer  at  less  than  full  market  value,  by such
individual.  UK inheritance  tax is not chargeable on gifts to individuals or to
accumulation  and  maintenance  or  disabled  trusts  made more than seven years
before the death of the donor.  Special  rules apply to shares or ADSs held in a
settlement.
<PAGE>

A share or ADS held by an individual  US holder whose  domicile is determined to
be the US for purposes of the UK-US Estate Tax Treaty, and who is not a national
of the UK, will not be subject to UK inheritance tax on the  individual's  death
or on a lifetime transfer of the share or ADS except where the share or ADS:

o    is part of the  business  property of a UK  permanent  establishment  of an
     enterprise; or

o    pertains to a UK fixed base of an individual  used for the  performance  of
     independent personal services.

The estate tax treaty provides a credit against US federal tax liability for the
amount of any tax paid in the UK in a case  where  the  share or ADS is  subject
both to UK inheritance tax and to US federal estate or gift tax.

On 23 February 2000, the Inland Revenue indicated that the US and UK Governments
had  scheduled  negotiations  for revisions to their estate and gift tax treaty.
However,  as of the date of this annual report no such  negotiations  have taken
place.

UK STAMP DUTY AND STAMP DUTY RESERVE TAX

No stamp duty or stamp duty reserve tax ("SDRT") will be payable on the transfer
of  existing  shares  which  are  held,  and  which  continue  to  be  held,  in
Clearstream.

No UK stamp duty will be payable on the  transfer  of an ADS  provided  that any
instrument  of transfer  remains at all times outside the UK and is not executed
in or brought into the UK. An agreement to transfer an ADS will not give rise to
SDRT.

No stamp duty or SDRT will be payable on a cancellation  of an ADS provided that
the underlying shares continue to be held within Clearstream Banking AG.



                           US FEDERAL INCOME TAXATION

If the  obligations  contemplated  by the deposit  agreement  are  performed  in
accordance with their terms, US holders of ADSs will be treated as the owners of
the shares represented by those ADSs for US federal income tax purposes.

DISTRIBUTIONS

Subject to the "Passive Foreign Investment Company" discussion below,  dividends
paid with respect to shares or ADSs will be included in the gross income of a US
holder as ordinary  dividend income from foreign sources to the extent paid from
Dialog's  earnings  and  profits  as  determined  under US  federal  income  tax
principles.  Distributions  in excess of earnings  and  profits  will be treated
first as a return of capital to the extent of the US  holder's  tax basis in the
shares or ADSs and then as a capital  gain.  Dividends  will not be eligible for
the dividends-received  deduction available to corporations.  Dividends received
by noncorporate US holders, however, will be taxed at the same preferential rate
allowed for long-term  capital gains if (i) Dialog  qualifies for benefits under
the new UK-US income tax treaty and (ii) the US holder satisfies certain holding
period and other  requirements.  Dialog will qualify for benefits  under the new
UK-US  income tax treaty as long as its shares are  regularly  and  sufficiently
traded on NASDAQ.
<PAGE>

Dividends  paid in Euro will be includable in income in a US Dollar amount based
on the  exchange  rate in effect on the day received by the  shareholder  or the
depositary  whether or not the payment is  converted  into Dollars at that time.
Gain or loss  recognized  on a  subsequent  conversion  of Euro for a  different
amount will be US source ordinary income or loss.

During a  twelve-month  transition  period under the new UK-US income tax treaty
(which  ends on 30 April  2004),  an  eligible  US  shareholder  that elects the
benefits of the old UK-US  treaty may be entitled to a foreign tax credit for UK
withholding  tax in an  amount  equal  to the tax  credit  payment  that  the US
shareholder  is entitled  to receive  from the UK Inland  Revenue  under the old
treaty.  At current  rates,  a dividend  of  (pound)90  entitles  an eligible US
shareholder  claiming  benefits  under the old treaty to a payment of  (pound)10
offset by a UK withholding tax of (pound)10.  Because the tax credit payment and
the  withholding  tax offset each other,  the Inland  Revenue  neither makes the
payment nor collects  the tax. The  offsetting  payments  nevertheless  have tax
significance  because an electing  US  shareholder  must  include the tax credit
payment in its income and may claim a foreign tax credit for the UK  withholding
tax (subject to otherwise  applicable  limitations  on foreign tax credits).  To
make  the  election,  a  US  shareholder  (or  where  the  US  shareholder  is a
partnership, each eligible US partner) must file a completed US Internal Revenue
Service Form 8833 with its US federal  income tax return for the relevant  year.
US  shareholders  cannot claim UK tax credit payments under the new UK-US treaty
after the transition  period. You should consult your own tax advisors about the
consequences of the new treaty in light of your particular circumstances.

DISPOSITIONS

Subject to the "Passive Foreign Investment Company" discussion below, US holders
will  recognize  capital  gain or loss on the sale or other  disposition  of the
shares or ADSs in an amount equal to the difference  between the amount realized
on the sale or other  disposition  and the US  holder's  basis in the  shares or
ADSs.  Such gain or loss will be long term capital gain or loss if the US holder
has held the  shares  or ADSs for more  than one year at the time of the sale or
other disposition. Long term capital gain recognized by an individual is subject
to taxation at a maximum rate of 20 per cent.  Deductions for capital losses are
subject to  limitations.  Any gain or loss will be  treated  as arising  from US
sources.

A US holder that receives Euro upon sale or other disposition of the shares will
realize an amount  equal to the US Dollar  value of the Euro on the date of sale
(or in the  case of  cash  basis  and  electing  accrual  basis  taxpayers,  the
settlement  date).  A US holder will have a tax basis in the Euro received equal
to the US Dollar amount received.  Any gain or loss realized by a US holder on a
subsequent  conversion of Euro into US Dollars will be US source ordinary income
or loss.
<PAGE>

PASSIVE FOREIGN INVESTMENT COMPANY

Dialog may become a passive foreign  investment  company ("PFIC") for US federal
income tax  purposes.  A non-US  company is a PFIC in any taxable year in which,
after taking into account the income and assets of certain subsidiaries,  either
(1) at least 75% of its gross  income is  passive  income or (2) at least 50% of
the average  value of its assets is  attributable  to assets that produce or are
held to produce passive income. Whether Dialog becomes a PFIC will depend, among
other things, upon the amount of its passive income and the value of its passive
assets,  the growth in its business revenues and its market value in the future.
Since goodwill represents a substantial part of its non-passive assets,  changes
in the market value of Dialog's  shares,  which have been  significant and could
continue to be significant, could cause Dialog to become a PFIC.

If Dialog were a PFIC in any year during  which a US holder  owned the shares or
ADSs,  the US  holder  would  be  subject  to  additional  taxes  on any  excess
distributions  received from Dialog and any gain realized from the sale or other
disposition of the shares or ADSs,  regardless of whether Dialog continued to be
a PFIC. A US holder has an excess  distribution to the extent that distributions
on the shares or ADSs during a taxable  year  exceed 125% of the average  amount
received  during the three  preceding tax years or, if shorter,  the US holder's
holding  period.  A US holder  may  realize  gain on the shares or ADSs not only
through a sale or other disposition,  but also by pledging the shares or ADSs as
security  for  a  loan  or  entering  into  certain   constructive   disposition
transactions.  To compute  the tax on excess  distributions  or any gain (1) the
excess  distribution  or the gain is  allocated  ratably  over  the US  holder's
holding period, (2) the amount allocated to the current year and any year before
Dialog became a PFIC is taxed as ordinary  income in the current  year,  and (3)
the amount  allocated to other taxable years is taxed at the highest  applicable
marginal  rate in effect  for each year and an  interest  charge is  imposed  to
recover the deemed benefit from the deferred  payment of the tax attributable to
each year.

If Dialog  were a PFIC and then  ceased to be a PFIC,  a US holder may avoid the
continued  application  of the tax treatment  described  above by electing to be
treated  as if it sold its  shares on the last day of the last  taxable  year in
which Dialog were a PFIC.  Any gain is  recognized  and subject to tax under the
rules  described  above.  Loss is not  recognized.  The US holder's basis in its
shares is increased by the amount of gain recognized on the sale.

If  Dialog  becomes a PFIC in any tax  year,  a US holder of the  shares or ADSs
could avoid some of the tax consequences  just described by electing to mark the
shares or ADSs to market  annually.  Any gain from marking the shares or ADSs to
market  or from  disposing  them  will be  ordinary  income.  A US  holder  will
recognize loss from marking the shares or ADSs to market, but only to the extent
of its unreversed gains from marking them to market. Loss from marking shares or
ADSs to market will be  ordinary,  but loss on disposing of them will be capital
loss except to the extent of unreversed gains.

A US holder  of  shares  or ADSs will not be able to avoid the tax  consequences
described  above by electing to treat  Dialog  Semiconductor  Plc as a qualified
electing fund ("QEF")  because Dialog does not intend to prepare the information
that US holders would need to make a QEF election.

<PAGE>

INFORMATION REPORTING AND BACKUP WITHHOLDING

Distributions on the shares or ADSs and proceeds from sale of the shares or ADSs
paid in the United States (or by certain persons outside the United States) will
be reported to the US Internal  Revenue  Service unless the shareholder (1) is a
corporation,  (2) provides a properly  executed US Internal Revenue Service Form
W-8 BEN or (3) otherwise  establishes a basis for exemption.  Backup withholding
tax may apply to amounts  subject to reporting if the holder fails to provide an
accurate taxpayer  identification  number.  The amount of any backup withholding
tax will be allowed as a credit against the shareholder's  United States federal
income  tax  liability  and the  shareholder  may claim a refund  of any  excess
amounts..

F.       DIVIDENDS AND PAYING AGENTS

NOT APPLICABLE.

G.       STATEMENT BY EXPERTS

NOT APPLICABLE

H.       DOCUMENTS ON DISPLAY

We are subject to the informational  requirements of the Securities Exchange Act
of 1934, as amended. In accordance with these requirements,  we file reports and
other information with the Securities and Exchange Commission.  These materials,
including  this annual  report and the exhibits  thereto,  may be inspected  and
copied at the  Commission's  Public  Reference  Room at 450 Fifth Street,  N.W.,
Washington,  D.C.  20549 and at the  Commission's  regional  offices at 500 West
Madison Street, Suite 1400, Chicago,  Illinois 60661. Copies of the material may
be  obtained  from the  Public  Reference  Room of the  Commission  at 450 Fifth
Street, N.W., Washington,  D.C. 20549 at prescribed rates. The public may obtain
information  on the  operation  of the  Commission's  Public  Reference  Room by
calling the  Commission in the United States at  1-800-SEC-0330.  The Commission
also maintains a web site at  HTTP://WWW.SEC.GOV  that contains  reports,  proxy
statements and other information  regarding registrants that file electronically
with the Commission.  Our annual reports and some other information submitted by
us to the Commission may be accessed through this web site.



I.       SUBSIDIARY INFORMATION

NOT APPLICABLE
<PAGE>

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

As a matter of policy,  we do not  engage in  derivatives  trading,  derivatives
market-making  or other  speculative  activities.  See  "Item 5:  Operating  and
Financial  Review  and   Prospects-Foreign   Currencies"  and  Note  19  to  the
consolidated financial statements.

During  2000 to hedge the  foreign  currency  exposure  with  respect to the $20
million of deposits  with  Chartered,  we  purchased  foreign  currency  forward
contracts  to  effectively  change  the US Dollar  deposits  into Euro (EUR 21.7
million) upon the expected return of the deposit as of December 31, 2003.  These
deposits were refunded to us in October  2003.  Upon receipt of the deposit,  we
settled our currency  hedging  position related to this deposit and recognized a
loss of EUR 71,000 in the consolidated  statement of operations.  See Note 19 to
the consolidated financial statements.

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

NOT APPLICABLE.

                                     PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

NOT APPLICABLE.

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS

NOT APPLICABLE.

ITEM 15. CONTROLS AND PROCEDURES

As of the end of the period  covered by this  annual  report,  we carried out an
evaluation,  under the  supervision  and with the  participation  of our  senior
management,  including Executive Director,  CEO and President Roland Pudelko and
Vice-President of Finance and Controlling  Martin Kloeble,  of the effectiveness
of our disclosure  controls and  procedures  pursuant to Rule 13a-15 of the U.S.
Securities Exchange Act of 1934. Disclosure controls and procedures are designed
to ensure that the material financial and non-financial  information required to
be disclosed in this Form 20-F is recorded,  processed,  summarized and reported
in a timely manner.  In designing and  evaluating  the  disclosure  controls and
procedures,  management  has considered the needs of the Company in light of its
size and  industry,  and has  recognized  that any controls and  procedures,  no
matter how well designed and operated, can provide only reasonable,  rather than
absolute, assurance of achieving the desired control objectives. Based upon that
evaluation,  our management,  including Mr. Pudelko and Mr.  Kloeble,  concluded
that our disclosure  controls and  procedures are effective in the  accumulation
and timely  communication  of  material  information  relating to the Company as
required to be included in periodic SEC filings.

<PAGE>

ITEM 16A.         AUDIT COMMITTEE FINANCIAL EXPERT

Our board has  determined  that we have at least two audit  committee  financial
experts,  as defined in Form 20-F of the U.S.  Securities  Exchange  Act,  1934,
serving on our audit committee. These experts are Messrs. Glover and Hughes, who
are independent as such term is defined in the listing  standards  applicable to
us.

ITEM 16B.         CODE OF ETHICS

We have  adopted  a code of ethics  ("Code  of  Business  Conduct  and  Ethics")
applicable  to  our  officers,   directors  and   employees,   pursuant  to  the
requirements of the Sarbanes-Oxley Act of 2002. The text of our Code of Business
Conduct    and    Ethics    is    provided    on    our     Internet     website
(www.dialog-semiconductor.com).

ITEM 16C.         PRINCIPAL ACCOUNTANT FEES AND SERVICES

AUDIT FEES

The aggregate fees billed for  professional  services  rendered by the principal
accountant, KPMG, for the audit of our financial statements or services normally
provided by the auditor in connection with statutory and regulatory filings were
EUR 174,000 for the year ended  December 31, 2004,  and EUR 169,000 for the year
ended December 31, 2003.

AUDIT-RELATED FEES

There  were no  assurance  or  related  services  performed  by KPMG  which were
reasonably  related to the  performance  of the audit or review of our financial
statements  and not reported  under  "--Audit  Fees"  above,  for the year ended
December 31, 2004 or for the year ended  December 31, 2003.  As such,  aggregate
fees billed for such services in these years were nil.

TAX FEES

The aggregate  fees billed for  professional  services  rendered by KPMG for tax
compliance,  tax advice,  and tax  planning  were EUR 110,000 for the year ended
December 31, 2004, and EUR 65,000 for the year ended December 31, 2003. Tax fees
are fees for  professional  services  rendered by KPMG for tax  compliance,  tax
advice on actual or contemplated  transactions,  tax consulting  associated with
international transfer prices, and expatriate employee tax services.

ALL OTHER FEES

There were no products or services  provided by KPMG,  other than those reported
above under  "--Audit  Fees" and "--Tax  Fees," for the year ended  December 31,
2003, or for the year ended  December 31, 2004. As such,  aggregate  fees billed
for such services in these years were nil.

<PAGE>

AUDIT COMMITTEE APPROVAL

Our Audit Committee nominates and engages our independent  auditors to audit our
financial  statements.  In 2003  our  Audit  Committee  also  adopted  a  policy
requiring  management to obtain the  Committee's  approval  before  engaging our
independent  auditors to provide any other audit or permitted non-audit services
to us or our subsidiaries.  Pursuant to this policy, which is designed to assure
that such engagements do not impair the independence of our auditors,  the Audit
Committee  pre-approves  annually a catalog of specific Tax Consulting  Services
that may be performed by our auditors. 100% and 79% of the tax services referred
to under "Tax Fees" above were  pre-approved  by the Audit Committee in 2004 and
2003, respectively.

All other services that are not included in the catalog require  pre-approval by
the Audit  Committee's  chairman on a  case-by-case  basis.  The chairman of our
Audit  Committee is not  permitted to approve any  engagement of our auditors if
the  services to be performed  either fall into a category of services  that are
not  permitted by  applicable  law or the services  would be  inconsistent  with
maintaining the auditors' independence.

ITEM 16D.         EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

We rely on an exemption  from the listing  standard for audit  committees as set
forth under Nasdaq  Marketplace Rule  4350(d)(2).  This exemption was granted to
Dialog on 1 August 2000.  We do not believe that our reliance on this  exemption
would  materially  adversely  affect the ability of our audit  committee  to act
independently  and to  satisfy  other  requirements  of Rule  10A-3  of the U.S.
Securities  Exchange Act of 1934. In lieu of following this requirement on audit
committee  composition,  Dialog's audit  committee  consists of two  independent
members  in  accordance  with law,  rule,  regulation,  and  generally  accepted
business practices in Dialog's home country of England and Wales.

<PAGE>

                                    PART III

ITEM 17. FINANCIAL STATEMENTS

We have responded to Item 18 in lieu of responding to this Item.

ITEM 18. FINANCIAL STATEMENTS

See the Consolidated Financial Statements and the Notes thereto.

ITEM 19. EXHIBITS

1.1      Memorandum and Articles of Association of Dialog Semiconductor Plc. (1)

2.1      Form of Deposit Agreement among Dialog  Semiconductor  Plc, The Bank of
         New York as depositary,  and holders and beneficial owners from time to
         time of ADRs issued thereunder.(1)

3.1      Not applicable.

4.1      Supply Agreement with Chartered Semiconductor Manufacturing Pte.,
         Ltd. dated June 30, 2000.(2)(3)

4.2      Amendment  Agreement with Chartered  Semiconductor  Manufacturing
         Pte., Ltd. dated December 18, 2001. (4) (5)

5.1      Not applicable.

6.1      Not applicable.

7.1      Not applicable.

8.1      See "Item 4: Information on the Company- C. Organizational Structure".

9.1      Not applicable.
10.1     Not applicable.

11.1     Not Applicable.

12.1     Rule  13a-14(a)  Certification  of the Chief  Executive  Officer of the
         Company in  accordance  with Section 302 of the  Sarbanes-Oxley  Act of
         2002.

12.2     Rule  13a-14(a)  Certification  of the  Vice-President  of Finance  and
         Controlling  of the  Company  in  accordance  with  Section  302 of the
         Sarbanes-Oxley Act of 2002.

13.1     Section 1350 Certification of Chief Executive Officer of the Company in
         accordance with Section 906 of the Sarbanes-Oxley Act of 2002.(6)

13.2     Section 1350 Certification of Vice-President of Finance and Controlling
         of the Company in accordance with Section 906 of the Sarbanes-Oxley Act
         of 2002.(6)

14.1     Not applicable.

----------

(1)      Previously filed as an exhibit to the Company's  Registration Statement
         on Form F-1, filed with the Securities and Exchange  Commission on June
         27, 2000 and incorporated herein by reference.

(2)      Previously  filed as an exhibit to the Company's  Annual Report on Form
         20-F for 2000, filed with the US Securities and Exchange  Commission on
         June 4, 2001 and incorporated herein by reference.
<PAGE>

(3)      On October 25, 2001, the US Securities and Exchange  Commission granted
         our request for confidential  treatment of the  commercially  sensitive
         material in this contract.

(4)      Previously  filed as an exhibit to the Company's  Annual Report on Form
         20-F for 2002, filed with the US Securities and Exchange  Commission on
         February 27, 2003 and incorporated herein by reference.

(5)      The US  Securities  and  Exchange  Commission  granted  our request for
         confidential  treatment of the commercially  sensitive material in this
         contract.

(6)      A signed original of this written statement required by Section 906 has
         been  provided  to the  Company and will be retained by the Company and
         furnished to the Securities  and Exchange  Commission or its staff upon
         request.



                                   SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing
on Form 20-F, and that it has duly caused and authorized the undersigned to sign
this annual report on its behalf.



                            DIALOG SEMICONDUCTOR PLC

                     By: /s/     Roland Pudelko
                        -----------------------------------------------
                                 Roland Pudelko
                                 Executive Director, Chief Executive
                                 Officer and President


<PAGE>
                              FINANCIAL INFORMATION



AUDITED CONSOLIDATED FINANCIAL STATEMENTS:

Report of Independent Registered Public Accounting Firm

Consolidated Statements of Operations for the years ended
December 31, 2004, 2003 and 2003

Consolidated Balance Sheets as of December 31, 2004 and 2003

Consolidated Statements of Cash Flows for the years ended December 31,
  2004, 2003 and 2002

Consolidated Statements of Shareholders' Equity for the years ended
  December 31, 2004, 2003 and 2002

Notes to the Consolidated Financial Statements

<PAGE>

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors of Dialog Semiconductor Plc:

We have audited the accompanying consolidated balance sheets of Dialog
Semiconductor Plc and subsidiaries (the "Company") as of December 31, 2004 and
2003 and the related consolidated statements of operations, changes in
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2004. These consolidated financial statements 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 standards established by the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. 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 Dialog Semiconductor
Plc and subsidiaries as of December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2004, in conformity with accounting principles generally
accepted in the United States of America.

Stuttgart, Germany
February 21, 2005

KPMG Deutsche Treuhand-Gesellschaft
Aktiengesellschaft
Wirtschaftspruefungsgesellschaft

<PAGE>



CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Statements of Operations

<TABLE>
<CAPTION>

--------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)             Notes            2004              2004               2003              2002
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                 <C>          <C>                 <C>               <C>               <C>
Revenues                                            20           $157,100        EUR 116,044      EUR  92,893       EUR  77,104
--------------------------------------------------------------------------------------------------------------------------------
Cost of sales                                        5           (108,010)          (79,783)          (62,374)          (57,409)
--------------------------------------------------------------------------------------------------------------------------------
GROSS MARGIN                                                       49,090            36,261            30,519            19,695
--------------------------------------------------------------------------------------------------------------------------------

Selling and marketing expenses                                     (8,444)           (6,237)           (4,197)           (4,149)
--------------------------------------------------------------------------------------------------------------------------------
General and administrative expense                                 (7,394)           (5,462)           (5,044)           (6,447)
--------------------------------------------------------------------------------------------------------------------------------
Research and development expenses                                 (39,356)          (29,071)          (30,590)          (34,530)
--------------------------------------------------------------------------------------------------------------------------------
Amortization and intangible assets                                 (2,058)           (1,520)           (2,073)           (1,975)
--------------------------------------------------------------------------------------------------------------------------------
Restructuring and related impairment charges         3                (80)              (59)           (1,839)                -
--------------------------------------------------------------------------------------------------------------------------------
OPERATING LOSS                                                     (8,242)           (6,088)          (13,224)          (27,406)
--------------------------------------------------------------------------------------------------------------------------------


Interest income, net                                                1,463             1,081               757             1,121
--------------------------------------------------------------------------------------------------------------------------------
Foreign currency exchange gains and losses, net                      (983)             (726)             (454)           (1,918)
--------------------------------------------------------------------------------------------------------------------------------
Recovery of investment                               4                 73                54               315            11,969
--------------------------------------------------------------------------------------------------------------------------------
Result before income taxes                                         (7,689)           (5,679)          (12,606)          (16,234)
--------------------------------------------------------------------------------------------------------------------------------


Income tax (expense) benefit                         6                (86)              (64)           (7,814)            6,026
--------------------------------------------------------------------------------------------------------------------------------
NET LOSS                                                           (7,775)           (5,743)          (20,420)          (10,208)
--------------------------------------------------------------------------------------------------------------------------------


Loss per share:
Basic and diluted                                                   (0.18)            (0.13)            (0.46)            (0.23)
--------------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF SHARES (IN THOUSANDS):
Basic and diluted                                                  44,025            44,025            43,951            43,888
--------------------------------------------------------------------------------------------------------------------------------


The accompanying notes are an integral part of these Consolidated Financial Statements.
</TABLE>

<PAGE>


Consolidated Balance Sheets

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
(in thousands)                                            Notes          Dec. 31, 2004    Dec. 31, 2004      Dec. 31, 2003
--------------------------------------------------------------------------------------------------------------------------
ASSETS
<S>                                                                       <C>                  <C>                  <C>
Cash and cash equivalents                                                 $18,922         EUR  13,977        EUR    8,109
--------------------------------------------------------------------------------------------------------------------------
Trade accounts receivable, net                              8              32,540              24,036              14,338
--------------------------------------------------------------------------------------------------------------------------
Inventories                                                 9              40,335              29,794              13,242
--------------------------------------------------------------------------------------------------------------------------
Marketable securities                                      10              23,749              17,542              44,900
--------------------------------------------------------------------------------------------------------------------------
Deferred taxes                                              6                 950                 702                 103
--------------------------------------------------------------------------------------------------------------------------
Prepaid expenses                                           11                 834                 616               2,131
--------------------------------------------------------------------------------------------------------------------------
Other current assets                                                          380                 281                 993
--------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS                                                      117,710              86,948              83,816
--------------------------------------------------------------------------------------------------------------------------


Property, plant and equipment, net                         12              28,752              21,238              20,590
--------------------------------------------------------------------------------------------------------------------------
Intangible assets                                          13               5,775               4,266               5,440
--------------------------------------------------------------------------------------------------------------------------
Goodwill                                                   13              15,956              11,786              11,786
--------------------------------------------------------------------------------------------------------------------------
Deposits                                                   11                 263                 194                 183
--------------------------------------------------------------------------------------------------------------------------
Deferred taxes                                              6              22,270              16,450              17,729
--------------------------------------------------------------------------------------------------------------------------
Prepaid expenses                                           11               1,458               1,077                 927
--------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS                                                              192,184             141,959             140,471
--------------------------------------------------------------------------------------------------------------------------


LIABILITIES AND SHAREHOLDERS' EQUITY
Trade accounts payable                                                     20,888              15,429               7,157
--------------------------------------------------------------------------------------------------------------------------
Accrued expenses                                           14               4,175               3,084               3,165
--------------------------------------------------------------------------------------------------------------------------
Income taxes payable                                                           12                   9                  18
--------------------------------------------------------------------------------------------------------------------------
Deferred taxes                                              6                   9                   7                   4
--------------------------------------------------------------------------------------------------------------------------
Other current liabilities                                                   1,726               1,275               1,615
--------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES                                                  26,810              19,804              11,959
--------------------------------------------------------------------------------------------------------------------------


Deferred taxes                                              6               1,381               1,020               1,669
--------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES                                                          28,191              20,824              13,628
--------------------------------------------------------------------------------------------------------------------------


Ordinary Shares                                            15               9,515               7,028               6,737
--------------------------------------------------------------------------------------------------------------------------
Additional paid-in capital                                                228,497             168,782             168,795
--------------------------------------------------------------------------------------------------------------------------
Accumulated deficit                                                       (72,323)            (53,422)            (47,679)
--------------------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive loss                                       (1,294)               (956)               (984)
--------------------------------------------------------------------------------------------------------------------------
Employee stock purchase plan shares                                          (402)               (297)                (26)
--------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY                                                      163,993             121,135             126,843
--------------------------------------------------------------------------------------------------------------------------


--------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                192,184             141,959             140,471
--------------------------------------------------------------------------------------------------------------------------

The accompanying notes are an integral part of these Consolidated Financial Statements.
</TABLE>


<PAGE>

Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
(in thousands)                                              2004          2004         2003           2002
------------------------------------------------------------------------------------------------------------
<S>                                                       <C>            <C>          <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss                                                  $(7,775)   EUR (5,743)  EUR (20,420)  EUR (10,208)
------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net loss to net cash
 provided by (used for)
------------------------------------------------------------------------------------------------------------
operating activities:
------------------------------------------------------------------------------------------------------------
Recovery of investment                                        (73)          (54)         (315)      (11,969)
------------------------------------------------------------------------------------------------------------
Provision for excess inventory                                  -             -             -         1,930
------------------------------------------------------------------------------------------------------------
Restructuring and related impairment charges                 (444)         (328)          613             -
------------------------------------------------------------------------------------------------------------
Depreciation of property, plant and equipment              15,570        11,501        12,545        12,834
------------------------------------------------------------------------------------------------------------
Amortization intangible assets                              2,058         1,520         2,073         1,975
------------------------------------------------------------------------------------------------------------
Losses on disposals of fixed assets                           199           147           253             -
------------------------------------------------------------------------------------------------------------
Increase in deferred tax asset valuation allowance              -             -        10,237             -
------------------------------------------------------------------------------------------------------------
Other changes in deferred taxes                                24            18        (1,984)       (4,167)
------------------------------------------------------------------------------------------------------------
Changes in current assets and liabilities:
------------------------------------------------------------------------------------------------------------
Trade accounts receivable                                 (13,128)       (9,697)        1,691           450
------------------------------------------------------------------------------------------------------------
Inventories                                               (22,408)      (16,552)        1,265           715
------------------------------------------------------------------------------------------------------------
Prepaid expenses                                            1,844         1,362         5,382         1,663
------------------------------------------------------------------------------------------------------------
Trade accounts payable                                     11,204         8,276        (2,846)        1,760
------------------------------------------------------------------------------------------------------------
Accrued expenses                                             (104)          (77)         (258)       (1,381)
------------------------------------------------------------------------------------------------------------
Income taxes payable                                          (12)           (9)         (107)       (1,224)
------------------------------------------------------------------------------------------------------------
Other assets and liabilities                                1,401         1,035          (541)           26
------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES          (11,644)       (8,601)        7,588        (7,596)
------------------------------------------------------------------------------------------------------------


CASH FLOWS FROM INVESTING ACTIVITIES:
Recovery of investment                                         73            54           315        11,969
------------------------------------------------------------------------------------------------------------
Purchases of property, plant and equipment                (16,680)      (12,321)       (5,901)       (3,872)
------------------------------------------------------------------------------------------------------------
Purchases of intangible assets                               (914)         (675)       (1,410)       (2,101)
------------------------------------------------------------------------------------------------------------
Investments and deposits received (made)                      (27)          (20)       21,670            94
------------------------------------------------------------------------------------------------------------
Purchases of marketable securities                        (67,243)      (49,670)      (44,998)            -
------------------------------------------------------------------------------------------------------------
Sale of marketable securities                             104,360        77,087             -             -
------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES           19,569        14,455       (30,324)        6,090
------------------------------------------------------------------------------------------------------------



CASH FLOWS FROM FINANCING ACTIVITIES:
Costs for issuance of shares                                  (28)          (21)            -             -
------------------------------------------------------------------------------------------------------------
Sale of employee stock purchase plan shares                    40            30            37            58
------------------------------------------------------------------------------------------------------------
Other                                                           -             -             -           (44)
------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES                          12             9            37            14
------------------------------------------------------------------------------------------------------------

------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED FOR) OPERATING, INVESTING AND
 FINANCING ACTIVITIES                                       7,937         5,863       (22,699)       (1,492)
------------------------------------------------------------------------------------------------------------


Effect of foreign exchange rate changes on cash and
 cash equivalents                                               7             5          (197)         (129)
------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS        7,944         5,868       (22,896)       (1,621)
------------------------------------------------------------------------------------------------------------

Cash and cash equivalents at beginning of period           10,978         8,109        31,005        32,626
------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                 18,922        13,977         8,109        31,005
------------------------------------------------------------------------------------------------------------

The accompanying notes are an integral part of these Consolidated Financial Statements.

</TABLE>

<PAGE>

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY


<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
                                                                    ACCUMULATED OTHER COMPREHENSIVE LOSS

                                                                                                        EMPLOYEE
                                             ADDITIONAL             CURRENCY     AVAILABLE  DERIVATIVE  STOCK
                                    ORDINARY  PAID-IN   ACCUMULATED TRANSLATION  FOR SALE   FINANCIAL   PURCHASE
(in thousands of EUR)                SHARES   CAPITAL     DEFICIT   ADJUSTMENT   SECURITIES INSTRUMENTS PLAN SHARES     TOTAL
-------------------------------------------------------------------------------------------------------------------------------
<S>                                   <C>       <C>        <C>        <C>       <C>         <C>           <C>       <C>
BALANCE AT DECEMBER 31, 2001          6,737     168,788    (17,051)   (270)          --          (42)       (70)      158,092
-------------------------------------------------------------------------------------------------------------------------------
Net loss                               --          --      (10,208)   --             --           --         --        (10,208)
Other comprehensive loss               --          --         --      (287)          --         (116)        --           (403)
                                                                                                                       -------
TOTAL COMPREHENSIVE LOSS                                                                                               (10,611)
Cost of issuance of shares in  2000    --           (44)      --      --             --           --         --           (44)
Sale of employee stock purchase
 plan shares                           --            37       --      --             --           --         21            58
-------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2002          6,737     168,781    (27,259)   (557)          --         (158)       (49)      147,495
-------------------------------------------------------------------------------------------------------------------------------
Net loss                               --          --      (20,420)   --             --           --         --       (20,420)
Other comprehensive income (loss)      --          --         --      (366)         (61)         158         --          (269)
                                                                                                                       --------
TOTAL COMPREHENSIVE LOSS                                                                                               (20,689)
Sale of employee stock purchase
 plan shares                           --            14       --      --             --           --         23             37
-------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2003          6,737     168,795    (47,679)   (923)         (61)          --        (26)       126,843
-------------------------------------------------------------------------------------------------------------------------------
Net loss                               --          --       (5,743)   --             --           --         --         (5,743)
Other comprehensive income (loss)      --          --         --        (5)          33           --         --             28
                                                                                                                       ---------
TOTAL COMPREHENSIVE LOSS                                                                                                (5,715)
New issuance of shares                  291         (22)      --      --             --           --       (291)           (22)
Sale of employee stock purchase
 plan shares                           --             9       --      --             --           --         20             29
-------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2004          7,028     168,782    (53,422)   (928)         (28)          --       (297)       121,135
-------------------------------------------------------------------------------------------------------------------------------

The accompanying notes are an integral part of these Consolidated Financial Statements.
</TABLE>


<PAGE>


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of EUR, unless otherwise stated)

1.  GENERAL

A) DESCRIPTION OF BUSINESS
Dialog Semiconductor Plc and subsidiaries ("Dialog" or the "Company") is a
fabless semiconductor company that develops and supplies power management, audio
and imaging technology, delivering innovative mixed signal standard products as
well as application specific IC solutions for wireless, automotive and
industrial applications. The company's expertise in mixed signal design, with
products manufactured entirely in CMOS technology, enhances the performance and
features of wireless, hand-held and portable electronic products. Its technology
is also used in intelligent control circuits in automotive and industrial
applications. Production of these designs is then outsourced, and the final
products are returned to Dialog for approval and testing before delivery to the
customers.


B) VULNERABILITY DUE TO CERTAIN SIGNIFICANT CONCENTRATIONS
The Company's future results of operations involve a number of risks and
uncertainties. Factors that could affect the Company's future operating results
and cause actual results to vary materially from historical results include, but
are not limited to, the highly cyclical nature of both the semiconductor and
wireless communications industries, dependence on certain customers and the
ability to obtain adequate supply of sub-micron wafers.

The Company's products are generally utilized in the cellular communications and
automotive industries. The Company generates a substantial portion of its
revenue from the wireless communications market, which accounted for 78%, 75%
and 71% of the Company's total revenue for the years ended December 31, 2004,
2003 and 2002, respectively.

The Company's revenue base is diversified by geographic region and by individual
customer. Changes in foreign currency exchange rates influence the Company's
results of operations. The Company's sales are primarily denominated in Euros
and US dollars whereas purchases of raw materials and manufacturing services are
primarily denominated in US dollars (see Note 19 for a description of the
Company's hedging activities). The Company also has foreign currency exchange
risks with respect to its net investments in foreign subsidiaries in Japan, the
United Kingdom and the United States. Fluctuations in these currencies could
significantly impact the Company's reported results from operations.

The Company depends on a relatively small number of customers for a substantial
portion of its revenues, and the loss of one or more of these customers may
result in a significant decline in future revenue. During 2004 and 2002, two
customers individually accounted for more than 10% of the Company's revenues.
Total revenues from these two customers were EUR 75,651 and EUR 46,746 or
65% and 61% in 2004 and 2002, respectively. Net receivables from these two
customers were EUR 15,724 at December 31, 2004. During 2003, one customer
individually accounted for more than 10% of the Company's revenue. Total revenue
from this customer was EUR 60,192 or 65%. Net receivables from this customer
were EUR 9,414 at December 31, 2003. The Company performs ongoing credit
evaluations of its customers' financial condition and, generally, requires no
collateral from its customers.


C) BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("US GAAP"). All amounts herein are shown in thousands of Euro
("EUR") and for the year 2004 are also presented in U.S. Dollars ("$"), the
latter being unaudited and presented solely for convenience of the reader at the
rate of EUR 1 = $1.3538, the Noon Buying Rate of the Federal Reserve Bank of
New York on December 31, 2004.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation and Investments in Affiliated Companies
The consolidated financial statements include Dialog Semiconductor Plc and all
of its owned subsidiaries:

<PAGE>

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
NAME                           REGISTERED OFFICE                 PARTICIPATION
-------------------------------------------------------------------------------
<S>                            <C>                                  <C>
Dialog Semiconductor GmbH      Kirchheim/Teck - Nabern, Germany       100%
-------------------------------------------------------------------------------
Dialog Semiconductor (UK)
 Limited                       Swindon, UK                            100%
-------------------------------------------------------------------------------
Dialog Semiconductor Inc       Clinton, New Jersey, USA               100%
-------------------------------------------------------------------------------
Dialog Semiconductor KK        Tokyo, Japan                           100%
-------------------------------------------------------------------------------
</TABLE>


All intercompany accounts and transactions are eliminated in consolidation.

CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid investments with original
maturity dates of three months or less.

MARKETABLE SECURITIES
Marketable securities at December 31, 2004 and 2003 consist of exchange traded
funds and at December 31, 2003 also debt securities that are classified as
available-for-sale and are accounted for on the basis of the settlement date and
recorded at fair value as determined by the most recently quoted market price of
each security at the balance sheet date. Unrealized gains and losses, net of the
related tax effect, on available-for-sale securities are excluded from earnings
and are reported as a component of other comprehensive income (loss) until
realized. Realized gains and losses from the sale of available-for-sale
securities are determined on a specific-identification basis. A decline in the
market value of any available-for-sale security below cost that is deemed to be
other than temporary will result in an impairment, which is charged to earnings.
Interest income is recognized when earned.

INVENTORIES
Inventories are valued at the lower of cost or market. Cost, which includes
direct materials, labor and overhead plus indirect overhead, is determined using
the first-in, first-out (FIFO) or weighted average cost methods.

TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable are recorded at the invoiced amount and do not bear
interest. The allowance for doubtful accounts is the Company's best estimate of
the amount of probable credit losses in the Company's existing accounts
receivable. The Company reviews its allowance for doubtful accounts quarterly.
Management, considering current information and events regarding the customers'
ability to repay their obligations, considers the collectibility of a trade
account receivable to be impaired when it is probable that the Company will be
unable to collect all amounts due according to the sales terms. When a trade
receivable is considered to be impaired, the amount of the impairment is
measured based on the present value of expected future cash flows. Any credit
losses are included in the allowance for doubtful accounts through a charge to
bad debt expense. Account balances are charged off against the allowance after
all means of collection have been exhausted and the potential for recovery is
considered remote. In the profit and loss account, impairment losses are
included in sales and marketing expenses. Recoveries of trade receivables
previously written-off are recorded when received. Reversals of impairment
losses, if any, would be included in other operating income. The Company does
not have any off-balance-sheet credit exposure related to its customers.


OTHER CURRENT ASSETS
Other current assets include tax refunds receivable at December 31, 2004 and
2003. It also included interest receivable at December 31, 2003.

PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated depreciation.
Depreciation is charged on a straight-line basis over the estimated useful lives
of the assets as follows:



<TABLE>
<CAPTION>
----------------------------------------------
EQUIPMENT               USEFUL LIFE
----------------------------------------------
<S>                    <C>
Test equipment         3 to 8 years
----------------------------------------------
                       Shorter of useful life
Leasehold improvements  or lease term
----------------------------------------------
Office and other
 equipment             3 to 13 years
----------------------------------------------
</TABLE>
<PAGE>

GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of purchase price over fair value of net assets
of businesses acquired. Purchased intangible assets with estimable useful lives
primarily consist of licenses, software, customer lists and patents and are
recorded at acquisition cost less accumulated amortization. Intangible assets
other than goodwill are amortized on a straight-line basis over the estimated
useful lives of the assets ranging from 3 to 17 years.

Goodwill is tested annually for impairment and more frequently if events and
circumstances indicate that the asset might be impaired. An impairment loss is
recognized to the extent the carrying amount exceeds the asset's fair value.
Prior to the adoption of SFAS 142 in 2002, goodwill and assembled workforce were
amortized over their estimated useful life.

IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with SFAS 144, long-lived assets, such as property, plant and
equipment, and purchased intangibles subject to amortization, are evaluated for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
or group of assets to future undiscounted net cash flows expected to be
generated by the asset or group of assets. If the carrying amount of an asset or
group of asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the asset. Assets to be disposed of would be separately presented
in the balance sheet and reported at the lower of the carrying amount or fair
value less costs to sell, and are no longer depreciated.

FOREIGN CURRENCIES
The functional currency for the Company's operations is generally the applicable
local currency. Accordingly, the assets and liabilities of companies whose
functional currency is other than the Euro are included in the consolidation by
translating the assets and liabilities into the reporting currency (the Euro) at
the exchange rates applicable at the end of the reporting year. Equity accounts
are measured at historical rates. The statements of income and cash flows are
translated at the average exchange rates during the year. Translation gains or
losses are accumulated as a separate component of shareholders' equity. Foreign
currency transaction gains and losses are included in financial income, net at
each reporting period. They result from amounts ultimately realized upon
settlement of foreign currency transactions and from the period end
re-measurement of foreign currency denominated monetary assets and liabilities
into the functional currency of the respective entity. The exchange rates of the
more important currencies against the Euro used in preparation of the
consolidated financial statements were as follows:


<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
CURRENCY                     DEC 31, 2004    DEC, 31, 2003   2004         2003         2002
---------------------------------------------------------------------------------------------
                                EUR   1 =    EUR   1 =    EUR   1 =    EUR   1 =    EUR   1 =
---------------------------------------------------------------------------------------------
<S>                                 <C>          <C>          <C>          <C>          <C>
Great Britain                       0.71         0.70         0.68         0.69         0.63
---------------------------------------------------------------------------------------------
Japan                             139.83       133.68       134.46       130.93       118.05
---------------------------------------------------------------------------------------------
United States                       1.36         1.25         1.24         1.13         0.94
---------------------------------------------------------------------------------------------
</TABLE>


REVENUE RECOGNITION
Substantially all of the Company's revenue is derived from the sale of its
products. Product revenue, net of discounts, is recognized when persuasive
evidence of an arrangement exists, delivery has occurred, the price of the
transaction is fixed and determinable, and collectibility is reasonably assured.

PRODUCT-RELATED EXPENSES
Cost of sales consist of the costs of outsourcing production and assembly,
personnel costs and applicable overhead and depreciation of test and other
equipment. Provisions for estimated product warranty are recorded in cost of
sales at the time the related sale is recognized. Expenditures for advertising
and sales promotion and for other sales-related expenses are charged to
marketing expenses as incurred. Shipping and handling costs amounting to EUR 313
(2003: EUR 251; 2002: EUR 221) are recorded within selling expenses.

INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years, in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes the
enactment date. The Company records deferred tax valuation allowances, if any,
to reduce the deferred tax assets to amounts, which will more likely than not be
realized.

<PAGE>

STOCK-BASED COMPENSATION
The Company has a stock-based employee compensation plan that is accounted for
using the intrinsic-value-based method prescribed by APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations. Under
this method, no stock-based compensation cost is reflected in net income (loss),
as all options granted by the plan had an exercise price equal to market value
of the underlying common stock on the date of grant. SFAS 123, Accounting for
Stock-Based Compensation, established accounting and disclosure requirements
using a fair-value-based method of accounting for stock-based employee
compensation. As allowed by SFAS 123, the Company has elected to continue to
apply the intrinsic-value-based method of accounting described above, and has
adopted only the disclosure requirements of SFAS 123, as amended by SFAS 148,
Accounting for Stock-Based Compensation-Transition and Disclosure. The following
table illustrates the effect on net loss if the fair-value-based method had been
applied to all outstanding and unvested awards in each period.

                         2004     2003    2002
-----------------------------------------------
Net loss, as reported:  (5,743)(20,420)(10,208)
-----------------------------------------------
Deduct: Total stock-
 based employee
 compensation expense
 determined under fair
 value based method for
 all awards, net of
 related tax effects      (847)   (601) (1,166)
-----------------------------------------------
Pro forma net loss      (6,590)(21,021)(11,374)
-----------------------------------------------
Earnings (loss) per
 share
-----------------------------------------------
Basic - as reported      (0.13)  (0.46)  (0.23)
-----------------------------------------------
Basic - pro forma        (0.15)  (0.48)  (0.26)
-----------------------------------------------
Diluted - as reported    (0.13)  (0.46)  (0.23)
Diluted - pro forma      (0.15)  (0.48)  (0.26)
-----------------------------------------------


DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company operates internationally, giving rise to exposure to changes in
foreign currency exchange rates. The Company applies SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137,
SFAS No. 138 and SFAS No. 149, which provides guidance on accounting for all
derivative instruments, and for hedging activities. Derivative financial
instruments are recorded at their fair value and included in other current
assets or other current liabilities.

EARNINGS (LOSS) PER SHARE
Earnings (loss) per share has been computed using the weighted average number of
outstanding ordinary shares for each year. Because the Company reported a net
loss in each of the years in the three-year period ended December 31, 2004, only
basic per share amounts have been presented for those years. Had the Company
reported net income in 2004, 2003 and 2002, the weighted average number of
shares outstanding would have potentially been diluted by 1,309,406 and 962,184
and 2,634,382 stock options, respectively (not assuming the effects of applying
the treasury stock method).

USE OF ESTIMATES
The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, as
well as disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Significant items subject to such estimates and judgments
include the recoverability of the carrying value of goodwill and other
long-lived assets, the realizability of deferred income tax assets and
inventories, and the fair value of stock-based employee compensation awards.
Actual results may differ from those estimates. In the fourth quarter of 2004,
the company determined that the useful life of its test equipment is eight
years. Previously the useful life had been determined to be five years. The
effect of this change in accounting estimates resulted in a lower depreciation
of EUR 1,349 (EUR 842, net of tax, or EUR 0.02 per share).

RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2004, EITF No. 03-1, The Meaning of Other-Than-Temporary Impairment and
its Application to Certain Investment, was issued which includes new guidance
for evaluating and recording other than temporary impairment losses on debt and
equity securities accounted for under SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities and cost method investments, as well
as new disclosure requirements for investments that are deemed to be temporarily
impaired. While the disclosure requirements for specified debt and equity
securities and cost method investments are effective for annual periods ending
after December 15, 2003, the FASB Board has directed the FASB staff to delay the
effective date for the measurement and recognition guidance contained in EITF
No. 03-1. This delay does not suspend the requirement to recognize
other-than-temporary impairments as required by existing authoritative
literature. The Company does not expect the adoption of EITF No. 03-1 to have a
material impact on its consolidated financial statements.

In November 2004, the FASB issued Statement No. 151, Inventory Costs, to amend
the guidance in Chapter 4, "Inventory Pricing," of FASB Accounting Research
Bulletin No. 43, Restatement and Revision of Accounting Research Bulletins.
Statement 151 clarifies the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material (spoilage). The Statement
requires that those items be recognized as current-period charges. Additionally,
Statement 151 requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the production
facilities. The company does not believe the adoption of SFAS No. 151 will have
a material impact on its consolidated financial statements.

In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment, which
establishes standards for transactions in which an entity exchanges its equity
instruments for goods or services. This standard requires a public entity to
measure the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award based upon an
option-pricing model and an estimate of the number of awards expected to vest.
Compensation cost will be recognized as they vest, including related tax
effects. SFAS No. 123(R) will be effective for interim or annual reporting
periods beginning on or after June 15, 2005. The statement provides for three
alternate transition methods, each having a different reporting implication. The
company previously accounted for its stock based compensation plan using the
intrinsic-value-based method based on APB Opinion No 25. Under this method, no
stock-based compensation is reflected in net income (loss) (see also "Stock
based compensation" in this note 2 to the consolidated financial statements).
The Company is in the process of determining the transition method it is going
to adopt and the potential impact on the financial statements.


3.  RESTRUCTURING AND RELATED IMPAIRMENT CHARGES

Restructuring and related asset impairment charges are comprised of EUR 59
restructuring charges for the year ended December 31, 2004 and of EUR 1,554
restructuring charges and EUR 285 impairment charges totaling EUR 1,839 for the
year ended December 31, 2003.

RESTRUCTURING CHARGES

In the first quarter of 2003 the Company decided to close the Swedish
subsidiary. Restructuring charges incurred in 2003, include termination benefits
that were paid to all employees affected by the closing of EUR 1,076 and a
provision for estimated costs that will continue to be incurred under an
operating lease for the building for its remaining term without economic benefit
to the Company of EUR 478. In the first quarter of 2004 the Company settled its
building lease obligation in connection with the closure and recognized an
additional charge of EUR 59. The contractual termination benefits were accounted
for in accordance with SFAS 88. The provision for the operating lease was
recorded at its estimated fair value in accordance with SFAS 146.

The pretax amounts for the restructuring charges are comprised of the following:


<TABLE>
<CAPTION>
                                TERMINATION          TERMINATION
(in thousands of EUR)              COSTS                COSTS         TOTAL
-----------------------------------------------------------------------------
<S>                             <C>                   <C>            <C>
Liability balance
 at January 1,
 2003                                -                    -               -
Initial charges                    834                  346           1,180
Additional
 charges                           242                  132             374
Payments made                   (1,076)                (150)         (1,226)
----------------------------------------------------------------------------
Liability balance
 at December 31,
 2003                                -                  328             328
----------------------------------------------------------------------------
Additional
 charges                             -                   59              59
Payments made                        -                 (387)           (387)
----------------------------------------------------------------------------
Liability balance
 at December 31,
 2004                                -                    -               -
----------------------------------------------------------------------------
</TABLE>


ASSET IMPAIRMENT CHARGES
As a result of the closure of the Swedish facility, certain long-lived assets
with a net carrying value of EUR 158 have been abandoned and certain prepaid
expenses of EUR 127 no longer provided any future benefit to the Company.
Accordingly, impairment charges totaling EUR 285 were recognized for the year
ended December 31, 2003, to write-off these assets.

<PAGE>

4.  RECOVERY OF INVESTMENT

In the fourth quarter of 2001, the Company determined that its ability to
recover the full amount of its investments in silicon supplier ESM was impaired.
Accordingly the Company wrote off the investments in ESM. In March 2002, ESM was
acquired by International Rectifier. As a result, the Company was able to
subsequently recover EUR 12.0 million, EUR 0.3 million and EUR 0.1 million of
its total investment in ESM in 2002, 2003 and 2004.

5.  OTHER DISCLOSURES TO THE STATEMENTS OF OPERATION

Result before income taxes is stated after charging:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
(in thousands of EUR)                                                  2004   2003     2202
---------------------------------------------------------------------------------------------
<S>                                                                   <C>     <C>     <C>
Depreciation of property, plant and equipment                         11,501  12,545  12,834
---------------------------------------------------------------------------------------------
Amortization of intangible assets                                      1,520   2,073   1,975
---------------------------------------------------------------------------------------------
Personnel costs                                                       21,622  21,197  20,193
---------------------------------------------------------------------------------------------
Cost of sales: provision for excess inventory                              -       -   1,930
---------------------------------------------------------------------------------------------
</TABLE>


6.  INCOME TAXES

Loss before income taxes consists of the following:


--------------------------------------------
(in thousands of EUR) 2004    2003     2002
--------------------------------------------
Germany              (3,079) (6,323)(11,376)
--------------------------------------------
Foreign              (2,600) (6,283) (4,858)
--------------------------------------------
                     (5,679)(12,606)(16,234)
--------------------------------------------


Benefit (provision) for income taxes are as follows:


--------------------------------------------
(in thousands of EUR)    2004   2003   2002
--------------------------------------------
Current taxes:
--------------------------------------------
Germany                   -     250      43
--------------------------------------------
Foreign                 (38)    (91)  1,685
--------------------------------------------

Deferred taxes:
--------------------------------------------
Germany                   -  (8,287)  3,941
--------------------------------------------
Foreign                 (26)    314     357
--------------------------------------------
                        (64) (7,814)  6,026
--------------------------------------------



Although Dialog is a UK company, its principal operations are located in Germany
and all of its operating subsidiaries are owned by its German subsidiary.
Accordingly, the following information is based on German corporate tax law. The
Company's statutory tax rate for its German subsidiary is 25%. Including the
impact of the solidarity surcharge of 5.5%, the federal corporate tax rate
amounts to 26,375%.

A reconciliation of income taxes determined using the German corporate tax rate
of 26,375% plus the after federal tax benefit rate for trade taxes of 11,225%,
for a combined statutory rate of 37.6%, is as follows:

<TABLE>
<CAPTION>

---------------------------------------------------------------------------------------------
                                                                        2004    2003    2002
---------------------------------------------------------------------------------------------
<S>                                                                    <C>     <C>     <C>
Expected benefit for income taxes                                      2,135   4,740   6,104
---------------------------------------------------------------------------------------------
Foreign tax rate differential                                           (200)   (505)   (387)
---------------------------------------------------------------------------------------------
Amortization of non-deductible intangible assets                         (41)    (41)    (41)
---------------------------------------------------------------------------------------------
Valuation allowance on deferred tax assets                            (1,947)(11,804)   (118)
---------------------------------------------------------------------------------------------
Others                                                                   (11)   (204)    468
---------------------------------------------------------------------------------------------
Actual benefit (expense) for income taxes                                (64) (7,814)  6,026
---------------------------------------------------------------------------------------------
</TABLE>

<PAGE>



Deferred income tax assets and liabilities are summarized as follows:

---------------------------------------------
                          DEC 31,      DEC 31,
                            2004         2003
---------------------------------------------
Property, plant and
 equipment                     374       196
---------------------------------------------
Net operating loss and
 tax credit carryforwards   25,158    24,284
---------------------------------------------
Liabilities                  5,654     5,640
---------------------------------------------
Other                           12        41
---------------------------------------------
                            31,198    30,161
---------------------------------------------
Valuation allowance        (14,046)  (12,329)
---------------------------------------------
Deferred tax assets         17,152    17,832
---------------------------------------------
Property, plant and
 equipment                  (1,020)   (1,669)
---------------------------------------------
Receivables                     (7)       (4)
---------------------------------------------
Deferred tax liabilities    (1,027)   (1,673)
---------------------------------------------
Net deferred tax assets     16,125    16,159
---------------------------------------------


Tax loss carryforwards and established valuation allowances are summarized as
follows:

<TABLE>
<CAPTION>

---------------------------------------------------------------------------------------------
                               DECEMBER 31, 2004                       DECEMBER 31, 2003

                               TAX LOSS                                TAX LOSS
                               CARRYFORWARDS                           CARRYFORWARDS
                               SUBJECT TO                              SUBJECT TO
                 TAX LOSS      VALUATION     VALUATION     TAX LOSS    VALUATION     VALUATION
               CARRYFORWARD    ALLOWANCE     ALLOWANCE   CARRYFORWARD  ALLOWANCE     ALLOWANCE
---------------------------------------------------------------------------------------------
<S>                <C>          <C>           <C>         <C>          <C>            <C>
Germany            63,124       28,648        11,392      61,696       27,220         10,235
---------------------------------------------------------------------------------------------
UK                  6,384        6,286         2,026       4,391        4,293          1,288
---------------------------------------------------------------------------------------------
US
    Federal         1,571        1,571           498       1,520        1,520            493
---------------------------------------------------------------------------------------------
    State           1,442        1,442           131       1,514        1,514            131
---------------------------------------------------------------------------------------------
Sweden                  -            -             -         543          543            182
---------------------------------------------------------------------------------------------
Total                                         14,046                                  12,329
---------------------------------------------------------------------------------------------
</TABLE>


In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods, in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. In December 2003, the
German government enacted new tax legislation, which among other things, limits
the use of German tax-loss carryforwards to 60% of the taxable income for fiscal
years starting from 2004 and thereafter. As a result of this change in tax law,
at December 31, 2003 the Company has re-evaluated its deferred tax asset
position and the need for a valuation allowance for the German tax losses. The
assessment requires the exercise of judgment on the part of management, with
respect to, among other things, benefits that could be realized from available
tax strategies and future taxable income, as well as other positive and negative
factors. The assessment in 2003 considered the weight given to cumulative losses
incurred in Germany over the three-year period ended December 31, 2003, as well
as detailed forecasts of taxable income in the foreseeable future. Although the
Company forecasted generating future taxable income to approximate available
tax-loss carryforwards, the change in tax law increased the forecasted number of
additional years that future taxable income must be generated in order to fully
realize these loss carryforward benefits. Pursuant to SFAS 109 and the inherent
uncertainties in projecting future taxable income, management had concluded that
it is more likely than not that a portion of our tax losses could not ultimately
be realized. Consequently, in 2003 the Company recognized a valuation allowance
of EUR 10,235, to reduce the carrying value of its net deferred tax assets on
tax loss carryforwards in Germany to an amount that was more likely than not
expected to be ultimately realized. Furthermore, based on management's
assessment, at December 31, 2003 the company established valuation allowances of
EUR 1,288, EUR 624 and EUR 182 on tax losses in the UK, the US and Sweden,
respectively, since it was more likely than not, that the deferred tax assets
will not be realized through future taxable earnings.

<PAGE>

Due to losses incurred in 2004, the company has not recognized any additional
deferred tax assets and established an additional valuation allowance of EUR
1,947 on the tax-loss carryforwards generated in Germany in 2004. However,
management has evaluated whether it is more likely than not that the Company can
recover the carrying amount of deferred tax assets and determined that an
additional valuation allowance with respect to the deferred tax assets is not
required at December 31, 2004.

The tax loss carryforwards in the US are expiring in 2005 through 2017, the
other tax loss carryforwards have no expiration date.


7. ADDITIONAL CASH FLOW INFORMATION

The following represents supplemental information with respect to cash flows:

--------------------------------------------
(in thousands of EUR)    2004    2003    2002
--------------------------------------------
Interest paid, net        5      14       9
--------------------------------------------
Income taxes paid,
 net                     49     372     911
--------------------------------------------


8. TRADE ACCOUNTS RECEIVABLE, NET

The recorded trade accounts receivable for which an impairment has been
recognized and the related allowance for doubtful accounts at December 31, 2004
and 2003 were EUR 34 and EUR 17, and EUR 270 and EUR 197, respectively. The
allowance for doubtful accounts developed as follows:


--------------------------------------------
(in thousands of EUR)    2004   2003    2002
--------------------------------------------
Allowance for
 doubtful accounts
 at beginning of
 year                   197     397     439
--------------------------------------------
Additions charged to
 bad debt expense        16     230     222
--------------------------------------------
Write-offs charged
 against the
 allowance             (186)   (210)   (139)
--------------------------------------------
Reductions charged
 to bad debt expense    (10)   (220)   (125)
--------------------------------------------
Allowance for
 doubtful accounts
 at end of year          17     197     397
--------------------------------------------


9.  INVENTORIES

Inventories are comprised of the following:


---------------------------------------------
(in thousands of EUR)            2004    2003
---------------------------------------------
Raw materials                  9,893   2,738
---------------------------------------------
Work-in-process               13,906   5,026
---------------------------------------------
Finished goods                 5,995   5,478
---------------------------------------------
                              29,794  13,242
---------------------------------------------


10.  MARKETABLE SECURITIES

The Company has invested in "investment grade" rated debt securities with a
maturity up to six months, and exchange traded funds, which invest in
debt-securities. All marketable securities are classified as available for sale.
The aggregate costs, fair values and unrealized losses per security class are as
follows:



<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
                                        DEC 31, 2004                      DEC 31, 2003
                                                      UNREALIZED
(in thousands of EUR)            COST     FAIR VALUE     LOSS   COST   FAIR VALUE     LOSS
--------------------------------------------------------------------------------------------
<S>                              <C>       <C>         <C>    <C>        <C>          <C>
Corporate debt securities             -         -          -   43,029    42,947         (82)
--------------------------------------------------------------------------------------------
Debt based funds                 17,581    17,542        (39)   1,969     1,953         (16)
--------------------------------------------------------------------------------------------
                                 17,581    17,542        (39)  44,998    44,900         (98)
--------------------------------------------------------------------------------------------
</TABLE>

<PAGE>


11.  DEPOSITS AND PREPAID EXPENSES

At December 31, 2002, the Company maintained deposits of $20 million with
Chartered Semiconductor Manufacturing Pte., Ltd. ("Chartered"). These deposits
were refunded to the Company in October 2003. In addition, the Company paid
Chartered a total of $10 million in 2000 as an advance payment for future wafer
deliveries and $2.5 million to another supplier. Such advance payments are
classified in the balance sheet line items "Prepaid expenses". In 2004 all
remaining advance payments paid to Chartered were refunded to the company. The
outstanding balance of the advance payments is refunded in proportion to the
Company's purchases of wafers from the other supplier, and at this time, the
Company expects to have the entire advance payments refunded. The amount of
advance payments classified in prepaid expenses on the consolidated balance
sheet as current assets represents that the amount of advance payments expected
to be refunded in the next twelve months.

12.  PROPERTY, PLANT AND EQUIPMENT, NET

A summary of activity for property, plant and equipment for the year ended
December 31, 2004 is as follows:

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
                                                                                         NET BOOK             NET BOOK
                                                                                         VALUE                VALUE
                                                                             ACCUMULATED AS OF    ACCUMULATED AS OF
(in thousands       JAN 1,   CURRENCY           RECLASSIFIC-          DEC 31, DEPRECIATI- DEC 31,  DEPRECIATI- DEC 31,  DEPRECIATI-
of EUR)              2004     CHANGE  ADDITIONS ATIONS     DISPOSALS  2004       ON       2004     ON 2003     2003     ON 2004
----------------------------------------------------------------------------------------------------------------------------------
<S>                 <C>        <C>    <C>         <C>       <C>     <C>      <C>        <C>       <C>        <C>       <C>
Test equipment      53,050     (2)    8,028       300        (863)     60,513   (45,227)   15,286   (36,956)    16,094    (9,076)
----------------------------------------------------------------------------------------------------------------------------------
Leasehold
 improvements          903    (19)      158        --        (145)        897      (596)      301      (550)       353      (121)
 equipment          14,303   (112)    2,412       (33)       (860)     15,710   (11,782)    3,928   (10,427)     3,876    (2,304)
----------------------------------------------------------------------------------------------------------------------------------
Advance payment
 relating to test
 equipment             267     --     1,723      (267)         --       1,723        --     1,723        --          267      --
----------------------------------------------------------------------------------------------------------------------------------
Property, plant
 and equipment      68,523   (133)   12,321        --      (1,868)     78,843   (57,605)   21,238   (47,933)    20,590   (11,501)
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>



13.  INTANGIBLE ASSETS AND GOODWILL

A summary of activity for intangible assets and Goodwill for the year ended
December 31, 2004 is as follows:


<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
                                                                                         NET BOOK             NET BOOK
                                                                                         VALUE                VALUE
                                                                             ACCUMULATED AS OF    ACCUMULATED AS OF
(in thousands       JAN 1,   CURRENCY           RECLASSIFIC-          DEC 31, DEPRECIATI- DEC 31,  DEPRECIATI- DEC 31,  DEPRECIATI-
of EUR)              2004     CHANGE  ADDITIONS ATIONS     DISPOSALS  2004       ON       2004     ON 2003     2003     ON 2004
----------------------------------------------------------------------------------------------------------------------------------
<S>                 <C>        <C>    <C>         <C>       <C>     <C>      <C>        <C>        <C>        <C>       <C>
Software, licenses
 and other           10,930      (26)      348     --      (199)     11,053    (8,952)     2,101    (7,992)    2,938     (1,183)
----------------------------------------------------------------------------------------------------------------------------------
Patents               3,008       --        --     --        --       3,008      (843)     2,165      (506)    2,502       (337)
----------------------------------------------------------------------------------------------------------------------------------
Intangible assets    13,938      (26)      348     --      (199)     14,061    (9,795)     4,266    (8,498)    5,440     (1,520)
----------------------------------------------------------------------------------------------------------------------------------
Goodwill             15,736       --        --     --        --      15,736    (3,950)    11,786    (3,950)   11,786         --
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>



During the year ended December 31, 2004 and 2003, the Company acquired software
and licenses for a total purchase price of EUR 348 and EUR 618 respectively. The
expected weighted average useful life of these assets is 3 years. During the
year 2002, the Company acquired the CMOS imaging technology and associated CMOS
Active Pixel Sensor (APS) patent portfolio from Sarnoff Corporation, a research
and development institute, for a total purchase price of EUR 3,008. The expected
weighted average useful life of these patents is 9 years. In addition, Sarnoff
may be paid additional contingent consideration which will be determined as a
percentage of the revenues received from sales of imagers used for camera
applications and as an agreed sum for each imager used for cellular phone
applications. Such contingent consideration is limited in absolute terms and has
a fixed expiration date as specified in the purchase agreement.

The aggregate amortization expense for the years ended December 31, 2004, 2003
and 2002 was EUR 1,520, EUR 2,073 and EUR 1,975, respectively. Amortization
expense of the gross carrying amount of intangible assets at December 31, 2004
is estimated to be EUR 1,015 in 2005, EUR 631 in 2006, EUR 542 in 2007, EUR 518
in 2008 and EUR 483 in 2009.
<PAGE>

14.  ACCRUED EXPENSES

The Company issues various types of contractual product warranties under which
it guarantees the performance of products delivered for a certain period or
term. The changes in the provision for those product warranties are summarized
as follows:

---------------------------------------------
(in thousands of EUR)            2004   2003
---------------------------------------------
Balance at beginning of year     135     115
---------------------------------------------
Utilizations                      (8)   (115)
---------------------------------------------
Additions                         28     135
---------------------------------------------
Balance at end of year           155     135
---------------------------------------------



15.  SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME

At December 31, 2003, Dialog had authorized 104,311,860 ordinary shares with a
par value of GBP 0.10 per share, of which 44,068,930 were issued and
outstanding. All shares are fully paid.

On September 24, 2004, the Company completed an offering of 2,000,000 previously
unissued ordinary shares at GBP 0.10 per share to its employee benefit trust, to
make such shares available for the exercise of stock option rights that had
previously been granted to employees. These shares are legally issued and
outstanding, but are not considered issued and outstanding for accounting
purposes and accordingly have been reported in the caption "employee stock
purchase plan shares" as a reduction of shareholders' equity.

The related tax effects allocated to each component of other comprehensive
income (loss) for the years ended December 31, 2004, 2003 and 2002 are as
follows:

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
                               2004                    2003                      2002
(in thousands of EUR)   PRETAX TAX EFFECT NET  PRETAX  TAX EFFECT  NET   PRETAX  TAX EFFECT NET
----------------------------------------------------------------------------------------------
<S>                     <C>     <C>    <C>     <C>     <C>   <C>        <C>      <C>        <C>
Unrealized (losses)
 gains on available
 for sale
 securities             59     (26)      33    (98)     37       (61)    -       -          -
----------------------------------------------------------------------------------------------
Unrealized (losses)
 gains on
 derivative
 financial
 instruments             -       -        -    253     (95)      158  (185)     69       (116)
----------------------------------------------------------------------------------------------
Currency
 translation
 adjustment             12     (17)      (5)  (508)    142      (366) (437)    150       (287)
----------------------------------------------------------------------------------------------
Other Comprensive
 Income (loss)          71     (43)      28   (353)     84      (269) (622)    219       (403)
----------------------------------------------------------------------------------------------
</TABLE>


In 2003, realized losses of EUR 44 (net of EUR 27 tax benefits) on the
settlement of a derivative financial instrument were reclassified into net loss
(see Note 19).

16.  PENSION SCHEME

The group operates defined contribution pension schemes. The pension cost charge
for the year represents contributions payable by the group to the funds and
amounted to EUR 484 (2003: EUR 565; 2002: EUR 640). At December 31, 2004,
contributions amounting to EUR 59 (2003: EUR 5) were payable to the funds and
are included in creditors.

17. STOCK-BASED COMPENSATION
A) STOCK OPTION PLAN

On August 7, 1998, the Company adopted a stock option plan ("Plan") under which
employees and directors may be granted from time-to-time, at the discretion of
the Board, stock options to acquire up to 3,840,990 shares of the Company's
authorized but unissued ordinary shares. On May 16, 2002 the shareholders of the
Company approved a resolution increasing the maximum amount of stock options
which may be granted by the company to 15%, after issue, of the Company's issued
share capital. At December 31, 2004, 15%, after issue, of the Company's issued
share capital amounted to 8,129,811 shares. Stock options are granted with an
exercise price not less than the quoted price at the date of grant. Stock
options have terms of ten years and vest over periods of one to five years from
the date of grant.

<PAGE>

The fair value of all grants in the three-year period ended December 31, 2004 is
estimated using the Black-Scholes option pricing model. Expectations of early
exercise are accounted for within the average life of the options. The following
weighted-average assumptions were used for stock option grants for the years
ended December 31, 2004, 2003 and 2002.


                        2004     2003    2002
--------------------------------------------
Expected dividend
 yield                    0%      0%      0%
--------------------------------------------
Expected volatility      80%     74%    106%
--------------------------------------------
Risk free interest
 rate                   3.4%    3.4%    3.7%
--------------------------------------------
Expected life (in
 years)                 5.0     3.8     5.0
--------------------------------------------
Weighted average
 share price           3.70    3.37    2.33
--------------------------------------------
Weighted average
 exercise price        3.70    3.37    2.33
--------------------------------------------
Weighted-average
 fair value of
 options granted (in
 EUR)                  2.44    2.21    1.83
--------------------------------------------




Stock option plan activity for the years ended December 31, 2004, 2003 and 2002
was as follows:

<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------
                                 2004                      2003                      2002
                                    WEIGHTED AVERAGE          WEIGHTED AVERAGE          WEIGHTED AVERAGE
(prices in EUR)            OPTIONS  EXERCISE PRICE  OPTIONS   EXERCISE PRICE  OPTIONS   EXERCISE PRICE
------------------------------------------------------------------------------------------------------
<S>                       <C>              <C>     <C>               <C>     <C>               <C>
Outstanding at beginning
 of year                  3,412,270        2.32    2,634,382         3.62    2,672,506         3.78
----------------------------------------------------------------------------------------------------
Granted                     108,960        3.70    2,050,180         3.37      124,060         2.33
----------------------------------------------------------------------------------------------------
Exercised                   (64,648)       0.44      (76,828)        0.52      (79,174)        0.79
----------------------------------------------------------------------------------------------------
Forfeited                  (157,176)       3.48     (204,004)        6.21      (83,010)        9.78
----------------------------------------------------------------------------------------------------
Cancelled                         -           -     (991,460)        7.29         -            -
----------------------------------------------------------------------------------------------------
Outstanding at end of
 year                     3,299,406        2.34    3,412,270         2.32    2,634,382         3.62
----------------------------------------------------------------------------------------------------
Options exercisable at
 year end                 1,827,076        1.53    1,013,356         0.70    1,217,402         3.07
----------------------------------------------------------------------------------------------------
</TABLE>


The weighted average share price at the date of exercise of options was EUR 3.23
in the year ended December 31, 2004.

In April 2003, the Company's board of directors approved a resolution giving
employees the right to cancel their options granted in 2000, 2001 and 2002.
Employees elected to cancel a total of 991,460 options with a weighted average
exercise of EUR 7.29. In November 2003, approximately 2.0 million options were
granted at an exercise price equal to fair value (at that date) of EUR 3.45 per
share.

The following table summaries information about stock options outstanding at
December 31, 2004:


<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
                                        OPTIONS OUTSTANDING                 OPTIONS EXERCISABLE

                                        WEIGHTED-AVERAGE             NUMBER
                          NUMBER           REMAINING     WEIGHTED-   EXERCISABLE
                          OUTSTANDING AT   CONTRACTUAL    AVERAGE       AT
                          DECEMBER 31,       LIFE         EXERCISE   DECEMBER 31, WEIGHTED-AVERAGE
RANGE OF EXERCISE PRICES      2004         (IN YEARS)       PRICE      2004       EXERCISE PRICE
--------------------------------------------------------------------------------------------------
<S>                       <C>                <C>           <C>   <C>                  <C>
EUR  0.32 - 2.15            1,345,086          5.0           0.70  1,254,622            0.64
--------------------------------------------------------------------------------------------------
EUR  3.00 - 8.00            1,954,320          8.7           3.47    572,454            3.48
--------------------------------------------------------------------------------------------------
EUR  0.32 - 8.00            3,299,406          7.2           2.34  1,827,076            1.53
--------------------------------------------------------------------------------------------------
</TABLE>

<PAGE>

B) EMPLOYEE STOCK PURCHASE PLAN
On March 26, 1998, in connection with the acquisition of the Company, the
Company and its then majority owner, Apax Partners, adopted a Subscription and
Shareholders Agreement under which employees and directors were invited at the
discretion of the Board, to purchase up to 3,456,890 ordinary shares of the
Company from Apax Partners or an established Employee Benefit Trust. The
purchase price of the shares was equal to their estimated fair value on the date
the employee or director subscribes for those shares. During the first quarter
of 1999, the Trust acquired the remaining 668,800 ordinary shares from Apax
Partners, which had not been sold to employees or directors, for purposes of
distributing them to employees under the Employee Stock Purchase Plan or for
distribution in connection with the exercise of employee stock options.

On September 24, 2004, the Company completed an offering of 2,000,000 previously
unissued ordinary shares at EUR 0.10 per share to its employee benefit trust, to
make such shares available for the exercise of stock option rights that had
previously been granted to employees. These shares are legally issued and
outstanding, but are not considered issued and outstanding for accounting
purposes and accordingly have been reported in the caption "employee stock
purchase plan shares" as a reduction of shareholders' equity.

At December 31, 2004, the Trust continued to hold 2,001,559 shares, equaling the
remaining balance of the acquired 668,800 shares and the 2,000,000 shares
acquired in 2004 (see note 15).

18. COMMITMENTS

The Company leases design software, all of its office facilities, office and
test equipment, and vehicles under operating leases. Total rentals under
operating leases, charged as an expense in the statement of operations, amounted
to EUR 7,780, EUR 7,581 and EUR 7,229 for the years ended December 31, 2004,
2003 and 2002, respectively.

Future minimum lease payments under rental and lease agreements, which have
initial or remaining terms in excess of one year at December 31, 2004 are as
follows:


(in thousands of EUR)       OPERATING LEASES
--------------------------------------------
2005                                  8,148
--------------------------------------------
2006                                  6,629
--------------------------------------------
2007                                  6,399
--------------------------------------------
2008                                  6,429
--------------------------------------------
2009                                  3,297
--------------------------------------------
Thereafter                              316
--------------------------------------------
Total                                31,218
--------------------------------------------


At December 31, 2004, the Company had an unused short-term credit line of EUR
12,782. There are no amounts outstanding under this credit line at December 31,
2004.

19.  FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

A) USE OF DERIVATIVE FINANCIAL INSTRUMENTS

The Company's sales are primarily denominated in Euros and US dollars whereas
purchases of raw materials, manufacturing services and the use of design
software are primarily denominated in US dollars, whereas other costs and
expenses such as salaries and other overhead costs are denominated in Euro, GBP
and US dollars. In order to manage these foreign currency exchange risks, the
Company attempts to match cash inflows and outflows (sales with supply costs) in
the same currency, primarily the US dollar. In situations where the Company is
not able to effectively match cash inflows and outflows in the same currency,
management considers the use of derivative financial instruments. As a matter of
policy, the Company does not engage in derivatives trading, derivatives
market-making or other speculative activities.

To hedge existing foreign currency exposure related to a $20 million deposit
(see Note 11), the Company purchased foreign currency forward contracts in 2000
to effectively change the US Dollar deposits into Euro ( EUR 21,680) upon the
expected return of the deposit as of December 31, 2003. These deposits were
refunded to the Company in October 2003. Upon receipt of the deposit, the
Company settled its currency hedging position related to this deposit and
recognized a loss of EUR 71 in the consolidated statement of operations.

In the fourth quarter of 2003, the Company entered into derivative financial
arrangements with a bank (the "counterparty") that obligates the Company, if
directed to do so by the counterparty, to purchase a total of $3,611 during the
first half of 2004 at euro-dollar exchange rates ranging from 1.22 to 1.24.
These arrangements do not qualify for hedge accounting treatment. Accordingly,
the fair value of these derivative financial instruments, which are based on a
Black-Scholes pricing model, are recognized on the balance sheet and the changes
in fair value are recognized in earnings. At December 31, 2003, these
transactions resulted in a net unrealized loss of EUR 78 recognized in earnings.

<PAGE>

B) FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of a financial instrument is the price at which one party would
assume the rights and /or duties of another party.

The carrying amounts and fair values of the Group's financial instruments are as
follows:


<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
                                                    DEC 31, 2004             DEC 31, 2003
                                                CARRYING                 CARRYING
(in thousands of EUR)                             AMOUNT    FAIR VALUE    AMOUNT   FAIR VALUE
---------------------------------------------------------------------------------------------
Financial instruments (other than derivative
 instruments)
<S>                                               <C>         <C>          <C>         <C>
Cash and cash equivalents                         13,977      13,977       8,109       8,109
---------------------------------------------------------------------------------------------
Marketable securities                             17,542      17,542      44,900      44,900
---------------------------------------------------------------------------------------------
Deposits                                             194         194         183         183
---------------------------------------------------------------------------------------------
Derivative instruments (currency contracts)
Current liabilities                                    -           -          78          78
---------------------------------------------------------------------------------------------
</TABLE>


20. SEGMENT REPORTING

The Company has one operating segment, which is the design and supply of
semiconductor chips. The Company delivers its products to various market sectors
and generates a substantial portion of its revenue from the wireless
communications market; 78%, 75% and 71% of total revenues in the years ended
December 31, 2004, 2003 and 2002, respectively.

Revenues by market sector consisted of the following:

--------------------------------------------
                      2004     2003     2002
--------------------------------------------
Wireless
 communication       90,617  69,849  54,715
--------------------------------------------
Automotive           11,898   7,896   6,074
--------------------------------------------
Industrial           13,529  15,148  16,315
--------------------------------------------
                    116,044  92,893  77,104
--------------------------------------------



Revenues are allocated to countries based on the location of the shipment
destination:


--------------------------------------------
                      2004     2003     2002
--------------------------------------------
Germany               47,719  45,395  31,478
---------------------------------------------
France                 1,936   4,532   9,348
---------------------------------------------
Other European
 countries            14,931  10,438  11,698
---------------------------------------------
China                 19,738  18,198  13,006
---------------------------------------------
Other Asian countries 22,351   6,695   5,154
---------------------------------------------
Other countries        9,369   7,635   6,420
---------------------------------------------
                     116,044  92,893  77,104
---------------------------------------------



Following are the net carrying values of investments in property, plant and
equipment by geographic location:



---------------------------------------------
                             DEC 31,  DEC 31,
                              2004      2003
---------------------------------------------
Property, plant and equipment
Germany                       20,675  19,634
---------------------------------------------
Japan                             92     176
---------------------------------------------
United Kingdom                   189     358
---------------------------------------------
USA                              282     422
---------------------------------------------
                              21,238  20,590
---------------------------------------------


21.  TRANSACTIONS WITH RELATED PARTIES

Timothy Anderson, a member of the Company's Board of Directors, is also a
partner in the law firm Reynolds Porter Chamberlain, which frequently acts as
the Company's legal adviser. Fees to Reynolds Porter Chamberlain for legal
services rendered were EUR 212, EUR 162 and EUR 268 in 2004, 2003 and 2002,
respectively.