**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549**

**FORM 10-Q**

**[X]       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
             SECURITIES EXCHANGE ACT OF 1934**

**For the quarterly period ended September 26, 2004**

**OR**

**[  ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934**

**For the transition period from ________to _________**

**Commission file number 333-98529**

**ZiLOG, INC.**
(Exact name of Registrant as specified in its charter)



|**Delaware**                                                   | **13-3092996**                         
|-------------------------------------------------------------- | ---------------------------------------
|(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number)

**532 Race StreetSan Jose, California   95126**(Address of principal executive offices)

**(408) 558-8500**(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X]    NO [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES [ ]    NO [X]

Indicate by check mark whether the registrant has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of
1934 subsequent to the distribution of securities under a plan confirmed by a court.
YES [X]    NO [ ]

As of November 8, 2004, there were 16,295,500 shares of the Company's Common
Stock, $.01 par value outstanding.



Some of the statements under sections entitled "Risk Factors" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and elsewhere in this Form 10-Q constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995, Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These statements relate to future events or our
future financial performance and involve known and may involve unknown risks,
uncertainties and other factors that may cause our actual results, levels of
activity, performance or achievements to be materially different from any future
results, levels of activity, performance or achievements expressed or implied by
forward-looking statements including, but not limited to, prospects for future
market growth, statements relating to the general direction of our business, our
expected liquidity, capital expenditures and expense levels in future periods.
Other factors that may cause or contribute to differences include, but are not
limited to:  continued availability of third-party foundry and assembly services
at commercially-reasonable quality and prices; under-absorption of manufacturing
costs from under-utilization of production capacity; our distributors and
customers significantly reducing their existing inventories before ordering new
products; the ongoing transition of wafer manufacturing to third party
foundries, at expected costs and at anticipated production yields; ongoing costs
to maintain the remaining assets of  our MOD III subsidiary in a saleable state
and anticipated costs in connection with the decommissioning of our MOD II wafer
fabrication facility.  In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "expects,"
"anticipates," "believes," "estimates," "potential," "continue," or the negative
terms or other comparable terminology. In evaluating these statements, you
should specifically consider various factors, including the risks outlined under
"Risk Factors."

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

Based in San Jose, California, we were incorporated in California in October
1981 and reincorporated in Delaware in April 1997.  In this report,
"ZiLOG," "the Company," "our," "us,"
"we," and similar expressions refer to ZiLOG, Inc. and its
subsidiaries.  However, when these expressions are used throughout this report
in connection with ZiLOG, Inc.'s reorganization under Chapter 11 of the U.S.
bankruptcy code, they are referring only to the parent company, ZiLOG, Inc., and
not to any of its subsidiaries.  ZiLOG, eZ80, Z8Encore! and eZ80TM are
registered trademarks of ZiLOG, Inc. and eZ80Acclaim! is a trademark of ZiLOG,
Inc.







**ZiLOG, INC.
    QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED September 26, 2004
                                TABLE OF CONTENTS**



|**PART I.   FINANCIAL INFORMATION**                                                                                                                                                               | **Page No.**
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------
|                                                                                                                                                                                                  |             
|Item 1.   Interim Condensed Consolidated Financial Statements
                  (unaudited):                                                                                                      |             
|                                                                                                                                                                                                  |             
|Unaudited Condensed Consolidated Statements of Operations for the
          
    three and nine months ended September 30, 2004 and three and
          
    nine months ended September 30, 2003 | **          
|                                                                                                                                                                                                  |             
|Unaudited Condensed Consolidated Balance Sheets at September 30, 2004 
          
   and December 31, 2003                                                                                        | **          
|                                                                                                                                                                                                  |             
|Unaudited Condensed Consolidated Statements of Cash Flows for the
          
    nine months ended September 30, 2004, and September 30, 2003                                                     | **          
|                                                                                                                                                                                                  |             
|Notes to Unaudited Condensed Consolidated Financial Statements                                                                                                                                    | **          
|                                                                                                                                                                                                  |             
|Item 2.   Management's Discussion and Analysis of Financial
                      Condition and Results of Operations                                                                             | **          
|                                                                                                                                                                                                  |             
|Item 3.   Quantitative and Qualitative Disclosures About Market Risk                                                                                                                              | **          
|                                                                                                                                                                                                  |             
|Item 4.   Controls and Procedures                                                                                                                                                                 | **          
|                                                                                                                                                                                                  |             
|**PART II.  OTHER INFORMATION**                                                                                                                                                                   |             
|                                                                                                                                                                                                  |             
|Item 1.   Legal Proceedings                                                                                                                                                                       | **          
|                                                                                                                                                                                                  |             
|Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds                                                                                                                              | **          
|                                                                                                                                                                                                  |             
|Item 3.  Defaults Upon Senior Securiities                                                                                                                                                         | **          
|                                                                                                                                                                                                  |             
|Item 4.  Submission of Matters to a Vote of Security Holders                                                                                                                                      | **          
|                                                                                                                                                                                                  |             
|Item 5.  Other Information                                                                                                                                                                        | **          
|                                                                                                                                                                                                  |             
|Item 6.   Exhibits and Reports on Form 8-K                                                                                                                                                        | **          
|                                                                                                                                                                                                  |             
|Signature                                                                                                                                                                                         | **          

---

**ZiLOG, INC.

           UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                      (in millions except per share data)**

`Three Months Ended         Nine Months Ended
                                                                 September 30,             September 30,
                                                         ------------------------- -------------------------
                                                             2004         2003         2004         2003
                                                         ------------ ------------ ------------ ------------
Net sales...............................................       $22.8        $26.0        $76.7        $76.9
Cost of sales...........................................        12.4         13.3         39.2         41.9
                                                         ------------ ------------ ------------ ------------
Gross margin............................................        10.4         12.7         37.5         35.0

Operating expenses:
  Research and development..............................         5.2          4.5         15.6         13.1
  Selling, general and administrative...................         7.2          7.2         21.8         20.4
  Special charges and reorganization items..............        (1.9)         1.3          6.3          3.2
  Amortization of intangible assets.....................         1.0          1.7          3.1          5.1
                                                         ------------ ------------ ------------ ------------
     Total operating expenses...........................        11.5         14.7         46.8         41.8
                                                         ------------ ------------ ------------ ------------
Operating loss..........................................        (1.1)        (2.0)        (9.3)        (6.8)

Other income (expense):
  Interest income.......................................         0.1          0.1          0.2          0.2
  Interest expense......................................        (0.1)        (0.1)        (0.2)        (0.3)
  Other, net............................................         --           --            (0)         0.2
                                                         ------------ ------------ ------------ ------------
Loss before income taxes................................        (1.1)        (2.0)        (9.4)        (6.7)
Provision (benefit) for income taxes....................         0.9          --          (0.2)         0.2
                                                         ------------ ------------ ------------ ------------
Net loss ...............................................       ($2.0)       ($2.0)       ($9.2)       ($6.9)
                                                         ============ ============ ============ ============
Basic ans diluted net loss per share....................      ($0.12)      ($0.13)      ($0.58)      ($0.48)
                                                         ============ ============ ============ ============
Shares used in computing basic and diluted
   net loss per share...................................        16.4         14.3         15.9         14.3
                                                         ============ ============ ============ ============`

See accompanying notes to unaudited condensed consolidated financial statements.

---

**ZiLOG, INC.

                UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

                                 (in millions)**

`Sep. 30,    Dec. 31,
                                                          2004        2003
                                                       ----------- -----------
                                  ASSETS
Current assets:
  Cash and cash equivalents...........................      $39.5       $22.0
  Accounts receivable, less allowance for doubtful
    accounts of $0.3 at September 30, 2004, and at
    December 31, 2003.................................        8.4        13.0
  Inventories.........................................       12.3         9.6
  Prepaid expenses and other current assets...........        3.1         3.8
  Deferred tax asset..................................        2.4        --
                                                       ----------- -----------
          Total current assets........................       65.7        48.4
                                                       ----------- -----------

MOD III assets held for sale..........................       --          30.0
MOD II assets held for sale...........................        7.8        --
Net property, plant and equipment.....................        6.7        18.1
Goodwill..............................................        9.5        16.9
Intangible assets, net................................        8.3        11.5
Other assets..........................................        7.3         9.0
                                                       ----------- -----------
                                                           $105.3      $133.9
                                                       =========== ===========
        LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' EQUITY
Current liabilities:
  Short-term debt.....................................     $ --          $5.0
  Accounts payable....................................       10.9         8.6
  Accrued compensation and employee benefits..........        3.6         3.7
  Other accrued liabilities...........................        2.5         2.5
  Accrued special charges.............................        1.2         0.2
  Deferred income on shipments to distributors........        5.7         7.4
                                                       ----------- -----------
          Total current liabilities...................       23.9        27.4
                                                       ----------- -----------

Deferred income taxes.................................        2.3         9.9
Other non-current tax liabilities.....................        5.9         5.9
                                                       ----------- -----------
          Total liabilities...........................       32.1        43.2
                                                       ----------- -----------

Minority interest in MOD III assets...................       --          30.0

Stockholders' equity:
  Common Stock........................................        0.2         0.1
  Additional paid-in capital..........................      121.7        96.4
  Deferred stock compensation.........................       (1.2)       (2.0)
  Treasury stock......................................       (6.4)       (1.9)
  Accumulated deficit.................................      (41.1)      (31.9)
                                                       ----------- -----------
          Total stockholders' equity..................       73.2        60.7
                                                       ----------- -----------
Total liabilities, minority interest and
  stockholders' equity................................     $105.3      $133.9
                                                       =========== ===========`

See accompanying notes to unaudited condensed consolidated financial stateme

---

**ZiLOG, INC.

           UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                                  (in millions)**

`Nine Months Ended
                                                                        September 30,
                                                               -------------------------
                                                                   2004         2003
                                                               ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss......................................................       ($9.2)       ($6.9)
Adjustments to reconcile net loss to net cash provided
     (used) by operating activities:
     Amortization of fresh-start intangible assets............         3.2          5.1
     Deferred income taxe assets and liabilities..............       (10.0)        (2.8)
     Depreciation and other amortization......................         2.4          4.3
     Loss on asset disposal...................................         0.1          --
     Impairment of equity investment..........................         --           0.2
     Impairment of long lived assets..........................         5.4          0.2
     Stock-based compensation.................................         1.5          1.2
Changes in operating assets and liabilities:
     Accounts receivable......................................         4.6         (0.2)
     Inventories..............................................        (2.7)         0.8
     Prepaid expenses and other current and
       noncurrent assets......................................         2.3          1.3
     Goodwill adjustment......................................         7.4          --
     Accounts payable.........................................         2.3         (1.2)
     Accrued compensation and employee benefits...............        (0.2)        (3.3)
     Deferred income on shipments to distributors.............        (1.7)        (1.9)
     Other accrued liabilities and accrued
       special charges........................................         1.0          1.1
                                                               ------------ ------------
        Net cash provided (used) by operating activities......         6.4         (2.1)
                                                               ------------ ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Capital expenditures.......................................        (4.2)        (1.6)
                                                               ------------ ------------
        Cash used by investing activities.....................        (4.2)        (1.6)
                                                               ------------ ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from public stock offering, net of
      offering costs..........................................        24.4          --
   Proceeds from issuance of common stock under stock
      purchase plans..........................................         0.4          --
   Repayments of short-term debt..............................        (5.0)        (1.9)
   Payments for treasury stock redemptions....................        (4.5)        (1.8)
                                                               ------------ ------------
        Cash provided (used) by financing activities..........        15.3         (3.7)
                                                               ------------ ------------
Increase (decrease) in cash and cash equivalents..............        17.5         (7.4)
Cash and cash equivalents at beginning of period..............        22.0         29.4
                                                               ------------ ------------
Cash and cash equivalents at end of period....................       $39.5        $22.0
                                                               ============ ============
Supplemental disclosure of cash flow information:
   Interest paid during period................................        $0.2         $0.3
   Income taxes paid during period............................        $1.5         $1.7`

See accompanying notes to unaudited condensed consolidated financial statements.

---

**ZiLOG, INC.

        NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

NOTE 1.	BASIS OF PRESENTATION

NOTE 1.	BASIS OF PRESENTATION

The accompanying interim financial information is unaudited.  In the opinion
of ZiLOG, Inc.'s ("ZiLOG" or the "Company") management, all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of interim results have been included.  The results for
interim periods are not necessarily indicative of results to be expected for the
entire year.  These condensed consolidated financial statements and notes should
be read in conjunction with the Company's annual consolidated financial
statements and notes thereto contained in the Company's 2003 Annual Report filed
on Form 10-K with the Securities and Exchange Commission, File Number 001-13748
for the fiscal year ended December 31, 2003, filed on March 30, 2004.

ZiLOG's interim results are based on fiscal quarters of thirteen weeks in
duration ending on the last Sunday of each calendar quarter.  The first and
second fiscal month of each quarter is four weeks in duration and the third
month is five weeks.  Each of ZiLOG's interim periods ends on Sunday except for
the last fiscal period of each year which ends on December 31.  However, for
financial reporting purposes, interim fiscal periods are labeled as ending on
calendar month-end.  The operating results for any interim period are not
necessarily indicative of results for any subsequent period or the full fiscal
year.

The results of operations for the nine months ended September 30, 2004
include the following:

On February 18, 2004, the Board of Directors approved a reverse stock split
in which every two shares of common stock was converted into one share of common
stock, effective March 1, 2004.  All common shares and per-share figures
presented herein have been retroactively restated to reflect this one-for-two
reverse stock split.

On March 12, 2004, the Company's common stock was listed for trading on the
NASDAQ National Market with a ticker symbol of ZILG. On March 18, 2004, and
subsequently April 6, 2004 through exercise of over allotment, the Company
raised approximately $24.4 million through the sale of 2,252,100 shares of its
common stock at a price $12.50 per share in a public offering of its stock (see
Note 13).

On April 16, 2004, the Company announced the closure of its MOD II five-inch
wafer manufacturing facility in Nampa, Idaho ("MOD II"). In
association with this decision, the Company has recorded special charges of $9.6
million reflecting the impairment of long lived assets and costs to cease
operations, including employee severance costs as of  September 30, 2004 (See
Note 4).

On September 24, 2004, the Company received $4.8 million after the completion
of the sale of substantially all of MOD III's manufacturing equipment to
STMicroelectronics ("STM") as reimbursement for certain costs of
maintaining the assets of MOD III, Inc. ("MOD III") in a salable
condition.  Such reimbursement is included within the caption special charges
and credit in the Company's statement of operations for the three-month and
nine-month periods ended September 30, 2004 (See Note 5).

The condensed consolidated balance sheet at December 31, 2003 has been
derived from audited financial statements at that date, but does not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements.

NOTE 2.  	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition.  Revenue from product sales to OEM customers
is recognized upon transfer of legal title, which occurs at time of shipment or
upon delivery to the customer, depending upon the FOB terms.  Revenue on these
sales is reported net of appropriate allowances for returns, which are recorded
at the time of revenue recognition and represent the Company's only post-sale
obligations. Revenue on shipments to distributors who have rights of return and
price protection on unsold merchandise held by them, is deferred until products
are resold by the distributors to end users. Although revenue is deferred until
resale, title of products sold to distributors transfers upon shipment.
Accordingly, shipments to distributors are reflected in the consolidated balance
sheets as accounts receivable and a reduction of inventories at the time of
shipment. Deferred revenue and the corresponding cost of sales on shipments to
distributors are reflected in the condensed consolidated balance sheets on a net
basis as "Deferred income on shipments to distributors."

Royalty Income and Expenses.  The Company licenses certain
intellectual property to and from third parties under royalty arrangements.
Royalty amounts received from third parties are included in net sales of the
Micrologic business line when there are no further obligations due from the
Company to the licensees at the time of receipt.  Royalty revenues for the nine-
month periods ended September 30, 2003 and 2004 were $1.4 million and $1.9
million, respectively.  Royalty amounts paid to third parties are accrued to
cost of sales in the period in which the underlying products containing or
utilizing the licensed intellectual property are sold to customers. Royalty
expenses were $0.3 million during both of the nine-month periods ended September
30, 2003 and 2004.

Goodwill and Intangible Assets.  Effective January 1, 2002,
ZiLOG adopted the provisions of FASB Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" ("FAS 142").  Under FAS 142,
goodwill and intangible assets with indefinite lives are not amortized, but are
reviewed annually or more frequently if impairment indicators arise.  In the
third quarter of 2004, the Company reviewed its intangible assets and determined
that there was no impairment indicated at that time.  Separable intangible
assets that are deemed to have defined lives will continue to be amortized over
their useful lives.  Intangible assets acquired prior to July 1, 2001 were being
amortized on a straight-line basis over lives ranging from three to five years.
In connection with the Company's "fresh start" reporting, as
prescribed by SOP 90-7, "Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code," upon its emergence from bankruptcy in May 2002,
separable intangible assets based on independent valuations were created with
deemed defined lives. These intangible assets are being amortized utilizing the
pattern-of-use method over their estimated useful lives of six years for current
technology and ten years for brand name.  Upon its emergence from bankruptcy,
the Company recorded Goodwill of $26.7 million.



Intangible assets. The separable intangible
assets identified in connection with SOP 90-7 "fresh start" accounting
and its associated amortization are included in the condensed consolidated
balance sheet as follows (in millions):

`Current       Brand
                                                  Technology      Name         Total
                                                 ------------ ------------ -------------
Gross carrying amount...........................       $17.0         $9.2         $26.2
Accumulated amortization........................        14.6          3.3          17.9
                                                 ------------ ------------ -------------
Carrying amount at September 30, 2004...........        $2.4         $5.9          $8.3
                                                 ============ ============ =============`

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

`Current        Brand         Total
             Year          Technology       Name      Amortization
      ------------------ -------------- ------------ --------------
      October-December 20         $0.6         $0.4           $1.0
             2005                  1.1          1.1            2.2
             2006                  0.4          1.0            1.4
             2007                  0.2          0.8            1.0
             2008                  0.1          0.7            0.8
          Thereafter              --            1.9            1.9
                         -------------- ------------ --------------
            Total                 $2.4         $5.9           $8.3
                         ============== ============ ==============`

Goodwill. The goodwill recorded and adjustments to such values
since the inception of  "fresh start" reporting in May 2003 included
in the Company's condensed consolidated balance sheets are summarized as follows
(in millions):

`Goodwill recorded May 13, 2002..............       $26.7
Adjustments of tax deferred charge..........         7.9
Adjustment in other non-current
   liabilities..............................       (17.7)
                                             ------------
Balance at December 31, 2003................       $16.9
Adjustmentin deferred tax liability.........        (7.4)
                                             ------------
Balance at September 30, 2004...............        $9.5
                                             ============`

During 2003, the Company reassessed its deferred income tax liabilities and
income tax contingencies a reduced the associated liabilities as an adjustment
to goodwill.  The $7.4 million adjustment of goodwill in 2004 represents release
of valuation allowance and recognition of net deferred income tax assets that
existed at the Company's May 13, 2002 date of reorganization.  During the third
quarter of 2004, it became apparent that such deferred tax assets were likely to
be realized.

Use of Estimates. The preparation of the condensed consolidated
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of financial statements and the reported amounts of
revenues and expenses during the reporting period. Significant estimates made in
preparing these financial statements include excess and obsolete inventories,
taxation valuation allowances, allowance for doubtful accounts and sales returns
and allowances. Actual results could differ from those estimates.

Research and Development Expenses.  ZiLOG's policy is to record
all research and development expenditures with no future alternative use as
period expenses when incurred. In-process research and development charges are
recorded for partially developed semiconductor product designs that have not
reached technological feasibility and have no alternative future use on the date
they were acquired or as valued for "fresh start" reporting.

Fair Value of Financial Instruments and Concentration of Credit Risk.
 The carrying value of the Company's financial instruments, including
cash and cash equivalents, accounts receivable and accounts payable,
approximates fair value due to their relatively short maturities. Financial
instruments that subject the Company to concentrations of credit risk consist
primarily of cash and cash equivalents and accounts receivable. The Company
maintains its cash and cash equivalents and investments with high quality
financial institutions. The Company's customer base is located primarily in
North America, Europe and Asia. The Company performs ongoing credit evaluations
of its customers and generally does not require collateral on accounts
receivable. The Company maintains allowances for potential credit losses. As of
September 30, 2004, there were two individual customers with net accounts
receivable each comprising 10% or more of total net accounts receivable. The
Company had unsecured accounts receivable due from Future Electronics, Inc. and
Thomson Consumer Electronics at September 30, 2004 of approximately $1.3 million
each.

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

`Three Months Ended        Nine Months Ended
                                                         September 30,            September 30,
                                                 ------------------------- --------------------------
                                                     2004         2003         2004          2003
                                                 ------------ ------------ ------------- ------------
Net loss - as reported..........................       ($2.0)       ($2.0)        ($9.2)       ($6.9)
Add stock-based employee compensation
    expense included in reported net
    loss, net of tax in 2004....................         0.2          0.3           0.9          1.2
Deduct total stock-based employee
    compensation expense determined
    under fair-value-based method for
    all awards, net of tax in 2004..............        (0.5)        (0.4)         (1.9)        (1.9)
                                                 ------------ ------------ ------------- ------------
Net loss - proforma.............................       ($2.3)       ($2.1)       ($10.2)       ($7.6)
                                                 ============ ============ ============= ============`

The fair value of options granted in 2003 and 2004 under the Company's 2002
and 2004 Omnibus Stock Incentive Plans were estimated at the date of grant using
the Black-Scholes option-pricing model.  The following weighted average
assumptions were used:

`Three Months Ended        Nine Months Ended
                                                         September 30,            September 30,
                                                 ------------------------- --------------------------
                                                     2004         2003         2004          2003
                                                 ------------ ------------ ------------- ------------
Risk free interest rate.........................         3.2%         3.0%          3.2%         3.0%
Estimated life in years.........................            5            5            5             5
Dividend yield..................................        --           --           --            --
Volatility......................................        46.9%        84.2%         46.9%        84.2%`

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

`Three Months Ended        Nine Months Ended
                                                         September 30,            September 30,
                                                 ------------------------- --------------------------
                                                     2004         2003         2004          2003
                                                 ------------ ------------ ------------- ------------
Risk free interest rate.........................        2.20%        --    1.81% to 2.2%        --
Estimated life in years.........................       0.313         --           0.313         --
Dividend yield..................................        --           --           --            --
Volatility......................................        46.9%        --            50.1%        --`

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

`Three Months Ended        Nine Months Ended
                                                         September 30,            September 30,
                                                 ------------------------- --------------------------
                                                     2004         2003         2004          2003
                                                 ------------ ------------ ------------- ------------
Weighted-average value of options granted
   during the period............................       $8.36        $7.90         $9.57        $5.53
Weighted-average fair value of employee
   stock purchases during the period............       $4.82        $5.52         $3.91        $5.52`



Adoption of Accounting Standards.  In January 2003, the
Financial Accounting Standards Board issued FASB Interpretation No. 46
("FIN 46"), "Consolidation of Variable Interest Entities."
In December 2003, the FASB issued Interpretation No. 46 (revised December 2003),
"Consolidation of Variable Interest Entities ("FIN 46R"),"
which addresses how a business enterprise should evaluate whether it has a
controlling financial interest in an entity through means other than voting
rights. The interpretation replaces Interpretation No. 46, "Consolidation
of Variable Interest Entities," which was issued in January 2003.

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

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

Substantially all of the equipment of MOD III was sold on July 16, 2004.  The
remaining assets of MOD III consist primarily of land and a building.  The
Company expects to continue incurring period expenses totaling approximately
$0.3 million per quarter for the ongoing costs of maintaining the remaining
assets of MOD III which has been recorded as a special charge fro the three
months ended September 30, 2004  Also, under the terms of the MOD III, Inc.
Series A preferred stock liquidation preference, approximately $4.8 million of
historical costs incurred by the Company on behalf of MOD III, Inc. to maintain
its assets in saleable condition was reimbursed to the Company from the net
proceeds received from the sale of MOD III's assets.  Such reimbursement is
included within the caption special charges and credit in the Company's
condensed consolidated statement of operations for the three-month and nine-
month periods ended September 30, 2004. See Note 14.

Recent Accounting Pronouncements.  In December 2003, the
Securities and Exchange Commission issued Staff Accounting Bulletin No. 104
("SAB 104"), which revises or rescinds portions of the interpretative
guidance included in Topic 13 of the codification of staff accounting bulletins
to make this interpretative guidance consistent with current authoritative
accounting and auditing guidance and SEC rules and regulations. SAB 104 also
rescinds the Revenue Recognition in Financial Statements Frequently Asked
Questions and Answers document issued in conjunction with Topic 13. The
application of the requirements of SAB 104 did not have an impact on the
Company's financial position or results of operations.

NOTE 3.	INVENTORIES

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

`Sep. 30,     Dec. 31,
                                                 2004         2003
                                             ------------ ------------
     Raw materials..........................        $0.7         $0.6
     Work-in-process........................         5.8          6.7
     Finished goods.........................         5.8          2.3
                                             ------------ ------------
                                                   $12.3         $9.6
                                             ============ ============`

NOTE 4.	SPECIAL CHARGES AND CREDITS

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

`Three Months Ended         Nine Months Ended
                                                     September 30,             September 30,
                                             ------------------------- -------------------------
                                                 2004         2003         2004         2003
                                             ------------ ------------ ------------ ------------
Asset impairments:
   MOD II assets............................       $--          $--           $5.4        $--
   Other....................................        --            0.2         --            0.4
Restructuring of operations:
   Employee severance and termination
     benefits, other........................        --            0.6          0.1          1.3
   MOD II employee severance and
     termination benefits...................        --           --            1.8         --
   MOD II period maintenance and
     closure costs..........................         2.3         --            2.4         --
   MOD III period maintenance and
     closure costs..........................         0.6          0.4          1.3          1.0
   MOD III reimbursement, all period
     costs..................................        (4.8)        --           (4.8)        --
Professional fees for debt
   restructuring............................        --            0.1          0.1          0.5
                                             ------------ ------------ ------------ ------------
                                                   ($1.9)        $1.3         $6.3         $3.2
                                             ============ ============ ============ ============`

These charges can be summarized as follows:

`Three Months Ended         Nine Months Ended
                                                     September 30,             September 30,
                                             ------------------------- -------------------------
                                                 2004         2003         2004         2003
                                             ------------ ------------ ------------ ------------
MOD II activity items.......................        $2.3        $--           $9.6        $--
MOD III activity items......................        (4.2)         0.4         (3.5)         1.0
Other.......................................        --            0.9          0.2          2.2
                                             ------------ ------------ ------------ ------------
                                                   ($1.9)        $1.3         $6.3         $3.2
                                             ============ ============ ============ ============`

On April 16th, 2004, the Company announced the closure of its MOD II five-
inch wafer manufacturing facility in Nampa, Idaho and the related transfer of
MOD II production activities to its foundry partner, X-FAB, in Lubbock, Texas.
MOD II ceased production operations on July 9, 2004.  As a result, for the
three-month period ended September 30, 2004, the Company incurred $2.3 million
in sustaining costs for post-closure maintenance of the MOD II facility.
Additionally, MOD III sustaining costs for post-closure maintenance incurred by
the Company totaled $0.6 million, which was offset by $4.8 million reimbursement
for these costs from the sale of the MOD III equipment to STMicroelectronics, in
July, 2004.  See Note 5 below.

As a result of the closure of MOD II, for the nine-month period ended
September 30, 2004, the Company incurred the  following special charges : (1)
employee severance and termination benefits of approximately $1.8 million for
approximately 125 people;  (2) asset impairment charges of $5.4 million related
to the write-down of MOD II long-lived assets to their estimated fair values;
and  (3) sustaining costs for post-closure maintenance of $2.4 million.

Additionally, for the nine-month period ended September 30, 2004, the Company
incurred approximately $1.3 million of special charges for sustaining costs for
post-closure maintenance of the MOD III facility, offset by the $4.8 million
reimbursement received from the sale of the MOD III equipment to STM.

The costs for MOD II and MOD III consist of utilities, taxes, insurance, and
other maintenance costs required to maintain the facilities in a condition
required for the sale of the respective properties.  Approximately $0.1 million
of special charges during the period relate to third-party professional legal
service fees associated with the Company's debt and equity restructuring of May
2002, and $0.1 million severance and termination benefits related to the
Company's continued efforts to align infrastructure costs to business-level
requirements.

The Company's estimates used to determine the fair value of MOD II land and
buildings during the second quarter of 2004 were based upon an independent
appraisal  from a third party.  There can be no assurance that the value the
Company will realize from the ultimate sale or disposition of these assets will
be equal to the estimated fair values.  If the ultimate net value realized upon
the disposition of the remaining MOD II assets is less than the estimated fair
value, the Company's future results of operations could be adversely impacted.
See Note 14.

The following table summarizes activity in accrued special charges which is
included within accrued liabilities on the condensed consolidated balance sheets
(in millions):

`MOD II
                                                  Severance     MOD III       Period
                                                     and         Period     Maintenance      Debt
                                                 Termination  Maintenance   and Closure  Restructur-
                                                   Benefits      Costs         Costs         ing         Total
                                                 ------------ ------------ ------------- ------------ ------------
    Balance at December 31, 2003................       $ --          $0.2        $ --          $ --          $0.2
    Provisions to special charges...............         1.9          1.3           2.4          0.1          5.7
    Provisions to cost of sales relating to
       MOD II closure...........................         0.4        --           --            --             0.4
    Cash paid...................................        (2.0)        (1.3)         (1.7)        (0.1)        (5.1)
                                                 ------------ ------------ ------------- ------------ ------------
    Balance at Sep. 30, 2004....................        $0.3         $0.2          $0.7        $ --          $1.2
                                                 ============ ============ ============= ============ ============`

During the three months ended September 30, 2003, ZiLOG incurred
approximately $1.3 million of special expenses, which included severance, and
termination benefits of $0.6 million relating to a reduction-in-force at the
Company's Philippine's test facility, and severance costs associated with
elimination of certain administrative positions, primarily in San Jose.
Approximately $0.4 million of special charges for the period relate to
continuing post-closure maintenance costs of the MOD III eight-inch wafer
fabrication facility in Idaho consisting of utilities, taxes, insurance and
other maintenance costs required to maintain the facility in a condition
required for sale of the property.

Restructuring of operations during the nine-month period ended September 30,
2003 of $3.2 million included severance and termination benefits of $1.3
million, which primarily related to a reduction-in-force at the Company's Nampa,
Idaho manufacturing plant and Philippine's test facility and approximately $1.0
million of post-closure maintenance costs of the MOD III eight-inch wafer
fabrication facility in Idaho consisting of utilities, taxes, insurance and
other maintenance costs required to maintain the facility in a condition
required for the sale of the property.  Approximately $0.5 million of special
charges during the nine-month period ended September 30, 2003 relate to third-
party professional fees for legal and accounting services to register 11.7
million shares of common stock as required by the Company's 2002 Plan of
Reorganization and for legal and financial advisors associated with actions
required to be taken as a result of the Company's May 2002 debt and equity
restructuring activities.

NOTE 5.     SALE OF MOD III EQUIPMENT

On July 16, 2004, the shareholders of MOD III approved the sale of
substantially all of the manufacturing equipment of MOD III to STM for an
aggregate amount of $26.0 million.  The sale closed and was funded on      July
16, 2004.  In September 2004, MOD III paid dividends and redeemed a portion of
the 28,000 Preferred Series A shares outstanding for a net consideration of
approximately $20.2 million after paying for reimbursements totaling
approximately $4.8 million to ZiLOG and $1.0 million for transaction costs
related to the sale, including brokerage fees, legal fees and other professional
services costs.  Reimbursements to ZiLOG were to pay certain costs of
maintaining MOD III in a saleable condition on MOD III's behalf that had been
previously recorded in special charges and credits.

NOTE 6.	GEOGRAPHIC AND SEGMENT INFORMATION

The Company operates in one operating segment and engages primarily in the
design, development, manufacture and marketing of semiconductor products.  The
Company sells its products to distributors and original equipment manufacturers
("OEM") in a broad range of market segments, performs on-going credit
evaluations of its customers and generally requires no collateral.  The
Company's operations outside the United States consist of a final test facility
in the Philippines, sales and support centers and design centers in certain
foreign countries.  Domestic operations are responsible for the design,
development and wafer fabrication of products, as well as the coordination of
production planning and shipping to meet worldwide customer commitments.  As
described in the first paragraph of Note 4, the Company's internal wafer
fabrication operations were terminated and are now entirely outsourced,
effective July 11, 2004.  The Company's Philippine test facility is reimbursed
in relation to value added with respect to test operations and other functions
performed, and certain foreign sales offices receive a commission on export
sales within their territory.  Accordingly, for financial statement purposes, it
is not meaningful to segregate sales or operating profits for the test and
foreign sales office operations. ZiLOG has two broad business lines, micrologic
devices and other devices.  The following table represents the net sales by
business line for each of the periods indicated (in millions):

`Three Months Ended         Nine Months Ended
                                                         September 30,             September 30,
                                                 ------------------------- --------------------------
                                                     2004         2003         2004          2003
                                                 ------------ ------------ ------------- ------------
Net sales by busines line:
   Micrologic Devices:
     8-bit Microcontrollers and
     Microprocessors............................       $15.7        $15.8         $54.1        $48.9
                                                 ------------ ------------ ------------- ------------
   Other Devices:
     Serial Communications Controllers..........        $3.6         $3.9         $11.7        $10.4
     Modems.....................................         1.0          1.3           2.3          2.3
     IrDA transceivers..........................         0.5          0.7           1.7          1.8
     Television, PC peripherals and other.......         1.6          1.1           3.5          4.0
                                                 ------------ ------------ ------------- ------------
       Total....................................        $6.7         $7.0         $19.2        $18.5
                                                 ------------ ------------ ------------- ------------
     Base business (excluding foundry)..........       $22.4        $22.8         $73.3        $67.4
   Foundry services.............................         0.4          3.2           3.4          9.5
                                                 ------------ ------------ ------------- ------------
     Total sales................................       $22.8        $26.0         $76.7        $76.9
                                                 ============ ============ ============= ============`

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

`Three Months Ended        Nine Months Ended
                                                         September 30,            September 30,
                                                 ------------------------- --------------------------
                                                     2004         2003         2004          2003
                                                 ------------ ------------ ------------- ------------
Net sales by region:
Americas........................................       $10.6        $12.4         $34.5        $34.3
Asia............................................         8.8          7.3          28.3         23.2
Europe..........................................         3.0          3.1          10.5          9.9
                                                 ------------ ------------ ------------- ------------
Base business...................................        22.4         22.8          73.3         67.4
                                                 ------------ ------------ ------------- ------------
America's foundry services......................         0.4          3.2           3.4          9.5
                                                 ------------ ------------ ------------- ------------
   Total sales..................................       $22.8        $26.0         $76.7        $76.9
                                                 ============ ============ ============= ============

Net sales by channel:
OEM.............................................       $10.2        $11.3         $35.7        $31.1
Distributor.....................................        12.2         11.5          37.6         36.3
                                                 ------------ ------------ ------------- ------------
Base business...................................        22.4         22.8          73.3         67.4
                                                 ------------ ------------ ------------- ------------
OEM foundry services............................         0.4          3.2           3.4          9.5
                                                 ------------ ------------ ------------- ------------
   Total sales..................................       $22.8        $26.0         $76.7        $76.9
                                                 ============ ============ ============= ============`

Major customers: During the three months ended September 30,
2004, one distributor, Future Electronics, Inc. ("Future"), accounted
for approximately 23.8% of net sales.  Future is a worldwide distributor of
product with an exclusive arrangement for distribution of the Company's products
in North America. During the three months ended September 30, 2003, two
customers, Future and OEM customer, GlobespanVirata, Inc.
("Globespan") accounted for approximately 17.7% and 12.2% of net
sales, respectively.During the nine months ended September 30,
2004, two customers, Future and SMK Corporation, an OEM customer, accounted for
approximately 19.8% and 10.4% of net sales, respectively.  During the nine
months ended September 30, 2003, two customers, Future and Globespan, accounted
for approximately 17.6% and 12.3% of net sales, respectively.

NOTE 7.      SHORT-TERM DEBT

Upon consummation of the Reorganization Plan, ZiLOG entered into a senior
secured financing facility (the "Facility") with a commercial lender, dated May
13, 2002, for a three-year $15.0 million senior secured revolving credit
facility.Borrowings on the Facility are secured primarily
against certain North American accounts receivable and bear interest at a rate
per annum equal, at ZiLOG's option, to the commercial lender's stated prime rate
or LIBOR, plus 2.5%.  The Facility has a LIBOR-based rate of 4.3% and, as a
result of certain limitations, had additional borrowing capacity available of
$3.9 million. The Facility is scheduled to mature on May 13, 2005.  As of
September 30, 2004, the Company had no borrowings and $0.2 million of
standby letters of credit issued to vendors under the Facility.

The Company is subject to certain financial covenants under this Facility,
including tangible asset and fixed charge coverage ratio, only if the total of
the Company's cash, cash equivalents and availability on the revolver are less
than $7.5 million at the end of any fiscal period.  Since the Company's cash
balance exceeds the minimum requirements at September 30, 2004, ZiLOG is in
compliance with its revolving debt covenants.

NOTE 8.	CONTINGENCIES

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

From time to time the Company has agreed to indemnify certain customers for
potential allegations of infringement of intellectual property rights and
patents arising from the use of the Company's products. Currently, there is an
indemnification agreement with a customer that limits the Company's net
contingent obligation to pay for the customer's defense costs, if any, up to a
maximum of $500,000.

NOTE 9.	INCOME TAXES



The Company's income tax benefit for the nine-month period ended September
30, 2004 reflects an estimated effective tax benefit at a rate of 2% for of the
year ending December 31, 2004. This rate is based on the Company's current
forecast of profits and losses for each taxable jurisdiction in which it
operates, including the taxable gains and charges for closure and sales of
certain assets of the MOD II and MOD III wafer manufacturing facilities in
Nampa, Idaho.  In order to align the Company's expected tax rate for the 2004
fiscal year, there was a $0.9 million income tax provision recorded in the third
quarter of 2004.  The Company's  2003 tax provision included, taxable income in
the U.S. resulting from items that are expensed for book purposes but are
nondeductible for tax purposes including amortization of intangible assets,
stock compensation expense and depreciation of U.S. based property, plant and
equipment. Additionally, the Company's tax provision in 2004 and 2003 includes
amortization of tax deferred charges relating to the establishment of its
international structure and accretion of deferred tax liabilities relating to
timing differences resulting from fresh start accounting.   The Company provides
for income tax expense in foreign jurisdictions where its operations generate
profits that are taxable.

NOTE 10.	MINORITY INTEREST IN MOD III ASSETS

Prior to the Company's adoption of FIN 46R on January 1, 2004, minority
interest of $30.0 million was recorded on the consolidated balance sheet in
order to reflect the share of MOD III, Inc. held by minority investors. The
minority interest share represented their entitlement to receive an aggregate
liquidation preference of the first $30.0 million plus any accrued but unpaid
dividends on the MOD III, Inc. Series A preferred stock from the net proceeds
from the sale of the MOD III, Inc. assets. The Company will be entitled to
recoup from the net proceeds of any sale all costs it has or will incur to sell
the facility or to maintain the facility in saleable condition.  Minority
holders in MOD III, Inc. preferred shares have no right of recourse against the
Company for net proceeds of less than $30 million on the ultimate sale of the
MOD III assets.  Following adoption of FIN 46R on January 1, 2004, MOD III, Inc.
was unconsolidated which resulted in the elimination of both the asset held for
sale and minority interest that had been previously recorded for MOD III.  This
resulted in no impact to the Company's results of operations (see Note 2).

As described in Note 5, the MOD III equipment was sold in July 2004 and
subsequently, in September 2004, the following distributions were made by MOD
III (in millions):

`cash proceeds received upon sale of
  MOD III assets............................       $26.0
Transaction expenses........................        (1.0)
Reimbursement to ZiLOG......................        (4.8)
                                             ------------
Net proceeds................................       $20.2
                                             ============
Distribution to MOD III Series A
   preferred stockholders:
Dividends paid..............................        $7.2
Partial Series A preferred stock redemption.        13.0
                                             ------------
                                                   $20.2
                                             ============`

NOTE 11.  	NET LOSS PER SHARE

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

`Three Months Ended         Nine Months Ended
                                                     September 30,             September 30,
                                             ------------------------- -------------------------
                                                 2004         2003         2004         2003
                                             ------------ ------------ ------------ ------------
Net loss....................................       ($2.0)       ($2.0)       ($9.2)       ($6.9)
                                             ============ ============ ============ ============
Weighted-average shares outstanding.........        16.5         14.6         16.1         14.7
Less: Weighted-average shares subject
    to repurchase...........................        (0.1)        (0.3)        (0.2)        (0.4)
                                             ------------ ------------ ------------ ------------
Weighted-average shares used in
   computing basic and diluted net
   loss per share...........................        16.4         14.3         15.9         14.3
                                             ------------ ------------ ------------ ------------
Basic and diluted net loss per share........      ($0.12)      ($0.13)      ($0.58)      ($0.48)
                                             ============ ============ ============ ============`

Weighted average shares subject to repurchase represent unvested restricted
stock that the Company has the right to repurchase. For the three months ended
September 30, 2004 and  September 30, 2003, options to purchase approximately
1.9 and 1.3 million shares of common stock at a weighted average exercise price
of $7.40 and $5.48, respectively, and for the nine months ended September 30,
2004 and September 30, 2003, options to purchase approximately 1.6 million and
1.2 million shares of common stock at a weighted average exercise price of $7.40
and $5.48, respectively were excluded from the determination of diluted net loss
per share, as the effect of such shares were anti-dilutive.  At September 30,
2004 and 2003, there were 16,315,575 and 14,545,023 common shares issued and
outstanding, respectively.

NOTE 12.  COMPREHENSIVE INCOME

The Company had no items of other comprehensive income to report in any
of the three-month or nine-month periods ended September 30, 2004 or September
30, 2003.

NOTE 13.  COMMON STOCK AND TREASURY STOCK REPURCHASES

Stock Repurchase Program:  On April 17, 2003, the Company's Board of
Directors approved a stock repurchase program authorizing the repurchase of up
to 500,000 shares of its common stock.  As of September 30, 2004, 405,164 shares
had been repurchased under this program and from employees and former employees
pursuant to repurchase rights at a cost of $2.1million.  Additionally, on July
29, 2004 the Company's Board of Directors approved the 2004 stock repurchase
program pursuant to which the Company may repurchase up to $5.0 million in
market value of its outstanding shares of common stock.  As of September 30,
2004, the Company has repurchased 551,700 shares of its common stock at an
aggregate cost of $4.3 million under this program.

In February 2004, the Company repurchased 22,500 shares of restricted common
stock from a former employee for approximately $136,000, which is net of a
partial loan forgiveness of approximately $32,000.  The Company recorded the
purchase of the common shares as treasury stock and recorded the forgiveness of
the loan as additional compensation cost.



Treasury stock repurchases can be summarized as follows ($ in millions):

`Nine Months Ended
                                                                     September 30,
                                             ---------------------------------------------------
                                                          2004                      2003
                                             ------------------------- -------------------------
                                                Stock        $ COST       Stock        $ COST
                                             ------------ ------------ ------------ ------------
Market repurchases..........................     551,700         $4.3         --         $ --
Non-Market repurchases......................      22,500          0.2      357,664          1.8
                                             ------------ ------------ ------------ ------------
Total Treasury Stock........................     574,200         $4.5      357,664         $1.8
                                             ============ ------------ ------------ ============
                                                                 $5.0      500,000
                                                          ============ ============`

On March 12, 2004, the Company was listed on the NASDAQ national market and
concurrently sold 2.0 million shares of common stock to the public at $12.50 per
share. On that date, certain existing stockholders also sold 2.0 million shares
of the Company's common stock that resulted in no proceeds to the Company.   On
April 6, 2004 the underwriters of the offering exercised a portion of their
over-allotment option and acquired 252,100 shares of common stock at $12.50 per
share. Below is a summary of the stock sales and net proceeds received by the
Company (in millions):

`Initial        Over
                                                Stock      Allotment
                                                 Sale        Option       Total
                                             ------------ ------------ ------------
    Number of shares sold...................         2.0          0.3          2.3
  Offering Proceeds:
    Gross proceeds ($12.50/share)...........       $25.0         $3.1        $28.1
    Less underwriters' discounr of 6.5%.....       ($1.6)       ($0.2)       ($1.8)
    Less offering expenses..................       ($1.8)       ($0.1)       ($1.9)
                                             ------------ ------------ ------------
    Net proceeds received by ZiLOG..........       $21.6         $2.8        $24.4
                                             ============ ============ ============`

NOTE 14.   SUBSEQUENT EVENT

Sale of MOD II Equipment

On September 27, 2004, ZiLOG announced the sale of all of its wafer
manufacturing equipment and related assets of its MOD II facility in Nampa,
Idaho, to STM, for an aggregate consideration of $5.8 million net of selling
costs and expenses. This transaction, including cash received and assets sold,
was consummated and will be reported within the three-month period ending
December 31, 2004.  The carrying value of the assets that are being sold is $4.2
million.  The expected gain upon the sale of these assets will be recorded in
special charges and credits during the December 2004 quarter.  Upon completion
of the sale, the remaining assets of MOD II will consist of land and buildings
with a carrying value of $3.6 million classified as assets held for sale on the
Company's balance sheet.



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



Our actual results may differ materially from those anticipated in these
forward-looking statements as a result of various factors including those set
forth in the section entitled "Risk Factors" and in other sections of
this quarterly report.

Overview

The following is management's discussion and analysis of financial
condition and results of operations of the Company and its subsidiaries for the
three-month and nine-month periods ended September 30, 2004 and     September
30, 2003.  This discussion and analysis should be read in conjunction with the
condensed consolidated financial statements and notes thereto included elsewhere
herein and the Company's 2003 annual report on Form 10-K. Management's
discussion and analysis provides information concerning our business
environment, consolidated results of operations and liquidity and capital
resources.

We prepare and release quarterly unaudited financial statements prepared in
accordance with generally accepted accounting principles or GAAP. We also
disclose and discuss Earnings Before Interest, Taxes, Depreciation, asset
impairments and Amortization ("EBITDA") as a measure of liquidity in
our filings with the Securities and Exchange Commission. We believe the
disclosure of such information helps investors more meaningfully evaluate the
results of our liquidity.  However, we recommend that investors carefully review
the GAAP financial information included as part of this report and read the
associated reconciliation.

Our interim results are based on fiscal quarters of thirteen weeks in
duration ending on the last Sunday of each calendar quarter.  However, for ease
of reading our financial reports, we have labeled our interim fiscal periods as
ending on a calendar month-end date.  The operating results for any interim
period are not necessarily indicative of results for any subsequent period or
the full fiscal year, which ends on December 31 of each year.

Critical Accounting Estimates

We believe our critical accounting estimates are as follows:

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

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

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



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

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

Estimating write-downs of excess and obsolete inventories.  Each
inventory component is initially assessed for excess or obsolescence by using an
algorithm that we established.  This algorithm is based on historical trends,
demand forecasts and inventory age.  We review the result of this algorithm and
generally write-off all work-in-process inventory more than one year old and
finished goods inventory quantities in excess of our current backlog.  Write-
offs of excess and obsolete inventories are reflected as a reduction to
inventory values in the accompanying consolidated balance sheets, and an
increase in cost of sales.  Consistent with the Company's policies and
procedures, management often adjusts the reserves computed by the algorithm to
reflect specific facts and circumstances such as transitional inventory
requirements when production moves from one location to another.  If actual
market conditions or customer demand patterns are less favorable than, or
inconsistent with our assumptions, we may be required to take further write-
downs of our inventory value, which could adversely impact our cost of sales and
operating results.

Asset impairments.  We apply the provisions of Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" and Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets."  We
assess the impairment of long-lived assets whenever events or changes in
circumstances indicate that the carrying value may not be recoverable.  Factors
we consider important which could trigger an impairment review include the
following:

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

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

The intangible assets created by the adoption of  "fresh start"
accounting on our emergence from bankruptcy consist of existing technology,
brand name as well as excess enterprise value, or goodwill.  The existing
technology and brand name are being amortized based on a pattern-of-use method
in proportion to the discounted cash flows from such assets.  The goodwill is
not subject to amortization, but is tested for impairment at least annually, as
required by FAS 142.

We evaluate the existing technology and brand name at each reporting period
to determine whether events and circumstances continue to support the current
carrying value as well as the remaining useful life.  Additionally, goodwill is
tested for impairment at least annually and more often if events and
circumstances indicate that its fair value may be less than its carrying value.
We perform the annual impairment test for goodwill in the third quarter of each
year, unless the existence of triggering events indicates that an earlier review
should be performed.  As of September 30, 2004, there was no indication of
impairment of the Company's intangible assets carrying value.

Following the April 2004 announcement of the closure of our MOD II facility,
we recorded asset impairment charges of $5.4 million, to reflect the excess of
book value over the current estimated fair value of our MOD II fixed assets as
prescribed under SFAS No. 144.   The estimates we used to determine fair value
of MOD II land and buildings were based upon an independent appraisal and the
fair value of MOD II equipment was determined based upon offers to purchase
these assets that had been received from independent third parties during the
second quarter of 2004.  There can be no assurance that the ultimate value that
we will realize from the ultimate sale or disposition of these assets will be
equal to the appraised fair value.  As of September 30, 2004, the carrying value
of MOD II assets held for sale was $7.8 million, of which $4.2 million was
subsequently sold to STM (see Note 14).  The carrying value of MOD II assets
held for sale after the consummation of the equipment sale to STM will be $3.6
million. If the ultimate net value realized upon the disposition of the
remaining MOD II assets is less than the estimated fair value, our future
results of operations could be adversely impacted.

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

Reporting Segments

Beginning in May 2002, we consolidated our business segments into one
reportable segment to reflect the manner in which our chief operating decision-
maker allocates resources and assesses the performance of our business.

Results of Operations

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

`Three Months Ended        Nine Months Ended
                                                         September 30,            September 30,
                                                 ------------------------- --------------------------
                                                     2004         2003         2004          2003
                                                 ------------ ------------ ------------- ------------
Net sales by region:
Americas........................................       $10.6        $12.4         $34.5        $34.3
Asia............................................         8.8          7.3          28.3         23.2
Europe..........................................         3.0          3.1          10.5          9.9
                                                 ------------ ------------ ------------- ------------
Base business...................................        22.4         22.8          73.3         67.4
                                                 ------------ ------------ ------------- ------------
America's foundry services......................         0.4          3.2           3.4          9.5
                                                 ------------ ------------ ------------- ------------
   Total sales..................................       $22.8        $26.0         $76.7        $76.9
                                                 ============ ============ ============= ============

Net sales by channel:
OEM.............................................       $10.2        $11.3         $35.7        $31.1
Distributor.....................................        12.2         11.5          37.6         36.3
                                                 ------------ ------------ ------------- ------------
Base business...................................        22.4         22.8          73.3         67.4
                                                 ------------ ------------ ------------- ------------
OEM foundry services............................         0.4          3.2           3.4          9.5
                                                 ------------ ------------ ------------- ------------
   Total sales..................................       $22.8        $26.0         $76.7        $76.9
                                                 ============ ============ ============= ============

Net sales by busines line:
   Micrologic Devices:
     8-bit Microcontrollers and
     Microprocessors............................       $15.7        $15.8         $54.1        $48.9
                                                 ------------ ------------ ------------- ------------
   Other Devices:
     Serial Communications Controllers..........        $3.6         $3.9         $11.7        $10.4
     Modems.....................................         1.0          1.3           2.3          2.3
     IrDA transceivers..........................         0.5          0.7           1.7          1.8
     Television, PC peripherals and other.......         1.6          1.1           3.5            4
                                                 ------------ ------------ ------------- ------------
       Total Other Devices......................        $6.7         $7.0         $19.2        $18.5
                                                 ------------ ------------ ------------- ------------
     Base business (excluding foundry)..........       $22.4        $22.8         $73.3        $67.4
   Foundry services.............................         0.4          3.2           3.4          9.5
                                                 ------------ ------------ ------------- ------------
     Total net sales............................       $22.8        $26.0         $76.7        $76.9
                                                 ============ ============ ============= ============`

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

`As of Sep. 30, and for
                                                the three month periods
                                                      then ended
                                             -------------------------
                                                 2004         2003
                                             ------------ ------------
Days sales outstanding......................      34           39
Net sales to inventory ratio (annualized)...     7.4          10.5
Weeks of inventory at distributors..........      10           11
Current ratio...............................     2.7          1.6`

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



Day's sales outstanding, DSO, is a common metric used to analyze how quickly
our customers pay us. This metric is calculated as our ending net accounts
receivable divided by our average daily net sales during the period and it is
influenced largely by the timing and mix of our customer billings and
collections. At September 30, 2004, our DSO was 34 days, which is lower than our
2003 levels.  This improvement in DSO reflects lower sales levels in the third
quarter of 2004 compared to 2003, and higher collections as a percentage of
accounts receivable during the third quarter of 2004 versus the same period in
2003.

Net sales to inventory ratio is a metric we use to analyze how quickly our
investment in inventories is recovered by our sales. This metric may not be
comparable to those that other companies use to analyze inventory and is not the
same as a typical inventory turns ratio. Our net sales to inventory ratio
decreased in the third quarter of 2004 as compared to the same period in 2003 as
we increased our inventory levels in the second quarter of  2004 to build
"bridge" inventory during the first half of 2004 in order to minimize
risks of supply of products to our customers following our decision to close our
MOD II wafer manufacturing facility in Nampa, Idaho and move production of these
products to X-FAB, a third-party foundry wafer manufacturer. The majority of
these products are now manufactured in X-FAB's six-inch wafer manufacturing
facility in Lubbock, Texas

Weeks of inventory at distributors measures how quickly our distributors sell
the inventories that we sell to them.  Although our distributors in various
regions of the world maintain different inventory stocking levels, overall our
goal is to maintain 10 to 13 weeks of inventories at our distributors to satisfy
their end demand.



Current ratio represents current assets divided by current liabilities and is
commonly used to assess a company's liquidity. The Company uses this ratio to
make spending determinations on discretionary items.  Our current ratio improved
markedly as of September 30, 2004 compared to September 30, 2003 primarily due
to an increase in cash from the proceeds of our March 2004 common stock
offering.

Three and Nine-Month Periods Ended September 30, 2004 and 2003

Net Sales.  Overall, our net sales of $22.8 million for the three-
months ended September 30, 2004, represents a decrease of 12% from net sales of
$26.0 million of net sales during the same period of 2003.  For the nine months
ended September 30, 2004, net sales were $76.7 million, which is flat with net
sales of $76.9 million during the same period of 2003.

Net sales of our Micrologic devices were relatively consistent at $15.7
million for the three months ended September 30, 2004, compared to net sales of
$15.8 million in the three months ended September 30, 2003.  For the nine months
ended September 30, 2004, net sales of our Micrologic devices were $54.1 million
or 11% higher than net sales of Micrologic devices during the three months ended
September 30, 2003. The increase in Micrologic sales during the nine-month
period of 2004 compared to 2003, reflect a marked increase in unit sales of our
Infra-Red (IR) remote control devices to our large OEM customers that make
universal remote control products.  In addition, we experienced a $1.5 million
increase in flash-based Micrologic sales in the nine-month period ended
September 30, 2004 compared to the same period of 2003, offset by lower sales of
our legacy Z8 flash-based micrologic devices.  Overall, we anticipate that
market demand and net sales for our general purpose microcontrollers will
decline over time as a result of customers moving from these older Z80 and Z8
products to alternative technologies, primarily microcontrollers with embedded
flash technology and the need for further integration of peripheral functions
and capabilities.  Since November 2002, we have released our new Z8 Encore!,
eZ80 Acclaim! and Z8 Encore! XP products that are focused on the embedded flash
market, with a strategy of recapturing sales to these customers and entering new
markets.  Orders for our embedded flash microcontroller products totaled $1.9
million for the three months ended September 30, 2004, as our design wins with
customers move to production and therefore product needs.

Net sales of our other devices for the three months ended September 30, 2004
decreased 4% to $6.7 million, which is down from $7.0 million in the same period
of 2003, reflecting slight decreases in unit demand for serial communication
controllers, modem and IrDA transceiver devices.   For the nine months ended
September 30, 2004, net sales of our other devices were $19.2 million or 4%
above net sales during the same period of 2003.  The increase in net sales
during the nine-month period of 2004 compared to the same period of 2003
reflects higher unit shipments of Serial Communications Controllers primarily to
telecommunications and PC peripheral customers.

Net sales of Foundry Services, for the three-month and nine-month periods
ended September 30, 2004 decreased 88% and 64%, respectively, compared to the
same periods in 2003.  Overall, our Foundry business has been opportunistic and
is solely dependent on the needs of one customer.  We are not anticipating
significant foundry business since we closed our MOD II wafer fabrication
facility in July 2004.

Gross Margin.  Our cost of sales primarily represents manufacturing-
related costs associated with wafer fabrication, package assembly and product
testing operations. Cost of sales fluctuates, depending on materials and
services prices from our vendors, manufacturing productivity, product mix,
equipment utilization and depreciation. Gross margin as a percent of net sales
was 46% in the three months ended September 30, 2004, down from 49% in the same
period of 2003.  For the three-month period ended September 2004, gross margin
declined compared to the same period in 2003 as a result of incremental costs
incurred to facilitate the migration and qualification of manufacturing from our
MOD II facility to X-FAB.  For the nine months ended September 30, 2004 our
gross margin was 49% compared to 46% in the same period of 2003.  The
improvement in overall gross margin for the nine month period ended September
30, 2004 compared to the same periods of 2003 reflects cost reductions in
manufacturing and improved utilization of manufacturing capacity.  In addition,
during the nine months ended September 30, 2004, we incurred one-time charges
totaling $0.6 million relating to closure expenses for our MOD II wafer facility
which were offset by incremental royalty revenue of $0.7 million resulting from
a royalty audit. The majority of products that were previously manufactured in
our five-inch wafer manufacturing facility have been transferred to X-FAB's six-
inch facility in Lubbock, Texas.  We will continue to purchase our 0.35 micron
wafers from our foundries primarily in Taiwan, including wafers for our new
embedded flash based Z8 Encore! and eZ80 Acclaim! products.

Research and Development Expenses.  Research and development expenses
were $5.2 million in the three months ended September 30, 2004, reflecting a 16%
increase from the $4.5 million of research and development expenses reported in
the three months ended September 30, 2003.  On a year-to-date basis, research
and development expenses increased 19% to $15.6 million.  The increase in
research and development spending in 2004 reflects continued investments in new
products, including out latest line of Flash-based Microcontrollers, the
Z8Encore!XPTM.  We are also investing in product development to add
peripheral features to our Z8Encore! and eZ80Acclaim! product lines as well as
new devices and software features for our Crimzon line of consumer solution
products concentrated in the Infra red remote control market segment.

Selling, General and Administrative Expenses.  Selling, general and
administrative expenses of $7.2 million in the three months ended September 30,
2004 were consistent with the $7.2 million in the three months ended September
30, 2003.  On a year-to-date basis, selling, general and administrative expenses
increased $1.4 million, or 7%, to $21.8 million.  The increase in our selling,
general and administrative spending for nine-month period of 2004, compared to
2003 primarily reflects higher incentive commissions commensurate with our
increased number of sales reps and higher legal costs associated with our
initial public offering.  Additionally, the Company has incurred approximately
$0.4 million of additional expenses for the nine months ended September 30,
2004, associated with compliance work for the Sarbanes Oxley Act of 2002.

Special Charges.  Special charges for each period indicated were as
follows (in millions):

`Three Months Ended         Nine Months Ended
                                                     September 30,             September 30,
                                             ------------------------- -------------------------
                                                 2004         2003         2004         2003
                                             ------------ ------------ ------------ ------------
Asset impairments:
   MOD II assets............................       $--          $--           $5.4        $--
   Other....................................        --            0.2         --            0.4
Restructuring of operations:
   Employee severance and termination
     benefits, other........................        --            0.6          0.1          1.3
   MOD II employee severance and
     termination benefits...................        --           --            1.8         --
   MOD II period maintenance and
     closure costs..........................         2.3         --            2.4         --
   MOD III period maintenance and
     closure costs..........................         0.6          0.4          1.3          1.0
   MOD III reimbursement, all period
     costs..................................        (4.8)        --           (4.8)        --
Professional fees for debt
   restructuring............................        --            0.1          0.1          0.5
                                             ------------ ------------ ------------ ------------
                                                   ($1.9)        $1.3         $6.3         $3.2
                                             ============ ============ ============ ============`

These charges can be summarized as follows:

`Three Months Ended         Nine Months Ended
                                                     September 30,             September 30,
                                             ------------------------- -------------------------
                                                 2004         2003         2004         2003
                                             ------------ ------------ ------------ ------------
MOD II activity items.......................        $2.3        $--           $9.6        $--
MOD III activity items......................        (4.2)         0.4         (3.5)         1.0
Other.......................................        --            0.9          0.2          2.2
                                             ------------ ------------ ------------ ------------
                                                   ($1.9)        $1.3         $6.3         $3.2
                                             ============ ============ ============ ============`

On April 16th, 2004, we announced the closure of our MOD II five-inch wafer
manufacturing facility in Nampa, Idaho ("MOD II") and the related
transfer of MOD II production activities to our foundry partner, X-FAB, in
Lubbock, Texas.  MOD II ceased production operations on July 11, 2004.  As a
result, for the three-month period ended September 30, 2004, we incurred $2.3
million in sustaining costs for post-closure maintenance of the MOD II facility.
Additionally, MOD III sustaining costs for post-closure maintenance incurred us
totaled $0.6 million, which was offset by $4.8 million reimbursement for these
costs from the sale of the MOD III equipment to STMicroelectronics
("STM"), in July, 2004.

As a result of the closure of MOD II, for the nine-month period ended
September 30, 2004, we incurred the following special charges: (1) employee
severance and termination benefits of approximately $1.8 million for
approximately 125 people; (2) asset impairment charges of $5.4 million related
to the write-down of MOD II long-lived assets to their fair values; and (3)
sustaining costs for post-closure maintenance of $2.4 million.

Additionally, for the nine-month period ended September 30, 2004, we incurred
approximately $1.3 million  of special charges for sustaining costs for post-
closure maintenance of the MOD III facility, offset by the $4.8 million
reimbursement received from the sale of the MOD III equipment to STM.  The costs
for MOD II and MOD III consist of utilities, taxes, insurance, and other
maintenance costs required to maintain the facilities in a condition required
for the sale of the respective properties.  During the nine months ended
September 30, 2004,we incurred one-time charges to cost of
sales totaling $0.6 million relating to closure expenses for our MOD II wafer
facility which included $0.4 million of cash charges.



Our estimates used to determine the fair value of MOD II land and buildings
were based upon an independent appraisal from a third party.  There can be no
assurance that the value we will realize from the ultimate sale or disposition
of these assets will be equal to the appraised fair values.  If the ultimate net
value realized upon the disposition of MOD II assets is less than the estimated
fair value, our future results of operations could be adversely impacted.

The following table summarizes activity in accrued special charges which is
included within accrued liabilities on the condensed consolidated balance sheets
(in millions):

`MOD II
                                                  Severance     MOD III       Period
                                                     and         Period     Maintenance      Debt
                                                 Termination  Maintenance   and Closure  Restructur-
                                                   Benefits      Costs         Costs         ing         Total
                                                 ------------ ------------ ------------- ------------ ------------
    Balance at December 31, 2003................       $ --          $0.2        $ --          $ --          $0.2
    Provisions to special charges...............         1.9          1.3           2.4          0.1          5.7
    Provisions to cost of sales relating to
       MOD II closure...........................         0.4        --           --            --             0.4
    Cash paid...................................        (2.0)        (1.3)         (1.7)        (0.1)        (5.1)
                                                 ------------ ------------ ------------- ------------ ------------
    Balance at Sep. 30, 2004....................        $0.3         $0.2          $0.7        $ --          $1.2
                                                 ============ ============ ============= ============ ============`

During the three months ended September 30, 2003, we incurred approximately
$1.3 million of special charges, which included severance and termination
benefits of $0.6 million relating to a reduction-in-force at the our
Philippine's test facility, and severance costs associated with elimination of
certain administrative positions, primarily in San Jose. Approximately $0.4
million of special charges for the period relate to continuing post-closure
maintenance costs of the MOD III eight-inch wafer fabrication facility in Idaho
consisting of utilities, taxes, insurance and other maintenance costs required
to maintain the facility in a condition required for sale of the property.
Approximately $0.1 million of special charges relate to third-party professional
service fees for legal and accounting services to register 11.7 million shares
of common stock as required by the our 2002 Plan of Reorganization and for legal
and financial advisors associated with actions required to be taken as a result
of our May 2002 debt and equity restructuring activities. Additionally, in the
three months ended September 30, 2003, asset impairments consisted of
approximately $0.2 million relating to a  non-cash impairment loss recognized on
the write-down of an equity investment.

Restructuring of operations during the nine-month period ended September 30,
2003 of $3.2 million included severance and termination benefits of $1.3
million, which primarily related to a reduction-in-force at our Nampa, Idaho
manufacturing plant and Philippine's test facility, eliminating a total of
approximately 86 positions.  Approximately $1.0 million of special charges for
the nine-month period relate to post-closure maintenance costs of the MOD III
eight-inch wafer fabrication facility in Idaho consisting of utilities, taxes,
insurance and other maintenance costs required to maintain the facility in a
condition required for the sale of the property.  Approximately $0.5 million of
special charges relate to third-party professional fees for legal and accounting
services to register 11.7 million shares of common stock as required by our 2002
Plan of Reorganization and for legal and financial advisors associated with
actions required to be taken as a result of our May 2002 debt and equity
restructuring activities.

Stock-Based Compensation.  Ourstock-based compensation
represents primarily amortization of deferred compensation associated with stock
options and restricted stock awarded to employees and directors at prices below
fair value. During both of the three-month periods ended September 30, 2004 and
2003, we recognized $0.4 million of stock-based compensation.  For the nine-
month periods ended September 30, 2004 and 2003, we recognized $1.5 million and
$1.2 million of stock-based compensation, respectively.  These charges were
recorded to reflect the intrinsic value of awards of restricted stock and stock
options to certain executives, employees and consultants.  These non-cash
charges are primarily included in our selling, general and administrative
expenses.   Our right to repurchase shares of restricted stock for $0.01 per
share generally lapses 25% on the award date and 25% on each of the first three
anniversaries following the award date.  Compensation expense for employee stock
awards was measured on the award date and will be recognized over each of the
next three years as these restrictions lapse.  Charges for stock awards to non-
employees are measured as the awards vest and will be recognized over the
periods that the restrictions lapse.

Amortization of Intangible Assets.  Effective January 1, 2002, we adopted
the provisions of FASB Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("FAS 142").  Under FAS 142, goodwill and
intangible assets with indefinite lives are not amortized, but are reviewed
annually or more frequently if impairment indicators arise.  Separable
intangible assets that are deemed to have defined lives will continue to be
amortized over their useful lives (but with no maximum life).  Intangible assets
acquired prior to July 1, 2001 were being amortized on a straight-line basis
over lives ranging from three to five years.  In connection with the Company's
"fresh start" reporting, separable intangible assets based on
independent valuations were created with deemed defined lives.  These intangible
assets are being amortized utilizing the pattern-of-use method over their
estimated useful lives of six years for current technology and ten years for
brand name.

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

`Current       Brand
                                                  Technology      Name         Total
                                                 ------------ ------------ -------------
Gross carrying amount...........................       $17.0         $9.2         $26.2
Accumulated amortization........................        14.6          3.3          17.9
                                                 ------------ ------------ -------------
Carrying amount at September 30, 2004...........        $2.4         $5.9          $8.3
                                                 ============ ============ =============`

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

`Current        Brand         Total
             Year          Technology       Name      Amortization
      ------------------ -------------- ------------ --------------
      October-December 20         $0.6         $0.4           $1.0
             2005                  1.1          1.1            2.2
             2006                  0.4          1.0            1.4
             2007                  0.2          0.8            1.0
             2008                  0.1          0.7            0.8
          Thereafter              --            1.9            1.9
                         -------------- ------------ --------------
            Total                 $2.4         $5.9           $8.3
                         ============== ============ ==============`

Goodwill and Intangible Assets.  Effective January 1, 2002, we
adopted the provisions of FASB Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets" ("FAS 142").  Under FAS 142,
goodwill and intangible assets with indefinite lives are not amortized, but are
reviewed annually or more frequently if impairment indicators arise.  Separable
intangible assets that are deemed to have defined lives will continue to be
amortized over their useful lives.  Intangible assets acquired prior to July 1,
2001 were being amortized on a straight-line basis over lives ranging from three
to five years.  In connection with our "fresh start" reporting, as
prescribed by SOP 90-7, "Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code," upon emergence from bankruptcy, separable
intangible assets based on independent valuations were created with deemed
defined lives. These intangible assets are being amortized utilizing the
pattern-of-use method over their estimated useful lives of six years for current
technology and ten years for brand name.  Upon emergence from bankruptcy, we
initially recorded goodwill of $26.7 million.

The goodwill recorded and adjustments to such value included in our condensed
consolidated balance sheet is summarized as follows (in millions):

`Goodwill recorded May 13, 2002..............       $26.7
Adjustments of tax deferred charge..........         7.9
Adjustment in other non-current
   liabilities..............................       (17.7)
                                             ------------
Balance at December 31, 2003................       $16.9
Adjustmentin deferred tax liability.........        (7.4)
                                             ------------
Balance at September 30, 2004...............        $9.5
                                             ============`

During 2003, we reassessed deferred income tax liabilities and income tax
contingencies a reduced the associated liabilities as an adjustment to goodwill.
The $7.4 million adjustment of goodwill in 2004 represents release of valuation
allowance and recognition of net deferred income tax assets that existed at the
time of our May 13, 2002 date of reorganization.  During the third quarter of
2004, it became apparent that such deferred tax assets were likely to be
realized.

Interest Expense.  During the first nine months of 2004 and 2003, our
interest expense was primarily accrued in connection with our borrowings under
our three-year $15.0 million senior secured revolving line of credit
facility.

Income Taxes.   Our income tax benefit for the nine-month period ended
September 30, 2004 reflects an estimated effective tax benefit at a rate of 2%
for of the year ending December 31, 2004. This rate is based on the our current
forecast of profits and losses for each taxable jurisdiction in which we
operate, including the taxable gains and charges for closure and sales of
certain assets of the MOD II and MOD III wafer manufacturing facilities in
Nampa, Idaho.  In order to align our expected tax rate for the entire 2004
fiscal year, we recorded a $0.9 million income tax provision in the third
quarter of 2004.  Our 2003 tax provision included taxable income in the U.S.
resulting from items that are expensed for book purposes but are nondeductible
for tax purposes, including amortization of intangible assets, stock
compensation expense and depreciation of U.S.-based property, plant and
equipment. Additionally, our tax provision in 2004 and 2003 includes
amortization of tax deferred charges relating to the establishment of our
international structure and accretion of deferred tax liabilities relating to
timing differences resulting from "fresh start" accounting.   We
provide for income tax expense in foreign jurisdictions where our operations
generate profits that are taxable.



Liquidity and Capital Resources

In May 2002, we entered into a three-year $15.0 million senior secured
revolving credit facility with a commercial lender under which borrowings bear
interest at a rate per annum equal, at our option, to the commercial lender's
stated prime rate or LIBOR, plus 2.5%.  We have elected the LIBOR interest rate
option, which, as of September 30, 2004, was 4.3%.  As of September 30, 2004, we
had paid off the remaining borrowings of $2.4 million and had standby letters of
credit of $0.2 million.  Our ability to borrow under the facility is based on a
monthly borrowing base calculation that is determined as a percentage of
eligible accounts receivable.  At September 30, 2004, our availability for
additional borrowings under the facility totaled $3.9 million.  We are subject
to certain financial covenants under the facility, including tangible net asset
balance and fixed charge coverage ratios only if the total of our cash, cash
equivalents and availability on the facility are less than $7.5 million at any
month end.

At September 30, 2004, we had cash and cash equivalents of $39.5 million,
compared to $22.0 million at December 31, 2003.  Cash provided by operating
activities was $6.4 million for the nine months ended September 30, 2004,
compared to $2.1 million of cash used by operating activities in the nine months
ended September 30, 2003.

During the nine-month period ended September 30, 2004, cash provided by
operating activities of $6.4 million primarily reflects increases in accounts
receivable and increases in prepaid expenses and other current and non-current
assets of $4.6 million and $2.3 million, respectively, goodwill adjustment of
$7.4 million, as well as a decrease in current liabilities of $1.4 million
offset by our net loss of $9.2 million. Cash provided by operations was
increased by non-cash charges totaling $2.6 million, including: a decrease of
deferred income tax assets and liabilities of $10.0 million; an increase of $3.2
million for amortization of  "fresh start" intangible assets; $2.4
million of depreciation and amortization; charges for impairment of long-lived
assets of $5.4 million; and loss on asset disposal of $0.1 million; and stock-
based compensation expense of $1.5 million.

During the nine-month period ended September 30, 2003, cash used by operating
activities of $2.1 million primarily reflects our net loss of $6.9 million
offset by non-cash charges of $8.2 million. Non-cash charges include $5.1
million for amortization of  "fresh start" intangible assets, $4.3
million in depreciation and other amortization charges, a reduction of deferred
income tax assets and liabilities of $2.8 million, $0.2 million of asset
impairments, $0.2 million of equity investment impairment and stock-based
compensation expense of $1.2 million. The primary use of cash for operating
activities in the nine months ended September 30, 2003 was a result of changes
in working capital driven by:

- payout of the 2002 annual employee incentive bonuses of $3.3 million;
- payments pertaining to accrued special charges of $2.9 million; and
- reduction of accrued vacation, reflecting shut-downs and mandatory time-off
taken by employees during the nine-month period ended September 30, 2003
totaling approximately $0.7 million.

Cash used by investing activities was $4.2 million and $1.6 million in the
nine-month periods ended September 30, 2004 and 2003, respectively. Cash used
for investing activities in both of these periods reflects capital expenditures
for building improvements, software and equipment.  For the nine-month period
ended September 30, 2004, capital expenditures were primarily related to CAD
tools, facilities and equipment relating to our research and development
activities, including our new design centers in Shanghai and Idaho.

Cash provided by financing activities for the nine-month period ended
September 30, 2004 of $15.3 million primarily reflects the net proceeds of $24.4
million from the Company's public offering of 2.3 million shares of common stock
at a price of $12.50 per share, net of offering expenses.  The stock offering
proceeds were offset by repayments of $5.0 million of borrowings under our
revolving line of credit, $4.5 million of stock repurchased primarily under the
stock repurchase program approved by our Board of Directors on July 29, 2004.
Additionally, proceeds from issuance of common stock under employee stock
purchase plans was $0.4 million

Cash used by financing activities was $3.7 million for the nine-month period
ended September 30, 2003, which reflected the repayment of borrowings under our
revolving line of credit of $1.9 million and $1.3 million for the repurchase of
restricted common stock from current and former employees, and $0.5 million for
the repurchase of common stock outstanding.

EBITDA as presented below reflect a non-GAAP measure of our liquidity.
EBITDA reflects our net income (loss) adjusted for non-cash items, interest and
income taxes.  Our management uses separate "adjusted EBITDA"
calculations for purposes of determining certain employees' incentive
compensation and, subject to meeting specified adjusted EBITDA amounts, for
accelerating the vesting of EBITDA-linked stock options. This measure of
adjusted EBITDA was approved as part of our plan of reorganization.  Adjusted
EBITDA, as we define it, excludes interest, income taxes, effects of changes in
accounting principles and non-cash charges such as depreciation, amortization,
in-process research and development, and stock-based compensation expense.  It
also excludes cash and non-cash charges associated with reorganization items and
special charges, which represent operational restructuring charges, including
asset write-offs, employee termination costs, and lease termination costs.
EBITDA is presented because management uses EBITDA as a measure of cash earnings
for budgeting and financial performance measurement.

The differences between the EBITDA amounts below and our adjusted EBITDA
relate to the following cash-settled reorganization and special items that are
added-back in our adjusted EBITDA computations:

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

Our EBITDA, reconciled to cash provided (used) by operations (the most
directly comparable measure of liquidity under generally accepted accounting
principles) for each period presented, is as follows (in millions):

`Three Months Ended        Nine Months Ended
                                                         September 30,             September 30,
                                                 ------------------------- --------------------------
                                                     2004         2003         2004          2003
                                                 ------------ ------------ ------------- ------------
Reconciliation of net loss to EBITDA:
   Net loss.....................................       ($2.0)       ($2.0)        ($9.2)       ($6.9)
   Depreciation and amortization................         1.7          3.1           5.6          9.4
   Interest expense, net........................         --           --           --            0.1
   Income taxe expense (benefit)................         0.9          --           (0.2)         0.2
                                                 ------------ ------------ ------------- ------------
EBITDA..........................................        $0.6         $1.1         ($3.8)        $2.8
                                                 ============ ============ ============= ============

Reconciliation of EBITDA to net cash used by
operating activities cash flow:
   EBITDA.......................................        $0.6         $1.1         ($3.8)        $2.8
   Interest expense, net........................         --           --           --           (0.1)
   Benefit (provision)for income taxes..........        (0.9)         --            0.2         (0.2)
   Deferred income taxe assets and liabilities..        (6.8)        (0.9)        (10.0)        (2.8)
   Asset impairments............................         --           0.2           5.4          0.4
   Loss on asset disposal.......................         --           --            0.1          --
   Stock-based compensation.....................         0.4          0.4           1.5          1.2
   Changes in operating assets and
      liabilities...............................        17.1          0.2          13.0         (3.4)
                                                 ------------ ------------ ------------- ------------
Net cash provided (used) by operating
   activities...................................       $10.4         $1.0          $6.4        ($2.1)
                                                 ============ ============ ============= ============`

Our cash needs for 2004 primarily include working capital, special charges
and capital expenditures.  In April 2004, we announced the closure of our MOD II
wafer fabrication facility which resulted in the elimination of approximately
150 positions.  We anticipate the remaining cash costs of this action will be
approximately $2.3 million for incentive bonuses, severance benefits and other
cash costs to be paid primarily during the fourth quarter of 2004 and first half
of 2005.  However, we currently anticipate that available cash and cash provided
by operating activities will be adequate to satisfy our cash requirements for at
least the next twelve months.

We expect our aggregate fiscal 2004 capital expenditures will total
approximately $4.8 million, primarily for test equipment, building improvements
and internal use software.  Decisions related to cash requirements for investing
activities are influenced by our expected cash provided by operations, our
existing cash reserves and the investment needs of the business as we continue
to expand our development activities.



Contractual Obligations.  We lease certain of our facilities and
equipment under non-cancelable operating leases, which expire in 2004 through
2009. These facility lease agreements generally provide for base rental rates
which increase at various times during the terms of the leases and also provide
for renewal options at fair market rental value. We expense the future minimum
lease payments on a straight-line basis over the lease term. We are also
responsible for common area maintenance charges on certain office leases, which
are not included in the above table. These charges are generally less than 10%
of base rents. Total operating lease expense, including month-to-month rentals,
was approximately $2.7 million, $1.7 million and $1.2 million and for the year
ended December 31, 2003, the eight-month period ended December 31, 2002 and the
four-month period ended April 30, 2002. We did not have any capital leases as of
December 31, 2003 or 2002.

We generally make purchases under cancelable purchase orders and do not enter
into long-term supply agreements. Certain of our wafer foundry, assembly,
materials suppliers, software vendors and support tool manufacturers require
non-cancelable purchase orders since they often provide products and services
tailored to our specifications.



Summarized in the table below are minimum future commitments under operating
leases and non-cancelable purchase obligations as of December 31, 2003 (in
millions):

`Payment due by period
                                                              ----------------------------------------------------
                                                                                           More than
                                                                Within 1   ---------------------------------------
                                                    Total         Year       1-3 years    3-5 years     5 years
                                                 ------------ ------------ ------------- ------------ ------------

Operating lease obligations.....................        $6.9         $1.9          $3.4         $1.4         $0.2

Purchase obligations............................         5.8          4.5           1.2          0.1         --
                                                 ------------ ------------ ------------- ------------ ------------
    Total.......................................       $12.7         $6.4          $4.6         $1.5         $0.2
                                                 ============ ============ ============= ============ ============`

We have purchase orders with our new foundry vendor, X-FAB, which total $3.2
million of outstanding purchase commitments as of September 30, 2004.  In 2004,
we have entered into new building leases for our design centers in Meridian,
Idaho and Shanghai, China, which have future minimum lease payments of $0.7
million over a 62-month term and $0.1 million over a 36-month term,
respectively.



From time to time we have agreed to indemnify certain customers for potential
allegations of infringement of intellectual property rights and patents arising
from the use of the Company's products. Currently, we have an indemnification
agreement with a customer that limits our net contingent obligation to pay for
the customer's defense costs, if any, up to a maximum of $500,000.

Effects of Inflation and Changing Prices

We believe that inflation and/or deflation had a minimal impact on our
overall operations during the periods included in these financial
statements.

Seasonality

Sales typically increase in the second quarter and peak in the third quarter
driven by increased holiday demand from our customers in the home entertainment
and consumer products markets.  Our revenues are generally lower in the first
and fourth quarters compared to the rest of the year.  We believe that this
historical seasonal trend could be impacted in the current year by general
economic conditions and reduction in sales of certain products such as foundry
services.  Additionally, general world-wide economic, political and regional
instabilities may impact our results of operations in any given period.

Recent Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46 ("FIN 46"), "Consolidation of Variable
Interest Entities." In December 2003, the FASB issued Interpretation No. 46
(revised December 2003), "Consolidation of Variable Interest Entities
("FIN 46R")," which addresses how a business enterprise should
evaluate whether it has a controlling financial interest in an entity through
means other than voting rights. The interpretation replaces Interpretation No.
46, "Consolidation of Variable Interest Entities," which was issued in
January 2003.

Effective January 1, 2004, the Company adopted the provisions of FIN 46R.
Under the provisions of FIN 46R, our investment in ZiLOG, MOD III, Inc.
("MOD III") was determined to be a variable interest entity and we are
not the primary beneficiary.  The adoption of FIN 46R did not have an impact on
prior periods. The adoption of FIN 46R did not have an impact on prior periods.
And accordingly, the $30.0 million book value and minority interest in MOD III
were unconsolidated effective January 1, 2004.

In December 2003, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 104 ("SAB 104"), which revises or rescinds
portions of the interpretative guidance included in Topic 13 of the codification
of staff accounting bulletins to make this interpretative guidance consistent
with current authoritative accounting and auditing guidance and SEC rules and
regulations. SAB 104 also rescinds the Revenue Recognition in Financial
Statements Frequently Asked Questions and Answers document issued in conjunction
with Topic 13. The application of the requirements of SAB 104 did not have an
impact on our financial position or results of operations.

RISK FACTORS

Risks Related to Our Business and Industry



In April 2004 we announced the closure of our MOD II wafer
manufacturing facility and outsourcing of wafer production to our foundry
partner, X-FAB.  If we are unable to effectively complete the closure and
decommissioning of MOD II and successfully transition production to X-FAB, our
business and net sales could be harmed materially.

During 2003, approximately 70% of our net sales were derived from
products that were manufactured in our MOD II wafer facility in Nampa, Idaho.
In April 2004, the Company decided to close our MOD II wafer production facility
and migrate the majority of this production into X-FAB's six-inch wafer
manufacturing facility in Lubbock, Texas. Subsequently, on July 9, 2004, MOD II
production was terminated and the facility was closed.  A number of issues could
arise in connection with our closure and decommissioning of MOD II and
outsourcing of production to X-FAB, including:

- The cost of closing and decommissioning MOD II could be more expensive than
anticipated;
- The closing and decommissioning could take longer than anticipated;
- Production yields at X-FAB could be unsatisfactory and result in higher
costs than expected, as was the case during the third quarter of 2004;
- Production of wafers at X-FAB could  fail to meet our product specifications
or our customers' qualification requirements;
- X-FAB may be unable to meet our need for wafers or to meet our delivery
requirements on a timely basis, as was the case during the third quarter of
2004; or
- After the first year of our agreement with X-FAB, they could substantially
raise the price we pay for wafers or they may terminate their contract with
us.

Any one or more of these factors could result in a material reduction in our
sales and increase in our costs or a loss of customers.

We have experienced declines in net sales, and, if we fail to implement our
new product strategy, we may continue to experience declines in sales or fail to
achieve our planned revenue growth.



In each of the past three years our net sales have declined significantly and
our future financial results are anticipated to be subject to substantial
fluctuations. Our total net sales were $103.6 million for the year ended
December 31, 2003, $139.6 million in 2002 and $172.3 million in 2001. In
addition, our net sales in the third quarter of 2004 were $22.8 million,
compared to net sales of $26.0 million in the third quarter of 2003. Our future
financial performance and success are largely dependent on our ability to
implement our new product strategy, which consists partly of refocusing our
business on the next generation of micrologic products built around our core 8-
bit micrologic architecture, beginning with the Z8 Encore! and eZ80
Acclaim! flash products. In November 2002 we launched our new 8-bit Z8 Encore!
micrologic product, and in February 2003 we launched our new eZ80 Acclaim!
micrologic product. These products typically have a long lead time from design
to production, which can range from twelve months to thirty-six months. To date
these products have only been sold in insignificant quantities, and we do not
currently expect these products to contribute a meaningful percentage of net
sales until 2005. If the market for these new products does not develop as we
currently expect, if we are unable to develop new products in a manner that
timely meets changing market requirements, or if we are not able to achieve
significant sales of our new 8-bit micrologic products for any reason, our
product strategy may fail and our net sales and operating results may continue
to decline or not grow as currently expected.



Our May 2002 reorganization may have harmed our relationships with our
customers, suppliers and employees, and may continue to impair our business
reputation.



On February 28, 2002, we filed a voluntary petition for reorganization under
Chapter 11 of the United States Bankruptcy Code. The United States Bankruptcy
Court for the Northern District of California confirmed our prepackaged plan of
reorganization on April 30, 2002, and we emerged from bankruptcy on May 13,
2002. The effect, if any, that our Chapter 11 case and plan of reorganization
may have had, and may continue to have, upon our continued operations cannot be
reasonably estimated, predicted or quantified. Some entities may be
uncomfortable doing business with a company that emerged from bankruptcy
approximately two years ago.  The fact that we have a Chapter 11 bankruptcy on
our credit record could adversely affect our relationships with our customers,
suppliers and employees.



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



Our operating results depend on our ability to introduce and sell new
products on a timely basis that can compete effectively based on price and
performance and that address customer requirements. Rapidly changing
technologies and industry standards, along with frequent new product
introductions, characterize the industries that are currently the primary end-
users of semiconductors. As these industries evolve and our customers and
potential customers introduce new products, our success will depend on our
ability to adapt to such changes in a timely and cost-effective manner by
designing, developing, manufacturing, marketing and providing customer support
for new products and technologies. In the past, we have brought products to
market on an untimely basis or canceled the introduction of previously planned
products, such as our Cartezian line of 32-bit microprocessors. Our ability to
introduce and sell new products successfully depends on several factors,
including:



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



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



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



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



- our ability to design and manufacture new products that implement new
technologies, including our eZ80 Acclaim! and Z8 Encore! product families;
- our ability to protect our products by effectively utilizing intellectual
property laws;
- our product quality, reliability, ease of use and price;
- the diversity of our product line and feature sets within our products;
- our efficiency of production;
- our ability to obtain adequate supplies of raw materials and other supplies
at acceptable prices;
- the pace at which customers incorporate our devices into their products; and
- the success of our competitors' products and general economic conditions.



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



Our quarterly operating results have fluctuated in the past and will likely
continue to fluctuate in the future. If our quarterly operating results fail to
meet expectations, the price of our securities could fluctuate or decline
significantly. In addition, high proportions of our costs are fixed, due in part
to our significant sales, research and development and manufacturing costs.
Therefore, small declines in revenue could disproportionately affect our
operating results in a quarter. A variety of factors could cause our quarterly
operating results to fluctuate, including:



- our ability to introduce and sell new products and technologies on a timely
basis, such as our Z8 Encore! and eZ80 Acclaim! device families and extensions
of these product families;
- any shortage of wafer or assembly manufacturing capacity at our third-party
vendors;
- competitive developments, including pricing pressures;
- technological change and product obsolescence;
- changes in product mix or fluctuations in manufacturing yields;
- variability of our customers' product life cycles;
- the level of orders that we receive and can ship in a quarter and customer
order patterns;
- seasonality;
- increases in the cost or scarcity of raw materials; and
- gain or loss of significant customers.



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



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



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



The semiconductor industry is highly cyclical and has experienced significant
economic downturns, often in connection with, or in anticipation of, maturing
product cycles (for semiconductors and for the end-user products in which they
are used) and declines in general economic conditions. These downturns have been
characterized by diminished product demand, erosion of average selling prices,
production over-capacity and high inventory levels. For example, beginning in
the fourth quarter of 2000 we experienced a three-year downturn in our business
cycle. We believe that, in light of these events, some of our customers
curtailed and may in the future delay or further curtail spending on technology,
which could negatively affect our quarterly results or financial condition in
the future. During the third quarter of 2004, our net sales declined both
sequentially and compared to the same period in 2003.  This economic downturn in
the semiconductor industry could increase pressure on us to reduce our prices,
which could impair our revenues, gross margins and operating cash flow. From
time to time, the semiconductor industry also has experienced periods of
increased demand and production capacity constraints. We have in the past
experienced substantial period-to-period declines in operating results, and will
likely in the future experience substantial period-to-period fluctuations in
operating results that are attributable to semiconductor industry conditions or
events occurring in the general economy.

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



Historically, average selling prices in the semiconductor industry have
decreased over the life of any particular product. To the extent that our
products achieve market acceptance, competitors typically seek to offer
competitive products or embark on discount pricing strategies. We have in the
past and may in the future be required to reduce selling prices in response to
competition. If we are unable to offset any reductions in the selling prices of
our products by introducing new products at higher prices or by reducing our
costs, our revenues, gross margins and operating results could be impaired.



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



We depend on relatively few distributors for a substantial portion of
our sales.



Historically we have been, and we expect to continue to be, dependent on a
relatively small number of distributors for a significant portion of our
revenues. We depend on third-party distributors to market and sell our products,
and these third-party distributors accounted for approximately 53% of our net
sales for the third quarter 2004, 49% of our net sales for the nine-month period
ended September 30, 2004, 47% of our net sales for 2003 and approximately 44% of
our net sales for 2002. In addition, our five largest distributors accounted for
approximately 41% of our net sales for the third quarter of 2004, 37% of our net
sales for the nine-month period ended September 30, 2004 and 33% of net sales
for 2003. Future Electronics accounted for approximately 24% of our net sales
for the third quarter of 2004, approximately 20% of our net sales for the nine-
month period ended September 30, 2004 and 18% of our net sales for 2003. Our
distributors decide whether to include our products among those that they sell,
and they may carry and sell product lines that are competitive with ours.
Because our distributors are not required to make a specified minimum level of
purchases from us, we cannot be sure that they will prioritize selling our
products. We also rely on our distributors to accurately report to us on a
timely basis their sales of our products and provide certain support services to
our customers. Our inability to obtain accurate and timely reports and to
successfully manage these relationships could adversely affect our business and
financial reports. Our distributors may not continue to effectively market, sell
or support our products.



We depend on relatively few major customers for a substantial portion
of our sales.



Our ten largest customers, including our distributors, accounted for
approximately 64% of net sales for the third quarter of 2004 and 65% for the
nine-month period ended September 30, 2004, 63% of our net sales for 2003 and
approximately 54% of our net sales for 2002. Concentration of net sales to
particular customers may change from period to period, but we expect that sales
to a limited number of customers will continue to account for a significant
percentage of our revenues in any particular period for the foreseeable future.
We have very few long-term contracts with our customers, and, like us, our
customers typically compete in cyclical industries. We routinely manufacture or
purchase inventory based on customers' estimates of demand for their products,
which is difficult to predict. We recently increased our inventory stocking
levels in anticipation of the closure of our MOD II facility and the related
transition of production to outside foundries. Our customers may decide not to
purchase our products at all, to purchase fewer products than they did in the
past, or to alter their purchasing patterns on short notice, particularly
because substantially all of our sales are made on a purchase order or sales
order acknowledgment basis, which permits our customers to cancel, change or
delay product purchase commitments upon 30 days notice for standard products and
60 days notice for custom products without paying a cancellation or rescheduling
charge. Customers may still cancel or reschedule within these time periods,
however they routinely incur a cancellation or rescheduling charge. This
cancellation risk is increased because our customers can purchase some similar
products from our competitors. The loss of one or more major customers or any
reduction, delay or cancellation of orders by any of these customers or our
failure to market successfully to new customers could result in a significant
reduction in net sales during one or more periods, excess inventory or write-
downs of inventory.



Our international operations subject us to risks inherent in doing
business in foreign countries that could impair our results of operations.



Approximately 66% of our net sales for the nine-month period ended September
30, 2004, approximately 66% of our net sales for 2003, and approximately 56% for
2002 were made to foreign customers, and we expect that international sales will
continue to represent a significant portion of our net sales in the future. We
maintain significant operations or rely on a number of contract manufacturers in
the Philippines, Indonesia, Taiwan, Thailand, India and other locations in Asia.
We cannot assure you that we will be successful in overcoming the risks that
relate to or arise from operating in international markets. Risks inherent in
doing business on an international level include:

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



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



The risks inherent in our international operations have been increased by the
terrorist attacks of September 2001. These attacks, coupled with the
international military response, have created an uncertain economic environment,
and we cannot predict the impact of these events, any subsequent terrorist acts
or any related military action, on our customers or our business.



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



We have had a history of losses for each of the years in the five-year period
ended December 31, 2003 and for the nine months ended September 30, 2004,
excluding the one-time gain on extinguishment of debt and "fresh start
" adjustments in 2002. We may not be profitable in the future.



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



We depend on our ability to attract and retain highly skilled technical and
managerial personnel. We believe that our future success in developing
marketable products and achieving a competitive position will depend in large
part on our ability to identify, recruit, hire, train, retain and motivate
highly skilled technical, executive, managerial, marketing and customer service
personnel. Competition for these personnel is intense, especially in Northern
California, where our headquarters are located, and we may not be able to
successfully recruit, assimilate or retain sufficiently qualified personnel. Our
failure to recruit and retain necessary technical, executive, managerial,
marketing and customer service personnel could harm our business and our ability
to obtain new customers and develop new products. In addition, our history of
losses and our bankruptcy filing could impair our ability to recruit and retain
employees.



Our current policy is that we not enter into or extend employment agreements
with executives. Mr. Thorburn's employment agreement expired in May 2004 and he
currently has an at-will employment relationship with us. If we are unable to
retain Mr. Thorburn as our Chief Executive Officer of any of the other key
executives, our business may be harmed.



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



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



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



Litigation may be necessary to enforce our intellectual property rights, to
protect our trade secrets or to determine the validity and scope of our
proprietary rights or the proprietary rights of others. Any such litigation
could require us to incur substantial costs and divert significant valuable
resources, including the efforts of our technical and management personnel,
which may harm our business materially. For example, we recently filed suit
against QuickLogic Corporation alleging that QuickLogic's FPGA and ESP products
infringe claims of ZiLOG's U.S. patent number 4,670,749 and seeking to recover
monetary damages resulting from the alleged infringement. While we believe we
would ultimately be successful in this litigation, it is possible that
QuickLogic could assert a number of defenses, such as non-infringement, or
counterclaims of invalidity or unenforceability. Nonetheless, we do not
currently believe that any outcomes of such defenses or counterclaims would have
a material adverse effect on our business.



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



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



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



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



We could be forced to spend significant time and money on products that
contain, or are rumored to contain, design defects or errors.



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

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



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



As a result of technological changes, from time to time our customers change
the design of their products so as not to include our products, which may have a
negative impact on our net sales. For example, in 1999 and 2000, a number of our
customers changed the designs of computer mouse pointing devices that they
manufactured, and as a result, these devices no longer contain our products.
Because we do not have long-term supply contracts with most of our customers,
changes in the designs of their products can have sudden and significant impacts
on our sales. For example, net sales of our computer mouse pointing devices and
other computer peripheral products decreased substantially from approximately
$15.4 million in 2000 to approximately $4.9 million in 2001, approximately $2.4
million in 2002, and approximately $0.7 million for 2003 and approximately
$72,000 for the nine months ended September 30, 2004. These reduced sales due to
design changes have harmed us in the past, and additional design changes could
result in lower revenues in the future.



We have implemented significant cost cutting measures, and we may be
required to implement additional cost cutting measures depending upon our future
revenues and operating results.

We have implemented significant cost cutting measures in the past, including
during 2003. These cost cutting efforts have included:

- restructuring our manufacturing operations, which included consolidating our
wafer fabrication facilities, outsourcing significant wafer and assembly
operations and consolidating probe and final test operations at our Philippines
site;
- refocusing our strategic priorities;
- closing of MOD II;
- reallocating personnel and responsibilities to better utilize human
resources;
- reducing research and development and capital expenditure spending;
- reducing our workforce; and
- instituting temporary office and facility shutdowns.



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

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



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



Our manufacturing processes require us to use various hazardous substances,
and, as a result, we are subject to a variety of environmental laws and
regulations governing the storage, use, emission, discharge and disposal of, and
human exposure to, such substances. In particular, the process of manufacturing
silicon wafers uses large amounts of corrosive and other hazardous chemicals and
huge quantities of distilled, de-ionized water. Our failure to comply with
present or future laws and regulations or the loss of any permit required to
conduct our business could result in fines being imposed on us, the limitation
or suspension of production, or cessation of our operations. Compliance with
environmental laws and regulations also could require us to acquire additional
equipment or to incur substantial other expenses. Any failure by us to control
the use of, or adequately restrict the discharge of, hazardous substances could
subject us to future liabilities that could materially harm our business,
including under laws and regulations that impose liability and clean-up
responsibility for releases of hazardous substances into the environment. Under
certain of these laws and regulations, current or previous owners or operators
of property may be liable for clean-up costs and other damages without regard to
whether they knew of, or caused, the contamination. The presence of, or failure
to remediate, contamination could adversely affect the value of, and the ability
to transfer or encumber, our property. In addition, we may be required to incur
significant expense in connection with governmental investigations of
environmental or employee health and safety matters.



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



We rely on independent third-party foundry manufacturers to fabricate all of
our products since we closed MOD II in June 2004. Since we closed MOD II,
industry-wide shortages in foundry capacity could harm our financial results. As
a result of our fabless business model, we are more vulnerable to shortages of
wafer supply or price increases by our foundry suppliers. If we are unable to
obtain the requisite foundry capacity to manufacture our products, or if we have
to pay higher than anticipated prices to foundries in periods of tight capacity,
we may not be able to meet our customers' demand for our products. Any delay in
initiating production at third-party foundries, any inability to have new
products manufactured at such foundries or any failure to meet our customers'
demands could damage our relationships with our customers and may decrease our
sales.



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

- reduced control over the cost of our products, delivery schedules and
product quality;
- limited warranties on wafers or products supplied to us;
- increased exposure to potential misappropriation of our technology;
- vulnerability to third-party foundries' financial, operations or production
difficulties; and
- the time and cost associated with switching foundries.



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



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



We may engage in acquisitions that could adversely affect our operating
results, dilute our stockholders' equity, or cause us to incur additional debt
or assume contingent liabilities.



To increase our business and maintain our competitive position, we have made
acquisitions in the past and may do so in the future. For example, in April
1999, we acquired substantially all of the assets and assumed the operating
liabilities of Seattle Silicon Corporation, and in July 2000 we acquired
Calibre, Inc.



Acquisitions involve a number of risks that could harm our business and
result in the acquired business not performing as expected, including:

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



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



Acts of war or terrorism could harm our business.



The September 11, 2001 terrorist attacks on the United States created
immediate significant economic and political uncertainty. The long-term effects
of such attacks on the world economy and our business are unknown, but could be
material to our business. Further terrorists' acts or acts of war, whether in
the United States or abroad, also could cause damage or disruption to our
business, our suppliers, our freight carriers, or our customers, or could create
political or economic instability, any of which could have a material adverse
effect on our business. Continuing tensions between India and Pakistan
particularly pose an increased risk to our design operations in India, which
could be disrupted in the event of the outbreak of war between the two
countries.



Recently enacted and proposed changes in securities laws and
regulations may increase our costs.



The Sarbanes-Oxley Act of 2002 that became law in July 2002 has previously
required changes in some of our corporate governance practices. The Act also
requires the SEC to promulgate new rules on a variety of subjects. During the
third quarter of 2004 these new rules and regulations increased our legal and
financial compliance costs by approximately $0.4 million.  In addition, these
new rules make some of our business activities more difficult, time consuming
and/or more costly. These new rules and regulations may increasingly make it
more costly to obtain director and officer liability insurance coverage, and we
may be required to accept reduced coverage or incur substantially higher costs
to obtain coverage. These new rules and regulations could also make it more
difficult for us to attract and retain qualified members of our board of
directors, particularly to serve on our audit committee, and qualified executive
officers.



Failure to achieve and maintain effective internal controls in
accordance with Section 404 of the Sarbanes-Oxley Act of 2002 could have a
material adverse effect on our business and stock price.



We are in the process of documenting and testing our internal control
procedures in order to satisfy the requirements of Section 404 of the Sarbanes-
Oxley Act, which requires annual management assessments of the effectiveness of
our internal controls over financial reporting and a report by our independent
auditors addressing these assessments. During the course of our testing we may
identify deficiencies which we may not be able to remediate in time to meet the
deadline imposed by the Sarbanes-Oxley Act of 2002 for compliance with the
requirements of Section 404.



A system of controls, however well designed and operated, cannot provide
absolute assurance that the objectives of the control system will be met.  In
addition, the design of a control system is based in part upon certain
assumptions about the likelihood of future events and our judgments and
assumptions may be different than those of our auditors.  Because of the
inherent limitations of control systems, there is only reasonable assurance that
any controls will succeed in achieving their stated goals under all potential
future conditions.



Beginning in Fiscal 2005, Section 404 of the Sarbanes-Oxley Act will require
us to include an internal control report of management in our Annual Report on
Form 10-K.  If we are unable to:

1. assert that our internal control over financial reporting is effective as of
December 31, 2004;  or
2. if our auditors determine for any reason that they will not attest that our
management's report is fairly stated; or
3. if our auditors  will not express an opinion on our management's evaluation
of its system of controls or on the effectiveness of such internal
controls;



We could lose confidence from our investors, suppliers or customers in the
accuracy or completeness of our financial reports, which in turn could have a
material adverse effect on our stock price and/or net sales and/or results of
operations.

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



We prepare our financial statements in conformity with accounting principles
generally accepted in the United States. These accounting principles are subject
to interpretation by the Financial Accounting Standards Board, the American
Institute of Certified Public Accountants, the Securities and Exchange
Commission and various bodies formed to interpret and create appropriate
accounting policies. A change in these policies or interpretations could have a
significant effect on our reported financial results, and could affect the
reporting of transactions completed before the announcement of a change. For
example, while current accounting rules allow us to exclude the expense of stock
options from our financial statements, influential business policy groups,
including the Financial Accounting Standards Board, have suggested that the
rules be changed to require these options to be expensed starting in the second
half of 2005. Technology companies generally, and our company, specifically,
rely heavily on stock options as a major component of our employee compensation
packages. If we are required to expense options, we may be less likely to
achieve profitability or we may have to decrease or eliminate options grants.
Decreasing or eliminating option grants may negatively impact our ability to
attract and retain qualified employees.



The agreements governing our credit facility may limit our ability to
finance future operations or capital needs or engage in business activities that
may be in our interest.



We have a $15.0 million senior secured revolving credit facility, under which
no borrowings were outstanding as of September 30, 2004 and approximately $3.9
million was available for additional borrowing based on our current borrowing
base. Borrowings under this credit facility are secured by substantially all of
our assets. The terms of our credit facility contain restrictive covenants,
which may impair our ability to take corporate actions that we believe to be in
the best interests of our stockholders, including restricting the ability to:

- dispose of assets;
- incur additional debt;
- prepay other debts or amend some debt instruments;
- pay dividends or repurchase stock;
- create liens on assets;
- enter into sale-leaseback transactions;
- make investments, loans or advances;
- make acquisitions or engage in mergers or consolidations;
- change the business activities conducted by us or our subsidiaries;
- make capital expenditures or engage in specific transactions with
affiliates; and
- otherwise restrict corporate activities.

In addition, this credit facility requires us to maintain certain financial
ratios. Our ability to comply with these borrowing terms may be affected by
events beyond our control, including prevailing economic, financial and industry
conditions. The breach of any of such covenants or restrictions could result in
a default, which would permit our lender to cause all amounts we owe them to
accelerate and become due and payable, together with accrued and unpaid interest
and give our lender the right to seize collateral securing repayment of the
indebtedness. In the future, we may not be able to repay all of our borrowings
if they were accelerated, and in such event, our business may be harmed
materially and the value of our common stock could decrease significantly. This
credit facility is scheduled to expire on May 13, 2005, at which time we may be
required to renew, refinance, or modify the credit facility with our lender or
locate alternative financing. We may not be able to do so on acceptable terms,
or at all.



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



Our North American distributor, Future Electronics, distributes products of
our competitors that may directly compete with our product offerings. If Future
Electronics chooses to promote those products over our products, our operating
results could be harmed significantly. In addition, if Future Electronics were
to terminate our distribution agreement, we could experience a period of
significant interruption of our business while we obtained other distribution
channels.



Provisions in our organizational documents and Delaware law could
discourage acquisition proposals or delay a change in control that would be
beneficial to our stockholders.



Our amended and restated certificate of incorporation and bylaws contain
anti-takeover provisions that could make it more difficult for a third party to
acquire control of us even if that change in control would be beneficial to our
stockholders. These provisions include:

- providing for a classified board of directors with staggered terms;
- limiting the persons who may call special meetings of stockholders.



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



Our directors, named executive officers and two large stockholders, who
beneficially own approximately 29.8% of our common stock in the aggregate, may
have interests that conflict with the interests of our other stockholders.



Our directors and named executive officers, together with two large
stockholders, UBS Willow Management, L.L.C. and funds managed by Capital
Research and Management Company, beneficially owned approximately 29.8% of our
outstanding common stock, in the aggregate, as of September 30, 2004, following
the consummation of our recent underwritten offering. As a result of their
ownership and positions, our directors and named executive officers, together
with UBS Willow Management and Capital Research and Management Company,
collectively are able to significantly influence all matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions. Such concentration of ownership may also
have the effect of delaying or preventing a change in control. If the ownership
of our common stock continues to be highly concentrated, it may prevent you and
other stockholders from influencing significant corporate decisions. The
investment objectives of these stockholders may differ from those of our other
stockholders, including our future public stockholders.



Item 3.  Quantitative and Qualitative Disclosure About Market Risk

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates primarily
to our short-term investment portfolio and borrowings under our revolving credit
facility.  We do not use derivative financial investments in our investment
portfolio.  Our primary investment objectives are to preserve capital and
maintain liquidity.  These objectives are met by investing in high-quality
credit issuances and limiting the amount of credit exposure to any one company.
Our policy is to mitigate default risk by investing in only the highest quality
securities and monitoring the credit ratings of such investments.  As of
September 30, 2004, our cash equivalents were invested in bank time deposits and
money market funds.  We have no significant cash flow exposure due to rate
changes for our cash equivalents as these instruments have very short
maturities.

The table below presents principal amounts and related average rates for our
cash equivalents as of September 30, 2004 (dollars in millions):

`Carrying
                                                            Value      Fair Value
                                                         ------------ ------------
Cash Equivalents:
  Fixed rate ...........................................       $32.6        $32.6
  Average interest rate ................................        1.06%        --`

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

Item 4. Controls and Procedures

Evaluation of Controls and Procedures

As of and for the period ended September 30, 2004, the Company's
management carried out an evaluation, under the supervision and with the
participation of the Company's Chief Executive Officer, James Thorburn, and the
Company's Chief Financial Officer, Perry J. Grace, of the effectiveness of the
design and operation of the company's disclosure controls and procedures.  Based
upon that evaluation, Mr. Thorburn and Mr. Grace concluded that the Company's
disclosure controls and procedures are effective in causing material information
to be collected, communicated and analyzed by management of the Company on a
timely basis and to ensure that the quality and timeliness of the Company's
public disclosures complies with its SEC disclosure obligations.

Changes in Internal Controls

There have not been any changes in the Company's internal control over
financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) during the most recent fiscal quarter that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.

PART II



OTHER INFORMATION

Item 1.  Legal Proceedings

We are participating in litigation and responding to
claims arising in the ordinary course of business.  We intend to defend
ourselves vigorously in these matters.  Our management believes that it is
unlikely that the outcome of these matters will have a material adverse effect
on our financial statements, although there can be no assurance in this
regard.



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

On July 29, 2004, ZiLOG announced that its board of directors has
authorized a stock repurchase program pursuant to which ZiLOG may repurchase up
to $5,000,000 in market value of its outstanding shares of common stock. As of
September 30, 2004, the Company has purchased $4.3 million of market value of
its common stock under this program.  ZiLOG's common stock trades on the NASDAQ
National Market and purchases under the program are made, from time-to-time, in
the open market, through block trades or otherwise. Depending upon market
conditions and other factors, these purchases may be commenced or suspended at
any time or from time-to-time without prior notice.

Item 3.  Defaults Upon Senior Securities

None.

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

None.

Item 5.  Other Information

None.

Item 6.  Exhibits and Reports on Form 8-K

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

 Exhibit
  Number                          Description
---------- --------------------------------------------------------------------------------
 2.1 (a)   Joint Reorganization Plan, as confirmed by order of the U.S. Bankruptcy
           Court for the Nothern District of California, dated April 30, 2002.

 3.1 (b)   Amended and Restated Certificate of Incorporation of ZiLOG, Inc., as amended
           and corrected.

 3.2 (b)   Amended and Restated Bylaws of ZiLOG, Inc.

 4.1 (c)   Form of Restricted Stock Purchase Agreement.

 4.2 (c)   Form of Non-Qualified EBITDA-Linked Option Grant Agreement.

 4.3 (c)   Form of Non-Qualified Non-EBITDA-Linked Option Grant Agreement.

 4.4       Form of 2004 Non-Qualified Option Grant Agreement, Date of Grant.

 4.5       Form of 2004 Non-Qualified Option Grant Agreement, Date of Hire.

 4.6       Form of 2004 Non-Qualified Option Grant Agreement, Fully Vest Date of Grant.

31.1       Certification of Chief Executive Officer pursuant to Securities Exchange Act
           Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
           Act of 2002, dated November 9, 2004.

31.2       Certification of Chief Financial Officer pursuant to Securities Exchange Act
           Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
           Act of 2002, dated November 9, 2004.

32.1       Certifications of Chief Executive Officer and Chief Financial Officer pursuant
           to Section 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
           Sarbanes-Oxley Act of 2002, dated November 9, 2004.

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

(b) Incorporated herein by reference to the item of the same name filed as an exhibit
    to the Company's annual report on Form 10-K for the fiscal year ended December 31, 2003.

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

---

**ZiLOG, INC.

                                   SIGNATURES**

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



| |            
| | -----------
| | ZiLOG, INC.

| |             
| | ------------
| | (Registrant)



| |     |                   
| | --- | ------------------
| | By: | /s/ Perry J. Grace

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



| |     |                      
| | --- | ---------------------
| | By: | /s/ James M. Thorburn

| |                                               
| | ----------------------------------------------
| |                                               
| | James M. Thorburn                             
| | Chairman, Chief Executive Officer and Director
| | (Duly Authorized Officer)                     

Date: November 9, 2004